United States
Securities and Exchange Commission
Washington, DC 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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
(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 535,638 on August 12, 2005.
FORM 10-QSB
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
as of June 30, 2005 (Unaudited) and December 31, 2004.......................................3
Condensed Consolidated Statement of Income
for the three and six months ended June 30, 2005 and 2004(Unaudited)......................4-5
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 2005 (Unaudited)...................................6
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2005 and 2004(Unaudited)..........................................7
Condensed Consolidated Statements of Comprehensive Income
for the six months ended June 30, 2005 and 2004(Unaudited)..................................8
Notes to Unaudited Condensed Consolidated Financial Statements...........................9-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................................14-20
Item 3. Controls and Procedures....................................................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................21
Item 2. Changes in Securities......................................................................21
Item 3. Defaults upon Senior Securities............................................................21
Item 4. Submission of Matters to a Vote
of Securities Holders......................................................................21
Item 5. Other Information..........................................................................21
Item 6. Exhibits and Reports on Form 8-K...........................................................21
Signature....................................................................................................22
2
Tennessee Valley Financial Holdings, Inc.
Condensed Consolidated Balance Sheet
(In Thousands)
June 30, 2005 December 31, 2004
(Unaudited)
------------------------ ------------------------
Assets
Cash and due from banks $ 3,998 $ 2,369
Federal funds sold 3,195
------------------------ ------------------------
Cash and cash equivalents 7,193 2,369
Investment Securities:
Investment Securities available for sale, at
Fair Value 18,301 15,325
Loans, net 107,979 101,227
Loans Held for Sale, at Fair Value 1,980 859
Banking premises and equipment, net 4,203 4,169
Accrued interest receivable 599 672
Other real estate owned 0 335
Prepaid expenses and other assets 472 381
------------------------ ------------------------
Total Assets $ 140,727 $ 125,337
======================== ========================
Liabilities and Stockholders Equity
Deposits $ 118,756 $ 104,799
Securities sold under agreements to repurchase 461 353
Other Borrowings 8,779 10,315
Accrued interest payable 450 355
Long Term Subordinated Debt 2,062 0
Other Liabilities 451 260
------------------------ ------------------------
Total Liabilities 130,959 116,082
------------------------ ------------------------
Stockholders Equity:
Common Stock, $1.00 Par Value, 2,000,000
shares authorized, 535,638 issued and outstanding 536 534
in 2004, 533,618 issued and outstanding in 2003.
Capital in excess of par value 6,522 6,491
Retained Earnings 2,675 2,183
Accumulated other comprehensive income 35 47
------------------------ ------------------------
Total Stockholders Equity 9,768 9,255
------------------------ ------------------------
Total Liabilities and Stockholders Equity $ 140,727 $ 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 For the six months ended
June 30, June 30,
2005 2004 2005 2004
--------------- -------------- ------------- -------------
Interest Income:
Loans, including fees $1,955 $ 1,495 $ 3,744 $2,955
Investment securities 165 138 301 286
Federal funds sold 59 5 88 5
Other interest income 7 13
--------------- -------------- ------------- -------------
Total interest income 2,186 1,638 4,146 3,246
--------------- -------------- ------------- -------------
Interest Expense:
Deposits 671 400 1,229 762
Advances from the Federal Home Loan Bank and other
borrowings 91 87 186 179
Trust Preferred Interest Expense 28 28
--------------- -------------- ------------- -------------
Total interest expense 790 487 1,443 941
--------------- -------------- ------------- -------------
Net interest income 1,396
1,151 2,703 2,305
Provision for loan losses 64 25 106 46
--------------- -------------- ------------- -------------
Net interest income after provision for loan losses 1,332 1,126 2,597 2,259
--------------- -------------- ------------- -------------
Non-interest income
Service charges on deposit accounts 106 97 189 191
Fees on sale of mortgage loans 95 112 170 166
Net gains (losses) on sales of investment securities
available for sale 0 0 1 1
Other income 16 15 43 39
--------------- -------------- ------------- -------------
Total non-interest income 217 224 403 397
--------------- -------------- ------------- -------------
