<PAGE> 1
================================================================================
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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, 1999
WERE $710,256.
THE AGGREGATE MARKET VALUE OF THE SHARES OF COMMON STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT AS OF MARCH 15, 2000 IS APPROXIMATELY
$7.2 MILLION. (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, 2000,
COMMON STOCK, $.01 PAR VALUE, 539,027 SHARES.
Documents Incorporated by Reference: NONE
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<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Volunteer Bancorp, Inc. is a registered bank holding company
organized under the laws of Tennessee, chartered in 1985. Volunteer, with
consolidated total assets of approximately $108 million at December 31, 1999,
is headquartered in Rogersville, Tennessee with offices in Church Hill and
Sneedville, Tennessee, and we conduct operations through our subsidiary, The
Citizens Bank of East Tennessee (the "Bank"), a state bank organized under
the laws of the state of Tennessee in April 1906. We do not engage in any
activities other than acting as a bank holding company for the Bank. We
believe we 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 our 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
We 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
Volunteer on our earning assets and the weighted average rates paid on our
average deposits and other interest-bearing liabilities for the years
indicated, and certain other information:
- 2 -
<PAGE> 3
<TABLE>
<CAPTION>
1999 1998
------------------------------- --------------------------------
(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 $ 63,895 $ 6,083 9.52% $54,684 $5,362 9.81%
U.S. Treasury and other U.S.
government agencies 23,765 1,512 6.36% 20,291 1,277 6.29%
States and municipalities 4,359 284 6.52% 1,781 115 6.46%
FHLB stock 288 20 6.94% 8 -- --
Federal funds sold 2,177 102 4.69% 5,854 302 5.16%
--------- -------- ------ ------- ------
Total interest-earning
assets/interest income 94,484 8,001 8.47% 82,618 7,056 8.54%
--------- -------- ------- ------
Cash and due from banks 3,702 2,164
Other assets 5,834 4,863
Allowance for loan losses (861) (727)
--------- -------
Total $ 103,159 $88,918
========= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Demand deposits 15,761 562 3.57% $13,559 $ 492 3.63%
Savings 4,227 126 2.98% 3,156 93 2.95%
Individual retirement accounts 7,449 363 4.87% 5,766 330 5.72%
Time certificates 54,380 2,910 5.35% 47,637 2,759 5.79%
Fed funds purchased 145 8 5.52%
FHLB advances 862 48 5.57%
Securities sold under repurchase 1,643 89 5.42% 1,680 101 6.01%
Note payable 2,812 208 7.40% 3,064 236 7.70%
-------- -------- ------- ------
Total interest-bearing
liabilities/interest expense 87,279 4,314 4.94% 74,862 4,011 5.36%
-------- -------- ------- ------
Non-interest bearing demand
deposits 10,598 9,031
Other liabilities 1,094 1,018
Stockholders' equity 4,189 4,007
-------- -------
Total $103,159 $88,918
======== =======
Net interest earnings $ 3,687 $3,045
======== ======
Net interest on interest earning
assets 3.90% 3.69%
==== ====
Return on average assets 0.69% 0.51%
Return on average equity 16.96% 11.35%
Cash dividends declared $53,903 $ 0
Dividend payout ratio 7.59% 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, December 31,
1999 1998
versus versus
December 31, December 31,
1998 1997
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:
Loans, net of unearned income $ 881 $(160) $ 721 $ 1,226 $ (5) $ 1,221
U.S. Treasury and other U.S.
government agency securities 221 14 235 204 (40) 164
States and municipal securities 168 1 169 109 (2) 107
FHLB stock 20 0 20 0 0 0
Federal funds sold (175) (25) (200) 102 (2) 100
------- ----- ----- ------- ----- -------
Total interest income 1,115 (170) 945 1,641 (49) 1,592
======= ===== ===== ======= ===== =======
Increase (decrease) in:
Demand deposits 79 (9) 70 66 3 69
Savings deposits 32 1 33 28 (1) 27
Individual retirement accounts 87 (54) 33 79 5 84
Time certificates 371 (220) 151 726 4 730
Federal funds purchased 8 0 8 0 0 0
Securities sold under repo agreements (2) (10) (12) 58 (0) 58
FHLB Advances 48 0 48 0 0 0
Note payable (19) (9) (28) (17) (11) (28)
------- ----- ----- ------- ----- -------
Total interest expense 604 (301) 303 940 0 940
======= ===== ===== ======= ===== =======
Increase (decrease) in
net interest income $ 511 $131 $ 642 $ 701 $ (49) $ 652
</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, Federal funds purchased and FHLB
advances is allocated 100% as a change in volume for 1999.
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
We currently operate an asset/liability model, the Young and
Associates, Inc. Asset/Liability and Profit Planning System, with which we
simulate operations and subsequently develop policies regarding permitted gap
positions, permitted risks in deviations from budget earnings and liquidity. We
apply the System quarterly using rate fluctuations of +/-2%.
At December 31, 1999, we had a negative cumulative repricing gap within
one year of approximately $33.2 million, or approximately 35.00% of total
earning assets. This negative repricing gap indicates that our 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 following table represents an interest sensitivity profile for
Volunteer as of December 31, 1999 and 1998. 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.
