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 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)
Indicate by mark whether the registrant (1) has filed all reports required
to be filed by Section 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. Yes [x] No [ ]
Indicate by mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13, or (15d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes [x] No [ ]
The number of outstanding shares of the registrant's Common Stock, par
value $1.00 per share, was 532,030 on August 6, 2004.
FORM 10-QSB
Index
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 2004 and December 31, 2003...........................3
Condensed Consolidated Statements of Income
for the three and six months ended June 30, 2004 and 2003...........4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 2004.......................5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2004 and 2003.............................6
Condensed Consolidated Statements of Comprehensive Income
for the six months ended June 30, 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..............12-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................20
Item 2. Changes in Securities...........................................20
Item 3. Defaults upon Senior Securities.................................20
Item 4. Submission of Matters to a Vote
of Securities Holders...........................................20
Item 5. Other Information...............................................20
Item 6. Exhibits and Reports on Form 8-K................................20
Signature....................................................................21
Certifications............................................................22-25
2
TENNESSEE VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
June 30, 2004
(Unaudited) December 31, 2003
------------------------- -------------------------
Assets
Cash and due from banks $ 1,358 $ 2,074
Federal funds sold 2,168 71
------------------------- -------------------------
Cash and cash equivalents 3,526 2,145
Investment Securities:
Investment Securities available for sale, at
Fair Value 15,904 14,502
Loans, net 93,761 85,498
Loans Held for Sale, at Fair Value 597 273
Banking premises and equipment, net 4,211 3,714
Accrued interest receivable 572 555
Other real estate owned 85 20
Prepaid expenses and other assets 438 376
------------------------- -------------------------
Total Assets $ 119,094 $ 107,083
========================= =========================
Liabilities and Stockholders' Equity
Deposits $ 100,865 $ 88,118
Securities sold under agreements to
repurchase 327 339
Other Borrowings 8,750 9,281
Accrued interest payable 280 282
Other liabilities 116 566
------------------------- -------------------------
Total Liabilities 110,338 98,586
------------------------- -------------------------
Stockholders' Equity:
Common Stock, $1.00 Par Value, 2,000,000
shares authorized, 532,030 issued and
outstanding (534,130 in 2003) 532 534
Capital in excess of par value 6,449 6,487
Retained Earnings 1,817 1,363
Accumulated other comprehensive
income (loss) (42) 113
------------------------- -------------------------
Total Stockholders' Equity 8,756 8,497
------------------------- -------------------------
Total Liabilities and Stockholders' Equity $ 119,094 $ 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)
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
2004 2003 2004 2003
----------------- ----------------- --------------- --------------
Interest Income:
Loans, including fees $ 1,495 $ 1,457 $2,955 $ 2,917
Investment securities 138 141 286 295
Federal funds sold 5 8 5 14
----------------- ----------------- --------------- --------------
Total interest income 1,638 1,606 3,246 3,226
----------------- ----------------- --------------- --------------
Interest Expense:
Deposits 400 469 762 986
Advances from the Federal Home Loan Bank and
other borrowings 87 83 179 159
----------------- ----------------- --------------- --------------
Total interest expense 487 552 941 1,145
----------------- ----------------- --------------- --------------
Net interest income 1,151 1,054 2,305 2,081
Provision for loan losses 25 90 46 163
----------------- ----------------- --------------- --------------
Net interest income after provision for loan losses 1,126 964 2,259 1,918
----------------- ----------------- --------------- --------------
Non-interest income:
Service charges on deposit accounts 97 84 191 162
Fees on sale of mortgage loans 112 294 166 532
Net gains (losses) on sales of investment securities
available for sale 0 4 1 15
Other income 15 28 39 42
----------------- ----------------- --------------- --------------
Total non-interest income 224 410 397 751
----------------- ----------------- --------------- --------------
Non-interest expense:
Salaries and employee benefits 497 473 969 929
Net occupancy expense 163 128 279 237
Data processing fees 72 59 133 119
Advertising and promotion 48 22 76 41
Office supplies and postage 50 53 92 90
Legal and professional 34 28 76 44
Loan Expense 63 78 118 145
Other 118 95 226 187
----------------- ----------------- --------------- --------------
Total non-interest expense 1,045 936 1,969 1,792
----------------- ----------------- --------------- --------------