Non-interest expense
Salaries and employee benefits 537 497 1,074 969
Net occupancy expense 78 163 229 279
Data processing fees 84 72 162 133
Advertising and promotion 21 48 54 76
Office supplies and postage 56 50 82 92
Legal and professional 115 34 153 76
Loan Expense 46 63 106 118
Other 180 118 361 226
--------------- -------------- ------------- -------------
Total non-interest expense 1,117 1,045 2,221 1,969
--------------- -------------- ------------- -------------
4
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statements of Income
(In Thousands except for per share amounts)
(Unaudited)
Income before income tax expense 432 305 779 687
Income tax expense 163 102 286 233
----------------- ------------- --------------- -----------
Net Income $269 $ 203 $ 493 $ 454
================= ============= =============== ===========
Basic Earnings per Common Share $0.50 $ 0.38 $ 0.92 $0.85
================= ============= =============== ===========
Diluted Earnings per Common Share $0.48 $ 0.38 $0.90 $0.85
================= ============= =============== ===========
Weighted average common shares (Denominator Basic EPS) 534,277 532,130 533,949 532,130
Dilutive effect of stock options 5,335 2,603 4,060 2,603
----------------- ------------- --------------- -----------
Weighted average common shares and common stock 539,612 534,733 538,009 534,733
equivalents (Denominator Diluted EPS) ================= ============= =============== ===========
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 six months ended June 30, 2005
(Unaudited)
Accumulated
Capital in Other Total
Common Excess of Retained Comprehensive Stockholders
Stock Par Value Earnings Income (Loss) Equity
----------- ------------ --------------- ----------------- ---------------
Balances at December 31, 2004 $534 $6,491 $2,183 $47 $9,255
Net income 493 493
Other comprehensive income (loss) (12) (12)
Sold 2,020 shares of common stock through
officer stock options. 2 31 33
----------- ------------ --------------- ----------------- --------------
Balances at June 30, 2005 $536 $6,522 $2,676 $ 35 $9,769
=========== ============ =============== ================= ==============
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)
(Unaudited)
For the Six Months ended June 30,
---------------------------------------------
2005 2004
------------------------ -------------------
Cash Flows from Operating Activities:
Net Income $ 493 $ 454
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 106 46
Amortization of premium on investment securities, 30 42
Depreciation 118 97
Net (gain) loss on sale of available for sale securities (1) 1
Stock dividends on FHLB Stock (12) (11)
Changes in operating assets and liabilities:
Accrued interest receivable 73 (17)
Other assets (84) (36)
Accrued interest payable and other liabilities 286 (452)
------------------------ --------------------
Net cash provided by operating activities $1,009 $124
------------------------ --------------------
Cash Flows from Investing Activities:
Proceeds from sales of available for sale investment securities 2,440 928
Proceeds from maturities and calls of available for sale investment
securities 1,036 1,882
Purchases of available for sale investment securities (6,488) (4,490)
Loans originated, net of payments received (6,858) (8,309)
Additions to banking premises and equipment (152) (594)
Sale of other real estate owned 335 0
Net (increase) decrease in loans held for sale (1,121) (324)
------------------------ --------------------
Net cash used in investing activities $(10,809) $(10,907)
------------------------ --------------------
Cash Flows from Financing Activities:
Increase in deposits, net 13,957 12,747
Repurchase of common stock 33 (40)
Proceeds from Trust Preferred Issuance 2,062 0
Proceeds from securities sold under agreements to repurchase and
other borrowings, net of principal repayments (1,428) (543)
------------------------ --------------------
Net cash provided by financing activities $14,624 $12,164
------------------------ --------------------
Net Increase (Decrease) in Cash and Cash Equivalents 4,824 1,381
Cash and Cash Equivalents, Beginning of Period 2,369 2,145
------------------------ --------------------
Cash and Cash Equivalents, End of Period $ 7,193 $ 3,526
======================== =====================
Supplementary Disclosure of Cash Flow Information:
Interest paid on deposit accounts and other borrowings 1,348 943
Income taxes paid 188 580
Supplementary Disclosures of Noncash Investing Activities:
Acquisition of real estate acquired through foreclosure 35 85
Purchase of building financed by capital lease obligation 0 477
Change in unrealized gain (loss) on available for sale investment
securities (19) (246)
Change in deferred tax associated with unrealized gain (loss) on
investment securities available for sale (7) (91)
Change in net unrealized gain (loss) on available for sale investment
securities (12) (155)
The accompanying notes are an integral part of these financial statements.
