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 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 November 2, 2004.
FORM 10-QSB
Index
Page
Number
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of
September 30, 2004 and December 31, 2003............................3
Condensed Consolidated Statement of Income
for the three and nine months ended
September 30, 2004 and 2003..........................................4
Condensed Consolidated Statement of Changes
in Stockholders'Equity for the nine months
ended September 30, 2004.............................................5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003....... ................6
Condensed Consolidated Statements of Comprehensive Income
for the nine months ended September 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
Item 3. Controls and Procedures....................................... 20
Signature.....................................................................21
-2-
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Balance Sheet
(In Thousands)
September 30, 2004 December 31, 2003
(Unaudited)
-------------------------------- --------------------------------
Assets
Cash and due from banks $ 3,634 $ 2,074
Federal funds sold 2,560 71
-------------------------------- --------------------------------
Cash and cash equivalents 6,194 2,145
Investment Securities:
Investment Securities available for sale, at
Fair Value 15,080 14,502
Loans, net 96,792 85,498
Loans Held for Sale, at Fair Value 143 273
Banking premises and equipment, net 4,253 3,714
Accrued interest receivable 557 555
Other real estate owned 345 20
Prepaid expenses and other assets 432 376
-------------------------------- --------------------------------
Total Assets $ 123,796 $ 107,083
================================ ================================
Liabilities and Stockholders Equity
Deposits $ 105,014 $ 88,118
Securities sold under agreements to repurchase 300 339
Other Borrowings 8,745 9,281
Accrued interest payable 307 282
Other liabilities 317 566
-------------------------------- --------------------------------
Total Liabilities 114,683 98,586
-------------------------------- --------------------------------
Stockholders Equity:
Common Stock, $1.00 Par Value, 2,000,000
shares authorized, 532,030 issued and outstanding
in 2004, 534,130 issued and 532 534
outstanding in 2003.
Capital in excess of par value 6,448 6,487
Retained Earnings 2,051 1,363
Accumulated other comprehensive income 82 113
-------------------------------- --------------------------------
Total Stockholders Equity 9,113 8,497
-------------------------------- --------------------------------
Total Liabilities and Stockholders Equity $ 123,796 $ 107,083
================================ ================================
The accompanying notes are an integral part of these financial statements.
-3-
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statements of Income
(In Thousands except for per share amounts)
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
2004 2003 2004 2003
----------------- --------------- ---------------- ----------------
Interest Income:
Loans, including fees $ 1,622 $ 1,467 $ 4,577 $ 4,384
Investment securities 149 132 435 427
Federal funds sold 4 4 9 18
----------------- --------------- ---------------- ----------------
Total interest income 1,775 1,603 5,021 4,829
----------------- --------------- ---------------- ----------------
Interest Expense:
Deposits 418 400 1,180 1,386
Advances from the Federal Home Loan Bank and other
borrowings 92 89 271 248
----------------- --------------- ---------------- ----------------
Total interest expense 510 489 1,451 1,634
----------------- --------------- ---------------- ----------------
Net interest income 1,265 1,114 3,570 3,195
Provision for loan losses 99 77 145 240
----------------- --------------- ---------------- ----------------
Net interest income after provision for loan losses 1,166 1,037 3,425 2,955
----------------- --------------- ---------------- ----------------
Non-interest income
Service charges on deposit accounts 104 93 295 255
Fees on sale of mortgage loans 97 251 263 783
Net gains (losses) on sales of investment securities
available for sale 0 30 23 45
Other income 15 8 65 50
----------------- --------------- --------------- ----------------
Total non-interest income 216 382 646 1,133
----------------- --------------- ---------------- ----------------
Non-interest expense
Salaries and employee benefits 472 494 1,441 1,423
Net occupancy expense 167 127 446 364
Data processing fees 75 67 208 186
Advertising and promotion 31 19 107 60
Office supplies and postage 46 51 138 141
Legal and professional 60 26 136 70
Loan Expense 54 94 172 239
Other 125 83 351 270
----------------- --------------- ---------------- ----------------
Total non-interest expense 1,030 961 2,999 2,753
----------------- --------------- ---------------- ----------------
Income before income tax expense 353 458 1,072 1,335
Income tax expense 151 170 384 479
----------------- --------------- ---------------- ----------------
Net Income $ 201 $ 288 $ 688 $ 856
================= =============== ================ ================
Basic Earnings per Common Share $ 0.38 $ 0.54 $ 1.29 $ 1.60