Income before income tax expense 305 438 687 877
Income tax expense 102 153 233 309
Net Income $ 203 $ 285 $ 454 $ 568
================= ================= =============== ==============
Basic Earnings per Common Share $ 0.38 $ 0.53 $ 0.85 $ 1.06
================= ================= =============== ==============
Diluted Earnings per Common Share $ 0.38 $ 0.53 $ 0.85 $ 1.06
================= ================= =============== ==============
Weighted average common shares (Denominator Basic EPS) 532,130 534,130 532,130 534,130
Dilutive effect of stock options 2,603 1,611 2,603 1,611
----------------- ----------------- --------------- --------------
Weighted average common shares and common stock 534,733 535,741 534,733 535,741
equivalents (Denominator Diluted EPS) ================= ================= =============== ==============
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 six months ended June 30, 2004
Accumulated
Capital in Other Total
Common Excess of Par Retained Comprehensive Stockholders'
Value Earnings Income (Loss) Equity
----------- --------------- ---------------- -------------------- -----------------
Balances at December 31, 2003 $ 534 $ 6,487 $ 1,363 $ 113 $ 8,497
Net income 454 454
Other comprehensive loss (155) (155)
Purchase and retirement of 2,100
shares of common stock (2) (38) (40)
------------- --------------- ---------------- -------------------- -----------------
Balances at June 30, 2004 $ 532 $ 6,449 $ 1,817 $ (42) $ 8,756
============= =============== ================ ==================== =================
The accompanying notes are an integral part of these financial statements.
5
TENNESSEE VALLEY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(In Thousands)
For the Six Months ended June 30,
2004 2003
--------------------- ------------------
Cash Flows from Operating Activities:
Net Income $ 454 $ 568
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 46 163
Amortization of premium on investment securities, net of
accretion of discount 42 42
Depreciation 97 78
Net (gain) loss on sale of available for sale securities 1 (15)
Stock dividends on FHLB Stock (11) (10)
Changes in operating assets and liabilities:
Accrued interest receivable (17) 10
Other assets (36) (170)
Accrued interest payable and other liabilities (452) 230
--------------------- ------------------
Net cash provided by operating activities 124 896
--------------------- ------------------
Cash Flows from Investing Activities:
Proceeds from sales of available for sale investment securities 928 1,339
Proceeds from maturities and calls of available for sale investment securities 1,882 2,245
Purchases of available for sale investment securities (4,490) (3,805)
Loans originated, net of payments received (8,309) (553)
Additions to banking premises and equipment (594) (60)
Net (increase) decrease in loans held for sale (324) 2,223
--------------------- ------------------
Net cash provided by (used in) investing activities (10,907) 1,389
--------------------- ------------------
Cash Flows from Financing Activities:
Increase (decrease) in deposits, net 12,747 (368)
Repurchase of common stock (40) -
Proceeds from securities sold under agreements to repurchase and other
borrowings, net of principal repayments (543) 1,197
--------------------- ------------------
Net cash provided by financing activities 12,164 829
--------------------- ------------------
Net Increase in Cash and Cash Equivalents 1,381 3,114
Cash and Cash Equivalents, Beginning of Period 2,145 2,146
--------------------- ------------------
Cash and Cash Equivalents, End of Period $ 3,526 $ 5,260
===================== ==================
Supplementary Disclosures of Cash Flow Information:
Interest paid on deposit accounts and other borrowings $ 943 $ 1,186
Income taxes paid $ 580 $ 261
Supplementary Disclosures of Noncash Investing Activities:
Acquisition of real estate acquired through foreclosure $ 85 $ 20
Purchase of building financed by capital lease obligation $ 477 $ 273
Change in unrealized gain (loss) on available for sale investment securities $ (246) $ 65
Change in deferred tax associated with unrealized gain (loss) on investment
securities available for sale $ (91) $ 24
Change in net unrealized gain (loss) on available for sale investment securities $ (155) $ 41
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 six months ended June 30, 2004 and 2003
(In Thousands)
(Unaudited)
2004 2003
---------------- -----------------
Net Income $ 454 $ 568
---------------- -----------------
Other comprehensive income (loss), net of tax:
Unrealized gains/losses on investment securities (247) 80
Reclassification adjustment for gains/losses included in
net income 1 (15)
Income taxes related to unrealized gains/losses on investment
securities 91 (24)
---------------- -----------------
Other comprehensive income (loss), net of tax (155) 41
---------------- -----------------
Comprehensive income $ 299 $ 609
================ =================
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
June 30, 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 as of June 30, 2004 and the results of operations for the
three and six months ended June 30, 2004, and cash flows for the six month
periods ended June 30, 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.
