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
OR
[ ] 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. 33-94050
Volunteer Bancorp, Inc.
(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, 37857
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Tennessee
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 423-272-2200
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Not applicable
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Former name, former address and former fiscal year, if changed since last report
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS: 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 May 14, 2004.
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 March 31, 2004
and December 31, 2003 3
Consolidated Statements of Income for the Three
Months Ended March 31,2004 and 2003 4
Consolidated Statements of Comprehensive Income for
the Three Months Ended March 31, 2004 and 2003 5
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2004 6
Notes to Consolidated Financial Statements 7
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 13
Certifications 14
PART 1 - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
2004 2003
---- ----
ASSETS
Cash and due from banks $ 2,550,700 $ 2,881,551
Federal funds sold 106,198 354,371
--------------- ----------------
Cash and cash equivalents 2,656,898 3,235,922
Securities
Available for sale 23,050,342 27,462,097
Held to maturity 624,069 709,910
Loans, less allowance for loan losses 73,154,805 68,719,127
Accrued interest receivable 790,144 759,388
Premises and equipment, net 3,666,395 3,715,926
Real estate acquired through foreclosure 263,500 1,533,749
Goodwill 131,259 131,259
Cash surrender value life insurance 2,112,326 2,088,704
Other assets 438,303 322,846
--------------- ----------------
Total Assets $ 106,888,041 $ 108,678,928
=============== ================
LIABILITIES
Deposits
Non-interest bearing $ 14,569,352 $ 13,207,429
Interest bearing 79,836,716 83,505,414
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Total deposits 94,406,068 96,712,840
Accrued interest payable 261,450 317,580
Federal funds purchased 2,325,000 1,450,000
Securities sold under repurchase agreements 1,183,842 1,358,902
Other accrued taxes, expenses and liabilities 134,009 123,765
Long-term debt 980,000 1,415,000
--------------- ----------------
Total Liabilities 99,290,369 101,378,087
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 1,000,000 shares
authorized; 539,027 shares issued and outstanding
in 2004 and 2003 5,390 5,390
Additional paid-in capital 1,916,500 1,916,500
Retained earnings 5,400,701 5,161,814
Accumulated other comprehensive income 275,081 217,137
--------------- ----------------
Total stockholders' Equity 7,597,672 7,300,841
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 106,888,041 $ 108,678,928
=============== ================
See accompanying notes.
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PART 1 - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31
2004 2003
---- ----
INTEREST INCOME
Loans, including fees $ 1,191,642 $ 1,241,197
Federal funds 813 11,659
Investment securities:
Taxable 151,775 232,550
Tax-exempt 72,796 71,585
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Total interest income 1,417,026 1,556,991
INTEREST EXPENSE
Deposits 316,055 444,243
Other borrowed funds 19,548 25,779
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Total interest expense 335,603 470,022
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Net interest income 1,081,423 1,086,969
Provision for loan losses 0 100,000
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Net interest income after provision for loan losses 1,081,423 986,969
NON-INTEREST INCOME
Service charges on deposits and fees 111,468 110,150
Securities gains 25,017 106,466
Other non-interest income 54,805 36,368
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Total non-interest income 191,290 252,984
NON-INTEREST EXPENSE
Salaries and employee benefits 481,043 504,624
Occupancy and equipment expenses 160,104 167,223
Other non-interest expense 297,440 341,495
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Total non-interest expense 938,587 1,013,342
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Income before income taxes 334,126 226,611
Income tax expense 95,239 65,079
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Net Income $ 238,887 $ 161,532
=========== ===========
Basic and diluted earnings per share $ 0.44 $ 0.30
See accompanying notes.
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VOLUNTEER BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
2004 2003
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Net income $ 238,887 $ 161,532
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities arising
during the period 118,475 (71,292)
Reclassification of realized amount (25,017) (106,466)
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Other comprehensive income 93,458 (177,758)
Income taxes related to other comprehensive income (35,514) 67,548
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Other comprehensive income, net of income taxes 57,944 (110,210)
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Total comprehensive income $ 296,831 $ 51,322
============= ==============
See accompanying notes.
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PART I - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 238,887 $ 161,532
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization 55,825 48,563
Provision for loan losses 0 100,000
Securities (gains) losses, net (22,807) (106,466)
Federal Home Loan bank stock dividends (3,800) (3,600)
Net amortization of premium on securities 64,916 46,875
Write downs of other real estate 0 5,000
Increase in bank owned life insurance (23,622) (9,159)
Changes in:
Interest receivable (30,756) 104,139
Interest payable (56,130) (27,492)
Other assets 109,513 159,771
Other liabilities 10,244 100,542
---------------- ----------------
Net cash from operating activities 342,270 579,707
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases 0 (10,232,562)
Proceeds from calls and maturities 723,679 4,261,962
Proceeds from sales 3,744,590 5,904,082
Securities held to maturity
Proceeds from calls and maturities 84,476 111,563
Net change in loans (4,500,678) (2,000,208)
Investment in bank owned life insurance 0 (2,000,000)
Proceeds from sale of other real estate 1,074,765 130,000
Purchases of premises and equipment, net (6,294) (21,277)
----------------- ----------------
Net cash from investing activities 1,120,538 (3,846,440)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (2,306,772) 3,100,999
Net change in repurchase agreements (175,060) (298,094)
Federal funds purchased 875,000 0
Repayment of long-term debt (435,000) (395,000)
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Net cash from financing activities (2,041,832) 2,407,905
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Net change in cash and cash equivalents (579,024) (858,828)
Cash and cash equivalents at beginning of period 3,235,922 9,155,507
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Cash and cash equivalents at end of period $ 2,656,898 $ 8,296,679
================ ================
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest expense $ 391,733 $ 497,514
Income taxes 0 3,704
See accompanying notes.
