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 March 31, 2002
[ ] 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 May 13, 2002.
Transitional Small Business Disclosure Format (check one); Yes [ ] No [X]
VOLUNTEER BANCORP, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets March
31, 2002 and 2001 (Unaudited) 3
Condensed Consolidated Statements of Earnings For The Three
Months Ended March 31, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 2002 and 2001 (Unaudited) 5
Condensed Consolidated Statements of Comprehensive Income For The
Three Months Ended March 31, 2002 and 2001 (Unaudited) 6
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months Ended March 31, 2002 and 2001 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Securities Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
1
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 March 31, 2002 and 2001, and the
related condensed consolidated statements of earnings, condensed consolidated
statements of cash flows, and condensed consolidated statements of comprehensive
income for the three 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.
May 15, 2002
2
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
March 31, 2002 and 2001
(Unaudited- See Accountants' Review Report)
- --------------------------------------------------------------------------------
ASSETS 2002 2001
------ ---- ----
Cash and due from banks $ 2,932,724 $ 3,520,499
Federal funds sold 5,850,000 4,837,700
-------------------- --------------------
Total cash and cash equivalents 8,782,724 8,358,199
Investment securities available for sale (amortized cost of
$28,038,407 and $29,288,264, respectively) 27,737,118 29,351,082
Investment securities held to maturity (estimated market
value of $617,255 and $1,756,688) 622,683 1,754,204
Loans, less allowances for loan losses of $915,601 and
$994,565, respectively 69,732,825 73,473,694
Accrued interest receivable 890,562 1,095,352
Premises and equipment, net 3,815,994 4,004,126
Deferred income taxes 223,518 115,974
Other real estate 1,177,589 905,382
Goodwill 131,259 144,671
Other assets 280,714 220,992
-------------------- --------------------
Total assets $ 113,394,986 $ 119,423,676
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 12,023,699 $ 11,701,570
Interest bearing 91,517,672 97,681,441
-------------------- --------------------
Total deposits 103,541,371 109,383,011
Note payable (Note 3) 1,810,000 2,170,000
Interest payable 574,066 900,070
Securities sold under repurchase agreements 1,210,822 996,354
Other accrued taxes, expenses and liabilities 200,164 263,348
-------------------- --------------------
Total liabilities 107,336,423 113,712,783
-------------------- --------------------
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 4,323,472 3,750,056
Accumulated other comprehensive income (186,799) 38,947
-------------------- --------------------
Total stockholders' equity 6,058,563 5,710,893
-------------------- --------------------
Total liabilities and stockholders' equity $ 113,394,986 $ 119,423,676
==================== ====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Earnings
For The Three Months Ended March 31, 2002 and 2001
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
2002 2001
---- ----
Interest Income:
Interest and fees on loans $ 1,485,562 $ 1,855,561
Interest on federal funds 22,102 100,813
Interest on investment securities:
Taxable 278,311 406,959
Exempt from Federal income taxes 43,537 30,358
-------------------- --------------------
Total interest income 1,829,512 2,393,691
-------------------- --------------------
Interest Expense:
Interest on deposits 690,024 1,312,973
Other borrowed funds 31,594 58,742
-------------------- --------------------
Total interest expense 721,618 1,371,715
-------------------- --------------------
Net interest income 1,107,894 1,021,976
Provision for possible loan losses 90,000 75,000
-------------------- --------------------
Net interest income after provision for possible loan losses 1,017,894 946,976
-------------------- --------------------
Non-interest income:
Service charges on deposits 38,985 51,936
Other service charges and fees 7,476 14,293
Securities gains 34,242 7,927
Other non-interest income 24,775 17,983
-------------------- --------------------
Total non-interest income 105,478 92,139
-------------------- --------------------
Non-interest expense:
Salaries and employee benefits 439,087 447,273
Occupancy expense 69,963 70,202
Furniture and equipment expense 101,854 81,585
Other non-interest expense 283,271 203,624
-------------------- --------------------
Total non-interest expense 894,175 802,684
-------------------- --------------------
Income before income taxes 229,197 236,431
Income tax expense 76,340 84,234
-------------------- --------------------
Net income $ 152,857 $ 152,197
==================== ====================
Income per common share $ 0.28 $ 0.28
==================== ====================
Common shares outstanding 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 Three Months Ended March 31, 2002 and 2001
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
2002 2001
---- ----
Cash Flows from Operating Activities:
