<PAGE> 1
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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
Commission file number 33-94050
VOLUNTEER BANCORP, INC.
(Name of small business issuer in its charter)
TENNESSEE 62-1271025
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
161 WEST MAIN STREET
SNEEDVILLE, TENNESSEE 37869
(Address of principal executive offices and Zip Code)
Issuer's telephone number (423) 733-2213
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ X ]
THE REGISTRANT'S REVENUES FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
WERE $4,212,868.
THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 12, 1997 IS APPROXIMATELY
$3,787,600. (For purposes of this calculation only, all executive officers and
directors are classified as affiliates.)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date. OUTSTANDING AT MARCH 12,
1997, COMMON STOCK, $.01 PAR VALUE, 525,717.
Documents Incorporated by Reference: NONE
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<PAGE> 2
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
The Company is a registered bank holding company organized under the laws
of Tennessee, chartered in 1985. The Company, with consolidated total assets
of approximately $63 million at December 31, 1996, is headquartered in
Sneedville, Tennessee with offices in Church Hill and Rogersville, Tennessee
and conducts its operations through its subsidiary, The Citizens Bank of East
Tennessee (the "Bank"), a state bank organized under the laws of the state of
Tennessee in April 1906. The Company does not engage in any activities other
than acting as a bank holding company for the Bank. The Company believes it
can present an alternative to recent mega-mergers by offering local ownership,
local decision making and other personalized service characteristics of
community banks. The holding company structure provides flexibility for
expansion of the Company's banking business through acquisition of other
financial institutions and provision of additional banking-related services
which the traditional commercial bank may not provide under present laws.
The Bank provides a full range of retail banking services, including (i)
the acceptance of demand, savings and time deposits; (ii) the making of loans
to consumers, businesses and other institutions; (iii) the investment of excess
funds in the sale of federal funds, U.S. government and agency obligations, and
state, county and municipal bonds; and (iv) other miscellaneous financial
services usually handled for customers by commercial banks.
MARKET AREA AND COMPETITION
The Company and the Bank compete with other commercial banks, savings and
loan associations, credit unions and finance companies operating in Hancock and
Hawkins counties and elsewhere. One other commercial bank is doing business in
Hancock County, and in Hawkins County there are five commercial banks and
savings and loan associations. The Bank is subject to substantial competition
in all aspects of its business. Intense competition for loans and deposits
comes from other financial institutions in the market area. In certain aspects
of its business, the Bank also competes with credit unions, small loan
companies, insurance companies, mortgage companies, finance companies,
brokerage houses and other financial institutions, some of which are not
subject to the same degree of regulation and restriction as the Bank and some
of which have financial resources greater than those of the Bank. The future
success of the Bank will depend primarily upon the difference between the cost
of its borrowing (primarily interest paid on deposits) and income from
operations (primarily interest or fees earned on loans, sales of loans and
investments). The Bank competes for funds with other institutions, which, in
most cases, are significantly larger and are able to provide a greater variety
of services than the Bank and thus may obtain deposits at lower rates of
interest.
NET INTEREST INCOME
The following table sets forth weighted average yields earned by the
Company on its earning assets and the weighted average rates paid on its
average deposits and other interest-bearing liabilities for the years
indicated, and certain other information:
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<PAGE> 3
<TABLE>
<CAPTION>
1996 1995
----------------------------- ---------------------------
Interest Average Interest Average
(Fully taxable equivalent) Average Income/ Yields/ Average Income/ Yields/
(Dollars in thousands) Balance Expense Rates Balance Expense Rates
-------- ---------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans net of unearned income.............. $28,647 $2,859 9.98% $16,608 $1,637 9.86%
U.S. Treasury and other U.S.
government agencies...................... 14,669 944 6.44% 9,526 582 6.11%
States and municipalities................. 63 5 7.94% 142 16 11.27%
Federal funds sold........................ 4,424 227 5.13% 2,127 122 5.74%
------- ------- ------
Total interest-earing
assets/interest income................ 47,803 4,035 8.44% 28,403 2,357 8.30%
------- ------ ------- ------
Cash and due from banks................... 1,766 1,223
Other assets.............................. 3,650 2,310
Allowance for loan losses................. (433) (418)
------- -------
Total........................... $52,786 $31,518
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Demand deposits .......................... $10,526 $374 3.55% $ 8,674 $ 295 3.40%
Savings .................................. 1,614 48 2.97% 720 21 2.92%
Individual retirement accounts............ 3,095 176 5.69% 2,120 118 5.57%
Time certificates......................... 23,521 1,352 5.75% 9,554 528 5.53%
Securities sold under repurchase.......... 315 11 3.49%
Note payable.............................. 3,450 290 8.41% 2,371 212 8.94%
------- ------- ------
Total interest-bearing
liabilities/interest expense.......... 42,521 2,251 5.29% 23,439 1,174 5.01%
------- ------ ------- ------
Non-interest bearing demand
deposits ................................. 6,655 5,183
Other liabilities......................... 663 336
Stockholders' equity...................... 2,947 2,560
------- -------
Total........................... $52,786 $31,518
======= =======
Net interest earnings..................... $1,784 $1,183
====== ======
Net interest on interest earning
assets................................... 3.73% 4.17%
==== ====
1996 1995
------ --------
Return on average assets.......... 0.16% (0.38)%
Return on average equity.......... 2.88% (4.69)%
Cash dividends declared........... $0 $0
Dividend payout ratio............. N/A N/A
</TABLE>
<PAGE> 4
The following table presents a summary of changes in interest income,
interest expense, and the interest rate differential aggregated by the changes
in volumes and rates:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
versus versus
December 31, 1995 December 31, 1994
Increase (Decrease) Increase (Decrease)
Change Due to: (1) Change Due to: (1)
------------------------- -------------------------
(Dollars in Thousands) Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in(2):
Loans, net of unearned income............. $1,201 $ 21 $1,222 $370 $118 $488
U.S. Treasury and other U.S.
government agency securities............ 329 33 362 239 12 251
States and municipal securities........... (7) (4) (11) (21) 4 (17)
Federal funds sold........................ 119 (14) 105 (44) 44 0
------ ---- ------ ---- ---- ----
Total interest income........... 1,643 35 1,678 545 177 722
------ ---- ------ ---- ---- ----
Increase (decrease) in(2):
Demand deposits........................... 65 14 79 (0) 43 43
Savings deposits.......................... 27 0 27 6 2 8
Individual retirement accounts............ 55 3 58 32 25 57
Time certificates......................... 802 22 824 199 134 333
Securities Sold........................... 11 0 11
Note payable.............................. 91 (13) 78 212 0 212
------ ---- ------ ---- ---- ----
Total interest expense.......... 1,052 25 1,077 449 204 653
------ ---- ------ ---- ---- ----
Increase (decrease) in net
interest income.......................... $ 591 $ 10 $ 601 $ 96 $(27) $ 69
====== ==== ====== ==== ==== ====
</TABLE>
(1) Increases (decreases) are attributable to volume changes and rate changes
on the following basis: Volume Change equals change in volume times prior year
rate. Rate Change equals change in rate times prior year volume. The
Rate/Volume Change equals the change in volume times the change in rate, and it
is allocated between Volume Change and Rate Change at the ratio that the
absolute value of each of these components bears to the absolute value of their
total. In the special case where the absolute value of a component was 0 at any
period end, the entire change has been allocated to a volume change.
(2) For purposes of this schedule, non-accruing loans are included in the
average balances and tax exempt income is reflected on a tax equivalent basis.
As tax exempt income is exempt only for Federal income tax purposes and not
Tennessee purposes, tax equivalent income is based upon an effective 34% tax
rate. Loan fees included in interest income are not material to the
presentation.
LIABILITY AND ASSET MANAGEMENT
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.
-4-
<PAGE> 5
The asset/liability committee, which consists of H. Lyons Price, Reed D.
Matney, Lawrence E. Gray and other officers, is charged with monitoring the
liquidity and funds position of the Company. The Committee regularly reviews
(a) the rate sensitivity position on a three-month, six-month, and one-year
time horizon; (b) loans to deposit ratios; and (c) average maturity for certain
categories of liabilities.
The Company does not operate an asset/liability management model. No
estimates of the impact of changing interest rates on historical or projected
earnings are available. The current level of interest rate risk can, however,
be inferred from maturity and repricing data. At December 31, 1996, the
Company had a negative cumulative repricing gap within one year of
approximately $21.7 million, or approximately 37.94% of total earning assets.
This negative repricing gap indicates that the Company's future earnings may be
materially adversely impacted by a rise in market interest rates, as occurred
in early 1995, and such impact would primarily be felt in the twelve month
period after such a rise in rates.
The Company is in the process of selecting an asset/liability model with
which to simulate operations and subsequently develop policies regarding
permitted gap positions, permitted risks in deviations from budget earnings and
liquidity. In the interim, management is acquiring securities to be designated
available for sale in order to better manage unexpected liquidity needs and
swings in interest rates.
The following table represents an interest sensitivity profile for the
Company as of December 31, 1996 and 1995. The table represents a static point
in time and does not consider other variables, such as changing spread
relationships or interest rate levels. "Net repricing gap" is the difference
between total earning assets and total interest-bearing liabilities repricing
in any given period and "cumulative gap" is the sum of the net repricing gap
from period to period. Interest-bearing demand, savings and money market
account deposits are presented as repricing in the earliest period presented.
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------------------------
Within After 3 months After 12 months
3 months Within 12 months Within 5 years After 5 years Total
-------- ---------------- --------------- ------------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
EARNING ASSETS:
Loans.................................... $ 13,186 $ 5,994 $15,335 $ 1,082 $35,597
Investment Securities:
Available for Sale..................... 0 754 5,696 7,069 13,519
Held to maturity....................... 1,087 0 251 266 1,604
Federal funds sold....................... 6,446 0 0 0 6,446
-------- -------- ------- ------- -------
Total earning assets........... $ 20,719 $ 6,748 $21,282 $ 8,417 $57,166
======== ======== ======= ======= =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits................ $ 27,560 $ 18,146 $ 2,071 $ 0 $47,777
Long-term debt........................... 3,450 0 0 0 3,450
-------- -------- ------- ------- -------
Total interest-bearing
liabilities.................... $ 31,010 $ 18,146 $ 2,071 $ 0 $51,227
======== ======== ======= ======= =======
Net repricing gap........................ ($10,291) $(11,398) $19,211 $ 8,417 $ 5,939
======== ======== ======= ======= =======
Rate sensitivity gap:
Net repricing gap as a percentage
of total earning assets................. -18.00% -19.94% 33.61% 14.72% 10.39%
======== ======== ======= ======= =======
Cumulative gap........................... ($10,291) $(21,689) $(2,478) $ 5,939
======== ======== ======= =======
Cumulative gap as a percentage of
total earning assets.................... -18.00% -37.94% -4.33% 10.39%
======== ======== ======= ======
</TABLE>
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<PAGE> 6
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------------------
Within After 3 months After 12 months
3 months Within 12 months Within 5 years After 5 years Total
----------- ---------------- --------------- ------------- -------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
EARNING ASSETS:
Loans................................... $ 4,981 $ 7,924 $ 8,206 $1,100 $22,211
Investment Securities:
Available for sale.................... 250 1,722 4,184 548 6,704
Held to maturity...................... 1,000 1,150 1,201 172 3,523
Federal funds sold...................... 3,780 0 0 0 3,780
------- ------- ------- ------ -------
Total earning assets.......... $10,011 $10,796 $13,591 $1,820 $36,218
======= ======= ======= ====== =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits............... $16,253 $10,355 $ 1,363 $ 0 $27,971
Long-term debt.......................... 3,450 0 0 0 3,450
------- ------- ------- ------ -------
Total interest-bearing
liabilities................... $19,703 $10,355 $ 1,363 $ 0 $31,421
======= ======= ======= ====== =======
Net repricing gap....................... $(9,692) $ 441 $12,228 $1,820 $ 4,797
======= ======= ======= ====== =======
Rate sensitivity gap:
Net repricing gap as a percentage
of total earning assets................ -26.76% 1.22% 33.76% 5.03% 13.24%
======= ======= ======= ====== =======
Cumulative gap.......................... $(9,692) $(9,251) $ 2,977 $4,797
======= ======= ======= ======
Cumulative gap as a percentage of
total earning assets................... -26.76% -25.54% 8.22% 13.24%
======= ======= ======= ======
</TABLE>
Management has made the following assumptions in the above analysis:
(a) Assets and liabilities are generally assigned to a period based upon
their earliest repricing period when the repricing is less than the
contractual maturity.
(b) Nonaccrual loans are included in the loan category.
(c) Investment securities available for sale are currently treated in the
same manner as comparable securities in the investment securities held to
maturity portfolio in that they are scheduled according to the earlier of
their contractual maturities or earliest repricing dates; however, the
maturities of callable agency securities are scheduled according to their
call dates when valued at a premium to par.
(d) Money market deposits and savings deposits that have no contractual
maturities are scheduled in the within 3 months category.
-6-
<PAGE> 7
DEPOSITS
The Company's primary sources of funds are interest-bearing deposits. The
following table sets forth the Company's deposit structure at December 31, 1996
and 1995.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
(In Thousands)
Non interest-bearing deposits:
Individuals, partnerships and corporations..................... $ 7,531 $ 5,769
U. S. Government and states and political subdivisions......... 37 19
Certified and official checks ................................. 332 753
------- -------
Total non interest-bearing deposits.......................... 7,900 6,541
------- -------
Interest-bearing deposits:
Interest-bearing demand accounts............................... 11,151 9,198
Savings accounts............................................... 1,861 1,175
Individual retirement accounts................................. 1,609 1,325
Certificates of deposit, less than $100,000.................... 24,507 13,448
Certificates of deposit, greater than $100,000................. 8,649 2,825
------- -------
Total interest-bearing deposits.............................. 47,777 27,971
------- -------
Total deposits............................................... $55,677 $34,512
======= =======
</TABLE>
The following table presents a breakdown by category of the average amount
of deposits and the weighted average rate paid on deposits for the periods as
indicated:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C> <C> <C>
(In Thousands)
Non interest-bearing deposits............... $ 6,655 $ 5,183
Savings deposits............................ 1,614 2.97% 720 2.92%
Individual retirement accounts.............. 3,095 5.69% 2,120 5.57%
Time deposits............................... 23,521 5.75% 9,554 5.53%
Interest-bearing demand deposits............ 10,526 3.55% 8,674 3.40%
------- -------
Total deposits.................... $45,411 $26,251
======= =======
</TABLE>
At December 31, 1996 and 1995, time deposits greater than $100,000
aggregated approximately $8.6 million and $2.8 million, respectively. The
following table indicates, as of December 31, 1996 and 1995, the dollar amount
of $100,000 or more deposits by the time remaining until maturity:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------- ----------------------------------------------
3 Months 3 to 12 1 Year through 5 3 Months 3 to 12 1 Year through 5
or less Months years Total or less Months years Total
-------- ------- ---------------- ----- -------- ------- ---------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Time certificates $3,262 4,967 420 8,649 $701 2,124 0 2,825
====== ===== === ===== ==== ===== = =====
</TABLE>
-7-
<PAGE> 8
ASSETS
The management of the Company considers many criteria in managing assets,
including creditworthiness, diversification and structural characteristics,
maturity and interest rate sensitivity. The following table sets forth the
Company's interest earning assets by category at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
(In Thousands)
Investment securities:
Available for sale........................ $13,519 $ 6,704
Held to maturity.......................... 1,604 3,523
Federal funds sold.......................... 6,446 3,780
Loans:
Real estate............................... 23,398 14,299
Commercial and other...................... 12,199 7,912
------- -------
Total loans ............................. 35,597 22,211
Less unearned income...................... (260) (235)
------- -------
Loans, net of unearned
income................................... 35,337 21,976
------- -------
Interest earning assets..................... $56,906 $35,983
======= =======
</TABLE>
INVESTMENT PORTFOLIO
At year end 1996, obligations of the United States Government or its
agencies and obligations of states and political subdivisions represented 100%
of the investment portfolio. The following table presents the composition of
the carrying value of the Company's investment portfolio at December 31, 1996
and 1995.
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
(In Thousands)
Held to maturity:
U.S. Treasury Securities................... $ 0 $ 0
Obligations of U.S.
Government agencies....................... 1,604 3,523
Obligations of states and
political subdivisions.................... 0 0
------- ------
$ 1,604 $3,523
======= ======
Available for sale:
U.S. Treasury securities................... $ 4,410 $4,709
Obligations of U.S.
Government agencies........................ 9,006 1,995
Obligations of states and
political subdivisions..................... 103 0
------- ------
$13,519 $6,704
======= ======
</TABLE>
-8-
<PAGE> 9
The following table presents the maturity distribution of the amortized
cost and estimated market value of the Company's investment portfolio at
December 31, 1996 and 1995. The weighted average yields on these instruments
are presented based on final maturity. Yields on obligations of states and
political subdivisions have not been adjusted to a fully-taxable equivalent
basis.
<TABLE>
<CAPTION>
1996 1995
------------------------------------------- -------------------------------------------
Estimated Weighted Estimated Weighted
Amortized Cost Market Value Average Yield Amortized Cost Market Value Average Yield
-------------- ------------ ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Held to maturity:
Obligations of U.S.
