United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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 37830
- ------------------------ -------------------
(I.R.S. Employer (Zip Code)
Identification No.)
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 533,618 on May 12, 2005.
FORM 10-QSB
Index
Page
Number
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2005
and December 31, 2004................................................3
Condensed Consolidated Statement of Income for the three
months ended March 31, 2005 and 2004.................................4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the three months ended March 31, 2005.....................6
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 and 2004...........................7
Condensed Consolidated Statements of Comprehensive
Income for the three months ended March 31, 2005 and 2004............8
Notes to Unaudited Condensed Consolidated
Financial Statements.................................................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................15
Item 3. Controls and Procedures.........................................23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................24
Item 2. Changes in Securities............................................24
Item 3. Defaults upon Senior Securities..................................24
Item 4. Submission of Matters to a Vote of Securities
Holders..........................................................24
Item 5. Other Information................................................24
Item 6. Exhibits and Reports on Form 8-K.................................24
Signature.....................................................................25
2
Tennessee Valley Financial Holdings, Inc.
Condensed Consolidated Balance Sheet
(In Thousands)
(Unaudited)
March 31, 2005 December 31, 2004
(Unaudited)
-------------------------------- ---------------------------------
Assets
Cash and due from banks $ 3,019 $ 2,369
Federal funds sold 10,091
-------------------------------- ---------------------------------
Cash and cash equivalents 13,110 2,369
Investment Securities:
Investment Securities available for sale, at Fair
Value 15,674 15,325
Loans, net 103,681 101,227
Loans Held for Sale, at Fair Value 867 859
Banking premises and equipment, net 4,197 4,169
Accrued interest receivable 667 672
Other real estate owned 310 335
Prepaid expenses and other assets 1,024 381
-------------------------------- ---------------------------------
Total Assets $ 139,530 $ 125,337
================================ =================================
Liabilities and Stockholders Equity
Deposits $ 118,259 $ 104,799
Securities sold under agreements to repurchase 365 353
Other Borrowings 8,784 10,315
Accrued interest payable 338 355
Long Term Subordinated Debt 2,062
Other Liabilities 327 260
-------------------------------- ---------------------------------
Total Liabilities
130,135 116,082
-------------------------------- ---------------------------------
Stockholders Equity:
Common Stock, $1.00 Par Value, 2,000,000
shares authorized, 533,618 issued and outstanding 534 534
in 2005, 533,618 issued and outstanding in 2004.
Capital in excess of par value 6,491 6,491
Retained Earnings 2,407 2,183
Accumulated other comprehensive income (37) 47
-------------------------------- ---------------------------------
Total Stockholders Equity 9,395 9,255
-------------------------------- ---------------------------------
Total Liabilities and Stockholders Equity $ 139,530 $ 125,337
================================ =================================
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
March 31,
2005 2004
---------------- ----------------
Interest Income:
Loans, including fees $ 1,789 $ 1,460
Investment securities 136 148
Federal Funds Sold 29 0
Other Interest Income 6
---------------- ----------------
Total interest income 1,960 1,608
---------------- ----------------
Interest Expense:
Deposits 558 362
Advances from the Federal Home Loan Bank
and other borrowings 95 92
---------------- ----------------
Total interest expense 653 454
---------------- ----------------
Net interest income 1,307 1,154
Provision for loan losses 42 21
---------------- ----------------
Net interest income after provision
for loan losses 1,265 1,133
---------------- ----------------
Non-interest income
Service charges on deposit accounts 83 94
Fees on sale of mortgage loans 75 54
Net gains (losses) on sales of
investment securities available for sale 1 4
Other income 27 21
---------------- ----------------
Total non-interest income 186 173
---------------- ----------------
Non-interest expense
Salaries and employee benefits 537 472
Net occupancy expense 151 116
Data processing fees 78 61
Advertising and promotion 33 28
Office supplies and postage 26 42
Legal and professional 38 42
Loan Expense 60 55
Other 181 108
---------------- ----------------
Total non-interest expense 1,104 924
---------------- ----------------
The accompanying notes are an integral part of these financial statements.
