<PAGE> 1
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
For the fiscal year ended December 31, 1997
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)
210 EAST MAIN STREET
ROGERSVILLE, TENNESSEE 37857
(Address of principal executive offices and Zip Code)
Issuer's telephone number (423) 272-2200
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK
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, 1997
WERE $5,674,463.
THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 20, 1998 IS APPROXIMATELY
$5,979,390. (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 29, 1998,
COMMON STOCK, $.01 PAR VALUE, 539,027.
Documents Incorporated by Reference: NONE
<PAGE> 2
PART I
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 $78 million at December 31, 1997, is headquartered in
Rogersville, Tennessee with offices in Church Hill and Sneedville, 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:
- 2 -
<PAGE> 3
<TABLE>
<CAPTION>
1997 1996
---------------------------------- --------------------------------
(Fully taxable equivalent) Interest Average Interest Average
(Dollars in thousands except Average Income/ Yields/ Average Income/ Yields/
for per share data) Balance Expense Rate Balance Expense Rate
- ------------------- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans net of unearned income $42,185 $4,141 9.82% $28,647 $2,859 9.98%
U.S. Treasury and other U.S.
government agencies 17,065 1,113 6.52% 14,669 944 6.44%
States and municipalities 102 8 7.84% 63 5 7.94%
Federal funds sold 3,875 202 5.21% 4,424 227 5.13%
------- -------
Total interest-earning
assets/interest income 63,227 5,464 8.64% 47,803 4,035 8.44%
------- ------ -------
Cash and due from banks 1,983 1,766
Other assets 4,675 3,650
Allowance for loan losses (550) (433)
------- -------
Total $69,335 $52,786
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Demand deposits $11,742 $423 3.60% $10,526 $374 3.55%
Savings 2,222 66 2.97% 1,614 48 2.97%
Individual retirement accounts 4,382 246 5.61% 3,095 176 5.69%
Time certificates 35,101 2,029 5.78% 23,521 1,352 5.75%
Securities sold under repurchase 709 43 6.06% 315 11 3.49%
Note payable 3,281 264 8.05% 3,450 290 8.41%
------- ------ ------- ------
Total interest-bearing
liabilities/interest expense 57,437 3,071 5.35% 42,521 2,251 5.29%
------- -------
Non-interest bearing demand
deposits 7,710 6,655
Other liabilities 624 663
Stockholders' equity 3,564 2,947
------- -------
Total $69,335 $52,786
======= =======
Net interest earnings $2,393 $1,784
====== ======
Net interest on interest earning
assets 3.78% 3.73%
===== =====
Return on average assets 0.31% 0.16%
Return on average equity 6.09% 2.88%
Cash dividends declared $0 $0
Dividend payout ratio N/A N/A
</TABLE>
- 3 -
<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, 1997 December 31, 1996
versus versus
December 31, 1996 December 31, 1995
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 .............. $1,330 $(48) $ 1,282 $ 1,201 $ 21 $ 1,222
U.S. Treasury and other U.S.
government agency securities ............ 156 13 169 329 33 362
States and municipal securities ............ 3 0 3 (7) (4) (11)
Federal funds sold ......................... (29) 4 (25) 119 (14) 105
------- ---- ------- ------- ---- -------
Total interest income ............. 1,460 (31) 1,429 1,643 35 1,678
------- ---- ------- ------- ---- -------
Increase (decrease) in(2):
Demand deposits ............................ 44 5 49 65 14 79
Savings deposits ........................... 18 (0) 18 27 0 27
Individual retirement accounts ............. 72 (2) 70 55 3 58
Time certificates .......................... 669 8 677 802 22 824
Securities sold under repurchase agreements 32 0 32 11 0 11
Note payable ............................... (14) (12) (26) 91 (13) 78
------- ---- ------- ------- ---- -------
Total interest expense ............ 821 (1) 820 1,052 25 1,077
------- ---- ------- ------- ---- -------
Increase (decrease) in net
interest income .......................... $ 639 $(30) $ 609 $ 591 $ 10 $ 601
======= ==== ======= ======= ==== =======
</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. The change
attributable to securities sold under repurchase agreements is allocated 100% as
a change in volume for 1996.
(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, 1997, the Company had
a negative cumulative repricing gap within one year of approximately $29.3
million, or approximately 40.82% 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, 1997 and 1996. 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, 1997
------------------------------------------------------------------------------
Within After 3 months After 12 months
3 months Within 12 months Within 5 years After 5 years Total
-------- ---------------- -------------- ------------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans ..................................... $ 13,174 $ 11,901 $ 23,140 $ 468 $48,683
Investment Securities:
Available for sale.................... 0 498 5,766 10,845 17,109
Held to maturity ..................... 500 325 200 60 1,085
Federal funds sold ........................ 4,842 0 0 0 4,842
------- -------
Total earning assets.............. $ 18,516 $ 12,724 $ 29,106 $11,373 $71,719
======== ======== ======== ======= =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits.................. $ 31,040 $ 24,993 $ 4,238 $ 0 $60,271
Securities sold under repurchase...........
agreements................................. 1,217 0 0 0 1,217
Long-term debt ............................ 3,265 0 0 0 3,265
-------- -------- -------- ------- -------
Total interest-bearing liabilities......... $ 35,522 $ 24,993 $ 4,238 $ 0 $64,753
======== ======== ======== ======= =======
Net repricing gap ......................... $(17,006) $(12,269) $ 24,868 $11,373 $ 6,966
======== ======== ======== ======= =======
Rate sensitivity gap:
Net repricing gap as a percentage
of total earning assets ................. -23.71% -17.11% 34.67% 15.86% 9.71%
======== ======== ======== ======= =======
Cumulative gap ............................ $(17,006) $(29,275) $ (4,407) $ 6,966
======== ======== ======= =======
Cumulative gap as a percentage of
total earning assets .................... -23.71% -40.82% -6.14% 9.71%
======== ======== ======= =======
</TABLE>
- 5 -
<PAGE> 6
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------
Within After 3 months After 12 months
3 months Within 12 months Within 5 years After 5 years Total
-------- ---------------- -------------- ------------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
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
Securities sold under repurchase ........
agreements .............................. 175 0 0 0 175
Long-term debt .......................... 3,450 0 0 0 3,450
-------- -------- -------- ------- -------
Total interest-bearing
liabilities .................. $ 31,185 $ 18,146 $ 2,071 $ 0 $51,402
======== ======== ======== ======= =======
Net repricing gap ....................... ($10,466) $(11,398) $ 19,211 $ 8,417 $ 5,764
======== ======== ======== ======= -------
Rate sensitivity gap:
Net repricing gap as a percentage
of total earning assets ............... -18.31% -19.94% 33.61% 14.72% 10.08%
======== ======== ======== ======= =======
Cumulative gap .......................... $(10,466) $(21,864) $ (2,653) $ 5,764
======== ======== ======== =======
Cumulative gap as a percentage of
total earning assets .................. -18.31% -38.25% -4.64% 10.08%
======== ======== ======== =======
</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,
1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Non interest-bearing deposits:
Individuals, partnerships and corporations .................. $ 8,570 $ 7,531
U. S. Government and states and political subdivisions ...... 83 37
Certified and official checks ............................... 164 332
------- -------
Total non interest-bearing deposits ....................... 8,817 7,900
------- -------
Interest-bearing deposits:
Interest-bearing demand accounts ............................ 12,636 11,151
Savings accounts ............................................ 2,585 1,861
Individual retirement accounts .............................. 1,674 1,609
Certificates of deposit, less than $100,000 ................. 33,405 24,507
Certificates of deposit, greater than $100,000 .............. 9,970 8,649
------- -------
Total interest-bearing deposits ........................... 60,270 47,777
------- -------
Total deposits ............................................ $69,087 $55,677
======= =======
</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>
December 31,
------------------------------------------------------------
1997 1996
----------------------------- --------------------------
(In Thousands)
<S> <C> <C>
Non interest-bearing deposits ......... $ 7,710 $ 6,655
Savings deposits ...................... 2,222 2.97% 1,614 2.97%
Individual retirement accounts ........ 4,382 5.61% 3,095 5.69%
Time deposits ......................... 35,101 5.78% 23,521 5.75%
Interest-bearing demand deposits ...... 11,742 3.60% 10,526 3.55%
------- -------
Total deposits ............... $61,157 $45,411
======= =======
</TABLE>
At December 31, 1997 and 1996, time deposits greater than $100,000
aggregated approximately $10.0 million and $8.6 million, respectively. The
following table indicates, as of December 31, 1997 and 1996, the dollar amount
of $100,000 or more deposits by the time remaining until maturity:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- -----------------------------------
1 Year 1 Year
3 Months 3 to 12 through 3 Months 3 to 12 through
or less Months 5 years Total or less Months 5 years Total
------- ------ ------- ----- ------- ------ ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Time certificates $3,199 5,625 1,146 $9,970 $3,262 4,967 420 $8,649
====== ===== ===== ====== ====== ===== === ======
</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,
1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(In Thousands)
<S> <C> <C>
Investment securities:
Available for sale ........ $ 17,109 $ 13,519
Held to maturity .......... 1,085 1,604
Federal funds sold .......... 4,842 6,446
Loans:
Real estate ............... 32,760 23,398
Commercial and other ...... 15,923 12,199
-------- --------
Total loans ............. 48,683 35,597
Less unearned income ..... (213) (260)
-------- --------
Loans, net of unearned
income .................. 48,470 35,337
-------- --------
Interest earning assets ..... $ 71,506 $ 56,906
======== ========
</TABLE>
INVESTMENT PORTFOLIO
At year end 1997, 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, 1997 and
1996.
