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 March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ---------
Commission File Number
Tennessee Valley Financial Holdings, Inc.
(Exact name of small business issue as specified in its charter)
Tennessee
(State or other jurisdiction of incorporation or organization)
401 South Illinois Avenue, Oak Ridge, Tennessee
(Address of principal executive office)
45-0471419
(I.R.S. Employer Identification No.)
37830
(Zip Code)
Registrant's telephone number, including area code: (865)483-9444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock (par
value $1.00 per share)
Check by mark whether the issuer (1) has filed all reports required to be
filed by Section 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.
Yes [x] No [ ]
The number of outstanding shares of the registrant's Common Stock, par
value $1.00 per share, was 532,130 on April 23, 2004.
FORM 10-QSB
Index
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of March 31, 2004 and December 31, 2003........................3
Condensed Consolidated Statements of Income
for the three months ended March 31, 2004 and 2003................4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the three months ended March 31, 2004..................5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003........................6
Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2004 and 2003................7
Notes to Unaudited Condensed Consolidated Financial
Statements.....................................................8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................12-18
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
Signature.....................................................................20
2
Item 1. Financial Statements
Part I - Financial Information
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Balance Sheet
March 31, 2004
(Unaudited) December 31, 2003
-----------------------------------------------
Assets
Cash and due from banks $ 1,682 $ 2,074
Federal funds sold 245 71
-----------------------------------------------
Cash and cash equivalents 1,927 2,145
Investment Securities:
Investment Securities available for sale, at Fair Value 14,240 14,502
Loans, net 89,612 85,498
Loans Held for Sale, at Fair Value 1,600 273
Banking premises and equipment, net 3,861 3,714
Accrued interest receivable 531 555
Other real estate owned - 20
Prepaid expenses and other assets 504 376
-----------------------------------------------
Total Assets $ 112,275 $ 107,083
===============================================
Liabilities and Stockholders Equity
Deposits $ 93,779 $ 88,118
Securities sold under agreements to repurchase 334 339
Other Borrowings 8,756 9,281
Accrued interest payable 252 282
Other liabilities 397 566
-----------------------------------------------
Total Liabilities 103,518 98,586
-----------------------------------------------
Stockholders Equity:
Common stock, $1.00 par value, 2,000,000 shares authorized,
532,130
issued and outstanding in 2004, 534,130 issued and outstanding
in 2003 532 534
Capital in excess of par value 6,450 6,487
Retained Earnings 1,614 1,363
Accumulated other comprehensive income 161 113
-----------------------------------------------
Total Stockholders Equity 8,757 8,497
-----------------------------------------------
Total Liabilities and Stockholders Equity 112,275 107,083
===============================================
The accompanying notes are an integral part of these financial statements.
3
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statements of Income
(in thousands except for per share amounts)
(Unaudited)
For the three months ended March 31
2004 2003
-----------------------------------------------
Interest Income:
Loans, including fees $ 1,460 $ 1,460
Investment securities 148 154
Federal funds sold - 6
-----------------------------------------------
Total interest income 1,608 1,620
-----------------------------------------------
Interest Expense:
Deposits 362 517
Advances from the Federal Home Loan Bank and other
borrowings 92 76
-----------------------------------------------
Total interest expense 454 593
-----------------------------------------------
Net interest income 1,154 1,027
Provision for loan losses 21 73
-----------------------------------------------
Net interest income after provision for loan losses 1,133 954
-----------------------------------------------
Non-interest income
Service charges on deposit accounts 94 78
Fees on sale of mortgage loans 54 238
Net gains (losses) on sales of investment securities
available for sale 4 11
Other income 21 14
-----------------------------------------------
Total non-interest income 173 341
-----------------------------------------------
Non-interest expense
Salaries and employee benefits 472 456
Net occupancy expense 116 109
Data processing fees 61 60
Advertising and promotion 28 19
Office supplies and postage 42 37
Legal and professional 42 16
Loan Expense 55 67
Other 108 92
-----------------------------------------------
Total non-interest expense 924 856
-----------------------------------------------
Income before income tax expense 382 439
Income tax expense 131 156
-----------------------------------------------
Net Income $ 251 $ 283
===============================================
Basic Earnings per Common Share $ 0.47 $ 0.53
===============================================
Diluted Earnings per Common Share $ 0.47 $ 0.53
===============================================
Weighted average common shares (Denominator Basic EPS) 532,130 534,130
Dilutive effect of stock options 2,603 853
-----------------------------------------------
Weighted average common shares and common stock
equivalents (Denominator Diluted EPS) 534,733 534,983
===============================================
The accompanying notes are an integral part of these financial statements.