Net income $ 152,857 $ 152,197
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred income taxes (3,127) 12,915
Provision for possible loan losses 90,000 75,000
Provision for depreciation and amortization 54,679 60,707
FHLB stock dividends (3,900) (5,900)
(Gain) on securities (34,242) (7,927)
Decrease in interest receivable 175,917 117,967
(Increase) other assets (44,711) (363,850)
(Decrease) in other liabilities (152,583) (100,641)
--------------------- ---------------------
Net cash provided (used) by operating activities 234,890 (59,532)
--------------------- ---------------------
Cash Flows from Investing Activities:
Proceeds from calls and maturity of held to maturity securities 4,176 17,485
Purchase of investment securities held to maturity - (705,141)
Purchase of investment securities available for sale (5,969,841) (11,165,713)
Proceeds from calls and maturity of investments available for
sale 1,000,000 2,200,000
Proceeds from sale of investments available for sale 2,960,272 5,557,623
Net decrease (increase) in loans 2,335,331 (509,774)
Capital expenditures (4,315) (8,318)
--------------------- ---------------------
Net cash provided (used) in investing activities 325,623 (4,613,838)
--------------------- ---------------------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW accounts, IRA and
savings accounts 3,557,616 2,962,335
Net (decrease) increase in certificates of deposit (3,925,900) 412,990
Repayment of note payable (360,000) (325,000)
Net increase (decrease) in securities sold under repurchase
agreements 101,219 (56,159)
Dividends paid (53,903) (75,464)
--------------------- ---------------------
Net cash (used) provided by financing activities (680,968) 2,918,702
--------------------- ---------------------
(Decrease) in cash and cash equivalents (120,455) (1,754,668)
Cash and cash equivalents beginning of period 8,903,179 10,112,867
--------------------- ---------------------
Cash and cash equivalents end of period $ 8,782,724 8,358,199
===================== =====================
Supplemental Disclosure of Cash Flow Information:
Provision for possible loan losses 90,000 75,000
Cash paid during the period for:
Interest $ 1,041,899 $ 1,611,678
===================== =====================
Income taxes $ 31,776 $ 73,254
===================== =====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income
For The Three Months Ended March 31, 2002 and 2001
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
2002 2001
---- ----
Net income $ 152,857 $ 152,197
-------------------- -------------------
Other comprehensive (loss) income, before tax: Unrealized (loss) gain on
securities available for sale:
Unrealized holding (losses) gains arising during the period (311,757) 514,423
Less: reclassification adjustment for (gains)
included in net income (34,242) (7,927)
-------------------- -------------------
Other comprehensive (loss) income (277,515) 506,496
Income taxes related to other comprehensive (loss) income (105,456) 192,469
-------------------- -------------------
(172,059) 314,027
-------------------- -------------------
Total comprehensive (loss) income $ (19,202) $ 466,224
==================== ===================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months Ended March 31, 2002 and 2001
- --------------------------------------------------------------------------------
1. Management Opinion
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Volunteer Bancorp, Inc. (the
"Company") 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.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS No. 144 supersedes SFAS No. 121 and provides a single
accounting model for long-lived assets to be disposed of. Although
retaining many of the fundamental recognition and measurement provisions of
SFAS No. 121, the new rules significantly change the criteria that would
have to be met to classify an asset as held-for-sale. SFAS No. 144 also
supersedes the provisions of Accounting Principles Board (APB) Opinion 30
with regard to reporting the effects of a disposal of a segment of a
business and requires expected future operating losses from discontinued
operations to be displayed in discontinued operations in the period(s) in
which the losses are incurred (rather than as of the measurement date as
presently required by APB Opinion 30). In addition, more dispositions will
qualify for discontinued operations treatment in the income statement. The
adoption of SFAS No. 144 did not have a material impact on the Company's
financial conditions 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
7
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months Ended March 31, 2002 and 2001
- --------------------------------------------------------------------------------
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.
SFAS No. 142, "Goodwill and Other Intangible Assets", is effective for
fiscal years beginning after December 15, 2001. This statement addresses
financial accounting and reporting for acquired goodwill and other
intangible assets and supercedes APB Opinion No. 17, "Intangible Assets".
It addresses how intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition.
This Statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the
financial statements. Under this Statement, goodwill and intangible assets
that have indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. Intangible assets that have finite
useful lives will continue to be amortized over their useful lives, but
without the constraint of an arbitrary ceiling. This Statement provides
specific guidance for testing goodwill for impairment. 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.
The Company adopted the provisions of Statement 142 effective January 1,
2002. As of the date of adoption, the Company had unamortized goodwill in
the amount of $131,259 and no unamortized identifiable intangible assets.
As part of its adoption of Statement 142, the Company has performed a
transitional impairment test on its goodwill assets, which indicated that
no impairment charge was required. The Company does not currently have any
other indefinite-lived intangible assets recorded in its statement of
financial condition. The full impact of adopting Statement 142 is expected
to result in an increase in net income of approximately $17,883 or
approximately $0.03 per share in 2002 as a result of the Company no longer
having to amortize goodwill against earnings. Assuming retroactive adoption
of Statement 142, net income for the year ended December 31, 2001 and the
quarter ended March 31, 2001 would have been $644,542 and $156,668,
respectively, and earnings per share would have been $1.19 and $0.29 for
the same periods, respectively.
8
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months Ended March 31, 2002 and 2001
- --------------------------------------------------------------------------------
The following table sets forth the reconcilement of net income and earnings
per share excluding goodwill amortization for the year ended December 31,
2001 and quarter ended March 31, 2001:
For the Year Ended For the Quarter Ended
December 31, 2001 March 31, 2001
------------------------------------ -------------------------------------
Net Earnings Net Earnings
Income Per Share Income Per hare
Earnings per common share computation:
Net income/EPS as reported $ 626,659 $ 1.1 $ 152,197 $ 0.28
Add back: Goodwill amortization 17,883 0.03 4,471 0.01
----------------- ----------------- ----------------- ------------------
Adjusted net income /EPS $ 644,542 $ 1.1 $ 156,668 $ 0.29
================= ================= ================= ==================
3. Note payable
The Company's debt consists of a single note payable in the amount of
$1,810,000 and $2,170,000 at March 31. 2002 and 2001, respectively, due an
unaffiliated national bank. Currently, 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 March 31. 2002 the rate on the note was 3.87% per annum.
Principal, unless accelerated, is payable annually on January 31, as
follows:
January 31, Principal Due
2003 $ 395,000
2004 435,000
2005 470,000
2006 (Final Maturity) 510,000
----------------------
$ 1,810,000
======================
The Company owns 100% of the stock of Citizens Bank of East Tennessee, all
of which has been pledged to the lender to secure the note payable.
9
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Three Months Ended March 31, 2002 and 2001
- --------------------------------------------------------------------------------
The Company is in violation of certain loan covenants with respect to this
loan in that the ratio of annualized earnings to tangible assets is less
than the 0.75% required and the ratio of nonperforming assets is greater
than 2.5%. These violations have not been waived by the lender.
Because of these violations, the lender may, at its option, by notice to
the Company declare the note in default. In such an event the Company would
have ten days to remedy compliance with all loan covenants. If the Company
did not or could not comply with all loan covenants within such ten day
period the note would be in default. In such a case the lender may declare
the note immediately due and payable and among other things proceed to
foreclose upon 100% of the stock of Citizens Bank of East Tennessee which
is pledged as security for the note.
The lender has been notified by the Company of its non-compliance with
certain covenants of the note that could lead to the lender declaring the
note in default. However, the lender has not notified the Company that it
is in default under the terms of the loan agreement.
The Company is in discussions with the lender and anticipates the lender to
first pursue remedies other than foreclosure. Accordingly, the Company
expects that the note will be restructured resulting in, among other
things, increasing the interest rate on the note and substantially reducing
the final maturity date on the note. In such a case, there can be no
assurance that the Company could satisfy the restructured debt without
obtaining new financing from other lenders or funds from a stock offering.
Further, there can be no assurance that a stock offering by the Company
would be successful or that new lenders would provide funds to 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.