<TABLE>
<CAPTION>
1997 1996
------- --------
(In Thousands)
<S> <C> <C>
Held to maturity:
U.S. Treasury Securities $ 0 $ 0
Obligations of U.S. Government agencies 1,085 1,604
Obligations of states and political subdivisions 0 0
------- -------
$ 1,085 $ 1,604
======= =======
Available for sale:
U.S. Treasury securities $ 3,964 $ 4,410
Obligations of U.S. Government agencies 13,042 9,006
Obligations of states and political subdivisions 103 103
------- -------
$17,109 $13,519
======= =======
</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, 1997 and 1996. 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>
1997 1996
-------------------------------------- ---------------------------------
Estimated Weighted Estimated Weighted
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Held to maturity:
- -----------------
Obligations of U.S.
Government agencies:
Due within 1 year .......................... $ 500 $ 494 $ 250 $ 251
Due after 1 year but within 5 years ........ 250 247 1,001 987
Due after 5 years but within
10 years ................................. 200 199 200 196
Due after 10 years ......................... 135 143 153 162
------- ------- ------- -------
Total ................................... $ 1,085 $ 1,083 5.64% $ 1,604 $ 1,596 5.85%
======= ======= ======= =======
Available for sale:
- -------------------
U.S. Securities:
Due within 1 year .......................... $ 493 $ 498 $ 500 $ 504
Due after 1 year but within 5 years ........ 3,435 3,466 3,883 3,906
------- ------- ------- -------
Total .................................... 3,928 3,964 6.19% 4,383 4,410 6.21%
------- ------- ------- -------
Obligations of U.S. Government
agencies:
Due within 1 year .......................... 704 702 248 250
Due after 1 year but within 5 years ........ 2,726 2,745 1,797 1,791
Due after 5 years but within 10 years ...... 9,567 9,595 7,071 6,965
------- ------- ------- -------
Total ..................................... 12997 13,042 6.29% 9,116 9,006 6.63%
------- ------- ------- -------
Obligations of states and political
subdivisions:
Due after 5 years but within 10 years ...... 100 103 5.00% 100 103 4.99%
------- ------- ------- -------
Total ........................................ $17,025 $17,109 6.26% $13,599 $13,519 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.
The Company's investment securities portfolio of $18,193,760 at
December 31, 1997, consisted of $1,085,104 of securities held to maturity, which
are carried at amortized cost and $17,108,656 of securities available for sale
which are carried at market value. In addition, unrealized gains on investment
securities available for sale were $98,995 and unrealized losses were $14,997.
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.
- 9 -
<PAGE> 10
As reflected in Note 2 to Consolidated Financial Statements, the
investment securities held to maturity had unrealized gains of $8,563 and
unrealized losses of $10,429 at December 31, 1997, compared to $9,264 unrealized
gains and $16,955 unrealized losses at year end December 31, 1996.
At December 31, 1997, the Company had approximately $250,000 of
structured notes in the held to maturity category, which constitutes
approximately 1.4% 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 loss in these securities was approximately $3,000 or 28.8% of total
gross unrealized losses 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, 1997, 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 2.75% of the investment portfolio. The
unrealized loss of approximately $6,000 associated with these notes represented
approximately 57.5% 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 $48,683,000 at December 31, 1997, reflected an increase
of $13,086,000 compared to total loans for the year ended December 31, 1996.
Residential real estate loans, which historically have had low loss experience,
increased $4,890,000 or 39.8%. Construction and land development loans, loans
secured by farmland and commercial real estate loans increased by $4,472,000 or
40.2%. Commercial and industrial loans and agricultural loans increased by
$1,376,000 or 34.4%. 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 $2,638,000 , or 33.6%. 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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------- -------
(In Thousands)
<S> <C> <C>
Real estate loans:
Construction and land development .. $ 5,716 $ 3,214
Secured by farmland and improvements 2,508 2,278
Secured by residential properties .. 17,171 12,281
Commercial real estate loans ....... 7,365 5,625
------- -------
Total real estate loans ......... 32,760 23,398
------- -------
Loans to farmers ..................... 547 596
Commercial and industrial loans ...... 4,829 3,404
Installment loans .................... 8,304 6,388
Other consumer loans ................. 2,189 1,467
All other loans ...................... 54 344
------- -------
Total loans....................... $48,683 $35,597
======= =======
</TABLE>
- 10 -
<PAGE> 11
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, 1997
------------------------------------------
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 $ 5,689 $ 27 $ 0 $ 5,716
Real estate mortgage loans .... 10,041 12,520 4,483 27,044
Commercial and industrial loans 3,681 1,148 0 4,829
Agricultural loans ............ 369 178 0 547
All other loans ............... 3,832 6,524 191 10,547
------- ------- ------ -------
Total loans ................. $23,612 $20,397 $4,674 $48,683
======= ======= ====== =======
</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, 1997 (in thousands):
<TABLE>
<S> <C>
Fixed rate ................................. $13,958
Floating rate .............................. 4,603
-------
$18,561
-------
Other loans maturing after one year:
Fixed rate ................................. $ 6,501
Floating rate .............................. 9
-------
$ 6,510
-------
Total loans maturing after one year $25,071
=======
</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, 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 $100,000 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
- 11 -
<PAGE> 12
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.
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.
- 12 -
<PAGE> 13
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 $660,336 at year end 1997, or
1.36% of loans outstanding, net of unearned income, compared to $57,432 or 1.29%
at year end 1996. The following table presents data related to the Company's
reserve for loan losses for the years ended December 31, 1997 and 19965.
<TABLE>
<CAPTION>
1997 1996
----- -----
(Dollars In Thousands)
<S> <C> <C>
Balance at beginning of period .......................................................... $ 457 $ 401
Charge offs:
Commercial, financial and agricultural ................................................ (4) (30)
Real estate mortgage .................................................................. 0 0
Installment loans to individuals ...................................................... (14) (49)
----- -----
(18) (79)
----- -----
Recoveries:
Commercial, financial and agricultural ................................................ 1 19
Real estate mortgage .................................................................. 0 0
Installment loans to individuals ...................................................... 5 16
----- -----
6 35
----- -----
Net charge offs ......................................................................... (12) (44)
----- -----
Additions to charged to operations ...................................................... 215 100
----- -----
Balance at end of period ................................................................ $ 660 $ 457
===== =====
Ratio of net charge offs during the period to average loans outstanding during the period 0.03% 0.15%
===== =====
Average allowance for loan losses to average total loans ................................ 1.30% 1.51%
===== =====
</TABLE>
At December 31, 1997 and 1996, the allowance for loan losses was
allocated as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Percent of Percent of
loans in each loans in each
category to category to
Amount total loans Amount total loans
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural ............................... $165 11.04% $ 70 12.20%
Real estate mortgage ................................................. 0 67.29% 168 65.73%
Installment loans to individuals ..................................... 495 21.67% 219 22.07%
---- ------ ---- ------
Total ............................................................. $660 100.00% $457 100.00%
==== ====== ==== ======
</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.