4
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Changes in Stockholders Equity
For the three months ended March 31, 2004
(In Thousands)
(Unaudited)
Accumulated
Capital in Other Total
Common Excess of Retained Comprehensive Stockholders
Stock Par Value Earnings Income (Loss) Equity
----------- ------------ -------------- ----------------- --------------
Balances at December 31, 2003 $ 534 $ 6,487 $ 1,363 $ 113 $ 8,497
Net income 251 251
Other comprehensive income (loss) 48 48
Purchase and retirement of 2,000
shares of common stock (2) (37) (39)
----------- ------------ -------------- ----------------- --------------
Balances at March 31, 2004 $ 532 $ 6,450 $ 1,614 $ 161 $ 8,757
=========== ============ ============== ================= ==============
The accompanying notes are an integral part of these financial statements.
5
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Cash Flows
For the three months ended March 31, 2004 and 2003
(In Thousands)
(Unaudited)
2004 2003
----------------- ----------------
Cash Flows from Operating Activities:
Net Income $ 251 $ 283
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 21 73
Amortization of premium on investment securities,
net of accretion of discount 19 18
Depreciation 42 39
Net (gain) loss on sale of available for sale securities (4) (11)
Stock dividends on FHLB Stock (11) (5)
Changes in operating assets and liabilities:
Accrued interest receivable 24 1
Other assets (137) (111)
Accrued interest payable and other liabilities (199) 182
----------------- ----------------
Net cash provided by operating activities 6 469
----------------- ----------------
Cash Flows from Investing Activities:
Proceeds from sales of available for sale investment securities 457 975
Proceeds from maturities and calls of available for sale investment securities 363 691
Purchases of available for sale investment securities (485) (1,029)
Loans originated, net of payments received (4,135) 82
Additions to banking premises and equipment (189) (8)
Net (increase) decrease in loans held for sale (1,327) 1,328
----------------- ----------------
Net cash used in investing activities (5,316) 2,039
----------------- ----------------
Cash Flows from Financing Activities:
Increase in deposits, net 5,661 1,527
Purchase of common stock (39) -
Proceeds from securities sold under agreements to repurchase and other borrowings, net
of principal repayments (530) (767)
----------------- ----------------
Net cash provided by financing activities 5,092 760
----------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents (218) 3,268
Cash and Cash Equivalents, Beginning of Period 2,145 2,146
----------------- ----------------
Cash and Cash Equivalents, End of Period $ 1,927 $ 5,414
================= ================
Supplementary Disclosure of Cash Flow Information:
Interest paid on deposit accounts and other borrowings 484 509
Income taxes paid 235 54
Supplementary Disclosures of Noncash Investing Activities:
Acquisition of real estate acquired through foreclosure - -
Purchase of building financed by capital lease obligation - -
Change in unrealized gain (loss) on available for sale investment securities 76 (23)
Change in deferred tax associated with unrealized gain (loss) on investment
securities available for sale 28 (9)
Change in net unrealized gain (loss) on available for sale investment securities 48 (14)
The accompanying notes are an integral part of these financial statements.
6
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statements of Comprehensive Income
For the three months ended March 31, 2004 and 2003
(In Thousands)
(Unaudited)
2004 2003
----------------- -----------------
Net Income $ 251 $ 283
----------------- -----------------
Other comprehensive income, net of tax:
Unrealized gains/losses on investment securities 80 (12)
Reclassification adjustment for gains/losses included in net income (4) (11)
Income taxes related to unrealized gains/losses on investment securities (28) 9
----------------- -----------------
Other comprehensive income (loss), net of tax 48 14
----------------- -----------------
Comprehensive income $ 299 $ 269
================= =================
The accompanying notes are an integral part of these financial statements.
7
Tennessee Valley Financial Holdings, Inc. and Subsidiary
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004 and 2003
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATIONS
- ----------------------------------------------------
The consolidated financial statements include the accounts of Tennessee Valley
Financial Holdings, Inc. (the "Company"), a bank holding company, and its
wholly-owned subsidiary, TnBank (the "Bank"). All intercompany balances and
transactions have been eliminated.
