10QSB 1 vbi10qsb063004.txt QUARTERLY FINANCIAL REPORT 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, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _________________ Commission File No. 33-94050 Volunteer Bancorp, Inc. (Exact name of registrant as specified in its charter) Tennessee 62-1271025 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 210 East Main Street, Rogersville, 37857 ---------------------------------- ----- Tennessee (Zip Code) --------- (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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest applicable date: 539,027 as of August 11, 2004. 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, 2004 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and June 2003 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and June 2003 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Controls and Procedures 10 Part II Other Information Item 1. Legal Proceedings 11 Item 2. Changes in Securities 11 Item 3. Defaults upon Senior Securities 11 Item 4. Submission of Matters to a Vote of Securities Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 PART 1 - FINANCIAL INFORMATION VOLUNTEER BANCORP, INC. CONSOLIDATED BALANCE SHEETS June 30, 2004 (Unaudited) ASSETS Cash and due from banks $ 2,686,197 Federal funds sold 1,100,276 ------------------ Total cash and cash equivalents 3,786,473 Investment securities Available for sale 21,227,434 Held to maturity 471,352 Loans, net (allowance for loan losses $878,075) 73,359,782 Federal Home Loan Bank stock, at cost 393,600 Accrued interest receivable 713,861 Premises and equipment, net 3,683,308 Other real estate 146,900 Cash surrender value life insurance 2,133,239 Other assets 709,267 ------------------ Total Assets $ 106,625,216 ================== LIABILITIES Deposits Non-interest bearing $ 14,157,968 Interest bearing 79,167,149 ------------------ Total deposits 93,325,117 Interest payable 182,656 Federal funds purchased 1,725,000 Securities sold under repurchase agreements 691,523 FHLB advances 2,000,000 Other accrued liabilities 237,146 Note payable 980,000 ------------------ Total Liabilities 99,141,442 STOCKHOLDERS' EQUITY Common stock, $0.01 par value; 1,000,000 shares authorized; 539,027 shares issued and outstanding 5,390 Additional paid-in capital 1,916,500 Retained earnings 5,572,515 Accumulated other comprehensive income (10,631) ------------------ Total Stockholders' Equity 7,483,774 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 106,625,216 ================== 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 2004 2003 2004 2003 ---- ---- ---- ---- INTEREST INCOME Loans, including fees $ 1,217,957 $ 1,240,801 $ 2,409,599 $ 2,481,998 Federal funds 1,190 7,293 2,003 18,952 Investment securities: Taxable 135,378 211,114 287,153 443,664 Tax-exempt 72,556 73,062 145,352 144,647 ----------- ----------- ----------- ----------- Total interest income 1,427,081 1,532,270 2,844,107 3,089,261 INTEREST EXPENSE Deposits 284,105 418,182 600,160 862,425 Other borrowed funds 17,570 22,114 37,118 47,893 ----------- ----------- ----------- ----------- Total interest expense 301,675 440,296 637,278 910,318 Net interest income 1,125,406 1,091,974 2,206,829 2,178,943 Provision for loan losses 100,000 290,000 100,000 390,000 ----------- ----------- ----------- ----------- Net interest income after provision for loan losses 1,025,406 801,974 2,106,829 1,788,943 ----------- ----------- ----------- ----------- NON-INTEREST INCOME Service charges on deposits and fees 114,339 132,122 225,807 242,272 Securities gains 0 0 25,017 106,465 Other non-interest income 64,175 66,178 118,980 102,547 ----------- ----------- ----------- ----------- Total non-interest income 178,514 198,300 369,804 451,284 NON-INTEREST EXPENSE Salaries and employee benefits 499,002 504,917 980,045 1,009,541 Occupancy and equipment expenses 152,110 212,047 312,214 379,270 Other non-interest expense 325,870 292,059 623,310 633,554 ----------- ----------- ----------- ----------- Total non-interest expense 976,982 1,009,023 1,915,569 2,022,365 ----------- ----------- ----------- ----------- (Loss) income before income taxes 226,938 (8,749) 561,064 217,862 Income tax (benefit) expense 55,124 (32,925) 150,363 32,154 ----------- ----------- ----------- ----------- Net Income $ 171,814 $ 24,176 $ 410,701 $ 185,708 =========== =========== =========== =========== Other comprehensive income Unrealized gain (loss) on securities available for sale, before tax $ (460,825) $ 197,785 $ (342,350) $ 126,442 Reclassification for gains included in net income 0 0 (25,017) (106,465) Income taxes related to other comprehensive income 175,113 (75,158) 139,599 (7,591) ----------- ------------ ----------- ----------- (285,712) 122,627 (227,768) 12,386 ----------- ----------- ----------- ----------- Total comprehensive income $ (113,898) $ 146,803 $ 182,933 $ 198,094 =========== =========== =========== =========== Net income (loss) per common share $ .32 $ 0.04 $ .76 $ 0.34 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 ------- 2004 2003 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 410,701 $ 185,708 Adjustments to reconcile net income to net cash from operating activities Provision for loan losses 100,000 390,000 Depreciation and amortization 196,226 198,444 Gain on securities (22,807) (107,903) Writedown of OREO 17,600 5,000 Federal Home Loan bank stock dividends (7,600) (7,300) Increase in cash surrender value of life insurance (44,535) (35,077) Change in: Accrued interest receivable 45,527 157,998 Other assets 144,921 170,923 Other liabilities (21,543) 257,750 ---------------- ---------------- Net cash from operating activities 818,490 1,215,543 CASH FLOWS FROM INVESTING ACTIVITIES Activity in held to maturity securities: Maturities, prepayments, and calls 236,336 324,300 Activity in available for sale securities: Sales 3,744,590 5,797,617 Purchases 0 (17,106,022) Maturities, prepayments, and calls 1,668,337 7,821,078 Net change in loans (4,837,655) (1,481,760) Purchase of premise and equipment, net (70,210) (27,668) Proceeds from sale - OREO 1,205,765 180,083 Investment in cash surrender value life insurance 0 (2,000,000) ---------------- ----------------- Net cash from investing activities 1,947,163 (6,492,372) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits (3,387,723) 2,617,322 Net change in securities sold under repurchase agreements (392,379) (742,047) FHLB advances 2,000,000 0 Repayment of long-term debt (435,000) (395,000) ---------------- ---------------- Net cash from financing activities (2,215,102) 1,480,275 ---------------- ---------------- Net change in cash and cash equivalents 550,551 (3,796,554) Cash and cash equivalents at beginning of period 3,235,922 9,155,507 ---------------- ---------------- Cash and cash equivalents at end of period $ 3,786,473 $ 5,358,953 ================ ================ Supplemental disclosure of cash flow information Transfers from loans to foreclosed real estate $ 97,000 $ 802,430 Cash paid during the period for Interest $ 772,202 $ 850,162 Income taxes 3,704 91,204
See accompanying notes to consolidated financial statements. -5- 1. Management Opinion In the opinion of management, the unaudited consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of June 30, 2004, the results of operations for the three and six months ended June 30, 2004 and 2003, and cash flows for the six months ended June 30, 2004 and 2003. All of these adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of results for a full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report for the year ended December 31, 2003. The consolidated financial statements include the accounts for the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation. 2. Long-Term Debt The Company's long-term debt consists of a single note payable in the amount of $980,000 at June 30, 2004, due an unaffiliated national bank. The interest rate on the note adjusts quarterly and is equal to the three-months London Interbank Offered Rate (Three Month LIBOR) plus 1.95% per annum or at the option of the Company, the rate on the note is equal to the lender's index rate as such rate changes from time to time. The Company may change interest rate options at any time with prior notice to the lender. Interest is payable quarterly. At June 30, 2004, the rate on the note was 3.13% per annum. Principal is payable annually on January 31 as follows: 2005 $ 470,000 2006 (final maturity) 510,000 ------------- $ 980,000 The loan is secured by all of the stock of Citizens Bank of East Tennessee owned by the Company. The note agreement contains financial and operating covenants. As of June 30, 2004, the Company is in compliance with these covenants. 3. Contingencies During the course of business, the Company makes various commitments and incurs certain contingent liabilities that are not presented in the accompanying balance sheet. The commitments and contingent liabilities may include various guarantees, commitments to extend credit, standby letters of credit, and litigation. In the opinion of management, no material adverse effect on the financial position, liquidity or operating results of the Company and its subsidiary is anticipated as a result of these items. 4. Certain Regulatory Matters As a result of certain findings in the Tennessee Department of Financial Institution's Report of Examination dated June 4, 2001, the Board of Directors of the Bank entered into a Memorandum of Understanding (the "Memorandum"), dated August 16, 2001, with the Commissioner of the Tennessee Department of Financial Institutions and the Memphis Regional Director of the Federal Deposit Insurance Corporation. A Memorandum of Understanding is an informal administrative tool for institutions that have some weaknesses that if not properly addressed and corrected could lead to supervisory concern requiring formal administrative action. The areas addressed in the Memorandum covered capital -6- 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. 