5. Certain Regulatory Matters
As a result of certain findings in the Tennessee Department of Financial
Institution's Report of Examination dated June 4, 2001, the Board of
Directors of the Bank entered into a Memorandum of Understanding
(Memorandum), dated August 16, 2001, with the Commissioner of the Tennessee
Department of Financial Institutions and the Memphis Regional Director of
the Federal Deposit Insurance Corporation. A Memorandum of Understanding is
an informal administrative tool for institutions that have some weaknesses
that if not properly addressed and corrected could lead to supervisory
concern requiring formal administrative action. The areas addressed in the
Memorandum cover capital adequacy, laws and regulations, data processing
audit and review, investment policy maturity strategies, adequate
documentation of each of the foregoing but primarily credit administration.
As a result, the Board has reviewed a number of the Bank's policies and
procedures including its loan policy and has incorporated recommendations
designed to strengthen credit quality and the Bank's review procedures
regarding loan loss reserve adequacy. Management of the Company and the
Bank believe that the Bank is in substantial compliance with the provisions
of the Memorandum.
10
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
As of And For The Three Months Ended
March 31, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Net earnings $ 152,857 $ 152,197
Per common share data:
Net earnings per common share $0.28 $0.28
Book value $11.24 $10.59
Ratios:
Return on average assets 0.54% 0.51%
Return on average common equity 10.03% 11.04%
Net interest margin (taxable equivalent basis) 4.31% 3.77%
Expense ratio 3.14% 2.71%
Allowance for loan losses / loans 1.29% 1.34%
Non-performing loans / loans 3.72% 1.97%
Non-performing assets / loans and foreclosed properties 5.30% 3.15%
Shareholders' equity / total assets 5.34% 4.78%
Leverage ratio (tangible capital / tangible assets) 5.38% 4.65%
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As Of and for the Three Months Ended March 31, 2002 and 2001
The following provides a narrative discussion and analysis of significant
changes in the results of operations and financial condition of Volunteer
Bancorp, Inc. (the "Company"). This discussion should be read in conjunction
with the consolidated financial statements and related financial analysis set
forth in the Company's 2001 Annual Report, the interim unaudited consolidated
financial statements and notes for the three months ended March 31, 2002,
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 2002 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 the Company's ability to execute its
business plans. Although the Company 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 first quarter of $152,857, or $0.28 per
common share, compared to net income of $152,197, or $0.28 for the same period a
year ago. Our returns on average assets and average common equity were 0.54% and
10.03%, respectively, for the quarter compared to 0.51% and 11.04% for the same
period last year.
12
FINANCIAL CONDITION
Earning Assets. Average earning assets for the three months ended March 31, 2002
totaled $104,920,000 which represents 92.23% of average total assets. Earning
assets totaled $103,943,000 at March 31, 2002. Average earning assets for the
three months ended March 31, 2001 totaled $110,110,000, which represents 92.81%
of average total assets. Earning assets totaled $109,417,000 at March 31, 2001.
Loan Portfolio. The Company's average loans for the three months ended March 31,
2002 were $71,626,000 and for the three months ended March 31, 2001 were
$74,052,000. The balance in total loans at March 31, 2002 was $70,648,000 and at
March 31, 2001 was $74,389,000.
Investment Portfolio. The Company's investment securities portfolio averaged
$27,469,000 for the three months ended March 31, 2002 and $28,589,000 for the
three month ended March 31, 2001. The portfolio totaled $28,360,000 at March 31,
2002 and $31,105,000 at March 31, 2001.
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 March
31, 2002 there was a net unrealized loss in the Available for Sale securities of
$301,000 and there was a net unrealized gain of $63,000 at March 31, 2001.
Deposits. The Company's average deposits were $103,589,000 for the three months
ended March 31, 2002. This included average non-interest bearing deposits of
$11,807,000, average certificates of deposit of $65,876,000, average savings
deposits of $6,725,000 and average interest bearing transaction accounts of
$19,181,000.
The Company's average deposits for the three months ended March 31, 2001 were
$108,474,000. This included average non-interest bearing deposits of
$11,003,000, average certificates of deposit of $68,498,000, average savings
deposits of $4,881,000 and average interest bearing transaction accounts of
$24,092,000.
Deposits at March 31, 2002 totaled $103,541,000 and totaled $109,383,000 at
March 31, 2001.
Securities sold under repurchase agreements. The Company's average balance of
securities sold under repurchase agreements for the three months ended March 31,
2002 was $1,161,000 and the average was $999,000 for the three months ended
March 31, 2001. The total outstanding under these agreements at March 31, 2002
was $1,211,000 and the total outstanding at March 31, 2001 was $996,000.