TnBank was incorporated on July 6, 1994 for the purpose of organizing a
state-chartered commercial bank and commenced operations on May 30, 1995. TnBank
provides a variety of banking services to individuals and businesses through its
two offices in Oak Ridge and one office in Knoxville, Tennessee. Its primary
deposit products are demand deposits and certificates of deposit, and its
primary lending products are commercial business, real estate mortgage, and
consumer installment loans.
This report contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties. When used in
this discussion, the words "believes", "anticipates", "contemplates", "expects",
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Although we believe
that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate, and therefore, we cannot assure you
that the forward-looking statements set out in this report will prove to be
accurate.
Factors that could cause actual results to differ from the results discussed in
the forward-looking statements include, but are not limited to:
o Economic conditions (both generally and more specifically in the markets in
which we operate);
o Competition for our customers from other providers of financial services;
o Government legislation and regulation (which changes from time to time and
over which we have no control);
o Changes in interest rates; and
o Material unforeseen changes in liquidity, results of operations, or
financial condition of our customers.
These risks are difficult to predict and many of them are beyond our control.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
The unaudited quarterly financial statements of Tennessee Valley Financial
Holdings, Inc. presented herein should be read in conjunction with our audited
financial statements for the year ended December 31, 2003.
Financial information and the results of operations for the three months ended
March 31, 2004, and cash flows for the three month periods ended March 31, 2004
and 2003 are unaudited, and in the opinion of management reflect all adjustments
necessary for a fair presentation of such information. Interim results are not
necessarily indicative of results to be expected for the entire year.
8
NOTE 2 - ACCOUNTING POLICY CHANGES
- ----------------------------------
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123. This
statement provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, this statement amends the disclosure requirements of Statement 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Statement No. 148 is effective
for financial statements for fiscal years ending after December 15, 2002 and for
interim periods beginning after December 15, 2002. We apply the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for their stock option plans and have
not elected a voluntary change to the fair value based method prescribed in
Statement No. 123. Our consolidated annual financial statements beginning in
2002 and consolidated interim financial statements beginning in 2003 include the
additional disclosures required by SFAS No. 148, but management does not
anticipate this statement having a significant impact on our consolidated
financial position or results of operations.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This statement amends Statement 133 for
decisions made as part of the Derivatives Implementation Group process and other
board projects and in conjunction with other implementation issues. Since we do
not invest in derivatives or engage in hedging activities, management does not
expect this statement to have a significant impact on our consolidated financial
position or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. Since
we have not yet issued any instruments of the type discussed in the statement,
management does not expect this statement to have a significant impact on our
consolidated financial position or results of operations.
NOTE 3 - COMMITMENTS
- --------------------
As of March 31, 2004, the Company had outstanding commitments to advance
construction funds and to originate loans in the amount of $12.9 million and
commitments to advance existing home equity and other credit lines in the amount
of $14.1 million. In addition, the Company has also conveyed $484,000 in standby
letters of credit.
NOTE 4 - OTHER BORROWINGS
- -------------------------
The following table summarizes the Company's other borrowings as of March 31,
2004 and December 31, 2003, respectively.
March 31, 2004 December 31, 2003
--------------------- ---------------------
Federal Home Loan Bank Advances $ 8,500 $ 8,650
Fed Funds Purchased - 370
Capital Lease Obligations 256 261
--------------------- ---------------------
Total Other Borrowings 8,756 9,281
===================== =====================
NOTE 5 - STOCK OPTIONS
- ----------------------
The Company has two stock option plans that are described more fully below. The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. No stock-based employee compensation cost is reflected
in consolidated income, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions under
SFAS Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
9
(In Thousands, Except Per Share Data)
Quarter Ended March 31,
----------------- -----------------
2004 2003
----------------- -----------------
Net Income, as Reported $ 251 $ 283
Less: Total Stock-Based Employee Compensation
Expense Determined Under Fair Value Based Method
for All Awards, Net of Related Tax Effects 0 0
----------------- -----------------
Pro Forma Net Income $ 251 $ 283
================= =================
Earnings Per Share:
Basic - as Reported $ 0.47 $ 0.53
================= =================
Basic - Pro Forma $ 0.47 $ 0.53
================= =================
Diluted - as Reported $ 0.47 $ 0.53
================= =================
Diluted - Pro Forma $ 0.47 $ 0.53
================= =================
Key Employee Stock Option Plan - In March 1996, the board of directors approved
a stock option plan to provide key employees with additional incentive to
contribute to the best interests of the Company. The plan terminates in ten
years, or sooner at the board's discretion. The board of directors also has
discretion concerning which eligible persons shall be granted options, the term
of each granted option, and the number of shares for which each option shall be
granted. Options must be exercised within ten years from the date they are
granted and must include a price per share of at least 85% to 110% of the fair
value of the stock on the date the options were granted. The board has reserved
19,457 shares of common stock for issuance during the term of the plan. In 1999,
the board of directors awarded a total of 14,600 options at an exercise price of
$16 per share, which was equal to the fair value of the stock on the date the
options were granted. The options vest over a four-year period, 14,500 of which
are vested and remain unexercised as of March 31, 2004. In the first quarter of
2002, options for 100 shares were exercised (none exercised in prior periods).
