<PAGE> 1
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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
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, 1998
WERE $7,329,113.
THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 20, 1999 IS APPROXIMATELY
$5,937,690. (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 15, 1999,
COMMON STOCK, $.01 PAR VALUE, 539,027.
Documents Incorporated by Reference: NONE
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<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 $98 million at December 31, 1998, 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>
1998 1997
---------------------------------- ------------------------------
(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......... $54,684 $5,362 9.81% $42,185 $4,141 9.82%
U.S. Treasury and other U.S. 6.29%
government agencies................ 20,291 1,277 6.46% 17,065 1,113 6.52%
States and municipalities............ 1,781 115 5.16% 102 8 7.84%
FHLB stock........................... 8 -- --
Federal funds sold................... 5,854 302 8.54% 3,875 202 5.21%
------- ----- ------- ------
Total interest-earning
assets/interest income......... 82,618 7,056 63,227 5,464 8.64%
------ ----- ------ ------
Cash and due from banks.............. 2,164 1,983
Other assets......................... 4,863 4,675
Allowance for loan losses............ (727) (550)
------- -------
Total............................ $88,918 $69,335
======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Demand deposits...................... 13,559 492 3.63% $11,742 $ 423 3.60%
Savings.............................. 3,156 93 2.95% 2,222 66 2.97%
Individual retirement accounts....... 5,766 330 5.72% 4,382 246 5.61%
Time certificates.................... 47,637 2,759 5.79% 35,101 2,029 5.78%
Securities sold under repurchase..... 1,680 101 6.01% 709 43 6.06%
Note payable......................... 3,064 236 7.70% 3,281 264 8.05%
------ ------ -----
Total interest-bearing
liabilities/interest expense..... 74,862 4,011 5.36% 57,437 3,071 5.35%
------ ----- ------ ------
Non-interest bearing demand
deposits........................... 9,031 7,710
Other liabilities.................... 1,018 624
Stockholders' equity................. 4,007 3,564
------- -------
Total.............................. $88,918 $69,335
======= =======
Net interest earnings................ $3,045 $2,393
====== ======
Net interest on interest earning assets 3.69% 3.78%
===== =====
Return on average assets............. 0.51% 0.31%
Return on average equity............. 11.36% 6.09%
Cash dividends declared.............. $ 0 $ 0
Dividend payout ratio................ N/A N/A
</TABLE>
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<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, 1998 December 31, 1997
versus versus
December 31, 1997 December 31, 1996
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 ............. $ 1,226 $ (5) $ 1,221 $ 1,330 $(48) $ 1,282
U.S. Treasury and other U.S. government
agency securities ....................... 204 (40) 164 156 13 169
States and municipal securities ........... 109 (2) 107 3 (0) 3
FHLB stock ................................ 8 0 0 -- -- --
Federal funds sold ........................ 102 (2) 100 (29) 4 (25)
------- ---- ------- ------- ---- -------
Total interest income ............ 1,649 (49) 1,592 1,460 (31) 1,429
------- ---- ------- ------- ---- -------
Increase (decrease) in(2):
Demand deposits ........................... 66 3 69 44 5 49
Savings deposits .......................... 28 (1) 27 18 (0) 18
Individual retirement accounts ............ 79 5 84 72 (2) 70
Time certificates ......................... 726 4 730 669 8 677
Securities sold under repurchase agreements 58 (0) 58 32 0 32
Note payable .............................. (17) (11) (28) (14) (12) (26)
------- ---- ------- ------- ---- -------
Total interest expense ........... 940 0 940 822 (2) 820
------- ---- ------- ------- ---- -------
Increase (decrease) in net interest income $ 709 $(49) $ 652 $ 638 $(29) $ 609
======= ==== ======= ======= ==== =======
</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 FHLB stock is allocated 100% as a change in volume for 1998.
(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.
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.
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<PAGE> 5
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, 1998, the Company had
a negative cumulative repricing gap within one year of approximately $37.4
million, or approximately 40.99% 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, 1998 and 1997. 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, 1998
---------------------------------------------------------------
After 3 After 12
months months
Within Within Within After
3 months 12 months 5 years 5 years Total
-------- -------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans ........................... $ 14,706 $ 15,836 $ 26,818 $ 1,870 $59,230
Investment Securities:
Available for Sale ......... 0 3,246 4,188 18,392 25,826
Held to maturity ........... 0 250 251 1,112 1,362
FHLB stock ...................... 262 0 0 0 262
Federal funds sold .............. 4,515 0 0 0 4,515
-------- -------- -------- ------- -------
Total earning assets ... $ 19,483 $ 19,332 $ 31,006 $21,374 $91,195
======== ======== ======== ======= =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits ....... $ 41,027 $ 30,663 $ 5,983 $ 0 $77,673
Securities sold under repurchase
agreements ...................... 1,462 0 0 0 1,462
Long-term debt .................. 3,045 0 0 0 3,045
-------- -------- -------- ------- -------
Total interest-bearing
liabilities .......... $ 45,534 $ 30,663 $ 5,983 $ 0 $82,180
======== ======== ======== ======= =======
Net repricing gap ............... $(26,051) $(11,331) $ 25,023 $21,374 $ 9,015
======== ======== ======== ======= -------
Rate sensitivity gap:
Net repricing gap as a percentage
of total earning assets ....... -28.57% -12.43% 27.44% 23.44% 9.89%
======== ======== ======== ======= =======
Cumulative gap .................. $(26,051) $(37,382) $(12,359) $ 9,015
======== ======== ======= =======
Cumulative gap as a percentage of
total earning assets .......... -28.57% -40.99% -13.55% 9.89%
======== ======== ======= =======
</TABLE>
- 5 -
<PAGE> 6
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------
After 3 After 12
months months
Within Within Within After
3 months 12 months 5 years 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>
- 6 -
<PAGE> 7
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.
- 7 -
<PAGE> 8
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,
1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Non interest-bearing deposits:
Individuals, partnerships and corporations ........... $ 9,521 $ 8,570
U. S. Government and states and political subdivisions 116 83
Certified and official checks ........................ 355 164
------- -------
Total non interest-bearing deposits ................ 9,992 8,817
------- -------
Interest-bearing deposits:
Interest-bearing demand accounts ..................... 14,838 12,636
Savings accounts ..................................... 3,603 2,585
Individual retirement accounts ....................... 2,163 1,674
Certificates of deposit, less than $100,000 .......... 41,564 33,405
Certificates of deposit, greater than $100,000 ....... 15,505 9,970
------- -------
Total interest-bearing deposits .................... 77,673 60,270
------- -------
Total deposits ..................................... $87,665 $69,087
======= =======
</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,
--------------------------------------------------
1998 1997
-------------------- ---------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Non interest-bearing deposits .. $ 9,031 $ 7,710
Savings deposits ............... 3,156 2.95% 2,222 2.97%
Individual retirement accounts . 5,766 5.72% 4,382 5.61%
Time deposits .................. 47,637 5.79% 35,101 5.78%
Interest-bearing demand deposits 13,559 3.63% 709 3.60%
------- -------
Total deposits ........ $79,149 $50,124
======= =======
</TABLE>
At December 31, 1998 and 1997, time deposits greater than $100,000
aggregated approximately $15.0 million and $10.0 million, respectively. The
following table indicates, as of December 31, 1998 and 1997, the dollar amount
of $100,000 or more deposits by the time remaining until maturity:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------- --------------------------------
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 $6,839 7,539 1,127 $15,505 $3,199 5,625 1,146 $9,970
====== ===== ===== ======= ====== ===== ===== ======
</TABLE>
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<PAGE> 9
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,
1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In Thousands)
<S> <C> <C>
Investment securities:
Available for sale .......... $ 25,827 $ 17,109
Held to maturity ............ 1,362 1,085
FHLB stock .................... 262 --
Federal funds sold ............ 4,515 4,842
Loans:
Real estate ................. 38,282 32,760
Commercial and other ........ 20,948 15,923
-------- --------
Total loans ............... 59,230 48,683
Less unearned income ....... (205) (213)
-------- --------
Loans, net of unearned income 59,025 48,470
-------- --------
Interest earning assets ....... $ 90,991 $ 71,506
======== ========
</TABLE>
INVESTMENT PORTFOLIO
At year end 1998, 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, 1998 and
1997.