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
8
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 June 30, 2004, the Company had outstanding commitments to advance
construction funds and to originate loans in the amount of $11.2 million and
commitments to advance existing home equity and other credit lines in the amount
of $15.0 million. In addition, the Company has also conveyed $477,000 in standby
letters of credit.
NOTE 4 - OTHER BORROWINGS
- -------------------------
The following table summarizes the Company's other borrowings as of June 30,
2004 and December 31, 2003, respectively.
December 31,
June 30, 2004 2003
----------------- ---------------------
Federal Home Loan Bank Advances $ 8,500 $ 8,650
Federal Funds Purchased - 370
Capital Lease Obligations 250 261
----------------- ---------------------
Total Other Borrowings $ 8,750 $ 9,281
================= =====================
9
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.
(In Thousands, Except Per Share Data)
Quarter Ended June 30, Six Months Ended June 30,
--------------- -------------- -------------- --------------
2004 2003 2004 2003
--------------- -------------- -------------- --------------
Net Income, as Reported $ 203 $ 285 $ 454 $ 568
Less: Total Stock-Based Employee Compensation
Expense Determined Under Fair Value Based Method
for All Awards,
Net of Related Tax Effects - - - -
--------------- -------------- -------------- --------------
Pro Forma Net Income $ 203 $ 285 $ 454 $ 568
=============== ============== ============== ==============
Earnings Per Share:
Basic - as Reported $ 0.38 $ 0.53 $ 0.85 $ 1.06
=============== ============== ============== ==============
Basic - Pro Forma $ 0.38 $ 0.53 $ 0.85 $ 1.06
=============== ============== ============== ==============
Diluted - as Reported $ 0.38 $ 0.53 $ 0.85 $ 1.06
=============== ============== ============== ==============
Diluted - Pro Forma $ 0.38 $ 0.53 $ 0.85 $ 1.06
=============== ============== ============== ==============
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 June 30, 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
10
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 June 30, 2004 and 2003.
Six Months June 30,
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%
A summary of the status of the Company's stock option plans is presented below:
Six Months Ended Six Months Ended
June 30, June 30,
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 June 30, 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 4.8 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 AND SIX MONTH PERIODS ENDING JUNE 30, 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 June 30, 2004, we earned net income of $203,000 or
$0.38 per share as compared to $285,000 or $0.53 per share for the corresponding
period in 2003. For the first half of 2004, net income was $454,000 and $568,000
for the same period in 2003. The decrease in net income for the second quarter
of 2004 and the first two quarters of 2004 are both primarily due to a decrease
in non-interest income (primarily fees on sales of mortgage loans) and an
increase in non-interest expense. These were partially offsets by increases in
the Company's net interest income and declines in the provision for loan losses.
The table below presents certain key financial ratios for the second quarter of
2004 and 2003 respectively.
