UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 000-22473
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Volunteer Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1271025
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
210 East Main Street, Rogersville, Tennessee 37879
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(Address of principal executive offices)
Registrant's telephone number, including area code: 423-272-2200
Not applicable
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Former name, former address and former fiscal year, if changed since last report
Check whether the issuer (1) has filed all reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act during the preceding 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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest applicable date: 539,027 as of November 12,
2003.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
VOLUNTEER BANCORP, INC.
INDEX
Page
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Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2003 3
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2003 and September 2002 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and September 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Controls and Procedures 11
Part II Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Securities Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART 1 - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2003
(Unaudited)
ASSETS
Cash and due from banks $ 3,277,743
Federal funds sold 302,850
------------------
Total cash and cash equivalents 3,580,593
Investment securities
Available for sale 29,559,109
Held to maturity 361,999
Loans, net (allowance for loan losses $845,286) 68,330,754
Federal Home Loan Bank stock, at cost 382,200
Accrued interest receivable 812,510
Premises and equipment, net 3,756,763
Other real estate 1,663,749
Cash surrender value life insurance 2,061,715
Other assets 455,961
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Total Assets $ 110,965,353
==================
LIABILITIES
Deposits
Non-interest bearing $ 14,611,943
Interest bearing 85,556,035
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Total deposits 100,167,978
Interest payable 389,229
Securities sold under repurchase agreements 1,735,288
Note payable 1,415,000
Other accrued liabilities 179,472
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Total Liabilities 103,886,967
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 1,000,000 shares
authorized; 539,027 shares issued and outstanding 5,390
Additional paid-in capital 1,916,500
Retained earnings 4,972,617
Accumulated other comprehensive income 183,879
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Total Stockholders' Equity 7,078,386
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,965,353
==================
See accompanying notes to consolidated financial statements.
-3-
PART 1 - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 1,252,890 $ 1,399,941 $ 3,734,888 $ 4,376,807
Federal funds 2,867 14,553 21,819 52,891
Investment securities:
Taxable 169,396 286,065 613,060 874,221
Tax-exempt 72,564 69,014 217,211 170,030
----------- ----------- ----------- -----------
Total interest income 1,497,717 1,769,573 4,586,978 5,473,949
INTEREST EXPENSE
Deposits 410,355 532,933 1,272,780 1,819,183
Other borrowed funds (8,622) 29,793 39,271 90,300
----------- ----------- ----------- -----------
Total interest expense 401,733 562,726 1,312,051 1,909,483
Net interest income 1,095,984 1,206,847 3,274,927 3,564,466
Provision for loan losses - 50,000 390,000 595,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 1,095,984 1,156,847 2,884,927 2,969,466
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Service charges on deposits and fees 119,592 106,645 359,161 255,374
Securities gains - - 107,903 39,222
Other non-interest income 63,217 23,769 167,029 41,073
----------- ----------- ----------- -----------
Total non-interest income 182,809 130,414 634,093 335,669
NON-INTEREST EXPENSE
Salaries and employee benefits 485,302 469,362 1,494,843 1,378,835
Occupancy and equipment expenses 177,141 166,735 556,411 510,954
Other non-interest expense 292,332 279,212 925,886 1,009,787
----------- ----------- ----------- -----------
Total non-interest expense 954,775 915,309 2,977,140 2,899,576
----------- ----------- ----------- -----------
Income before income taxes 324,018 371,952 541,880 405,559
Income tax expense 94,301 124,812 126,455 115,617
----------- ----------- ----------- -----------
Net Income $ 229,717 $ 247,140 $ 415,425 $ 289,942
=========== =========== =========== ===========
Other comprehensive income
Unrealized gain (loss) on securities available
for sale, before tax $ (287,027) $ 290,922 $ (168,356) $ 723,495
Reclassification for gains included in net income - - (107,903) (39,222)
Income taxes related to other comprehensive income 103,330 (110,550) 104,978 (260,023)
----------- ------------ ----------- ------------
(183,697) 180,372 (171,281) 424,250
------------ ----------- ------------ -----------
Total comprehensive income $ 46,020 $ 427,512 $ 244,144 $ 714,192
=========== =========== =========== ===========
Net income per common share $ 0.43 $ 0.46 $ 0.77 $ 0.54
Common shares outstanding 539,027 539,027 539,027 539,027
See accompanying notes to consolidated financial statement
-4-
PART I - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 415,425 $ 289,942
Adjustments to reconcile net income to net cash
from operating activities
Provision for loan losses 390,000 595,000
Depreciation and amortization 332,484 156,935
Gain on securities (107,903) (39,222)
Loss on OREO 16,758 -
OREO write-downs 5,000 -
Federal Home Loan bank stock dividends (11,100) (12,400)
Increase in cash surrender value of life insurance (61,715) -
Change in:
Other assets 242,455 400,699
Other liabilities 53,969 (447,733)
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Net cash from operating activities 1,275,373 943,221
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in held to maturity securities:
Maturities, prepayments, and calls 690,992 11,252
Activity in available for sale securities:
Proceeds 5,797,617 5,782,690