<TABLE>
<CAPTION>
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Held to maturity:
Obligations of U.S. Government agencies ....... $ 1,362 $ 1,085
======= =======
Available for sale:
U.S. Treasury securities ....................... $ 3,476 $ 3,964
Obligations of U.S. Government agencies ........ 18,127 13,042
Obligations of states and political subdivisions 4,223 103
FHLB stock ..................................... 262 --
------- -------
$26,088 $17,109
======= =======
</TABLE>
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<PAGE> 10
The following table presents the maturity distribution of the amortized
cost and estimated market value of the Company's investment portfolio at
December 31, 1998 and 1997. 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>
1998 1997
------------------------------------- ---------------------------------
Estimated Weighted Estimated Weighted
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
------- ------- --------- ------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
Obligations of U.S.
Government agencies:
Due within 1 year............................. $ -- $ -- $500 $494
Due after 1 year but within 5 years........... 250 252 250 247
Due after 5 years but within 10 years........ 999 1,001 200 199
Due after 10 years............................ 113 120 135 143
------- ------- ------- -------
Total...................................... $ 1,362 $ 1,373 5.38% $ 1,085 $ 1,083 5.64%
======= ======= ======= =======
Available for sale:
- ------------------
U.S. Securities:
Due within 1 year............................. $ 1,918 $ 1,938 $ 493 $ 498
Due after 1 year but within 5 years........... 1,498 1,538 3,435 3,466
------- ------- ------- -------
Total....................................... 3,416 3,476 6.13% 3,928 3,964 6.19%
------- ------- ------- -------
Obligations of U.S. Government agencies:
Due within 1 year............................. -- -- 704 702
Due after 1 year but within 5 years.......... 2,638 2,650 2,726 2,745
Due after 5 years but within 10 years......... 10,673 10,724 9,567 9,595
Due after 10 years............................ 4,762 4,753
------- ------- ------- -------
Total........................................ 18,073 18,127 6.27% 12,997 13,042 6.29%
------- ------- ------- -------
Obligations of states and political subdivisions:
Due after 1 year but within 5 years.......... 402 407
Due after 5 years but within 10 years......... 3,025 3,108 100 103 5.00%
Due after 10 years.......................... 705 708
------- ------- ------- -------
Total........................................... 4,132 4,223 100 103
------- ------- ------- -------
Total.................................. $25,621 $25,826 6.22% $17,025 $17,109 6.26%
======= ======= ======= =======
</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 $27,450,577 at
December 31, 1998, consisted of $1,362,477 of securities held to maturity, which
are carried at amortized cost and $26,088,100 of securities available for sale
which are carried at market value. In addition, unrealized gains on investment
securities available for sale were $238,669 and unrealized losses were $33,670.
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.
- 10 -
<PAGE> 11
As reflected in Note 2 to Consolidated Financial Statements, the
investment securities held to maturity had unrealized gains of $10,450 and
unrealized losses of $0 at December 31, 1998, compared to $8,563 unrealized
gains and $10,429 unrealized losses at year end December 31, 1997.
At December 31, 1998, the Company had approximately $250,000 of
structured notes in the held to maturity category, which constitutes
approximately 0.9% of its investment securities portfolio. Structured notes have
uncertain cash flows which are driven by interest rate movements and expose the
Company to greater market risk than traditional medium-term notes. All of the
Company's investments of this type are government agency issues (primarily
Federal Home Loan Bank and Federal National Mortgage Association). The
unrealized gain in these securities was approximately $2,000 or 19.14% of total
gross unrealized gains on held to maturity securities. It is management's intent
to hold these securities to maturity. The market risk associated with the
structured notes is not considered material to the Company's financial position,
results of operations or liquidity.
LOAN PORTFOLIO
Total loans of $59,230,000 at December 31, 1998, reflected an increase
of $10,547,000 compared to total loans for the year ended December 31, 1997.
Residential real estate loans, which historically have had low loss experience,
increased $3,820,000 or 22.3%. Construction and land development loans, loans
secured by farmland and commercial real estate loans increased by $1,702,000 or
10.9%. Commercial and industrial loans and agricultural loans increased by
$2,614,000 or 48.6%. 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 $2,411,000 , or 22.9%. 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 Hawkins 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, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Real estate loans:
Construction and land development .. $ 5,598 $ 5,716
Secured by farmland and improvements 2,401 2,508
Secured by residential properties .. 20,991 17,171
Commercial real estate loans ....... 9,292 7,365
------- -------
Total real estate loans .......... 38,282 32,760
------- -------
Loans to farmers ..................... 816 547
Commercial and industrial loans ...... 7,174 4,829
Installment loans .................... 9,626 8,304
Other consumer loans ................. 3,249 2,189
All other loans ...................... 83 54
------- -------
Total loans ...................... $59,230 $48,683
======= =======
</TABLE>
The following table sets forth the maturities of the loan portfolio and
the sensitivity to interest rate changes of that portion of the Company's loan
portfolio that matures after one year.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
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 $ 5,467 $ 131 $ 0 $ 5,598
Real estate mortgage loans .... 11,382 13,676 7,626 32,684
Commercial and industrial loans 4,703 2,016 455 7,174
Agricultural loans ............ 613 203 0 816
All other loans ............... 4,788 7,981 189 12,958
------- ------- ------ -------
Total loans ................. $26,953 $24,007 $8,270 $59,230
======= ======= ====== =======
</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.
- 11 -
<PAGE> 12
Real estate, commercial and industrial and agricultural loans maturing after one
year as of December 31, 1998 (in thousands):
<TABLE>
<S> <C>
Fixed rate ................................. $16,752
Floating rate .............................. 7,355
-------
$24,107
-------
Other loans maturing after one year:
Fixed rate ................................. $ 8,092
Floating rate .............................. 78
-------
$ 8,170
-------
Total loans maturing after one year $32,277
=======
</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 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.
- 12 -
<PAGE> 13
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.
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 $810,563 at year end 1998, or
1.37% of loans outstanding, net of unearned income, compared to $660,336 or
1.36% at year end 1997. The following table presents data related to the
Company's reserve for loan losses for the years ended December 31, 1998 and
1997.
- 13 -
<PAGE> 14
<TABLE>
<CAPTION>
1998 1997
----- -----
(Dollars In Thousands)
<S> <C> <C>
Balance at beginning of period .......................................................... $ 660 $ 457
Charge offs:
Commercial, financial and agricultural ................................................ (29) (4)
Real estate mortgage .................................................................. 0 0
Installment loans to individuals ...................................................... (65) (14)
----- -----
(94) (18)
----- -----
Recoveries:
Commercial, financial and agricultural ................................................ 2 1
Real estate mortgage .................................................................. 0 0
Installment loans to individuals ...................................................... 3 5
----- -----
5 6
----- -----
Net charge offs ......................................................................... (89) (12)
----- -----
Additions to charged to operations ...................................................... 240 215
----- -----
Balance at end of period ................................................................ $ 811 $ 660
===== =====
Ratio of net charge offs during the period to average loans outstanding during the period 0.16% 0.03%
===== =====
Average allowance for loan losses to average total loans ................................ 1.33% 1.30%
===== =====
</TABLE>
At December 31, 1998 and 1997, the allowance for loan losses was
allocated as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
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 $241 13.49% $165 11.04%
Real estate mortgage ................. -- 64.63% 0 67.29%
Installment loans to individuals ..... 570 21.88% 495 21.67%
---- ------ ---- ------
Total ............................. $811 100.00% $660 100.00%
==== ====== ==== ======
</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.
<TABLE>
<CAPTION>
Nonperforming assets (Dollars in thousands):
December 31,
-----------------
1998 1997
------ ------
<S> <C> <C>
Nonaccrual loans.......................................................................... $ 19 $ 70
Restructured loans........................................................................ 0 0
Other loans past due 90 days or more to principal or interest payments.................... 418 186
Nonperforming loans as a percentage of net loans before allowance for loan losses......... 0.74% 0.53%
Allowance for loan losses as a percentage of nonperforming loans.......................... 185.58% 257.81%
</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
- 14 -
<PAGE> 15
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>
1998 1997
---- ----
<S> <C> <C>
Average loans to average deposits........ 70.26% 68.98%
</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 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.