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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 March 31,
2004, the results of operations for the three months ended March 30, 2004 and
2003, and cash flows for the three months ended March 31, 2004 and 2003. 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, 2003. 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
$980,000 at March 31, 2004, due to an unaffiliated 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 March
31, 2004, the rate on the note was 3.08% per annum. Principal is payable
annually on January 31 as follows:
2005 470,000
2006 (final maturity) 510,000
------------
$ 980,000
============
The loan is secured by all of the stock of Citizens Bank of East Tennessee owned
by the Company.
The note agreement contains financial and operating covenants. As of March 31,
2004, the Company is in compliance with these covenants.
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.
-7-
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.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As of and for the Three Months Ended March 31, 2004 and 2003.
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 2003 Annual Report, the interim unaudited consolidated
financial statements and notes for the three months ended March 31, 2004,
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 2004 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 three months of 2004 of $238,887,
or $.44 per common share, compared to net income of $161,532 or $0.30 per common
share, for the same period a year ago. Total assets decreased $1,790,887 from
December 31, 2003 to March 31, 2004. Our return on average assets was .88% for
the quarter ended March 31, 2004 compared to .58% for the same period a year
ago. This improvement is primarily due to significantly lower loan loss
provisions and a decrease in non-interest expenses.
FINANCIAL CONDITION
Earning Assets.
Average earning assets have remained constant as a percentage of total average
assets since year end. Average earning assets to Average Assets is 90.7% for
three months ended March 31, 2004 compared to 90.7% for all of 2003.
-9-
Loan Portfolio.
The Company's total loan portfolio increased by 6.3% at March 31, 2004 compared
to December 31, 2003. There were differences in the mix as summarized below.
March 31 December 31
2004 2003
---- ----
(in thousands)
Commercial, financial and agriculture $ 5,530 $ 4,721
Real estate - construction 1,528 992
Real estate - mortgage 56,455 54,588
Consumer 8,443 7,765
Other 2,058 1,565
----------- -----------
$ 74,014 $ 69,631
=========== ===========
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 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 loan losses and the appropriate provisions required to
maintain a level considered adequate to absorb probable incurred loan losses.
The provision for loan losses was $0 for the three months ended March 31, 2004
as compared to $100,000 in the same period in 2003.
The allowance for loan losses at March 31, 2004 was 1.16% of loans. Management
believes that the $858,892 at March 31, 2004 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.
Three Months Ended March 31
2004 2003
---- ----
(in thousands)
Balance, beginning of year $ 911 $ 1,111
Provision charged to expense 0 100
Loans charged off (60) (134)
Recoveries 7 12
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Balance, end of year $ 858 $ 1,089
-10-
Investment Portfolio.
The Company maintains an investment strategy of seeking portfolio yields within
acceptable risk levels, as well as providing liquidity. The Company maintains
two classifications of investment securities; Available for Sale and Held to
Maturity. The Available for Sale securities are carried at fair market value,
whereas the Held to Maturity securities are carried at amortized cost. At March
31, 2004 and December 31, 2003, there was an unrealized gain in the Available
for Sale securities of approximately $444,000 and $350,000, respectively.
The Company's investment securities portfolio decreased approximately $4,500,000
since December 31, 2003. This decrease is primarily attributed to management's
selling lower yielding securities to fund higher yielding loans.
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 $2,112,326 at March 31, 2004. All
officers of The Citizens Bank of East Tennessee as of February 15, 2003 were
insured.
Deposits.
Deposits totaled $94,406,068 at March 31, 2004 compared to $96,712,840 at
December 31, 2003. The deposit decline has primarily been in 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
$980,000 at March 31, 2004 due an unaffiliated bank and is discussed further in
Note 2 in the Notes to Consolidated Financial Statements.
Results of Operations
Net income increased to $238,887 for the three months ended March 31, 2004 from
$161,532 in the same period in 2003.
Net interest income decreased .51% for the three months ended March 31, 2004
compared to the same period in 2003 from $1,086,969 to $1,081,423.
The provision for loan losses decreased $100,000 during the three months ended
March 31, 2004 compared to the same periods last year. Non-performing assets
decreased $2,016,000 from December 31, 2003 to March 31, 2004.
Non-performing assets were as follows as of March 31, 2004 and December 31,2003:
March 31 December 31
2004 2003
---- ----
(in thousands)
Loans past due over 90 days $ 114 $ 1,035
Non-accrual loans 350 175
Other real estate owned 264 1,534
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Total non-performing assets $ 728 $ 2,744
=========== ===========
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Non-Interest Income.
Gains on the sale of securities decreased $83,658 during the first three months
of 2004 compared to 2003. Service charges increased slightly in 2004.
Non-Interest Expense.
Salaries and employee benefits decreased $23,581 in the three months ended March
31, 2004 compared to 2003. Occupancy and equipment expenses decreased $7,119 in
the three months ended March 31, 2004 compared to 2003. Other expenses were
lower in the three months ended March 31, 2004 than in 2003 due to reduced
professional and legal fees.
Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
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)) as of a date within 90 days of the filing date of
this quarterly report. 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.
-12-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of President Pursuant to Section 302 of
Sarbanes-Oxley Act
31.2 Certification of Vice President Pursuant to Section 302 of
Sarbanes-Oxley Act
32 Certification of President and Vice President and Cashier
Pursuant to Section 18 U.S.C. Section 1350 (As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002)
(b) There have been no Current Reports on Form 8-K filed during the
quarter ended March 31, 2004.
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: May 14, 2004 /s/ Reed D. Matney
---------------------------------------------
Reed D. Matney, President
Date: May 14, 2004 /s/ Greg Oliver
--------------------------------------------
Greg Oliver, Vice President and Cashier
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