Government agencies:
Due within 1 year................ $ 250 $ 251 $ 500 $ 500
Due after 1 year but
within 5 years................... 1,001 987 2,401 2,349
Due after 5 years but
within 10 years.................. 200 196 450 451
Due after 10 years............... 153 162 172 181
------- ======= ------ ------
Total......................... $ 1,604 $ 1,596 5.85% $3,523 $3,481 5.78%
======= ======= ====== ======
Available for sale:
U.S. Securities:
Due within 1 year................ $ 500 $ 504 $1,752 $1,768
Due after 1 year but within 5
years ............................. 3,883 3,906 2,873 2,941
------- ------- ------ ------
Total............................ 4,383 4,410 6.21% 4,625 4,709 6.39%
------- ------- ------ ------
Obligations of U.S. Government
agencies:
Due within 1 year................ 248 250 202 204
Due after 1 year but within 5
years.............................. 1,797 1,791 738 753
Due after 5 years but within
10 years........................... 7,071 6,965 1,035 1,038
------- ------- ------ ------
Total............................ 9,116 9,006 6.63% 1,975 1,995 6.71%
------- ------- ------ ------
Obligations of states and
political subdivisions:
Due after 5 years but within 10
years............................ 100 103 4.99%
------- -------
Total.............................. $13,599 $13,519 6.50% $6,600 $6,704 6.50%
======= ======= ====== ======
</TABLE>
INVESTMENT POLICY
The objective of the Company's investment policy is to invest funds not
otherwise needed to meet the loan demand of its market area to earn the maximum
return for the Company, yet still maintain sufficient liquidity to meet
fluctuations in the Company's loan demand and deposit structure. In doing so,
the Company balances the market and credit risks against the potential
investment return, makes investments compatible with the pledge requirements of
the Company's deposits of public funds, maintains compliance with regulatory
investment requirements, and assists the various public entities with their
financing needs. H. Lyons Price and Reed D. Matney are authorized to execute
security transactions for the investment portfolio based on the decisions of
the investment committee. The investment committee, which consists of the
President, Chief Executive Officer and Chairman of the Board, has full
authority over the investment portfolio and makes decisions on purchases and
sales of securities. All the investment transactions occurring since the
previous board of directors' meeting are reviewed by the board at its next
monthly meeting, and the entire portfolio is reviewed on a semi-annual basis.
The investment policy allows portfolio holdings to include short-term
securities purchased to provide the Company's needed liquidity and longer term
securities purchased to generate level income for the Company over periods of
interest rate fluctuations.
-9-
<PAGE> 10
The Company's investment securities portfolio of $15,122,740 at December
31, 1996, consisted of $1,603,847 of securities held to maturity, which are
carried at amortized cost and $13,518,893 of securities available for sale
which are carried at market value. In addition, unrealized gains on investment
securities available for sale were $51,909 and unrealized losses were $132,332.
The Company's investment securities portfolio of $10,226,895 at December 31,
1995, consisted of $3,522,798 of securities held to maturity, which are carried
at amortized cost and $6,704,097 of securities available for sale which are
carried at market value. In addition, unrealized gains on investment
securities available for sale were $107,569 and unrealized losses were $3,143.
As reflected in Note 2 to Consolidated Financial Statements, the
investment securities held to maturity had unrealized gains of $9,264 and
unrealized losses of $16,955 at December 31, 1996, compared to $21,884
unrealized gains and $63,516 unrealized losses at year end December 31, 1995.
The decline in the market value of the portfolio is due primarily to the rising
market interest rate environment in 1996.
At December 31, 1996, the Company had approximately $500,000 of structured
notes in the held to maturity category, which constitutes approximately 3.31%
of its investment securities portfolio. Structured notes have uncertain cash
flows which are driven by interest rate movements and expose the Company to
greater market risk than traditional medium-term notes. All of the Company's
investments of this type are government agency issues (primarily Federal Home
Loan Bank and Federal National Mortgage Association). The unrealized gain in
these securities was approximately $925 or 9.98% of total gross unrealized
gains on held to maturity securities. It is management's intent to hold these
securities to maturity. The market risk associated with the structured notes
is not considered material to the Company's financial position, results of
operations or liquidity.
At December 31, 1996, the Company had two inverse floaters issued by the
Federal Home Loan Bank totaling $500,000 in the held to maturity category.
These notes represented approximately 3.31% of the investment portfolio. The
unrealized loss of approximately $6,200 associated with these notes represented
approximately 36.6% of the Company's gross unrealized losses in the held to
maturity category. These notes have uncertain cash flows which are driven by
interest rate movements and may expose the Company to greater market risk than
traditional medium-term notes. In addition, these notes contain quarterly call
and repricing features which may expose the Company to greater prepayment and
interest rate risks. These notes were acquired by the former management of the
Company based on the assumption of continued falling interest rates. A
continued rise in interest rates would increase the unrealized losses
associated with these notes. It is management's intent to hold these notes to
maturity. The market risk associated with these inverse floaters is not
considered material to the Company's financial position, results of operations
or liquidity.
LOAN PORTFOLIO
Total loans of $35,596,745 at December 31, 1996, reflected an increase of
$13,385,945 or 60.3%, compared to total loans for the year ended December 31,
1995. Residential real estate loans, which historically have had low loss
experience, increased $6,289,000 or 105%. Construction and land development
loans, loans secured by farmland and commercial real estate loans increased by
$2,810,000, or 33.83%. Commercial and industrial loans and agricultural loans
increased by $1,601,000, or 66.7%. These types of loans carry a higher level
of risk in that the borrowers' ability to repay may be affected by local
economic trends. Installment and other consumer loans increased by $2,583,000,
or 49%. These loans, generally secured by automobiles and other consumer
goods, contain a historically higher level of risk; however, this risk is
mitigated by the fact that these loans generally consist of small individual
balances. As the loan portfolio is concentrated in Hancock and surrounding
counties, there is a risk that the borrowers' ability to repay the loans could
be affected by changes in local economic conditions.
The following table sets forth the composition of the Company's loan
portfolio at December 31, 1996 and 1995.
-10-
<PAGE> 11
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
(In Thousands)
Real estate loans:
Construction and land development............. $ 3,214 $ 827
Secured by farmland and improvements.......... 2,278 2,146
Secured by residential properties............. 12,281 5,992
Commercial real estate loans.................. 5,625 5,334
------- -------
Total real estate loans...................... 23,398 14,299
------- -------
Loans to farmers............................... 596 1,066
Commercial and industrial loans................ 3,404 1,333
Installment loans.............................. 6,388 4,371
Other consumer loans........................... 1,467 901
All other loans................................ 344 241
------- -------
Total loans.................................. $35,597 $22,211
======= =======
</TABLE>
The following table sets forth the maturities of the loan portfolio and
the sensitivity to interest rate changes of that portion of the Company's loan
portfolio that matures after one year.
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------
Maturity Range
--------------------------------------------
One Year One Through Over
(In Thousands) or Less Five Years Five Years Total
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Real estate construction loans.......... $ 3,187 $ 27 $ 0 $ 3,214
Real estate mortgage loans.............. 7,413 9,275 3,496 20,184
Commercial and industrial loans......... 2,596 808 0 3,404
Agricultural loans...................... 414 182 0 596
All other loans......................... 2,776 5,288 135 8,199
------- ------- ------ -------
Total loans............................. $16,386 $15,580 $3,631 $35,597
======= ======= ====== =======
</TABLE>
The sensitivity to interest rate changes of that portion of the Company's
loan portfolio that matures after one year is set forth below.
Real estate, commercial and industrial and agricultural loans maturing after
one year as of December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Fixed rate....................................... $11,115
Floating rate.................................... 2,673
-------
$13,788
-------
Other loans maturing after one year:
Fixed rate....................................... $ 5,422
Floating rate.................................... 1
-------
$ 5,423
-------
Total loans maturing after one year......... $19,211
=======
</TABLE>
LOAN POLICY
All lending activities of the Company are under the direct supervision and
control of the senior loan committee, which consists of three directors. The
loan committee enforces loan authorizations for each officer, decides on loans
exceeding such limits, services all requests for officer credits to the extent
allowable under current laws and regulations,
-11-
<PAGE> 12
administers all problem credits, and determines the allocation of funds for
each lending division. The Company's established maximum loan volume to
deposits is 85%. The loan portfolio consists primarily of real estate,
commercial, farming and installment loans. Commercial loans consist of either
real estate loans or term loans. Maturity of term loans is normally limited to
five to seven years. Conventional real estate loans may be made up to 80% of
the appraised value or purchase cost of the real estate for no more than a
thirty-year term. Installment loans are based on the earning capacity and
vocational stability of the borrower.
The board of directors at its regularly scheduled meetings reviews all new
loans in excess of $50,000 made the preceding month. Loans which are 30 days
or more past due are reviewed monthly.
Management of the Company periodically reviews the loan portfolio,
particularly nonaccrual and renegotiated loans. The review may result in a
determination that a loan should be placed on a nonaccrual status for income
recognition. In addition, to the extent that management identifies potential
losses in the loan portfolio, it reduces the book value of such loans, through
charge-offs, to their estimated collectible value. The Company's policy is to
classify as nonaccrual any loan on which payment of principal or interest is 90
days or more past due except where there is adequate collateral to cover
principal and accrued interest and the loan is in the process of collection.
Management defines "in the process of collection" as that point where the
customer has agreed to an accelerated repayment plan to bring the loan current,
which definition is in accordance with generally accepted accounting principles
("GAAP") but is not in accordance with such definition as contained in Banking
Bulletin 91-19. No concessions are granted and late fees are collected. In
addition, a loan will be classified as nonaccrual if, in the opinion of the
management, based upon a review of the borrower's or guarantor's financial
condition, collateral value or other factors, payment is questionable, even
though payments are not 90 days or more past due.
When a loan is classified as nonaccrual, any unpaid interest is reversed
against current income. Interest is included in income thereafter only to the
extent received in cash. The loan remains in a nonaccrual classification until
such time as the loan is brought current, when it may be returned to accrual
classification. When principal or interest on a nonaccrual loan is brought
current, if in management's opinion future payments are questionable, the loan
would remain classified as nonaccrual. After a nonaccrual or renegotiated loan
is charged off, any subsequent payments of either interest or principal are
applied first to any remaining balance outstanding, then to recoveries and
lastly to income.
The large number of consumer installment loans and the relatively small
dollar amount of each makes an individual review impracticable. It is the
Company's policy to charge off any consumer installment loan which is past due
90 days or more.
In addition, mortgage loans secured by real estate are placed on
nonaccrual status when the mortgagor is in bankruptcy, or foreclosure
proceedings are instituted. Any accrued interest receivable remains an
obligation of the borrower.
The Company's underwriting guidelines are applied to four major categories
of loans, commercial and industrial, consumer, agricultural and real estate
which includes residential, construction and development and certain other real
estate loans. The Company requires its loan officers and loan committee to
consider the borrower's character, the borrower's financial condition as
reflected in current financial statements, the borrower's management
capability, the borrower's industry and the economic environment in which the
loan will be repaid. Before approving a loan, the loan officer or committee
must determine that the borrower is basically honest and creditworthy,
determine that the borrower is a capable manager, understand the specific
purpose of the loan, understand the source and plan of repayment, determine
that the purpose, plan and source of repayment as well as collateral are
acceptable, reasonable and practical given the normal framework within which
the borrower operates.
-12-
<PAGE> 13
CREDIT RISK MANAGEMENT AND RESERVE FOR LOAN LOSSES
Credit risk and exposure to loss are inherent parts of the banking
business. Management seeks to manage and minimize these risks through its loan
and investment policies and loan review procedures. Management establishes and
continually reviews lending and investment criteria and approval procedures
that it believes reflect the risk sensitive nature of the Company. The loan
review procedures are set to monitor adherence to the established criteria and
to ensure that on a continuing basis such standards are enforced and
maintained.
Management's objective in establishing lending and investment standards is
to manage the risk of loss and provide for income generation through pricing
policies. To effectuate this policy, the Company makes commercial real estate
and farming loans with one year or less fixed maturity.
The loan portfolio is regularly reviewed and management determines the
amount of loans to be charged-off. In addition, such factors as the Company's
previous loan loss experience, prevailing and anticipated economic conditions,
industry concentrations and the overall quality of the loan portfolio are
considered. While management uses available information to recognize losses on
loans and real estate owned, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowances for losses on loans and real estate owned. Such agencies may
require the Company to recognize additions to the allowances based on their
judgments about information available at the time of their examinations. In
addition, any loan or portion thereof which is classified as a "loss" by
regulatory examiners is charged-off.
The reserve for loan losses is increased by provisions charged to
operating expense. The reserve is reduced by charging off loans or portions of
loans at the time they are deemed by management to be uncollectible and
increased when loans previously charged off are recovered. The resulting
reserve for loan losses is viewed by management as a single, unallocated
reserve available for all loans and, in management's opinion, is adequate to
provide for reasonably foreseeable potential loan losses. Rules and formulas
relative to the adequacy of the reserve, although useful as guidelines to
management, are not rigidly applied. The reserve for loan losses was $457,432
at year end 1996, or 1.29% of loans outstanding, net of unearned income,
compared to $401,066, or 1.83% at year end 1995. The following table presents
data related to the Company's reserve for loan losses for the years ended
December 31, 1996 and 1995.
-13-
<PAGE> 14
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
(Dollars In Thousands)
Balance at beginning of period............................ $ 401 $ 419
Charge offs:
Commercial, financial and agricultural.................. (30) (4)
Real estate mortgage.................................... 0 (45)
Installment loans to individuals ....................... (49) (25)
----- -----
(79) (74)
----- -----
Recoveries:
Commercial, financial and agricultural.................. 19
Real estate mortgage.................................... 0 9
Installment loans to individuals........................ 16 11
----- -----
35 20
----- -----
Net charge offs .......................................... (44) (54)
----- -----
Additions to charged to operations........................ 100 36
----- -----
Balance at end of period.................................. $ 457 $ 401
===== =====
Ratio of net charge offs during
the period to average loans
outstanding during the period ............................ 0.15% 0.33%
===== =====
Average allowance for loan
losses to average total loans............................. 1.51% 2.52%
===== =====
</TABLE>
At December 31, 1996 and 1995, the allowance for loan losses was allocated
as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
Percent of loans in Percent of loans in
each category to each category to
Amount total loans Amount total loans
------ -------------------- ------ --------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 70 12.20% $113 11.88%
Real estate mortgage 168 65.73% 185 64.38%
Installment loans to individuals 219 22.07% 103 23.74%
---- ------ ---- ------
Total $457 100.00% $401 100.00%
==== ====== ==== ======
</TABLE>
The allocation of the allowance is presented based in part on evaluations
of past history and composition of the loan portfolio. Since these factors are
subject to change, the current allocation of the allowance is not necessarily
indicative of the breakdown of future losses.
The following table sets forth information with respect to nonperforming
loans of the Company on the dates indicated. Accrual of interest is
discontinued when there is reasonable doubt as to the full, timely collections
of interest or principal. When a loan becomes contractually past due 90 days
with respect to interest or principal, it is reviewed and a determination is
made as to whether it should be placed on nonaccrual status. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period interest income. Income on such loans is
then recognized only to the extent that cash is received and where the future
collection of principal is probable. Interest accruals are resumed on such
loans only when they are brought fully current with respect to principal and
interest and when, in the judgment of management, the loans are estimated to be
fully collectible as to principal and interest. Restructured loans are those
loans on which concessions in terms have been granted because of a borrower's
financial difficulty. Interest is generally accrued on such loans in
accordance with the new terms.
-14-
<PAGE> 15
<TABLE>
<CAPTION>
Nonperforming assets (Dollars in thousands): December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Nonaccrual loans.................................. $ 98 $ 136
Restructured loans ............................... 0 0
Other loans past due 90 days or
more to principal or interest payments .......... 84 2
Nonperforming loans as a percentage
of net loans before allowance for
loan losses ..................................... 0.52% 0.63%
Allowance for loan losses as a percentage
of nonperforming loans .......................... 251.10% 290.58%
</TABLE>
CAPITAL RESOURCES/LIQUIDITY
Liquidity. Of primary importance to depositors, creditors and regulators
is the ability to have readily available funds sufficient to repay fully
maturing liabilities. The Company's liquidity, represented by cash and cash
due from banks, is a result of its operating, investing and financing
activities. In order to insure funds are available at all times, the Company
devotes resources to projecting on a monthly basis the amount of funds which
will be required and maintains relationships with a diversified customer base
so funds are accessible. Liquidity requirements can also be met through
short-term borrowings or the disposition of short-term assets which are
generally matched to correspond to the maturity of liabilities.
Although the Company has no formal liquidity policy, in the opinion of
management, its liquidity levels are considered adequate. Neither the Company
nor the Bank is subject to any specific liquidity requirements imposed by
regulatory orders. The Bank is subject to general FDIC guidelines which do not
require a minimum level of liquidity. Management believes its liquidity ratios
meet or exceed these guidelines. Management does not know of any trends or
demands which are reasonably likely to result in liquidity increasing or
decreasing in any material manner.