In 2002, the board of directors approved an additional stock option plan to
provide key employees with additional incentive to contribute to our best
interests. The plan terminates in ten years. The board of directors also has
discretion concerning which eligible persons shall be granted options, the term
of each granted option, and the number of shares for which each option shall be
granted. Options must be exercised within ten years from the date they are
granted and must include a price per share of at least 100% of the fair value of
our common stock on the date the option is granted. The board of directors has
reserved the lesser of 20% of the diluted shares outstanding (107,346 shares at
December 31, 2003) or 213,612 shares of common stock for issuance during the
term of the plan. The board of directors has not awarded any options under this
plan.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for the quarter ending March 31, 2004 and 2003.
Quarter ended March 31,
2004 2003
--------------------------
Dividend Yield 1.37% 1.37%
Expected Life 6 years 6 years
Expected Volatility 10% 10%
Risk-Free Interest Rate 5.2% 5.2%
10
A summary of the status of the Company's stock option plans is presented below:
Three Months Ended Three Months Ended
March 31, March 31,
2004 2003
---------------------------------- --------------------------------
Shares Weighted Shares Weighted
Average Average
Exercise Price Exercise Price
---------------- ----------------- ------------- ------------------
Outstanding at
Beginning of Period 14,500 $ 16.00 14,500 $ 16.00
Granted 0 0
Exercised 0 0
Forfeited 0 0
---------------- -------------
Outstanding at
End of Period 14,500 $ 16.00 14,500 $ 16.00
================ ================= ============= ==================
Options Exercisable
at Period-End 14,500 $ 16.00 14,500 $ 16.00
Weighted Average Fair
Value of Options Granted
During the Period N/A N/A
Information pertaining to options outstanding at March 31, 2004 is as follows:
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------ ---------------- ----------------- ----------------- ----------------- ---------------
$16.00 - $16.00 14,500 5.0 years $ 16.00 14,500 $ 16.00
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
- -------------------------------------------------------------------------------
GENERAL
- -------
We are a Tennessee bank holding company which acquired the Bank through a share
exchange in May 2002. We are a registered bank holding company under the Federal
Reserve Act. Our only activity is owning the Bank which commenced operations on
May 30, 1995.
For the three months ending March 31, 2004, we earned net income of $251,000 or
$0.47 per share as compared to $283,000 or $0.53 per share for the corresponding
period in 2003. The decrease in net income for the first quarter of 2004 is
primarily due to a decrease in non-interest income (primarily fees on sales of
mortgage loans) and an increase in non-interest expense, partially offset by a
reduction in interest expense. The table below presents certain key financial
ratios for the first quarter of 2004 and 2003 respectively.
For the three months ending
March 31,
2004 2003
------------------ ------------------
Return on Average Assets 0.92% 1.05%
Return on Average Equity 11.74% 14.39%
Earnings per share - basic $ 0.47 $ 0.53
NET INTEREST INCOME
- -------------------
Net interest income was $1.2 million for the first quarter of 2004, an increase
of approximately 12.4% or $127,000 over the same period in 2003. The increase in
net interest income was due to an increase in our net interest margin. Our net
interest margin improved as the rates on our interest-bearing deposits decreased
to a greater degree than the yield on our interest-bearing assets. Average loans
increased approximately $6.45 million to $89.2 million at March 31, 2004, as
compared to $82.8 million at March 31, 2003. Average loans were approximately
86% of total earning assets at March 31, 2004 and 84% at March 31, 2003.