7
Tennessee Valley Financial Holdings, Inc. and Subsidiary
Condensed Consolidated Statement of Cash Flows
(In Thousands)
(Unaudited)
For the Six Months ended June 30,
----------------------------------------------
2005 2004
----------------------- ----------------------
Net Income $ 493 $ 454
----------------------- ----------------------
Other comprehensive income, net of tax:
Unrealized gains/losses on investment securities (29) (247)
Reclassification adjustment for gains/losses included in net income
(1) 1
Income taxes related to unrealized gains/losses on investment
securities 18 91
----------------------- ----------------------
Other comprehensive income (loss), net of tax (12) (155)
----------------------- ----------------------
Comprehensive income $ 481 $ 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
June 30, 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 (sometimes referred to as 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 the Company presented herein
should be read in conjunction with our audited financial statements for the year
ended December 31, 2004.
Financial information as of June 30, 2005 and the results of operations for the
three and six months ended June 30, 2005 and 2004, and cash flows for the six
month periods ended June 30, 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.
NOTE 2 - ACCOUNTING POLICY CHANGES
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 was originally postponed. Effective June
29, 2005, the FASB decided not to provide additional guidance on the meaning of
other-than-temporary impairment, but directed its staff to issue as final FSP
EITF 03-1-a, ("Implementation Guidance for the Application of Paragraph 16 of
EITF Issue No. 03-1"). The adoption of the guidance contained in this EITF
consensus did not have a material effect on the Company's financial statements,
however, the Bank is currently reviewing the impact of Issue 03-1-a.
9
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 June 30, 2005, the Company had outstanding commitments to advance
construction funds and to originate loans in the amount of $41.9 million and
commitments to advance existing home equity and other credit lines in the amount
of $25.3 million. In addition, the Company has also conveyed $917,000 in standby
letters of credit.
NOTE 4 - TRUST PREFERRED SECURITIES
In March 2005, the Company 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 $2.61 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.
NOTE 5 - OTHER BORROWINGS
The following table summarizes the Company's other borrowings as of June 30,
2005 and December 31, 2004, respectively.
June 30, 2005 December 31, 2004
--------------------- -----------------------
Federal Home Loan Bank Advances $ 8,500 $ 9,700
Fed Funds Purchased 0 375
Capital Lease Obligations 229 240
Other Borrowings (FHLB ZIF) 50
--------------------- -----------------------
Total Other Borrowings $ 8,779 $ 10,315
===================== =======================
10
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 June 30, Six Months Ended June 30,
------------- ------------- ----------------- --------------
2005 2004 2005 2004
------------- ------------- ----------------- --------------
Net Income, as Reported $ 269 $ 203 $ 493 $ 454
Less: Total Stock-Based Employee Compensation
Expense Determined Under Fair Value Based
Method
for All Awards, Net of Related Tax Effects (10) - (12) -
------------- ------------- ----------------- --------------
Pro Forma Net Income $ 259 $ 203 $ 481 $ 454
============= ============= ================= ==============
Earnings Per Share:
Basic - as Reported $0.50 $ 0.38 $0.92 $ 0.85
============= ============= ================= ==============
Basic - Pro Forma $0.48 $ 0.38 $0.90 $ 0.85
============= ============= ================= ==============
Diluted - as Reported $0.50 $ 0.38 $0.90 $ 0.85
============= ============= ================= ==============
Diluted - Pro Forma $0.48 $ 0.38 $0.89 $ 0.85
============= ============= ================= ==============
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 awarded a total of 15,600 options at an exercise prices
ranging from $16 to $19.50 per share. These prices were equal to the fair value
of the stock on the date the options were granted. The options vest over a
four-year period, 13,480 of which are vested and remain unexercised as of June
30, 2005.