4
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statements of Income
Continued from Page 4
(In Thousands except for per share amounts)
(Unaudited)
Income before income tax expense 347 382
Income tax expense 123 131
---------------- ----------------
Net Income $ 224 $ 251
================ ================
Basic Earnings per Common Share $ 0.37 $ 0.47
================ ================
Diluted Earnings per Common Share $ 0.37 $ 0.47
================ ================
Weighted average common shares (Denominator Basic EPS)
533,618 532,130
Dilutive effect of stock options 5,577 2,603
---------------- ----------------
Weighted average common shares and common stock
equivalents (Denominator Diluted EPS) 539,195 534,733
================ ================
The notes are an integral part of these financial statements.
5
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Changes in Stockholders Equity
For the three months ended March 31, 2005
Capital in Accumulated Other Total
Excess of Par Comprehensive Stockholders
Common Stock Value Retained Earnings Income (Loss) Equity
----------------------------------------------------------------------------------------
Balances at December 31, 2004 $ 534 $ 6,491 $ 2,183 $ 47 $ 9,255
Net income 224 224
Other comprehensive income (loss) (84) (84)
-----------------------------------------------------------------------------------------
Balances at March 31, 2005 $ 534 $ 6,491 $ 2,407 $ (37) $ 9,395
=========================================================================================
The accompanying notes are an integral part of these financial statements.
6
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Cash Flows
(In Thousands)
For the three months ended March 31, 2005 and 2004
2005 2004
--------------------- ---------------------
Cash Flows from Operating Activities:
Net Income $ 224 $ 251
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 42 21
Amortization of premium on investment securities, 15 19
Depreciation 18 42
Net (gain) loss on sale of available for sale securities (1) (4)
Stock dividends on FHLB Stock (6) (11)
Changes in operating assets and liabilities:
Accrued interest receivable 5 24
Other assets (128) (137)
Accrued interest payable and other liabilities 99 (199)
--------------------- ---------------------
Net cash provided by operating activities 268 6
--------------------- ---------------------
Cash Flows from Investing Activities:
Proceeds from sales of available for sale investment securities 2,225 457
Proceeds from maturities and calls of available for sale investment securities 306 363
Purchases of available for sale investment securities (3,536) (485)
Loans originated, net of payments received (2,531) (4,135)
Additions to banking premises and equipment (46) (189)
Sale of other real estate owned 60 -
Net (increase) decrease in loans held for sale (8) (1,327)
--------------------- ---------------------
Net cash used in investing activities (3,530) (5,316)
--------------------- ---------------------
Cash Flows from Financing Activities:
Increase in deposits, net 13,460 5,661
Repurchase of common stock 0 (39)
Proceeds from Trust Preferred Issuance 2,062 0
Proceeds from securities sold under agreements to repurchase and other borrowings, net of
principal repayments (1,519) (530)
--------------------- ---------------------
Net cash provided by financing activities 14,003 5,092
--------------------- ---------------------
Net Increase (Decrease) in Cash and Cash Equivalents 10,741 (218)
Cash and Cash Equivalents, Beginning of Period 2,369 2,145
--------------------- ---------------------
Cash and Cash Equivalents, End of Period $ 13,110 $ 1,927
===================== =====================
Supplementary Disclosure of Cash Flow Information:
Interest paid on deposit accounts and other borrowings 670 484
Income taxes paid 174 235
Supplementary Disclosures of Noncash Investing Activities:
Acquisition of real estate acquired through foreclosure 35
Purchase of building financed by capital lease obligation
Change in unrealized gain (loss) on available for sale investment securities 133 76
Change in deferred tax associated with unrealized gain (loss) on investment
securities available for sale 49 28
Change in net unrealized gain (loss) on available for sale investment securities (84) 48
The accompanying notes are an integral part of these financial statements.
7
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statements of Comprehensive Income
For the three months ended March 31, 2005 and 2004
(In Thousands)
(Unaudited)
2005 2004
----------------- -----------------
Net Income $ 224 $ 251
----------------- -----------------
Other comprehensive income, net of tax:
Unrealized gains/losses on investment securities (134) 80
Reclassification adjustment for gains/losses included in net income (1) (4)
Income taxes related to unrealized gains/losses on investment securities (49) (28)
----------------- -----------------
Other comprehensive income (loss), net of tax (84) 48
----------------- -----------------
Comprehensive income $ 140 $ 299
================= =================
The accompanying notes are an integral part of these financial statements.