- 5 -
<PAGE> 6
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------------------------------------
WITHIN AFTER 3 MONTHS AFTER 12 MONTHS AFTER
3 MONTHS WITHIN 12 MONTHS WITHIN 5 YEARS 5 YEARS TOTAL
--------- ---------------- --------------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans $ 26,984 $ 11,459 $ 24,490 $ 4,642 $67,575
Investment securities:
Available for sale 9,602 2,522 9,029 4,229 25,382
Held to maturity 999 99 1,098
FHLB stock 309 309
Federal funds sold 575 575
--------- -------- -------- -------- -------
Total earning assets $ 38,469 $ 13,981 $ 33,618 $ 8,871 $94,939
========= ======== ======== ======== =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits $ 42,401 $ 34,662 $ 6,688 $83,751
Securities sold under
repurchase agreements 1,321 1,321
FHLB advances 4,500 4,500
Long-term debt 2,790 2,790
--------- -------- -------- -------- -------
Total interest-bearing liabilities $ 51,012 $ 34,662 $ 6,688 $ 0 $92,362
========= ======== ======== ======== =======
Net repricing gap $ (12,543) $(20,681) $ 26,930 $ 8,871 $ 2,577
========= ======== ======== ======== =======
Rate sensitivity gap:
Net repricing gap as a percentage
of total earning assets -13.21% -21.78% 28.37% 9.34% 2.71%
========= ======== ======== ======== =======
Cumulative gap $ (12,543) $(33,224) $( 6,294) $ 2,577
========= ======== ======== ========
Cumulative gap as a percentage of
total earning assets -13.21% -35.00% -6.63% 2.71%
========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------------
WITHIN AFTER 3 MONTHS AFTER 12 MONTHS AFTER
3 MONTHS WITHIN 12 MONTHS WITHIN 5 YEARS 5 YEARS TOTAL
--------- ---------------- --------------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans $ 14,501 $ 15,836 $ 26,818 $ 1,870 $59,025
Investment securities:
Available for sale 3,246 4,188 18,392 25,826
Held to maturity 250 1,112 1,362
FHLB stock 262 262
Federal funds sold 4,515 4,515
--------- -------- -------- -------- -------
Total earning assets $ 19,278 $ 19,332 $ 31,006 $ 21,374 $90,990
========= ======== ======== ======== =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits $ 41,027 $ 30,663 $ 5,983 $77,673
Securities sold under
repurchase agreements 1,462 1,462
Long-term debt 3,045 3,045
--------- -------- -------- -------- -------
Total interest-bearing liabilities $ 45,534 $ 30,663 $ 5,983 $ 0 $82,180
========= ======== ======== ======== =======
Net repricing gap $ (26,256) $(11,331) $ 25,023 $ 21,374 $ 8,810
========= ======== ======== ======== =======
Rate sensitivity gap:
Net repricing gap as a percentage
of total earning assets -28.86% -12.45% 27.50% 23.49% 9.68%
========= ======== ======== ======== =======
Cumulative gap $ (26,256) $(37,587) $(12,564) $ 8,810
======== ======== ========
Cumulative gap as a percentage of
total earning assets -28.86% -41.31% -13.81% 9.68%
========= ======== ======= ========
</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
Our primary sources of funds are interest-bearing deposits. The
following table sets forth our deposit structure at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
Non interest-bearing deposits:
Individuals, partnerships and corporations $10,721 $ 9,521
U.S. Government and states and political subdivisions 72 116
Certified and official checks 280 355
------- -------
Total non-interest bearing deposits 11,073 9,992
------- -------
Interest-bearing deposits:
Interest-bearing demand accounts 16,213 14,838
Savings accounts 4,396 3,603
Individual retirement accounts 2,522 2,163
Certificates of deposit, less than $100,000 44,525 41,564
Certificates of deposit, greater than $100,000 16,095 15,505
------- -------
Total interest-bearing deposits 83,751 77,673
------- -------
Total deposits $94,824 $87,665
======= =======
</TABLE>
The following table presents a breakdown by category of the average
amounts of deposits and the weighted average rate paid on deposits for the
periods indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
Non-interest bearing deposits $10,598 $ 9,031
Savings deposits 4,227 2.98% 3,156 2.95%
Individual retirement accounts 7,449 4.87% 5,766 5.72%
Time deposits 54,380 5.35% 47,637 5.79%
Interest bearing demand deposits 15,761 3.57% 13,559 3.63%
------- -------
Total deposits $92,415 $79,149
======= =======
</TABLE>
At December 31, 1999 and 1998, time deposits greater than $100,000
aggregated approximately $16 million and $15 million, respectively. The
following table indicates, as of December 31, 1999 and 1998, the dollar amount
of $100,000 or more deposits by the time remaining until maturity:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------ ------------------------------
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 $4,627 $9,667 $1,801 $16,095 $6,839 $7,539 $1,127 $15,505
====== ====== ====== ======= ====== ====== ====== =======
</TABLE>
- 8 -
<PAGE> 9
ASSETS
Our management considers many criteria in managing assets, including
creditworthiness, diversification and structural characteristics, maturity and
interest rate sensitivity. The following table sets forth our interest earning
assets by category at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
(In thousands) Investment securities:
Available for sale $ 25,382 $ 25,826
Held to maturity 1,098 1,362
FHLB stock 309 262
Federal funds sold 575 4,515
Loans:
Real estate 44,613 38,282
Commercial and other 23,027 20,948
-------- --------
Total loans 67,640 59,230
Less unearned income (65) (205)
-------- --------
Loans, net of unearned
income 67,575 59,025
-------- --------
Interest earning assets $ 94,939 $ 90,990
======== ========
</TABLE>
INVESTMENT PORTFOLIO
At year end 1999, obligations of the United States Government or its
agencies and obligations of states and political subdivisions represented 96.49%
of the investment portfolio.
The following table sets forth the composition of the carrying value
of our investment portfolio at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Held to maturity:
Obligations of U.S. Government
agencies $ 1,098 $ 1,362
-------- --------
Available for sale:
U.S. Treasury securities $ 1,491 $ 3,476
Obligations of U.S. Government
agencies 19,037 18,127
Corporate 631 --
Obligations of states and
political subdivisions 4,223 4,223
FHLB stock 309 262
-------- --------
$ 25,691 $ 26,088
======== ========
</TABLE>
- 9 -
<PAGE> 10
The following table presents the maturity distribution of the
amortized cost and estimated market value of the Company's debt securities at
December 31, 1999 and 1998. The weighted average yields on these instruments
are presented based on final maturity. Yields on states and political
subdivisions have not been adjusted to a fully-taxable equivalent basis.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------------- --------------------------------------
Estimated Weighted Estimated Weighted
Amortized Market Average Amortized Market Average
Cost Value Yield Cost Value Yield
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Held to maturity:
- -----------------
Obligations of U.S. Government
agencies:
Due after 1 year but within
5 years $ 99 $ 103 $ 250 $ 252
Due after 5 years but within
10 years 999 932 999 1,001
Due after 10 years 113 120
------- ------- ------- -------
Total $ 1,098 $ 1,035 6.47% $ 1,362 $ 1,373 5.38%
======= ======= ======= =======
Available for sale:
- -------------------
U.S. Securities:
Due within 1 year $ 1,000 $ 999 $ 1,918 $ 1,938
Due after 1 year but within
5 years 504 492 1,498 1,538
------- ------- ------- -------
Total 1,504 1,491 5.77% 3,416 3,476 6.13%
------- ------- ------- -------
Obligations of U.S. Government
agencies:
Due within 1 year 2,114 2,048 -- --
Due after 1 year but within
5 years 2,428 2,341 2,638 2,650
Due after 5 years but within
10 years 13,955 13,082 10,673 10,724
Due after 10 years 1,670 1,564 4,762 4,753
------- ------- ------- -------
Total 20,167 19,037 6.33% 18,073 18,127 6.27%
------- ------- ------- -------
Corporate
Due after ten years 631 631 6.55% -- -- --
------- ------- ------- -------
Obligations of states and
political subdivisions
Due after 1 year but within
5 years 704 692 402 407
Due after 5 years but within
10 years 3,425 3,246 3,025 3,108
Due after 10 years 305 285 705 708
------- ------- ------- -------
Total 4,434 4,223 6.03% 4,132 4,223 6.08%
------- ------- ------- -------
Total $26,737 $25,382 6.55% $25,621 $25,826 6.22%
======= ======= ======= =======
</TABLE>
INVESTMENT POLICY
The objective of our investment policy is to invest funds not otherwise
needed to meet the loan demand of its market area to earn the maximum return,
yet still maintain sufficient liquidity to meet fluctuations in our loan demand
and deposit structure. In doing so, we balance the market and credit risks
against the potential investment return, make investments compatible with the
pledge requirements of our deposits of public funds, maintain compliance with
regulatory investment requirements, and assist 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 Volunteer needed liquidity and longer term securities
purchased to generate level income for us over periods of interest rate
fluctuations.