- 15 -
<PAGE> 16
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------- --------
(Dollars in Thousands)
<S> <C> <C>
CAPITAL:
Tier I capital:
Stockholders' common equity ............................................. $ 4,401 $ 3,871
Less unrealized (loss) gain in securities ............................... 52 52
Less disallowed intangibles ............................................. (185) (203)
-------- --------
Total Tier I capital ........................................... 4,164 3,616
Tier II capital:
Qualifying allowance for loan losses .................................... 743 609
-------- --------
Total capital .................................................. $ 4,907 $ 4,225
======== ========
Risk-adjusted assets ............................................................. $ 59,431 $ 48,725
Quarterly average assets ......................................................... $ 95,806 $ 76,127
RATIOS:
Tier I capital to risk-adjusted assets ........................................... 7.01% 7.42%
Tier II capital to risk-adjusted assets .......................................... 1.25% 1.25%
Total capital to risk-adjusted assets ............................................ 8.26% 8.67%
Leverage -- Tier I capital to quarterly average assets less disallowed intangibles 4.28% 4.83%
</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.
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
- 16 -
<PAGE> 17
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.
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
- 17 -
<PAGE> 18
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 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.
- 18 -
<PAGE> 19
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 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.
- 19 -
<PAGE> 20
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.
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
- 20 -
<PAGE> 21
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, 1998, the Company had a total of 46 employees with 4
of those employed on a part-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
- 21 -
<PAGE> 22
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company conducted public offering of its Common Stock in 1998 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 17, 1998
and was for the price of $15.00 per share.
There were 471 holders of record of the Common Stock as of March 20,
1999.
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.
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, 1998 and 1997.
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 1998 was $454,841 increasing $238,066 compared with net
income of $216,775 for 1997. The Company's return on average assets was 0.51%
for 1998 or 1.65 times the return on average assets of 0.31% for 1997. The
Company's return on average equity improved to 11.36% for 1998 compared with
6.09% for 1997.
The Company's net income for 1998 and 1997 were impacted by the
following:
-- The yield on average interest earnings assets was 8.54% for
1998 decreasing 0.10% from 8.64% for 1997.
-- Average earning assets increased $19,391,000 to $82,618,000
for 1998 compared to $63,227,000 for 1997.
-- Yield on average interest bearing liabilities increased 0.01%
from 5.35% in 1997 to 5.36% for 1998.
-- Average interest bearing liabilities increased $17,425,000 to
$74,862,000 for 1998 compared to $57,437,000 for 1997.
-- Average interest earning assets to average total assets
increased slightly from 91.19% for 1997 to 92.91% for 1998.
-- Average interest bearing liabilities to average total assets
increased from 82.84% for 1997 to 84.19% for 1998.
- 22 -
<PAGE> 23
As a result of the foregoing net interest income as a percentage of
average interest earning assets decreased from 3.78% for 1997 to 3.69% for 1998.
Accordingly, net interest income for 1998 of $3,006,351 was only $616,214
greater than net interest income of $2,390,137 for 1997.
Net interest income for 1998 was positively impacted by a decrease in
interest expense of $29,000 on parent company only borrowings. Of this decrease
of $29,000 approximately $17,000 was attributable to a decrease in average
borrowings. Average parent company only borrowings were $3,064,000 for 1998 or a
decrease of $217,000 compared to 1997 of $3,281,000. The remaining decrease of
$12,000 was attributable to a decrease in the average rate on such outstanding
borrowings from 8.05% for 1997 to 7.70% for 1998. 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.
- 23 -
<PAGE> 24
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, 1998 and 1997.
<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 $337,031 from $2,034,140 for 1997 to
$2,371,171 for 1998. However, non-interest expense as a percentage of average
assets decreased by 0.26% from 2.93% in 1997 to 2.67% for 1998.
- 24 -
<PAGE> 25
The following table presents non-interest expense for 1998 compared to
1997 as a percentage of average assets and the changes therein (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
% Average % Average
Non-interest Expense Amount Assets Amount Assets
-------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Salaries and employee benefits............................ $1,256 1.41% $1,094 1.58%
Occupancy, net............................................ 197 0.22% 160 0.23%
Furniture and equipment................................... 263 0.30% 206 0.30%
Directors fees............................................ 50 0.06% 49 0.07%
Advertising............................................... 66 0.07% 59 0.09%
FDIC insurance............................................ 8 0.01% 7 0.01%
Office supplies........................................... 46 0.05% 29 0.04%
Professional services..................................... 96 0.11% 84 0.12%
Telephone................................................. 34 0.04% 34 0.05%
Postage and courier....................................... 54 0.06% 36 0.05%
Other..................................................... 301 0.34% 276 0.40%
------ ---- ------ ----
$2,371 2.67% $2,034 2.93%
====== ==== ====== ====
</TABLE>
Non-interest expenses increased 16.57% in absolute terms from 1997 to
1998 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 1998 by 55.34%
primarily attributable to the fact that 1998 was the first full year of
operations of the Bank's new main office facilities in Rogersville. 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 1998 was $240,000 or $35,000 greater
than the provision for loan losses of $215,000 for 1997. 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 $99,030 from $212,915 in 1997 to $311,945
in 1998.
Income tax expense increased $115,147 from $137,137 in 1997 to $252,284
in 1998.
FINANCIAL POSITION
Company total assets grew 25.04% or $19.59 million during 1998 to
$97.84 million at year end 1998 from $78.25 million at year end 1997. This
growth is primarily attributable to growth of $18.83 million in deposits and
securities sold under repurchase agreements during 1998 to $89.13 million at
year end 1998 from $70.30 million at year end 1997.
Portfolio securities grew $9.26 million in 1998 to $59.02 million at
year end 1998 from $18.19 million at year end 1997 while federal funds decreased
$326,000 during 1998.
Loans increased $10.55 million during 1998 to $59.02 million at year
end 1998 compared to $48.47 million at year end 1997. Of this growth real estate
mortgage loans grew $5.52 million in 1998 and consumer loans grew $2.38 million
in 1998. Real estate mortgage loans represented 64.77% of gross outstanding
loans at year end 1998. Consumer loans represented 21.81% of gross outstanding
loans at year end 1998.
- 25 -
<PAGE> 26
Deposits and securities sold under repurchase agreements grew $18.83
million in 1998 from $70.30 million at year end 1997 to $89.13 million at year
end 1998.
CAPITAL REQUIREMENTS
The Company's equity capital was $4.40 million at year end 1998
compared to $3.87 million at year end 1997. This increase of approximately
$530,000 consists of the Company's net income for 1998 of $454,841, an increase
in the accumulated other comprehensive income of $75,020. No dividends were paid
by the Company during 1998 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 was 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.
These restrictions were no longer in effect at December 31, 1998.
The Bank had 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% on an end of period basis at December 31, 1997. The actual tangible
capital maintained by the Bank at December 31, 1997 after the Rogersville and
Church Hill branches were opened was $6,639, which was consistent with the
approval regarding opening the branches. These requirements were no longer in
effect at December 31, 1998.
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.
Management believes, as of December 31, 1998, 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, 1998.
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.
During 1998 the Company increased available for sale securities by
$8.98 million from $19.11 million at year end 1997 to $26.09 million at year end
1998.
- 26 -
<PAGE> 27
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, 1998 the Company had a cumulative one year negative
gap of (40.99%) or a net of $37.38 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," matured in 1998 and were 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 $437,287
at year end 1998 compared to $256,636 at year end 1997 representing an increase
of $180,651. Non-performing loans as a percentage of net loans before the
allowance for loan losses was 0.74% at year end 1998 and 0.53% at year end 1997.
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 185.4% at
year end 1998 and 259.8% at year end 1997. The Company had no material
restructured loans in 1998 or 1997. The asset quality of the Company continues
to be good which is a result of good underwriting standards coupled with
aggressive collection efforts and a good local economy.
EFFECTS OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation. In the current
interest rate environment, the liquidity and maturity structures of the
Company's assets and liabilities are critical to maintenance of acceptable
performance levels.