8
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2005 and 2004
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, 2004.
Financial information and the results of operations for the three months ended
March 31, 2005, and cash flows for the three month periods ended March 31, 2005
and 2004 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.
9
NOTE 2 - ACCOUNTING POLICY CHANGES
Derivative Instruments and Hedging Activities
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard 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. Management
does not expect this statement to have any significant impact on the Company's
financial position or results of operations.
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity
In May 2003, the financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Management does not expect this statement to have a significant impact on the
Company's financial position or results of operations.
Consolidation of Variable Interest Entities
In December 2003, the FASB issued revised Interpretation No. 46 (FIN46),
"Consolidation of Variable Interest Entities." This Interpretation clarifies the
application of ARB No. 51, "Consolidated Financial Statements," for certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated support from
other parties. This Interpretation requires variable interest entities to be
consolidated by the primary beneficiary, which represents the enterprise that
will absorb the majority of the variable interest entities' expected losses if
they occur, receive a majority of the variable interest entities' residual
returns if they occur, or both. This Interpretation is effective for the Company
in the first fiscal year or interim period ending after December 15, 2004. The
Company does not presently have any related entities considered to be variable
interest entities and this Standard is not expected to have a material effect on
the Company's financial statements.
Accounting for Certain Loans or Debt Securities Acquired in a Transfer
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position 03-3, "Accounting for Certain Loans and Debt Securities
Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 addresses accounting for
differences between contractual cash flows expected to be collected and an
investor's initial investment in loans or debt securities acquired in a transfer
if those differences are attributable, at least in part, to credit quality. SOP
03-3 also prohibits "carrying over" or creation of valuation allowances in the
initial accounting of all loans acquired in a transfer that are within the scope
of SOP 03-3. The prohibition of the valuation allowance carryover applies to the
purchase of an individual loan, a pool of loans, a group of loans, and loans
acquired in a purchase business combination. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 15, 2004. The Company does not
anticipate that the adoption of SOP 03-3 will have a material impact on its
financial condition or results of operations.
10
Meaning of Other-Than-Temporary Impairment
In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1,
"Meaning of Other Than Temporary Impairment" ("Issue 03-1"). The Task Force
reached a consensus on an other-than-temporary impairment model for debt and
equity securities accounted for under Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" and cost method investments, and required certain additional
financial statement disclosures. The implementation of the "Other-than-Temporary
Impairment" component of this consensus has been postponed. The adoption of the
guidance contained in this EITF consensus did not have a material effect on the
Company's financial statements.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123(R) supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and amends SFAS Statement No. 95, "Statement of Cash
Flows." Generally, the approach to accounting for share-based payments in SFAS
No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS
No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values, which means that pro forma disclosure is no longer an
alternative to financial statement recognition. SFAS No. 123(R) is effective for
the Company beginning January 1, 2006. The Company is currently evaluating the
provisions of SFAS No. 123(R) to determine its impact on the Company's financial
statements in future periods.
Exchanges of Non-Monetary Assets
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an Amendment to APB opinion No. 29." This Statement addresses the measurement
of exchanges of nonmonetary assets. The Statement is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. Management
does not believe this Statement will have a material effect on the Company's
financial statements.
NOTE 3 - COMMITMENTS
As of March 31, 2005, the Company had outstanding commitments to advance
construction funds and to originate loans in the amount of $33 million and
commitments to advance existing home equity and other credit lines in the amount
of $24.9 million. In addition, the Company has also conveyed $955,000 in standby
letters of credit.
NOTE 4 - TRUST PREFERRED SECURITIES
In March 2005, TVFHI formed Tennessee Valley Statutory Trust I (TV Trust). TV
Trust is a statutory business trust formed under the laws of the state of
Delaware and is wholly-owned by the Company. In March 2005, the TV Trust issued
preferred securities with an aggregate liquidation amount of $2.0 million
($1,000 per preferred security) to third-party investors. The Company, in turn,
issued junior debentures aggregating $2.1 million to TV Trust. The junior
subordinated debentures are the sole assets of TV Trust. The subordinated debt
and preferred securities pay interest and dividends quarterly. The interest rate
is fixed for five years at 6.75% (4.75% Swap Rate plus 2.00% spread). After five
years, the rate floats at three-month LIBOR plus 2.00%. The debentures mature in
2036, at which time the preferred securities must be redeemed. The subordinated
debentures and preferred securities can be redeemed, in whole or in part, at the
discretion of the Company beginning in June 2010.
