U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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.YesX 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 August 13, 2002.
Transitional Small Business Disclosure Format (check one); Yes No X
---- ----
VOLUNTEER BANCORP, INC.
INDEX
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets June
30, 2002 and 2001 (Unaudited) 3
Condensed Consolidated Statements of Earnings and Comprehensive Income
For The Three and Six Months Ended June 30, 2002 and 2001
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows For The Six Months
Ended June 30, 2002 and 2001 (Unaudited) 5
Notes to Unaudited Condensed Consolidated Financial Statements
Six Months Ended June 30, 2002 and 2001 6
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 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 June 30, 2002 and 2001, and the
related condensed consolidated statements of earnings and comprehensive income
for the three and six months then ended and the condensed consolidated
statements of cash flows for the six months then ended, in accordance with
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these condensed consolidated financial statements is the representation of the
management of Volunteer Bancorp, Inc.
A review of interim financial statements consists primarily of inquiries of
company personnel and analytical procedures applied to financial data. It is
substantially less in scope than an audit in accordance with generally accepted
accounting standards, the objective of which is the expression of an opinion
regarding the condensed consolidated financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements in order
for them to be in conformity with generally accepted accounting principles.
/s/ Welch & Associates, Ltd.
August 8, 2002
Nashville, Tennessee
2
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30, 2002 and 2001
(Unaudited- See Accountants' Review Report)
- --------------------------------------------------------------------------------
ASSETS 2002 2001
------ --------------------- ---------------------
Cash and due from banks $ 3,484,813 $ 3,322,975
Federal fund sold 2,725,000 5,425,000
--------------------- ---------------------
Total cash and cash equivalents 6,209,813 8,747,975
Investment securities available for sale (amortized cost of
$29,746,913 and $27,298,020, respectively) 30,116,490 27,312,892
Investment securities held to maturity (estimated market
$622,312 value of and $1,755,914) 619,547 1,749,338
Loans, less allowances for loan losses of $1,275,854 and
$993,915, respectively 68,643,098 75,792,641
Accrued interest receivable 983,239 1,160,623
Premises and equipment, net 3,827,571 3,960,623
Deferred income taxes 116,671 144,605
Other real estate 906,061 902,168
Goodwill 131,259 140,201
Other assets 281,033 176,160
--------------------- ---------------------
Total assets $ 111,834,782 $ 120,087,226
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 13,447,334 $ 11,498,556
Interest bearing 88,191,979 98,601,943
--------------------- ---------------------
Total deposits 101,639,313 110,100,499
Interest payable 540,371 1,077,294
Securities sold under repurchase agreements 1,409,878 862,296
Note payable 1,810,000 2,170,000
Other accrued taxes, expenses and liabilities 70,775 59,329
--------------------- ---------------------
Total liabilities 105,470,337 114,269,418
--------------------- ---------------------
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 4,213,417 3,905,140
Accumulated other comprehensive income 229,138 (9,222)
--------------------- ---------------------
Total stockholders' equity 6,364,445 5,817,808
--------------------- ---------------------
Total liabilities and stockholders' equity $ 111,834,782 $ 120,087,226
===================== =====================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Earnings and Comprehensive Income
For The Three and Six Months Ended June 30, 2002 and 2001
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
---------- ----------
2002 2001 2002 2001
---- ---- ---- ----
Interest Income:
Interest and fees on loans $ 1,491,304 $ 1,833,188 $ 2,976,866 $ 3,688,749
Interest on federal funds 16,236 56,586 38,338 157,399
Interest on investment securities:
Taxable 309,845 435,800 588,156 842,759
Exempt from Federal income taxes 57,479 28,250 101,016 58,608
------------------ ---------------- ------------------ ------------------
Total interest income 1,874,864 2,353,824 3,704,376 4,747,515
------------------ ---------------- ------------------ ------------------
Interest Expense:
Interest on deposits 596,226 1,243,615 1,286,250 2,556,588
Other borrowed funds 28,913 50,300 60,507 109,042
------------------ ---------------- ------------------ ------------------
Total interest expense 625,139 1,293,915 1,346,757 2,665,630
------------------ ---------------- ------------------ ------------------
Net interest income 1,249,725 1,059,909 2,357,619 2,081,885
Provision for possible loan losses 455,000 85,000 545,000 160,000
------------------ ---------------- ------------------ ------------------
Net interest income after provision for possible
loan losses 794,725 974,909 1,812,619 1,921,885
------------------ ---------------- ------------------ ------------------
