10QSB 1 vbi063003.txt QUARTERLY REPORT ON FORM 10-QSB 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, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------- Commission File No. 000-22473 Volunteer Bancorp, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Tennessee 62-1271025 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 210 East Main Street, Rogersville, Tennessee 37879 ---------------------------------------------------- Address of principal executive offices Registrant's telephone number, including area code 423-272-2200 ------------ Not applicable -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Check whether the issuer (1) has filed all reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest applicable date: 539,027 as of August 13, 2003. Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No VOLUNTEER BANCORP, INC. INDEX Part I Financial Information Page Item 1. Financial Statements Consolidated Balance Sheet as of June 30, 2003 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003 and June 2002 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and June 2002 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 Item 3. Controls and Procedures 11 Part II Other Information Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Securities Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 PART 1 - FINANCIAL INFORMATION VOLUNTEER BANCORP, INC. CONSOLIDATED BALANCE SHEETS June 30, 2003 (Unaudited) ASSETS Cash and due from banks $ 2,941,124 Federal funds sold 2,417,829 ------------------ Total cash and cash equivalents 5,358,953 Investment securities Available for sale 30,919,700 Held to maturity 717,630 Loans, net (allowance for loan losses $952,901) 67,057,312 Federal Home Loan Bank stock, at cost 378,400 Accrued interest receivable 777,618 Premises and equipment, net 3,719,118 Other real estate 1,858,749 Cash surrender value life insurance 2,035,077 Other assets 238,607 ------------------ Total Assets $ 113,061,164 ================== LIABILITIES Deposits Non-Interest bearing $ 14,455,525 Interest bearing 88,119,554 ------------------ Total deposits 102,575,079 Interest payable 471,478 Securities sold under repurchase agreements 1,546,737 Note payable 1,415,000 Other accrued liabilities 20,504 ------------------ Total Liabilities 106,028,798 STOCKHOLDERS' EQUITY Common Stock, $0.01 par value; 1,000,000 shares authorized; 539,027 shares issued and outstanding 5,390 Additional paid-in capital 1,916,500 Retained earnings 4,742,900 Accumulated other comprehensive income 367,576 ------------------ Total Stockholders' Equity 7,032,366 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 113,061,164 ================== See accompanying notes to consolidated financial statements. 3 PART 1 - FINANCIAL INFORMATION VOLUNTEER BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- INTEREST INCOME Loans, including fees $ 1,240,801 $ 1,491,304 $ 2,481,998 $ 2,976,866 Federal funds 7,293 16,236 18,952 38,338 Investment securities: Taxable 211,114 309,845 443,664 588,156 Tax-exempt 73,062 57,479 144,647 101,016 ----------- ----------- ----------- ----------- Total interest income 1,532,270 1,874,864 3,089,261 3,704,376 INTEREST EXPENSE Deposits 418,182 596,226 862,425 1,286,250 Other borrowed funds 22,114 28,913 47,893 60,507 ----------- ----------- ----------- ----------- Total interest expense 440,296 625,139 910,318 1,346,757 Net interest income 1,091,974 1,249,725 2,178,943 2,357,619 Provision for loan losses 290,000 455,000 390,000 545,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 801,974 794,725 1,788,943 1,812,619 ----------- ----------- ----------- ----------- NON-INTEREST INCOME Service charges on deposits and fees 132,122 102,268 242,272 148,729 Securities gains 1,437 4,980 107,903 39,222 Other non-interest income 64,741 (7,471) 101,109 17,304 ----------- ----------- ----------- ----------- Total non-interest income 198,300 99,777 451,284 205,255 NON-INTEREST EXPENSE Salaries and employee benefits 504,917 470,386 1,009,541 909,473 Occupancy and equipment expenses 212,047 172,402 379,270 344,219 Other non-interest expense 292,059 447,304 633,554 730,575 ----------- ----------- ----------- ----------- Total non-interest expense 1,009,023 1,090,092 2,022,365 1,984,267 ----------- ----------- ----------- ----------- (Loss) income before income taxes (8,749) (195,590) 217,862 33,607 Income tax (benefit) expense (32,925) (85,535) 32,154 (9,195) ------------ ----------- ----------- ----------- Net Income $ 24,176 $ (110,055) $ 185,708 $ 42,802 =========== =========== =========== =========== Other comprehensive income Unrealized gain (loss) on securities available for sale, before tax $ 197,785 $ 744,330 $ 126,442 $ 432,573 Reclassification for gains included in net income 0 (4,980) (106,465) (39,222) Income taxes related to other comprehensive income (75,158) (323,413) (7,591) (149,473) ----------- ----------- ----------- ----------- 122,627 415,937 12,386 243,878 ----------- ----------- ----------- ----------- Total comprehensive income $ 146,803 $ 305,882 $ 198,094 $ 286,680 =========== =========== =========== =========== Net income (loss) per common share $ 0.04 $ (0.20) $ 0.34 $ 0.08 Dividends per share - 0.10 - 0.10 Common shares outstanding 539,027 539,027 539,027 539,027