The following table sets forth liquidity ratios for the periods indicated:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Average loans to average deposits....... 63.08% 63.27%
</TABLE>
Impact of Inflation and Changing Prices. The consolidated financial
statements and related consolidated financial data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time and due to inflation. The impact of inflation on
operations of the Company is reflected in increased operating costs. Unlike
most industrial companies, virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services.
CAPITAL ADEQUACY
Capital adequacy refers to the level of capital required to sustain asset
growth over time and to absorb losses. The objective of the Company's
management is to maintain a level of capitalization that is sufficient to take
advantage of profitable growth opportunities while meeting regulatory
requirements. This is achieved by improving profitability through effectively
allocating resources to more profitable businesses, improving asset quality,
strengthening service quality, and streamlining costs. The primary measures
used by management to monitor the results of these efforts are
-15-
<PAGE> 16
the ratios of average equity to average assets, average tangible equity to
average tangible assets, and average equity to net loans.
The Federal Reserve Board has adopted capital guidelines governing the
activities of bank holding companies. These guidelines require the maintenance
of an amount of capital based on risk-adjusted assets so that categories of
assets with potentially higher credit risk will require more capital backing
than assets with lower risk. In addition, banks and bank holding companies are
required to maintain capital to support, on a risk-adjusted basis, certain
off-balance sheet activities such as loan commitments.
The capital guidelines classify capital into two tiers, referred to as
Tier I and Tier II. Under risk-based capital requirements, total capital
consists of Tier I capital which is generally common stockholders' equity less
goodwill and Tier II capital which is primarily a portion of the allowance for
loan losses and certain qualifying debt instruments. In determining risk-based
capital requirements, assets are assigned risk-weights of 0% to 100%, depending
primarily on the regulatory assigned levels of credit risk associated with such
assets. Off-balance sheet items are considered in the calculation of
risk-adjusted assets through conversion factors established by the regulators.
The framework for calculating risk-based capital requires banks and bank
holding companies to meet the regulatory minimums of 4% Tier I and 8% total
risk-based capital. In 1990 regulators added a leveraged computation to the
capital requirements, comparing Tier I capital to total average assets less
goodwill.
The Company's consolidated capital ratios are set forth below. See Note
12 to Notes to Consolidated Financial Statements for Bank-only capital ratios.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
(Dollars in Thousands)
CAPITAL:
Tier I capital:
Stockholders' common equity .............. $ 3,397 $ 2,632
Less unrealized (loss) gain in securities. (50) 65
Less disallowed intangibles .............. (221) (239)
------- -------
Total Tier I capital.......... 3,226 2,328
Tier II capital:
Qualifying allowance for loan losses...... 457 298
------- -------
Total capital................. $ 3,683 $ 2,626
Risk-adjusted asset.............................. $37,066 $23,800
Quarterly average assets ........................ $60,836 $37,400
RATIOS:
Tier I capital to risk-adjusted assets........... 8.70% 9.78
Tier II capital to risk-adjusted assets.......... 1.23% 1.25%
Total capital to risk-adjusted assets............ 9.94% 11.03
Leverage -- Tier I capital to quarterly
average assets less disallowed intangibles....... 5.31% 6.26%
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established five capital categories for banks and bank holding
companies. The bank regulators adopted regulations defining these five capital
categories in September 1992. Under these new regulations each bank is
classified into one of the five categories based on its level of risk-based
capital as measured by Tier I capital, total risk-based capital, and Tier I
leverage ratios and its supervisory ratings.
The following table lists the five categories of capital and each of the
minimum requirements for the three risk-based capital ratios.
-16-
<PAGE> 17
<TABLE>
<CAPTION>
Total Risk-Based Tier I Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
---------------- ----------------- ------------
<S> <C> <C> <C>
Well-capitalized................ 10% or above 6% or above 5% or above
Adequately capitalized.......... 8% or above 4% or above 4% or above
Undercapitalized................ Less than 8% Less than 4% Less than 4%
Significantly undercapitalized.. Less than 6% Less than 3% Less than 3%
Critically undercapitalized..... -- -- 2% or less
</TABLE>
On December 31, 1996, the Company exceeded the regulatory minimums and
qualified as a well-capitalized institution under the regulations.
CERTAIN REGULATORY CONSIDERATIONS
As a bank holding company, the Company is subject to the regulation and
supervision of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). Under the BHCA, bank holding companies may not in general
directly or indirectly acquire the ownership or control of more than 5% of the
voting shares or substantially all the assets of any company, including a bank,
without the prior approval of the Federal Reserve Board. The BHCA also
restricts the types of activities in which a bank holding company and its
subsidiaries may engage. Generally, activities are limited to banking and
activities found by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto.
In addition, the BHCA prohibits the Federal Reserve Board from approving
an application by a bank holding company to acquire shares of a bank or bank
holding company located outside the acquiror's principal state of operations
unless such an acquisition is specifically authorized by statute in the state
in which the bank or bank holding company whose shares are to be acquired is
located. Tennessee has adopted legislation that authorizes nationwide
interstate bank acquisitions, subject to certain state law reciprocity
requirements, including the filing of an application with and approval of the
Tennessee Commissioner of Financial Institutions. The Tennessee Bank Structure
Act of 1974, as amended, restricts the acquisition by bank holding companies of
banks in Tennessee. A bank holding company is prohibited from acquiring any
bank in Tennessee as long as banks that it controls retain 30% or more of the
total deposits in individual, partnership and corporate demand and other
transaction accounts and in savings accounts and time deposits in all federally
insured financial institutions in Tennessee, subject to certain limitations and
exclusions. Also, under this act, no bank holding company may acquire any bank
in operation for less than five years or begin a de novo bank in any county in
Tennessee with a population, in 1970, of 200,000 or less, subject to certain
exceptions. Under Tennessee law, branch banking is permitted in any county in
the state.
The Bank is a Tennessee state-chartered bank and is subject to the
regulations of and supervision by the Federal Deposit Insurance Corporation
(the "FDIC") as well as the DFI, Tennessee's state banking authority. The Bank
is also subject to various requirements and restrictions under federal and
state law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon and limitations on the types of
investments that may be made and the type of services that may be offered.
Various consumer laws and regulations also affect the operations of the Bank.
In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the Federal Reserve Board as it attempts to
control the money supply and credit availability in order to influence the
economy.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its banking
subsidiary. The principal source of cash flow of the Company, including cash
flow to pay dividends on its stock or principal (premium, if any) and interest
on debt securities, is dividends from the Bank. There are statutory and
regulatory limitations on the payment of dividends by the Bank to the Company,
as well as by the Company to its shareholders.
-17-
<PAGE> 18
The Bank is subject to the Tennessee Banking Act, which provides that
dividends will be paid out of undivided profits. Capital surplus, however,
must equal or exceed 50% of capital stock, and in the event capital surplus
falls below 50% of capital stock, no dividends may be paid until net profits
have been transferred to capital surplus so that it equals 50% of capital
stock. Thereafter, 10% of net profits must be transferred to capital surplus
prior to payment of dividends until capital surplus equals capital stock. The
Bank is also subject to the minimum capital requirements of the FDIC which
impact the Bank's ability to pay dividends. If the Bank fails to meet these
standards, it may not be able to pay dividends or to accept additional deposits
because of regulatory requirements. See "Certain Regulatory Considerations."
Under current Tennessee tax law, cash dividends paid by Tennessee banks to
Tennessee residents are exempt from state income tax. Under federal income tax
law, dividends paid by the Bank would be considered taxable.
If, in the opinion of the applicable federal bank regulatory authority, a
depository institution or a holding company is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition
of the depository institution or holding company, could include the payment of
dividends), such authority may require that such institution or holding company
cease and desist from such practice. The federal banking agencies have
indicated that paying dividends that deplete a depository institution's or
holding company's capital base to an inadequate level would be such an unsafe
and unsound banking practice. Moreover, the Federal Reserve Board, the
Comptroller of the Currency and the FDIC have issued policy statements which
provide that bank holding companies and insured depository institutions
generally should only pay dividends out of current operating earnings.
The payment of dividends by the Company and the Bank may also be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines.
TRANSACTIONS WITH AFFILIATES
There are various legal restrictions on the extent to which the Company
can borrow or otherwise obtain credit from the Bank. There are also legal
restrictions on the Bank's purchases of or investments in the securities of and
purchase of assets from the Company, a bank's loans or extensions of credit to
third parties, collateralized by the securities or obligations of the Company,
the issuance of guaranties, acceptances and letters of credit on behalf of the
Company, and certain bank transactions with the Company, or with respect to
which the Company acts as agent, participates or has a financial interest.
Subject to certain limited exceptions, the Bank may not extend credit to the
Company or to any other affiliate in an amount which exceeds 10% of the Bank's
capital stock and surplus and may not extend credit in the aggregate to such
affiliates in an amount which exceeds 20% of its capital stock and surplus.
Further, there are legal requirements as to the type, amount and quality of
collateral which must secure such extensions of credit by the Bank to the
Company or to such other affiliates. Also, extensions of credit and other
transactions between the Bank and the Company or such other affiliates must be
on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the Bank as those prevailing
at the time for comparable transactions with non-affiliated companies. Also,
the Company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
HOLDING COMPANY STRUCTURE AND SUPPORT OF THE BANK
Because the Company is a holding company, its right to participate in the
assets of any subsidiary upon the latter's liquidation or reorganization will
be subject to the prior claims of the subsidiary's creditors (including
depositors in the case of bank subsidiaries) except to the extent that the
Company may itself be a creditor with recognized claims against the subsidiary.
Under Federal Reserve Board policy, the Company is expected to act as a
source of financial strength to, and commit resources to support, the Bank.
This support may be required at times when, absent such Federal Reserve Board
-18-
<PAGE> 19
policy, the Company may not be inclined to provide it. In addition, any
capital loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness
of such subsidiary bank. In the event of a bank holding company's bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
CROSS-GUARANTEE LIABILITY
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to any
commonly controlled FDIC-insured depository institution "in danger of default."
"Default" is defined generally as the appointment of a conservator or receiver
and "in danger of default" is defined generally as the existence of certain
conditions indicating that a default is likely to occur in the absence of
regulatory assistance. The FDIC's claim for damages is superior to claims of
shareholders of the insured depository institution or its holding company but
is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution. The Bank is subject to these cross-guarantee
provisions. As a result, any loss suffered by the FDIC in respect of the Bank
would likely result in assertion of the cross-guarantee provisions, and a
potential loss of the Company's investment in the Bank.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") which was enacted on December 19, 1991, substantially revised the
depository institution regulatory and funding provisions of the FDIA and made
revisions to several other federal banking statutes. Among other things,
FDICIA requires the federal banking regulators to take "prompt corrective
action" in respect of FDIC-insured depository institutions that do not meet
minimum capital requirements. FDICIA establishes five capital tiers: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under applicable
regulations, a FDIC-insured depository institution is defined to be well
capitalized if it maintains a Leverage Ratio of at least 5%, a risk adjusted
Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10%
and is not subject to a directive, order or written agreement to meet and
maintain specific capital levels. An insured depository institution is defined
to be adequately capitalized if it meets all of its minimum capital
requirements as described above. In addition, an insured depository
institution will be considered undercapitalized if it fails to meet any minimum
required measure, significantly undercapitalized if it is significantly below
such measure and critically undercapitalized if it fails to maintain a level of
tangible equity equal to not less than 2% of total assets. An insured
depository institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
The capital-based prompt corrective action provision of FDICIA and their
implementing regulations apply to FDIC-insured depository institutions and are
not directly applicable to holding companies which control such institutions.
However, the Federal Reserve Board has indicated that, in regulating bank
holding companies, it will take appropriate action at the holding company level
based on an assessment of the effectiveness of supervisory actions imposed upon
subsidiary depository institutions pursuant to such provisions and regulations.
FDICIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve System. In
addition, undercapitalized depository institutions are subject to growth
limitations and are required to submit capital restoration plans. A depository
institution's holding company must guarantee the capital plan, up to an amount
equal to the lesser of 5% of the depository institution's assets at the time it
becomes
-19-
<PAGE> 20
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator generally within 90 days of the date on which they
became critically undercapitalized.
The Company believes that at March 1, 1997, the Bank was well capitalized
under the criteria discussed above.
FDICIA contain numerous other provisions, including new accounting, audit
and reporting requirements, beginning in 1995 termination of the "too big to
fail" doctrine except in special cases, limitations on the FDIC's payment of
deposits at foreign branches, new regulatory standards in such areas as asset
quality, earnings and compensation and revised regulatory standards for, among
other things, powers of state banks, real estate lending and capital adequacy.
FDICIA also requires that a depository institution provide 90 days prior notice
of the closing of any branches.
Various other legislation, including proposals to revise the bank
regulatory system and to limit the investments that a depository institution
may make with insured funds, is from time to time introduced in Congress.
INTERSTATE ACT
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act"), which was enacted on September 29, 1994, among other things
and subject to certain conditions and exceptions, permits on an interstate
basis (i) bank holding company acquisitions commencing one year after enactment
of banks (of a minimum age of up to five years as established by state law in
any state), (ii) mergers of national and state banks after May 31, 1997 unless
the home state of either bank has opted out of the interstate bank merger
provision, (iii) branching de novo by national and state banks if the host
state has opted-in to this provision of the Interstate Act, and (iv) certain
bank agency activities after one year after enactment. The Interstate Act
contains a 30% intrastate deposit cap, except for the initial acquisition in
the state, restriction that applies to certain interstate acquisitions unless a
different intrastate cap has been adopted by the applicable state pursuant to
the provisions of the Interstate Act and a 10% national deposit cap
restriction. Regulations have not yet been issued under the Interstate Act. A
bill has been enacted by the Tennessee legislature which repeals the Tennessee
Reciprocal Banking Act, amends the Tennessee Bank Structure Act of 1974, and
amends Tennessee's bank branching laws by opting in to the Interstate Act.
Management cannot predict the extent to which the business of the Company and
the Bank may be affected.
BROKERED DEPOSITS AND PASS-THROUGH INSURANCE
The FDIC has adopted regulations under FDICIA governing the receipt of
brokered deposits and pass-through insurance. Under the regulations, a bank
cannot accept or rollover or renew brokered deposits unless (i) it is well
capitalized or (ii) it is adequately capitalized and receives a waiver from the
FDICIA. A bank that cannot receive brokered deposits also cannot offer
"pass-through" insurance on certain employee benefit accounts. Whether or not
it has obtained such a waiver, an adequately capitalized bank may not pay an
interest rate on any deposits in excess of 75 basis points over certain index
prevailing market rates specified by regulation. There are no such
restrictions on a bank that is well capitalized. Because it believes that the
Bank was well capitalized as of March 1, 1997, the Company believes the
brokered deposits regulation will have not material effect on the funding or
liquidity of the Bank.
-20-
<PAGE> 21
FDIC INSURANCE PREMIUMS
The Bank is required to pay semiannual FDIC deposit insurance assessments.
As required by FDICIA, the FDIC adopted a risk-based premium schedule which
increased the assessment rates for most FDIC-insured depository institutions.
Under the schedule, the premiums initially range from $.23 to $.31 for every
$100 of deposits. Each financial institution is assigned to one of three
capital groups -- well capitalized, adequately capitalized or undercapitalized
- -- and further assigned to one of three subgroup within a capital group, on the
basis of supervisory evaluations by the institution's primary federal and, if
applicable, state supervisors and other information relevant to the
institution's financial condition and the risk posed to the applicable FDIC
deposit insurance fund. The actual assessment rate applicable to a particular
institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC. Recently the FDIC
has passed a resolution to lower premiums. The Bank currently does not pay any
premium on the insurance for its deposits.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.
DEPOSITOR PREFERENCE
The Omnibus Budget Reconciliation Act of 1993 provides that deposits and
certain claims for administrative expenses and employee compensation against an
insured depositary institution would be afforded a priority over other general
unsecured claims against such an institution, including federal funds and
letters of credit, in the "liquidation or other resolution" of such an
institution by any receiver.
EFFECT OF GOVERNMENTAL POLICIES
The Bank is affected by the policies of regulatory authorities, including
the Federal Reserve System. An important function of the Federal Reserve
System is to regulate the national money supply. Among the instruments of
monetary policy used by the Federal Reserve are: purchases and sales of U.S.
Government securities in the marketplace; changes in the discount rate, which
is the rate any depository institution must pay to borrow from the Federal
Reserve; and changes in the reserve requirements of depository institutions.
These instruments are effective in influencing economic and monetary growth,
interest rate levels and inflation.
The monetary policies of the Federal Reserve System and other governmental
policies have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. Because
of changing conditions in the national economy and in the money market, as well
as the result of actions by monetary and fiscal authorities, it is not possible
to predict with certainty future changes in interest rates, deposit levels,
loan demand or the business and earnings of the Company and the Bank or whether
the changing economic conditions will have a positive or negative effect on
operations and earnings.
Bills are pending before the United States Congress and the Tennessee
General Assembly which could affect the business of the Company and the Bank,
and there are indications that other similar bills may be introduced in the
future. It cannot be predicted whether or in what form any of these proposals
will be adopted or the extent to which the business of the Company and the Bank
subsidiaries may be affected thereby.
EMPLOYEES
At December 31, 1996, the Company had a total of 31 employees with 28 of
those employed on a full-time basis.