11
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 or 213,612 shares
of common stock for issuance during the term of the plan. The board of directors
has awarded 44,000 options under this plan.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for the quarter ending June 30, 2005 and 2004.
Six Months June 30,
2005 2004
--------------------------
Dividend Yield 1.37% 1.37%
Expected Life 6 years 6 years
Expected Volatility 10% 10%
Risk-Free Interest Rate 5.2% 5.2%
12
A summary of the status of the Company's stock option plans is presented below:
Six Months Ended Six Months Ended
June 30, June 30,
2005 2004
---------------------------------- --------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
---------------- ----------------- ------------- ------------------
Outstanding at
Beginning of Period 15,500 $ 16.65 14,500 $ 16.00
Granted 44,000 $ 26.00 0
Exercised (2,020) $ 16.00 0
Forfeited 0 0
--------------- -------------
Outstanding at
End of Period 57,480 $ 23.65 14,500 $ 16.00
================ ================= ============= ==================
Options Exercisable
at Period-End 13,480 $ 16.74 14,500 $ 16.00
Weighted Average Fair
Value of Options Granted
During the Period 26.00 N/A
Information pertaining to options outstanding at June 30, 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 57,480 3.8 years $ 23.65 13,480 $ 16.74
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS ENDING JUNE 30, 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 June 30, 2005, we earned net income of $203,000 or
$0.38 per share as compared to $285,000 or $0.53 per share for the corresponding
period in 2004. For the first half of 2005, net income was $454,000 and $568,000
for the same period in 2004. The decrease in net income for the second quarter
of 2004 and the first two quarters of 2004 are both primarily due to a decrease
in non-interest income (primarily fees on sales of mortgage loans) and an
increase in non-interest expense. These were partially offsets by increases in
the Company's net interest income and declines in the provision for loan losses.
The table below presents certain key financial ratios for the first quarter of
2004 and 2003 respectively.
For the six months ending June 30,
2005 2004
---- ----
Return on Average Assets 0.70% 0.80%
Return on Average Equity 9.4% 10.53%
Earnings per share - basic $ 0.92 $ 0.85
NET INTEREST INCOME
Net interest income was $2.7 million for the first two quarters of 2005, an
increase of approximately 17.3% or $398,000 over the same period in 2004. The
increase in net interest income was due primarily to an increase in the volume
of earnings assets for the first two quarters of 2005 as compared to 2004 and an
increase in our net interest margin. Net interest income was $ 1.4 million for
the second quarter of 2005 as compared to $1.1 million for the same period in
2004. The increase in net interest income for the second quarter of 2005 as
compared to the second quarter of 2004 can be attributed to an increase in the
volume of earning assets. Average loans increased approximately $14.7 million to
$105.8 million at June 30, 2005, as compared to $91 million at June 30, 2004.
Average loans were approximately 82% of total earning assets at June 30, 2005
and 85% at June 30, 2004.
The yield on total earning assets increased 35 basis points for the first two
quarters of 2005 as compared to the same period of 2004. The recent continued
increase in overall rates has enhanced yields on the loan portfolio. However,
the yield on investments has been slightly negatively impacted by rising rates.
Yields on Federal Funds Sold, the rates on which can change overnight,
significantly increased to 2.68% as of June 30, 2005, compared to 0.87% as of
June 30, 2004.
Total interest expense was approximately $1.4 million for the first two quarters
of 2005, a 53.3% increase as compared to the same period in 2004. The average
rate on interest-bearing deposits was 2.35% for the first two quarters of 2005,
50 basis points higher than the average rate on deposits during the first two
quarters of 2004. The increase in the rates on deposits during 2005 as compared
to 2004 can be attributed to the increase in interest rates since 2004. The
average cost of borrowed funds was 4.44% for the first two quarters of 2005 and
3.76% for the first two quarters of 2004. The overall rate on interest-bearing
liabilities was 2.31% for the first two quarters of 2005 compared to 1.81% for
the same period in 2004.
