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 June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission File No. 33-94050
Volunteer Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Tennessee 62-1271025
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
210 East Main Street, Rogersville, 37857
- ---------------------------------- -----
Tennessee (Zip Code)
---------
(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
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 August 11, 2004.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
VOLUNTEER BANCORP, INC.
INDEX
Part I Financial Information Page
----
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2004 3
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 2004 and June 2003 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2004 and June 2003 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Controls and Procedures 10
Part II Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of
Securities Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
PART 1 - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2004
(Unaudited)
ASSETS
Cash and due from banks $ 2,686,197
Federal funds sold 1,100,276
------------------
Total cash and cash equivalents 3,786,473
Investment securities
Available for sale 21,227,434
Held to maturity 471,352
Loans, net (allowance for loan losses $878,075) 73,359,782
Federal Home Loan Bank stock, at cost 393,600
Accrued interest receivable 713,861
Premises and equipment, net 3,683,308
Other real estate 146,900
Cash surrender value life insurance 2,133,239
Other assets 709,267
------------------
Total Assets $ 106,625,216
==================
LIABILITIES
Deposits
Non-interest bearing $ 14,157,968
Interest bearing 79,167,149
------------------
Total deposits 93,325,117
Interest payable 182,656
Federal funds purchased 1,725,000
Securities sold under repurchase agreements 691,523
FHLB advances 2,000,000
Other accrued liabilities 237,146
Note payable 980,000
------------------
Total Liabilities 99,141,442
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 5,572,515
Accumulated other comprehensive income (10,631)
------------------
Total Stockholders' Equity 7,483,774
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 106,625,216
==================
See accompanying notes to consolidated financial statements.
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PART 1 - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 1,217,957 $ 1,240,801 $ 2,409,599 $ 2,481,998
Federal funds 1,190 7,293 2,003 18,952
Investment securities:
Taxable 135,378 211,114 287,153 443,664
Tax-exempt 72,556 73,062 145,352 144,647
----------- ----------- ----------- -----------
Total interest income 1,427,081 1,532,270 2,844,107 3,089,261
INTEREST EXPENSE
Deposits 284,105 418,182 600,160 862,425
Other borrowed funds 17,570 22,114 37,118 47,893
----------- ----------- ----------- -----------
Total interest expense 301,675 440,296 637,278 910,318
Net interest income 1,125,406 1,091,974 2,206,829 2,178,943
Provision for loan losses 100,000 290,000 100,000 390,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 1,025,406 801,974 2,106,829 1,788,943
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Service charges on deposits and fees 114,339 132,122 225,807 242,272
Securities gains 0 0 25,017 106,465
Other non-interest income 64,175 66,178 118,980 102,547
----------- ----------- ----------- -----------
Total non-interest income 178,514 198,300 369,804 451,284
NON-INTEREST EXPENSE
Salaries and employee benefits 499,002 504,917 980,045 1,009,541
Occupancy and equipment expenses 152,110 212,047 312,214 379,270
Other non-interest expense 325,870 292,059 623,310 633,554
----------- ----------- ----------- -----------
Total non-interest expense 976,982 1,009,023 1,915,569 2,022,365
----------- ----------- ----------- -----------
(Loss) income before income taxes 226,938 (8,749) 561,064 217,862
Income tax (benefit) expense 55,124 (32,925) 150,363 32,154
----------- ----------- ----------- -----------
Net Income $ 171,814 $ 24,176 $ 410,701 $ 185,708
=========== =========== =========== ===========
Other comprehensive income
Unrealized gain (loss) on securities available
for sale, before tax $ (460,825) $ 197,785 $ (342,350) $ 126,442
Reclassification for gains included in net income 0 0 (25,017) (106,465)
Income taxes related to other comprehensive income 175,113 (75,158) 139,599 (7,591)
----------- ------------ ----------- -----------
(285,712) 122,627 (227,768) 12,386
----------- ----------- ----------- -----------
Total comprehensive income $ (113,898) $ 146,803 $ 182,933 $ 198,094
=========== =========== =========== ===========
Net income (loss) per common share $ .32 $ 0.04 $ .76 $ 0.34
Common shares outstanding 539,027 539,027 539,027 539,027
See accompanying notes to consolidated financial statements.