Note Payable. The Company's note payable consists of a single note payable in
the amount of $1,810,000 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
13
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 March 31, 2002 the rate on the note
was 3.87% per annum. Principal is payable annually commencing January 31, 1996
and each January 31 thereafter. Interest expense for the three months ended
March 31, 2002 totaled $19,000. The loan is secured by all of the stock of
Citizens Bank of East Tennessee owned by the Company. The Company is in
violation of certain loan covenants with respect to this loan in that the ratio
of annualized earnings to tangible assets is less than required and the ratio of
nonperforming assets is greater than 2.5%. These violations have not been waived
by the lender.
Because of these violations, the lender may, at its option, by notice to the
Company declare the note in default. In such an event the Company would have ten
days to remedy compliance with all loan covenants. If the Company did not or
could not comply with all loan covenants within such ten day period the note
would be in default. In such a case the lender may declare the note immediately
due and payable and among other things proceed to foreclose upon 100% of the
stock of Citizens Bank of East Tennessee which is pledged as security for the
note.
The lender has been notified by the Company of its non-compliance with certain
covenants of the note that could lead to the lender declaring the note in
default. However, the lender has not notified the Company that it is in default
under the terms of the loan agreement.
The Company is in discussions with the lender and anticipates the lender to
first pursue remedies other than foreclosure. Accordingly, the Company expects
that the note will be restructured resulting in, among other things, increasing
the interest rate on the note and substantially reducing the final maturity date
on the note. In such a case, there can be no assurance that the Company could
satisfy the restructured debt without obtaining new financing from other lenders
or funds from a stock offering. Further, there can be no assurance that a stock
offering by the Company would be successful or that new lenders would provide
funds to the Company.
Capital Resources. Shareholder's equity totaled $6,058,000 as of March 31, 2002.
This included $5,000 of common stock, $1,917,000 of additional paid-in capital,
$4,323,000 of retained earnings and accumulated other comprehensive income
consisting of an unrealized loss on Securities Available for Sale, net of
deferred taxes, of $187,000.
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 securities. Additional
sources of liquidity are loan repayments and possible prepayments from the
mortgage backed securities in the investment portfolio. At March 31, 2002 and
2001, the Company had investments in federal funds of $5,850,000 and $4,838,000,
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 March 31, 2002, 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 March 31, 2002 and 2001. At March 31, 2002, the Company had $2,500,000 of
federal funds purchase lines available at three correspondent banks. There were
no federal funds purchased at March 31, 2002 and 2001. The Company has
agreements with customers, who must meet certain
14
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 $1,211,000 and $996,000 at
March 31, 2002 and 2001, respectively.
Additional capital funds or long-term debt are anticipated to be deemed
necessary during the next twelve to eighteen months. The additional funds
required approximately $1,810,000 or the amount necessary to replace the
Company's current note payable. If the Company is able to obtain new debt
funding, the Company anticipates that the terms would be less favorable than
those that exist under the Company's current note payable. There is no assurance
that additional capital funds or other long-term debt can be obtained under
current market conditions.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND
2001
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 three months ended March 31, 2002 totaled
$1,108,000. This was a result of interest income of $1,830,000 and interest
expense of $722,000. Interest and fee income on loans totaled $1,486,000,
interest income on the investment portfolio totaled $322,000, and interest
income on federal funds sold totaled $22,000. Interest expense included $598,000
on certificates of deposit, $64,000 on interest bearing transaction accounts,
$29,000 on savings accounts, $12,000 on securities sold under repurchase
agreements, and $19,000 on the note payable.
Net interest income for the three months ended March 31, 2001 totaled
$1,022,000. This was a result of interest income of $2,394,000 and interest
expense of $1,372,000. Interest and fee income on loans totaled $1,856,000,
interest income on the investment portfolio totaled $437,000, and interest
income on federal funds sold totaled $101,000. Interest expense included
$1,042,000 on certificates of deposit, $235,000 on interest bearing transaction
accounts, $36,000 on savings accounts, $15,000 on securities sold under
repurchase agreements, and $44,000 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 three months ended March 31, 2002 was 4.31%. The
net cost of funds, defined as interest expense divided by average earning assets
was 2.75% and the yield on earning assets was 7.06% for the three months ended
March 31, 2002. The net
15
interest margin for the three months ended March 31, 2001 was 3.77%. The net
cost of funds for the three months ended March 31, 2001 was 4.99% and the yield
on earning assets was 8.76%. The decrease in interest rates during the first
three months of 2001 had a negative impact on the Company's net interest margin.