Our investment securities portfolio of $26,788,770 at
December 31, 1999, consisted of $1,097,629 of securities held to maturity, which
are carried at amortized cost and $25,691,141 of securities available for sale
which are carried at market value. In addition, unrealized gains on investment
securities available for sale were $3,676 and unrealized losses were $1,358,321.
Our 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.
- 10 -
<PAGE> 11
As reflected in Note 2 to Consolidated Financial Statements, the
investment securities held to maturity had unrealized gains of $4,978 and
unrealized losses of $67,264 at December 31, 1999, compared to $10,450
unrealized gains and $0 unrealized losses at year end December 31, 1998.
At December 31, 1998, we 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 Volunteer to greater
market risk than traditional medium-term notes. All of our 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 our financial position, results of operations or liquidity.
LOAN PORTFOLIO
Total loans of $67,640,000 at December 31, 1999, reflected an increase
of $8,410,000 compared to total loans for the year ended December 31, 1998.
Residential real estate loans, which historically have had low loss experience,
increased $4,440,000 or 21.15%. Construction and land development loans, loans
secured by farmland and commercial real estate loans increased by $1,891,000 or
10.9%. Commercial and industrial loans and agricultural loans increased by
$671,000 or 8.4%. These types of loans carry a higher level of risk in that
the borrowers' ability to repay may be affected by local economic trends.
Installment and other consumer loans increased by $1,071,000, or 8.3%. 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 as December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
--------------------
(In thousands) 1999 1998
------- -------
<S> <C> <C>
Real estate loans:
Construction and land development $ 7,271 $ 5,598
Secured by farmland and improvements 2,406 2,401
Secured by residential properties 25,431 20,991
Commercial real estate loans 9,505 9,292
------- -------
Total real estate loans 44,613 38,282
Loans to farmers 1,455 816
Commercial and industrial loans 7,206 7,174
Installment loans 11,116 9,626
Other consumer loans 2,830 3,249
All other loans 420 83
------- -------
Total loans $67,640 $59,230
======= =======
</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, 1999
--------------------------------------------------
MATURITY RANGE
--------------------------------------------------
ONE YEAR ONE THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
(In thousands)
Real estate construction loans $ 6,929 $ 253 $ 89 $ 7,271
Real estate mortgage loans 12,691 14,830 9,821 37,342
Commercial and industrial loans 5,142 1,704 360 7,206
Agricultural loans 1,174 281 -- 1,455
All other loans 5,409 8,751 206 14,366
------- ------- ------- -------
Total loans $31,345 $25,819 $10,476 $67,640
======= ======= ======= =======
</TABLE>
- 11 -
<PAGE> 12
The sensitivity to interest rate changes of that portion of Company's
loan portfolio that matures after one year is set below:
Real estate, commercial and industrial and agricultural loans maturing after one
year as of December 31, 1999 (in thousands);
<TABLE>
<S> <C>
Fixed rate $20,253
Floating rate 7,085
-------
$27,338
-------
Other loans maturing after one year:
Fixed rate $ 4,132
Floating rate 4,825
-------
$ 8,957
-------
Total loans maturing after one year $36,295
=======
</TABLE>
LOAN POLICY
All of our lending activities 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. Our
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 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.
Our 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. We require our 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 Volunteer. 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, we make 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 us 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 $842,328 at year end 1999, or
1.25% of loans outstanding, net of unearned income, compared to $810,563 or
1.38% at year end 1998.
- 13 -
<PAGE> 14
RESERVE FOR LOAN LOSSES
The following table presents the data related to the Company's reserve for loan
losses for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
----- -----
<S> <C> <C>
(In thousands)
Balance at beginning of period $ 811 $ 660
Charge offs:
Commercial, financial and agricultural (93) (29)
Real estate mortgage 0 0
Installment loans to individuals (122) (65)
----- -----
(215) (94)
----- -----
Recoveries:
Commercial, financial and agricultural 0 2
Real estate mortgage 0 0
Installment loans to individuals 6 3
----- -----
6 5
----- -----
Net charge offs (209) (89)
----- -----
Additions charged to operations 240 240
----- -----
Balance at end of period $ 842 $ 811
===== =====
Ratio of net charge offs during the period to
average loans outstanding during the period 0.33% 0.16%
===== =====
Average allowance for loan losses to average
total loans 1.35% 1.33%
===== =====
</TABLE>
At December 31, 1999 and 1998, the allowance for loan losses was allocated
as follows: (In thousands)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------------- ----------------------------------
Percent of loans in each Percent of loans in each
Amount category to total loans Amount category to total loans
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $339 13.42% $241 13.49%
Real estate mortgage - 65.96% - 64.63%
Installment loans to individuals 503 20.62% 570 21.88%
---- ------ ---- ------
$842 100.00% $811 100.00%
==== ====== ==== ======
</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>
Non-performing assets (In thousands) December 31
-----------------------
1999 1998
---- ----
<S> <C> <C>
Nonaccrual loans $ 264 $ 19
Restructured loans - -
Other loans past due 90 days or more to principal or interest payments 221 418
Non-performing loans as a percentage of net loans before allowance
for loan losses 0.72% 0.74%
Allowance for loan losses as a percentage of nonperforming loans 173.61% 185.58%
</TABLE>
CAPITAL RESOURCES/LIQUIDITY
Liquidity. Of primary importance to depositors, creditors and
regulators is the ability to have readily available funds sufficient to repay
fully maturing liabilities. Our 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, we
- 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 we have no formal liquidity policy, in the opinion of
management, its liquidity levels are considered adequate. We are not 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.
LIQUIDITY
The following table sets forth liquidity ratios for the periods indicated:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Average loans to average deposits . . . . . . 78.09% 77.99%
</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 Volunteer is reflected in increased operating costs. Unlike most
industrial companies, virtually all of our assets and liabilities are monetary
in nature. As a result, interest rates have a more significant impact on our
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 our 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
Our consolidated capital ratios are set forth below. See Note 12 to the
Notes to Consolidated Financial Statements for Bank-only capital ratios.