================= =============== ================ ================
Diluted Earnings per Common Share $ 0.38 $ 0.53 $ 1.29 $ 1.59
================= =============== ================ ================
Weighted average common shares (Denominator Basic EPS) 532,030 534,130 532,752 534,130
Dilutive effect of stock options 2,603 2,603 2,603 2,603
----------------- --------------- ---------------- ----------------
Weighted average common shares and common stock
equivalents (Denominator Diluted EPS) 534,633 536,733 535,355 536,733
================= =============== ================ ================
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 Nine Months Ended September 30, 2004
(In Thousands)
(Unaudited)
Capital in Accumulated Other Total
Excess of Par Comprehensive Stockholders
Common Stock Value Retained Earnings Income (Loss) Equity
------------------ --------------- ------------------ -------------------- ------------------
Balances at December 31, 2003 $ 534 $ 6,487 $ 1,363 $ 113 $ 8,497
Net income 688 688
Other comprehensive income (loss) (31) (31)
Purchase and retirement of
2,100 shares of common
stock (2) (39) (41)
------------------ --------------- ------------------ -------------------- ------------------
Balances at September 30, 2004 $ 532 $ 6,448 $ 2,051 $ 82 $ 9,113
================== =============== ================== ==================== ==================
The accompanying notes are an integral part of these financial statements.
-5-
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Cash Flows
(In Thousands)
(Unaudited)
For the Nine Months ended September 30,
2004 and 2003
2004 2003
--------------------- ---------------------
Cash Flows from Operating Activities:
Net Income $ 688 $ 856
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 145 140
Amortization of premium on investment securities, 62 9
Depreciation 155 116
Net (gain) loss on sale of available for sale securities (23) (45)
Stock dividends on FHLB Stock (17) (16)
Changes in operating assets and liabilities:
Accrued interest receivable (2) 96
Other assets (43) (91)
Accrued interest payable and other liabilities (224) 164
--------------------- ---------------------
Net cash provided by operating activities 741 1,369
--------------------- ---------------------
Cash Flows from Investing Activities:
Proceeds from sales of available for sale investment securities 1,489 1,843
Proceeds from maturities and calls of available for sale investment securities 3,761 2,990
Purchases of available for sale investment securities (5,894) (5,258)
Loans originated, net of payments received (11,859) 365
Additions to banking premises and equipment (619) (142)
Sale of other real estate owned 20 0
Net (increase) decrease in loans held for sale 130 3,487
--------------------- ---------------------
Net cash used in investing activities (12,972) 2,555
--------------------- ---------------------
Cash Flows from Financing Activities:
Increase in deposits, net 16,896 (1,942)
Repurchase of common stock (41) 0
Proceeds from securities sold under agreements to repurchase and other borrowings,
net of principal repayments (575) 1,194
--------------------- ---------------------
Net cash provided by financing activities 16,280 (748)
--------------------- ---------------------
Net Increase (Decrease) in Cash and Cash Equivalents 4,050 3,196
Cash and Cash Equivalents, Beginning of Period 2,145 2,146
--------------------- ---------------------
Cash and Cash Equivalents, End of Period $ 6,194 $ 5,322
===================== =====================
Supplementary Disclosure of Cash Flow Information:
Interest paid on deposit accounts and other borrowings 1,426 1,780
Income taxes paid 636 299
Supplementary Disclosures of Noncash Investing Activities:
Acquisition of real estate acquired through foreclosure 85 20
Purchase of building financed by capital lease obligation 488 273
Change in unrealized gain (loss) on available for sale investment securities (45) (149)
Change in deferred tax associated with unrealized gain (loss) on investment
securities available for sale (14) (56)
Change in net unrealized gain (loss) on available for sale investment securities (31) (93)
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 Nine Months Ended September 30, 2004 and 2003
(In Thousands)
(Unaudited)
2004 2003
----------------- ----------------
Net Income $ 688 $ 856
----------------- ----------------
Other comprehensive income, net of tax:
Unrealized gains/losses on investment securities (22) (104)
Reclassification adjustment for gains/losses included in net income (23) (45)
Income taxes related to unrealized gains/losses on investment securities 14 (56)
----------------- ----------------
Other comprehensive income (loss), net of tax (31) (93)
----------------- ----------------
Comprehensive income $ 657 $ 763
================= ================
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
September 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. During the
third quarter of 2004, we moved our Knoxville branch to a new facility in the
Farragut community of Knoxville. This new facility, located at 11200 Kingston
Pike, replaces the Company's branch formerly located at 118 Mabry Hood Road.