- 27 -
<PAGE> 28
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, 1998 and 1997..............................................F-2
Consolidated Statements of Earnings for the years ended December 31, 1998 and 1997.....................F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998 and 1997....................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996...................F-5
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1998 and 1997....................................................................F-6
Notes to Consolidated Financial Statements.............................................................F-7
</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 (49) 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 (58) has served as a Director since 1994. Mr. Price is
retired and was the former Executive for Hawkins County, Tennessee.
WILLIAM E. PHILLIPS (51) 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 (64) has served as the Secretary/Treasurer and Director
since 1994. Mr. Price was employed by First Union National Bank of Tennessee
until June 1993.
GARY E. VARNELL (52) 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 (71) has served as a Director of the Company since
1994. Dr. Truett practices medicine in Sneedville, Tennessee.
GEORGE L. BROOKS (69) has served as a Director of the Company since
1994. Mr. Brooks retired from Citizens Union Bank in 1993 and resides in
Rogersville, Tennessee.
- 28 -
<PAGE> 29
SHIRLEY A. PRICE (64) has served as a Director of the Company since
1994. Ms. Price is an insurance agent in Rogersville, Tennessee.
LEON GLADSON (73) has served as a Director of the Company since 1994.
Mr. Gladson is a retired businessman and resides in Rogersville, Tennessee.
EDDIE FREEMAN (46) 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 (79) has served as a Director of the Company since 1994.
Mr. Miller is a farmer in Rogersville, Tennessee.
M. CARLIN GREENE (56) 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 (50) has served as a Director of the Company since
1994. Mr. Collins is the Hancock County Clerk & Master in Sneedville, Tennessee.
LAWRENCE E. GRAY (54) 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 1998 the Board of Directors of the Company held two meetings.
The Directors of the Company also serve as directors of the Bank. The Board of
Directors of the Bank held 12 meetings in 1998. No director attended less than
75% of the meetings held by the Company or the Bank during 1998. 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.
- 29 -
<PAGE> 30
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 $100,000
(determined as of the end of 1997) for the years ended December 31, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
Annual
Compensation
------------
Name and Position Year Salary ($)
- ----------------- ---- ----------
<S> <C> <C>
Reed Matney 1998 78,000
Chief Executive Officer and President 1997 72,000
1996 66,000
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 20, 1999, 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 15.86%
Rt. 2 Box 157
Sneedville, TN 37869
William E. Phillips(1)............................ 21,755 4.03
312 Main Street
Rogersville, TN 37857
(ii) William E. Phillips(1)............................ 21,755 4.03
Lawrence E. Gray(2)............................... 18,601 3.45
Shirley A. Price.................................. 7,957 1.47
Reed D. Matney.................................... 8,343 1.54
Leon Gladson...................................... 3,683 *
Eddie Freeman..................................... 1,852 *
G. Douglas Price(3)............................... 15,894 2.94
Gary E. Varnell(4)................................ 16,220 3.00
Scott F. Collins.................................. 1,560 *
H. Lyons Price.................................... 6,125 1.13
George L. Brooks.................................. 6,125 1.13
M. Carlin Greene.................................. 11,678 1.70
Dr. Truett H. Pierce(5)........................... 12,231 2.16
Neil D. Miller.................................... 11,110 2.26
(iii) Directors and executive officers as a group (14 143,181 26.56%
persons)..........................................
</TABLE>
- ----------
* 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.
- 30 -
<PAGE> 31
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.*
21.2 List of Subsidiaries
23.1 Consent of Welch & Associates, Ltd.
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,
1999.
- 31 -
<PAGE> 32
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Volunteer Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Volunteer
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, changes in stockholders' equity, cash flows
and comprehensive income 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, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Welch & Associates, Ltd.
January 15, 1999
Nashville, Tennessee
F-1
<PAGE> 33
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks (note 10) $ 2,287,388 $ 2,583,960
Federal funds sold 4,515,263 4,841,622
--------------------------------
Cash and cash equivalents 6,802,651 7,425,582
Investment securities available for sale (amortized
cost of $25,883,100 and $17,024,658, respectively) (note 2) 26,088,100 17,108,656
Investment securities held to maturity (estimated market
value of $1,372,927 and $1,083,238, respectively) (note 2) 1,362,477 1,085,104
Loans, less allowance for possible loan losses of $810,563
and $660,336 in 1998 and 1997, respectively (note 3) 58,214,045 47,809,870
Accrued interest receivable 905,237 819,510
Premises and equipment, net (note 4) 4,116,851 3,647,191
Other real estate 51,923 89,946
Deferred income taxes (note 8) 23,204 -
Goodwill (note 1) 184,908 202,791
Other assets 91,799 57,733
--------------------------------
Total assets $97,841,195 $78,246,383
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes 2 and 5)
Non-interest bearing $ 9,991,890 $ 8,816,803
Interest bearing 77,673,242 60,270,586
--------------------------------
Total deposits 87,665,132 69,087,389
Accrued interest payable 939,899 720,842
Securities sold under repurchase agreements (note 16) 1,462,130 1,216,679
Other accrued taxes, expenses and liabilities 328,469 64,218
Long-term debt (note 6) 3,045,000 3,265,000
Deferred income taxes (note 8) - 21,551
--------------------------------
Total liabilities 93,440,630 74,375,679
--------------------------------
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 5,390 5,390
Additional paid-in capital 1,916,500 1,916,500
Retained earnings 2,351,576 1,896,735
Accumulated other comprehensive income (note 1) 127,099 52,079
--------------------------------
Total stockholders' equity 4,400,565 3,870,704
--------------------------------
Total liabilities and stockholders' equity $97,841,195 $78,246,383
================================
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE> 34
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 5,362,173 $ 4,141,546
Interest on federal funds 302,849 202,199
Interest on investment securities:
Taxable 1,276,541 1,112,803
Exempt from Federal income tax 75,605 5,000
--------------------------------
Total interest income 7,017,168 5,461,548
--------------------------------
Interest expense:
Interest on deposits 3,674,533 2,764,396
Interest on other borrowed funds 336,284 307,015
--------------------------------
Total interest expense 4,010,817 3,071,411
--------------------------------
Net interest income 3,006,351 2,390,137
Provisions for possible loan losses (note 3) 240,000 215,000
--------------------------------
Net interest income after provision for possible loan losses 2,766,351 2,175,137
--------------------------------
Non-interest income:
Service charges on deposit accounts 149,560 105,057
Other fees and commissions 89,025 78,015
Securities gain (loss) (note 2) 37,318 8,342
Other non-interest income 36,042 21,501
--------------------------------
Total non-interest income 311,945 212,915
--------------------------------
Non-interest expense:
Salaries and employee benefits (note 7) 1,251,557 1,094,241
Occupancy expenses, net (note 4) 197,388 160,188
Furniture and equipment expense 263,416 206,498
Other non-interest expense (note 7) 658,810 573,213
--------------------------------
Total non-interest expense 2,371,171 2,034,140
--------------------------------
Net earnings before income taxes 707,125 353,912
Income tax expense (note 8) 252,284 137,137
--------------------------------
Net income $ 454,841 $ 216,775
================================
Income per weighted average common share $ 0.84 $ 0.41
================================
Weighted average common shares outstanding 539,027 529,318
================================
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 35
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Accumulated
Stock Additional Other
Common Stated Paid-In Retained Comprehensive
Shares Value Capital Earnings Income Total
------- ------ ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance January
1,1997 525,717 $5,258 $1,761,552 $1,679,960 $ (49,862) $3,396,908
Net income - - - 216,775 - 216,775
Other
comprehensive
income
- - - - 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
Net income - - - 454,841 - 454,841
Other
comprehensive
income - - - - 75,020 75,020
----------------------------------------------------------------------------------------
Balance December
31,1998 539,027 $5,390 $1,916,500 $2,351,576 $ 127,099 $4,400,565
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 36
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 454,841 $ 216,775
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (90,736) (51,312)
Provision for loan losses 240,000 215,000
Provision for depreciation and amortization 236,925 216,547
Securities (gain) (37,318) (8,342)
(Increase) in interest receivable (85,727) (208,856)
Decrease (increase) in other assets 3,957 (23,384)
Increase in other liabilities 483,308 101,273
--------------------------------
Net cash provided by operating activities 1,205,250 457,701
--------------------------------
Cash Flows from Investing Activities:
Purchase of investment securities held to maturity (2,975,686) -
Proceeds from calls and maturity of held to maturity securities 2,699,156 518,743
Purchase of investment securities available for sale (23,024,574) (8,719,001)
Proceeds from calls and maturities of available for sale securities 10,792,245 1,849,892
Proceeds from sale of available for sale securities 3,410,361 3,452,109
Net (increase) in loans (10,644,175) (13,145,042)
Capital expenditures (688,702) (628,790)
--------------------------------
Net cash (used) in investing activities (20,431,375) (16,672,089)
--------------------------------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW accounts,
IRA and savings accounts 4,884,189 3,191,292
Net increase in certificates of deposit 13,693,554 10,218,966
Net increase in securities sold under repurchase agreements 245,451 1,041,679
Repayment of long-term debt (220,000) (185,000)
Issue common stock - 199,650
Stock issuance costs - (44,570)
--------------------------------
Net cash provided by financing activities 18,603,194 14,422,017
--------------------------------
Increase (decrease) in cash and cash equivalents (622,931) (1,792,371)
Cash and cash equivalents beginning of year 7,425,582 9,217,953
--------------------------------
Cash and cash equivalents end of year (note 1) $ 6,802,651 $ 7,425,582
================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 3,791,760 $ 2,905,786
================================
Income taxes $ 209,635 $ 258,826
================================
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 37
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $ 454,841 $ 216,775
--------------------------------
Other comprehensive income, before tax:
Unrealized gains on securities available for sale:
Unrealized holding gains arising during the period 158,319 177,732
Less: reclassification adjustment for gains included in
Income (37,318) (13,311)
--------------------------------
Other comprehensive income 121,001 164,421
Income taxes related to other comprehensive income (45,981) (62,480)
--------------------------------
Other comprehensive income, net of income taxes 75,020 101,941
--------------------------------
Total comprehensive income $ 529,861 $ 318,716
================================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 38
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
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, 1998 and 1997. 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-7
<PAGE> 39
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
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-8
<PAGE> 40
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
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-9
<PAGE> 41
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
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, 1998 and 1997 was approximately
$28,000 and $88,000, 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.