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 three months ended March 31, 2002 was 4.02% and it was 3.37% for the three
months ended March 31, 2001.
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
responsible 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 $90,000 for the three months
ended March 31, 2002. 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 March 31, 2002 was 1.29% of loans and
approximately 24% of non-performing assets. Management believes that the
$908,000 at March 31, 2002 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
16
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 March 31, 2002 were $3,804,000, or
5.30% of loans and foreclosed properties. Non-performing assets at March 31,
2002 consisted of non-accrual loans of $622,000, loans past due 90 days and
still accruing interest of $2,005,000 and foreclosed real estate of $1,177,000.
Non- performing assets at March 31, 2001 were $2,375,000, or 3.15% of loans and
foreclosed assets. Non-performing assets at March 31, 2001 consisted of
non-accrual loans of $485,000 loans past due 90 days and still accruing interest
of $985,000 and foreclosed real estate of $905,000. 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. In addition, in
February, 2002, the Bank hired an experienced senior credit officer to oversee
credit administration, including policies and procedures, underwriting, and
credit analysis.
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 $105,000 for the
three months ended March 31, 2002. This included $39,000 from service charges on
deposit accounts, $7,000 from other service charges and fees, $34,000 of
securities gains, and $25,000 of other non-interest income.
Total non-interest income for the three months ended March 31, 2001 was $92,000.
This included $52,000 from service charges on deposit accounts, $14,000 from
other service charges and fees, $8,000 of securities gains, and $18,000 of other
non-interest income.
The increase in total non-interest income is mainly attributable to an increase
in securities gains.
Non-Interest Expense. Non-interest expense for the three months ended March 31,
2002 was $894,000. This consisted of $439,000 of salaries and employee benefits,
$70,000 of occupancy expenses, $102,000 of furniture and equipment expense, and
$283,000 of other non-interest expenses. Other non-interest expenses include
advertising, supplies and printing, telephone, postage, and legal and accounting
fees. Non-interest expenses for the first quarter of 2002 increased $91,489
compared to the first quarter of 2002 primarily for costs associated with losses
on other real estate owned and an increase in the FDIC assessment and compliance
costs.
Non-interest expense for the three months ended March 31, 2001 was $803,000.
This consisted of $447,000 of salaries and employee benefits, $70,000 of
occupancy expenses, $82,000 of furniture and equipment expense, and $204,000 of
other non-interest expenses.
17
Income Taxes. For the three months ended March 31, 2002, the Company incurred
income tax expense of $76,000. For the three months ended March 31, 2001, the
Company incurred income tax expense of $84,000. Approximately $44,000 of income
earned for the three months ended March 31, 2002 is exempt from Federal income
taxes. Approximately $30,000 of the income earned during the three months ended
March 31, 2001 is exempt from Federal income taxes.
RETURN ON ASSETS AND EQUITY
Return on assets (annualized net income divided by average total assets) for the
three months ended March 31, 2002 was 0.54%. Return on assets for the three
months ended March 31, 2001 was 0.51%.
Return on equity (annualized net income divided by average equity) for the three
months ended March 31, 2002 was 10.03% and it was 11.04% for the three months
ended March 31, 2001.
Equity to assets (average equity divided by average total assets) was 5.36% for
the three months ended March 31, 2002 and it was 4.65% for the three months
ended March 31, 2001.
The dividend payout ratio (dividends declared divided by net income) for the
three months ended March 31, 2002 was 70.61%. The dividend payout ratio for the
three months ended March 31, 2001 was 35.26%.
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.
18
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
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 March 31, 2002.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VOLUNTEER BANCORP, INC.
(Registrant)
Date: March 14, 2002 /s/ Reed D. Matney
- -------------------- ------------------
Reed D. Matney, President
(principal executive officer)
Date: March 14, 2002 /s/ G. Douglas Price
- -------------------- --------------------
G. Douglas 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 May 15, 2002, included in this Quarterly Report on Form 10-QSB for
the Quarter Ended March 31, 2002.
/s/ Welch & Associates, Ltd.
Welch & Associates, Ltd.
Nashville, Tennessee
May 15, 2002
21