Our primary deposit products are demand deposits and certificates of deposit,
and our 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 September 30, 2004 and the results of operations for
the three and nine months ended September 30, 2004, and cash flows for the nine
month periods ended September 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 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
-8-
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 September 30, 2004, the Company had outstanding commitments to advance
construction funds and to originate loans in the amount of $9.6 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 $364,000 in standby
letters of credit.
NOTE 4 - OTHER BORROWINGS
- -------------------------
The following table summarizes the Company's other borrowings as of September
30, 2004 and December 31, 2003, respectively (in thousands).
September 30, 2004 December 31, 2003
--------------------- ----------------------
Federal Home Loan Bank Advances $ 8,500 $ 8,650
Fed Funds Purchased - 370
Capital Lease Obligations 245 261
---------------------- ----------------------
Total Other Borrowings $ 8,745 $ 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 September 30, Nine Months Ended September 30,
--------------- ----------------- ------------------- -----------------
2004 2003 2004 2003
--------------- ----------------- ------------------- -----------------
Net Income, as Reported $ 201 $ 288 $ 688 $ 856
Less: Total Stock-Based Employee Compensation
Expense Determined Under Fair Value Based
Method
for All Awards, Net of Related Tax Effects 0 0 - (1)
--------------- ----------------- ------------------- -----------------
Pro Forma Net Income $ 201 $ 288 $ 688 $ 855
=============== ================= =================== =================
Earnings Per Share:
Basic - as Reported $ 0.38 $ 0.54 $ 1.29 $ 1.60
=============== ================= =================== =================
Basic - Pro Forma $ 0.38 $ 0.54 $ 1.29 $ 1.60
=============== ================= =================== =================
Diluted - as Reported $ 0.38 $ 0.53 $ 1.29 $ 1.59
=============== ================= =================== =================
Diluted - Pro Forma $ 0.38 $ 0.53 $ 1.29 $ 1.59
=============== ================= =================== =================
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 September 30, 2004.
In 2002, the board of directors approved an additional stock option plan to
provide key employees with additional incentive to contribute to our best
interests. The plan terminates in ten years. The board of directors also has
discretion concerning which eligible persons shall be granted options, the term
of each granted option, and the number of shares for which each option shall be
granted. Options must be exercised within ten years from the date they are
granted and must include a price per share of at least 100% of the fair value of
our common stock on the date the option is granted. The board of directors has
reserved the lesser of 20% of the diluted shares outstanding (107,346 shares at
December 31, 2003) or 213,612 shares of common stock for issuance during the
term of the plan. The board of directors has not awarded any options under this
plan.
-10-
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 September 30, 2004 and 2003.
Nine Months September 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:
Nine Months Ended September 30, Nine Months Ended September 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 September 30, 2004 is as
follows:
Weighted
Average Weighted Weighted
Remaining Aveerage Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Price
- ------------------------------------ ---------------- ------------------ ---------------- ----------------- ---------------
$16.00 - $16.00 14,500 4.5 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 NINE MONTH PERIODS ENDING SEPTEMBER 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 September 30, 2004, we earned net income of $201,000
or $0.38 per share as compared to $288,000 or $0.53 per share for the
corresponding period in 2003. For the first three quarters of 2004, net income
was $688,000 and $856,000 for the same period in 2003. The decrease in net
income for the third quarter of 2004 and the first three 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
offset by increases in the Company's net interest income for both the third
quarter and the first three quarters of 2004. The table below presents certain
key financial ratios for the first three quarters of 2004 and 2003.
For the nine months ending
September 30,
2004 2003
------------------- -------------------
Return on Average Assets 0.80% 1.06%
Return on Average Equity 10.53% 14.02%
Earnings per share - basic $ 1.29 $ 1.60
NET INTEREST INCOME
- -------------------
Net interest income was $3.6 million for the first three quarters of 2004, an
increase of approximately 11.7% or $375,000 over the same period in 2003. The
increase in net interest income was due primarily to an increase in the volume
of earnings assets for the first three quarters of 2004 as compared to 2003 and
an increase in our net interest margin. Net interest income was $ 1.3 million
for the third quarter of 2004 as compared to $1.1 million for the same period in
2003. The increase in net interest income for the third quarter of 2004 as
compared to the third quarter of 2003 can be attributed to an increase in the
volume of earning assets. Average loans increased approximately $9.5 million to
$92.7 million at September 30, 2004, as compared to $83.1 million at December
31, 2003. Average loans were approximately 85% of total earning assets at
September 30, 2004 and 84% at December 31, 2003.