-21-
<PAGE> 22
ITEM 2. DESCRIPTION OF PROPERTY
The Bank's main office is located at 161 W. Main Street in Sneedville,
Tennessee. The property consists of a masonry building of approximately 7,000
square feet, which is constructed on a half acre of land owned by the Bank.
The Bank operates one branch office in Rogersville, which is approximately 33
miles from the main office. The Bank operates a third location as a branch in
Church Hill, which is approximately 53 miles from the main office. The Bank is
currently constructing a fourth location on East Main Street in Rogersville
consisting of a masonry building with approximately 10,000 square feet, 7,500
square feet of which will be used by the Bank. All facilities have
improvements including drive-through tellers, vaults, night depository and
certain facilities have safe deposit boxes.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
the Bank is a party or of which any of their properties are subject; nor are
there material proceedings known to the Company to be contemplated by any
governmental authority; nor are there material proceedings known to the
Company, pending or contemplated, in which any director, officer or affiliate
or any principal security holder of the Company, or any associate of any of the
foregoing, is a party or has an interest adverse to the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-22-
<PAGE> 23
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company initiated a public offering of its Common Stock in August 1995
at a price of $10 per Share (the "Offering"). There is no established public
market for the shares. Management of the Company is aware that isolated
transactions in the Common Stock occur from time to time. To the best of the
knowledge of the Company the most recent transaction in the Common Stock was
September 11, 1996, and was for the price of $10.00 per share.
There were 374 holders of record of the Common Stock as of March 12,
1997.
The Company currently intends to retain its earnings, if any, for use in
the business and does not anticipate paying any cash dividends in the
foreseeable future. The board of directors cannot predict when such dividends,
if any, will ever be made. The payment of dividends, if any, shall at all
times be subject to the payment of the Company's expenses, the maintenance of
reasonable working capital and risk reserves, and minimum capitalization
requirements for state banks. The application by the Bank to establish an
additional branch in Rogersville and a new branch in Church Hill, Tennessee was
approved by the Commissioner of the Department of Financial Institutions (the
"DFI") subject to certain conditions including, among others, that the Bank
will not be allowed to pay dividends to shareholders other than for the purpose
of holding company debt reduction for a period of 2 years without prior written
consent from the Commissioner of the DFI.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The purpose of this discussion and analysis is to provide the reader with
a concise description of the financial condition and changes therein and
results of operations of the Company and the Bank for the years ended December
31, 1995 and 1996.
This discussion and analysis is intended to complement the audited
financial statements and footnotes and the supplemental financial data and
charts appearing elsewhere in this report, and should be read in conjunction
therewith. This discussion and analysis will focus on the following major
areas: Results of Operations, Financial Position, Capital Resources, Asset
Quality, and Liquidity and Interest-Sensitivity.
RESULTS OF OPERATIONS
Net gain for 1996 was $84,520 or $204,318 more than net loss for 1995. Net
loss for 1995 was $(120,000). The Company's return on average assets was .16%
for 1996 and (0.38%) for 1995. Its return on average equity was (4.69%) for
1995 and 2.88% for 1996.
The Company's loss for 1995 and earnings for 1996 were impacted by the
following significant items:
- Yield on average earning assets increased from 8.30% for 1995
to 8.44% for 1996.
- Average earning assets for 1996 were $47,803,000 representing
an increase of $19,400,000 over 1995's average earning assets of
$28,403,000.
- Yield on average interest-bearing liabilities increased from
5.01% for 1995 to 5.29% for 1996.
- Average interest-bearing liabilities increased from
$23,439,000 in 1995 to $42,521,000 for 1996 representing an
increase of $19,082,000.
-23-
<PAGE> 24
- Average earning assets to average total assets increased to 90.56%
for 1996 from 90.12% for 1995.
- Average interest-bearing liabilities to average assets increased
to 80.55% in 1996 from 74.37% in 1995. Net average earning assets
(average earning assets minus average interest-bearing
liabilities) to average total assets decreased from 15.75% for
1995 to 10.01% for 1996.
As a result of the foregoing net interest income as a percentage of net
average interest earning assets decreased to 3.73% for 1996 as compared to
4.17% for 1995. Accordingly, net interest income for 1996 increased by only
$601,000 in 1996 to $1,784,000 from $1,183,000 for 1995.
Net interest income for 1996 was adversely impacted by parent company only
borrowings of $3,450,000 which averaged $3,450,000 at a cost of $290,000 or
8.41% of average borrowings. Compared to 1995, this is an increase in cost of
$78,000 attributable primarily to an increase of $1,079,000 average borrowings
outstanding. Net interest income for 1995 was adversely impacted by parent
Company only borrowings of $3,450,000 which averaged $2,371,000 at a cost of
$212,000 or 8.94% on average borrowing. This borrowing was incurred by the
Company in order to increase the capital of the subsidiary Bank. Without this
borrowing, the Bank would not have had sufficient capital to permit the Bank to
open branches in Rogersville and Church Hill.
-24-
<PAGE> 25
The following table indicates the average balance, interest income or
expense, average interest rates earned or paid, interest rate spread, and
interest margin for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
(Fully taxable equivalent) Interest Average Interest
(Dollars in thousands except Average Income/ Yields/ Average Income/ Average
for per share data) Balance Expense Rates Balance Expense Rate
------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans net of unearned income ......... $28,647 $2,859 9.98% $16,608 $1,637 9.86%
U.S. Treasury and other U.S.
government agencies.................. 14,669 944 6.44% 9,526 582 6.11%
States and municipalities............. 63 5 7.94% 142 16 11.27%
Federal funds sold.................... 4,424 227 5.13% 2,127 122 5.74%
------- ------ ------- ------
Total interest-earning
assets/interest income.............. $47,803 $4,035 8.44% $28,403 $2,357 8.30%
======= ====== ======= ======
Interest-bearing liabilities:
Demand deposits....................... $10,526 $ 374 3.55% $ 8,674 $ 295 3.40%
Savings............................... 1,614 48 2.97% 720 21 2.92%
Individual retirement accounts........ 3,095 176 5.69% 2,120 118 5.57%
Time certificates..................... 23,521 1,352 5.75% 9,554 528 5.53%
Securities sold under repurchase...... 315 11 3.49%
Note payable.......................... 3,450 290 8.41% 2,371 212 8.94%
------- ------ ------- ------
Total interest-bearing
liabilities/interest expense........ $42,521 $2,251 5.29% $23,439 $1,174 5.01%
======= ====== ======= ======
Net interest earnings................. $1,784 $1,183
====== ======
Net interest on interest earning
assets.............................. 3.73% 4.17%
==== ====
</TABLE>
-25-
<PAGE> 26
Non-interest expense increased by $272,000 to $1.7 million for 1996
compared to $1.4 million for 1995. Non-interest expense was 4.61% of average
assets in 1995 and 3.264% of average assets in 1996.
The following table presents non-interest expense for 1996 compared to
1995 and as a percentage of average assets and the changes therein (in
thousands):
<TABLE>
<CAPTION>
Increase % Increase
% Average % Average (Decrease) (Decrease)
Non-Interest Expense 1996 Assets 1995 Assets 1996/1995 1996/1995
- ------------------------------ ------- --------- ------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Salaries and
employee benefits............ $ 976 1.85% $ 839 2.66% $137 16.33
Occupancy, net................ 103 .20% 73 0.23% 30 41.10
Furniture and equipment....... 142 .27% 100 0.32% 42 42.00
Directors fees................ 49 .09% 48 0.15% 1 2.08
Advertising................... 67 .13% 72 0.23% (5) (6.94)
FDIC insurance................ 2 .004% 25 0.08% (23) (92.00)
Office supplies .............. 30 .06% 96 0.30% (66) (68.75)
Professional services......... 85 .16% 29 0.09% 56 193.10
Telephone..................... 29 .05% 26 0.08% 3 11.54
Postage and courier........... 49 .09% 32 0.10% 17 53.13
Other......................... 192 .36% 112 0.36% 80 71.43
------ ----- ------ ---- ---- -----
$1,724 3.264% $1,452 4.61% $272 18.73%
====== ===== ====== ==== ==== =====
</TABLE>
The substantial increase in non-interest expenses is the result of
operating and fully staffing two branch facilities in Hawkins County,
Tennessee. Occupancy expense is expected to increase again in 1997 because of
the expected completion of new main office facilities in Rogersville sometime
in the second quarter of 1997. Other costs, such as salaries and benefits are
expected to level off since management feels that current staffing levels are
adequate to handle expected increased business once the permanent facilities
are opened. Accordingly, non-interest expense as a percentage of average assets
is expected to decline as growth in Bank assets is expected to increase faster
than growth in non-interest expense.
The provision for loan losses in 1995 was $36,000 compared to $100,000
for 1996. The provision for loan losses is the amount management considers
necessary to maintain a reserve for loan losses at a level sufficient to meet
risks inherent in the Bank's loan portfolio. The level of the reserves is
determined by management after conducting ongoing reviews of the loan portfolio
as well as considering the level and magnitude of non-performing assets and
loan delinquencies, general economic conditions in the areas served by the
Company, historic loan-loss experience, loan mix and the level of loans
relative to reserves.
Non-interest income increased by $75,000 to $179,000 in 1996 as compared
to $104,000 in 1995. Management expects this trend to continue consistent with
continued growth in overall Bank assets and new customers.
Income tax expenses for 1996 were $54,000 reducing the Company's net
earnings from $139,000. Income tax benefits for 1995 were $86,000. The
Company's Tennessee excise tax loss for 1995 of approximately $271,000 was
carried over and fully utilized against 1996 earnings.
FINANCIAL POSITION
Company total assets grew 54.3% or $22.3 million during 1996 to end of
year total of $63.4 million. The growth in assets during 1996 is primarily
attributable to deposit growth of $21.2 million from current and new banking
customers.
Portfolio securities grew by $4.9 million during 1996 to $15.1 million at
year end 1996 from $10.2 million at year end 1995.
-26-
<PAGE> 27
Loans grew during 1996 by $13.4 million or 60.4% from $22.2 million at
year end 1995 to $35.6 million at year end 1996. The majority of this growth
was in real estate mortgage loans which grew by 63.6% or $9.1 million to $23.4
million at year end 1996 and consumer lending which grew $2.6 million or 49.1%
to $7.9 million at year end 1996.
Deposits grew during 1996 by $21.2 million or 61.4% to $55.7 million at
year end 1996. Management is not aware of any reason why this trend in deposit
growth should not continue throughout 1997.
CAPITAL REQUIREMENTS
The Company's equity capital was $3.4 million at year end 1996 compared to
$2.6 million at year end 1995. This increase of $765,000 consists of a
$(115,000) increase in unrealized loss on available for sale securities, sales
of common stock, net of offering expenses, of $795,000 and the Company's
income of $85,000 for 1996. No dividends were paid by the Company during 1996
and the Company does not expect to pay dividends any time in the foreseeable
future.
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31, 1996,
approximately $1.4 million of retained earnings were available for dividend
declaration without prior regulatory approval but only if necessary to service
parent company indebtedness. Otherwise, the Bank is prohibited from paying any
dividends for two years from the opening of branches in Rogersville and Church
Hill, Tennessee without the prior written approval of the Commissioner of the
Department of Financial Institutions for the State of Tennessee.
The Bank would be considered "well capitalized" within applicable Federal
banking regulatory guidelines at December 31, 1996.
The Bank has committed to the Commissioner of the Department of Financial
Institutions, in connection with the approval to open branches during 1995 in
Rogersville and Church Hill, Tennessee that it would, among other things,
maintain a Tier I capital plus loan loss reserve to asset ratio of not less
than 10% during the first three years after approval. This condition was
modified by state banking regulators on September 19, 1996 to require Bank to
maintain a Tier I leverage ratio of no less than 8% for the three years
subsequent to commencing operation in Hawkins County, Tennessee. The actual
Tier I leverage ratio maintained by the Bank was 14.05% and 10.26% on an end of
period basis at December 31, 1995 and 1996, respectively. The actual tangible
capital maintained by the Bank at December 31, 1996 was $6.488 million.
The Company is a "small one-bank holding company" within the meaning of
regulations promulgated by the Board of Governors of the Federal Reserve
System. Accordingly, the Company's capital compliance, for bank holding company
purposes, will be measured solely with respect to the Bank and not on a
consolidated basis. The Company has committed to the Commissioner of the
Department of Financial Institutions that it would raise an additional $1
million of equity capital by October 28, 1996. At October 28, 1996, the Company
had raised $1,070,137 toward this commitment.
Management believes, as of December 31, 1996, that the Bank and Company
meet all capital requirements to which they are subject and that they are in
compliance with all conditions and commitments to banking regulators regarding
the approval and opening of branches in Rogersville and Church Hill, Tennessee.
However, events beyond the control of the Company, such as a downturn in the
local economy, could adversely affect future earnings and, consequently, the
ability of the Company to meet its future minimum capital requirements.
-27-
<PAGE> 28
LIQUIDITY RESOURCES
Liquidity management focuses on the need to meet both short-term funding
requirements and long-term growth objectives. Primary sources of funds for
liquidity include deposits, loan repayments and security repayments or sales of
available for sale securities.
During 1996, the Company increased available for sale securities by $6.8
million. On November 30, 1995, the Company transferred debt securities with an
amortized cost of $2,830,000 from "securities held to maturity" to "securities
available for sale." Management decided to take advantage of this special
one-time reevaluation of the classification of securities. Management believes
that it is in a position to better manage its liquidity position after this
reevaluation and transfer of securities from held to maturity to available for
sale.
ASSET LIABILITY MANAGEMENT
The long-term profitability of the Company depends on properly priced
products and services, asset quality and asset-liability management.
Historically, the Company has had a mismatch between the maturities of its
assets and liabilities because customers have traditionally preferred
short-term deposits and longer-term loans. This mismatch makes the Company
sensitive to changes in interest rates and the resulting effect on interest
income and the market value of assets. The Company attempts to manage this
mismatch and thus reduce its effect on earnings during periods of significant
changes in interest rates. The strategies utilized by the Company include the
origination of shorter-term fixed rate loans and adjustable rate loans or loans
with call provisions. The Company also emphasizes checking accounts and other
transaction accounts which management believes are less rate sensitive than
certificate accounts.
A traditional measure of interest rate sensitivity and its impact upon the
next years earnings is the Company's one-year gap position (total assets
subject to repricing less total liabilities subject to repricing). A negative
one-year gap position generally exposes the Company's earnings to rising short
term rates over the period and thus reduced net interest income because current
liabilities reprice faster than current assets. However, this earnings exposure
can be mitigated during the period if total asset growth is sufficient such
that new assets are priced at relatively higher rates and new deposit
maturities are extended. At December 31, 1995 the Company had a cumulative one
year negative gap of (37.94%) or a net of $21.7 million in liabilities
repricing faster than assets.
While the one-year-gap measure helps provide some information about a
financial institution's interest sensitivity, it does not predict the trends of
future earnings.
The Company's investment in derivatives at year end 1996 was $500,000 at
cost. These two securities had an approximate market value at that time of
$493,800. Both securities are "inverse floaters," maturing in 1998 and are
the obligation of the Federal Home Loan Bank, a quasi-government agency.
Ultimate collection of the par amount of the obligations is relatively risk
free. However, until maturity, earnings will be impacted either positively or
negatively depending upon the prevailing level of interest rates. In essence,
an inverse floater generally earns more in a falling interest rate environment
and earns less in a rising interest rate environment. At December 31, 1996 one
of these securities was earning at 4.5% while the other was earning at 4.949%.
Both securities have a par amount of $250,000. These securities were acquired
by prior management during 1994 because of their then attractive yields and the
then expectation that interest rates would continue falling or remain stable.
Current management intends to hold these securities until maturity and has no
present plans or intentions of investing in similar instruments in the future.
ASSET QUALITY
Non-performing and other loans past due 90 days or more were $182,000 at
year end 1996 compared to $138,000 at year end 1995 representing an increase
of $44,000. Non-performing loans as a percentage of net loans before the
allowance for loan losses was 0.52% at year end 1996 and .63% at year end 1995.
The reserve for loan losses to non-performing loans, which is a measure of the
Bank's ability to cover problem assets with existing reserves, was
-28-
<PAGE> 29
290.6% at year end 1995 and 251.1% at year end 1996. The Company had no
material restructured loans in 1996 or 1995. The asset quality of the Company
continues to be good which is a result of good underwriting standards coupled
with aggressive collection efforts and a good local economy.
EFFECTS OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation. In the current
interest rate environment, the liquidity and maturity structures of the
Company's assets and liabilities are critical to maintenance of acceptable
performance levels.
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements: Page
<S> <C>
Independent Auditor's Report........................................................................F-1
Consolidated Balance Sheets at December 31, 1996 and 1995...........................................F-2
Consolidated Statements of Earnings for the years ended December 31, 1996 and 1995..................F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996 and 1995...................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995................F-5
Notes to Consolidated Financial Statements..........................................................F-6
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Following is certain information regarding the nominee directors and
executive officers of the Company.
REED D. MATNEY (47) assumed the position of Chief Executive Officer in
November 1996 and has served as the President and Director since 1994.
Mr. Matney was employed by First Union National Bank of Tennessee until April
1994 and he was employed by the Bank in May 1994.