Purchases (21,275,460) (16,604,251)
Maturities, prepayments, and calls 12,942,136 8,150,000
Net change in loans (2,528,202) 4,268,361
Purchase of premise and equipment, net (117,420) (118,186)
Proceeds from sale of OREO 378,325 -
Investment in cash surrender value life insurance (2,000,000) -
----------------- ----------------
Net cash from investing activities (6,112,012) 1,489,866
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 210,221 (3,059,076)
Net change in securities sold under repurchase agreements (553,496) 352,556
Repayment of long-term debt (395,000) (360,000)
Payment of dividends - (53,903)
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Net cash from financing activities (738,275) (3,120,423)
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Net change in cash and cash equivalents (5,574,914) (687,336)
Cash and cash equivalents at beginning of period 9,155,507 8,903,179
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Cash and cash equivalents at end of period $ 3,580,593 $ 8,215,843
================ ================
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 1,334,144 $ 2,361,956
Income taxes 91,204 260,776
See accompanying notes to consolidated financial statements
-5-
VOLUNTEER BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Management Opinion
In the opinion of the management of Volunteer Bancorp, Inc., (the "Company"),
the unaudited consolidated financial statements include all normal adjustments
considered necessary to present fairly the financial position as of September
30, 2003, the results of operations for the three and nine months ended
September 30, 2003 and 2002, and cash flows for the nine months ended September
30, 2003 and 2002. All of these adjustments are of a normal, recurring nature.
Interim results are not necessarily indicative of results for a full year.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions for Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes included in the Company's annual report for the year ended December
31, 2002. The consolidated financial statements include the accounts for the
Company and Citizens Bank of East Tennessee, (the "Bank"). All material
intercompany balances and transactions have been eliminated in consolidation.
2. Long-Term Debt
The Company's long-term debt consists of a single note payable in the amount of
$1,415,000 at September 30, 2003, due an unaffiliated national bank. The
interest rate on the note adjusts quarterly and is equal to the three-months
London Interbank Offered Rate (Three Month LIBOR) plus 1.95% per annum or at the
option of the Company, the rate on the note is equal to the lender's index rate
as such rate changes from time to time. The Company may change interest rate
options at any time with prior notice to the lender. Interest is payable
quarterly. At September 30, 2003, the rate on the note was 3.09% per annum.
Principal is payable annually on January 31 as follows:
2004 $ 435,000
2005 470,000
2006 (final maturity) 510,000
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$ 1,415,000
The loan is secured by all of the stock of the Bank 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 the Bank 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.
-6-
The Company is in discussions with the lender and anticipates that the lender
will 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.
3. 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.
4. 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.
5. New Accounting Standards
The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities,
both of which generally become effective in the quarter beginning July 1, 2003.
Management determined that, upon adopting the new standards, they will not
materially affect the Company's operating results or financial condition
(because the Company does not have these instruments or engage in these
activities).
-7-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As of and for the Three and Nine Months Ended September 30, 2003 and 2002.
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 2002 Annual Report, the interim unaudited consolidated
financial statements and notes for the three months and nine months ended
September 30, 2003, 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 loan losses on loans and the
level of future provisions for losses on loans, and
- business plans for the year 2003 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 nine months of 2003 of $415,425,
or $0.77 per common share, compared to net income of $289,942 or $0.54 per
common share, for the same period a year ago and for the three months ended
September 30, 2003 net income was $229,717, or $0.43 per share compared to a net
income of $247,140 or $0.46 per share in the third quarter of 2002. Total assets
decreased $406,662 from December 31, 2002 to September 30, 2003. Our return on
average assets was .37% compared to .26% for the same period a year ago. This
improvement is primarily due to significantly lower loan loss provisions and
additional gains on the sale of securities, partially offset by lower net
interest income.
FINANCIAL CONDITION
Earning Assets.
Average earning assets has continued to decline as a percentage of total average
assets. The decline is attributed to increased non-accrual loans and other real
estate owned. Average earning assets to Average Assets is 91.6% for nine months
ended September 30, 2003 compared to 93.3% for all of 2002.
-8-
Loan Portfolio.
The Company's total loan portfolio was substantially the same at September 30,
2003 and December 31, 2002, however there were differences in the mix as
summarized below.
September 30 December 31
2003 2002
---- ----
(in thousands)
Commercial, financial and agriculture $ 7,403 $ 7,302
Real estate - construction 1,326 2,647
Real estate - mortgage 51,553 48,055
Consumer 8,293 9,958
Other 601 163
----------- -----------
$ 69,176 $ 68,125
=========== ===========
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 $390,000 for the nine months
ended September 30, 2003 as compared to $595,000 in the same period in 2002. For
the quarter ended September 30, 2003 the provision was $0 compared to $50,000 in
2002.