Non-interest income:
Service charges on deposits 54,623 41,997 93,608 93,933
Other service charges and fees 47,645 38,801 55,121 53,094
Securities gains 4,980 1,677 39,222 9,604
Other non-interest income (7,471) 487 17,304 18,470
------------------ ---------------- ------------------ ------------------
Total non-interest income 99,777 82,962 205,255 175,101
------------------ ---------------- ------------------ ------------------
Non-interest expense:
Salaries and employee benefits 470,386 428,248 909,473 875,521
Occupancy expense 79,209 78,593 149,172 148,795
Furniture and equipment expense 93,193 84,999 195,047 166,584
Other non-interest expense 447,304 224,038 730,575 427,662
------------------ ---------------- ------------------ ------------------
Total non-interest expense 1,090,092 815,878 1,984,267 1,618,562
------------------ ---------------- ------------------ ------------------
(Loss) earnings before income taxes (195,590) 241,993 33,607 478,424
Income tax (benefit) expense (85,535) 86,909 (9,195) 171,143
------------------ ---------------- ------------------ ------------------
Net (loss) income $ (110,055)$ 155,084 $ 42,802 $ 307,281
================== ================ ================== ==================
Other comprehensive income :
Unrealized gain (loss) on securities available
for sale, before tax $ 744,330 $ (76,014) $ 432,573 $ 438,409
Reclassification for gains included in net income (4,980) (1,677) (39,222) (9,604)
Income taxes related to other comprehensive
income (323,413) 29,522 (149,473) (162,947)
------------------ ---------------- ------------------ ------------------
415,937 (48,169) 243,878 265,858
------------------ ---------------- ------------------ ------------------
Total comprehensive income $ 305,882 $ 106,915 $ 286,680 $ 573,139
================== ================ ================== ==================
Net income (loss)per common share $ (0.20) $ 0.29 $ 0.08 $ 0.57
================== ================ ================== ==================
Common shares outstanding 539,027 539,027 539,027 539,027
================== ================ ================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 2002 and 2001
(Unaudited - See Accountants' Review Report)
- --------------------------------------------------------------------------------
2002 2001
------------------- -------------------
Cash Flows from Operating Activities:
Net income $ 42,802 $ 307,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (151,209) 13,806
Provision for possible loan losses 545,000 160,000
Provision for depreciation and amortization 107,291 121,021
FHLB stock dividends (8,100) (12,000)
(Gain) on securities (39,222) (9,604)
Decrease in interest receivable 83,240 52,696
Decrease (increase) in other assets 226,498 (315,804)
(Decrease) increase in other liabilities (315,667) (127,436)
-------------------- -------------------
Net cash provided by operating activities 490,633 189,960
-------------------- -------------------
Cash Flows from Investing Activities:
Purchase of investment securities held to maturity - (705,141)
Proceeds from calls and maturity of held to maturity securities 7,312 22,351
Purchase of investment securities available for sale (11,491,585) (14,251,973)
Proceeds from calls and maturity of securities available for sale 2,000,000 4,606,695
Proceeds from sale of securities available for sale 5,782,690 8,205,464
Net decrease (increase) in loans 2,970,058 (2,913,721)
Capital expenditures (68,504) (20,659)
-------------------- -------------------
Net cash (used) in investing activities (800,029) (5,056,984)
-------------------- -------------------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW accounts, IRA
and savings accounts 4,866,661 2,908,166
Net (decrease) increase in certificates of deposit (7,137,003) 1,184,647
Net increase (decrease) in securities sold under
repurchase agreements 300,275 (190,217)
Repayment of long-term borrowing (360,000) (325,000)
Payment of dividends (53,903) (75,464)
-------------------- -------------------
Net cash (used) provided by financing activities (2,383,970) 3,502,132
-------------------- -------------------
(Decrease) in cash and cash equivalents (2,693,366) (1,364,892)
Cash and cash equivalents beginning of period 8,903,179 10,112,867
-------------------- -------------------
Cash and cash equivalents end of period $ 6,209,813 $ 8,747,975
==================== ===================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,700,733 $ 2,782,369
==================== ===================
Income taxes $ 98,026 $ 293,754
==================== ===================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Six Months Ended June 30, 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)
------------------------------------------------------------------
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 transactions and collateral for fiscal
years ending after December 15, 2000. This statement replaces SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguisments of Liabilities". It revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, but it carries over
most of SFAS No. 125's provisions without reconsideration. This
Statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities.