- 13 -
<PAGE> 14
<TABLE>
<CAPTION>
December 31,
-----------------
Nonperforming assets (Dollars in thousands): 1997 1996
---- ----
<S> <C> <C>
Nonaccrual loans ................................................................ $ 70 $98
Restructured loans .............................................................. 0 0
Other loans past due 90 days or more to principal or interest payments .......... 186 84
Nonperforming loans as a percentage of net loans before allowance for loan losses 0.53% 0.52%
Allowance for loan losses as a percentage of nonperforming loans ................ 257.81% 251.10%
</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>
1997 1996
----- -----
<S> <C> <C>
Average loans to average deposits ................... 68.98% 63.08%
</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 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
- 14 -
<PAGE> 15
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, 1997 December 31, 1996
----------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
CAPITAL:
Tier I capital:
Stockholders' common equity ............................................. $ 3,871 $ 3,397
Less unrealized (loss) gain in securities ............................... 52 (50)
Less disallowed intangibles ............................................. (203) (221)
-------- --------
Total Tier I capital ........................................... 3,616 3,226
Tier II capital:
Qualifying allowance for loan losses .................................... 609 457
-------- --------
Total capital .................................................. $ 4,225 $ 3,683
======== ========
Risk-adjusted assets ............................................................. $ 48,725 $ 37,066
Quarterly average assets ......................................................... $ 76,127 $ 60,836
RATIOS:
Tier I capital to risk-adjusted assets ........................................... 7.42% 8.70%
Tier II capital to risk-adjusted assets .......................................... 1.25% 1.23%
Total capital to risk-adjusted assets ............................................ 8.67% 9.94%
Leverage Tier I capital to quarterly average assets less disallowed intangibles 4.83% 5.31%
</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.
<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.
- 15 -
<PAGE> 16
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.
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.
- 16 -
<PAGE> 17
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 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
- 17 -
<PAGE> 18
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 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, 1998, 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
- 18 -
<PAGE> 19
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, 1998, the Company believes the brokered deposits
regulation will have not material effect on the funding or liquidity of the
Bank.
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.
- 19 -
<PAGE> 20
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, 1997, the Company had a total of 41 employees with 37
of those employed on a full-time basis.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank's main office is located at 210 East Main Street in
Rogersville, Tennessee. The property consists of a masonry building with
approximately 10,000 square feet, 7,500 square feet of which is used by the
Bank. The Bank has a branch in Sneedville, Tennessee which is 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 a third location as a branch in Church
Hill. 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
- 20 -
<PAGE> 21
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company conducted public offering of its Common Stock in 1997 at a
price of $15 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 December 31, 1997
and was for the price of $15.00 per share.
There were 480 holders of record of the Common Stock as of March 20,
1998.
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, 1997 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 income for 1997 was $216,775 increasing $132,255 compared with net
income of $84,520 for 1996. The Company's return on average assets was 0.31% for
1997 or 1.94 times the return on average assets of 0.16% for 1996. The Company's
return on average equity improved to 6.09% for 1997 compared with 2.88% for
1996.
The Company's net income for 1997 and 1996 were impacted by the
following:
-- The yield on average interest earnings assets was 8.64% for
1997 increasing 0.20% from 8.44% for 1996.
-- Average earning assets increased $15,424,000 to $63,227,000
for 1997 compared to $47,803,000 for 1996.
-- Yield on average interest bearing liabilities increased 0.06%
from 5.29% in 1996 to 5.35% for 1997.
-- Average interest bearing liabilities increased $14,916,000 to
$57,437,000 for 1997 compared to $42,521,000 for 1996.
- 21 -
<PAGE> 22
-- Average interest earning assets to average total assets
increased slightly from 90.56% for 1996 to 91.19% for 1997.
-- Average interest bearing liabilities to average total
assets increased from 80.55% for 1986 to 82.84% for 1997.
As a result of the foregoing net interest income as a percentage of
average interest earning assets increased from 3.73% for 1996 to 3.78% for 1997.
Accordingly, net interest income for 1997 of $2,390,137 was only $607,008
greater than net interest income of $1,783,129 for 1997.
Net interest income for 1997 was positively impacted by a decrease in
interest expense of $26,000 on parent company only borrowings. Of this decrease
of $26,000 approximately $14,000 was attributable to a decrease in average
borrowings. Average parent company only borrowings were $3,281,000 for 1997 or a
decrease of $169,000 compared to 1996 of $3,450,000. The remaining decrease of
$12,000 was attributable to a decrease in the average rate on such outstanding
borrowings from 8.41% for 1996 to 8.05% for 1997. The borrowing was incurred by
the Company in order to increase the capital of its 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.
- 22 -
<PAGE> 23
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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
(Fully taxable equivalent) Interest Average Interest Average
(Dollars in thousands except Average Income/ Yields/ Average Income/ Yields/
for per share data) Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans net of unearned income $42,185 $4,141 9.82% $28,647 $2,859 9.98%
U.S. Treasury and other U.S.
government agencies 17,065 1,113 6.52% 14,669 944 6.44%
States and municipalities 102 8 7.84% 63 5 7.94%
Federal funds sold 3,875 202 5.21% 4,424 227 5.13%
------- ------ ------- ------
Total interest-earning
assets/interest income 63,227 5,464 8.64% 47,803 4,035 8.44%
------- ------ ------- ------
Cash and due from banks 1,983 1,766
Other assets 4,675 3,650
Allowance for loan losses (550) (433)
------- -------
Total $69,335 $52,786
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Demand deposits $11,742 $423 3.60% $10,526 $374 3.55%
Savings 2,222 66 2.97% 1,614 48 2.97%
Individual retirement accounts 4,382 246 5.61% 3,095 176 5.69%
Time certificates 35,101 2,029 5.78% 23,521 1,352 5.75%
Securities sold under repurchase 709 43 6.06% 315 11 3.49%
Note payable 3,281 264 8.05% 3,450 290 8.41%
------- ------ ------- ------
Total interest-bearing
liabilities/interest expense 57,437 3,071 5.35% 42,521 2,251 5.29%
------- ------ ------- ------
Non-interest bearing demand
deposits 7,710 6,655
Other liabilities 624 663
Stockholders' equity 3,564 2,947
------- -------
Total $69,335 $52,786
======= =======
Net interest earnings $2,393 $1,784
====== ======
Net interest on interest earning
assets 3.78% 3.73%
===== =====
Return on average assets 0.31% 0.16%
Return on average equity 6.09% 2.88%
Cash dividends declared $0 $0
Dividend payout ratio N/A N/A
</TABLE>
Non-interest expense increased $310,722 from $1,723,418 for 1996 to
$2,034,140 for 1997. However, non-interest expense as a percentage of average
assets decreased by 0.33% from 3.26% in 1996 to 2.93% for 1997.
- 23 -
<PAGE> 24
The following table presents non-interest expense for 1997 compared to
1996 as a percentage of average assets and the changes therein (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ---- Increase % Increase
% Average % Average (Decrease) (Decrease)
Non-interest Expense Amount Assets Amount Assets 1997/1996 1997/1996
------ ------ ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee $1,094 1.58% $976 1.85% $118 12.09%
benefits
Occupancy, net 160 0.23% 103 0.20% 57 55.34%
Furniture and equipment 206 0.30% 142 0.27% 64 45.07%
Directors fees 49 0.07% 49 0.09% 0 0.00%
Advertising 59 0.09% 67 0.13% -8 -11.94%
FDIC insurance 7 0.01% 2 0.004% 5 250.00%
Office supplies 29 0.04% 30 0.06% -1 -3.33%
Professional services 40 0.06% 85 0.16% -45 -52.94%
Telephone 34 0.05% 29 0.05% 5 17.24%
Postage and courier 84 0.12% 49 0.09% 35 71.43%
Other 272 0.39% 192 0.36% 80 41.67%
------ ---- ------ ----- ---- -----
$2,034 2.93% $1,724 3.264% $310 17.98%
====== ==== ====== ===== ==== =====
</TABLE>
Non-interest expenses increased 17.98% in absolute terms from 1996 to
1997 but decreased as a percentage of average total assets. The decrease is
attributable to an expansion of the Company's asset base without a corresponding
increase in non-interest expenses. Occupancy expense increased in 1997 by 55.34%
primarily attributable to the opening of the Bank's new main office facilities
in Rogersville in 1997. Non-interest expense as a percentage of average assets
is expected to continue to decline as growth in Bank assets is expected to
increase faster than the growth in non-interest expense.
The provision for loan losses in 1997 was $215,000 or $115,000 greater
than the provision for loan losses of $100,000 for 1996. The provision for loan
losses is the amount management deems 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 reserve is determined by management after
considering 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 $33,783 from $179,132 in 1996 to $212,915
in 1997.
Income tax expense increased $82,814 from $54,323 in 1996 to $137,137
in 1997.
FINANCIAL POSITION
Company total assets grew 23.43% or $14.85 million during 1997 to $78.25 million
at year end 1997 from $63.39 million at year end 1996. This growth is primarily
attributable to growth of $14.45 million in deposits and securities sold under
repurchase agreements during 1996 to $70.30 million at year end 1997 from $55.85
million at year end 1996.
Portfolio securities grew $3.07 million in 1997 to $18.19 million at
year end 1997 from $15.12 million at year end 1997 while federal funds decreased
$1.60 million during 1997.