G. DOUGLAS PRICE (56) has served as a Director since 1994. Mr. Price is
employed as the Executive for Hawkins County, Tennessee.
WILLIAM E. PHILLIPS (49) has served as Chairman of the Board since 1994.
Mr. Phillips is an attorney with the law firm of Phillips and Hale in
Rogersville, Tennessee.
H. LYONS PRICE (62) has served as the Secretary/Treasurer and Director
since 1994. Mr. Price was employed by First Union National Bank of Tennessee
until June 1993.
-29-
<PAGE> 30
GARY E. VARNELL (50) has served as a Director of the Company since 1994.
Mr. Varnell is the owner and operator of a retail office products store in
Rogersville, Tennessee.
DR. TRUETT H. PIERCE (69) has served as a Director of the Company since
1994. Dr. Truett practices medicine in Sneedville, Tennessee.
GEORGE L. BROOKS (67) has served as a Director of the Company since 1994.
Mr. Brooks retired from Citizens Union Bank in 1993 and resides in Rogersville,
Tennessee.
SHIRLEY A. PRICE (62) has served as a Director of the Company since 1994.
Ms. Price is an Insurance Agent in Rogersville, Tennessee.
LEON GLADSON (71) has served as a Director of the Company since 1994. Mr.
Gladson is a retired businessman and resides in Rogersville, Tennessee.
EDDIE FREEMAN (44) has served as a Director of the Company since 1995 and
serves as Vice President and Manager of the Bank's Church Hill office.
NEIL D. MILLER (77) has served as a Director of the Company since 1994.
Mr. Miller is a farmer in Rogersville, Tennessee.
M. CARLIN GREENE (54) has served as a Director of the Company since 1994.
Mr. Greene is a real estate agent and farmer in Sneedville, Tennessee.
SCOTT F. COLLINS (48) has served as a Director of the Company since 1994.
Mr. Collins is the Hancock County Clerk & Master in Sneedville, Tennessee.
LAWRENCE E. GRAY (52) has served as a Director of the Company since 1994
and serves as Executive Vice President of the Bank.
No director of the Company is a director or executive officer of another
bank holding company, bank, savings and loan association, or credit union.
During the last fiscal year, the Board of Directors of the Company held
one (1) meeting during 1996. The Directors of the Company also serve as
directors of the Bank. The Board of Directors of the Bank held twelve (12)
meetings in 1996. No director attended less than 75% of the meetings held by
the Company or the Bank during 1996. The Directors received no compensation as
directors of the Company but as directors of the Bank received $300 for each
meeting attended.
The Board of Directors has two committees. Messrs. Phillips, H. Lyons
Price and Matney serve as the Executive Committee and Messrs. Doug Price,
Gladson and Collins serve as members of the Audit Committee. These persons
receive no compensation as members of such committees.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation paid by the
Company to the chief executive officer of the Company. No other executive
officer of the Company received cash compensation in excess of $100,000
(determined as of the end of 1996) for the years ended December 31, 1996, 1995,
and 1994.
-30-
<PAGE> 31
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and Position Year Salary ($)
- ----------------- ---- -------------------
<S> <C> <C>
Reed Matney(1)
Chief Executive Officer and President 1996 66,000
H. Lyons Price 1996 66,608
Chief Executive Officer 1995 84,000
1994 21,712
</TABLE>
- ----------------------
(1) Mr. Matney assumed the position of Chief Executive Officer effective
November 21, 1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 12, 1997, the Company's records indicated that the following
number of shares were beneficially owned by (i) each person known by the
Company to beneficially own more than 5% of the Company's shares; (ii)
directors and persons nominated to become directors of the Company and
executive officers; and (iii) directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
Amount and Nature
Name of of Beneficial Ownership Percent
Beneficial Owner (Number of Shares) of Class
---------------- ----------------------- --------
<S> <C> <C> <C>
(i) Ralph T. Hurley 85,500 16.26%
Rt. 2 Box 157
Sneedville, TN 37869
William E. Phillips(1) 28,451 5.41
312 Main Street
Rogersville, TN 37857
(ii) William E. Phillips(1) 28,451 5.41
Lawrence E. Gray(2) 18,561 3.53
Shirley A. Price 7,937 1.51
Reed D. Matney 8,303 1.58
Leon Gladson 3,663 *
Eddie Freeman 1,812 *
G. Douglas Price(3) 15,874 3.02
Gary E. Varnell(4) 16,200 3.08
Scott F. Collins 1,587 *
H. Lyons Price 6,105 1.16
George L. Brooks 6,105 1.16
M. Carlin Greene 9,158 1.74
Dr. Truett H. Pierce(5) 12,211 2.32
</TABLE>
-31-
<PAGE> 32
<TABLE>
<S> <C> <C> <C>
Neil D. Miller 10,990 2.09
(iii) Directors and executive officers 146,957 27.95%
as a group (14 persons)
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 6,716 shares owned by Jane Porter Rogers, for whom Mr. Phillips
serves as conservator and 12,211 shares owned by the Joe H. Wilson Trust,
for which Mr. Phillips serves as co-trustee.
(2) Includes 12,211 shares owned jointly with his father, for which he
disclaims voting and investment power.
(3) Includes 6,105 shares owned by his spouse, for which he disclaims voting
and investment power.
(4) Includes 326 shares owned jointly with his son, Gary E. Varnell, Jr.
(5) Includes 9,158 shares owned by his spouse, for which he disclaims voting
and investment power.
-32-
<PAGE> 33
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company expects to have in the future banking and other business
transactions in the ordinary course of its banking business with directors,
officers, and 10% beneficial owners of the Company and their affiliates,
including members of their families, or corporations, partnerships, or other
organizations in which such officers or directors have a controlling interest,
on substantially the same terms (including price, or interest rates and
collateral) as those prevailing at the time for comparable transactions with
unrelated parties. Any such banking transactions will not involve more than the
normal risk of collectibility nor present other unfavorable features to the
Company or the Bank.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3.1 Articles of Incorporation of Volunteer Bancorp, Inc., as amended*
3.2 Bylaws of Volunteer Bancorp, Inc.*
24.1 Consent of Independent Certified Public Accountants
27 Financial Data Schedule (SEC use only)
</TABLE>
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form SB-1, Registration No. 33-94050.
(2) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
-33-
<PAGE> 34
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Sneedville, Tennessee
Consolidated Financial Statements
And Additional Information
December 31, 1996 and 1995
<PAGE> 35
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Volunteer Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Volunteer
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, changes in stockholders' equity, and cash
flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Volunteer Bancorp,
Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Welch & Associates, Ltd.
January 30, 1997
Nashville, Tennessee
F - 1
<PAGE> 36
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ -------------
ASSETS
------
<S> <C> <C>
Cash and due from banks (note 10) $ 2,771,810 $ 2,588,055
Federal funds sold 6,446,143 3,779,913
Investment securities available for sale (amortized
cost of $13,599,316 and $6,599,671, respectively) (note 2) 13,518,893 6,704,097
Investment securities held to maturity (estimated market
value of $1,596,156 and $3,481,166, respectively) (note 2) 1,603,847 3,522,798
Loans, less allowance for possible loan losses of $457,432 and
$401,066 in 1996 and 1995, respectively (note 3) 34,879,828 21,574,603
Accrued interest receivable 610,654 434,555
Premises and equipment, net (note 4) 3,217,064 1,987,103
Other real estate 82,846 15,160
Goodwill (note 1) 220,675 238,558
Other assets 41,449 240,679
-----------------------------
Total assets $63,393,209 $41,085,521
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits (notes 2 and 5)
Non-interest bearing $ 7,900,466 $ 6,540,778
Interest bearing 47,776,665 27,971,396
-----------------------------
Total deposits 55,677,131 34,512,174
Accrued interest payable 555,217 330,048
Securities sold under repurchase agreements (note 17) 175,000 -
Other accrued taxes, expenses and liabilities 128,570 1,796
Long-term debt (note 6) 3,450,000 3,450,000
Deferred income taxes (note 8) 10,383 159,117
-----------------------------
Total liabilities 59,996,301 38,453,135
-----------------------------
Commitments and contingent liabilities (note 9)
Stockholders' equity:
Common stock, $0.01 par value, 1,000,000 shares authorized,
525,717 shares issued and outstanding at December 31,
1996; 446,252 shares issued and outstanding, at
December 31, 1995 (note 14) 5,258 4,463
Additional paid-in capital 1,761,552 967,697
Retained earnings 1,679,960 1,595,440
Unrealized (loss) gain on securities available for sale, net (note 2) (49,862) 64,786
-----------------------------
Total stockholders equity 3,396,908 2,632,386
-----------------------------
Total liabilities and stockholders' equity $63,393,209 $41,085,521
=============================
</TABLE>
See accompanying notes to consolidated financial statements
F - 2
<PAGE> 37
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans $2,859,280 $1,637,442
Interest on federal funds 227,391 122,203
Interest on investment securities:
Taxable 943,940 581,766
Exempt from Federal income tax 3,125 10,727
-----------------------------
Total interest income 4,033,736 2,352,138
-----------------------------
Interest expense:
Interest on deposits 1,950,458 961,786
Interest on other borrowed funds 300,149 212,095
-----------------------------
Total interest expense 2,250,607 1,173,881
-----------------------------
Net interest income 1,783,129 1,178,257
Provisions for possible loan losses (note 3) 100,000 36,000
-----------------------------
Net interest income after provision for possible loan losses 1,683,129 1,142,257
-----------------------------
Non-interest income:
Service charges on deposit accounts 67,238 44,096
Other fees and commissions 82,419 48,578
Securities gain (loss) (note 2) 13,311 (4,810)
Other non-interest income 16,164 16,008
-----------------------------
Total non-interest income 179,132 103,872
-----------------------------
Non-interest expense:
Salaries and employee benefits (note 7) 975,967 839,476
Occupancy expenses, net (note 4) 103,302 72,790
Furniture and equipment expense 141,988 99,537
Other non-interest expense (note 7) 502,161 440,482
-----------------------------
Total non-interest expense 1,723,418 1,452,285
-----------------------------
Net earnings (loss) before income taxes 138,843 (206,156)
Income tax expense (benefit) (note 8) 54,323 (86,358)
-----------------------------
Net income (loss) $ 84,520 $ (119,798)
=============================
Income (loss) per weighted average common share (note 14) $ 0.17 $ (0.29)
=============================
Weighted average common shares outstanding 483,884 411,132
=============================
</TABLE>
See accompanying notes to consolidated financial statements
F - 3
<PAGE> 38
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain
Common (Loss) on
Stock Additional Securities
Common Stated Paid-In Retained Available
Shares Value Capital Earnings for Sale Total
------ ----- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance January 1,1995 1,343 $ 1,343 $ 695,330 $ 1,715,238 $ - $ 2,411,911
Net loss - - - (119,798) - (119,798)
Common 300:1 stock split
(note 14) 401,635 2,687 (2,687) - - -
Unrealized gain - - - - 64,786 64,786
Issue common stock,
net of costs of issuance 43,274 433 275,054 - - 275,487
------------------------------------------------------------------------------------
Balance December 31, 1995 446,252 4,463 967,697 1,595,440 64,786 2,632,386
Net income - - - 84,520 - 84,520
Unrealized (loss) - - - - (114,648) (114,648)
Issue common stock,
net of costs of issuance 79,465 795 793,855 - - 794,650
------------------------------------------------------------------------------------
Balance December 31,1996 525,717 $ 5,258 $1,761,552 $ 1,679,960 $ (49,862) $ 3,396,908
====================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F - 4
<PAGE> 39
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
December 31, 1996 and 1995
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 84,520 $ (119,798)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Deferred income taxes (78,533) 38,180
Provision for loan losses 100,000 36,000
Provision for depreciation and amortization 127,977 87,711
Securities (gain) loss (13,311) 4,810
(Increase) in interest receivable (176,099) (169,198)
Decrease (increase) in other assets 131,544 (210,778)
Increase in other liabilities 526,943 249,931
-------------------------------
Net cash provided (used) by operating activities 703,041 (83,142)
-------------------------------
Cash Flows from Investing Activities:
Purchase of investment securities held to maturity (250,000) -
Proceeds from calls and maturity of held to maturity securities 2,168,951 1,514,611
Purchase of investment securities available for sale (9,863,209) (5,519,671)
Proceeds from calls and maturities of available for sale securities 2,200,000 1,750,000
Proceeds from sale of available for sale securities 501,875 -
Net (increase) in loans (13,405,225) (8,935,473)
Acquisition of minority interest - (144,414)
Capital expenditures (1,340,055) (1,272,837)
-------------------------------
Net cash (used) in investing activities (19,987,663) (12,607,784)
-------------------------------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW accounts
and savings accounts 4,282,036 2,204,082
Net increase in certificates of deposit 16,882,921 10,302,977
Net increase in securities sold under repurchase agreements 175,000
Proceeds from long-term debt - 3,450,000
Issue common stock 794,650 432,740
Stock issuance costs - (157,253)
-------------------------------
Net cash provided by financing activities 22,134,607 16,232,546
-------------------------------
Increase in cash and cash equivalents 2,849,985 3,541,620
Cash and cash equivalents beginning of year 6,367,968 2,826,348
-------------------------------
Cash and cash equivalents end of year (note 1) $ 9,217,953 $ 6,367,968
===============================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,025,438 $ 912,753
===============================
Income taxes $ - $ 4,177
===============================
</TABLE>
See accompanying notes to consolidated financial statements
F - 5
<PAGE> 40
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1. Summary of Significant Accounting Policies
The accounting policies of Volunteer Bancorp, Inc. (the Company) conform to
generally accepted accounting principles and to general practices within
the banking industry. The following is a summary of the significant
policies.
a. Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiary, Citizens Bank of East Tennessee, formerly
known as Citizens Bank of Sneedville, (the Bank), of which the Company
owns 133,300 (100.0%) shares of the Bank's 133,300 issued and
outstanding shares of voting common stock at December 31, 1996 and
1995, respectively. During 1995, the Company acquired 5,970
additional shares of Bank stock from minority stockholders resulting
in minority interest decreasing from 4.48% to zero at December 31,
1995. All material inter-company accounts and transactions have been
eliminated in consolidation.
b. Investment Securities
Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
requires investments in equity securities that have a readily
determinable fair value and investments in debt securities to be
classified into three categories, as follows: held to maturity debt
securities, trading securities, and securities available for sale.
Classification of a debt security as held to maturity is based on the
Company's positive intent and ability to hold such security to
maturity. Securities held to maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts, unless there is a
decline in value which is considered to be other than temporary, in
which case the cost basis of such security is written down to market
and the amount of the write-down is included in earnings.
Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading account
securities, which are valued at market with unrealized gains and
losses included in earnings. Gains or losses on sales and adjustments
to market value of trading account securities are included in
non-interest income in the income statements.
F - 6
<PAGE> 41
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
Securities classified as available for sale are reported at market
value with unrealized gains and losses excluded from earnings and
reported, net of tax, in a separate component of stockholders equity
and include all securities not classified as trading account
securities or securities held to maturity. These include securities
used as part of the Company's asset/liability strategy which may be
sold in response to changes in interest rates, prepayment risk, the
need or desire to increase regulatory capital, and other similar
factors. Gains or losses on sale of securities available for sale are
recognized at the time of sale, based upon specific identification of
the security sold, and are included in non-interest income in the
income statements.
Interest income on investments is computed on the par value of the
outstanding investment. Amortization of discounts and accretion of
premiums is recorded as an adjustment to interest income utilizing the
effective yield method.
c. Loans, Less Allowance for Possible Loan Losses
Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting By Creditors For Impairment Of A Loan," as amended by SFAS
No. 118, "Accounting By Creditors For Impairment Of A Loan - Income
Recognition And Disclosures" state that an impaired loan is generally
any loan, excluding certain homogeneous small balance credits such as
credit card indebtedness, that is not performing in accordance with
its contractual terms. SFAS No. 114 requires that impairment on a loan
be measured by the difference between carrying value and the present
value of expected future cash flows discounted at the loan'ss effective
interest rate, the loan's observable market price, or the collateral's
value if the loan is collateral dependent. The amount of a loan's
impairment or changes therein require charges to earnings. SFAS
No. 118 allows a creditor to use existing methods for the recognition
of interest income on an impaired loan.
Loans are stated at the principal amount outstanding reduced by
unearned interest and an allowance for loan losses. Unearned interest
on loans, which relates principally to installment loans, is
recognized by the sum of the months' digits method, which, in the
current case, approximates the level yield method. Interest on all
other loans is computed on the outstanding loan balance.
F - 7
<PAGE> 42
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The allowance method is used by the Company to provide for possible
loan losses. Accordingly, all loan losses are charged to the
allowance for possible loan losses and all recoveries are credited to
it. Loans are charged against the allowance when management believes
that the collection of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb possible
losses on existing loans that may become uncollectible. The provision
for possible loan losses charged to operating expense is the amount
management considers necessary to bring the allowance to an adequate
level based on past loan loss experience and other factors which, in
management's judgment, deserve current recognition in estimating
possible loan losses. Such other factors considered by management
include growth and composition of the loan portfolio, the relationship
of the allowance for possible loan losses to outstanding loans and
current economic conditions that may affect the borrower's ability to
repay.