14
Six Months Ended (In thousands) Six Months Ended (In thousands)
June 30, 2005 June 30, 2004
------------------------------------------- ---------------------------------------------
Average Interest Yield/Rate Average Balance Interest Yield/Rate
Balance
--------------- --------------- ----------- ----------------- --------------- -----------
Loans(1) (2) $ 105,767 $ 3,744 7.08% $ 91,050 $ 2,955 6.49%
Investment securities(3) 16,073 337 4.19% 14,556 318 4.36%
Federal funds sold 6,560 88 2.68% 1,145 5 0.87%
--------------- ----------------- -----------
Total earning assets 128,400 4,169 6.49% 106,751 3,278 6.14%
Other assets 7,530 6,340
--------------- -----------------
Total Assets
135,930 113,091
=============== =================
Interest-bearing deposits 104,672 1,229 2.35% 85,283 760 1.78%
Demand deposits 10,442 0.00% 8,945 0.00%
Securities sold under agreements to
repurchase and other borrowings 9,643 214 4.44% 9,619 181 3.76%
--------------- --------------- ----------------- --------------- -----------
Total rate-bearing liabilities 124,757 1,443 2.31% 103,847 941 1.81%
Other liabilities 727 623
--------------- -----------------
Total Liabilities 125,484 104,470
--------------- -----------------
Total Stockholders' Equity 10,446 8,621
--------------- -----------------
Total Liabilities and Stockholders'
Equity 135,930 113,091
=============== =================
Net interest income $ 2,726 $ 2,337
=============== ===============
Net interest spread 4.18% 4.33%
=========== ===========
Net interest margin(4) 4.25% 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
Our 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. We 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 our net income through a narrower interest margin and
reduced lending volume.
Our Asset/Liability Committee ("ALCO" committee) follows the Asset/Liability
Management Policy approved by the board of directors. The ALCO committee is
scheduled to meet 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 our assets (loans, and investments) and liabilities
(deposits); anticipated loan demands; and liquidity position.
15
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. We have a negative gap for the next twelve months
period.
PROVISION FOR LOAN LOSSES
Provision for loan losses was $106,000 for the first two quarters of 2005,
compared to $46,000 for the first two quarters of 2004. For the second quarter
of 2005 the provision for loan losses was $64,000 compared to $25,000 during the
second quarter of 2004. The provision for loan losses for the periods in 2004
was lower due to management's assessment of the Bank's loan loss allowance at
that time. Also, management was able to satisfactorily resolve certain adversely
classified loans without loss to the Bank. As discussed below, the provision for
loan losses fluctuates based on certain factors including management's
assessment of risk in the loan portfolio and general economic conditions Net
charge-offs for the first two quarters of 2005 were $83,000 as compared to
$100,000 for the first two quarters of 2004. As a percentage of average loans,
the annualized rate of net charge-offs was 0.2% for the first two quarters of
2005 compared to a 0.10% ratio for fiscal 2004.
As of June 30, 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.
Analysis of the Allowance for Loan Losses
For the Six Months Ended June 30,
2005 2004
----------------- ------------------
Average Loans Outstanding 105,767 91,050
================= ==================
Allowance at beginning of period 1,271 1,283
Charge-offs:
Commercial, financial and agricultural 28
Real Estate - construction
Real Estate - mortgage 57 23
Installment - consumer 64
Other 32
----------------- ------------------
Total charge-offs 89 115
----------------- ------------------
16
Recoveries:
Commercial, financial and agricultural
Real Estate - construction
Real Estate - mortgage 5 3
Installment - consumer 1 12
Other
------------- --------------
Total recoveries 6 15
Net charge-offs 83 100
------------- --------------
Provision for loan losses 106 46
------------- --------------
Balance at end of period $ 1,294 $ 1,229
============= ==============
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.08% 0.11%
NON-INTEREST INCOME
Total non-interest income was approximately $403,000 for the first two quarters
of 2005 compared to $397,000 for the same period in 2004. For the second quarter
of 2005, non-interest income declined $7,000 to $217,000 as compared to the
second quarter of 2004. The primary reason for the decline in non-interest
income for the first two quarters of 2005 as compared to the same period in 2004
is a decline in fees on sales mortgage loans. Fees on sales of mortgage loans
fell to $95,000 during the first two quarters of 2005 as compared to
approximately $112,000 during the first two quarters of 2004. 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.