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, 2004 and 2003 The following provides a narrative discussion and analysis of significant changes in the results of operations and financial condition of Volunteer Bancorp, Inc. (the "Company"). This discussion should be read in conjunction with the consolidated financial statements and related financial analysis set forth in the Company's 2003 Annual Report, the interim unaudited consolidated financial statements and notes for the three months and six months ended June 30, 2004, included elsewhere herein, and the supplemental financial data included herein. CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION This discussion contains certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). Such statements are based on management's expectations as well as certain assumptions made by, and information available to, management. Specifically, this discussion contains forward-looking statements with respect to the following items: - effects of projected changes in interest rates, - effects of changes in the securities markets, - effects of changes in general economic conditions, - the adequacy of the allowance for loan losses on loans and the level of future provisions for losses on loans, and - business plans for the year 2004 and beyond including underwriting criteria. When used in this discussion, the words "anticipate", "project", "expect", "believe", "should", and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve significant risks and uncertainties including changes in general economic and financial market conditions, changes in banking laws and regulations, and the Company's ability to execute its business plans. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, actual results could differ materially. SUMMARY The Company reported net income for the first six months of 2004 of $410,701, or $.76 per common share, compared to net income of $185,708 for the same period a year ago and for the three months ended June 30, 2004 net income was $171,814, or $.32 per share compared to a net income of $24,176 or $.04 per share in the second quarter of 2003. Total assets decreased approximately $2,054,000 from December 31, 2003 to June 30, 2004. Our return on average assets was .76% for June 30, 2004 compared to .33% for December 31, 2003. This improvement is primarily due to significantly lower loan loss provisions and a decrease in non-interest expense. -7- Financial Condition Earning Assets. Average earning assets has remained constant as a percentage of total average assets. Average earning assets to Average Assets is 90.6% for six months ended June 30, 2004 compared to 90.7% for all of 2003. Loan Portfolio. The Company's total loan portfolio has increased 6.6% at June 30, 2004 compared to December 31, 2003. There were differences in the mix as summarized below. June 30 December 31 2004 2003 ---- ---- (in thousands) Commercial, financial and agriculture $ 5,346 $ 4,721 Real estate - construction 4,919 992 Real estate - mortgage 55,387 54,588 Consumer 7,918 7,765 Other 668 1,565 ----------- ----------- $ 74,238 $ 69,631 =========== =========== Allowance for Possible Loan Losses. Lending officers are responsible for the ongoing review and administration of each loan. They make the initial identification of loans that present some difficulty in collection or where there is an indication that the probability of loss exists. Lending officers are responsible for the collection effort on a delinquent loan. Senior management is informed of the status of delinquent and problem loans on a weekly basis. Senior management makes recommendations monthly to the Board of Directors as to charge-offs. Senior management reviews the allowance for possible loan losses on a monthly basis. The Company's policy is to discontinue interest accrual when payment of principal and interest is 90 days or more in arrears, unless there is sufficient collateral to justify continued accrual. The allowance for losses represents management's assessment of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provisions required to maintain a level considered adequate to absorb probable incurred loan losses. The provision for loan losses was $100,000 for the six months ended June 30, 2004 as compared to $390,000 in the same period in 2003. For the quarter ended June 30, 2004 the provision was $100,000 compared to $290,000 in 2003. The allowance for loan losses at June 30, 2004 was 1.18% of loans. Management believes that the $878,075 at June 30, 2004 is adequate to absorb known risks in the portfolio. -8- The following table provides the changes in the allowance for loan losses for the periods indicated. Six Months Ended June 30 2004 2003 ---- ---- (in thousands) Balance, beginning of year $ 911 $ 1,111 Provision charged to expense 100 390 Loans charged off (183) (565) Recoveries 50 17 ------ ------- Balance, end of year $ 878 $ 953 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, 2004, there was an unrealized loss in the Available for Sale securities of approximately $17,000 compared to an unrealized gain of $350,000 at December 31, 2003. The company's Investment securities portfolio decreased approximately $5.4 million since December 31, 2003. This decrease is primarily attributed to management selling lower yielding securities to fund higher yielding loans. 