j. Advertising Cost
All advertising costs are expensed when incurred. Other
advertising expense was $65,797 and $58,709 for the years
ended December 31, 1998 and 1997, respectively. There was no
direct-response advertising costs incurred for 1998 or 1997.
F-10
<PAGE> 42
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
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-11
<PAGE> 43
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
n. Accumulated Other Comprehensive Income
Comprehensive income is the change in the Company's equity
during a period from transactions and other events except
those resulting from investments by investors and
distributions to those investors. Comprehensive income
includes net income and other changes in assets and
liabilities that are not reported in net income, but instead
reported as a separate component of stockholders' equity.
Accumulated other comprehensive income is the cumulative
amount of revenues, expenses, and gains and losses that under
Generally Accepted Accounting Principles are included as a
component of stockholders' equity, but excluded from net
income. The net unrealized gain on investment securities
available for sale is the only item of other comprehensive
income currently recognized by the Company.
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, 1998
---------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Treasury $ 3,416,093 $ 59,982 - $ 3,476,075
Securities of U.S. Government
agencies 18,072,976 84,047 (30,156) 18,126,867
Obligations of states and
political subdivisions 4,132,232 94,640 (3,514) 4,223,358
Restricted securities:
Federal Home Loan Bank stock 261,800 - - 261,800
---------------------------------------------------------------------------
$25,883,101 $ 238,669 $ (33,670) $26,088,100
===========================================================================
</TABLE>
F-12
<PAGE> 44
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<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>
The Bank is a member of the Federal Home Loan Bank (FHLB) and as such is
required to maintain an investment in the capital stock of the FHLB of
Cincinnati. The FHLB stock is carried at cost which approximates the market
value of the stock. The amount of stock required to be held by the Bank is
adjusted annually based on a determination made by the FHLB of Cincinnati.
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, 1998
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Government agencies $ 1,362,477 $ 10,450 $ - $ 1,372,927
===========================================================================
</TABLE>
<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
===========================================================================
</TABLE>
F-13
<PAGE> 45
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
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>
1998 1997
---- ----
<S> <C> <C>
Gross unrealized gains $ 238,669 $ 98,995
Gross unrealized losses (33,670) (14,997)
--------------------------------
Gross unrealized (loss) gain, net 204,999 83,998
Deferred tax effect (77,900) (31,919)
--------------------------------
Net unrealized (loss) gain $ 127,099 $ 52,079
================================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Available for Sale Held to maturity
------------------ ----------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 1,918,077 $1,937,839 $ - $ -
Due after one year and through
five years 4,136,466 4,188,192 250,292 252,364
Due after five years and through
ten years 13,892,620 14,025,348 998,750 1,000,553
Due after ten years 5,674,138 5,674,921 113,435 120,010
----------- ----------- ------------ -----------
$25,621,301 $25,826,300 $ 1,362,477 $ 1,372,927
=========== =========== ============ ===========
</TABLE>
F-14
<PAGE> 46
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
The following table presents the gross realized gains and losses on
investment securities transactions for the years ended December 31,
1998 and 1997.
<TABLE>
<CAPTION>
Realized gains Realized Losses
------------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Available for sale securities $36,475 $15,998 $ - $(7,656)
-------
Held to maturity securities $ 843 - - -
------- ------- ------- -------
$37,318 $15,998 $ - $(7,656)
======= ======= ======= =======
</TABLE>
At December 31, 1998 a net gain of $37,318 was realized , or a gain of
$23,152 net of a tax expense of $14,166. 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.
Investment securities with amortized cost of approximately $13,489,000
and market value of approximately $13,626,000 at December 31, 1998 were
pledged to secure public deposits and for other purposes required or
permitted by law. In 1997, investment securities with amortized cost of
approximately $9,041,000 and market value of approximately $9,074 were
pledged.
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-15
<PAGE> 47
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Loans, less allowance for possible loan losses at December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 7,989,632 $ 5,376,340
Real estate - construction 5,597,515 5,715,776
Real estate - mortgage 32,684,835 27,044,460
Consumer 12,874,979 10,492,473
Other 82,688 54,354
--------------------------------
59,229,649 48,683,403
Less unearned interest 205,041 213,197
--------------------------------
59,024,608 48,470,206
Less allowance for possible loan losses 810,563 660,336
--------------------------------
$58,214,045 $47,809,870
================================
</TABLE>
Loans at December 31, 1998 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 $5,315,722 $5,466,576 $11,382,416 $ 4,716,473 $71,956
After one
through five 2,218,779 130,939 13,675,970 7,970,036 10,732
years
After five
years through
ten years 455,131 - 1,341,188 188,470 -
After ten years - - 6,285,261 - -
-----------------------------------------------------------------------------
Total $7,989,632 $5,597,515 $32,684,835 $12,874,979 $82,688
=============================================================================
</TABLE>
At December 31, 1998, fixed and variable rate loans were as follows:
<TABLE>
<S> <C>
Fixed rate loans $40,023,454
Variable rate loans 19,206,195
-----------
$59,229,649
===========
</TABLE>
F-16
<PAGE> 48
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Non-performing assets at December 31, were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans past due over 90 days $418,124 $186,477
Non-accrual loans 19,163 70,159
Other real estate owned 51,923 89,946
-----------------------
$489,210 $346,582
=======================
</TABLE>
Foregone interest income on the above non-accrual loans was $3,979 and
$6,118 at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, the Bank had loans to its executive
officers, directors and their affiliates of $1,125,4860 and $771,400,
respectively. At December 31, 1998 and 1997, the Bank had commitments
to extend credit to its executive officers, directors and their
affiliates of $1,336,928 and $1,259,978, 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>
1998 1997
---- ----
<S> <C> <C>
Balance January 1 $ 771,400 $ 466,927
Payments received (583,705) (185,972)
Advances made 937,791 490,445
----------------------------
Balance December 31 $ 1,125,486 $ 771,400
============================
</TABLE>
Transactions in the allowance for possible loan losses of the Bank for
the years ended December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance - beginning of year $ 660,336 $ 457,432
Provisions charged to operating expense 240,000 215,000
Loans charged-off (95,005) (17,730)
Recoveries 5,232 5,634
--------------------------
Balance - end of year $ 810,563 $ 660,336
==========================
</TABLE>
As of December 31, 1998 and 1997, the Bank's recorded investment in
impaired loans and disclosures related thereto were not material.