Loans increased $13.13 million during 1997 to $48.47 million at year
end 1997 compared to $35.34 million at year end 1996. Of this growth real estate
mortgage loans grew $9.36 million in 1997 and consumer loans grew $2.64 million
in 1997. Real estate mortgage loans represented 67.59% of gross outstanding
loans at year end 1997. Consumer loans represented 21.65% of gross outstanding
loans at year end 1997.
- 24 -
<PAGE> 25
Deposits and securities sold under repurchase agreements grew $14.45
million in 1997 from $55.85 million at year end 1996 to $70.30 million at year
end 1997.
CAPITAL REQUIREMENTS
The Company's equity capital was $3.87 million at year end 1997
compared to $3.40 million at year end 1996. This increase of approximately
$470,000 consists of the Company's net income for 1997 of $216,775, an increase
in the unrealized gain net of tax on securities available for sale of $101,941,
and the issuance of new common shares for the balance net of applicable expenses
of sale of approximately $155,000. No dividends were paid by the Company during
1997 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. 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 1996) without the prior written approval
of the Commissioner of Financial Institution for the State of Tennessee. At
December 31, 1997, the Bank had approximately $399,703 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.
The Bank has committed to State banking regulators, in connection with
the approval to open branches during 1996 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, 1997 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
8.75% and 10.26% on an end of period basis at December 31, 1997 and 1996,
respectively. The actual tangible capital maintained by the Bank at December 31,
1997 and 1996 after the Rogersville and Church Hill branches were opened was
$6,639 and $6,488 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, 1997, 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.
The Bank would be considered "well capitalized" within the applicable
regulatory capital guidelines at December 31, 1997.
LIQUIDITY RESOURCES
Liquidity management focuses on the need to meet both short-term
funding requirements and long-term growth objectives. Primary sources for
liquidity include deposits, loan repayments and security repayments or sales of
available for sale securities.
- 25 -
<PAGE> 26
During 1997 the Company increased available for sale securities by
$3.59 million from $13.52 million at year end 1996 to $17.11 million at year end
1997.
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, 1997 the Company had a cumulative one year negative
gap of (40.82%) or a net of $29.275 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 1997 was $500,000
at cost. These two securities had an approximate market value at that time of
$493,558. 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, 1997 one of
these securities was earning at 4.338% while the other was earning at 4.738%.
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 $256,636
at year end 1997 compared to $181,926 at year end 1996 representing an increase
of $74,710. Non-performing loans as a percentage of net loans before the
allowance for loan losses was 0.53% at year end 1997 and 0.51% at year end 1996.
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 257.8% at
year end 1997 and 251.4% at year end 1996. The Company had no material
restructured loans in 1997 or 1996. 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.
- 26 -
<PAGE> 27
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.
YEAR 2000 COMPLIANCE
The Company does not expect the cost of converting its computer systems
to year 2000 compliant software to be material to its financial condition or
results of operations. The Company believes it will achieve year 2000 compliance
in a timely manner and does not anticipate any disruption in its operations as
the result of any failure by the Company to be in compliance.
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index to Consolidated Financial Statements:
Independent Auditor's Report...........................................................................F-1
Consolidated Balance Sheets at December 31, 1997 and 1996..............................................F-2
Consolidated Statements of Earnings for the years ended December 31, 1997 and 1996.....................F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997 and 1996....................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996...................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 (48) assumed the position of Chief Executive Officer in
November 1996 and has served as the President and a 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 (57) has served as a Director since 1994. Mr. Price is
employed as the Executive for Hawkins County, Tennessee.
WILLIAM E. PHILLIPS (50) 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 (63) has served as the Secretary/Treasurer and Director
since 1994. Mr. Price was employed by First Union National Bank of Tennessee
until June 1993.
- 27 -
<PAGE> 28
GARY E. VARNELL (51) 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 (70) has served as a Director of the Company since
1994. Dr. Truett practices medicine in Sneedville, Tennessee.
GEORGE L. BROOKS (68) 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 (63) has served as a Director of the Company since
1994. Ms. Price is an insurance agent in Rogersville, Tennessee.
LEON GLADSON (72) has served as a Director of the Company since 1994.
Mr. Gladson is a retired businessman and resides in Rogersville, Tennessee.
EDDIE FREEMAN (45) 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 (78) has served as a Director of the Company since 1994.
Mr. Miller is a farmer in Rogersville, Tennessee.
M. CARLIN GREENE (55) 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 (49) has served as a Director of the Company since
1994. Mr. Collins is the Hancock County Clerk & Master in Sneedville, Tennessee.
LAWRENCE E. GRAY (53) 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 1997 the Board of Directors of the Company held one meeting. The
Directors of the Company also serve as directors of the Bank. The Board of
Directors of the Bank held 12 meetings in 1997. No director attended less than
75% of the meetings held by the Company or the Bank during 1997. 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 three committees. Messrs. Phillips, H. Lyons
Price and Matney serve as the Executive Committee, Messrs. Doug Price, Gladson
and Collins serve as members of the Audit Committee and Messrs. Phillips,
Matney, H. Lyons Price and G. Douglas Price serve as members of the Trust
Committee. These persons receive no compensation as members of such committees.
- 28 -
<PAGE> 29
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 $100,000
(determined as of the end of 1997) for the years ended December 31, 1997, 1996,
and 1995.
<TABLE>
<CAPTION>
Annual
Compensation
------------
Name and Position Year Salary ($)
- ----------------- ---- ------------
<S> <C> <C>
Reed Matney 1997 72,000
Chief Executive Officer and President 1996 66,000
1995 65,000
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 20, 1998, 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>
(i) Ralph T. Hurley 85,500 16.26%
Rt. 2 Box 157
Sneedville, TN 37869
William E. Phillips(1) 21,735 4.03
312 Main Street
Rogersville, TN 37857
(ii) William E. Phillips(1) 21,735 4.03
Lawrence E. Gray(2) 18,581 3.45
Shirley A. Price 7,937 1.47
Reed D. Matney 8,323 1.54
Leon Gladson 3,663 *
Eddie Freeman 1,832 *
G. Douglas Price(3) 15,874 3.00
Gary E. Varnell(4) 16,200 3.00
Scott F. Collins 1,587 *
H. Lyons Price 6,105 1.13
George L. Brooks 6,105 1.13
M. Carlin Greene 9,158 1.70
Dr. Truett H. Pierce(5) 12,211 2.26
Neil D. Miller 11,090 2.06
(iii) Directors and executive officers 140,401 26.05%
as a group (14 persons)
</TABLE>
- 29 -
<PAGE> 30
- -------------
* Less than 1%
(1) Includes 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 320 shares owned jointly with his two sons.
(5) Includes 9,158 shares owned by his spouse, for which he disclaims
voting and investment power.
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
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation of Volunteer Bancorp, Inc., as amended*
3.2 Bylaws of Volunteer Bancorp, Inc.*
27 Financial Data Schedule (For SEC use only)
* 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,
1997.
- 30 -
<PAGE> 31
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Volunteer Bancorp, Inc.
Rogersville, Tennessee
We have audited the accompanying consolidated balance sheets of Volunteer
Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, 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, 1997 and 1996, 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.
