UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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, Tennessee 37857
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 423-272-2200
------------
Not applicable
- --------------------------------------------------------------------------------
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 November 10, 2004.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
VOLUNTEER BANCORP, INC.
INDEX
Part I Finnancial Information Page
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2004............. 3
Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 2004 and
September 30, 2003............................................ 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2004 and September 30, 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
Certifications ........................................................... 13-15
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PART 1 - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED BALANCE SHEET
September 30, 2004
(Unaudited)
ASSETS
Cash and due from banks $ 2,668,516
Federal funds sold -
------------------
Total cash and cash equivalents 2,668,516
Investment securities
Available for sale 19,883,842
Held to maturity 407,320
Loans, net (allowance for loan losses $945,608) 78,094,979
Federal Home Loan Bank stock, at cost 397,800
Accrued interest receivable 804,362
Premises and equipment, net 3,647,748
Other real estate 121,800
Cash surrender value life insurance 2,154,695
Other assets 431,058
------------------
Total Assets $ 108,612,120
==================
LIABILITIES
Deposits
Non-interest bearing $ 13,509,682
Interest bearing 78,947,414
------------------
Total deposits 92,457,096
Interest payable 253,984
Federal funds purchased 1,100,000
Securities sold under repurchase agreements 600,064
FHLB advances 5,000,000
Other accrued liabilities 318,314
Note payable 980,000
------------------
Total Liabilities 100,709,458
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 5,807,357
Accumulated other comprehensive income 173,415
------------------
Total Stockholders' Equity 7,902,662
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 108,612,120
==================
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PART 1 - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
---- ---- ---- ----
INTEREST INCOME
Loans, including fees $ 1,269,444 $ 1,252,890 $ 3,679,043 $ 3,734,888
Federal funds 1,243 2,867 3,246 21,819
Investment securities:
Taxable 120,883 169,396 408,036 613,060
Tax-exempt 72,661 72,564 218,013 217,211
----------- ----------- ----------- -----------
Total interest income 1,464,231 1,497,717 4,308,338 4,586,978
INTEREST EXPENSE
Deposits 282,654 410,355 882,814 1,272,780
Other borrowed funds 26,581 (8,622) 63,699 39,271
----------- ----------- ----------- -----------
Total interest expense 309,235 401,733 946,513 1,312,051
Net interest income 1,154,996 1,095,984 3,361,825 3,274,927
Provision for loan losses 75,000 - 175,000 390,000
----------- ----------- ----------- -----------
Net interest income after provision for loan losses 1,079,996 1,095,984 3,186,825 2,884,927
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Service charges on deposits and fees 115,275 119,592 341,082 359,161
Securities gains 1,905 - 26,922 107,903
Other non-interest income 74,081 63,217 193,061 167,029
----------- ----------- ----------- -----------
Total non-interest income 191,261 182,809 561,065 634,093
NON-INTEREST EXPENSE
Salaries and employee benefits 530,328 485,302 1,510,373 1,494,843
Occupancy and equipment expenses 158,344 177,141 470,558 556,411
Other non-interest expense 253,952 292,332 877,262 925,886
----------- ----------- ----------- -----------
Total non-interest expense 942,624 954,775 2,858,193 2,977,140
----------- ----------- ----------- -----------
Income before income taxes 328,633 324,018 889,697 541,880
Income tax expense 93,791 94,301 244,154 126,455
----------- ----------- ----------- -----------
Net Income $ 234,842 $ 229,717 $ 645,543 $ 415,425
=========== =========== =========== ===========
Other comprehensive income
Unrealized gain (loss) on securities available
for sale, before tax $ 298,753 $ (287,027) $ (43,597) $ (168,356)
Reclassification for gains included in net income (1,905) - (26,922) (107,903)
Income taxes related to other comprehensive income (112,802) 103,330 26,797 104,978
----------- ----------- ----------- -----------
184,046 (183,697) (43,722) (171,281)
----------- ----------- ----------- -----------
Total comprehensive income $ 418,888 $ 46,020 $ 601,821 $ 244,144
=========== =========== =========== ===========
Net income per common share $ .44 $ .43 $ 1.20 $ .77
Common shares outstanding 539,027 539,027 539,027 539,027
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PART I - FINANCIAL INFORMATION
VOLUNTEER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 645,543 $ 415,425
Adjustments to reconcile net income to net cash
from operating activities
Provision for loan losses 175,000 390,000
Depreciation and amortization 150,974 332,484
Gain on securities (26,922) (107,903)
Loss on OREO 11,436 16,758
Writedown of OREO 17,600 5,000
Federal Home Loan bank stock dividends (11,800) (11,100)
Increase in cash surrender value of life insurance (65,991) (61,715)
Change in:
Other assets 264,354 242,455
Other liabilities 130,953 53,969
---------------- ----------------
Net cash from operating activities 1,292,147 1,275,373
CASH FLOWS FROM INVESTING ACTIVITIES Activity in held to maturity securities:
Maturities, prepayments, and calls 336,329 690,992
Activity in available for sale securities:
Proceeds 3,744,590 5,797,617
Purchases - (21,275,460)
Maturities, prepayments, and calls 3,370,329 12,942,136
Net change in loans (9,687,752) (2,528,202)
Purchase of premise and equipment, net (82,796) (117,420)
Proceeds from sale of OREO 1,259,329 378,325
Investment in cash surrender value life insurance - (2,000,000)
---------------- ----------------
Net cash from investing activities (1,059,971) (6,112,012)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in FHLB advances 5,000,000 -
Net change in deposits (4,255,744) 210,221
Net change in securities sold under repurchase agreements
and federal funds purchase (1,108,838) (553,496)
Repayment of long-term debt (435,000) (395,000)
---------------- ----------------
Net cash from financing activities (799,582) (738,275)
---------------- ----------------
Net change in cash and cash equivalents (567,406) (5,574,914)
Cash and cash equivalents at beginning of period 3,235,922 9,155,507
---------------- ----------------
Cash and cash equivalents at end of period $ 2,668,516 $ 3,580,593
================ ================
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 1,010,109 $ 1,334,144
Income taxes 18,719 91,204
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1. Basis of Presentation
In the opinion of management, the unaudited consolidated financial statements
include all normal adjustments considered necessary to present fairly the
financial position as of September 30, 2004, the results of operations for the
three and nine months ended September 30, 2004 and 2003, and cash flows for the
nine months ended September 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 September 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
September 30, 2004, the rate on the note was 3.65% 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 September
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.