The yield on total earning assets declined 40 basis points for the first three
quarters of 2004 as compared to the first three 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 44 basis points to 6.59% for the first three quarters of 2004 as
compared to 7.03% for the first three quarters of 2003 due to the reasons
discussed above. Investment yields declined 56 basis points during the first
three 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 7 basis points remaining
relatively stable as short-term investments remained stable from 2003 to 2004.
-12-
Total interest expense was approximately $1.5 million for the first three
quarters of 2004, an 11.2% decrease as compared to the same period in 2003. The
average rate on interest-bearing deposits was 1.80% for the first three quarters
of 2004, 43 basis points lower than the average rate on deposits during the
first three 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 3.82% for the first three quarters
of 2004 and 4.01% for the first three quarters of 2003. The overall rate on
interest-bearing liabilities was 1.83% for the first three quarters of 2004
compared to 2.20% for the same period in 2003.
Nine Months Ended (In thousands) Nine Months Ended (In thousands)
September 30, 2004 September 30, 2003
------------------------------------------ ----------------------------------------------
Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate
---------------- -------------- ---------- ------------------ --------------- -----------
Loans(1) (2) $ 92,656 $ 4,577 6.59% $ 83,122 $ 4,384 7.03%
Investment securities(3) (5) 14,891 462 4.14% 13,428 473 4.70%
Federal funds sold 1,111 9 1.08% 2,090 18 1.15%
---------------- -------------- ---------- ------------------ --------------- -----------
Total earning assets 108,658 5,048 6.19% 98,640 4,875 6.59%
-------------- ---------------
Other assets 6,485 9,517
---------------- ------------------
Total Assets 115,144 108,157
================ ==================
Interest-bearing deposits 87,388 1,180 1.80% 82,773 1,386 2.23%
Demand deposits 9,026 - 0.00% 8,206 - 0.00%
Securities sold under agreements to
repurchase and other borrowings 9,452 271 3.82% 8,238 248 4.01%
---------------- -------------- ------------------ --------------- -----------
Total rate-bearing liabilities 105,866 1,451 1.83% 99,217 1,634 2.20%
Other liabilities 563 798
---------------- ------------------
Total Liabilities 106,429 100,015
---------------- ------------------
Total Stockholders' Equity 8,715 8,142
---------------- ------------------
Total Liabilities and Stockholders'
Equity 115,144 108,157
================ ==================
Net interest income $ 3,597 $ 3,241
============== ===============
Net interest spread 4.36% 4.39%
========== ===========
Net interest margin(4) 4.41% 4.38%
========== ===========
(1) Gross of allowance for loan losses
(2) Includes average non-accrual loans
(3) Excludes the impact of the average net unrealized loss on securities
available for sale
(4) Net interest income divided by total earning assets
(5) Interest income on investment securities is presented on a tax-effected
basis using a 38% income tax rate and a 20% TEFRA disallowance
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 bank 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.
-13-
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.
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 as of September 30,
2004.
PROVISION FOR LOAN LOSSES
- -------------------------
Provision for loan losses was $145,000 for the first three quarters of 2004,
compared to $240,000 for the first three quarters of 2003. For the third quarter
of 2004 the provision for loan losses was $99,000 compared to $77,000 during the
third quarter of 2003. The decline in the provision for certain loan losses for
the first three quarters of 2004 can be primarily attributed to the satisfactory
resolution of loans classified adversely without loss to the Company. The
increase in provision for loan loss for the third quarter of 2004 as compared
2003 can be primarily attributed to increased charge-offs during the third
quarter of 2004. The balance of the allowance for loan losses at September 30,
2004 was $1.23 million (1.25% of gross loans) compared to $1.24 million (1.46%
of gross loans) at December 31, 2003. Net charge-offs for the first three
quarters of 2004 were $200,000 as compared to $43,000 for the first three
quarters of 2003. As a percentage of average loans, the annualized rate of net
charge-offs was 0.29% for the first three quarters of 2004 compared to a 0.06%
ratio for the same period in 2003.