February 5, 1998
Nashville, Tennessee
F - 1
<PAGE> 32
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
ASSETS
Cash and due from banks (note 10) $ 2,583,960 $ 2,771,810
Federal funds sold 4,841,622 6,446,143
Investment securities available for sale (amortized
cost of $17,024,658 and $13,599,316, respectively) (note 2) 17,108,656 13,518,893
Investment securities held to maturity (estimated market
value of $1,083,238 and $1,596,156, respectively) (note 2) 1,085,104 1,603,847
Loans, less allowance for possible loan losses of $660,336 and
$457,432 in 1997 and 1996, respectively (note 3) 47,809,870 34,879,828
Accrued interest receivable 819,510 610,654
Premises and equipment, net (note 4) 3,647,191 3,217,064
Other real estate 89,946 82,846
Goodwill (note 1) 202,791 220,675
Other assets 57,733 41,449
-------------------------------
Total assets $78,246,383 $63,393,209
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes 2 and 5)
Non-interest bearing $ 8,816,803 $ 7,900,466
Interest bearing 60,270,586 47,776,665
-------------------------------
Total deposits 69,087,389 55,677,131
Accrued interest payable 720,842 555,217
Securities sold under repurchase agreements (note 17) 1,216,679 175,000
Other accrued taxes, expenses and liabilities 64,218 128,570
Long-term debt (note 6) 3,265,000 3,450,000
Deferred income taxes (note 8) 21,551 10,383
-------------------------------
Total liabilities 74,375,679 59,996,301
-------------------------------
Commitments and contingent liabilities (note 9)
Stockholders' equity:
Common stock, $0.01 par value, 1,000,000 shares authorized,
539,027 shares issued and outstanding at December 31,
1997; 525,717 shares issued and outstanding, at
December 31, 1996 5,390 5,258
Additional paid-in capital 1,916,500 1,761,552
Retained earnings 1,896,735 1,679,960
Unrealized (loss) gain on securities available for sale, net (note 2) 52,079 (49,862)
-------------------------------
Total stockholders' equity 3,870,704 3,396,908
-------------------------------
Total liabilities and stockholders' equity $78,246,383 $63,393,209
===============================
</TABLE>
See accompanying notes to consolidated financial statements
F - 2
<PAGE> 33
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Interest income:
Interest and fees on loans $4,141,546 $2,859,280
Interest on federal funds 202,199 227,391
Interest on investment securities:
Taxable 1,112,803 943,940
Exempt from Federal income tax 5,000 3,125
---------------------------
Total interest income 5,461,548 4,033,736
---------------------------
Interest expense:
Interest on deposits 2,764,396 1,950,458
Interest on other borrowed funds 307,015 300,149
---------------------------
Total interest expense 3,071,411 2,250,607
---------------------------
Net interest income 2,390,137 1,783,129
Provisions for possible loan losses (note 3) 215,000 100,000
---------------------------
Net interest income after provision for possible loan losses 2,175,137 1,683,129
---------------------------
Non-interest income:
Service charges on deposit accounts 105,057 67,238
Other fees and commissions 78,015 82,419
Securities gain (loss) (note 2) 8,342 13,311
Other non-interest income 21,501 16,164
---------------------------
Total non-interest income 212,915 179,132
---------------------------
Non-interest expense:
Salaries and employee benefits (note 7) 1,094,241 975,967
Occupancy expenses, net (note 4) 160,188 103,302
Furniture and equipment expense 206,498 141,988
Other non-interest expense (note 7) 573,213 502,161
---------------------------
Total non-interest expense 2,034,140 1,723,418
---------------------------
Net earnings before income taxes 353,912 138,843
Income tax expense (note 8) 137,137 54,323
---------------------------
Net income $ 216,775 $ 84,520
===========================
Net income per weighted average common share $ 0.41 $ 0.17
===========================
Weighted average common shares outstanding 529,318 483,884
===========================
</TABLE>
See accompanying notes to consolidated financial statements
F - 3
<PAGE> 34
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997 and 1996
- -------------------------------------------------------------------------------
<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, 1996 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
Net income - - - 216,775 - 216,775
Unrealized gain - - - - 101,941 101,941
Issue common stock,
net of costs of issuance 13,310 132 154,948 - - 155,080
----------------------------------------------------------------------------------------------
Balance December 31, 1997 539,027 $5,390 $1,916,500 $1,896,735 $ 52,079 $3,870,704
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F - 4
<PAGE> 35
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------ -----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 216,775 $ 84,520
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (51,312) (78,533)
Provision for loan losses 215,000 100,000
Provision for depreciation and amortization 216,547 127,977
Securities (gain) (8,342) (13,311)
(Increase) in interest receivable (208,856) (176,099)
Decrease (increase) in other assets (23,384) 131,544
Increase in other liabilities 101,273 526,943
-----------------------------------
Net cash provided by operating activities 457,701 703,041
-----------------------------------
Cash Flows from Investing Activities:
Purchase of investment securities held to maturity - (250,000)
Proceeds from calls and maturity of held to maturity securities 518,743 2,168,951
Purchase of investment securities available for sale (8,719,001) (9,863,209)
Proceeds from calls and maturities of available for sale securities 1,849,892 2,200,000
Proceeds from sale of available for sale securities 3,452,109 501,875
Net (increase) in loans (13,145,042) (13,405,225)
Capital expenditures (628,790) (1,340,055)
------------------------------------
Net cash (used) in investing activities (16,672,089) (19,987,663)
------------------------------------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW accounts,
IRA and savings accounts 3,191,292 4,282,036
Net increase in certificates of deposit 10,218,966 16,882,921
Net increase in securities sold under repurchase agreements 1,041,679 175,000
Repayment of long-term debt (185,000) -
Issue common stock 199,650 794,650
Stock issuance costs (44,570) -
-----------------------------------
Net cash provided by financing activities 14,422,017 22,134,607
-----------------------------------
Increase (decrease) in cash and cash equivalents (1,792,371) 2,849,985
Cash and cash equivalents beginning of year 9,217,953 6,367,968
-----------------------------------
Cash and cash equivalents end of year (note 1) $ 7,425,582 $ 9,217,953
===================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,905,786 $ 2,025,438
===================================
Income taxes $ 258,826 $ -
===================================
</TABLE>
See accompanying notes to consolidated financial statements
F - 5
<PAGE> 36
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
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, 1997 and
1996. All material intercompany 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.
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.
F - 6
<PAGE> 37
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
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's 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.
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 for cash or other considerations should be accounted for as a
sale or as a pledge of collateral in a secured borrowing. There are
certain criteria that must be met for the transfer to be recorded as a
sale: The transferred assets have been isolated from the transferor -
put presumptively beyond the reach of the transferor and its creditors,
even in bankruptcy or other receivership. Each transferee obtains the
right - free of conditions that constrain it from taking advantage of
that right - to pledge or exchange the transferred assets. If these
criteria are not met, the transfer must be recorded as a secured
borrowing. SFAS No. 125 also addresses repurchase agreements that might
allow the transferor to maintain control over the transferred asset. If
such an agreement exists, a transfer should be accounted for as a
secured borrowing if (a) the assets to be repurchased are substantially
the same, (b) they can be repurchased on substantially the agreed
terms, (c) repurchase will occur before maturity at a fixed and
determinable price, and (d) the agreement was entered into concurrently
with the transfer.
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.
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
F - 7
<PAGE> 38
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
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 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.
F - 8
<PAGE> 39
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
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, 1997 and
1996 was approximately $88,000 and $120,000, respectively.
h. Goodwill
The Company's acquisition during 1995 and 1994 of 18,360 shares of
subsidiary Bank stock held by minority shareholders of the 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.
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>
1997 1996
---- ----
<S> <C> <C>
Cash and due from banks $2,583,690 $2,771,810
Federal funds sold 4,841,622 6,446,143
-------------------------------
$7,425,312 $9,217,953
===============================
</TABLE>
F - 9
<PAGE> 40
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
j. Advertising Cost
All advertising costs are expensed when incurred. Other advertising
expense was $58,709 and $66,767 for the years ended December 31, 1997
and 1996, respectively. There was no direct-response advertising costs
incurred for 1997 or 1996.
k. Stock Based Compensation
During 1997, the Company adopted SFAS No. 123, "Accounting for Stock
Based Compensation." The Company utilizes the fair value method of
determining compensation for stock based plans wherein compensation
cost is measured at the grant date at fair value and is recognized over
the service period.
l. 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.
m. 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 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.
F - 10
<PAGE> 41
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
2. Investment Securities
The carrying value of investment securities classified as available for
sale at December 31, are as follows:
<TABLE>
<CAPTION>
Available for Sale
-------------------------------------
December 31, 1997
-----------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Treasury $ 3,927,935 $39,025 $ (2,967) 3,963,993
Securities of U.S. Government agencies 12,996,723 57,546 (12,030) 13,042,239
Obligations of states and political
subdivisions 100,000 2,424 - 102,424
---------------------------------------------------
$17,024,658 $98,995 $(14,997) 17,108,656
====================================================
</TABLE>
<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> 42
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
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, 1997
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Government agencies $1,085,104 $8,563 $(10,429) $1,083,238
=================================================
Held to Maturity
-----------------------------------
December 31, 1996
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Securities of U.S. Government agencies $1,603,847 $9,264 $(16,955) $1,596,156
=================================================
</TABLE>
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>
1997 1996
---- ----
<S> <C> <C>
Gross unrealized gains $ 98,995 $ 51,909
Gross unrealized losses (14,997) (132,332)
--------------------------
Gross unrealized (loss) gain, net 83,998 (80,423)
Deferred tax effect (31,919) 30,561
--------------------------
Net unrealized (loss) gain $ 52,079 $ (49,862)
==========================
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1997, 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.
F - 12
<PAGE> 43
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
<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 $ 1,197,042 $ 1,200,076 $ 500,240 $ 493,799
Due after one year and through
five years 6,160,734 6,211,130 250,461 247,214
Due after five years and through
ten years 9,666,882 9,697,450 200,000 199,280
Due after ten years - - 134,403 142,945
----------------------------------------------------------------------
$17,024,658 $17,108,656 $1,085,104 $1,083,238
======================================================================
</TABLE>
The following table presents the gross realized gains and losses on
investment securities transactions for the years ended December 31, 1997
and 1996.