NON-INTEREST EXPENSE
Non-interest expense totaled approximately $2.2 million for the first two
quarters of 2005 as compared to $2.0 million during the first two quarters of
2004. Non-interest expense (annualized) as a percent of total average assets was
3.27% for the first two quarters of 2005 compared to 3.32% for the first two
quarters of 2004. The increase in non-interest expense during the first quarters
of 2005 as compared to the same period in 2004 can be primarily attributed to
increases in salaries and employee benefits, legal and professional expenses,
data processing expenses, and other expenses. Most of the salary and employee
benefit and data processing increases can be attributed to the growth of the
bank which has necessitated increases in overhead expenses. The increase in
legal and professional expense is attributable in part to additional audit work
required under new audit standards and expanded internal audit services employed
by management. Non-interest expense increased $72,000 to $1.1 million for the
second quarter as compared to the same period in 2004. Growth strategies and
overall increase in asset size have been the primary reasons for the increases
in all affected expense categories.
INCOME TAXES
We recognize 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 $286,000 and $233,000 for the first two
quarters of 2005 and 2004, respectively. Income tax expense was $163,000 for the
second quarter of 2005 as compared to $102,000 for the second quarter of 2004.
The effective income tax rate was 36.7% for the first two quarters of 2005 and
33.9% for the first two quarters of 2004.
17
BALANCE SHEET ANALYSIS - COMPARISON OF JUNE 30, 2005 TO DECEMBER 31, 2004
Assets totaled $140.7 million at June 30, 2005, as compared to $125.3 million at
December 31, 2004, an increase of 12.3%. The primary categories of asset growth
were loans, investments, cash and due from banks, and federal funds sold. Loans,
including loans held for sale, increased approximately $7.8 million, investments
grew approximately $3.0 million, cash and due from banks increased approximately
$1.6 million, and federal funds grew approximately $3.2 million. An approximate
increase of $14.0 million in deposit growth funded the increase in the asset
categories.
INVESTMENT SECURITIES
Investment securities were approximately $18.3 million, or 13% of total assets,
at June 30, 2005, an increase of $3.0 million from December 31, 2004. We
purchased $6.5 million in investment securities during the first two quarters of
2005, while maturities, calls, sales and principal pay-downs provided cash of
$3.5 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 29.7% of the portfolio at June
30, 2005 and 31.0% at December 31, 2004.
At June 30, 2005 and December 31, 2004, 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 gain on investment securities available for sale was $56,000 at June
30, 2005, a decrease of $19,000 from December 31, 2004, 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 two quarters of 2005, loans increased $6.7 million to $107.9
million at June 30, 2005.
Loans by Type
June 30, 2005 December 31, 2004
--------------------- --------------------
Commercial, financial and agricultural $31,886 $29,197
Real estate - construction 26,601 23,552
Real estate - mortgage 37,526 38,320
Installment loans to individuals 13,427 11,566
--------------------- --------------------
Loans, gross $109,440 $102,635
Less:
Allowance for loan losses (1,294) (1,271)
Unearned loan fees (167) (137)
--------------------- --------------------
$107,979 $101,227
===================== ====================
Included in the above may be loans which have been classified as impaired,
pursuant to the adoption of SFAS No. 114.
18
Non-Performing Assets
June 30, 2005 December 31, 2004
------------------------ -----------------------
Non-accrual loans(1) $ 88 $ 546
Loans past due greater than
90 days and still accruing interest 58 -
Restructured loans 275 257
Other real estate owned 0 335
------------------------ -----------------------
Total Non-Performing Assets $ 421 $ 1,138
======================== =======================
(1) Included in non-accrual loans are $88,000 and $546,000 of loans considered
impaired as of June 30, 2005 and December 31, 2004, respectively.
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. We had no Other Real Estate Owned as of
June 30, 2005. The balance of Other Real Estate Owned at December 31, 2004,
totaled $335,000. We have 3 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 $14.0 million to $118.7 million at June 30, 2005
from $104.7 million at December 31, 2004. Core deposits, which include regular
savings, money market, NOW and demand deposits, were $57.5 million, or 48.4% of
total deposits, at June 30, 2005. Core deposits were 57.5% of total deposits at
December 31, 2004. Time deposits totaled $61.2 million at June 30, 2005, an
increase of approximately $16.7 million from $44.5 million at December 31, 2004.