For the six months ending June 30,
------------------------- ---------------------
2004 2003
------------------------- ---------------------
Return on Average Assets 0.80% 1.05%
Return on Average Equity 10.53% 14.44%
Earnings per share - basic $ 0.85 $ 1.06
NET INTEREST INCOME
- -------------------
Net interest income was $2.3 million for the first two quarters of 2004, an
increase of approximately 10.7% or $224,000 over the same period in 2003. The
increase in net interest income was due primarily to an increase in the volume
of earning assets for the first two quarters of 2004 as compared to 2003 and an
increase in our net interest margin. Net interest income was $ 1.15 million for
the second quarter of 2004 as compared to $1.05 million for the same period in
2003. The increase in net interest income for the second quarter of 2004 as
compared to the second quarter of 2003 can be attributed to an increase in the
volume of earning assets. Average loans increased approximately $8.2 million to
$91.0 million at June 30, 2004, as compared to $82.8 million at December 31,
2003. Average loans were approximately 85% of total earning assets at June 30,
2004 and 84% at December 31, 2003.
The yield on total earning assets declined 46 basis points for the first two
quarters of 2004 as compared to the first two quarters 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 55 basis points to 6.49% for the first two quarters of 2004 as
compared to 7.04% for the first two quarters of 2003 due to the reasons
discussed above. Investment yields declined 44 basis points during the first two
quarters of 2004 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 31 basis points due to the
decline in interest rates.
Total interest expense was approximately $941,000 for the first two quarters of
2004, a 17.8% decrease as compared to the same period in 2003. The average rate
on interest-bearing deposits was 1.78% for the first two quarters of 2004, 58
basis points lower than the average rate on deposits during the first two
quarters 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. The
average cost of borrowed funds was 3.76% for the first two quarters of 2004 and
4.11% for the first two quarters of 2003. The overall rate on interest-bearing
liabilities was 1.81% for the first two quarters of 2004 compared to 2.31% for
the same period in 2003.
12
Six Months Ended (In thousands) Six Months Ended (In thousands)
June 30, 2004 June 30, 2003
-------------------------------------------- ----------------------------------------------
Average Interest Yield/ Average Balance Interest Yield/
Balance Rate Rate
--------------- --------------- ------------ ----------------- --------------- ------------
Loans(1) (2) $ 91,050 $ 2,955 6.49% $ 82,815 2,917 7.04%
Investment securities(3) (5) 14,556 318 4.36% 13,324 320 4.80%
Federal funds sold 1,145 5 0.87% 2,373 14 1.18%
--------------- --------------- ------------ ----------------- --------------- ------------
Total earning assets 106,751 3,278 6.14% 98,512 3,251 6.60%
Other assets 6,340 9,441
--------------- -----------------
Total Assets $ 113,091 $ 107,953
=============== =================
Interest-bearing deposits $ 85,283 762 1.78% $ 83,532 986 2.36%
Demand deposits 8,945 0.00% 7,871 0.00%
Securities sold under agreements to
repurchase and other borrowings 9,619 179 3.76% 7,735 159 4.11%
--------------- --------------- ------------ ----------------- --------------- ------------
Total rate-bearing liabilities 103,847 941 1.81% 99,138 1,145 2.31%
Other liabilities 623 799
--------------- -----------------
Total Liabilities 104,470 99,937
--------------- -----------------
Total Stockholders' Equity 8,621 8,016
--------------- -----------------
Total Liabilities and Stockholders'
Equity $ 113,091 $ 107,953
=============== =================
Net interest income $ 2,337 $ 2,106
=============== =================
Net interest spread 4.33% 4.29%
============ ============
Net interest margin(4) 4.38% 4.28%
============ ============
(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 presented on
a tax-effected basis using a 38% income tax rate and a 20% TEFRA
disallowance.