<TABLE>
<CAPTION>
Realized gains Realized Losses
------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Available for sale securities $15,998 $13,311 $(7,656) -
Held to maturity securities - - - -
-----------------------------------------------
$15,998 $13,311 $(7,656) $ -
===============================================
</TABLE>
At December 31, 1997 a net gain of $8,342 was realized, or a gain of
$5,176 net of a tax expense of $3,166. 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.
Investment securities with amortized cost of approximately $9,041,000 and
market value of approximately $9,074,000 at December 31, 1997 were pledged
to secure public deposits and for other purposes required or permitted by
law. In 1996, investment securities with amortized cost of approximately
$6,802,000 and market value of approximately $6,760,975 were pledged.
F - 13
<PAGE> 44
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
At December 31, 1997, 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, 1997 was 4.338% and the approximate market value was $247,500. The
interest rate at December 31, 1996 was 4.5% and the approximate market
value was $250,000.
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, 1997 was 4.738% and the
approximate market value was $246,058. The interest rate at December
31, 1996 was 4.949% and the approximate market value was $243,800.
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.
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.
F - 14
<PAGE> 45
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
Loans, less allowance for possible loan losses at December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 5,376,340 $ 4,000,113
Real estate - construction 5,715,776 3,213,578
Real estate - mortgage 27,044,460 20,184,713
Consumer 10,492,473 7,853,323
Other 54,354 345,218
------------------------------------
48,683,403 35,596,945
Less unearned interest 213,197 259,685
------------------------------------
48,470,206 35,337,260
Less allowance for possible loan losses 660,336 457,432
------------------------------------
$47,809,870 $34,879,828
====================================
</TABLE>
Loans at December 31, 1997 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 $4,049,528 $5,689,342 $10,041,282 $ 3,848,279 $34,005
After one through
five years 1,326,812 26,434 12,520,197 6,514,324 9,588
After five years
through ten
years - - 716,217 129,870 10,761
After ten years - - 3,766,764 - -
------------------------------------------------------------------
Total $5,376,340 $5,715,776 $27,044,460 $10,492,473 $54,354
==================================================================
</TABLE>
At December 31, 1997, fixed and variable rate loans were as follows:
<TABLE>
<S> <C>
Fixed rate loans $33,771,336
Variable rate loans 14,912,067
-----------
$48,683,403
===========
</TABLE>
F - 15
<PAGE> 46
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
Non-performing assets at December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans past due over 90 days $186,477 $ 84,007
Non-accrual loans 70,159 97,919
Other real estate owned 89,946 82,846
--------------------------
$346,582 $264,772
==========================
</TABLE>
Foregone interest income on the above non-accrual loans was $6,118 and
$5,902 at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, the Bank had loans to its executive
officers, directors and their affiliates of $771,400 and $466,927,
respectively. At December 31, 1997 and 1996, the Bank had commitments to
extend credit to its executive officers, directors and their affiliates of
$1,259,978 and $1,298,120, 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>
1997 1996
---- ----
<S> <C> <C>
Balance January 1 $ 466,927 $ 433,217
Payments received (185,972) (242,037)
Advances made 490,445 275,747
------------------------------
Balance December 31 $ 771,400 $ 466,927
==============================
</TABLE>
Transactions in the allowance for possible loan losses of the Bank for the
years ended December 31, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance - beginning of year $457,432 $401,066
Provisions charged to operating expense 215,000 100,000
Loans charged-off (17,730) (79,228)
Recoveries 5,634 35,594
--------------------------
Balance - end of year $660,336 $457,432
==========================
</TABLE>
As of December 31, 1997 and 1996, the Bank's recorded investment in
impaired loans and disclosures related thereto were not material.
F - 16
<PAGE> 47
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
4. Premises and Equipment, Net
The detail of premises and equipment, net at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 446,503 $ 162,637
Buildings 2,620,959 941,133
Furniture and equipment 1,167,114 679,516
Construction in progress - 1,825,639
-----------------------------
4,234,576 3,608,925
Less accumulated depreciation 587,385 391,861
-----------------------------
$3,647,191 $3,217,064
=============================
</TABLE>
Depreciation related to premises and equipment for the years ended December
31, 1997 and 1996 was $198,663 and $110,094, respectively.
The Bank leased its loan production office and Rogersville Branch on an
annual basis. These leases were canceled when the main office in
Rogersville, Tennessee opened in 1997. Total rental expense for these
locations was $11,054 and $20,000 for December 31, 1997 and 1996,
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.
In connection with the construction of the main office in Rogersville,
Tennessee, the Bank purchased approximately $97,000 of furniture and
equipment from an entity owned by a shareholder/director of the Company.
All such purchases 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.
F - 17
<PAGE> 48
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
5. Deposits
Deposits at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Demand deposits $ 8,816,803 $ 7,900,466
NOW and money market accounts 12,636,336 11,150,876
Savings 2,584,451 1,860,585
Individual retirement accounts 1,674,149 1,608,520
Certificates of deposits - under $100,000 33,405,347 24,507,417
Certificates of deposits - over $100,000 9,970,303 8,649,267
------------------------------
$69,087,389 $55,677,131
==============================
</TABLE>
The amounts and scheduled maturities of certificate accounts at December
31, are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Within one year $39,137,586 $31,085,189
After one but within two years 3,569,053 1,650,146
After two but within three years 662,011 421,349
After three but within four years 7,000 -
-----------------------------
$43,375,650 $33,156,684
=============================
</TABLE>
Demand deposits reclassified as loans (overdrafts) aggregated approximately
$12,600 and $3,600 at December 31, 1997 and 1996, respectively.
Deposits of executive officers, directors and their affiliates aggregated
approximately $1,132,000 and $1,342,000 at December 31, 1997 and 1996,
respectively.
6. Long-term debt
The Company's long-term debt consists of a single note payable in the
amount of $3,265,000 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 1.95% per annum or at the
option of the Company the rate on the note is equal to the lender's index
rate as such rate changes from time to time. The Company may change
interest rate options at any time with prior notice to the lender. Interest
is payable quarterly. At December 31, 1997 the rate on the note was 7.731%
per annum. Principal is payable annually commencing January 31, 1997 and
each January 31 thereafter as follows:
F - 18
<PAGE> 49
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, Principal Due
----------- -------------
<S> <C>
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
----------
$3,265,000
==========
</TABLE>
The loan is secured by all of the stock of Citizens Bank of East Tennessee
owned by the Company.
7. Other Non-Interest Expenses
The major components of other non-interest expense at December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Directors fees $ 48,700 $ 48,600
Advertising 58,709 66,767
Professional services 84,023 85,164
Postage and courier 36,005 48,569
Other 345,776 253,061
---------------------------
Total other non-interest expense $573,213 $502,161
===========================
</TABLE>
The increase in salaries and employee benefits, occupancy expense,
furniture and equipment expenses and other non-interest expense for 1997 is
due primarily to the increased costs associated with operating and fully
staffing the new main office in Rogersville, Tennessee which became
operational during 1997.
F - 19
<PAGE> 50
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
8. Income Taxes
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current $188,449 $132,856
Deferred (51,312) (78,533)
-------------------------
$137,137 $ 54,323
=========================
</TABLE>
The sources of deferred income taxes and the tax effect of each are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accrual to cash conversion $ 20,377 $(82,961)
Provision for loan losses (77,022) (21,397)
Accelerated depreciation 8,123 12,067
State tax loss carryover - 16,274
Other, net (2,790) (2,516)
-------------------------
$(51,312) $(78,533)
=========================
</TABLE>
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>
1997 1996
---- ----
<S> <C> <C>
Tax expense (benefit) at statutory rate $120,330 $47,207
Increase (decrease) in taxes resulting from:
Tax-exempt interest (4,627) (6,601)
Amortization of goodwill 6,080 6,080
State income taxes net of
Federal income tax 14,629 6,236
Other, net 725 1,401
------------------------
$137,137 $54,323
========================
</TABLE>
F - 20
<PAGE> 51
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
The components of the net deferred tax liability recognized by the Company
at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax liabilities:
Accrual to cash conversion $(37,572) (17,195)
Unrealized gain on securities available for sale (31,919) -
Accumulated depreciation (38,962) (30,839)
------------------------
Total liabilities (108,453) (48,034)
------------------------
Deferred tax assets:
Allowances for loan losses 84,112 7,090
Unrealized loss on securities available for sale - 30,561
Other, net 2,790 -
------------------------
Total assets 86,902 37,651
------------------------
Net deferred tax liability $(21,551) $(10,383)
========================
</TABLE>
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.
F - 21
<PAGE> 52
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
The following table summaries the Company's significant commitments and
contingent liabilities at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commitments to extend credit $5,102,970 $4,004,362
Standby letters of credit 184,000 170,000
------------------------------
$5,286,970 $4,174,362
==============================
</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.