The increase in time deposits represents more aggressive deposit pricing for
time deposits in the first two quarters of 2005, due to the funding requirements
of our loan portfolio growth.
Deposit Balances By Type
December 31,
June 30, 2005 2004
-------------------- -----------------
Demand Deposits:
Non-interest bearing demand
accounts $ 11,574 $ 11,958
NOW and money market accounts 42,440 44,966
Savings accounts 3,504 3,374
-------------------- -----------------
Total demand deposits 57,518 60,298
-------------------- -----------------
Term Deposits:
Less than $100,000 38,199 29,879
$100,000 or more 23,041 14,622
-------------------- -----------------
Total Term Deposits 61,240 44,501
-------------------- -----------------
Total Deposits $ 118,758 $ 104,799
==================== =================
19
CAPITAL
During the first two quarters of 2005, stockholders' equity increased $513,000
to $9.8 million, due to net income for the first two quarters of 2005 of
$493,000 and proceeds from the exercise of stock options of $33,000 offset a
decline in accumulated other comprehensive income of $12,000.
Regulatory Capital
TnBank
(Wholly-Owned Subsidiary of Tennessee Valley Financial Holdings, Inc.)
June 30, 2005
-----------------------------------------
Bank Well Minimum
Capitalized Regulatory
Levels Requirement
--------- -------------- ----------------
Tier 1 Capital as a percentage of risk-weighted assets 10.1% 6.0% 4.0%
Total Capital as a percentage of risk-weighted assets 11.3% 10.0% 8.0%
Tier 1 capital to average assets 8.3% 5.0% 5.0%
December 31, 2004
-----------------------------------------
Bank Well Minimum
Capitalized Regulatory
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%
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 June 30, 2005, we held $18.3 million in available-for-sale securities.
Deposits increased approximately $14.0 million during the first two quarters of
2005. 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 June
30, 2005.
We can also enter into repurchase agreement transactions should the need for
additional liquidity arise. At June 30, 2005, the Company had $461,000 in
repurchase agreement balances outstanding.
At June 30, 2005, the Company had capital of $9.8 million, or 6.94% of total
assets as compared to $9.3 million, or 7.4% 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. Our chief executive
officer and chief financial officer have evaluated the effectiveness
of the design and operation of our "disclosure controls and
procedures" (as that term is defined in Rule 13a-15(e) under the
Exchange Act) as of June 30, 2005, the end of the fiscal quarter
covered by this Quarterly Report on Form 10-QSB. Based on that
evaluation, the chief executive officer and chief financial officer
have concluded that our 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 on Form 10-QSB was prepared, in order to
allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls. There has been no change in our internal
control over financial reporting that occurred during the fiscal
quarter covered by this Quarterly Report on Form 10-QSB that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
20
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
The annual meeting was held on April 26, 2005 and the following proposals were
voted upon by the shareholders:
Proposal 1. To elect nine directors to serve until the next Annual Meeting of
Shareholders and until their successor are elected and qualified:
For Against Abstain
----------- ----------- -----------
J. Michael Anderson 283,000 - 47,641
Larry Beeman 283,100 - 47,541
A.P. Cappiello 280,032 - 50,609
Victor I. Dodson 328,526 - 2,115
J. Frank Jamison 283,100 - 47,541
Terry L. Kerbs 283,100 - 47,541
Thomas E. Tuck 330,041 - 600
Thomas D. Moye 283,100 - 47,541
W. Robert Witt 283,100 - 47,541
Proposal 2. To ratify the appointment of Pugh & Company, Certified Public
Accountants, as auditors for 2005:
For Against Abstain
----------- ----------- -----------
328,840 1,000 801
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
21
FORM 1O-QSB
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Tennessee Valley Financial Holdings, Inc.
Date: August 12, 2005 By: /s/Jason Wilkinson
--------------------------------------------
Jason Wilkinson
Vice President
22