See accompanying notes to consolidated financial statements. 4 PART I - FINANCIAL INFORMATION VOLUNTEER BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 2003 2002 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 185,708 $ 42,802 Adjustments to reconcile net income to net cash from operating activities Provision for loan losses 390,000 545,000 Depreciation and amortization 198,444 107,291 Gain on securities (107,903) (39,222) Federal Home Loan bank stock dividends (7,300) (8,100) Increase in cash surrender value of life insurance (35,077) - Change in: Accrued interest receivable 157,998 83,240 Other assets 356,006 75,289 Other liabilities 10,750 (315,667) ---------------- ---------------- Net cash from operating activities 1,148,626 490,633 CASH FLOWS FROM INVESTING ACTIVITIES Activity in held to maturity securities: Maturities, prepayments, and calls 324,300 7,312 Activity in available for sale securities: Sales 5,797,617 5,782,690 Purchases (17,106,022) (11,491,585) Maturities, prepayments, and calls 7,821,078 2,000,000 Net change in loans (1,234,760) 2,970,058 Purchase of premise and equipment, net (27,668) (68,504) Investment in cash surrender value life insurance (2,000,000) - ----------------- ---------------- Net cash from investing activities (6,425,455) (800,029) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 2,617,322 (2,270,342) Net change in securities sold under repurchase agreements (742,047) 300,275 Repayment of long-term debt (395,000) (360,000) Payment of dividends - (53,903) ---------------- ---------------- Net cash from financing activities 1,480,275 (2,383,970) ---------------- ---------------- Net change in cash and cash equivalents (3,796,554) (2,693,366) Cash and cash equivalents at beginning of period 9,155,507 8,903,179 ---------------- ---------------- Cash and cash equivalents at end of period $ 5,358,953 $ 6,209,813 ================ ================ Supplemental disclosure of cash flow information Transfers from loans to foreclosed real estate $ 802,430 $ 1,140,899 Cash paid during the period for Interest $ 850,162 $ 1,700,733 Income taxes 91,204 98,026
See accompanying notes to consolidated financial statements. 5 VOLUNTEER BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Management Opinion In the opinion of the management of Volunteer Bancorp, Inc. (the "Company"), the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of June 30, 2003, the results of operations for the three and six months ended June 30, 2003 and 2002, and cash flows for the six months ended June 30, 2003 and 2002. All of these adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of results for a full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report for the year ended December 31, 2002. The consolidated financial statements include the accounts for the Company and Citizens Bank of East Tennessee (the "Bank"). All material intercompany balances and transactions have been eliminated in consolidation. 2. Long-Term Debt The Company's long-term debt consists of a single note payable in the amount of $1,415,000 at June 30, 2003, due to an unaffiliated national bank. The interest rate on the note adjusts quarterly and is equal to the three-months London Interbank Offered Rate (Three Month LIBOR) plus 1.95% per annum or at the option of the Company, the rate on the note is equal to the lender's index rate as such rate changes from time to time. The Company may change interest rate options at any time with prior notice to the lender. Interest is payable quarterly. At June 30, 2003, the rate on the note was 3.25% per annum. Principal is payable annually on January 31 as follows: 2004 $ 435,000 2005 470,000 2006 (final maturity) 510,000 ------------- $ 1,415,000 The loan is secured by all of the stock of the Bank owned by the Company. The Company is in violation of certain loan covenants with respect to this loan in that annualized earnings to tangible assets are less than the 0.75% required and the ratio of nonperforming assets is greater than 2.5%. These violations have not been waived by the lender. Because of these violations, the lender may, at its option, by notice to the Company declare the note in default. In such an event the Company would have