The allowance for loan losses at September 30, 2003 was 1.22% of loans.
Management believes that the $845,286 at September 30, 2003 is adequate to
absorb known risks in the portfolio.
The following table provides the changes in the allowance for loan losses for
the periods indicated.
Nine Months Ended September 30
2003 2002
---- ----
(in thousands)
Balance, beginning of year $ 1,111 $ 908
Provision charged to expense 390 595
Loans charged off (686) (485)
Recoveries 30 17
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Balance, end of year $ 845 $ 1,035
Investment Portfolio.
-9-
The Company maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. The Company maintains
two classifications of investment securities: Available for Sale and Held to
Maturity. The Available for Sale securities are carried at fair market value,
whereas the Held to Maturity securities are carried at amortized cost. At
September 30, 2003 and December 31, 2002, there was an unrealized gain in the
Available for Sale securities of approximately $296,580 and $573,000,
respectively.
The Company's investment securities portfolio increased approximately $1.5
million since December 31, 2002. This increase is primarily attributed to
management moving lower yielding Federal Funds Sold into the Bank's securities
portfolio.
Cash Value of Life Insurance.
During the first quarter of 2003, the Company invested in Bank-owned life
insurance to provide a higher yield than alternative investments. The cash
surrender value of this life insurance is $2,061,715 at September 30, 2003. All
officers of the Bank as of February 15, 2003 were insured.
Deposits.
Deposits totaled $100,167,978 at September 30, 2003 compared to $99,957,757 at
December 31, 2002. The deposit growth has primarily been in the Non-Interest
Bearing accounts. Management has aggressively priced interest bearing deposits
to improve interest margins. Additionally, management is working to limit
deposit growth to core deposit customers. This limited growth will assist in
management's overall strategy to meet Memorandum guidelines established for
capital.
Note Payable.
The Company's long-term debt consists of a single note payable in the amount of
$1,415,000 at September 30, 2003 due an unaffiliated national bank and is
discussed further in Note 2 in the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net income increased to $415,425 for the nine months ended September 30, 2003
from $289,942 in the same period in 2002. For the three months ended September
30, 2003, net income was $229,717 compared to $247,140 in 2002.
Net interest income decreased 8.1% for the nine months ended September 30, 2003
to the same period in 2002 from $3,564,466 to $3,274,927 and decreased 10.1% for
the three months periods ended.
The provision for loan losses decreased $50,000 and $205,000 during the three
and nine months ended September 30, 2003 compared to the same periods last year.
Non-performing assets decreased $45,000 from December 31, 2002 to September 30,
2003.
Non-performing assets were as follows as of September 30, 2003 and December 31,
2002:
September 30 December 31
2003 2002
---- ----
(in thousands)
Loans past due over 90 days $ 718 $ 673
Non-accrual loans 410 923
Other real estate owned 1,664 1,241
----------- -----------
Total non-performing assets $ 2,792 $ 2,837
=========== ===========
-10-
Non-Interest Income.
Gains on the sale of securities increased $68,681 during the first nine months
of 2003 compared to 2002. Service charges also increased in 2003 due to the
increase in transaction accounts and an increase in the fees charged.
Non-Interest Expense.
Salaries and employee benefits increased $15,940 and $116,038 in the three and
nine months ended September 30, 2003 compared to 2002. Occupancy and equipment
expenses increased $10,406 and $45,457 in the three and nine months ended
September 30, 2003 compared to 2002. Other expenses were lower in the nine
months ended September 30, 2003 than in 2002 due to reduced professional and
legal fees.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
As of the end of the period covered by this report, the Company's President and
its Vice President and Cashier have evaluated the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14(c)). Based on that evaluation, the President and the
Vice President and Cashier have concluded that the Company's disclosure controls
and procedures are effective to ensure that material information relating to the
Company and the Company's consolidated subsidiaries is made known to such
officers by others within these entities, particularly during the period this
quarterly report was prepared, in order to allow timely decisions regarding
required disclosure.
(b) Changes in Internal Controls.
There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
-11-
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
-12-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Certification of Reed Matney, President of Volunteer
Bancorp, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Greg Oliver,Vice President and Cashier
of Volunteer Bancorp, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification of Reed Matney, President of Volunteer
Bancorp, Inc. pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Greg Oliver, Vice President and
Cashier of Bancorp, Inc. pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed one Current Report on Form 8-K during the
quarter ended September 30, 2003. The Company filed a Current
Report on Form 8-K on July 21, 2003 to report a change in its
certifying accountant.
-13-
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.
Date: November 14, 2003 /s/ Reed D. Matney
-----------------------------------------
Reed D. Matney, President
Date: November 14, 2003 /s/ Greg Oliver
-----------------------------------------
Greg Oliver, Vice President and Cashier
-14-