Those standards are based on consistent application of a
financial-components approach that focuses on control. Under the
approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
Statement provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. The adoption of the provisions of this Statement did not
have any material impact upon the financial position or results of
operation of the Company.
6
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Six Months Ended June 30, 2002 and 2001
- --------------------------------------------------------------------------------
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 six
months ended June 30, 2001 would have been $644,542 and $316,223,
respectively, and earnings per share would have been $1.19 and $0.59
for the same periods, respectively.
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 six months ended June 30, 2001:
For the Year Ended For the Six Months Ended
December 31, 2001 June 30, 2001
-------------------------------------------------------------------
Net Earnings Net Earnings
Income Per Share Income Per Share
----------------- ----------------- --------------- --------------
Earnings per common share computation:
Net income/EPS as reported $ 626,659 $ 1.16 $ 307,281 $ 0.57
Add back: Goodwill amortization 17,883 0.03 8,942 0.02
----------------- ----------------- --------------- --------------
Adjusted net income /EPS $ 644,542 $ 1.19 $ 316,223 $ 0.59
================= ================= =============== ==============
7
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Six Months Ended June 30, 2002 and 2001
3. Long-term debt
--------------
The Company's long-term debt consists of a single note payable in the
amount of $1,810,000 and $2,170,000 at June 30, 2002 and 2001,
respectively, due an unaffiliated national bank. The interest rate on the
note adjusts quarterly and is equal to the three-months London Interbank
Offered Rate (Three Month LIBOR) plus 1.95% per annum or at the option of
the Company, the rate on the note is equal to the lender's index rate as
such rate changes from time to time. The Company may change interest rate
options at any time with prior notice to the lender. Interest is payable
quarterly. At June 30, 2002 the rate on the note was 3.87% per annum.
Principal 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 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 annualized earnings to tangible assets are 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.
8
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Six Months Ended June 30, 2002 and 2001
- --------------------------------------------------------------------------------
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 (the
"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.
9
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
FINANCIAL HIGHLIGHTS
As of And For The Three And Six Months Ended
June 30, 2002 and 2001
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net (loss) income $ (110,055) $ 155,084 $ 42,802 $ 307,281
Per common share data:
Net (loss) income per weighted average
common share ($0.20) $ 0.29 $ 0.08 $ 0.57
Book value $11.81 $ 10.79 $ 11.81 $ 10.79
Ratios:
Return on average assets (0.39)% 0.52% 0.08% 0.52%
Return on average common equity (7.08)% 10.76% 1.37% 11.04%
Net interest margin (taxable equivalent basis) 4.61 % 3.44% 4.30% 3.41%
Expense ratio 3.87 % 2.73% 3.50% 2.74%
Allowance for loan losses / loans 1.82 % 1.29% 1.82% 1.29%
Non-performing loans / loans 3.81 % 2.11% 3.81% 2.11%
Non-performing assets / loans and
foreclosed properties 5.04 % 3.25% 5.04% 3.25%
Shareholders' equity / total assets 5.68 % 4.84% 5.68% 4.84%
Leverage ratio (tangible capital /
tangible average assets) 4.70 % 4.34% 4.64% 4.38%
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As Of and for the Three and Six Months Ended June 30, 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 and six months ended June
30, 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 a net loss in the second quarter of ($110,055), or ($0.20)
per common share, compared to net income of $155,084, or $0.29 for the same
period a year ago. Our returns on average assets and average common equity were
(0.39%) and (7.08%), respectively, for the quarter compared to 0.52% and 10.76%
for the same period last year.