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---- ----
(Dollars in thousands)
CAPITAL:
<S> <C> <C>
Tier I capital:
Stockholders' common equity $ 4,090 $ 4,401
Less unrealized (loss) gain in securities (840) 127
Less dissallowed intangibles (167) (185)
--------- --------
Total Tier I capital 4,763 4,089
Tier II capital:
Qualifying allowance for loan losses 842 743
--------- --------
Total capital $ 5,605 $ 4,832
========= ========
Risk-adjusted assets $ 66,780 $ 59,431
Quarterly average assets $ 108,494 $ 95,806
RATIOS:
Tier I capital to risk-adjusted assets 7.13% 6.88%
Tier II capital to risk-adjusted assets 1.26% 1.25%
Total capital to risk-adjusted assets 8.39% 8.13%
Leverage - Tier I capital to quarterly
average assets less disallowed intangibles 4.40% 4.28%
</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, 1999, the Bank and Volunteer exceeded the regulatory
minimums and qualified under the regulations as a well-capitalized institution
and an adequately capitalized institution, respectively.
CERTAIN REGULATORY CONSIDERATIONS
As a bank holding company, Volunteer 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
Volunteer is a legal entity separate and distinct from its banking
subsidiary. The principal source of cash flow of Volunteer, 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 Volunteer, 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 Volunteer 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 we 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 Volunteer, a bank's loans or extensions of credit to
third parties, collateralized by the securities or obligations of Volunteer, the
issuance of guaranties, acceptances and letters of credit on behalf of
Volunteer, and certain bank transactions with the Company, or with respect to
which Volunteer acts as agent, participates or has a financial interest. Subject
to certain limited exceptions, the Bank may not extend credit to Volunteer 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 Volunteer or to such other affiliates. Also, extensions of credit and
other transactions between the Bank and Volunteer 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,
Volunteer 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 Volunteer 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 Volunteer may itself
be a creditor with recognized claims against the subsidiary.
Under Federal Reserve Board policy, Volunteer 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,
Volunteer 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
Volunteer'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.
We believe that at March 1, 2000, 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 we believe that the Bank was well
capitalized as of March 1, 2000, we believe 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 Volunteer and the Bank
subsidiaries may be affected thereby.
EMPLOYEES
At December 31, 1999, the Company had a total of 49 employees with 2
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 Volunteer or
the Bank is a party or of which any of their properties are subject; nor are
there material proceedings known to us to be contemplated by any governmental
authority; nor are there material proceedings known to us, pending or
contemplated, in which any director, officer or affiliate or any principal
security holder of Volunteer, or any associate of any of the foregoing, is a
party or has an interest adverse to Volunteer 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
We conducted a public offering of our Common Stock in 1997 at a price
of $15 per share (the "Offering"). There is no established public market for the
shares. Management is aware that isolated transactions in the Common Stock occur
from time to time. To our best knowledge the most recent transaction in the
Common Stock was December 17, 1997 and was for the price of $15.00 per share.
There were 438 holders of record of the Common Stock as of March 15,
2000.
We currently intend to retain our earnings, if any, for use in the
business and do 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 our 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 our financial condition and changes therein and
results of our operations and the Bank for the years ended December 31, 1999 and
1998.
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 1999 was $710,256 increasing $255,415 compared with net
income of $454,841 for 1998. Our return on average assets was 0.69% for 1999 or
1.36 times the return on average assets of 0.51% for 1998. Our return on average
equity improved to 16.96% for 1999 compared with 11.36% for 1998.
Our net income for 1999 and 1998 were impacted by the
following:
-- The yield on average interest earnings assets was 8.47% for
1999 decreasing 0.07% from 8.54% for 1998.
-- Average earning assets increased $11,866,000 to $94,484,000
for 1999 compared to $82,618,000 for 1998.
-- Yield on average interest bearing liabilities decreased 0.42%
from 5.36% in 1998 to 4.94% for 1999.
-- Average interest bearing liabilities increased $12,417,000 to
$87,279,000 for 1999 compared to $74,862,000 for 1998.
-- Average interest earning assets to average total assets
decreased slightly from 92.91% for 1998 to 91.59% for 1999.
-- Average interest bearing liabilities to average total assets
increased from 84.19% for 1998 to 84.61% for 1999.
- 22 -
<PAGE> 23
As a result of the foregoing net interest income as a percentage of
average interest earning assets increased from 3.64% for 1998 to 3.80% for 1999.
Accordingly, net interest income for 1999 of $3,590,306 was only $583,955
greater than net interest income of $3,006,351 for 1998.
Net interest income for 1999 was positively impacted by a decrease in
interest expense of $28,000 on parent company only borrowings. Of this decrease
of $28,000 approximately $19,000 was attributable to a decrease in average
borrowings. Average parent company only borrowings were $2,812,000 for 1999 or a
decrease of $252,000 compared to 1998 of $3,064,000. The remaining decrease of
$9,000 was attributable to a decrease in the average rate on such outstanding
borrowings from 7.70% for 1998 to 7.40% for 1999. The borrowing was incurred in
order to increase the capital of our 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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ ----------------------------------------------
(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 $ 63,895 $ 6,083 9.52% $54,684 $5,362 9.81%
U.S. Treasury and other U.S.
government agencies 23,765 1,512 6.36% 20,291 1,277 6.29%
States and municipalities 4,359 284 6.52% 1,781 115 6.46%
FHLB stock 288 20 6.94% 8 - -
Federal funds sold 2,177 102 4.69% 5,854 302 5.16%
------- ---- ------ ----
Total interest-earning
assets/interest income 94,484 8,001 8.47% 82,618 7,056 8.54%
------- ------ ------- ------
Cash and due from banks 3,702 2,164
Other assets 5,834 4,863
Allowance for loan losses (861) (727)
----- ------
Total $103,159 $88,918
======== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing liabilities:
Demand deposits 15,761 562 3.57% $13,559 $492 3.63%
Savings 4,227 126 2.98% 3,156 93 2.95%
Individual retirement accounts 7,449 363 4.87% 5,766 330 5.72%
Time certificates 54,380 2,910 5.35% 47,637 2,759 5.79%
Fed funds purchased 145 8 5.52%
FHLB advances 862 48 5.57%
Securities sold under repurchase 1,643 89 5.42% 1,680 101 6.01%
Note payable 2,812 208 7.40% 3,064 236 7.70%
----- ---- ------ ----
Total interest-bearing
liabilities/interest expense 87,279 4,314 4.94% 74,862 4,011 5.36%
------ ------ ------- -----
Non-interest bearing demand
deposits 10,598 9,031
Other liabilities 1,094 1,018
Stockholders' equity 4,189 4,007
------ -----
Total $103,159 $88,918
======== =======
Net interest earnings $ 3,687 $3,045
======= ======
Net interest on interest earning
assets 3.90% 3.69%
===== ====
Return on average assets 0.69% 0.51%
Return on average equity 16.96% 11.35%
Cash dividends declared $ 53,903 $ 0
Dividend payout ratio 7.59% N/A
</TABLE>
Non-interest expense increased $287,875 from $2,371,171 for 1998 to
$2,659,046 for 1999. However, non-interest expense as a percentage of average
assets decreased by 0.09% from 2.67% in 1998 to 2.58% for 1999.