ten days to remedy compliance with all loan covenants. If the Company did not or could not comply with all loan covenants within such ten day period the note would be in default. In such a case the lender may declare the note immediately due and payable and among other things proceed to foreclose upon 100% of the stock of the Bank which is pledged as security for the note. 6 VOLUNTEER BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The lender has been notified by the Company of its non-compliance with certain covenants of the note that could lead to the lender declaring the note in default. However, the lender has not notified the Company that it is in default under the terms of the loan agreement. The Company is in discussions with the lender and anticipate the lender to first pursue remedies other than foreclosure. Accordingly, the Company expects that the note will be restructured resulting in, among other things, increasing the interest rate on the note and substantially reducing the final maturity date on the note. In such a case, there can be no assurance that the Company could satisfy the restructured debt without obtaining new financing from other lenders or funds from a stock offering. Further, there can be no assurance that a stock offering by the Company would be successful or that new lenders would provide funds to the Company. 3. Contingencies During the course of business, the Company makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying balance sheet. The commitments and contingent liabilities may include various guarantees, commitments to extend credit, standby letters of credit, and litigation. In the opinion of management, no material adverse effect on the financial position, liquidity or operating results of the Company and its subsidiary is anticipated as a result of these items. 4. Certain Regulatory Matters As a result of certain findings in the Tennessee Department of Financial Institution's Report of Examination dated June 4, 2001, the Board of Directors of the Bank entered into a Memorandum of Understanding (the "Memorandum"), dated August 16, 2001, with the Commissioner of the Tennessee Department of Financial Institutions and the Memphis Regional Director of the Federal Deposit Insurance Corporation. A Memorandum of Understanding is an informal administrative tool for institutions that have some weaknesses that if not properly addressed and corrected could lead to supervisory concern requiring formal administrative action. The areas addressed in the Memorandum cover capital adequacy, laws and regulations, data processing audit and review, investment policy maturity strategies, adequate documentation of each of the foregoing but primarily credit administration. As a result, the Board has reviewed a number of the Bank's policies and procedures including its loan policy and has incorporated recommendations designed to strengthen credit quality and the Bank's review procedures regarding loan loss reserve adequacy. Management of the Company and the Bank believe that the Bank is in substantial compliance with the provisions of the Memorandum. 5. New Accounting Standards The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally become effective in the quarter beginning July 1, 2003. Management determined that, upon adopting the new standards, they will not materially affect the Company's operating results or financial condition because the Company does not have these instruments or engage in these activities. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As of and for the Three and Six Months Ended June 30, 2003 and 2002 The following provides a narrative discussion and analysis of significant changes in the results of operations and financial condition of Volunteer Bancorp, Inc. (the "Company"). This discussion should be read in conjunction with the consolidated financial statements and related financial analysis set forth in the Company's 2002 Annual Report, the interim unaudited consolidated financial statements and notes for the three months and six months ended June 30, 2003, included elsewhere herein, and the supplemental financial data included herein. CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION This discussion contains certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). Such statements are based on management's expectations as well as certain assumptions made by, and information available to, management. Specifically, this discussion contains forward-looking statements with respect to the following items: - effects of projected changes in interest rates, - effects of changes in the securities markets, - effects of changes in general economic conditions, - the adequacy of the allowance for loan losses on loans and the level of future provisions for losses on loans, and - business plans for the year 2003 and beyond including underwriting criteria. When used in this discussion, the words "anticipate", "project", "expect", "believe", "should", and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve significant risks and uncertainties including changes in general economic and financial market conditions, changes in banking laws and regulations, and the Company's ability to execute its business plans. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially. SUMMARY The Company reported net income for the first six months of 2003 of $185,708, or $0.34 per common share, compared to net income of $42,802, or $0.08 per common share, for the same period a year ago and for the three months ended June 30, 2003 net income was $24,176, or $0.04 per share compared to a net loss of $110,055 or ($0.20) per share in the second quarter of 2002. Total assets grew approximately $2 million from December 31, 2002 to June 30, 2003. Our return on average assets was .33% compared to .08% for the same period a year ago. This improvement is primarily due to significantly lower loan loss provisions and additional gains on the sale of securities, partially offset by lower net interest income. FINANCIAL CONDITION Earning Assets. Average earning assets has continued to decline as a percentage of total average assets. The decline is attributed to increased non-accrual loans and other real estate owned. Average earning assets to Average Assets is 90.36% for six months ended June 30, 2003 compared to 92.7% for all of 2003. 8 Loan Portfolio. The Company's total loan portfolio was substantially the same at June 30, 2003 and December 31, 2002, however there were differences in the mix as summarized below. June 30, December 31, 2003 2002 ----------- ----------- (in thousands) Commercial, financial and agriculture $ 6,732 $ 7,302 Real estate - construction 1,996 2,647 Real estate - mortgage 51,186 48,055 Consumer 7,687 9,958 Other 409 163 ----------- ----------- $ 68,010 $ 68,125 =========== =========== Allowance for Possible Loan Losses. Lending officers are responsible for the ongoing review and administration of each loan. They make the initial identification of loans that present some difficulty in collection or where there is an indication that the probability of loss exists. Lending officers are responsible for the collection effort on a delinquent loan. Senior management is informed of the status of delinquent and problem loans on a weekly basis. Senior management makes recommendations monthly to the Board of Directors as to charge-offs. Senior management reviews the allowance for possible loan losses on a monthly basis. The Company's policy is to discontinue interest accrual when payment of principal and interest is 90 days or more in arrears, unless there is sufficient collateral to justify continued accrual. The allowance for possible losses represents management's assessment of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for possible loan losses and the appropriate provisions required to maintain a level considered adequate to absorb anticipated loan losses. The provision for possible loan losses was $390,000 for the six months ended June 30, 2003 as compared to $545,000 in the same period in 2002. For the quarter ended June 30, 2003 the provision was $290,000 compared to $455,000 in 2002. The allowance for loan losses at June 30, 2003 was 1.4% of loans. Management believes that the $953,000 at June 30, 2003 is adequate to absorb known risks in the portfolio. The following table provides the changes in the allowance for loan losses for the periods indicated. Six Months Ended June 30, 2003 2002 ---- ---- (in thousands) Balance, beginning of year $ 1,111 $ 908 Provision charged to expense 390 545 Loans charged off (565) (186) Recoveries 17 9 --------- -------- Balance, end of year $ 953 $ 1,276 9 Investment Portfolio. The Company maintains an investment strategy of seeking portfolio yields within acceptable risk levels, as well as providing liquidity. The Company maintains two classifications of investment securities: Available for Sale and Held to Maturity. The Available for Sale securities are carried at fair market value, whereas the Held to Maturity securities are carried at amortized cost. At June 30, 2003 and December 31, 2002, there was an unrealized gain in the Available for Sale securities of approximately $593,000 and $573,000, respectively. The Company's investment securities portfolio increased approximately $2.8 million since December 31, 2002. This increase is primarily attributed to management moving lower yielding Federal Funds Sold into the Bank's securities portfolio. Cash Value of Life Insurance. During the