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such
that the collection of interest is doubtful.
d. Loan Fees
Loan fees are credited to income at the time of loan origination.
Direct origination costs for loans are charged to expenses when
incurred. The results of using this accounting method do not differ
materially from generally accepted accounting principles requiring the
use of the level interest yield method.
e. Premises and equipment
Premises and equipment are stated at cost. Depreciation is computed
primarily by the straight line method over the estimated useful lives
of the related assets. Gain or loss on items retired or otherwise
disposed of is credited or charged to operations and cost and related
accumulated depreciation are removed from the asset and accumulated
depreciation accounts.
Expenditures for major renewals and improvements of premises and
equipment are capitalized and those for maintenance and repairs are
charged to earnings as incurred.
f. Other Real Estate
Real estate acquired in foreclosure or in settlement of debt or
repossessed in substance is carried at the lower of cost or fair
market value less estimated costs to sell. Fair market value at the
time of foreclosure or settlement of debt is based on a current
appraisal of the property. Any reduction in carrying value to fair
market value at the time the property is acquired is accounted
F - 8
<PAGE> 43
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
for as a loan loss. Management evaluates the fair market value of
individual properties in other real estate periodically and any
subsequent write-downs of the carrying value of the properties are
charged to losses on other real estate and credited directly to the
carrying value of individual properties.
If an individual property is in condition for use or sale at the time
of foreclosure, any subsequent holding costs are included in expense
as incurred. If an individual property is not in condition for use or
sale at the time of foreclosure, completion and holding costs are
capitalized until the property is in condition for use or sale.
All legal fees and other direct costs incurred in foreclosure are
expensed as incurred.
g. Income Taxes
The Company reports taxable income utilizing the cash method of
accounting whereby expenses are recognized when paid and income is
recognized when received. Deferred income taxes are provided on all
significant timing differences between income determined for financial
and tax reporting purposes principally related to the methods used to
report income and expenses, depreciation, and the provision for
possible loan losses.
The Company and the Bank file consolidated income tax returns.
Therefore, the provision arising from the operations of the Bank is
payable to the Company as the amounts are utilized in the consolidated
income tax returns. The amount due the Company at December 31, 1996
and 1995 was approximately $120,000 and $7,800, respectively.
h. Goodwill
The Company's acquisition during 1995 and 1994 of 18,360 shares of
subsidiary Bank stock held by minority shareholders of Bank was
accounted for by the purchase method of accounting and resulted in the
recording of goodwill in the amount of $261,226. Total costs for the
18,360 shares amounted to $559,306. Goodwill represents the excess
cost over the fair value of the assets acquired of the subsidiary and
is being amortized on the straight-line method over a 15 year life.
F - 9
<PAGE> 44
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
i. Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash and due from banks $2,771,810 $2,588,055
Federal funds sold 6,446,143 3,779,913
---------------------------
$9,217,953 $6,367,968
===========================
</TABLE>
j. Advertising Cost
All advertising costs are expensed when incurred. Other advertising
expense was $66,767 and $71,569 for the years ended December 31, 1996
and 1995, respectively. There was no direct-response advertising costs
incurred for 1996 or 1995.
k. Risk Factors
The Company's operations are affected by various risk factors,
including interest-rate risk, credit risk, and risk from geographic
concentrations of lending activities. Management attempts to manage
interest-rate risk through various asset/liability management
techniques designed to match maturities of assets and liabilities.
Loan policies and administration are designed to provide assurance
that loans will only be granted to credit- worthy borrowers, although
credit losses are expected to occur because of subjective factors and
factors beyond the control of the Company. In addition, most of the
Company's lending activities are within the geographic area where it
is located. As a result, the Company and its borrowers may be
vulnerable to the consequences of changes in the local economy.
l. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ
from those estimates.
The determination of the allowance for loan losses is a material
estimate that is particularly susceptible to material change. While
management uses available information to recognize losses on loans,
further reductions in the carrying amount of loans may be necessary
based on
F - 10
<PAGE> 45
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process,
periodically review the estimated losses on loans. Such agencies may
require the Bank to recognize additional losses based on their
judgements about information available to them at the time of their
examination.
2. Investment Securities
On November 30, 1995, the Company transferred debt securities with an
amortized cost of $2,830,000 from "securities held to maturity" to
"securities available for sale." The transfer was accomplished under a
special one-time Financial Accounting Standards Board interpretation of
SFAS No. 115. Essentially, such provision permitted entities to reconsider
their original allocations under SFAS No. 115 and make appropriate
adjustments if such adjustments or transfers were accomplished on or before
December 31, 1995 without the risk of tainting securities which remain or
future decisions to place securities in the held to maturity category.
Without such a special provision the foregoing transfer would call into
question the Company's original intent to hold remaining or place
subsequently acquired securities into the held to maturity category. The
transfer resulted in an increase in the unrealized gain on securities
available for sale, included as a component of stockholders equity, of
$31,050 net of applicable deferred taxes.
The carrying value of investment securities classified as available for
sale at December 31, are as follows:
<TABLE>
<CAPTION>
Available for Sale
--------------------------------------------------------------
December 31, 1996
-----------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Treasury $ 4,382,998 $38,182 $ (10,884) $ 4,410,296
Securities of U.S. Government
agencies 9,116,318 10,597 (121,448) 9,005,467
Obligations of states and political
subdivisions 100,000 3,130 - 103,130
-----------------------------------------------------------
$13,599,316 $51,909 $(132,332) $13,518,893
===========================================================
</TABLE>
F - 11
<PAGE> 46
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Available for Sale
--------------------------------------------------------------
December 31, 1995
-----------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Treasury $4,624,993 $ 87,329 $(3,041) $4,709,281
Securities of U.S. Government
agencies 1,974,678 20,240 (102) 1,994,816
----------------------------------------------------------
$6,599,671 $107,569 $(3,143) $6,704,097
==========================================================
</TABLE>
The amortized cost and approximate market value of investment securities
classified as held to maturity at December 31, follows:
<TABLE>
<CAPTION>
Held to Maturity
------------------------------------------------------
December 31, 1996
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Government agencies $1,603,847 $9,264 $(16,955) $1,596,156
========================================================
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
------------------------------------------------------
December 31, 1995
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Government agencies $3,522,798 $21,884 $(63,516) $3,481,166
========================================================
</TABLE>
F - 12
<PAGE> 47
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The components of the net unrealized (loss) gain on investment securities
available for sale at December 31, recorded as a component of stockholders'
equity are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross unrealized gains $ 51,909 $107,569
Gross unrealized losses (132,332) (3,143)
-------------------------
Gross unrealized (loss) gain, net (80,423) 104,426
Deferred tax effect 30,561 (39,640)
-------------------------
Net unrealized (loss) gain $ (49,862) $ 64,786
=========================
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to maturity
------------------ ----------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 748,130 $ 754,075 $ 250,279 $ 251,279
Due after one year and through
five years 5,679,966 5,697,108 1,000,611 987,367
Due after five years and through
ten years 7,171,220 7,067,710 200,000 196,320
Due after ten years - - 152,957 161,190
--------------------------------------------------------------
$13,599,316 $13,518,893 $1,603,847 $1,596,156
==============================================================
</TABLE>
F - 13
<PAGE> 48
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The following table presents the gross realized gains and losses on
investment securities transactions for the years ended December 31, 1996
and 1995.
<TABLE>
<CAPTION>
Realized gains Realized Losses
--------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Available for sale securities $13,311 - - -
Held to maturity securities - - - (4,810)
----------------------------------------------------------
$13,311 $ - $ - $(4,810)
==========================================================
</TABLE>
At December 31, 1996 a net gain of $13,311 was realized , or a gain of
$8,258 net of a tax expense of $5,053. At December 31, 1995, net losses of
$4,810 were realized, or a loss of $2,984 net of applicable tax benefits of
$1,826.
Investment securities with amortized cost of approximately $6,802,000 and
market value of approximately $6,760,975 at December 31, 1996 were pledged
to secure public deposits and for other purposes required or permitted by
law. In 1995, investment securities with amortized cost of approximately
$4,127,000 and market value of approximately $4,108,000 were pledged.
At December 31, 1996, the Bank had two Federal Home Loan Bank (FHLB) debt
securities which are defined as being derivatives. Pertinent facts of each
security are as follows:
FHLB inverse floater, $250,000 par, final maturity September 2, 1998
was purchased on September 2, 1993 at par. The interest rate was
fixed at 6.25% until September 9, 1994 at which time it is adjusted
quarterly at 10% minus the three month dollar London Interbank Offered
Rate (LIBOR) with a 10% cap and a -0-% floor. It is callable on any
quarterly interest payment date at 100. The interest rate at December
31, 1996 was 4.5% and the approximate market value was $250,000. The
interest rate at December 31, 1995 was 4.06% and the approximate
market value was $228,458.
FHLB inverse floater, $250,000 par, final maturity September 29, 1998
was purchased on September 29, 1993 at par. The interest rate was
fixed at 6.25% until September 29, 1994 at which time it is adjusted
quarterly at 10.5% minus the three month dollar LIBOR with an 8.25%
cap and a -0-% floor. It is callable on any quarterly interest
payment date at 100. The interest rate at December 31, 1996 was
4.949% and the approximate market value was $243,800. The interest
rate at December 31, 1995 was 3.26% and the approximate market value
was $221,855.
F - 14
<PAGE> 49
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
Management has elected, based upon its intent and ability, to hold these
derivative securities to maturity. These inverse floaters were acquired by
prior management because of their then attractive yields with the
expectation that interest rates would remain stable or continue falling.
SFAS No. 119 entitled "Disclosure about Derivative Financial Instruments
and Fair Value of Financial instruments" is effective, with respect to the
Company, December 15, 1995. The adoption of SFAS No. 119 had no material
impact on the Company's results of operations, financial position or
liquidity.
3. Loans and Allowances for Possible Loan Losses
The Bank makes commercial, consumer, and real estate loans to its
customers, located principally within the Bank's primary markets, which
consists of Hancock, Hawkins and surrounding counties. Although the Bank
has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon economic conditions
within its primary markets.
Loans are either secured or unsecured based upon the financial condition of
the borrower. The loans are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrower; however, the
Bank is exposed to risk of loss on loans due to a borrower's difficulties,
which may arise from any number of factors including problems within the
respective industry or economic conditions, including those within the
Bank's primary market.
Loans, less allowance for possible loan losses at December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 4,000,113 $ 2,399,193
Real estate - construction 3,213,578 826,500
Real estate - mortgage 20,184,713 13,472,330
Consumer 7,853,323 5,272,050
Other 345,218 240,978
-----------------------------
35,596,945 22,211,051
Less unearned interest 259,685 235,382
-----------------------------
35,337,260 21,975,669
Less allowance for possible loan losses 457,432 401,066
-----------------------------
$34,879,828 $21,574,603
=============================
</TABLE>
F - 15
<PAGE> 50
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
Loans at December 31, 1996 are scheduled to mature as follows:
<TABLE>
<CAPTION>
Commercial,
Financial & Real Estate Real Estate
Agricultural Construction Mortgage Consumer Other
------------- ------------ -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
One year or less $3,010,464 $3,187,255 $7,412,941 $2,613,386 $162,337
After one through
five years 989,649 26,323 9,275,458 5,111,457 176,364
After five years
through ten
years - - 953,320 128,480 6,517
After ten years - - 2,542,994 - -
-----------------------------------------------------------------------------
Total $4,000,113 $3,213,578 $20,184,713 $7,853,323 $345,218
=============================================================================
</TABLE>
At December 31, 1996, fixed and variable rate loans were as follows:
<TABLE>
<S> <C>
Fixed rate loans $25,785,758
Variable rate loans 9,811,187
-----------
$35,596,945
===========
</TABLE>
Non-performing assets at December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Loans past due over 90 days $ 84,007 $ 2,341
Non-accrual loans 97,919 136,301
Other real estate owned 82,846 15,160
---------------------------
$ 264,772 $ 153,802
===========================
</TABLE>
Foregone interest income on the above non-accrual loans was $5,902 and
$7,675 at December 31, 1996 and 1995, respectively.
F - 16
<PAGE> 51
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
At December 31, 1996 and 1995, the Bank had loans to its executive
officers, directors and their affiliates of $466,927 and $433,217,
respectively. At December 31, 1996 and 1995, the Bank had commitments to
extend credit to its executive officers, directors and their affiliates of
$1,298,120 and $1,477,554, respectively. All such loans and commitments
were made in the ordinary course of business on substantially the same
terms as those prevailing at the time for comparable transactions with
unrelated parties. An analysis of related party loans from January 1 to
December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance January 1 $ 433,217 $ 98,214
Payments received (242,037) (126,424)
Advances made 275,747 461,427
---------------------------
Balance December 31 $ 466,927 $ 433,217
===========================
</TABLE>
Transactions in the allowance for possible loan losses of the Bank for the
years ended December 31, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance - beginning of year $ 401,066 $ 419,170
Provisions charged to operating expense 100,000 36,000
Loans charged-off (79,228) (74,169)
Recoveries 35,594 20,065
---------------------------
Balance - end of year $ 457,432 $ 401,066
===========================
</TABLE>
The Bank adopted SFAS No. 114, "Accounting By Creditors For Impairment Of A
Loan" as amended by SFAS No. 118, as of January 1, 1995. As of December 31,
1996 and 1995, the Bank's recorded investment in impaired loans and
disclosures related thereto were not material.
F - 17
<PAGE> 52
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
4. Premises and Equipment, Net
The detail of premises and equipment, net at December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 162,637 $ 162,637
Buildings 941,133 937,845
Furniture and equipment 679,516 658,835
Construction in progress 1,825,639 509,553
----------------------------
3,608,925 2,268,870
Less accumulated depreciation 391,861 281,767
----------------------------
$3,217,064 $1,987,103
============================
</TABLE>
Depreciation related to premises and equipment for the years ended December
31, 1996 and 1995 was $110,094 and $69,828, respectively.
The Bank leases its loan production office and Rogersville Branch on an
annual basis. Total rental expense for these locations was $20,000 and
$17,770 for December 31, 1996 and 1995, respectively.
Construction in progress at December 31, 1996 consists of costs incurred to
date for land acquisition, site preparation and general construction costs
for a permanent office in Rogersville, Tennessee.
5. Deposits
Deposits at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Demand deposits $ 7,900,466 $ 6,540,778
NOW and money market accounts 11,150,876 9,197,824
Savings 1,860,585 1,175,345
Individual retirement accounts 1,608,520 1,324,464
Certificates of deposits - under $100,000 24,507,417 13,448,201
Certificates of deposits - over $100,000 8,649,267 2,825,562
----------------------------
$55,677,131 $34,512,174
============================
</TABLE>
F - 18
<PAGE> 53
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The amounts and scheduled maturities of certificate accounts at December
31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Within one year $31,085,189 $14,910,874
After one but within two years 1,650,146 77,313
After two but within three years 421,349 585,576
------------------------------
$33,156,684 $16,273,763
==============================
</TABLE>
Demand deposits reclassified as loans (overdrafts) aggregated approximately
$3,600 and $1,900 at December 31, 1996 and 1995, respectively.
Deposits of executive officers, directors and their affiliates aggregated
approximately $1,342,000 and $659,000 at December 31, 1996 and 1995,
respectively.
6. Long-term debt
The Company's long-term debt consists of a single note payable in the
amount of $3,450,000 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 2.25% 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 December 31, 1996 the rate on the note was 8.25%
per annum. Principal is payable annually commencing January 31, 1997 and
each January 31 thereafter as follows:
<TABLE>
<CAPTION>
January 31, Principal Due
----------- -------------
<S> <C>
1997 $ 185,000
1998 220,000
1999 255,000
2000 295,000
2001 325,000
2002 360,000
2003 395,000
2004 435,000
2005 470,000
2006 (final Maturity) 510,000
------------
$ 3,450,000
============
</TABLE>
The loan is secured by all of the stock of Citizens Bank of East Tennessee
owned by the Company.
F - 19
<PAGE> 54
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
7. Non-Interest Expenses
The major components of other non-interest expense at December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Directors fees $ 48,600 $ 47,700
Advertising 66,767 71,569
FDIC insurance 2,000 25,391
Office supplies 30,165 95,618
Professional services 85,164 29,112
Telephone expense 29,372 26,397
Postage and courier 48,569 31,911
Other 191,524 112,784
-------------------------
Total other non-interest expense $502,161 $440,482
=========================
</TABLE>
The increase in salaries and employee benefits, occupancy expense,
furniture and equipment expenses and other non- interest expense for 1996
is due primarily to the increased costs associated with operating and fully
staffing two branch facilities in Hawkins County which became operational
during 1995.