- 24 -
<PAGE> 25
The following table presents non-interest expense for 1999 compared to
1998 as a percentage of average assets and the changes therein (in thousands):
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
% AVERAGE % AVERAGE
99 ASSETS 1998 ASSETS
-- ---------- ------ ---------
<S> <C> <C> <C> <C>
Salaries and employee benefits $1,434 1.39% $1,256 1.41%
Occupancy, net 222 0.22% 197 0.22%
Furniture and equipment 315 0.31% 263 0.30%
Directors fees 52 0.05% 50 0.06%
Advertising 37 0.04% 66 0.07%
FDIC insurance 10 0.01% 8 0.01%
Office supplies 48 0.05% 46 0.05%
Professional services 72 0.07% 96 0.11%
Telephone 47 0.05% 34 0.04%
Postage and courier 56 0.05% 54 0.06%
Other 366 0.35% 301 0.34%
------- ------
$ 2,659 2.58% $2,371 2.67%
======= ===== ====== ====
</TABLE>
Non-interest expenses increased 12.14% in absolute terms from 1998 to
1999 but decreased as a percentage of average total assets. The decrease is
attributable to an expansion of our asset base without a corresponding increase
in non-interest expenses. Occupancy expense increased in 1999 by 12.70%
primarily attributable overall asset growth. 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 1999 and 1998 was $240,000. 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 Volunteer, historic loan-loss
experience, loan mix and the level of loans relative to reserves.
Non-interest income increased $69,439 from $311,945 in 1998 to $381,384
in 1999.
Income tax expense increased $110,104 from $252,284 in 1998 to $362,388
in 1999.
FINANCIAL POSITION
Our total assets grew 10.87% or $10.63 million during 1999 to $108.47
million at year end 1999 from $97.84 million at year end 1998. This growth is
primarily attributable to growth of $11.51 million in deposits, securities sold
under repurchase agreements and short-term Federal Home Loan Bank Advances
during 1999 to $100.64 million at year end 1999 from $89.13 million at year end
1998.
Portfolio securities decreased $660,000 in 1999 to $26.79
million at year end 1999 from $27.45 million at year end 1998 while federal
funds decreased $3.94 million during 1999.
Loans increased $8.55 million during 1999 to $67.57 million at year
end 1999 compared to $59.02 million at year end 1998. Of this growth real estate
mortgage loans grew $6.31 million in 1999 and consumer loans grew $1.07 million
in 1999. Real estate mortgage loans represented 65.96% of gross outstanding
loans at year end 1999. Consumer loans represented 20.62% of gross outstanding
loans at year end 1999.
- 25 -
<PAGE> 26
Deposits, securities sold under repurchase agreements and short-term
Federal Home Loan Bank Advances grew $11.51 million in 1999 from $89.13 million
at year end 1998 to $100.64 million at year end 1999.
CAPITAL REQUIREMENTS
Our equity capital was $4.09 million at year end 1999 compared to $4.40
million at year end 1998. This increase of approximately $311,000 consists of
our net income for 1999 of $710,256, a decrease in the accumulated other
comprehensive income of $966,979 and dividends paid of $53,903.
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, 1999, that we meet all capital
requirements to which we are subject and that we 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 our control, such as a downturn in the local economy, could adversely
affect future earnings and, consequently, our ability of to meet our future
minimum capital requirements.
The Bank would be considered "well capitalized" within the applicable
regulatory capital guidelines at December 31, 1999.
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.
- 26 -
<PAGE> 27
ASSET LIABILITY MANAGEMENT
Our long-term profitability depends on properly priced products and
services, asset quality and asset-liability management. Historically, we have
had a mismatch between the maturities of our assets and liabilities because
customers have traditionally preferred short-term deposits and longer-term
loans. This mismatch makes us sensitive to changes in interest rates and the
resulting effect on interest income and the market value of assets. We attempt
to manage this mismatch and thus reduce its effect on earnings during periods of
significant changes in interest rates. Our strategies include the origination of
shorter-term fixed rate loans and adjustable rate loans or loans with call
provisions. We also emphasize 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 our one-year gap position (total assets subject to
repricing less total liabilities subject to repricing). A negative one-year gap
position generally exposes our 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, 1999 we had a cumulative one year negative gap of (35.00%) or a net
of $33.22 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.
ASSET QUALITY
Non-performing and other loans past due 90 days or more were $485,528
at year end 1999 compared to $437,287 at year end 1998 representing an increase
of $48,241. Non-performing loans as a percentage of net loans before the
allowance for loan losses was 0.72% at year end 1999 and 0.74% at year end 1998.
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 173.5% at
year end 1999 and 185.4% at year end 1998. Other real estate owned increase
$292,927 to $344,850 at year end 1999 compared to $51,923 at year end 1998. We
had no material restructured loans in 1999 or 1998. Our asset quality 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 our assets
and liabilities are critical to maintenance of acceptable performance levels.
- 27 -
<PAGE> 28
YEAR 2000 COMPLIANCE
We experienced a successful transition into the 21st century primarily
resulting from extensive testing and correction of problems prior to the new
year. We will continue to test operating systems during the first half of 2000
to ensure that all programs are operating properly. There have been no Y2K
failures to date.
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, 1999 and 1998..............................................F-2
Consolidated Statements of Earnings for the years ended December 31, 1999 and 1998.....................F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999 and 1998....................................................................F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998...................F-5
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999 and 1998....................................................................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 Volunteer.
REED D. MATNEY (50) 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 (59) has served as a Director since 1994. Mr. Price is
retired and was the former Executive for Hawkins County, Tennessee.
WILLIAM E. PHILLIPS (52) 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 (65) 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 (53) has served as a Director since 1994. Mr. Varnell
is the owner and operator of a retail office products store in Rogersville,
Tennessee.
DR. TRUETT H. PIERCE (72) has served as a Director since 1994. Dr.
Truett practices medicine in Sneedville, Tennessee.
GEORGE L. BROOKS (70) has served as a Director since 1994. Mr. Brooks
retired from Citizens Union Bank in 1993 and resides in Rogersville, Tennessee.
- 28 -
<PAGE> 29
SHIRLEY A. PRICE (65) has served as a Director since 1994. Ms. Price is
an insurance agent in Rogersville, Tennessee.
LEON GLADSON (74) has served as a Director since 1994. Mr. Gladson is a
retired businessman and resides in Rogersville, Tennessee.
EDDIE FREEMAN (47) has served as a Director since 1995 and serves as
Vice President and Manager of the Bank's Church Hill office.
NEIL D. MILLER (80) has served as a Director since 1994. Mr. Miller is
a farmer in Rogersville, Tennessee.
M. CARLIN GREENE (57) has served as a Director since 1994. Mr. Greene
is a real estate agent and farmer in Sneedville, Tennessee.
SCOTT F. COLLINS (51) has served as a Director since 1994. Mr. Collins
is the Hancock County Clerk & Master in Sneedville, Tennessee.