As of September 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 the us to recognize additions to the reserve for loan losses. Management
completes a formal analysis of the reserve for loan losses adequacy on a monthly
basis.
-14-
Analysis of the Allowance for Loan Losses
(In thousands)
For the Nine Months Ended September 30,
2004 2003
----------------- ----------------
Average Loans Outstanding $ 92,656 $ 82,815
================= ================
Allowance at beginning of period 1,283 1,047
Charge-offs:
Commercial, financial and agricultural 83 6
Real Estate - construction
Real Estate - mortgage 8 14
Installment - consumer 126 37
Other
----------------- ----------------
Total charge-offs 217 57
----------------- ----------------
Recoveries:
Commercial, financial and agricultural
Real Estate - construction
Real Estate - mortgage 5
Installment - consumer 12 14
Other ----------------- ----------------
Total recoveries 17 14
Net charge-offs 200 43
----------------- ----------------
Provision for loan losses 145 240
----------------- ----------------
Balance at end of period $ 1,228 $ 1,244
================= ================
Ratio of net charge-offs during the
period to average loans outstanding 0.22% 0.05%
during the period
NON-INTEREST INCOME
- -------------------
Total non-interest income was approximately $646,000 for the first three
quarters of 2004 compared to $1.1 million for the same periods in 2003. For the
third quarter of 2004, non-interest income declined $166,000 to $216,000 as
compared to the third quarter of 2003. The primary reason for the decline in
non-interest income for the first three quarters of 2004 and the third quarter
of 2004 as compared to the same periods in 2003 is a decline in fees on sales
mortgage loans. Fees on sales of mortgage loans fell to $263,000 during the
first three quarters of 2004 as compared to approximately $783,000 during the
first three quarters of 2003. Fees on the sale of mortgage loans were $97,000
for the third quarter of 2004 as compared to $251,000 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, as a significant number of eligible
households have already refinanced during this low mortgage interest rate cycle,
and the increase in mortgage rates from 2004 as compared to 2003.
NON-INTEREST EXPENSE
- ---------------------
Non-interest expense totaled approximately $3.0 million for the first three
quarters of 2004 as compared to $2.8 million during the first three quarters of
2003. Non-interest expense (annualized) as a percent of total average assets was
3.47% for the first three quarters of 2004 compared to 3.39% for the first three
quarters of 2003. The increase in non-interest expense during the first three
quarters of 2004 as compared to the same period in 2003 can be primarily
attributed to increases in net occupancy expense, legal and professional expense
and other expenses. Most of the net occupancy expense increases are attributable
to the branch relocation of our Knoxville branch in 2004, where we moved to a
larger facility. 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
-15-
expense increased $69,000 to $1.0 million for the third quarter as compared to
the same period in 2003. The increase in these expenses can be attributed to the
growth of the Bank 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 $384,000 and $479,000 for the first three
quarters of 2004 and 2003, respectively. Income tax expense was $151,000 for the
third quarter of 2004 as compared to $170,000 for the third quarter of 2003. The
effective income tax rate for the Company was 35.8% for the first three quarters
of 2004 and 35.9% for the first three quarters of 2003.
BALANCE SHEET ANALYSIS - COMPARISON OF SEPTEMBER 30, 2004 TO DECEMBER 31, 2003
- -------------------------------------------------------------------------------
Assets totaled $123.8 million at September 30, 2004, as compared to $107.1
million at December 31, 2003, an increase of 15.6%. The primary category of
assets growth was loans, which grew $11.3 million, funded by $16.9 million in
growth of deposits.
INVESTMENT SECURITIES
- ---------------------
Investment securities were approximately $15.1 million, or 12% of total assets,
at September 30, 2004, an increase of $578,000 from December 31, 2003. We
purchased $5.9 million in investment securities during the first three quarters
of 2004, while maturities, calls, sales and principal pay-downs provided cash of
$5.2 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 32.6% of the portfolio at
September 30, 2004 and 35.1% at December 31, 2003.
At September 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 $129,000 at September 30, 2004, a decrease of $45,000 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.
LOANS
- -----
During the first three quarters of 2004, loans increased $11.3 million to $96.8
million at September 30, 2004.