The yield on total earning assets declined 37 basis points for the first quarter
of 2004 as compared to the first quarter of 2003. The primary reason for the
continued decline in yields on earning assets was due to a decline in general
interest rates since 2001. The decline in general interest rates resulted in a
decline in earning asset yields primarily due to two circumstances. First,
earning assets which repriced during 2003 and 2004 (i.e. loans and investment
securities at floating rates, loans renewed or renegotiated, etc.) generally
were priced at lower yields than had previously been the case. Additionally, new
earning assets (i.e. loans originated, securities purchased) during 2003 and
2004 were added at lower yields. Loan yields declined 51 basis points to 6.55%
for the first quarter of 2004 as compared to 7.06% for the first quarter of 2003
due to the reasons discussed above. Investment yields declined 27 basis points
during the first quarter as compared to the same period in 2003, again due to
the decline in the general interest rate environment. Yields on federal funds
sold, the rates on which can change overnight, declined 30 basis points due to
the decline in interest rates.
Total interest expense was approximately $454,000 for the first quarter of 2004,
a 23.44% decrease as compared to the same period in 2003. The average rate on
interest-bearing deposits was 1.77% for the first quarter of 2004, 68 basis
points lower than the average rate on deposits during the first quarter of 2003.
The decrease in the rates on deposits during 2004 as compared to 2003 can be
attributed to the decline in interest rates since 2001. Initially, as rates
began to decline after the Federal Reserve lowered interest rates, our deposit
rates did not lower as quickly as did the rates on earning assets. However, as
rates moderated during the latter part of 2001 and remained at their lower
levels, the rate on our deposits continued to decline as we repriced maturing
time deposits into lower rates and attracted new deposits at lower rates. The
average cost of borrowed funds was 3.62% for the first quarter of 2004
12
and 4.27% for the first quarter of 2003. The decline in rates on borrowed funds
can be attributed to a change in the mix of borrowings to more overnight
borrowings, which were priced at significantly lower interest rates than the
borrowings of the first quarter of 2003; we had no overnight borrowings as of
March 31, 2004. The overall rate on interest-bearing liabilities was 1.82% for
the first quarter of 2004 compared to 2.40% for the same period in 2003.
Three Months Ended (In thousands) Three Months Ended (In thousands)
March 31, 2004 March 31, 2003
--------------------------------------- --------------------------------------------
Average Interest Yield/Rate Average Interest Yield/Rate
Balance Balance
------------ ------------ ------------- -------------- --------------- -------------
Loans(1) (2) $ 89,224 $ 1,460 6.55% $ 82,775 $ 1,460 7.06%
Investment securities(3) (5) 14,165 168 4.74% 13,244 166 5.01%
Federal funds sold 136 0 0.91% 1,979 6 1.21%
------------ ------------ ------------- -------------- --------------- -------------
Total earning assets 103,525 1,628 6.29% 97,998 1,632 6.66%
------------ ---------------
Other assets 5,813 9,590
------------ --------------
Total Assets 109,338 107,588
============ ==============
Interest-bearing deposits 81,668 362 1.77% 84,394 517 2.45%
Demand deposits 8,202 - 0.00% 7,449 - 0.00%
Securities sold under agreements to
repurchase and other borrowings 10,155 92 3.62% 7,113 76 4.27%
------------ ------------ ------------- -------------- --------------- -------------
Total rate-bearing liabilities 100,025 454 1.82% 98,956 593 2.40%
Other liabilities 763 767
------------ --------------
Total Liabilities 100,787 99,723
------------ --------------
Total Stockholders' Equity 8,550 7,865
------------ --------------
Total Liabilities and Stockholders' Equity 109,338 107,588
============ ==============
------------ ---------------
Net interest income $ 1,174 $ 1,039
============ ===============
------------- -------------
Net interest spread 4.47% 4.26%
============= =============
------------- -------------
Net interest margin(4) 4.54% 4.24%
============= =============
(1) Gross of allowance for loan losses
(2) Includes average non-accrual loans
(3) Excludes the impact of the average net unrealized loss on securities
available for sale
(4) Net interest income divided by total earning assets
(5) Interest income on investment securities is presented on a tax-effected
basis using a 38% income tax rate and a 20% TEFRA disallowance
PROVISION FOR LOAN LOSSES
- -------------------------
Provision for loan losses was $21,000 during the first quarter of 2004, compared
to $73,000 in the first quarter of 2003. The balance of the allowance for loan
losses at March 31, 2004 was $1.29 million (1.39% of gross loans) compared to
$1.28 million (1.47% of gross loans) at December 31, 2003. Net charge-offs for
the first quarter of 2004 were $19,000 as compared to $9,000 for the first
quarter of 2003. As a percentage of average loans, the annualized rate of net
charge-offs was 0.08% for the first quarter of 2004 compared to a 0.04% ratio
for the same period in 2003.