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PART I - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30
-------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 410,701 $ 185,708
Adjustments to reconcile net income to net cash
from operating activities
Provision for loan losses 100,000 390,000
Depreciation and amortization 196,226 198,444
Gain on securities (22,807) (107,903)
Writedown of OREO 17,600 5,000
Federal Home Loan bank stock dividends (7,600) (7,300)
Increase in cash surrender value of life insurance (44,535) (35,077)
Change in:
Accrued interest receivable 45,527 157,998
Other assets 144,921 170,923
Other liabilities (21,543) 257,750
---------------- ----------------
Net cash from operating activities 818,490 1,215,543
CASH FLOWS FROM INVESTING ACTIVITIES Activity in held to maturity securities:
Maturities, prepayments, and calls 236,336 324,300
Activity in available for sale securities:
Sales 3,744,590 5,797,617
Purchases 0 (17,106,022)
Maturities, prepayments, and calls 1,668,337 7,821,078
Net change in loans (4,837,655) (1,481,760)
Purchase of premise and equipment, net (70,210) (27,668)
Proceeds from sale - OREO 1,205,765 180,083
Investment in cash surrender value life insurance 0 (2,000,000)
---------------- -----------------
Net cash from investing activities 1,947,163 (6,492,372)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (3,387,723) 2,617,322
Net change in securities sold under repurchase agreements (392,379) (742,047)
FHLB advances 2,000,000 0
Repayment of long-term debt (435,000) (395,000)
---------------- ----------------
Net cash from financing activities (2,215,102) 1,480,275
---------------- ----------------
Net change in cash and cash equivalents 550,551 (3,796,554)
Cash and cash equivalents at beginning of period 3,235,922 9,155,507
---------------- ----------------
Cash and cash equivalents at end of period $ 3,786,473 $ 5,358,953
================ ================
Supplemental disclosure of cash flow information
Transfers from loans to foreclosed real estate $ 97,000 $ 802,430
Cash paid during the period for
Interest $ 772,202 $ 850,162
Income taxes 3,704 91,204
See accompanying notes to consolidated financial statements.
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1. Management Opinion
In the opinion of management, the unaudited consolidated financial statements
include all normal adjustments considered necessary to present fairly the
financial position as of June 30, 2004, the results of operations for the three
and six months ended June 30, 2004 and 2003, and cash flows for the six months
ended June 30, 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-Q. 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 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 June 30, 2004, due an unaffiliated national bank. The interest rate
on the note adjusts quarterly and is equal to the three-months London Interbank
Offered Rate (Three Month LIBOR) plus 1.95% per annum or at the option of the
Company, the rate on the note is equal to the lender's index rate as such rate
changes from time to time. The Company may change interest rate options at any
time with prior notice to the lender. Interest is payable quarterly. At June 30,
2004, the rate on the note was 3.13% 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 June 30,
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.
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 covered capital
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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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As of and for the Three and Six Months Ended June 30, 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 and six months ended June
30, 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 six months of 2004 of $410,701, or
$.76 per common share, compared to net income of $185,708 for the same period a
year ago and for the three months ended June 30, 2004 net income was $171,814,
or $.32 per share compared to a net income of $24,176 or $.04 per share in the
second quarter of 2003. Total assets decreased approximately $2,054,000 from
December 31, 2003 to June 30, 2004. Our return on average assets was .76% for
June 30, 2004 compared to .33% for December 31, 2003. This improvement is
primarily due to significantly lower loan loss provisions and a decrease in
non-interest expense.
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Financial Condition
Earning Assets.
Average earning assets has remained constant as a percentage of total average
assets. Average earning assets to Average Assets is 90.6% for six months ended
June 30, 2004 compared to 90.7% for all of 2003.
Loan Portfolio.
The Company's total loan portfolio has increased 6.6% at June 30, 2004 compared
to December 31, 2003. There were differences in the mix as summarized below.
June 30 December 31
2004 2003
---- ----
(in thousands)
Commercial, financial and agriculture $ 5,346 $ 4,721
Real estate - construction 4,919 992
Real estate - mortgage 55,387 54,588
Consumer 7,918 7,765
Other 668 1,565
----------- -----------
$ 74,238 $ 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 $100,000 for the six months ended June 30,
2004 as compared to $390,000 in the same period in 2003. For the quarter ended
June 30, 2004 the provision was $100,000 compared to $290,000 in 2003.