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,
1997 and 1996 was $287,000 and $213,000, 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 1996) without the prior written
approval of the Commissioner of Financial Institution for the State of
Tennessee. At December 31, 1997, the Bank had approximately $399,703
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.
F - 22
<PAGE> 53
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------
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) $3,139 4.00% $6,639 8.46% $3,139 4.00% $6,639 8.46%
====== ==== ====== ==== ====== ==== ====== ====
Tier I Capital (to risk-
weighted assets) $1,949 4.00% $6,639 13.63% $1,949 4.00% $6,639 13.63%
====== ==== ====== ===== ====== ==== ====== =====
Total Capital (to risk-
weighted assets) $3,898 8.00% $7,249 14.88% $3,898 8.00% $7,249 14.88%
====== ==== ====== ===== ====== ==== ====== =====
</TABLE>
<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>
Bases solely upon the foregoing ratios the Bank would be considered "well
capitalized" within applicable Federal banking regulatory guidelines.
F - 22
<PAGE> 54
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
In addition, the Bank has committed to State banking regulators, in
connection with the approval to open branches during 1996 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, 1997 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 8.75% and 10.26% on an end
of period basis at December 31, 1997 and 1996, respectively. The actual
tangible capital maintained by the Bank at December 31, 1997 and 1996 after
the Rogersville and Church Hill branches were opened was $6,639 and $6,488
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, 1997, 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.
F - 24
<PAGE> 55
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
13. Condensed Financial Information
Following is condensed financial information of Volunteer Bancorp, Inc.
(parent company only):
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
------------------
1997 1996
---- ----
<S> <C> <C>
Assets:
Cash $ 180,079 $ 97,948
Investment in subsidiary 6,691,103 6,437,266
Goodwill 202,791 220,675
Deferred income taxes 16,228 18,308
Tax benefit receivable 88,253 120,937
-----------------------------
$7,178,454 $6,895,134
=============================
Liabilities and stockholders' equity
Long-term debt $3,265,000 $3,450,000
Accrued interest payable 42,750 48,226
Stockholders' equity 3,870,704 3,396,908
-----------------------------
$7,178,454 $6,895,134
=============================
</TABLE>
Condensed Statement of Earnings
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996
---- ----
<S> <C> <C>
Income:
Dividends from subsidiary $269,628 $292,795
---------------------------
Expenses:
Interest 264,149 289,321
Professional services 44,041 66,950
Other expenses 10,894 10,123
----------------------------
Total expense 319,084 366,394
----------------------------
(Loss) before tax benefit and equity in
undistributed subsidiary income (49,456) (73,599)
Tax benefit 114,335 132,297
Equity in undistributed subsidiary income 151,896 25,822
----------------------------
Net income $216,775 $ 84,520
============================
</TABLE>
F - 25
<PAGE> 56
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996
---- ----
<S> <C> <C>
Operating Activities:
Net income (loss) $ 216,775 $ 84,520
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed subsidiary earnings (151,896) (25,822)
Deferred income taxes 2,080 7,592
Amortization 17,884 17,883
Decrease (increase) in other assets 32,684 (51,383)
(Decrease) in other liabilities (5,476) (3,480)
-----------------------------
Net cash provided (used) by operating activities 112,051 29,310
-----------------------------
Investing activities:
Capital contribution to subsidiary bank - (800,000)
-----------------------------
Financing activities:
Repayment of note payable (185,000) -
Issue common stock, net of issuance costs 155,080 794,650
-----------------------------
Net cash(used) provided by financing activities (29,920) 794,650
-----------------------------
Change in cash and equivalents 82,131 23,960
Cash and equivalents - beginning 97,948 73,988
-----------------------------
Cash and equivalents - ending $ 180,079 $ 97,948
=============================
</TABLE>
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).
F - 26
<PAGE> 57
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
14. Fair Value of Financial Instruments
The fair value of financial instruments at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 2,583,960 $ 2,583,960 $ 2,771,810 $ 2,771,810
Federal funds sold 4,841,622 4,841,622 6,446,143 6,446,143
Investment securities:
Derivatives 500,000 493,558 500,000 493,000
All others 17,693,760 17,698,336 14,622,740 14,622,049
------------------------------------------------------------
Total investment
securities 18,193,760 18,191,894 15,122,740 15,115,049
------------------------------------------------------------
Loans, net 47,809,870 47,543,696 34,879,828 34,644,611
------------------------------------------------------------
$73,429,212 $73,161,172 $59,220,521 $58,977,613
============================================================
Financial liabilities:
Deposits $69,087,389 $69,172,494 $55,677,131 $55,759,105
Securities sold under
repurchase agreements 1,216,679 1,216,679 175,000 175,000
Long-term debt 3,265,000 3,265,000 3,450,000 3,450,000
------------------------------------------------------------
$73,569,068 $73,654,173 $59,302,131 $59,384,105
============================================================
Unrecognized financial
instruments:
Commitments to extend
credit $ - $ - $ - $ -
Standby letters of credit $ - $ - $ - $ -
------------------------------------------------------------
$ - $ - $ - $ -
============================================================
</TABLE>
F - 27
<PAGE> 58
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
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.
Deposits:
The fair value of demand deposits, IRAs, 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.
F - 28
<PAGE> 59
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
15. Profit-Sharing Plan
The Company's subsidiary, The Citizens Bank of East Tennessee, adopted a
profit-sharing retirement plan on July 1, 1996. 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, 1997 and 1996.
16. Stock Based Employee Compensation
On December 31, 1997, the Company awarded each full time employee 20 shares
of the Company's voting common stock as a bonus for past services. The
awarded shares are fully vested and were awarded without any restrictions.
In the aggregate, 740 shares were awarded to employees and compensation
expenses based upon the fair value of $15.00 per share was recognized in
the aggregate amount of $11,100. There is no obligation or commitment on
behalf of the Company to award any shares of its common stock to employees
in the future.
17. Securities Sold Under Repurchase Agreements
At December 31, 1997 and 1996, the book value of the securities sold under
repurchase agreements, including accrued interest, was $1,250,069 and
$488,854, respectively. The maximum amount outstanding during 1997 and 1996
was $1,217,588 and $428,804, respectively. The daily average of outstanding
agreements during 1997 and 1996 was $708,385 and $315,006, respectively.
The securities underlying the agreements are maintained under the Bank's
control.
18. Reclassification
Certain reclassifications have been made to the December 31, 1996 financial
statements in order to conform with the presentation of the December 31,
1997 financial statements.
F - 29
<PAGE> 60
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
19. Impact of Recently Issued Accounting Standards
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 supercedes SFAS No. 122 and itself amends various previous
pronouncements of the Financial Accounting Standards Board. Adoption by the
Company on January 1, 1997 did not 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.
F - 30
<PAGE> 61
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------
1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $1,205,000 $1,326,213 $1,415,040 $1,515,295 $5,461,548
Net interest income 513,586 578,625 632,127 665,799 2,390,137
Provision for loan losses 45,000 50,000 60,000 60,000 215,000
Non-interest income 52,331 53,096 54,319 53,169 212,915
Non-interest expense 463,599 527,129 510,941 532,471 2,034,140
Income before income taxes
(benefit) expense 57,318 54,592 115,505 126,497 353,912
Net income $ 35,685 $ 32,833 $ 70,751 $ 77,506 $ 216,775
=====================================================================================
Weighted average common
shares outstanding 525,717 525,729 527,651 532,303 529,318
=====================================================================================
Net income per
weighted average common
share outstanding $ 0.07 $ 0.06 $ 0.13 $ 0.15 $ 0.41
=====================================================================================
</TABLE>
F - 31
<PAGE> 62
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
- -------------------------------------------------------------------------------
<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
(benefit) (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>
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> 63
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.