13
Analysis of the Allowance for Loan Losses
For the Three Months Ended March 31,
2004 2003
------------------ -------------------
Average Loans Outstanding 89,224 82,775
================== ===================
Allowance at beginning of period 1,283 1,047
Charge-offs:
Commercial, financial and agricultural - -
Real Estate - construction - -
Real Estate - mortgage - -
Installment - consumer 24 11
Other - -
------------------ -------------------
Total charge-offs 24 11
------------------ -------------------
Recoveries:
Commercial, financial and agricultural - -
Real Estate - construction - -
Real Estate - mortgage 3 -
Installment - consumer 2 2
Other - -
------------------ -------------------
Total recoveries 5 2
Net charge-offs 19 9
------------------ -------------------
Provision for loan losses 21 73
------------------ -------------------
Balance at end of period $ 1,285 $ 1,111
================== ===================
Ratio of net charge-offs during the period to average loans
outstanding during the period 0.02% 0.01%
As of March 31, 2004, management's review of the allowance for loan losses
concluded that the balance was adequate to provide for potential losses based
upon an evaluation of risk in the loan portfolio. Despite our credit standards,
internal controls, and continuous loan review process, the inherent risk in the
lending process results in periodic charge-offs. Through the provision for loan
losses, we maintain a reserve for loan losses that management believes is
adequate to absorb losses within the loan portfolio. In addition, various
regulatory agencies, as an integral part of their examination procedures,
periodically review our reserve for loan losses, and based on their judgment may
require the us to recognize additions to the reserve for loan losses. Management
completes a formal analysis of the reserve for loan losses adequacy on a monthly
basis. A portion of this analysis is maintained as an unallocated reserve to
recognize the imprecision in estimating the allowance for loan losses.
Management strives on an ongoing basis to identify potential problems in its
loan portfolio, resulting in more specific analysis of reserve amounts for
specific loans and less amounts for unallocated reserve amounts.
NON-INTEREST INCOME
- -------------------
Total non-interest income was approximately $173,000 for the first quarter of
2004 compared to $341,000 for the same period in 2003. Fees on sales of mortgage
loans fell to $54,000 during the first quarter of 2004 as compared to
approximately $238,000 during the first quarter of 2003. Management attributes
the decrease in fees on sales of mortgage loans to a decrease in the volume of
loans sold, as a significant number of eligible households have already
refinanced during this low mortgage interest rate cycle. Service charges on
deposit accounts increased 21% during the first quarter of 2004 as compared to
the same period in 2003.
14
NON-INTEREST EXPENSE
- --------------------
Non-interest expense totaled approximately $924,000 during the first quarter of
2004 as compared to $856,000 during the first quarter of 2003. Non-interest
expense (annualized) as a percent of total average assets was 3.38% for the
first quarter of 2004 compared to 3.18% for the first quarter of 2003. The
increase in non-interest expense during the first quarter of 2004 as compared to
the same period in 2003 can be primarily attributed to increases in salaries and
employee benefits, legal and professional expense and other expenses. Most of
the salary and employee benefit increases can be attributed to the growth in our
assets which has necessitated increases in overhead expenses. The increase in
legal and professional expense is attributable in part to additional audit work
required under new audit standards.
INCOME TAXES
- ------------
The Company recognizes income taxes under the asset and liability method
established in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis and the
tax basis of our assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are realized or
settled. Our deferred tax assets are reviewed quarterly and adjustments to such
assets are recognized as deferred income tax expense or benefit based on
management's judgment relating to the realizability of such assets.
We recognized income tax expense of $131,000 and $156,000 for the first quarter
of 2004 and 2003, respectively. The effective income tax rate for the Company
was 34.3% for the first quarter of 2004 and 35.5% for the first quarter of 2003.
BALANCE SHEET ANALYSIS - COMPARISON OF MARCH 31, 2004 TO DECEMBER 31, 2003
- --------------------------------------------------------------------------
Assets totaled $112.3 million at March 31, 2004, as compared to $107.1 million
at December 31, 2003, an increase of 4.9%. Our growth is attributable to a $4.1
million in loans, $1.3 million in loans held for sale, and $0.4 million in
prepaid expenses and other assets.