F-17
<PAGE> 49
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
4. Premises and Equipment, Net
The detail of premises and equipment, net at December 31, is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 486,668 $ 446,503
Buildings 3,081,470 2,620,959
Furniture and equipment 1,285,407 1,167,114
---------------------------
4,853,545 4,234,576
Less accumulated depreciation 736,694 587,385
---------------------------
$4,116,851 $3,647,191
===========================
</TABLE>
Depreciation related to premises and equipment for the years ended
December 31, 1998 and 1997 was $219,042 and $198,663, respectively.
The Bank leases two parcels of real estate in Rogersville . One parcel
is leased through April 1, 2000, with an option to renew for two
additional years. The other parcel is leased on an annual basis with
one year renewal options through May 1, 2000. In addition, certain
computer and other equipment was leased during 1998 under various long
term operating leases. Total rental expense for these leases was
$40,445 and $11,054 for December 31, 1998 and 1997, respectively.
Future minimum rental commitments under noncancellable leases are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
1999 $226,342
2000 220,042
2001 217,942
2003 198,093
--------
Total $862,419
========
</TABLE>
During 1997, 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 into ordinary course of
business on substantially the same terms as those prevailing at the
time for comparable transactions with unrelated parties.
F-18
<PAGE> 50
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
5. Deposits
Deposits at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Demand deposits $ 9,991,890 $ 8,816,803
NOW and money market accounts 14,837,878 12,636,336
Savings 3,602,455 2,584,451
Individual retirement accounts 2,163,368 1,674,149
Certificates of deposits - under $100,000 41,564,463 33,405,347
Certificates of deposits - over $100,000 15,505,078 9,970,303
-----------------------------
$87,665,132 $69,087,389
=============================
</TABLE>
The amounts and scheduled maturities of certificate accounts at
December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Within one year $51,086,589 $39,137,586
After one but within two years 5,254,958 3,569,053
After two but within three years 727,994 662,011
After three but within four years - 7,000
-----------------------------
$57,069,541 $43,375,650
=============================
</TABLE>
Demand deposits reclassified as loans (overdrafts) aggregated
approximately $12,600 and $3,600 at December 31, 1998 and 1997,
respectively.
Deposits of executive officers, directors and their affiliates
aggregated approximately $1,132,000 and $1,265,000 at December 31, 1998
and 1997, respectively.
6. Long-term debt
The Company's long-term debt, due an unaffiliated national bank,
consists of a single note payable in the amount of $3,045,000 and
$3,265,000 at December 31, 1998 and 1997, respectively. 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, 1998 the rate on
the note was 7.169% per annum. Principal is payable annually commencing
January 31, 1997 and each January 31 thereafter as follows:
F-19
<PAGE> 51
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, Principal Due
----------- -------------
<S> <C>
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
----------
$3,045,000
==========
</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>
1998 1997
---- ----
<S> <C> <C>
Directors fees $ 49,800 $ 48,700
Advertising 65,798 58,709
Professional services 96,493 84,023
Postage and courier 54,219 36,005
Other 392,500 345,776
-----------------------
Total other non-interest expense $658,810 $573,213
=======================
</TABLE>
The increase in salaries and employee benefits, occupancy expense,
furniture and equipment expenses and other non-interest expense for
1998 is due primarily to the increased costs associated with the growth
of the Bank
8. Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current $ 343,020 $ 188,449
Deferred (90,736) (51,312)
--------------------------------
$ 252,284 $ 137,137
================================
</TABLE>
F-20
<PAGE> 52
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
The sources of deferred income taxes and the tax effect of each are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrual to cash conversion $(51,747) $ 20,377
Provision for loan losses (57,045) (77,022)
Accelerated depreciation 11,235 8,123
Other, net 6,821 (2,790)
---------------------------
$(90,736) $(51,312)
===========================
</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>
1998 1997
---- ----
<S> <C> <C>
Tax expense at statutory rate $240,422 $120,330
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (23,821) (4,627)
Amortization of goodwill 6,080 6,080
State income taxes net of
Federal income tax 28,804 14,629
Other, net 799 725
---------------------------
$252,284 $137,137
===========================
</TABLE>
The components of the net deferred tax asset/liability recognized by
the Company at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Accrual to cash conversion $ - $ (37,572)
Unrealized gain on securities available for sale (77,900) (31,919)
Accumulated depreciation (50,197) (38,962)
Other, net (4,031) -
-----------------------------
Total liabilities (132,128) (108,453)
-----------------------------
Deferred tax assets:
Accrual to cash conversion 14,175 -
Allowances for loan losses 141,157 84,112
Other, net - 2,790
-----------------------------
Total assets 155,332 86,902
-----------------------------
Net deferred tax asset/liability $ 23,204 $ (21,551)
=============================
</TABLE>
F-21
<PAGE> 53
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
9. Commitments and Contingencies
In the normal course of business, the Company makes various commitments
and incurs certain contingent liabilities that are not presented in the
accompanying balance sheet. The commitments and contingent liabilities
may include various guarantees, commitments to extend credit, standby
letters of credit, and litigation. The Company's exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of these
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. Unless noted otherwise, the Company does not require
collateral or other security to support financial instruments with
credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Since some commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained
if deemed necessary by the Company upon extension of credit is based on
management's credit evaluation of the counter-party. Collateral held
varies but may include accounts receivable, inventory, property, plant,
and equipment.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. Most guarantees expire within one year with
some having automatic one year renewals cancelable by the Company. The
credit risk in issuing letters of credit is essentially the same as
that involved in extending loans to customers.
The following table summaries the Company's significant commitments and
contingent liabilities at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commitments to extend credit $6,207,812 $5,102,970
Standby letters of credit 82,000 184,000
---------- ----------
$6,289,812 $5,286,970
========== ==========
</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, 1998 and 1997 was $402,000 and $287,000, respectively.
F-22
<PAGE> 54
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
11. Stockholder's Equity
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval.
12. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possible
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
The regulations require a bank to meet specific capital adequacy
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital classification is
also subject to qualitative judgments by the regulators about
components, risk weights, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier I capital as defined in the
regulations) to total average assets (as defined), and minimum ratios
of Tier I and total capital (as defined) to risk-weighted assets (as
defined). To be considered adequately capitalized (as defined) under
the regulatory framework for prompt corrective action, the Bank must
maintain minimum Tier I leverage, Tier I risk-based, and total
risk-based ratios as set forth in the table. The Bank's actual capital
amounts and ratios, at December 31, are also presented in the tables
below.
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------------
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) $3,825 4.00% $7,046 7.37% $3,825 4.00% $7,046 7.37%
====== ===== ====== ===== ====== ===== ====== =====
Tier I Capital (to
risk-weighted assets) $2,377 4.00% $7,046 11.86% $2,377 4.00% $7,046 11.86%
====== ===== ====== ===== ====== ===== ====== =====
Total Capital (to
risk-weighted assets) $4,754 8.00% $7,790 13.11% $4,754 8.00% $7,790 13.11%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
F-23
<PAGE> 55
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<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) $3,036 4.00% $6,639 8.75% $3,036 4.00% $6,639 8.75%
====== ==== ====== ===== ====== ==== ====== =====
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>
Bases solely upon the foregoing ratios the Bank would be considered "well
capitalized" within applicable Federal banking regulatory guidelines.
In addition, the Bank has committed to State banking regulators, in
connection with the approval to open branches during 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 8.51% on an end of period
basis at December 31, 1997. The actual tangible capital maintained by the
Bank at December 31, 1997 after the Rogersville and Church Hill branches
were opened was $6,639 million, 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.
Management believes, as of December 31, 1998, 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> 56
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
13. Condensed Financial Information
Following is condensed financial information of Volunteer Bancorp, Inc.