-16-
Loans by Type (In thousands)
September 30, 2004 December 31, 2003
----------------------- ----------------------------
Commercial, financial and agricultural $ 28,050 $ 26,898
Real estate - construction 19,831 12,363
Real estate - mortgage 40,324 38,668
Installment loans to individuals 9,952 8,981
----------------------- ----------------------------
Loans, gross $ 98,157 $ 86,910
Less:
Allowance for loan losses (1,229) (1,283)
Unearned loan fees (136) (129)
----------------------- ----------------------------
$ 96,792 $ 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 (In thousands)
September 30, 2004 December 31, 2003
----------------------- -----------------------
Non-accrual loans(1)
$ 749 962
Loans past due greater than 90 days and still
accruing interest - 21
Restructured loans(2) 151 155
Other real estate owned 345 20
----------------------- -----------------------
Total Non-Performing Assets $ 1,245 $ 1,158
======================= =======================
(1) Included in non-accrual loans are $749,000 and $962,000 of loans considered
impaired as of September 30, 2004 and December 31, 2003, respectively.
(2) Included in restructured loans are $64,000 as of December 31, 2003.
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 $345,000
at September 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.
DEPOSITS
- --------
Deposits grew approximately $16.9 million to $105.0 million at September 30,
2004 from $88.1 million at December 31, 2003. Core deposits, which include
regular savings, money market, NOW and demand deposits, were $58.4 million, or
55.7% of total deposits, at September 30, 2004. Core deposits were 53.3% of
total deposits at December 31, 2003. Time deposits totaled $46.6 million at
September 30, 2004, an increase of approximately $5.4 million from $41.1 million
at December 31, 2003. The increase in core deposits can be primarily be
attributed to additional marketing and management focus on attracting core
deposits in an effort to improve the Bank's net interest margin, as these
deposits typically carry lower interest rates than time deposits. The increase
in time deposits represents more aggressive deposit pricing for time deposits in
the first three 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 the Farragut community of Knoxville during the third quarter
of 2004.
-17-
Deposit Balances By Type (In thousands)
September 30, 2004 December 31, 2003
-------------------- ------------------
Demand Deposits:
Non-interest bearing demand
accounts $ 10,813 $ 7,815
NOW and money market accounts 44,265 36,049
Savings accounts 3,367 3,141
-------------------- ------------------
Total demand deposits 58,445 47,005
-------------------- ------------------
Term Deposits:
Less than $100,000 31,494 26,317
$100,000 or more 15,065 14,796
-------------------- ------------------
Total Term Deposits 46,559 41,113
-------------------- ------------------
Total Deposits $ 105,004 $ 88,118
==================== ==================
CAPITAL
- -------
During the first three quarters of 2004, stockholders' equity increased $616,000
to $9.1 million. The increase in stockholders' equity was due primarily to net
income of $688,000, offset by a decline in comprehensive income of $31,000, and
a reduction in common stock and capital in excess of par value of $41,000
related to repurchase of 2,100 shares of common stock during the first three
quarters of 2004.
-18-
Regulatory Capital
TnBank
(Wholly-Owned Subsidiary of Tennessee Valley Financial Holdings, Inc.)
September 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%
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, the Board of Directors of the Company approved
a resolution authorizing the repurchase of up to 2,000 of the Company's shares
at $19.50 per share during the second quarter of 2003. That plan was modified in
October 2003 authorizing the repurchase of 3,000 shares. During the first three
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,
Fed Fund lines, and Federal Home Loan Bank advances.
At September 30, 2004, we held $15.0 million in available-for-sale securities.
Deposits increased approximately $16.9 million during the first three quarters
of 2004. We had $3.0 million in available federal funds lines and approximately
$7.6 million in available borrowings from the Federal Home Loan Bank as of
September 30, 2004.
We can also enter into repurchase agreement transactions should the need for
additional liquidity arise. At September 30, 2004, the Company had $300,000 in
repurchase agreement balances outstanding.
At September 30, 2004, the Company had capital of $9.1 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-
ITEM 3 CONTROLS AND PROCEDURES
- ------ -----------------------
(a) Evaluation of Disclosure Controls and Procedures. The Company's
President and Chief Executive Officer and its Senior Vice President 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 September 30, 2004. Based on that evaluation, the President
and Chief Executive Officer and the Senior Vice President 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.
-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: November 15, 2004 By: /s/ Mark B. Holder
--------------------------------------------
Mark B. Holder, Senior Vice President
(Principal financial and accounting
officer)
-21-