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 $2,133,239 at June 30, 2004. All officers of The Citizens Bank of East Tennessee as of February 15, 2003 are insured. Deposits. Deposits totaled $93,325,117 at June 30, 2004 compared to $96,712,840 at December 31, 2003. The deposit decline has primarily been in the Interest Bearing accounts. Management has aggressively priced interest bearing deposits to improve interest margins. Additionally, management is working to limit deposit growth to only core deposit customers. This limited growth will assist in management's overall strategy to strengthen capital ratios. Note Payable. The company's long-term debt consists of a single note payable in the amount of $980,000 at June 30, 2004 due an unaffiliated national bank and is discussed further in Note 2 in the Notes to Consolidated Financial Statements. Results of Operations Net income increased to $410,701 for the six months ended June 30, 2004 from $185,708 in the same period in 2003. For the three months ended June 30, 2004, net income was $171,814 compared to $24,176 in 2003. Net interest income increased 1.28% from the six months ended June 30, 2003 to the same period in 2004 from $2,178,943 to $2,206,829 and increased 3% from the three month period ended June 30, 2003 to the same period in 2004. -9- The provision for loan losses decreased $190,000 and $290,000 during the three and six months ended June 30, 2004 compared to the same periods last year. Non-performing assets decreased $2,123,000 from December 31, 2003 to June 30, 2004. Non-performing assets were as follows as of June 30, 2004 and December 31, 2003: June 30 December 31 2004 2003 ---- ---- (in thousands) Loans past due over 90 days $ 100 $ 1,035 Non-accrual loans 374 175 Other real estate owned 147 1,534 ----------- --------- Total non-performing assets $ 621 $ 2,744 =========== ========= Non-Interest Income. Gains on the sale of securities decreased $83 thousand from $108 thousand in the first half of 2003 to $25 thousand in the first half of 2004. Service charges decreased $18 thousand and $16 thousand in the three and six months ended June 30, 2004. Non-Interest Expense. Salaries and employee benefits decreased $6 thousand and $29 thousand in the three and six months ended June 30, 2004 compared to 2003. Occupancy and equipment expenses were significantly lower in the three and six months ended June 30, 2004 than in 2003, as a result of maturing operating leases for equipment. Other non-interest expense decreased $10 thousand in the six months ended June 30, 2004 compared to 2003 and increased $34 thousand for the three months ending June 30, 2004. Item 3. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. The Company's President and its Vice President and Cashier have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days of the filing date of this quarterly report. Based on that evaluation, the President and the Vice President and Cashier have concluded that the Company's disclosure controls and procedures are effective to ensure that material information relating to the Company and the Company's consolidated subsidiaries is made known to such officers by others within these entities, particularly during the period this quarterly report was prepared, in order to allow timely decisions regarding required disclosure. (b) Changes in Internal Controls. There have not been any significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. -10- 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 27, 2004, the shareholders voted on the following proposal with the results as indicated: Elected four of its current directors to continue in office until the 2007 meeting of shareholders. Current directors elected to three-year terms were as follows: For Withhold Authority --- ------------------ Reed Matney 402,336 0 Shirley Price 402,336 0 Carlin Greene 402,336 0 Leon Gladson 402,336 0 Directors continuing to serve include: William E. Phillips G. Douglas Price Scott Collins Gary Varnell Neil Miller George Brooks Jim Friddell Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certification of President Pursuant to Section 302 of Sarbanes-Oxley Act 31.2 Certification of Vice President Pursuant to Section 302 of Sarbanes-Oxley Act 32 Certification of President and Vice President and Cashier Pursuant to Section 18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) (b) There have been no Current Reports on Form 8-K filed during the quarter ended June 30, 2004. -11- 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 12, 2004 /s/ Reed D. Matney --------------------------------------------- Reed D. Matney, President Date: August 12, 2004 /s/ Greg Oliver ---------------------------------------------- Greg Oliver, Vice President and Cashier -12-