FINANCIAL CONDITION
Earning Assets. Average earning assets for the six months ended June 30, 2002
totaled $104,835,000 which represents 92.38% of average total assets. Earning
assets totaled $102,104,000 at June 30, 2002. Average earning assets for the six
months
11
ended June 30, 2001 totaled $110,776,000, which represented 92.92% of average
total assets. Earning assets totaled $111,274,000 at June 30, 2001.
Loan Portfolio. The Company's average loans for the six months ended June 30,
2002 were $70,889,000 and for the six months ended June 30, 2001 were
$74,835,000. The Company's average loans for the quarter ended June 30, 2002
were $70,142,000 and were $75,571,000 for the quarter ended June 30, 2001. The
balance in total loans at June 30, 2002 was $69,919,000 and at June 30, 2001 was
$76,787,000.
Investment portfolio. The Company's investment securities portfolio averaged
$29,030,000 for the six months ended June 30, 2002 and $29,521,000 for the six
months ended June 30, 2001. The Company's investment securities portfolio
averaged $30,213,000 for the quarter ended June 30, 2002 and averaged
$30,104,000 for the quarter ended June 30, 2001. The portfolio totaled
$30,736,000 at June 30, 2002 and $29,062,000 at June 30, 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 June
30, 2002 there was an unrealized gain in the Available for Sale securities of
$370,000 and there was an unrealized loss of $15,000 at June 30, 2001.
Deposits. The Company's average deposits were $104,474,000 for the six months
ended June 30, 2002. This included average non-interest bearing deposits of
$12,192,000, average certificates of deposit of $65,359,000, average savings
deposits of $7,016,000 and average interest bearing transaction accounts of
$19,907,000.
The Company's average deposits for the six months ended June 30, 2001 were
$109,219,000. This included average non-interest bearing deposits of
$11,202,000, average certificates of deposit of $68,076,000, average savings
deposits of $5,186,000 and average interest bearing transaction accounts of
$18,821,000.
Deposits at June 30, 2002 totaled $101,639,313 and totaled $110,100,499 at June
30, 2001.
Securities sold under repurchase agreements. The Company's average balance of
securities sold under repurchase agreements for the six months ended June 30,
2002 was $1,229,000 and the average was $976,000 for the six months ended June
30, 2001. The total outstanding under these agreements at June 30, 2002 was
$1,410,000 and the total outstanding at June 30, 2001 was $862,000.
Note Payable. The Company's long-term debt 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 LIBOR) plus 1.95% per annum or at the option of the
Company the rate on the note is equal to the lender's index rate as such rate
changes from time to time. The Company may change interest rate options at any
time with prior notice to the lender. Interest is payable quarterly. At June 30,
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 six months ended June 30, 2002 totaled $24,000. 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 annualized earnings to tangible assets are 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.
12
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 $6,364,000 as of June 30, 2002.
This included $5,000 of common stock, $1,917,000 of additional paid-in capital,
$4,213,000 of retained earnings and accumulated other comprehensive income
consisting of an unrealized gain on Securities Available for Sale, net of
deferred taxes, of $229,000.
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 June 30, 2002 and
2001, the Company had investments in federal funds of $2,725,000 and $5,425,000,
respectively.
The liability portion of the balance sheet provides liquidity through various
interest bearing and non-interest bearing deposit accounts. Additional sources
of liquidity are Federal Home Loan Bank Advances, federal funds purchased, and
securities sold under repurchase agreements. The Company has an agreement with
the Federal Home Loan Bank whereby the Company may borrower up to an amount,
$6,000,000 at June 30, 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 June 30, 2002 and 2001. At June 30, 2002, the Company had $2,500,000 of
federal funds purchase lines available at three correspondent banks. There were
no federal funds purchased at June 30, 2002 and 2001. 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 $1,410,000 and $862,000 at June 30, 2002 and 2001, respectively.