The Company has provided a full, irrevocable, and unconditional guarantee on a
subordinated basis of the obligations of the Trust under the preferred
securities in the event of the occurrence of an event of default, as defined in
such guarantee. The trust agreements contain provisions that enable the Company
to defer making interest payments for a period of up to five years.
11
NOTE 5 - OTHER BORROWINGS
The following table summarizes the Company's other borrowings as of March 31,
2005 and December 31, 2004, respectively.
March 31, 2005 December 31, 2004
---------------------- -----------------------
Federal Home Loan Bank Advances $ 8,500 $ 9,700
Fed Funds Purchased - 375
Capital Lease Obligations 234 240
Other Borrowings 50
---------------------- -----------------------
Total Other Borrowings $ 8,784 $ 10,315
====================== =======================
NOTE 6 - 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 March 31,
-------------- -----------------
2005 2004
-------------- -----------------
Net Income, as Reported $ 224 $ 251
Less: Total Stock-Based Employee Compensation
Expense Determined Under Fair Value Based
Method for All Awards, Net of Related
Tax Effects (33) 0
--------------- -----------------
Pro Forma Net Income $ 191 $ 251
=============== =================
Earnings Per Share:
Basic - as Reported $ 0.42 $ 0.47
=============== =================
Basic - Pro Forma $ 0.75 $ 0.53
=============== =================
Diluted - as Reported $ 0.35 $ 0.47
=============== =================
Diluted - Pro Forma $ 0.35 $ 0.53
=============== =================
12
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. The
board of directors has awarded a total of 15,600 options under this plan.
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 (107,014 shares at
December 31, 2004) or 213,612 shares of common stock for issuance during the
term of the plan. On March 15, 2005, the Board of TVFHI granted 44,000 of the
outstanding options of this plan to certain employees. The exercisable date for
these options is effective beginning December 31, 2005.
The fair value of each option granted during the three-months ended March 31,
2005 is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions.
2005
-----------
Dividend Yield 1.35%
Expected Life 7 years
Expected Volatility 14%
Risk-Free Interest Rate 5.2%
13
A summary of the status of the Company's stock option plans is presented below:
Three Months Ended Three Months Ended
March 31, March 31,
2005 2004
----------------------------------- -------------------------------
Shares Weighted Average Shares Weighted
Average
Exercise Price Exercise Price
---------------- ------------------ ------------- -----------------
Outstanding at
Beginning of Period 15,500 $ 16.22 14,500 $ 16.00
Granted 44,000 26.00 0
Exercised 0 0
Forfeited 0 0
---------------- -------------
Outstanding at
End of Period 59,500 $ 23.45 14,500 $ 16.00
================ ================== ============= =================
Options Exercisable
at Period-End 15,500 $ 16.22 14,500 $ 16.00
Weighted Average Fair
Value of Options Granted
During the Period 26.00 N/A
Information pertaining to options outstanding at March 31, 2005 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 - $26.00 59,500 6.9 years $23.45 15,500 16.22
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDING MARCH 31, 2005 AND 2004
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 March 31, 2005 we earned net income of $224,000 or
$0.42 per share as compared to $251,000 or $0.47 per share for the corresponding
period in 2004. The decrease in net income for the first quarter of 2005 was
primarily due to increased cost of funds and increased non-interest expense.
Overall rising interest rates impacted net interest expense in the first quarter
of 2005. Additionally, increasing salary expense and occupancy expense
associated with growth strategies further affected expenses. Increases in
interest income from loan activity partially offset these increased
expenditures. The table below represents certain key financial ratios for the
first quarter of 2005 and 2004, respectively.