The Company's profitability is dependent to a large extent upon net interest
income, which is the difference between its interest income on interest-earning
assets and interest expense on interest-bearing liabilities. In recent years,
the banking industry has experienced steady interest rates, which have likewise
produced steady growth in net interest income as the Company has grown. The
Company will be affected by changes in levels of interest rates and other
economic factors beyond its control, particularly to the extent that such
factors affect the overall volume of its lending and deposit activities. A
sudden increase in interest rates could have an adverse impact on the Company's
net income through a narrower interest margin and reduced lending volume.
The Company's Asset/Liability Committee ("ALCO" committee) follows the
Asset/Liability Management Policy approved by the board of directors. The ALCO
committee meets at least quarterly or more often as considered necessary to
discuss asset/liability management issues and make recommendations to the board
of directors regarding prudent asset/liability management policies and
procedures. Some of the issues the ALCO committee considers include: local and
national economic forecasts; interest rate forecasts and spreads; mismatches
between the maturities of the Company's assets (loans, and investments) and
liabilities (deposits); anticipated loan demands; and the liquidity position of
the Company.
13
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap would tend to adversely affect net interest income while a
positive gap would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income while a positive gap would tend to adversely
affect net interest income. The Company has a positive gap, with more rate
bearing liabilities repricing than earning assets repricing within the next 12
months as of June 30, 2004.
PROVISION FOR LOAN LOSSES
- -------------------------
Provision for loan losses was $46,000 for the first two quarters of 2004,
compared to $163,000 for the first two quarters of 2003. For the second quarter
of 2004 the provision for loan losses was $25,000 compared to $90,000 during the
second quarter of 2003. The decline in the provision for loan losses for the
2004 periods versus the 2003 periods can be primarily attributed to the
satisfactory resolution of loans classified adversely without loss to the
Company. The balance of the allowance for loan losses at June 30, 2004 was $1.23
million (1.29% of gross loans) compared to $1.28 million (1.47% of gross loans)
at December 31, 2003. Net charge-offs for the first two quarters of 2004 were
$100,000 as compared to $41,000 for the first two quarters of 2003. As a
percentage of average loans, the annualized rate of net charge-offs was 0.11%
for the first two quarters of 2004 compared to a 0.05% ratio for fiscal 2003.
As of June 30, 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 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.
Analysis of the Allowance for Loan Losses
For the Six Months Ended June 30,
2004 2003
------------------ -----------------
Average Loans Outstanding $ 91,050 $ 82,815
================== =================
Allowance at beginning of period $ 1,283 $ 1,047
Charge-offs:
Commercial, financial and agricultural 28 6
Real Estate - construction
Real Estate - mortgage 23 14
Installment - consumer 64 32
Other
------------------ -----------------
Total charge-offs 115 52
------------------ -----------------
14
Recoveries:
Commercial, financial and agricultural
Real Estate - construction
Real Estate - mortgage 3
Installment - consumer 12 11
Other ------------------ -----------------
Total recoveries 15 11
Net charge-offs 100 41
------------------ -----------------
Provision for loan losses 46 163
------------------ -----------------
Balance at end of period $ 1,229 $ 1,169
================== =================
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.11% 0.05%
NON-INTEREST INCOME
- -------------------
Total non-interest income was approximately $397,000 for the first two quarters
of 2004 compared to $751,000 for the same period in 2003. For the second quarter
of 2004, non-interest income declined $186,000 to $224,000 as compared to the
second quarter of 2003. The primary reason for the decline in non-interest
income for the first two quarters of 2004 and the second quarter of 2004 as
compared to the same period in 2003 is a decline in fees on sales mortgage
loans. Fees on sales of mortgage loans fell to $166,000 during the first two
quarters of 2004 as compared to approximately $532,000 during the first two
quarters of 2003. Fees on sales of mortgage loans were $112,000 for the second
quarter of 2004 as compared to $294,000 for the same period in 2003. Management
attributes the decrease in fees on sales of mortgage loans to a decrease in the
volume of loans sold brought on by the fact that mortgage rates increased during
2004 and that a significant number of eligible households have already
refinanced during this low mortgage interest rate cycle.