Additional capital funds or long-term debt are anticipated to be necessary
during the next twelve to eighteen months. There is no assurance that additional
capital funds or other long-term debt can be obtained under current market
condition. The additional funds required approximate $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 exist under the Company's current note payable.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 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.
13
Net interest income for the six months ended June 30, 2002 totaled $2,358,000.
This was a result of interest income of $3,704,000 and interest expense of
$1,346,000. Interest and fee income on loans totaled $2,977,000, interest income
on the investment portfolio totaled $689,000, and interest income on federal
funds sold totaled $38,000. Interest expense included $1,095,000 on certificates
of deposit, $132,000 on interest bearing transaction accounts, $58,000 on
savings accounts, $24,000 on securities sold under repurchase agreements, and
$37,000 on the note payable.
Net interest income for the six months ended June 30, 2001 totaled $2,082,000.
This was a result of interest income of $4,748,000 and interest expense of
$2,666,000. Interest and fee income on loans totaled $3,689,000, interest income
on the investment portfolio totaled $902,000, and interest income on federal
funds sold totaled $157,000. Interest expense included $2,042,000 on
certificates of deposit, $443,000 on interest bearing transaction accounts,
$72,000 on savings accounts, $29,000 on securities sold under repurchase
agreements, and $80,000 on the note payable.
Net interest income for the three months ended June 30, 2002 totaled $1,250,000.
This was a result of interest income of $1,875,000 and interest expense of
$625,000. Interest and fee income on loans totaled $1,491,000, interest income
on the investment portfolio totaled $367,000, and interest income on federal
funds sold totaled $17,000. Interest expense included $497,000 on certificates
of deposit, $68,000 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 June 30, 2001 totaled $1,060,000.
This was a result of interest income of $2,354,000 and interest expense of
$1,294,000. Interest and fee income on loans totaled $1,833,000, interest income
on the investment portfolio totaled $464,000, and interest income on federal
funds sold totaled $57,000. Interest expense included $1,000,000 on certificates
of deposit, $208,000 on interest bearing transaction accounts, $36,000 on
savings accounts, $13,000 on securities sold under repurchase agreements, and
$37,000 on the note payable.
The trend in net interest income is commonly evaluated in terms of average rates
using the net interest margin and the interest rate spread. The net interest
margin, or the net yield on earning assets, is computed by dividing fully
taxable equivalent net interest income by average earning assets. This ratio
represents the difference between the average yield on overage earning assets
and the average rate incurred for all funds used to support those earning
assets.
The net interest margin for the six months ended June 30, 2002 was 4.60%. The
net cost of funds, defined as interest expense divided by average earning assets
was 2.57% and the yield on earning assets was 7.17% for the six months ended
June 30, 2002. The net interest margin for the six months ended June 30, 2001
was 3.81%. The net cost of funds for the six months ended June 30, 2001 was
4.82% and the yield on earning assets was 8.63%. The decrease in interest rates
during the first six months of 2002 had a positive impact on the Company's net
interest margin.
The net interest margin for the three months ended June 30, 2002 was 4.90%. The
net cost of funds, defined as interest expense divided by average earning assets
was 2.40% and the yield on earning assets was 7.30% for the three months ended
June 30, 2002. The net interest margin for the three months ended June 30, 2001
was 3.87%. The net cost of funds for the three months ended June 30, 2001 was
4.66% and the yield on earning assets was 8.53%.
The interest rate spread measures the difference between the average yield on
earning assets and the average rate incurred on interest bearing sources of
funds. The interest rate spread eliminates the impact of non-interest bearing
funds and gives a direct perspective on the effect of market interest rate
movements. During recent years, the net interest rate margins and interest rate
spreads have been under intense pressure to maintain historical levels, due in
part to tax laws that discourage investment in tax-exempt securities and intense
competition for funds with non-bank institutions. The interest rate spread for
the six months ended June 30, 2002 was 4.30% and it was 3.41% for the six months
ended June 30, 2001. The interest rate spread for the three months ended June
30, 2002 was 4.61% and it was 3.44% for the three months ended June 30, 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
14
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 $455,000 for the three months
ended June 30, 2002 and it was $85,000 for the three months ended June 30, 2001.