For the three months ending
March 31,
2005 2004
------------------- -------------------
Return on Average Assets 0.68% 0.92%
Return on Average Equity 9.60% 11.74%
Earnings per share - basic $0.42 $ 0.47
NET INTEREST INCOME
Net interest income was $1.3 million for the first quarter of 2005, an increase
of approximately 13% or $153,000 over the same period in 2004. The increase in
net interest income was due primarily to an increase in the volume of earnings
assets and rising interest rate environment. The net interest margin declined to
4/25% as of March 31, 2005 compared to 4.54% for March 31, 2004. While slight
improvement is noted in the yield on earning assets, a more pronounced increase
in overall rates on interest bearing liabilities attributed to this decline.
Average loans increased approximately $15.3 million to $104.5 million at March
31, 2005, as compared to $89.2 million at March 31, 2004. Average loans were
approximately 84% of total earning assets at March 31, 2005 and 86% at March 31,
2004.
The yield on total earning assets increased 3 basis points for the first quarter
of 2005 as compared to the first quarter of 2004. The recent continued increase
in overall interest rates has enhanced yields on the loan portfolio. However,
the yield on investments has been negatively impacted by rising rates. Yields on
federal funds sold, the rates on which can change overnight, increased 154 basis
points from March 31, 2003 to March 31. 2004.
Total interest expense was approximately $653,000 for the first quarter of 2005,
an almost 44% increase as compared to the same period in 2004. The increase is
primarily related to an increase in the average volume of interest bearing
liabilities from $91.8million for the first quarter of 2004 to $11.4 million for
the same period in 2005. The average rate on interest-bearing deposits was 2.20%
for the first quarter of 2005, 43 basis points higher than the average rate on
deposits during the first quarter of 2004. This increase is a direct result of
the current rising interest rate environment. The average cost of borrowed funds
was 3.77% for the first quarter of 2005 compared to 3.62% the same period 2004.
The overall rate on interest-bearing liabilities was 2.35% for the first quarter
of 2005 and 1.98% for the same period in 2004.
15
Three Months Ended (In thousands) Three Months Ended (In thousands)
March 31, 2005 March 31, 2004
Average Balance Interest Yield/Rate Average Balance Interest Yield/Rate
Loans(1) (2) $ 104,500 $ 1,789 6.85% $ 89,224 $ 1,460 6.55%
Investment securities(3) (5) 14,736 142 3.85% 14,165 168 4.74%
Federal funds sold 4,738 29 2.45% 136 0 0.91%
---------------- -------------- ---------- ------------------ --------------- -----------
Total earning assets 123,974 1,960 6.32% 103,525 1,628 6.29%
-------------- ---------------
Other assets 7,595 5,813
---------------- ------------------
Total Assets 131,569 109,338
================ ==================
Interest-bearing deposits 101,267 558 2.20% 81,668 362 1.77%
Securities sold under agreements to
repurchase and other borrowings 10,091 95 3.77% 10,155 92 3.62%
---------------- -------------- ---------- ------------------ --------------- -----------
Total Interest Bearing Liabilities 111,358 653 2.35% 91,823 454 1.98%
Non-Interest Bearing Deposits 10,167 8,202
Other liabilities 717 763
---------------- ------------------
Total Liabilities
122,232 100,788
---------------- ------------------
Total Stockholders' Equity
9,337 8,550
----------------
Total Liabilities and Stockholders'
Equity 131,569 109,338
================ ==================
Net interest income $ 1,307 $ 1,174
============== ===============
Net interest spread 3.97% 4.31%
Net interest margin(4) 4.22% 4.54%
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. Within the past 12
months, interest rates have begun to increase in steady increments applied by
the Federal Reserve Bank. 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. While the overall lending volume has not been
particularly affected by rising rates, the net interest margin, as previously
noted, has been impacted.
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.
16
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. As of March 31, 2005, the Company has a negative gap
for the next twelve month period.
PROVISION FOR LOAN LOSSES
Provision for loan losses was $42,000 for the first quarter of 2005, compared to
$21,000 for the first quarter of 2004. The balance of the allowance for loan
losses at March 31, 2005 was $1.24 million (1.17% of gross loans) compared to
$1.29 million (1.23% of gross loans) at December 31, 2004. Net charge-offs for
the first quarter of 2005 were $72,000 compared to $19,000 for the first quarter
of 2004. As a percentage of average loans, the annualized rate of net
charge-offs was 0.28% for the first quarter of 2005 compared to a 0.08% ratio
for the same period 2004.