LAWRENCE E. GRAY (55) has served as a Director 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 1999 our Board of Directors held two meetings. The Directors of
Volunteer also serve as directors of the Bank. The Board of Directors of the
Bank held 12 meetings in 1999. No director attended less than 75% of the
meetings held by Volunteer or the Bank during 1999. The Directors received no
compensation as directors of Volunteer 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
Volunteer to our chief executive officer. No other executive officer received
cash compensation in excess of $100,000 (determined as of the end of 1999) for
the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Annual
Compensation
------------
Name and Position Year Salary ($)
- ----------------- ---- ----------
<S> <C> <C>
1999 86,000
Reed Matney 1998 78,000
Chief Executive Officer and President 1997 72,000
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 15, 2000, our records indicated that the following number
of shares were beneficially owned by (i) each person known by us to beneficially
own more than 5% of our shares; (ii) directors and persons nominated to become
directors of Volunteer and executive officers; and (iii) our directors and
executive officers 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)............................ 22,475 4.17
312 Main Street
Rogersville, TN 37857
(ii) William E. Phillips(1)............................ 22,475 4.17
Lawrence E. Gray(2)............................... 18,621 3.45
Shirley A. Price.................................. 7,957 1.47
Reed D. Matney.................................... 8,363 1.55
Leon Gladson...................................... 3,703 *
Eddie Freeman..................................... 1,872 *
G. Douglas Price(3)............................... 15,914 2.95
Gary E. Varnell(4)................................ 16,240 3.01
Scott F. Collins.................................. 1,627 *
H. Lyons Price.................................... 6,145 1.14
George L. Brooks.................................. 6,145 1.14
M. Carlin Greene.................................. 14,218 2.64
Dr. Truett H. Pierce(5)........................... 12,251 2.27
Neil D. Miller.................................... 11,130 2.06
(iii) Directors and executive officers as a group (14 146,661 27.19%
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
We expect to have in the future banking and other business transactions
in the ordinary course of our banking business with directors, officers, and 10%
beneficial owners of Volunteer and their affiliates, including members of their
families, or corporations, partnerships, or other organizations in which these
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 Volunteer 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.*
21.1 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,
2000.
- 31 -
<PAGE> 32
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Rogersville, Tennessee
Consolidated Financial Statements
And Additional Information
December 31, 1999 and 1998
<PAGE> 33
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, 1999 and 1998, 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
January 19, 2000
Nashville, Tennessee
F - 1
<PAGE> 34
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
ASSETS
Cash and due from banks (note 11) $ 8,031,055 $ 2,287,388
Federal funds sold 575,290 4,515,263
-----------------------------
Cash and cash equivalents 8,606,345 6,802,651
Investment securities available for sale (amortized
cost of $27,045,786 and $25,883,100, respectively) (note 2) 25,691,141 26,088,100
Investment securities held to maturity (estimated market
value of $1,035,343 and $1,372,927, respectively) (note 2) 1,097,629 1,362,477
Loans, less allowance for possible loan losses of $842,328 and
$810,563 in 1999 and 1998, respectively (note 3) 66,732,428 58,214,045
Accrued interest receivable 1,028,360 905,237
4,116,851and equipment, net (note 4) 4,074,250
Other real estate 344,850 51,923
Deferred income taxes (note 9) 607,860 23,204
Goodwill (note 1) 167,025 184,908
Other assets 119,844 91,799
-----------------------------
Total assets $ 108,469,732 $97,841,195
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes 2 and 5)
Non-interest bearing $ 11,072,70 $ 9,991,890
Interest bearing 83,751,347 77,673,242
-----------------------------
Total deposits 94,824,047 87,665,132
Accrued interest payable 851,394 939,899
FHLB advances (note 7) 4,500,000 --
Securities sold under repurchase agreements (note 17) 1,321,090 1,462,130
Other accrued taxes, expenses and liabilities 93,262 328,469
Long-term debt (note 6) 2,790,000 3,045,000
-----------------------------
Total liabilities 104,379,793 93,440,630
-----------------------------
Commitments and contingent liabilities (note 10)
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 3,007,929 2,351,576
Accumulated other comprehensive income (note 1) (839,880) 127,099
-----------------------------
Total stockholders' equity 4,089,939 4,400,565
-----------------------------
Total liabilities and stockholders' equity $ 108,469,732 $97,841,195
=============================
</TABLE>
See accompanying notes to consolidated financial statements
F - 2
<PAGE> 35
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------ -----
<S> <C> <C>
Interest income:
Interest and fees on loans $6,082,587 $5,362,173
Interest on federal funds 102,471 302,849
Interest on investment securities:
Taxable 1,531,867 1,276,541
Exempt from Federal income tax 187,233 75,605
--------------------------
Total interest income 7,904,158 7,017,168
--------------------------
Interest expense:
Interest on deposits 3,960,862 3,674,533
Interest on other borrowed funds 352,990 336,284
--------------------------
Total interest expense 4,313,852 4,010,817
--------------------------
Net interest income 3,590,306 3,006,351
Provisions for possible loan losses (note 3) 240,000 240,000
--------------------------
Net interest income after provision for possible loan losses 3,350,306 2,766,351
--------------------------
Non-interest income:
Service charges on deposit accounts 204,185 149,560
Other fees and commissions 106,561 89,025
Securities gains (note 2) 40,742 37,318
Other non-interest income 29,896 36,042
--------------------------
Total non-interest income 381,384 311,945
--------------------------
Non-interest expense:
Salaries and employee benefits (note 8) 1,434,578 1,251,557
Occupancy expenses, net 222,454 197,388
Furniture and equipment expense 315,221 263,416
Other non-interest expense (note 8) 686,793 658,810
--------------------------
Total non-interest expense 2,659,046 2,371,171
--------------------------
Net earnings before income taxes 1,072,644 707,125
Income tax expense (note 9) 362,388 252,284
--------------------------
Net income $ 710,256 $ 454,841
==========================
Income per common share $ 1.32 $ 0.84
==========================
Common shares outstanding 539,027 539,027
==========================
</TABLE>
See accompanying notes to consolidated financial statements
F - 3
<PAGE> 36
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Common Other
Stock Additional Compre-
Common Stated Paid-In Retained hensive
Shares Value Capital Earnings Income Total
------ ----- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance January 1,1998 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
Net income -- -- -- 710,256 -- 710,256
Dividends declared -- -- -- (53,903) -- (53,903)
Other comprehensive
income (loss) -- -- -- -- (966,979) (966,979)
------------------------------------------------------------------------------------------
Balance December 31,1999 539,027 $5,390 $1,916,500 $ 3,007,929 $(839,880) $ 4,089,939
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
F - 4
<PAGE> 37
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 710,256 $ 454,841
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 8,009 (90,736)
Provision for loan losses 240,000 240,000
Provision for depreciation and amortization 248,385 236,925
Securities (gain) (40,742) (37,318)
FHLB stock dividends (20,200) --
(Increase) in interest receivable (123,123) (85,727)
(Increase) decrease in other assets (320,972) 3,957
(Decrease) increase in other liabilities (323,712) 483,308
--------------------------------
Net cash provided by operating activities 377,901 1,205,250
--------------------------------
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 264,848 2,699,156
Purchase of investment securities available for sale (11,325,770) (23,024,574)