first quarter of 2003, the Company invested in Bank owned life insurance to provide a higher yield than alternative investments. The cash surrender value of this life insurance is $2,035,077 at June 30, 2003. All officers of the Bank as of February 15, 2003 were insured. Deposits. Deposits totaled $102,575,079 at June 30, 2003 compared to $99,957,757 at December 31, 2002. The deposit growth has primarily been in the Non-Interest Bearing accounts. Management has aggressively priced interest bearing deposits to improve interest margins. Additionally, management is working to limit deposit growth to core deposit customers. This limited growth will assist in management's overall strategy to meet Memorandum Guidelines established for capital. Note Payable. The company's long-term debt consists of a single note payable in the amount of $1,415,000 at June 30, 2003 due to an unaffiliated national bank and is discussed further in Note 2 in the Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS Net income increased to $185,708 for the six months ended June 30, 2003 from $42,802 in the same period in 2002. For the three months ended June 30, 2003, net income was $24,176 compared to a loss of $110,055 in 2002. Net interest income decreased 7.6% for the six months ended June 30, 2002 to the same period in 2003 from $2,357,619 to $2,178,943 and decreased 12.6% for the three months periods ended. The provision for loan losses decreased $165,000 and $155,000 during the three and six months ended June 30, 2003 compared to the same periods last year. Non-performing assets increased $144,000 from December 31, 2002 to June 30, 2003. Non-performing assets were as follows as of June 30, 2003 and December 31, 2002: June 30, December 31, 2003 2002 ------- ------- (in thousands) Loans past due over 90 days $ 757 $ 673 Non-accrual loans 365 923 Other real estate owned 1,859 1,241 ------- ------- Total non-performing assets $ 2,981 $ 2,837 ======= ======= 10 Non-Interest Income. Gains on the sale of securities increased $67,000 from $39,000 in the first half of 2002 to $108,000 in the first half of 2003. Service charges also increased in 2003 due to the increase in transaction accounts and an increase in the fees charged. Non-Interest Expense. Salaries and employee benefits increased $35,000 and $100,000 in the three and six months ended June 30, 2003 compared to 2002. Other expenses were lower in the three and six months ended June 30, 2003 than in 2002 due to reduced professional and legal fees and a reduction in other real estate owned related expenses. 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 President and its Vice President and Cashier have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)). Based on that evaluation, the President and the Vice President and Cashier have concluded that the Company's disclosure controls and procedures are effective to ensure that material information relating to the Company and the Company's consolidated subsidiaries is made known to such officers by others within these entities, particularly during the period this quarterly report was prepared, in order to allow timely decisions regarding required disclosure. (b) Changes in Internal Controls. There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 11 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 At the Annual Meeting on May 15, 2003, the shareholders voted on the following proposal with the results as indicated: Elected four (4) of its current directors to continue in office until the 2006 meeting of shareholders. Current directors elected to three-year terms were as follows: Withhold For Authority G. Douglas Price 303,761 0 Gary Varnell 303,761 0 George Brooks 303,761 0 Jim Friddell 303,761 0 Directors continuing to serve include: William E. Phillips Leon Gladson Reed Matney Shirley Price Scott Collins Carlin Greene Neil Miller Item 5. Other Information None 12 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 31.1 Certification of Reed Matney,President of Volunteer Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Greg Oliver, Vice President and Cashier of Volunteer Bancorp, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of Reed Matney, President of Volunteer Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification of Reed Matney, President of Volunteer Bancorp, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K There have been no Current Reports on Form 8-K filed during the quarter ended June 30, 2003. 13 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VOLUNTEER BANCORP, INC. Date: August 14, 2003 /s/ Reed D. Matney --------------------------- Reed D. Matney, President Date: August 14, 2003 /s/ Greg Oliver --------------------------- Greg Oliver, Vice President and Cashier 14