The allowance for loan losses at June 30, 2004 was 1.18% of loans. Management
believes that the $878,075 at June 30, 2004 is adequate to absorb known risks in
the portfolio.
-8-
The following table provides the changes in the allowance for loan losses for
the periods indicated.
Six Months Ended June 30
2004 2003
---- ----
(in thousands)
Balance, beginning of year $ 911 $ 1,111
Provision charged to expense 100 390
Loans charged off (183) (565)
Recoveries 50 17
------ -------
Balance, end of year $ 878 $ 953
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 June
30, 2004, there was an unrealized loss in the Available for Sale securities of
approximately $17,000 compared to an unrealized gain of $350,000 at December 31,
2003.
The company's Investment securities portfolio decreased approximately $5.4
million since December 31, 2003. This decrease is primarily attributed to
management 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 $2,133,239 at June 30, 2004. All
officers of The Citizens Bank of East Tennessee as of February 15, 2003 are
insured.
Deposits.
Deposits totaled $93,325,117 at June 30, 2004 compared to $96,712,840 at
December 31, 2003. The deposit decline has primarily been in the Interest
Bearing accounts. Management has aggressively priced interest bearing deposits
to improve interest margins. Additionally, management is working to limit
deposit growth to only core deposit customers. This limited growth will assist
in management's overall strategy to strengthen capital ratios.
Note Payable.
The company's long-term debt consists of a single note payable in the amount of
$980,000 at June 30, 2004 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 $410,701 for the six months ended June 30, 2004 from
$185,708 in the same period in 2003. For the three months ended June 30, 2004,
net income was $171,814 compared to $24,176 in 2003.
Net interest income increased 1.28% from the six months ended June 30, 2003 to
the same period in 2004 from $2,178,943 to $2,206,829 and increased 3% from the
three month period ended June 30, 2003 to the same period in 2004.
-9-
The provision for loan losses decreased $190,000 and $290,000 during the three
and six months ended June 30, 2004 compared to the same periods last year.
Non-performing assets decreased $2,123,000 from December 31, 2003 to June 30,
2004.
Non-performing assets were as follows as of June 30, 2004 and December 31, 2003:
June 30 December 31
2004 2003
---- ----
(in thousands)
Loans past due over 90 days $ 100 $ 1,035
Non-accrual loans 374 175
Other real estate owned 147 1,534
----------- ---------
Total non-performing assets $ 621 $ 2,744
=========== =========
Non-Interest Income.
Gains on the sale of securities decreased $83 thousand from $108 thousand in the
first half of 2003 to $25 thousand in the first half of 2004. Service charges
decreased $18 thousand and $16 thousand in the three and six months ended June
30, 2004.
Non-Interest Expense.
Salaries and employee benefits decreased $6 thousand and $29 thousand in the
three and six months ended June 30, 2004 compared to 2003. Occupancy and
equipment expenses were significantly lower in the three and six months ended
June 30, 2004 than in 2003, as a result of maturing operating leases for
equipment. Other non-interest expense decreased $10 thousand in the six months
ended June 30, 2004 compared to 2003 and increased $34 thousand for the three
months ending June 30, 2004.
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.
-10-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting on May 27, 2004, the shareholders voted on the
following proposal with the results as indicated:
Elected four of its current directors to continue in office until the
2007 meeting of shareholders. Current directors elected to three-year
terms were as follows:
For Withhold Authority
--- ------------------
Reed Matney 402,336 0
Shirley Price 402,336 0
Carlin Greene 402,336 0
Leon Gladson 402,336 0
Directors continuing to serve include:
William E. Phillips G. Douglas Price
Scott Collins Gary Varnell
Neil Miller George Brooks
Jim Friddell
Item 5. Other Information
None
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 June 30, 2004.
-11-
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: August 12, 2004 /s/ Reed D. Matney
---------------------------------------------
Reed D. Matney, President
Date: August 12, 2004 /s/ Greg Oliver
----------------------------------------------
Greg Oliver, Vice President and Cashier
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