Analysis of the Allowance for Loan Losses
For the Three Months Ended March 31,
2005 2004
----------------- ------------------
Average Loans Outstanding 104,500 89,224
================= ==================
Allowance at beginning of period 1,271 1,283
Charge-offs:
Commercial, financial and agricultural
Real Estate - construction
Real Estate - mortgage 57
Installment - consumer
Other 19 24
----------------- ------------------
Total charge-offs 76 24
----------------- ------------------
Recoveries:
Commercial, financial and agricultural
Real Estate - construction
Real Estate - mortgage 3 3
Installment - consumer 1 2
Other
----------------- ------------------
Total recoveries 4 5
Net charge-offs 72 19
----------------- ------------------
Provision for loan losses 42 21
----------------- ------------------
Balance at end of period $ 1,241 $ 1,285
================= ==================
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.07% 0.02%
17
As of March 31, 2005, 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. 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.
NON-INTEREST INCOME
Total non-interest income was approximately $186,000 for the first quarter of
2005 compared to $173,000 for the same period in 2004. This slight increase is
attributed to an increase in fees on sale of mortgage loans countered by a
decrease in service charges on deposit account.
NON-INTEREST EXPENSE
Non-interest expense totaled approximately $1.1 million for the first quarter of
2005 as compared to $924,000 during the first three quarter of 2004.
Non-interest expense (annualized) as a percent of total average assets was 3.37%
for the first quarter of 2005 compared to 3.38% for the first quarter of 2004.
The increase in non-interest expense during the first quarter of 2005 as
compared to the same period in 2004 can be primarily attributed to increases in
salaries and employee benefits, net occupancy expense, and other expenses
associated with growth strategies.
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 $123,000 and $131,000 for the first quarter
of 2005 and 2004, 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 35.4% for the first quarter of
2005 and 34.3% for the first quarter of 2004.
BALANCE SHEET ANALYSIS - COMPARISON OF SEPTEMBER 30, 2004 TO DECEMBER 31, 2003
Assets totaled $139.6 million at March 31, 2005 as compared to $125.3 million at
December 31, 2004, an increase of 11.3%. The primary category of asset growth
was $10.1 million in Federal Funds sold with an additional $2.5 million increase
in loans. The increase in Federal Funds sold was the direct result of obtaining
an additional $13.5 million in deposits in the first quarter of 2005.
18
INVESTMENT SECURITIES
Investment securities were approximately $16.2 million, or 12% of total assets,
at March 31, 2005, an increase of $864,000 from December 31, 2004. We purchased
$3.5 million in investment securities during the first quarter of 2005, while
maturities, calls, sales and principal pay-downs provided cash of $2.5 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 27.1% of the portfolio at
March 31, 2005 and 27.3% at December 31, 2004.
At March 31, 2005 and December 31, 20043, 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
$59,000 at March 31, 2005, compared to an unrealized gain of $75,000 as of
December 31, 2004, primarily a result of changes in the bond market. The fair
value of securities fluctuates with the movement of interest rates. The recent
rising interest rate environment has directly influenced these changes within
the bond portfolio. Generally, during periods of decreasing interest rates, the
fair values increase whereas the opposite may hold true when interest rates
rise.
LOANS
During the first quarter of 2005, loans increased $2.5 million to $103.7 million
at March 31, 2005.
Loans by Type
March 31, 2005 December 31, 2004
----------------------- ----------------------------
Commercial, financial and agricultural $ 30,541 $ 29,197
Real estate - construction 24,618 23,552
Real estate - mortgage 38,157 38,320
Installment loans to individuals 11,730 11,566
----------------------- ----------------------------
Loans, gross $ 105,046 $ 102,635
Less:
Allowance for loan losses (1,241) (1,271)
Unearned loan fees (123) (137)
----------------------- ----------------------------
$ 103,682 $ 101,227
======================= ============================
Included in the above may be loans which have been classified as impaired,
pursuant to the adoption of SFAS No. 114.
19
Non-Performing Assets
March 31, 2005 December 31, 2004
---------------------- -----------------------
Non-accrual loans(1) $ 101 $ 546
Loans past due greater than 90 days and still
accruing interest - -
Restructured loans(2) 276 257
Other real estate owned 310 335
---------------------- -----------------------
Total Non-Performing Assets $ 685 $ 1,138
====================== =======================
(1) Included in non-accrual loans are $101,000 and $564,000 of loans considered
impaired as of March 31, 2005 and December 31, 2004, respectively.