Proceeds from calls and maturities of available for sale securities 4,664,861 10,792,245
Proceeds from sale of available for sale securities 5,559,166 3,410,361
Net (increase) in loans (8,758,383) (10,644,175)
Capital expenditures (187,901) (688,702)
--------------------------------
Net cash (used) in investing activities (9,783,179) (20,431,375)
--------------------------------
Cash Flows from Financing Activities:
Net increase in demand deposits, NOW accounts,
IRA and savings accounts 3,608,080 4,884,189
Net increase in certificates of deposit 3,550,835 13,693,554
Net (decrease) increase in securities sold under
repurchase agreements (141,040) 245,451
FHLB advances 4,500,000 --
Dividends paid (53,903) --
Repayment of long-term debt (255,000) (220,000)
--------------------------------
Net cash provided by financing activities 11,208,972 18,603,194
--------------------------------
Increase (decrease) in cash and cash equivalents 1,803,694 (622,931)
Cash and cash equivalents beginning of year 6,802,651 7,425,582
--------------------------------
Cash and cash equivalents end of year (note 1) $ 8,606,345 $ 6,802,651
================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 4,402,357 $ 3,791,760
=====================-==========
Income taxes $ 461,692 $ 209,635
======================-=========
</TABLE>
See accompanying notes to consolidated financial statements
F - 5
<PAGE> 38
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income $ 710,256 $ 454,841
---------------------------
Other comprehensive income, before tax:
Unrealized (losses) gains on securities available
for sale:
Unrealized holding (losses) gains arising
during the period (1,600,386) 158,319
Less: reclassification adjustment for gains
included in income 40,742 (37,318)
----------------------------
Other comprehensive (loss) income (1,559,644) 121,001
Income taxes related to other comprehensive
(loss) income 592,665 (45,981)
----------------------------
Other comprehensive (loss) income, net of
income taxes (966,979) 75,020
----------------------------
Total comprehensive (loss) income $ (256,723) $ 529,861
============================
</TABLE>
See accompanying notes to consolidated financial statements
F - 6
<PAGE> 39
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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 (the
"Bank"), formerly known as Citizens Bank of Sneedville, 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, 1999 and
1998. All material inter-company accounts and transactions have been
eliminated in consolidation.
b. Investment Securities
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" requires
investments in equity securities that have a readily determinable fair
value and investments in debt securities to be classified into three
categories, as follows: held to maturity debt securities, trading
securities, and securities available for sale.
Classification of a debt security as held to maturity is based on the
Company's positive intent and ability to hold such security to
maturity. Securities held to maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts, unless there is a
decline in value which is considered to be other than temporary, in
which case the cost basis of such security is written down to market
and the amount of the write-down is included in earnings.
Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading account
securities, which are valued at market with unrealized gains and losses
included in earnings. Gains or losses on sales and adjustments to
market value of trading account securities are included in non-interest
income in the income statements.
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> 40
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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 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
F - 8
<PAGE> 41
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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.
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.
F - 9
<PAGE> 42
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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, 1999 and
1998 was approximately $28,000.
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 $36,636 and $65,797 for the years ended December 31, 1999
and 1998, respectively. There was no direct-response advertising costs
incurred for 1999 or 1998.
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.
F - 10
<PAGE> 43
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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.
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.
F - 11
<PAGE> 44
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Carrying
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Treasury $ 1,504,493 $ 1,215 $ (14,684) $ 1,491,024
Securities of U.S. Government
agencies 20,166,827 2,461 (1,132,588) 19,036,700
Corporate bonds 631,812 -- -- 631,812
Obligations of states and political
subdivisions 4,433,954 -- (211,049) 4,222,905
Restricted securities:
Federal Home Loan Bank stock 308,700 -- -- 308,700
------------------------------------------------------------------
$27,045,786 $ 3,676 $ (1,358,321) $25,691,141
==================================================================
<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> 45
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
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, 1999
-----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities of U.S. Government agencies $1,097,629 $4,978 $(67,264) $1,035,343
======================================================
<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>
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>
1999 1998
---- ----
<S> <C> <C>
Gross unrealized gains $ 3,676 $ 238,669
Gross unrealized losses (1,358,321) (33,670)
-------------------------------
Gross unrealized (loss) gain, net (1,354,645) 204,999
Deferred tax effect 514,765 (77,900)
-------------------------------
Net unrealized (loss) gain $ (839,880) $ 127,099
===============================
</TABLE>
F - 13
<PAGE> 46
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of debt securities at
December 31, 1999, 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 $ 1,089,512 $ 1,088,134 $ 299 $ 299
Due after one year and through
five years 4,732,537 4,610,441 98,500 103,478
Due after five years and through
ten years 18,308,144 17,202,300 998,830 931,566
Due after ten years 2,606,893 2,481,566 -- --
-------------------------------------------------------------
$26,737,086 $25,382,441 $1,097,629 $1,035,343
=============================================================
</TABLE>
The following table presents the gross realized gains and losses on
investment securities transactions for the years ended December 31, 1999
and 1998.
<TABLE>
<CAPTION>
Realized gains Realized Losses
--------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Available for sale securities $40,745 $ 36,475 $(3) $ --
Held to maturity securities -- 843 -- --
------------------------------------------
$40,745 $ 37,318 $(3) $ --
==========================================
</TABLE>
At December 31, 1999 a net gain of $40,742 was realized, or a gain of
$25,276 net of a tax expense of $15,466. 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.
Investment securities with amortized cost of approximately $14,402,000 and
market value of approximately $13,650,000 at December 31, 1999 were pledged
to secure public deposits and for other purposes required or permitted by
law. In 1998, investment securities with amortized cost of approximately
$13,489,000 and market value of approximately $13,626,000 were pledged.
F - 14
<PAGE> 47
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
3. Loans and Allowances for Possible Loan Losses
The Bank makes commercial, consumer, and real estate loans to its
customers, located principally within the Bank's primary markets, which
consists of Hancock, Hawkins and surrounding counties. Although the Bank
has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon economic conditions
within its primary markets.
Loans are either secured or unsecured based upon the financial condition of
the borrower. The loans are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrower; however, the
Bank is exposed to risk of loss on loans due to a borrower's difficulties,
which may arise from any number of factors including problems within the
respective industry or economic conditions, including those within the
Bank's primary market.