8. Income Taxes
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current $ 132,856 $(124,538)
Deferred (78,533) 38,180
------------------------
$ 54,323 $ (86,358)
========================
</TABLE>
The sources of deferred income taxes and the tax effect of each are as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrual to cash conversion $(82,961) $ 25,057
Provision for loan losses (21,397) 6,873
Accelerated depreciation 12,067 20,008
State tax loss carryover 16,274 (16,274)
Other, net (2,516) 2,516
-----------------------
$(78,533) $ 38,180
=======================
</TABLE>
F - 20
<PAGE> 55
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
A reconciliation of the provision for income taxes as shown in the
statements of earnings with that which would be computed by applying the
statutory Federal income tax rate of 34 percent to income before income
taxes is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Tax expense (benefit) at statutory rate $47,207 $(70,093)
Increase (decrease) in taxes resulting from:
Tax-exempt interest (6,601) (7,851)
Amortization of goodwill 6,080 6,080
State income taxes net of
Federal income tax 6,236 (7,444)
Rate differential in net operating loss
carryback year - (7,854)
Other, net 1,401 804
----------------------
$54,323 $(86,358)
======================
</TABLE>
The components of the net deferred tax liability recognized by the Company
at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Accrual to cash conversion $(17,195) $(100,156)
Allowances for loan losses - (14,307)
Unrealized gain on securities available for sale - (39,640)
Accumulated depreciation (30,839) (18,772)
Other, net - (2,516)
-----------------------
Total liabilities (48,034) (175,391)
-----------------------
Deferred tax assets:
Allowances for loan losses 7,090 -
Unrealized loss on securities available for sale 30,561 -
State tax net operating loss carryover - 16,274
-----------------------
Total assets 37,651 16,274
-----------------------
Net deferred tax liability $(10,383) $(159,117)
=======================
</TABLE>
F - 21
<PAGE> 56
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
9. Commitments and Contingencies
In the normal 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. The Company's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented
by the contractual notional amount of these instruments. The Company uses
the same credit policies in making commitments and conditional obligations
as it does for on- balance-sheet instruments. Unless noted otherwise, the
Company does not require collateral or other security to support financial
instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Since some commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary
by the Company upon extension of credit is based on management's credit
evaluation of the counter-party. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. Most guarantees expire within one year with some having
automatic one year renewals cancelable by the Company. The credit risk in
issuing letters of credit is essentially the same as that involved in
extending loans to customers.
The following table summaries the Company's significant commitments and
contingent liabilities at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to extend credit $4,004,362 $1,639,422
Standby letters of credit 170,000 58,000
---------------------------
$4,174,362 $1,697,422
===========================
</TABLE>
In the opinion of management, no material adverse effect on the financial
position of the Company and its subsidiary is anticipated as a result of
these items.
F - 22
<PAGE> 57
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
10. Restricted Cash
The Bank is required to maintain a minimum cash reserve with the Federal
Reserve Bank and/or in vault cash. The minimum requirement at December 31,
1996 and 1995 was $213,000 and $113,000, respectively.
11. Stockholder's Equity
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. The Bank is prohibited
from paying any dividends, other than to service the parent company
indebtedness, for two years from the opening of branches in Rogersville and
Church Hill, Tennessee (opened during 1995) without the prior written
approval of the Commissioner of Financial Institution for the State of
Tennessee. At December 31, 1996, the Bank had approximately $1,429,336
tangible capital in excess of the 8% Tier I leverage capital required to be
maintained by State bank regulators during the three years subsequent to
beginning operations in Hawkins County, Tennessee. Such excess tangible
capital may be used to pay dividends from the Bank without prior regulatory
approval but only if necessary to service parent company indebtedness in
accordance with the terms of such indebtedness (note 6).
12. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. The regulations
require a bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital classification is also subject to qualitative
judgments by the regulators about components, risk weights, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of Tier I capital as defined in the regulations) to total
average assets (as defined), and minimum ratios of Tier I and total capital
(as defined) to risk-weighted assets (as defined). To be considered
adequately capitalized (as defined) under the regulatory framework for
prompt corrective action, the Bank must maintain minimum Tier I leverage,
Tier I risk-based, and total risk-based ratios as set forth in the table.
The Bank's actual capital amounts and ratios, at December 31, are also
presented in the tables below.
F - 23
<PAGE> 58
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------
Capital Adequacy Prompt Corrective Action
-------------------------------------- ----------------------------------
Required Actual Required Actual
-------- ------ -------- ------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier I Capital (to
average assets) $2,431 4.00% $6,488 10.66% $2,431 4.00% $6,488 10.66%
====== ===== ====== ====== ====== ===== ====== ======
Tier I Capital (to risk-
weighted assets) $1,483 4.00% $6,488 17.50% $1,483 4.00% $6,488 17.50%
====== ===== ====== ====== ====== ===== ====== ======
Total Capital (to risk-
weighted assets) $2,965 8.00% $6,945 18.74% $2,965 8.00% $6,945 18.74%
====== ===== ====== ====== ====== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------
Capital Adequacy Prompt Corrective Action
-------------------------------------- ----------------------------------
Required Actual Required Actual
-------- ------ -------- ------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier I Capital (to
average assets) $1,486 4.00% $5,662 15.24% $1,486 4.00% $5,662 15.24%
====== ===== ====== ====== ====== ===== ====== ======
Tier I Capital (to risk-
weighted assets) $ 952 4.00% $5,662 23.79% $ 952 4.00% $5,662 23.79%
====== ===== ====== ====== ===== ===== ====== ======
Total Capital (to risk-
weighted assets) $1,904 8.00% $5,961 25.04% $1,904 8.00% $5,961 25.04%
====== ===== ====== ====== ====== ===== ====== ======
</TABLE>
Bases solely upon the foregoing ratios the Bank would be considered "well
capitalized" within applicable Federal banking regulatory guidelines.
In addition, the Bank has committed to State banking regulators, in
connection with the approval to open branches during 1995 in Rogersville
and Church Hill, Tennessee that it would, among other things, maintain a
Tier I capital plus loan loss reserve to asset ratio of not less than 10%
during the first three years after approval. This condition was modified by
State banking regulators on September 19, 1996 to require the Bank to
maintain a Tier I leverage ratio of no less than 8% for the three years
subsequent to commencing operation in Hawkins County, Tennessee. The actual
Tier I leverage ratio maintained by the Bank was 10.26% and 14.05% on an
end of period basis at
F - 24
<PAGE> 59
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
December 31, 1996 and 1995, respectively. The actual tangible capital
maintained by the Bank at December 31, 1996 and 1995 after the Rogersville
and Church Hill branches were opened was $6,488 and $5,662 million,
respectively, which was consistent with the approval regarding opening the
branches.
The Company is a "small one-bank holding company" within the meaning of
regulations promulgated by the Board of Governors of the Federal Reserve
System. Accordingly, the Company's capital compliance, for bank holding
company purposes, will be measured solely with respect to the Bank and not
on a consolidated basis. The Company has committed to State banking
regulators that it would raise an additional $1 million of equity capital
by October 28, 1996. At October 28, 1996 the Company had raised $1,070,137.
Management believes, as of December 31, 1996, that the Bank and Company
meet all capital requirements to which they are subject and that they are
in compliance with all conditions and commitments to banking regulators
regarding the approval and opening of branches in Rogersville and Church
Hill, Tennessee. However, events beyond the control of the Company, such as
a downturn in the local economy, could adversely affect future earnings
and, consequently, the ability of the Company to meet its future minimum
capital requirements.
13. Condensed Financial Information
Following is condensed financial information of Volunteer Bancorp, Inc.
(parent company only):
<TABLE>
<CAPTION>
Condensed Balance Sheets
------------------------
December 31
----------------------
1996 1995
---- ----
Assets:
-------
<S> <C> <C>
Cash $ 97,948 $ 73,988
Investment in subsidiary 6,437,266 5,726,092
Goodwill 220,675 238,558
Deferred income taxes 18,308 25,900
Refundable income taxes - 61,800
Tax benefit receivable 120,937 7,754
--------------------------
$6,895,134 $6,134,092
==========================
Liabilities and stockholders' equity
------------------------------------
Long-term debt $3,450,000 $3,450,000
Accrued interest payable 48,226 51,706
Stockholders' equity 3,396,908 2,632,386
--------------------------
$6,895,134 $6,134,092
==========================
</TABLE>
F - 25
<PAGE> 60
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Condensed Statement of Earnings
-------------------------------
Years Ended December 31
-----------------------
1996 1995
---- ----
<S> <C> <C>
Income:
Dividends from subsidiary $ 292,795 $ 20,757
--------------------------
Expenses:
Interest 289,321 212,060
Professional services 66,950 4,001
Other expenses 10,123 12,195
--------------------------
Total expense 366,394 228,256
--------------------------
(Loss) before tax benefit and equity in
undistributed subsidiary income (73,599) (207,499)
Tax benefit 132,297 87,701
Equity in undistributed subsidiary income 25,822 -
--------------------------
Net income (loss) $ 84,520 $(119,798)
==========================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
---------------------------------
Years Ended December 31
-------------------------
1996 1995
---- ----
<S> <C> <C>
Operating Activities:
Net income (loss) $ 84,520 $ (119,798)
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed subsidiary earnings (25,822) -
Deferred income taxes 7,592 (25,900)
Amortization 17,883 17,883
(Increase) in other assets (51,383) (29,960)
(Decrease) increase in other liabilities (3,480) 51,706
-----------------------------
Net cash provided (used) by operating activities 29,310 (106,069)
-----------------------------
Investing activities:
Capital contribution to subsidiary bank (800,000) (3,600,000)
Dividends received in excess of subsidiary earnings - 138,564
Acquisition of minority interest - (144,414)
-----------------------------
Net cash (used) by investing activities (800,000) (3,605,850)
-----------------------------
Financing activities:
Proceeds from note payable - 3,450,000
Issue common stock, net of issuance costs 794,650 275,487
-----------------------------
Net cash provided by financing activities 794,650 3,725,487
-----------------------------
Change in cash and equivalents 23,960 13,568
Cash and equivalents - beginning 73,988 60,420
-----------------------------
Cash and equivalents - ending $ 97,948 $ 73,988
=============================
</TABLE>
F - 26
<PAGE> 61
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
The Company is a legal entity separate and distinct from its banking
subsidiary. The principal sources of cash flow for the Company, to pay
dividends and service Company debt, are dividends from its banking
subsidiary. There are statutory and regulatory limitations on the payment
of dividends from banking subsidiaries to their parent companies as well as
statutory and regulatory restrictions on the payment of dividends by the
Company (note 11 and 12).
14. Stock Split
During 1995, the Board of Directors approved a stock restructuring
increasing the shares authorized to 1,000,000 and reducing the par value to
one cent per share. Immediately thereafter, existing common $1 par value
shares were exchanged for 300 new $0.01 par value shares rounded up to the
nearest whole share. The restructuring had no effect on net stockholders'
equity of the Company.
15. Fair Value of Financial Instruments
The fair value of financial instruments at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 2,771,810 $ 2,771,810 $ 2,588,055 $ 2,588,055
Federal funds sold 6,446,143 6,446,143 3,779,913 3,779,913
Investment securities:
Derivatives 500,000 493,000 500,000 450,313
All others 14,622,740 14,622,049 9,726,895 9,734,950
--------------------------------------------------------------------
Total investment
securities 15,122,740 15,115,049 10,226,895 10,185,263
--------------------------------------------------------------------
Loans, net 34,879,828 34,644,611 21,574,603 21,566,860
--------------------------------------------------------------------
$59,220,521 $58,977,613 $38,169,466 $38,120,091
====================================================================
</TABLE>
F - 27
<PAGE> 62
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial liabilities:
Deposits $55,677,131 $55,759,105 $34,512,174 $34,581,064
Securities sold under
repurchase agreements 175,000 175,000 - -
Long-term debt 3,450,000 3,450,000 3,450,000 3,450,000
--------------------------------------------------------------------
$59,302,131 $59,384,105 $37,962,174 $38,031,064
====================================================================
Unrecognized financial
instruments:
Commitments to extend
credit $ - $ - $ - $ -
Standby letters of credit $ - $ - $ - $ -
--------------------------------------------------------------------
$ - $ - $ - $ -
====================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
Cash and Federal funds sold:
For these short-term instruments, the carrying value is a
reasonable estimate of fair value.
Investments:
Fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans, net
The fair value of fixed rate loans is estimated by discounting
expected future cash flows using current rates at which similar
fixed rate loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. The carrying value
of variable rate loans is assumed to approximate fair value.
F - 28
<PAGE> 63
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
Deposits:
The fair value of demand deposits, savings accounts and NOW and
money market accounts is the amount payable on demand at the
reporting date. The fair value of fixed-rate-maturity certificates
of deposits is estimated using the rates currently offered for
deposits of similar remaining maturities using a discounted cash
flow method.
Securities sold under repurchase agreements:
The fair value of fixed-rate term securities sold under repurchase
agreements is estimated using the rates currently in effect
offered for repurchase agreements of similar remaining maturities
using a discounted cash flow method.
Long-term debt:
Rates currently available to the Company for debt with similar
terms and maturities are used to estimate fair value of existing
debt using a discounted cash flow method.
Commitments to extend credit and standby letters of credit:
The fair value of commitments is estimated by considering the fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counter parties. For fixed rate loan
commitments, fair value also considers current level of interest
rates and the committed rates. The fair value of letters of credit
is based on fees currently charged for similar agreements. For
this caption, the "carrying amount" represents the accrual or
deferred income (fees) arising from the related unrecognized
financial instruments.
16. Profit-Sharing Plan
The Company's subsidiary, The Citizens Bank of East Tennessee, adopted a
profit-sharing retirement plan on July 1, 1995. All employees who meet
certain age and length of service requirements are eligible to participate
on a voluntary basis. Benefits, which become 20% vested after two years,
40% after three years, 60% after four years, 80% after five years, and 100%
after six years, are paid on death, disability or retirement.
The Board of Directors has discretion in establishing the amount of the
Bank's contributions to the plan, if any. Participants may make
voluntary, after-tax contributions up to 20% of their compensation up to
$9,500 per year. The participants are fully vested in any voluntary
contributions they make. The Bank did not made any contributions to the
plan for the year ended December 31, 1996 and 1995.
F - 29
<PAGE> 64
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
17. Securities Sold Under Repurchase Agreements
At December 31, 1996, the book value of the securities sold under
repurchase agreements, including accrued interest, was $488,854. The
maximum amount outstanding during 1996 was $428,804. The daily average of
outstanding agreements during 1996 was $315,006. The securities underlying
the agreements are maintained under the Bank's control.
18. Reclassification
Certain reclassifications have been made to the December 31, 1995 financial
statements in order to conform with the presentation of the December 31,
1996 financial statements.
19. Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued SFAS No. 123
entitled "Accounting for Stock Based Compensation." The statement is
generally effective for financial statements issued for years beginning
after December 15, 1995. The Statement establishes a fair-value based
method of accounting for stock based compensation plans and similar
arrangements and a fair-value basis for measuring transactions in which an
entity acquires goods or services from non-employees utilizing entity stock
or similar equity instruments. The Company does not currently employ stock
based compensation plans or similar arrangements. The adoption of SFAS No.
123 did not have any impact upon the financial position or results of
operations of the Company.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an
amendment to Statement No. 65" ("SFAS No. 122"), on May 12, 1995. SFAS No.
122 provides guidance for recognition of mortgage servicing rights ("MSR")
as an asset when a mortgage loan is sold or securitized and servicing
rights retained, regardless of how those servicing rights were acquired.
This eliminates the previously existing accounting distinction between
rights to service mortgage loans for others that are acquired through loan
origination activities and those acquired through purchase transactions.
Impairment of the recorded MSR is to be measured periodically using a
current fair value approach applied to each stratum of the disaggregated
mortgage-servicing portfolio. Provisions of SFAS No. 122 were effective for
fiscal years beginning after December 15, 1995. The adoption of SFAS No.
122 did not have a material impact upon the financial position or results
of operations of the Company.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and the Extinguishment of Liabilities," establishes, among other things,
new criteria for determining whether a transfer of financial assets in
exchange for cash and other consideration should be accounted for as a sale
or as a pledge of collateral in a secured borrowing. SFAS No. 125 also
establishes new accounting requirements for pledged collateral. As issued,
SFAS No.125 is generally effective for transactions occurring after
December 31, 1996 and should be applied on a prospective basis. This
statement
F - 30
<PAGE> 65
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
supercedes SFAS No. 122 and itself amends various previous pronouncements
of the Financial Accounting Standards Board. Adoption by the Company on
January 1, 1997 is not expected to have a material impact upon the
Company's earnings or financial position.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No.
121 addresses situations where information indicates that a company might
be unable to recover, through future operations or sale, the carrying
amount of long-lived assets, identified intangibles and goodwill related
to those assets. This Statement is effective for fiscal years beginning
after December 31, 1995. The adoption of SFAS No. 121 did not have a
material impact upon the financial position or results of operation of
the Company.