(2) Included in restructured loans are $189,000 as of March 31, 2005 also
considered impaired.
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 $310,000
at March 31, 2005, representing a decrease of $25,000 from December 31, 2004. We
have four 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 $13.5 million to $118.3 million at March 31, 2005
from $104.8 million at December 31, 2004. This increase was a result of the
attraction of certificates of deposit through a local marketing campaign. Core
deposits, which include regular savings, money market, NOW and demand deposits,
were $56.0 million, or 47.4% of total deposits, at March 31, 2005. Core deposits
were 57.8% of total deposits at December 31, 2004. Time deposits totaled $62.2
million at March 31, 2005, an increase of approximately $17.7 million from $44.5
million at December 31, 2004. The significant increase in time deposits, as
previously mentioned, was due to an en flux of time deposits in order to obtain
additional funding sources for growth strategies. The decrease in core deposits
was partly attributed to a shift of funds from non interest bearing accounts to
time deposit accounts in the first quarter.
20
Deposit Balances By Type
March 31, 2005 December 31, 2004
-------------------- ------------------
Demand Deposits:
Non-interest bearing demand
accounts $ 9,742 $ 11,958
NOW and money market accounts 43,053 44,966
Savings accounts 3,243 3,374
-------------------- ------------------
Total demand deposits 56,038 60,298
-------------------- ------------------
Term Deposits:
Less than $100,000 39,998 29,879
$100,000 or more 22,215 14,622
-------------------- ------------------
Total Term Deposits 62,213 44,501
-------------------- ------------------
Total Deposits $ 118,251 $ 104,799
==================== ==================
CAPITAL
During the first quarter of 2005, stockholders' equity increased $140,000 to
$9.4 million. Stockholders' equity of $9.4 million was due primarily to net
income of $224,000, offset by a decline in accumulated other comprehensive
income of $84,000.
21
Regulatory Capital
TnBank
(Wholly-Owned Subsidiary of Tennessee Valley Financial Holdings, Inc.)
March 31, 2005
--------------------------------------------
Well Minimum
Capitalized Regulatory
Bank Levels Requirement
-------- ---------------- ------------------
Tier 1 Capital as a percentage of risk-weighted assets 10.6% 6.0% 4.0%
Total Capital as a percentage of risk-weighted assets 11.8% 10.0% 8.0%
Tier 1 capital to average assets 8.6% 5.0% 5.0%
December 31, 2004
--------------------------------------------
Well Minimum
Capitalized Regulatory
Bank Levels Requirement
-------- ----------------- -----------------
Tier 1 Capital as a percentage of risk-weighted assets 8.9% 6.0% 4.0%
Total Capital as a percentage of risk-weighted assets 10.1% 10.0% 8.0%
Tier 1 capital to average assets 7.4% 5.0% 5.0%
22
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are deposit accounts, available-for-sale
securities, principal and interest payments on loans and investment securities,
Fed Fund lines, and Federal Home Loan Bank advances.
At March 31, 2005, we held $16.2 million in available-for-sale securities.
Deposits increased approximately $13.5 million during the first quarter of 2005.
We had $3.0 million of available federal funds lines and approximately $7.6
million in available borrowings from the Federal Home Loan Bank as of March 31,
2005.
We can also enter into repurchase agreement transactions should the need for
additional liquidity arise. At March 31, 2005, the Company had $365,000 in
repurchase agreement balances outstanding.
At March 31, 2005, the Company had capital of $9.4 million, or 6.7% of total
assets as compared to $9.3 million, or 7.2% at December 31, 2004. 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.
Item 3. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this report, the Company's Chief Executive Officer and its
principal accounting officer 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 March 31, 2005. Based on that evaluation, the
Chief Executive Officer and the principal accounting officer 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
subsidiary 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.
23
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
None.
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 Jason Wilkinson, 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 Jason Wilkinson, 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.
24
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: May 16, 2005 By: /s/Jason Wilkinson
--------------------------------------------
Jason Wilkinson, Vice President
25