In assessing the adequacy of the allowance, management reviews the size, quality
and risk of loans in the portfolio. Management also considers such factors as
loan loss experience, the amount of past due and non-performing loans, specific
known risk, the status and amount of non-performing assets, underlying
collateral values securing loans, current and anticipated economic conditions
and other factors which affect the allowance for possible loan losses.
While it is the Company's policy to charge off in the current period the loans
in which a loss is considered probable, there are additional risks of future
losses that cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy,
management's judgement as to the adequacy of the allowance is necessarily
approximate and imprecise.
The allowance for loan losses at June 30, 2002 was 1.82% of loans and
approximately 36% of non-performing assets. Management believes that the
$1,276,000 at June 30, 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 increased losses
in the loan portfolio, and require greater provisions for possible loan losses
in the future.
Non-Performing Assets. Non-performing assets include non-performing loans and
foreclosed real estate held for sale. Non-performing loans include loans
classified as non-accrual and loans past due more than 90 days and still
accruing interest. Non-performing assets at June 30, 2002 were $3,573,000, or
5.04% of loans and foreclosed properties. Non-performing assets at June 30, 2002
consisted of non-accrual loans of $1,141,000, loans past due 90 days and still
accruing interest of $1,526,000 and foreclosed real estate of $906,000. Non-
performing assets at June 30, 2001 were $2,526,000, or 3.25% of loans and
foreclosed assets. Non-performing assets at June 30, 2001 consisted of
non-accrual loans of $470,000 loans past due 90 days and still accruing interest
of $1,154,000 and foreclosed real estate of $902,000. 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 $205,000 for the
six months ended June 30, 2002. This included $94,000 from service charges on
deposit accounts, $55,000 from other service charges and fees, $39,000 of
securities gains, and $17,000 of other non-interest income.
Total non-interest income for the six months ended June 30, 2001 was $175,000.
This included $94,000 from service charges on deposit accounts, $53,000 from
other service charges and fees, $10,000 of securities gains, and $18,000 of
other non-interest income.
Total non-interest income was $100,000 for the three months ended June 30, 2002.
This included $55,000 from service charges on deposit accounts, $48,000 from
other service charges and fees, $5,000 of securities gains, and ($8,000) of
other non-interest income.
15
Total non-interest income for the three months ended June 30, 2001 was $83,000.
This included $42,000 from service charges on deposit accounts, $39,000 from
other service charges and fees, $1,000 of securities gains, and $1,000 of other
non-interest income.
The increase in total non-interest income is mainly attributable to an increase
in service charges on deposit accounts and other service charges and fees.
Non-Interest Expense. Non-interest expense for the six months ended June 30,
2002 was $1,984,000. This consisted of $909,000 of salaries and employee
benefits, $149,000 of occupancy expenses, $195,000 of furniture and equipment
expense, and $731,000 of other non-interest expenses. Other non-interest
expenses include advertising, supplies and printing, telephone, postage, and
legal and accounting fees.
Non-interest expense for the six months ended June 30, 2001 was $1,619,000. This
consisted of $876,000 of salaries and employee benefits, $149,000 of occupancy
expenses, $167,000 of furniture and equipment expense, and $427,000 of other
non-interest expenses.
Non-interest expense for the three months ended June 30, 2002 was $1,090,000.
This consisted of $470,000 of salaries and employee benefits, $79,000 of
occupancy expenses, $93,000 of furniture and equipment expense, and $448,000 of
other non-interest expenses.
Non-interest expense for the three months ended June 30, 2001 was $816,000. This
consisted of $428,000 of salaries and employee benefits, $79,000 of occupancy
expenses, $85,000 of furniture and equipment expense, and $224,000 of other
non-interest expenses.
The increase in total non-interest expense is primarily associated with the
overall growth of the Company and a write down in the carrying value of other
real estate owned of $222,000.
Income Taxes. For the six months ended June 30, 2002, the Company incurred an
income tax benefit of ($9,000.) For the six months ended June 30, 2001, the
Company incurred income tax expense of $171,000. Approximately $101,000 of
income earned for the six months ended June 30, 2002 is exempt from Federal
income taxes. Approximately $59,000 of the income earned during the six months
ended June 30, 2001 is exempt from Federal income taxes.