NON-INTEREST EXPENSE
- --------------------
Non-interest expense totaled approximately $2.0 million for the first two
quarters of 2004 as compared to $1.8 million during the first two quarters of
2003. Non-interest expense (annualized) as a percent of total average assets was
3.48% for the first two quarters of 2004 compared to 3.32% for the first two
quarters of 2003. The increase in non-interest expense during the first quarters
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
and expanded internal audit services employed by management. Non-interest
expense increased $109,000 to $1.0 million for the second quarter as compared to
the same period in 2003. The increase in these expenses can be attributed to the
growth which has brought on the need for additional overhead expenses.
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 $233,000 and $309,000 for the first two
quarters of 2004 and 2003, respectively.
15
Income tax expense was $102,000 for the second quarter of 2004 as compared to
$153,000 for the second quarter of 2003. The effective income tax rate for the
Company was 33.9% for the first two quarters of 2004 and 35.2% for the first two
quarters of 2003.
BALANCE SHEET ANALYSIS - COMPARISON OF JUNE 30, 2004 TO DECEMBER 31, 2003
- --------------------------------------------------------------------------
Assets totaled $119.1 million at June 30, 2004, as compared to $107.1 million at
December 31, 2003, an increase of 11.2%. The primary category of assets growth
was loans, which grew $8.3 million, funded by $12.7 million in growth of
deposits.
INVESTMENT SECURITIES
- ---------------------
Investment securities were approximately $15.9 million, or 13% of total assets,
at June 30, 2004, an increase of $1.4 million from December 31, 2003. We
purchased $4.5 million in investment securities during the first two quarters of
2004, while maturities, calls, sales and principal pay-downs provided cash of
$2.8 million.
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 33.1% of the portfolio at June
30, 2004 and 35.1% at December 31, 2003.
At June 30, 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 loss on investment securities available for sale was $71,000 at June
30, 2004, a decrease of $246,000 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.
16
LOANS
- -----
During the first two quarters of 2004, loans increased $8.3 million to $95.1
million at June 30, 2004.
Loans by Type
June 30, 2004 December 31, 2003
---------------------- -------------------------
Commercial, financial and agricultural $ 27,944 $ 26,898
Real estate - construction 17,986 12,363
Real estate - mortgage 39,888 38,668
Installment loans to individuals 9,292 8,981
---------------------- -------------------------
Loans, gross 95,110 86,910
Less:
Allowance for loan losses (1,229) (1,283)
Unearned loan fees (120) (129)
---------------------- -------------------------
$ 93,761 $ 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
June 30, 2004 December 31, 2003
--------------------- -------------------------
Non-accrual loans(1) $ 1,272 $ 962
Loans past due greater than 90
days and still accruing interest - 21
Restructured loans(2) 153 155
Other real estate owned 85 20
--------------------- --------------------------
Total Non-Performing Assets $ 1,510 $ 1,158
===================== ==========================
(1) Included in non-accrual loans are $786,000 and $962,000 of loans
considered impaired as of June 30, 2004 and December 31, 2003,
respectively.
(2) Included in restructured loans are $64,000 as of December 31, 2003.
Activity in Non-Accrual Loans - Six Months Ending June 30, 2004
Non-accrual loans December 31, 2003 962
Loans paid in full (65)
Loans charged off (6)
Loans removed from non-accrual status (284)
Loans repossessed or foreclosed (175)
Loans paid down from December 31, 2003 (61)
Loans added to non-accrual status during 2004 901
----------
Non-accrual loans June 30, 2004 1,272
==========
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. Other real estate owned totaled $85,000
at June 30, 2004 and $20,000 at December 31, 2003. We have six 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.
17
DEPOSITS
- --------
Deposits grew approximately $12.7 million to $100.9 million at June 30, 2004
from $88.1 million at December 31, 2003. Core deposits, which include regular
savings, money market, NOW and demand deposits, were $53.3 million, or 52.9% of
total deposits, at June 30, 2004. Core deposits were 53.3% of total deposits at
December 31, 2003. Time deposits totaled $47.5 million at June 30, 2004, an
increase of approximately $6.4 million from $41.1 million at December 31, 2003.