INVESTMENT SECURITIES
- ---------------------
Investment securities were approximately $14.2 million, or 13% of total assets,
at March 31, 2004, a decrease of $262,000 from December 31, 2003. We purchased
$485,000 in investment securities during the first quarter of 2004, while
maturities, calls, sales and principal paydowns provided cash of $821,000.
The investment portfolio is comprised of U.S. Government and federal agency
obligations and mortgage-backed securities issued by the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal Home Loan Bank (FHLB), the Federal
Farm Credit Bank (FFCB), the Government National Mortgage Association (GNMA) and
the Federal National Mortgage Association (FNMA). We also invest in tax-free,
bank-qualified state, county and municipal bonds, and investment grade corporate
debt securities. Mortgage-backed issues comprised 31.0% of the portfolio at
March 31, 2004 and 35.1% at December 31, 2003.
At March 31, 2004 and December 31, 2003, 100% of our portfolio was classified as
available for sale and is reflected on the balance sheet at fair value with net
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of applicable deferred income taxes. The
unrealized gain on investment securities available for sale was $251,000 at
March 31, 2004, an increase of $76,000 from December 31, 2003, primarily as a
result of changes in the bond market. The fair value of securities fluctuates
with the movement of interest rates. Generally, during periods of decreasing
interest rates, the fair values increase whereas the opposite may hold true
during a rising interest rate environment.
15
LOANS
- -----
During the first quarter of 2004, loans increased $4.1 million to $89.6 million
at March 31, 2004.
Loans by Type
March 31, December 31,
2004 2003
--------------- -----------------
Commercial, financial and agricultural $ 27,384 $ 26,900
Real Estate - construction 16,948 12,363
Real estate - mortgage 38,013 38,666
Installment loans to individuals 8,689 8,981
--------------- -----------------
Loans, gross $ 91,034 $ 86,910
Less:
Allowance for loan losses (1,285) (1,283)
Unearned loan fees (137) (129)
--------------- -----------------
$ 89,612 $ 85,498
=============== =================
Included in the above may be loans which have been classified as impaired,
pursuant to the adoption of SFAS No. 114.
Non-Performing Assets
March 31, 2004 December 31, 2003
------------------ ------------------
Non-accrual loans(1) $ 654 $ 962
Loans past due greater than 90 days and still accruing interest 4 21
Restructured loans(2) 437 155
Other real estate owned - 20
------------------ ------------------
Total Non-Performing Assets $ 1,095 1,158
================== ==================
(1) Included in non-accrual loans are $439,000 and $962,000 of loans considered
impaired as of March 31, 2004 and December 31, 2003, respectively.
(2) Restructured loans as of March 31, 2004 includes $347,000 also considered
impaired.
Activity in Non-Accrual Loans - Three Months Ending March 31, 2004
Non-accrual loans December 31, 2003 962
Loans paid in full (60)
Loans charged off (2)
Loans removed from non-accrual status (284)
Loans paid down from December 31, 2003 balance (55)
Loans added to non-accrual status during 2004 93
----------
Non-accrual loans March 31, 2004 654
==========
A loan is generally placed on non-accrual status and ceases accruing interest
when loan payment performance is deemed unsatisfactory. All loans past due 90
days, however, are placed on non-accrual status, unless the loan is both well
collateralized and in the process of collection. Cash payments received while a
loan is classified as non-accrual are recorded as a reduction of principal as
long as doubt exists as to collection. We had $8,500 in repossessed assets at
March 31, 2004 and $20,000 at December 31, 2003. We have five relationships that
are considered restructured as defined by accounting standards. The
classification as restructured was brought on by changes in the terms of the
loans precipitated by deterioration in the borrowers' financial condition.
16
DEPOSITS
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Deposits grew approximately $5,661,000 to $93.8 million at March 31, 2004 from
$88.1 million at December 31, 2003. Core deposits, which include regular
savings, money market, NOW and demand deposits, were $49.1 million, or 52.3% of
total deposits, at March 31, 2004. Core deposits were 53.3% of total deposits at
December 31, 2003. Time deposits totaled $44.6 million at March 31, 2004, an
increase of approximately $3.5 million from $41.1 million at December 31, 2003.
The increase in core deposits can be primarily be attributed to additional
marketing and management focus on attracting core deposits in an effort to
improve the Bank's net interest margin, as these deposits typically carry lower
interest rates than time deposits. The increase in time deposits represents a
return to more traditional levels with more aggressive deposit pricing for time
deposits in the first quarter of 2004, in part due to the funding requirements
of our loan portfolio growth.