For the three months ended June 30, 2002, the Company incurred an income tax
benefit of ($86,000.) For the three months ended June 30, 2001, the Company
incurred income tax expense of $87,000. Approximately $57,000 of income earned
for the three months ended June 30, 2002 is exempt from Federal income taxes.
Approximately $28,000 of the income earned during the three months ended June
30, 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
six months ended June 30, 2002 was 0.08%. Return on assets for the six months
ended June 30, 2001 was 0.52%. Return on assets for the three months ended June
30, 2002 was (0.39%) and it was 0.52% for the three months ended June 30, 2001.
Return on equity (annualized net income divided by average equity) for the six
months ended June 30, 2002 was 1.37% and it was 11.04% for the six months ended
June 30, 2001. Return on equity for the three months ended June 30, 2002 was
(7.08%) and it was 10.76% for the three months ended June 30,2001.
Equity to assets (average equity divided by average total assets) was 5.51% for
the six months ended June 30, 2002 and it was 4.72% for the six months ended
June 30, 2001. Equity to assets for the three months ended June 30, 2002 was
5.52% and it was 4.82% for the three months ended June 30, 2001.
The dividend payout ratio (dividends declared divided by net income) for the six
months ended June 30, 2002 was 125.93%. The dividend payout ratio for the six
months ended June 30, 2001 was 24.55%. No dividends were declared during the
three months ended June 30, 2002 and 2001 and, accordingly, no dividend payout
ratio is presented for those quarters.
16
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
At the Annual Meeting on May 16, 2002, the shareholders voted on the following
proposals with the results as indicated:
1. Elected four of its current directors to continue in office until the 2005
meeting of shareholders. Current directors elected to three-year terms were as
follows:
FOR WITHHOLD AUTHORITY
----- ------------------
William E. Phillips 377,716 0
Neil D. Miller 377,716 0
Scott F. Collins 377,716 0
Lawrence E. Gray 377,716 0
Directors continuing to serve include: Reed D. Matney, Shirley Price, Carlin
Green, Douglas Price, Gary Varnell, George Brooks, Jim Friddell and Leon
Gladson.
2. Ratified the appointment of Welch & Associates, Ltd. as the Company's
independent accounts and auditors for 2002 as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
- ---- ------- ------- ----------------
375,435 115 2,166 0
Item 5. Other Information
None.
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 23.1 Consent of Welch & Associates
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350,as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, signed by Reed D.
Matney, the President of Volunteer Bancorp, Inc.
on August 14, 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350,
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, signed by G. Douglas
Price, the principal accounting and financial
officer of Volunteer Bancorp, Inc. on August
14, 2002.
(b) There have been no Current Reports on Form 8-K filed during the
quarter ended June 30, 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: August 14, 2002 /s/ Reed D. Matney
-----------------------------
Reed D. Matney, President
(principal executive officer)
Date: August 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 August 8, 2002, included in this Quarterly Report on Form 10-QSB
for the Quarter Ended June 30, 2002.
s/ Welch & Associates, Ltd.
---------------------------
Welch & Associates, Ltd.
Nashville, Tennessee
August 13, 2002
21
Exhibit 99.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, and in connection with the quarterly report on
Form 10-QSB of Volunteer Bancorp, Inc. (the "Company") for the quarter ended
June 30, 2002, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), the undersigned, Reed D. Matney, the President of the
Company, hereby certifies that (1) the Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
and (2) the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
This Certification is signed on August 14, 2002.
/s/ Reed D. Matney
------------------------------------------
Reed D. Matney
President
Exhibit 99.2
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, and in connection with the quarterly report on
Form 10-QSB of Volunteer Bancorp, Inc. (the "Company") for the quarter ended
June 30, 2002, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), the undersigned, G. Douglas Price, the principal
accounting and financial officer of the Company, hereby certifies that (1) the
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and (2) the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
This Certification is signed on August 14, 2002.
/s/ G. Douglas Price
-----------------------------------------
G. Douglas Price
principal accounting and financial officer)