20. Selected Quarterly Financial Data (Unaudited)
Summarized below are selected financial data regarding results of
operations for the periods indicated.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------
1996
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $839,652 $962,576 $1,075,026 $1,156,482 $4,033,736
Net interest income 367,367 425,788 497,035 492,939 1,783,129
Provision for loan losses 15,000 15,000 32,500 37,500 100,000
Non-interest income 38,747 43,036 49,758 47,591 179,132
Non-interest expense 451,556 412,783 427,972 431,107 1,723,418
Income before income taxes (60,442) 41,041 86,321 71,923 138,843
Net (loss) income $(38,464) $ 25,157 $ 53,366 $ 44,461 $ 84,520
==========================================================
Weighted average common
shares outstanding 448,565 465,980 494,619 525,717 483,884
==========================================================
Net (loss) income per
weighted average common
share outstanding $ (0.09) $ 0.05 $ 0.11 $ 0.09 $ 0.17
==========================================================
</TABLE>
F - 31
<PAGE> 66
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
-----------------------------------------------------------
1995
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $453,858 $553,558 $ 631,351 $ 713,371 $2,352,138
Net interest income 284,509 276,135 291,989 325,624 1,178,257
Provision for loan losses 9,000 9,000 9,000 9,000 36,000
Non-interest income 23,519 23,210 22,293 34,850 103,872
Non-interest expense 300,324 349,723 392,002 410,236 1,452,285
Income before income taxes (1,427) (58,042) (86,637) (60,050) (206,156)
Net (loss) income $ 533 $(35,388) $ (59,279) $ (25,664) $ (119,798)
==========================================================
Weighted average common
shares outstanding 344,700 402,978 402,978 430,334 411,132
==========================================================
Net (loss) income per
weighted average common
share outstanding $ 0.00 $ (0.08) $ (0.15) $ (0.06) $ (0.29)
==========================================================
</TABLE>
The sum of the net (loss) income per weighted average common share
outstanding per quarter may not equal the net (loss) or income per
weighted average common share outstanding for the year because of
rounding effects within the quarters.
F - 32
<PAGE> 67
INDEPENDENT AUDITOR'S REPORT
Our audit was made for the purpose of forming an opinion of the consolidated
financial statements taken as a whole. The consolidating information
represented on the following pages is presented for purposes of additional
analysis and is not a required part of the consolidated financial statements.
Such information has been subjected to the auditing procedures applied in the
audit of the consolidated financial statements and, in our opinion, the
information is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.
January 30, 1997
Nashville, Tennessee
F - 33
<PAGE> 68
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Balance Sheet
December 31, 1996
<TABLE>
<CAPTION>
Volunteer Citizens Bank Consolidated
Bancorp, of East Volunteer
Inc. Tennessee Bancorp, Inc
ASSETS (Parent) (Subsidiary) Eliminations and Subsidiary
------ -------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 97,948 $ 2,771,810 $ (97,948) $ 2,771,810
Federal funds sold - 6,446,143 - 6,446,143
Investment in subsidiary 6,437,266 - (6,437,266) -
Investment securities - 15,122,740 - 15,122,740
Loans, net - 34,879,828 - 34,879,828
Accrued interest receivable - 610,654 - 610,654
Premises and equipment - 3,217,064 - 3,217,064
Goodwill 220,675 - - 220,675
Other assets 139,245 124,295 (139,245) 124,295
------------------------------------------------------------
Total assets $6,895,134 $63,172,534 $(6,674,459) $63,393,209
============================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ - $55,775,079 $ (97,948) $55,677,131
Long-term debt 3,450,000 - - 3,450,000
Accrued interest payable 48,226 506,991 - 555,217
Other liabilities - 424,507 (120,937) 303,570
Deferred income taxes - 28,691 (18,308) 10,383
------------------------------------------------------------
Total liabilities 3,498,226 56,735,268 (237,193) 59,996,301
------------------------------------------------------------
Stockholders' equity:
Capital stock 5,258 666,500 (666,500) 5,258
Additional paid-in capital 1,761,552 5,068,016 (5,068,016) 1,761,552
Retained earnings 1,679,960 752,612 (752,612) 1,679,960
Net unrealized (loss) on securities
available for sale (49,862) (49,862) 49,862 (49,862)
------------------------------------------------------------
Total stockholders' equity 3,396,908 6,437,266 (6,437,266) 3,396,908
------------------------------------------------------------
Total liabilities and stockholders'
equity $6,895,134 $63,172,534 $(6,674,459) $63,393,209
============================================================
</TABLE>
F - 34
<PAGE> 69
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Balance Sheet
December 31, 1995
<TABLE>
<CAPTION>
Volunteer Citizens Bank Consolidated
Bancorp, of East Volunteer
Inc. Tennessee Bancorp, Inc
ASSETS (Parent) (Subsidiary) Eliminations and Subsidiary
------ -------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 73,988 $ 2,588,055 $ (73,988) $ 2,588,055
Federal funds sold - 3,779,913 - 3,779,913
Investment in subsidiary 5,726,092 - (5,726,092) -
Investment securities - 10,226,895 - 10,226,895
Loans, net - 21,574,603 - 21,574,603
Accrued interest receivable - 434,555 - 434,555
Premises and equipment - 1,987,103 - 1,987,103
Goodwill 238,558 - - 238,558
Other assets 95,454 194,039 (33,654) 255,839
---------------------------------------------------------------------
Total assets $6,134,092 $40,785,163 $(5,833,734) $41,085,521
=====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits $ - $34,586,162 $ (73,988) $34,512,174
Long-term debt 3,450,000 - - 3,450,000
Accrued interest payable 51,706 278,342 - 330,048
Other liabilities - 9,550 (7,754) 1,796
Deferred income taxes - 185,017 (25,900) 159,117
---------------------------------------------------------------------
Total liabilities 3,501,706 35,059,071 (107,642) 38,453,135
---------------------------------------------------------------------
Stockholders' equity:
Capital stock 4,463 666,500 (666,500) 4,463
Additional paid-in capital 967,697 4,268,016 (4,268,016) 967,697
Retained earnings 1,595,440 726,790 (726,790) 1,595,440
Net unrealized gain on securities
available for sale 64,786 64,786 (64,786) 64,786
---------------------------------------------------------------------
Total stockholders' equity 2,632,386 5,726,092 (5,726,092) 2,632,386
---------------------------------------------------------------------
Total liabilities and
stockholders' equity $6,134,092 $40,785,163 $(5,833,734) $41,085,521
=====================================================================
</TABLE>
F-35
<PAGE> 70
VOLUNTEER BANCORP, INC
Consolidating Statement of Earnings
December 31, 1996
<TABLE>
<CAPTION>
Volunteer Citizens Bank Consolidated
Bancorp, of East Volunteer
Inc. Tennessee Bancorp, Inc
(Parent) (Subsidiary) Eliminations and Subsidiary
-------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ - $ 2,859,280 $ - $ 2,859,280
Interest on federal funds - 227,391 - 227,391
Interest and dividends on
investments:
Taxable - 943,940 - 943,940
Exempt from federal income taxes - 3,125 - 3,125
------------------------------------------------------------
Total interest income - 4,033,736 - 4,033,736
------------------------------------------------------------
Interest expense:
Interest on deposits - 1,950,458 - 1,950,458
Interest on other borrowed funds 289,321 10,828 - 300,149
------------------------------------------------------------
Total interest expense 289,321 1,961,286 - 2,250,607
------------------------------------------------------------
Net interest income (289,321) 2,072,450 - 1,783,129
Provision for possible loan losses - 100,000 - 100,000
------------------------------------------------------------
Net interest income after loan
provision (289,321) 1,972,450 - 1,683,129
------------------------------------------------------------
Non-interest income:
Equity in earnings of subsidiary 318,617 - (318,617) -
Service charges - 67,238 - 67,238
Other income - 111,894 - 111,894
------------------------------------------------------------
318,617 179,132 (318,617) 179,132
------------------------------------------------------------
Non-interest expense:
Salaries and benefits - 975,967 - 975,967
Other 77,073 670,378 - 747,451
------------------------------------------------------------
77,073 1,646,345 - 1,723,418
------------------------------------------------------------
(Loss) income before taxes (47,777) 505,237 (318,617) 138,843
Income tax (benefit) expense (132,297) 186,620 - 54,323
------------------------------------------------------------
Net (loss) income $ 84,520 $ 318,617 $(318,617) $ 84,520
============================================================
</TABLE>
F - 36
<PAGE> 71
VOLUNTEER BANCORP, INC
Consolidating Statement of Earnings
December 31, 1995
<TABLE>
<CAPTION>
Volunteer Citizens Bank Consolidated
Bancorp, of East Volunteer
Inc. Tennessee Bancorp, Inc
(Parent) (Subsidiary) Eliminations and Subsidiary
--------------- ------------- ------------- --------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ - $ 1,637,442 $ - $1,637,442
Interest on federal funds - 122,203 - 122,203
Interest and dividends on
investments:
Taxable - 581,766 - 581,766
Exempt from federal income taxes - 10,727 - 10,727
-----------------------------------------------------------
Total interest income - 2,352,138 - 2,352,138
-----------------------------------------------------------
Interest expense:
Interest on deposits - 961,786 - 961,786
Interest on other borrowed funds 212,060 35 - 212,095
-----------------------------------------------------------
Total interest expense 212,060 961,821 - 1,173,881
-----------------------------------------------------------
Net interest income (212,060) 1,390,317 - 1,178,257
Provision for possible loan losses - 36,000 - 36,000
-----------------------------------------------------------
Net interest income after loan
provision (212,060) 1,354,317 - 1,142,257
-----------------------------------------------------------
Non-interest income:
Equity in earnings of subsidiary 20,757 - (20,757) -
Service charges - 44,096 - 44,096
Other income - 59,776 - 59,776
-----------------------------------------------------------
20,757 103,872 (20,757) 103,872
-----------------------------------------------------------
Non-interest expense:
Salaries and benefits - 839,476 - 839,476
Other 16,196 596,613 - 612,809
-----------------------------------------------------------
16,196 1,436,089 - 1,452,285
-----------------------------------------------------------
(Loss) income before taxes (207,499) 22,100 (20,757) (206,156)
Income tax (benefit) expense (87,701) 1,343 - (86,358)
-----------------------------------------------------------
Net (loss) income $ (119,798) $ 20,757 $ (20,757) $ (119,798)
===========================================================
</TABLE>
F - 37
<PAGE> 72
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Statement of Cash Flows
December 31, 1996
<TABLE>
<CAPTION>
Volunteer Citizens Bank Consolidated
Bancorp, of East Volunteer
Inc. Tennessee Bancorp, Inc
(Parent) (Subsidiary) Eliminations and Subsidiary
--------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Cash Flows From Operating
Activities
Net income $ 84,520 $ 318,587 $ (318,587) $ 84,520
Adjustments to reconcile net
income to net cash provided by
operating activities:
Subsidiary earnings undistributed (25,822) - 25,822 -
Deferred income taxes 7,592 (86,125) - (78,533)
Provision for loan losses - 100,000 - 100,000
Depreciation and amortization 17,883 110,094 - 127,977
Securities (gains) - (13,311) - (13,311)
(Increase) in other assets (51,383) (106,355) 113,183 (44,555)
Increase in other liabilities (3,480) 643,606 (113,183) 526,943
-------------------------------------------------------
Net cash provided by operating
activities 29,310 966,496 (292,765) 703,041
-------------------------------------------------------
Cash Flows From Investing Activities:
Contribution of capital of
subsidiary (800,000) - 800,000 -
(Increase) in investment securities - (5,242,383) - (5,242,383)
(Increase) in loans - (13,405,225) - (13,405,225)
Capital expenditures - (1,340,055) - (1,340,055)
-------------------------------------------------------
Net cash (used) by investing
activities (800,000) (19,987,663) 800,000 (19,987,663)
-------------------------------------------------------
Cash Flows From Financing
Activities:
Increase in deposits - 21,188,917 (23,960) 21,164,957
Increase in securities sold under
repurchase agreements - 175,000 - 175,000
Issue common stock 794,650 - - 794,650
Dividends paid - (292,765) 292,765 -
Capital contribution from parent - 800,000 (800,000) -
-------------------------------------------------------
Net cash provided from financing
activities 794,650 21,871,152 (531,195) 22,134,607
-------------------------------------------------------
Change in cash and equivalents 23,960 2,849,985 (23,960) 2,849,985
Cash and equivalents - beginning 73,988 6,367,968 (73,988) 6,367,968
-------------------------------------------------------
Cash and equivalents - ending $ 97,948 $ 9,217,953 $ (97,948) $ 9,217,953
=======================================================
</TABLE>
F - 38
<PAGE> 73
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Statement of Cash Flows
December 31, 1995
<TABLE>
<CAPTION>
Volunteer Citizens Bank Consolidated
Bancorp, of East Volunteer
Inc. Tennessee Bancorp, Inc
(Parent) (Subsidiary) Eliminations and Subsidiary
-------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash Flows From Operating
Activities
Net (loss) income $ (119,798) $ 20,757 $ (20,757) $ (119,798)
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Deferred income taxes (25,900) 64,080 - 38,180
Provision for loan losses - 36,000 - 36,000
Depreciation and amortization 17,883 69,828 - 87,711
Securities losses - 4,810 - 4,810
(Increase) in other assets (29,960) (316,362) (33,654) (379,976)
Increase in other liabilities 51,706 164,571 33,654 249,931
-----------------------------------------------------------
Net cash (used) provided by
operating activities (106,069) 43,684 (20,757) (83,142)
-----------------------------------------------------------
Cash Flows From Investing Activities:
Contribution of capital of
subsidiary (3,600,000) - 3,600,000 -
Dividends in excess of earnings 138,564 - (138,564) -
(Increase) in investment securities - (2,255,060) - (2,255,060)
(Increase) in loans - (8,935,473) - (8,935,473)
Acquisition of minority interest (144,414) - - (144,414)
Capital expenditures - (1,272,837) - (1,272,837)
-----------------------------------------------------------
Net cash (used) by investing
activities (3,605,850) (12,463,370) 3,461,436 (12,607,784)
-----------------------------------------------------------
Cash Flows From Financing
Activities:
Increase in deposits - 12,520,627 (13,568) 12,507,059
Proceeds from long-term debt 3,450,000 - - 3,450,000
Issue common stock 275,487 - - 275,487
Dividends paid - (159,321) 159,321 -
Capital contribution from parent - 3,600,000 (3,600,000) -
-----------------------------------------------------------
Net cash provided from financing
activities 3,725,487 15,961,306 (3,454,247) 16,232,546
-----------------------------------------------------------
Change in cash and equivalents 13,568 3,541,620 (13,568) 3,541,620
Cash and equivalents - beginning 60,420 2,826,348 (60,420) 2,826,348
-----------------------------------------------------------
Cash and equivalents - ending $ 73,988 $ 6,367,968 $ (73,988) $ 6,367,968
===========================================================
</TABLE>
F - 39
<PAGE> 74
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
VOLUNTEER BANCORP, INC.
By: /s/ Reed D. Matney
-------------------
President
Date: March 20, 1997
In accordance with the requirements of the Exchange Act, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ William E. Phillips Chairman of the Board and Director March 20, 1997
/s/ H. Lyons Price Secretary/Treasurer and Director March 20, 1997
(principal financial and accounting officer)
/s/ Reed D. Matney President and Director March 20, 1997
(principal executive officer)
/s/ Carlin Greene Director March 20, 1997
/s/ Douglas Price Director March 20, 1997
/s/ Gary Varnell Director March 20, 1997
/s/ Truett Pierce Director March 20, 1997
/s/ George Brooks Director March 20, 1997
/s/ Shirley Price Director March 20, 1997
</TABLE>
<PAGE> 75
<TABLE>
<S> <C> <C>
/s/ Eddie Freeman Director March 20, 1997
/s/ Neil Miller Director March 20, 1997
/s/ Lawrence Gray Director March 20, 1997
/s/ Scott Collins Director March 20, 1997
/s/ Leon Gladson Director March 20, 1997
</TABLE>
<PAGE> 1
Exhibit 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated January 30, 1997, related to the consolidated balance sheets of Volunteer
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, changes in stockholders' equity, and Form
10-KSB for the year ended December 31, 1996, for Volunteer Bancorp, Inc.
Welch & Associates, Ltd.
Nashville, Tennessee
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATMENT OF VOLUNTEER BANCORP, INC. FOR THE YEAR ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,771,810
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,446,143
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,518,893
<INVESTMENTS-CARRYING> 1,603,847
<INVESTMENTS-MARKET> 1,596,156
<LOANS> 35,337,260
<ALLOWANCE> 457,432
<TOTAL-ASSETS> 63,393,209
<DEPOSITS> 55,677,131
<SHORT-TERM> 0
<LIABILITIES-OTHER> 869,170
<LONG-TERM> 3,450,000
0
0
<COMMON> 5,258
<OTHER-SE> 3,391,650
<TOTAL-LIABILITIES-AND-EQUITY> 63,393,209
<INTEREST-LOAN> 2,859,280
<INTEREST-INVEST> 947,065
<INTEREST-OTHER> 227,391
<INTEREST-TOTAL> 4,033,736
<INTEREST-DEPOSIT> 1,950,458
<INTEREST-EXPENSE> 2,250,607
<INTEREST-INCOME-NET> 1,783,129
<LOAN-LOSSES> 100,000
<SECURITIES-GAINS> 13,311
<EXPENSE-OTHER> 1,723,418
<INCOME-PRETAX> 138,843
<INCOME-PRE-EXTRAORDINARY> 84,520
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 84,520
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.43
<LOANS-NON> 97,919
<LOANS-PAST> 84,007
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 401,066
<CHARGE-OFFS> 79,228
<RECOVERIES> 35,594
<ALLOWANCE-CLOSE> 457,432
<ALLOWANCE-DOMESTIC> 457,432
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