(parent company only):
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Assets:
Cash $ 82,458 $ 180,079
Investment in subsidiary 7,173,016 6,691,103
Goodwill 184,908 202,791
Deferred income taxes 14,267 16,228
Tax benefit receivable 28,471 88,253
---------- ----------
$7,483,120 $7,178,454
========== ==========
Liabilities and stockholders' equity
Long-term debt $3,045,000 $3,265,000
Accrued interest payable 37,555 42,750
Stockholders' equity 4,400,565 3,870,704
---------- ----------
$7,483,120 $7,178,454
========== ==========
</TABLE>
Condensed Statements of Earnings
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Income:
Dividends from subsidiary $ 240,721 $ 269,628
--------- ---------
Expenses:
Interest 235,528 264,149
Professional services 53,275 44,041
Other expenses 10,990 10,894
--------- ---------
Total expense 299,793 319,084
--------- ---------
(Loss) before tax benefit and equity in
undistributed subsidiary income (59,072) (49,456)
Tax benefit 107,020 114,335
Equity in undistributed subsidiary income 406,893 151,896
--------- ---------
Net income $ 454,841 $ 216,775
========= =========
</TABLE>
F-25
<PAGE> 57
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities:
Net income (loss) $ 454,841 $ 216,775
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed subsidiary earnings (406,893) (151,896)
Deferred income taxes 1,961 2,080
Amortization 17,883 17,884
Decrease (increase) in other assets 59,782 32,684
(Decrease) in other liabilities (5,195) (5,476)
--------- ---------
Net cash provided (used) by operating activities 122,379 112,051
--------- ---------
Financing activities:
Repayment of note payable (220,000) (185,000)
Issue common stock, net of issuance costs -- 155,080
--------- ---------
Net cash(used) provided by financing activities (220,000) (29,920)
--------- ---------
Change in cash and equivalents (97,621) 82,131
Cash and equivalents - beginning 180,079 97,948
--------- ---------
Cash and equivalents - ending $ 82,458 $ 180,079
========= =========
</TABLE>
Condensed Statements of Comprehensive Income
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net income $454,841 $216,775
-------- --------
Other comprehensive income:
Company's share of subsidiary's other comprehensive
income, net of tax 75,020 101,941
-------- --------
Total comprehensive income $529,861 $318,716
======== ========
</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> 58
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
14. Fair Value of Financial Instruments
The fair value of financial instruments at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 2,287,388 $ 2,287,388 $ 2,583,960 $ 2,583,960
Federal funds sold 4,515,263 4,515,263 4,841,622 4,841,622
Investment securities:
Derivatives -- -- 500,000 493,558
All others 27,450,577 27,461,027 17,693,760 17,698,336
----------- ----------- ----------- -----------
Total investment
securities 27,450,577 27,461,027 18,193,760 18,191,894
----------- ----------- ----------- -----------
Loans, net 58,214,045 58,145,300 47,809,870 47,543,696
----------- ----------- ----------- -----------
$92,467,273 $92,408,978 $73,429,212 $73,161,172
=========== =========== =========== ===========
Financial liabilities:
Deposits $87,665,132 $87,924,335 $69,087,389 $69,172,494
Securities sold under
repurchase agreements 1,462,130 1,462,130 1,216,679 1,216,679
Long-term debt 3,045,000 3,045,000 3,265,000 3,265,000
----------- ----------- ----------- -----------
$92,172,262 $92,431,465 $73,569,068 $73,654,173
=========== =========== =========== ===========
Unrecognized financial
instruments:
Commitments to extend
credit $ -- $ -- $ -- $ --
Standby letters of credit $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
F-27
<PAGE> 59
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
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.
Investment securities:
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> 60
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
14. Profit-Sharing Plan
The Company's subsidiary, The Citizens Bank of East Tennessee, has a
profit-sharing retirement plan. 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 $10,000 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, 1998 and 1997.
16. Securities Sold Under Repurchase Agreements
At December 31, 1998 and 1997, the book value of the securities sold
under repurchase agreements, including accrued interest, was $1,808,718
and $1,250,069, respectively. The maximum amount outstanding during
1998 and 1997 was $1,790,341 and $1,217,588, respectively. The daily
average of outstanding agreements during 1998 and 1997 was $1,680,071
and $708,385, respectively. The securities underlying the agreements
are maintained under the Bank's control.
17. Reclassification
Certain reclassifications have been made to the December 31, 1997
financial statements in order to conform with the presentation of the
December 31, 1998 financial statements.
18. Impact of Recently Issued Accounting Standards
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.
F-29
<PAGE> 61
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
19. 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
--------------------------------------------------------------------------
1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $1,586,534 $1,723,426 $1,830,710 $1,876,498 $7,017,168
Net interest income 669,556 740,739 788,820 807,236 3,006,351
Provision for loan losses 60,000 60,000 60,000 60,000 240,000
Non-interest income 64,462 74,471 86,321 86,691 311,945
Non-interest expense 570,462 600,828 587,172 612,709 2,371,171
Income before income taxes 103,556 154,382 227,969 221,218 707,125
Net income $ 60,009 $ 101,255 $ 148,048 $ 145,529 $ 454,841
========== ========== ========== ========== ==========
Weighted average common
shares outstanding 539,027 539,027 539,027 539,027 539,027
========== ========== ========== ========== ==========
Net income per
weighted average common
share outstanding $ 0.11 $ 0.19 $ 0.27 $ 0.27 $ 0.84
========== ========== ========== ========== ==========
</TABLE>
F-30
<PAGE> 62
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<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 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> 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.
January 15, 1999
Nashville, Tennessee
F-32
<PAGE> 64
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Balance Sheet
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Citizens Consolidated
Volunteer Bank Volunteer
Bancorp, of East Bancorp, Inc
ASSETS Inc. Tennessee and
(Parent) (Subsidiary) Eliminations Subsidiary
-------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Cash and due from banks $ 82,458 $ 2,287,388 $ (82,458) $ 2,287,388
Federal funds sold -- 4,515,263 -- 4,515,263
Investment in subsidiary 7,173,016 -- (7,173,016) --
Investment securities -- 27,450,577 -- 27,450,577
Loans, net -- 58,214,045 -- 58,214,045
Accrued interest receivable -- 905,237 -- 905,237
Premises and equipment -- 4,116,851 -- 4,116,851
Goodwill 184,908 -- -- 184,908
Deferred income taxes 14,267 8,937 23,204
Other assets 28,471 143,722 (28,471) 143,722
---------- ----------- ----------- -----------
Total assets $7,483,120 $97,642,020 $(7,283,945) $97,841,195
========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ -- $87,747,590 $ (82,458) $87,665,132
Long-term debt 3,045,000 -- -- 3,045,000
Accrued interest payable 37,555 902,344 -- 939,899
Securities sold under repurchase
agreements -- 1,462,130 -- 1,462,130
Other liabilities -- 356,940 (28,471) 328,469
---------- ----------- ----------- -----------
Total liabilities 3,082,555 90,469,004 (110,929) 93,440,630
---------- ----------- ----------- -----------
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 2,351,576 1,311,401 (1,311,401) 2,351,576
Accumulated other comprehensive
income 127,099 127,099 (127,099) 127,099
---------- ----------- ----------- -----------
Total stockholders' equity 4,400,565 7,173,016 (7,173,016) 4,400,565
---------- ----------- ----------- -----------
Total liabilities and stockholders'
equity $7,483,120 $97,642,020 $(7,283,945) $97,841,195
========== =========== =========== ===========
</TABLE>
F-33
<PAGE> 65
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Balance Sheet
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Citizens Consolidated
Volunteer Bank Volunteer
Bancorp, of East Bancorp, Inc
ASSETS 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
Accumulated other comprehensive
income 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> 66
VOLUNTEER BANCORP, INC.