Deposit Balances By Type
March 31, 2004 December 31, 2003
----------------- -------------------
Demand Deposits:
Non-interest bearing demand
accounts $ 9,003 $ 7,815
NOW and money market accounts 36,853 36,049
Savings accounts 3,277 3,141
----------------- -------------------
Total demand deposits 49,133 47,005
----------------- -------------------
Term Deposits:
Less than $100,000 29,578 26,317
$100,000 or more 15,068 14,796
----------------- -------------------
Total Term Deposits 44,646 41,113
----------------- -------------------
Total Deposits $ 93,779 $ 88,118
================= ===================
CAPITAL
- -------
During the first quarter of 2004, stockholders' equity increased $260,000 to
$8.8 million, due to net income for the first quarter of 2004 of $251,000 and an
increase in other comprehensive income of $48,000 during the same period.
Regulatory Capital
TnBank
(Wholly-Owned Subsidiary of Tennessee Valley Financial Holdings, Inc.)
March 31, 2004
---------------------------------------
Well Minimum
Capitalized Regulatory
Bank Levels Requirement
---------------------------------------
Tier 1 Capital as a percentage of risk-weighted assets 9.6% 6.0% 4.0%
Total Capital as a percentage of risk-weighted assets 10.8% 10.0% 8.0%
Tier 1 capital to average assets 7.8% 5.0% 5.0%
December 31, 2003
---------------------------------------
Well Minimum
Capitalized Regulatory
Bank Levels Requirement
---------------------------------------
Tier 1 Capital as a percentage of risk-weighted assets 9.8 6.0% 4.0%
Total Capital as a percentage of risk-weighted assets 11.1% 10.0% 8.0%
Tier 1 capital to average assets 7.7% 5.0% 5.0%
17
During the first quarter of 2003, our Board of Directors approved a resolution
authorizing the repurchase of up to 2,000 of our shares at $19.50 per share
during the second quarter of 2003. That plan was modified in October 2003 to
authorize the repurchase of 3,000 shares. Our directors believe that the
periodic repurchase of our shares will assist in establishing a bona fide value
for the shares and assist in creating a limited market for the shares, thereby
enhancing the liquidity for our shareholders. The directors arrived at the
$19.50 per share price based on, among other things, information provided by an
independent third party, utilizing market multiples and coming up with a range
of values in the form of an evaluation. The Board will consider additional
repurchases in the future based on our financial condition at that time.
Management does not expect this program will have a material impact on our
financial position. 2,000 shares were repurchased during the first quarter of
2004; none were repurchased in 2003.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Our primary sources of liquidity are deposit balances, available-for-sale
securities, principal and interest payments on loans and investment securities,
Fed Fund lines, and Federal Home Loan Bank advances.
At March 31, 2004, we held $14.2 million in available-for-sale securities.
Deposits increased approximately $5.7 million during the first quarter of 2004.
We had $3.0 million in available federal funds lines and approximately $6.0
million in available borrowings from the Federal Home Loan Bank as of March 31,
2004.
We can also enter into repurchase agreement transactions should the need for
additional liquidity arise. At March 31, 2004, the Company had $334,000 in
repurchase agreement balances outstanding.
At March 31, 2004, the Company had capital of $8.8 million, or 7.8% of total
assets as compared to $8.5 million, or 7.9% at December 31, 2003. Tennessee
chartered banks that are insured by the FDIC are subject to minimum capital
maintenance requirements. Regulatory guidelines define the minimum amount of
qualifying capital an institution must maintain as a percentage of risk-weighted
assets and average total assets.
18
Tennessee Valley Financial Holdings, Inc.
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 31.1 Certification of Thomas E. Tuck, President and Chief
Executive Officer of Tennessee Valley Financial
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification of Gerald Cooksey, Jr., Vice President
and Cashier of Tennessee Valley Financial Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Exhibit 32.1 Certification of Thomas E. Tuck, President and Chief
Executive Officer of Tennessee Valley Financial
Holdings, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Gerald Cooksey, Jr., Vice President
and Cashier of Tennessee Valley Financial Holdings,
Inc. pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
None.
19
FORM 1O-QSB
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.
Tennessee Valley Financial Holdings, Inc.
Date: April 23, 2004 By: /s/ Jerry Cooksey
--------------- ------------------------------------------------
Jerry Cooksey, Vice President and
Principal Accounting Officer
20