The memorandum was lifted August 19, 2004.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As of and for the Three and Nine Months Ended September 30, 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 nine months ended
September 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 nine months of 2004 of $645,543,
or $1.20 per common share, compared to net income of $415,425 for the same
period a year ago and for the three months ended September 30, 2004 net income
was $234,842, or $.44 per share compared to a net income of $229,717 or $.43 per
share in the third quarter of 2003. Total assets decreased approximately $67,000
from December 31, 2003 to September 30, 2004. Our return on average assets was
..80% for nine months ended September 30, 2004 compared to .54% for the year
ended 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 90.7% for nine months ended
September 30, 2004 compared to 90.7% for all of 2003.
Loan Portfolio.
The Company's total loan portfolio has increased 13.5% at September 30, 2004
compared to December 31, 2003 and is summarized below.
September 30 December 31
2004 2003
---- ----
(in thousands)
Commercial, financial and agriculture $ 5,360 $ 4,721
Real estate - construction 5,678 992
Real estate - mortgage 58,628 54,588
Consumer 8,727 7,765
Other 648 1,565
----------- -----------
$ 79,041 $ 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 $175,000 for the nine months ended September
30, 2004 as compared to $390,000 in the same period in 2003. For the quarter
ended September 30, 2004 the provision was $75,000 compared to $0 in 2003.
The allowance for loan losses at September 30, 2004 was 1.20% of loans.
Management believes that the $945,608 at September 30, 2004 is adequate to
absorb known risks in the portfolio.
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The following table provides the changes in the allowance for loan losses for
the periods indicated.
Nine Months Ended September 30
2004 2003
---- ----
(in thousands)
Balance, beginning of year $ 911 $ 1,111
Provision charged to expense 175 390
Loans charged off (197) (686)
Recoveries 57 30
----------- -----------
Balance, end of year $ 946 $ 845
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
September 30, 2004, there was an unrealized gain in the Available for Sale
securities of approximately $280,000 compared to an unrealized gain of $350,000
at December 31, 2003.
The company's Investment securities portfolio decreased approximately $7.8
million since December 31, 2003. This decrease is primarily attributed to
management selling lower yielding securities to fund higher yielding loans, as
well as principal pay downs on mortgage backed securities.
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 $2,154,695 at September 30, 2004. All
officers of The Citizens Bank of East Tennessee as of February 15, 2003 are
insured.
Deposits.
Deposits totaled $92,457,096 at September 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 September 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 $645,543 for the nine months ended September 30, 2004
from $415,425 in the same period in 2003. For the three months ended September
30, 2004, net income was $234,842 compared to $229,717 in 2003.
Net interest income increased 2.7% from the nine months ended September 30, 2003
to the same period in 2004 from $3,274,927 to $3,361,825 and increased 5.38%
from the three month period ended September 30, 2003 to the same period in 2004.
-9-
The provision for loan losses decreased $215,000 for the nine months ended
September 30, 2004 and increased $75,000 during the three months ended September
30, 2004 compared to the same periods last year. Non-performing assets decreased
$1,995,000 from December 31, 2003 to September 30, 2004.
Non-performing assets were as follows as of September 30, 2004 and December 31,
2003:
September 30 December 31
2004 2003
---- ----
(in thousands)
Loans past due over 90 days $ 35 $ 1,035
Non-accrual loans 592 175
Other real estate owned 122 1,534
----------- -----------
Total non-performing assets $ 749 $ 2,744
=========== ===========
Non-Interest Income.
Gains on the sale of securities decreased $80,981 from $107,903 in the nine
months ended September 30, 2003 to $26,922 in the nine months ended September
30, 2004. Service charges decreased $4 thousand and $18 thousand in the three
and nine months ended September 30, 2004.
Non-Interest Expense.
Salaries and employee benefits increased $45 thousand and $16 thousand in the
three and nine months ended September 30, 2004 compared to 2003. Occupancy and
equipment expenses were significantly lower in the three and nine months ended
September 30, 2004 than in 2003, as a result of maturing operating leases for
equipment. Other non-interest expense decreased $49 thousand in the nine months
ended September 30, 2004 compared to 2003 and decreased $38 thousand for the
three months ending September 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 the end of the period covered by this
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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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
32.1 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 September 30, 2004.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VOLUNTEER BANCORP, INC.
Date: November 12, 2004 /s/ Reed D. Matney
--------------------------------------------
Reed D. Matney, President
Date: November 12, 2004 /s/ Greg Oliver
--------------------------------------------
Greg Oliver, Vice President and Cashier
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