Consolidating Statement of Earnings
December 31, 1998
- --------------------------------------------------------------------------------
<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 $ -- $ 5,362,173 $ -- $5,362,173
Interest on federal funds -- 302,849 -- 302,849
Interest and dividends on
investments:
Taxable -- 1,276,541 -- 1,276,541
Exempt from federal income taxes -- 75,605 -- 75,605
----------- ----------- ----------- ----------
Total interest income -- 7,017,168 -- 7,017,168
----------- ----------- ----------- ----------
Interest expense:
Interest on deposits -- 3,674,533 -- 3,674,533
Interest on other borrowed funds 235,528 100,756 -- 336,284
----------- ----------- ----------- ----------
Total interest expense 235,528 3,775,289 -- 4,010,817
----------- ----------- ----------- ----------
Net interest income (235,528) 3,241,879 -- 3,006,351
Provision for possible loan losses -- 240,000 -- 240,000
----------- ----------- ----------- ----------
Net interest income after loan
provision (235,528) 3,001,879 -- 2,766,351
----------- ----------- ----------- ----------
Non-interest income:
Equity in earnings of subsidiary 647,614 -- (647,614) --
Service charges -- 149,560 -- 149,560
Other income -- 162,385 -- 162,385
----------- ----------- ----------- ----------
647,614 311,945 (647,614) 311,945
----------- ----------- ----------- ----------
Non-interest expense:
Salaries and benefits -- 1,251,557 -- 1,251,557
Other 64,265 1,055,349 -- 1,119,614
----------- ----------- ----------- ----------
64,265 2,306,906 -- 2,371,171
----------- ----------- ----------- ----------
Income before taxes 347,821 1,006,918 (647,614) 707,125
Income tax (benefit) expense (107,020) 359,304 -- 252,284
----------- ----------- ----------- ----------
Net income $ 454,841 $ 647,614 $ (647,614) $ 454,841
=========== =========== =========== ==========
</TABLE>
F-35
<PAGE> 67
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
----------- ----------- ----------- ----------
(Loss) 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> 68
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Statement of Cash Flows
December 31, 1998
- --------------------------------------------------------------------------------
<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 $ 454,841 $ 647,614 $(647,614) $ 454,841
Adjustments to reconcile net
income to net cash provided by
operating activities:
Subsidiary earnings undistributed (406,893) -- 406,893 --
Deferred income taxes 1,961 (92,697) -- (90,736)
Provision for loan losses -- 240,000 -- 240,000
Depreciation and amortization 17,883 219,042 -- 236,925
Securities (gains) -- (37,318) -- (37,318)
Decrease (increase) in other
assets 59,782 (81,770) (59,782) (81,770)
Increase in other liabilities (5,195) 428,721 59,782 483,308
--------- ------------ --------- ------------
Net cash provided by operating
activities 122,379 1,323,592 (240,721) 1,205,250
--------- ------------ --------- ------------
Cash Flows From Investing
Activities:
(Increase) in investment securities -- (9,098,498) -- (9,098,498)
(Increase) in loans -- (10,644,175) -- (10,644,175)
Capital expenditures -- (688,702) -- (688,702)
--------- ------------ --------- ------------
Net cash (used) by investing
activities -- (20,431,375) -- (20,431,375)
--------- ------------ --------- ------------
Cash Flows From Financing
Activities:
Increase in deposits -- 18,480,122 97,621 18,577,743
Increase in securities sold under
repurchase agreements -- 245,451 -- 245,451
Dividends paid -- 240,721 (240,721) --
Repayment of long-term debt (220,000) -- -- (220,000)
--------- ------------ --------- ------------
Net cash (used) provided from
financing activities (220,000) 18,966,294 (143,100) 18,603,194
--------- ------------ --------- ------------
Change in cash and equivalents (97,621) (141,489) (383,821) (622,931)
Cash and equivalents - beginning 180,079 7,425,582 (180,079) 7,425,582
--------- ------------ --------- ------------
Cash and equivalents - ending $ 82,458 $ 7,284,093 $(563,900) $ 6,802,651
========= ============ ========= ============
</TABLE>
F-37
<PAGE> 69
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)
(Increase) in other assets 32,684 (232,240) (32,684) (232,240)
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 0 (16,672,089) 0 (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 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> 70
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Statements Comprehensive Income
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
- -------------------------------------------------------------------------------------------------------------
Citizens Consolidated
Volunteer Bank Volunteer
Bancorp, of East Bancorp, Inc
Inc. Tennessee and
(Parent) (Subsidiary) Eliminations Subsidiary
-------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Net income $454,841 $ 647,614 $(647,614) $ 454,841
-------- --------- --------- ---------
Other comprehensive income, before tax
Unrealized gains on securities available
for sale:
Unrealized holding gains arising during
the period -- -- 158,319 158,319
Less: reclassification adjustments for
gains included in net income -- (37,318) -- (37,318)
-------- --------- --------- ---------
Other comprehensive income -- 121,001 -- 121,001
Income taxes -- (45,981) -- (45,981)
-------- --------- --------- ---------
Other comprehensive income net of
income taxes -- 75,020 -- 75,020
Company's share of subsidiary's other
comprehensive income, net of tax 75,020 -- (75,020) --
-------- --------- --------- ---------
Total comprehensive income $529,861 $ 722,634 $(722,634) $ 529,861
======== ========= ========= =========
December 31, 1997
- -------------------------------------------------------------------------------------------------------------
Net income $216,775 $ 421,524 $(421,524) $ 216,775
-------- --------- --------- ---------
Other comprehensive income, before tax
Unrealized gains on securities available
for sale:
Unrealized holding gains arising during
the period -- -- 177,732 177,732
Less: reclassification adjustments for
gains included in net income -- (13,311) -- (13,311)
-------- --------- --------- ---------
Other comprehensive income -- 164,421 -- 164,421
Income taxes -- (62,480) -- (62,480)
-------- --------- --------- ---------
Other comprehensive income net of
income taxes -- 101,941 -- 101,941
Company's share of subsidiary's other
comprehensive income, net of tax 101,941 -- (101,941) --
-------- --------- --------- ---------
Total comprehensive income $318,716 $ 523,465 $(523,465) $ 318,716
======== ========= ========= =========
</TABLE>
F-39
<PAGE> 71
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, 1999
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, 1999
/s/ H. Lyons Price Secretary/Treasurer and Director March 27, 1999
(principal financial and accounting officer)
/s/ Reed D. Matney President and Director March 27, 1999
(principal executive officer)
/s/ Carlin Greene Director March 27, 1999
/s/ Douglas Price Director March 27, 1999
/s/ Gary Varnell Director March 27, 1999
/s/ Truett Pierce Director March 27, 1999
/s/ George Brooks Director March 27, 1999
/s/ Shirley Price Director March 27, 1999
/s/ Eddie Freeman Director March 27, 1999
/s/ Neil Miller Director March 27, 1999
/s/ Lawrence Gray Director March 27, 1999
/s/ Scott Collins Director March 27, 1999
/s/ Leon Gladson Director March 27, 1999
</TABLE>
<PAGE> 1
Exhibit 21.2
SUBSIDIARY STATE OF INCORPORATION
The Citizens Bank of East Tennessee Tennessee
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated January 15, 1999, related to the consolidated balance sheets of Volunteer
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, changes in stockholders' equity, cash flows
and comprehensive income and Form 10-KSB for the year ended December 31, 1998,
for Volunteer Bancorp, Inc.
Welch & Associates, Ltd.
Nashville, Tennessee
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,287,388
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,515,263
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,088,100
<INVESTMENTS-CARRYING> 1,362,477
<INVESTMENTS-MARKET> 1,372,927
<LOANS> 59,024,608
<ALLOWANCE> 810,563
<TOTAL-ASSETS> 97,841,195
<DEPOSITS> 87,665,132
<SHORT-TERM> 1,462,130
<LIABILITIES-OTHER> 1,268,368
<LONG-TERM> 3,045,000
0
0
<COMMON> 5,390
<OTHER-SE> 4,395,175
<TOTAL-LIABILITIES-AND-EQUITY> 97,841,195
<INTEREST-LOAN> 5,362,173
<INTEREST-INVEST> 1,352,146
<INTEREST-OTHER> 302,849
<INTEREST-TOTAL> 7,017,168
<INTEREST-DEPOSIT> 3,674,533
<INTEREST-EXPENSE> 4,010,817
<INTEREST-INCOME-NET> 3,006,351
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> 37,318
<EXPENSE-OTHER> 2,371,171
<INCOME-PRETAX> 707,125
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<EPS-PRIMARY> 0.84
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<ALLOWANCE-CLOSE> 810,563
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</TABLE>