February 5, 1998
Nashville, Tennessee
F - 33
<PAGE> 64
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Balance Sheet
December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Citizens Consolidated
Volunteer Bank Volunteer
ASSETS Bancorp, of East Bancorp, Inc
Inc. Tennessee and
(Parent) (Subsidiary) Eliminations Subsidiary
-------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Cash and due from banks $ 180,079 $ 2,583,960 $ (180,079) $ 2,583,960
Federal funds sold - 4,841,622 - 4,841,622
Investment in subsidiary 6,691,103 - (6,691,103) -
Investment securities - 18,193,760 - 18,193,760
Loans, net - 47,809,870 - 47,809,870
Accrued interest receivable - 819,510 - 819,510
Premises and equipment - 3,647,191 - 3,647,191
Goodwill 202,791 - - 202,791
Other assets 104,481 147,679 (104,481) 147,679
--------------------------------------------------------------------
Total assets $7,178,454 $78,043,592 $(6,975,663) $78,246,383
====================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ - $69,267,468 $ (180,079) $69,087,389
Long-term debt 3,265,000 - - 3,265,000
Accrued interest payable 42,750 678,092 - 720,842
Securities sold under repurchase
agreements - 1,216,679 - 1,216,679
Other liabilities - 152,471 (88,253) 64,218
Deferred income taxes - 37,779 (16,228) 21,551
---------------------------------------------------------------------
Total liabilities 3,307,750 71,352,489 (284,560) 74,375,679
---------------------------------------------------------------------
Stockholders' equity:
Capital stock 5,390 666,500 (666,500) 5,390
Additional paid-in capital 1,916,500 5,068,016 (5,068,016) 1,916,500
Retained earnings 1,896,735 904,508 (904,508) 1,896,735
Net unrealized gain on securities
available for sale 52,079 52,079 (52,079) 52,079
--------------------------------------------------------------------
Total stockholders' equity 3,870,704 6,691,103 (6,691,103) 3,870,704
--------------------------------------------------------------------
Total liabilities and stockholders'
equity $7,178,454 $78,043,592 $(6,975,663) $78,246,383
====================================================================
</TABLE>
F - 34
<PAGE> 65
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Balance Sheet
December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Citizens Consolidated
Volunteer Bank Volunteer
ASSETS Bancorp, of East Bancorp, Inc
Inc. Tennessee and
(Parent) (Subsidiary) Eliminations 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
Securities sold under repurchase
agreements - 175,000 - 175,000
Other liabilities - 249,507 (120,937) 128,570
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 gain 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 - 35
<PAGE> 66
VOLUNTEER BANCORP, INC
Consolidating Statement of Earnings
December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Citizens Consolidated
Volunteer Bank Volunteer
Bancorp, of East Bancorp, Inc
Inc. Tennessee and
(Parent) (Subsidiary) Eliminations Subsidiary
-------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ - $4,141,546 $ - $4,141,546
Interest on federal funds - 202,199 - 202,199
Interest and dividends on
investments:
Taxable - 1,112,803 - 1,112,803
Exempt from federal income taxes - 5,000 - 5,000
------------------------------------------------------------------
Total interest income - 5,461,548 - 5,461,548
------------------------------------------------------------------
Interest expense:
Interest on deposits - 2,764,396 - 2,764,396
Interest on other borrowed funds 264,149 42,866 - 307,015
------------------------------------------------------------------
Total interest expense 264,149 2,807,262 - 3,071,411
------------------------------------------------------------------
Net interest income (264,149) 2,654,286 - 2,390,137
Provision for possible loan losses - 215,000 - 215,000
------------------------------------------------------------------
Net interest income after loan
provision (264,149) 2,439,286 - 2,175,137
------------------------------------------------------------------
Non-interest income:
Equity in earnings of subsidiary 421,524 - (421,524) -
Service charges - 105,057 - 105,057
Other income - 107,858 - 107,858
------------------------------------------------------------------
421,524 212,915 (421,524) 212,915
------------------------------------------------------------------
Non-interest expense:
Salaries and benefits - 1,094,241 - 1,094,241
Other 54,935 884,964 - 939,899
------------------------------------------------------------------
54,935 1,979,205 - 2,034,140
------------------------------------------------------------------
Income before taxes 102,440 672,996 (421,524) 353,912
Income tax (benefit) expense (114,335) 251,472 - 137,137
------------------------------------------------------------------
Net income $ 216,775 $ 421,524 $(421,524) $ 216,775
==================================================================
</TABLE>
F - 36
<PAGE> 67
VOLUNTEER BANCORP, INC
Consolidating Statement of Earnings
December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Citizens Consolidated
Volunteer Bank Volunteer
Bancorp, of East Bancorp, Inc
Inc. Tennessee and
(Parent) (Subsidiary) Eliminations 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 income $ 84,520 $ 318,617 $(318,617) $ 84,520
==================================================================
</TABLE>
F - 37
<PAGE> 68
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Statement of Cash Flows
December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Citizens Consolidated
Volunteer Bank Volunteer
Bancorp, of East Bancorp, Inc
Inc. Tennessee and
(Parent) (Subsidiary) Eliminations Subsidiary
-------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Cash Flows From Operating
Activities
Net income $ 216,775 $ 421,524 $(421,524) $ 216,775
Adjustments to reconcile net
income to net cash provided by
operating activities:
Subsidiary earnings undistributed (151,896) - 151,896 -
Deferred income taxes 2,080 (53,392) - (51,312)
Provision for loan losses - 215,000 - 215,000
Depreciation and amortization 17,884 198,663 - 216,547
Securities (gains) - (8,342) - (8,342)
Decrease (increase) in other 32,684 (232,240) (32,684) (232,240)
assets
Increase in other liabilities (5,476) 74,065 32,684 101,273
-------------------------------------------------------------------
Net cash provided by operating
activities 112,051 615,278 (269,628) 457,701
-------------------------------------------------------------------
Cash Flows From Investing Activities:
(Increase) in investment securities - (2,898,257) - (2,898,257)
(Increase) in loans - (13,145,042) - (13,145,042)
Capital expenditures - (628,790) - (628,790)
-------------------------------------------------------------------
Net cash (used) by investing
activities - (16,672,089) - (16,672,089)
-------------------------------------------------------------------
Cash Flows From Financing
Activities:
Increase in deposits - 13,492,389 (82,131) 13,410,258
Increase in securities sold under
repurchase agreements - 1,041,679 - 1,041,679
Issue common stock 155,080 - - 155,080
Dividends paid - (269,628) 269,628 -
Repayment of long-term debt (185,000) - - (185,000)
-------------------------------------------------------------------
Net cash (used) provided from
financing activities (29,920) 14,264,440 187,497 14,422,017
-------------------------------------------------------------------
Change in cash and equivalents 82,131 (1,792,371) (82,131) (1,792,371)
Cash and equivalents - beginning 97,948 9,217,953 (97,948) 9,217,953
-------------------------------------------------------------------
Cash and equivalents - ending $ 180,079 $ 7,425,582 $(180,079) $ 7,425,582
===================================================================
</TABLE>
F - 38
<PAGE> 69
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Statement of Cash Flows
December 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Citizens Consolidated
Volunteer Bank Volunteer
Bancorp, of East Bancorp, Inc
Inc. Tennessee and
(Parent) (Subsidiary) Eliminations 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 to
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 - 39
<PAGE> 70
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 27, 1998
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 27, 1998
/s/ H. Lyons Price Secretary/Treasurer and Director March 27, 1998
(principal financial and accounting officer)
/s/ Reed D. Matney President and Director March 27, 1998
(principal executive officer)
/s/ Carlin Greene Director March 27, 1998
/s/ Douglas Price Director March 27, 1998
/s/ Gary Varnell Director March 27, 1998
/s/ Truett Pierce Director March 27, 1998
/s/ George Brooks Director March 27, 1998
/s/ Shirley Price Director March 27, 1998
/s/ Eddie Freeman Director March 27, 1998
/s/ Neil Miller Director March 27, 1998
/s/ Lawrence Gray Director March 27, 1998
/s/ Scott Collins Director March 27, 1998
/s/ Leon Gladson Director March 27, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF VOLUNTEER BANCORP, INC. FOR THE YEAR ENDED DECEMBER 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,583,960
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,841,622
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,108,656
<INVESTMENTS-CARRYING> 1,085,104
<INVESTMENTS-MARKET> 1,083,238
<LOANS> 48,470,206
<ALLOWANCE> 660,336
<TOTAL-ASSETS> 78,246,383
<DEPOSITS> 69,087,389
<SHORT-TERM> 1,216,679
<LIABILITIES-OTHER> 806,611
<LONG-TERM> 3,265,000
0
0
<COMMON> 5,390
<OTHER-SE> 3,865,314
<TOTAL-LIABILITIES-AND-EQUITY> 78,246,383
<INTEREST-LOAN> 4,141,546
<INTEREST-INVEST> 1,112,803
<INTEREST-OTHER> 202,199
<INTEREST-TOTAL> 5,461,548
<INTEREST-DEPOSIT> 2,764,396
<INTEREST-EXPENSE> 3,071,411
<INTEREST-INCOME-NET> 2,390,137
<LOAN-LOSSES> 215,000
<SECURITIES-GAINS> 8,342
<EXPENSE-OTHER> 2,034,140
<INCOME-PRETAX> 353,912
<INCOME-PRE-EXTRAORDINARY> 216,775
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 216,775
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0
<YIELD-ACTUAL> 8.64
<LOANS-NON> 70,159
<LOANS-PAST> 186,477
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 457,432
<CHARGE-OFFS> 17,730
<RECOVERIES> 5,634
<ALLOWANCE-CLOSE> 660,336
<ALLOWANCE-DOMESTIC> 660,336
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