The increase in core deposits can be primarily 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 more
aggressive deposit pricing for time deposits in the first two quarters of 2004,
in part due to the funding requirements of our loan portfolio growth and
specials associated with the Company moving to a new branch facility in Farragut
during the second quarter of 2004. This new facility, located at 11200 Kingston
Pike, Knoxville replaces the Company's branch formerly located at 118 Mabry Hood
Road in Knoxville.
Deposit Balances By Type
June 30, 2004 December 31, 2003
----------------- ------------------
Demand Deposits:
Non-interest bearing demand accounts $ 9,944 $ 7,815
NOW and money market accounts 39,613 36,049
Savings accounts 3,784 3,141
----------------- ------------------
Total demand deposits 53,341 47,005
----------------- ------------------
Term Deposits:
Less than $100,000 31,871 26,317
$100,000 or more 15,653 14,796
----------------- ------------------
Total Term deposits 47,524 41,113
----------------- ------------------
Total deposits $ 100,865 $ 88,118
================= ==================
CAPITAL
- -------
During the first two quarters of 2004, stockholders' equity increased $259,000
to $8.8 million, due to net income of 2004 of $454,000 which offset a decline in
comprehensive income of $155,000 and a reduction in common stock and capital in
excess of par value of $40,000 related to repurchase of 2,100 shares of common
stock during the first two quarters of 2004 .
Regulatory Capital
TNBank
(Wholly-Owned Subsidiary of Tennessee Valley Financial Holdings, Inc.)
June 30, 2004
------------------------------------------------
Well Minimum
Capitalized Regulatory
Bank Levels Requirement
--------- ----------------- --------------------
Tier 1 capital as a percentage of risk-weighted assets 9.4% 6.0% 4.0%
Total capital as a percentage of risk-weighted assets 10.6% 10.0% 8.0%
Tier 1 capital to average assets 7.5% 5.0% 5.0%
18
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%
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. During the first two quarters of 2004, the Company
repurchased 2,100 shares of common stock at $19.50 per share. There were no
shares repurchased during 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,
Federal Fund lines, and Federal Home Loan Bank advances.
At June 30, 2004, we held $15.9 million in available-for-sale securities.
Deposits increased approximately $12.7 million during the first two quarters of
2004. We had $3.0 million in available federal funds lines and approximately
$7.2 million in available borrowings from the Federal Home Loan Bank as of June
30, 2004.
We can also enter into repurchase agreement transactions should the need for
additional liquidity arise. At June 30, 2004, the Company had $327,000 in
repurchase agreement balances outstanding.
At June 30, 2004, the Company had capital of $8.8 million, or 7.4% 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.
19
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
Proposal 1. To elect nine directors to serve
until the next Annual Meeting of Shareholders
and until their successor are elected and
qualified: For Against Abstain
----------- ----------- -----------
J. Michael Anderson 337,332 - 8,200
Larry Beeman 337,432 - 8,100
A.P. Cappiello 333,364 - 12,168
Victor I. Dodson 343,432 - 2,100
J. Frank Jamison 337,432 - 8,100
Terry Kerbs 337,432 - 8,100
Thomas E. Tuck 345,432 - 100
Dug Moye 337,432 - 8,100
Bob Witt 337,432 - 8,100
Proposal 2. To ratify the appointment of Pugh
& Company, Certified Public Accountants, as
auditors for the Bank for 2004: For Against Abstain
----------- ----------- -----------
344,232 1,000 300
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 Mark B. Holder, Senior Vice
President 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 Mark B. Holder, Senior Vice President
of Tennessee Valley Financial Holdings, Inc. pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
20
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: August 16, 2004 By:/s/ Mark B. Holder
-----------------------------------------------
Mark B. Holder, Senior Vice President
21