Loans, less allowance for possible loan losses at December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Commercial, financial and agricultural $ 8,661,030 $ 7,989,632
Real estate - construction 7,271,025 5,597,515
Real estate - mortgage 37,342,128 32,684,835
Consumer 13,946,048 12,874,979
Other 420,001 82,688
----------------------------
67,640,232 59,229,649
Less unearned interest 65,476 205,041
-----------------------------
67,574,756 59,024,608
Less allowance for possible loan losses 842,328 810,563
-----------------------------
$66,732,428 $58,214,045
=============================
</TABLE>
F - 15
<PAGE> 48
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Loans at December 31, 1999 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 $6,316,022 $6,929,024 $12,691,044 $ 4,997,017 $412,001
After one through
five years 1,985,007 253,001 14,830,050 8,743,031 8,000
After five years
through ten years 360,001 -- 1,612,006 206,000 --
After ten years -- 89,000 8,209,028 -- --
--------------------------------------------------------------------------
Total $8,661,030 $7,271,025 $37,342,128 $13,946,048 $420,001
===========================================================================
</TABLE>
At December 31, 1999, fixed and variable rate loans were as follows:
<TABLE>
<CAPTION>
<S> <C>
Fixed rate loans $ 47,486,112
Variable rate loans 20,154,120
---------------
$ 67,640,232
===============
</TABLE>
Non-performing assets at December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loans past due over 90 days $ 221,180 $ 418,124
Non-accrual loans 264,348 19,163
Other real estate owned 344,850 51,923
-----------------------------
$ 830,378 $ 489,210
=============================
</TABLE>
Foregone interest income on the above non-accrual loans was $11,341 and
$3,979 at December 31, 1999 and 1998, respectively.
F - 16
<PAGE> 49
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, the Bank had loans to its executive
officers, directors and their affiliates of $1,300,692 and $1,125,486,
respectively. At December 31, 1999 and 1998, the Bank had commitments to
extend credit to its executive officers, directors and their affiliates of
$1,143,280 and $1,336,928, 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>
1999 1998
---- ----
<S> <C> <C>
Balance January 1 $ 1,125,486 $ 771,400
Payments received (519,346) (583,705)
Advances made 694,552 937,791
------------------------------
Balance December 31 $ 1,300,692 $ 1,125,486
==============================
</TABLE>
Transactions in the allowance for possible loan losses of the Bank for the
years ended December 31, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance - beginning of year $ 810,563 $ 660,336
Provisions charged to operating expense 240,000 240,000
Loans charged-off (215,341) (95,005)
Recoveries 7,106 5,232
--------------------------
Balance - end of year $ 842,328 $ 810,563
==========================
</TABLE>
As of December 31, 1999 and 1998, the Bank's recorded investment in
impaired loans and disclosures related thereto were not material.
4. Premises and Equipment, Net
The detail of premises and equipment, net at December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 642,257 $ 486,668
Buildings 3,080,586 3,081,470
Furniture and equipment 1,296,631 1,285,407
-----------------------------
5,019,474 4,853,545
Less accumulated depreciation 945,224 736,694
-----------------------------
$ 4,074,250 44,116,851
=============================
</TABLE>
F - 17
<PAGE> 50
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Depreciation related to premises and equipment for the years ended December
31, 1999 and 1998 was $230,502 and $219,042, 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 1999 under various long term operating leases.
Total rental expense for these leases was $107,023 and $40,445 for December
31, 1999 and 1998, respectively.
Future minimum rental commitments under noncancellable leases are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
2000 77,487
2001 75,387
2002 55,538
--------
Total $208,412
========
</TABLE>
5. Deposits
Deposits at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Demand deposits $11,072,700 $ 9,991,890
NOW and money market accounts 16,213,017 14,837,878
Savings 4,395,920 3,602,455
Individual retirement accounts 2,522,034 2,163,368
Certificates of deposits - under $100,000 44,525,276 41,564,463
Certificates of deposits - over $100,000 16,095,100 15,505,078
----------------------------
$94,824,047 $87,665,132
============================
</TABLE>
F - 18
<PAGE> 51
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
The amounts and scheduled maturities of certificate accounts at December
31, are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Within one year $ 53,932,335 $ 51,086,589
After one but within two years 6,564,041 5,254,958
After two but within three years 41,000 727,994
After three but within four years 11,000 --
After four but within five years 72,000 --
------------------------------
$ 60,620,376 $ 57,069,541
==============================
</TABLE>
Demand deposits reclassified as loans (overdrafts) aggregated approximately
$37,000 and $12,600 at December 31, 1999 and 1998, respectively.
Deposits of executive officers, directors and their affiliates aggregated
approximately $1,898,000 and $1,132,000 at December 31, 1999 and 1998,
respectively.
6. Long-term debt
The Company's long-term debt consists of a single note payable in the
amount of $2,790,000 due an unaffiliated national bank. The interest rate
on the note adjusts quarterly and is equal to the three- months London
Interbank Offered Rate (Three Month LIBOR) plus 1.95% per annum or at the
option of the Company the rate on the note is equal to the lender's index
rate as such rate changes from time to time. The Company may change
interest rate options at any time with prior notice to the lender. Interest
is payable quarterly. At December 31, 1999 the rate on the note was 8.135%
per annum. Principal is payable annually commencing January 31, 1996 and
each January 31 thereafter as follows:
<TABLE>
<CAPTION>
January 31, Principal Due
----------- -------------
<S> <C>
2000 295,000
2001 325,000
2002 360,000
2003 395,000
2004 435,000
2005 470,000
2006 (Final Maturity) 510,000
-----------
$ 2,790,000
===========
</TABLE>
The loan is secured by all of the stock of Citizens Bank of East Tennessee
owned by the Company.
F - 19
<PAGE> 52
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
7. FHLB Advances
FHLB advances at December 31, 1999 represent short term advances with three
month maturities and bear an average rate of 5.57%. The Bank is required to
maintain eligible collateral representing 150 percent of the current
outstanding balance of all advances. At December 31, 1999, eligible
collateral was pledged to secure advances as follows:
<TABLE>
<CAPTION>
<S> <C>
FHLB advances $ 4,500,000
============
Pledged collateral $ 6,750,000
============
</TABLE>
8. Other Non-Interest Expenses
The major components of other non-interest expense at December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Directors fees $ 52,200 $ 49,800
Advertising 36,636 65,798
Professional services 72,411 96,493
Postage and courier 55,806 54,219
Stationary and printing 47,505 64,784
Other 422,235 327,716
----------------------------
Total other non-interest expense $ 686,793 $ 658,810
============================
</TABLE>
The increase in salaries and employee benefits, occupancy expense,
furniture and equipment expenses and other non-interest expense for 2000 is
due primarily to the increased costs associated with the growth of the
Bank.
9. Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current $ 354,379 $ 343,020
Deferred 8,009 (90,736)
-----------------------------
$ 362,388 $ 252,284
=============================
</TABLE>
F - 20
<PAGE> 53
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
The sources of deferred income taxes and the tax effect of each are as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Accrual to cash conversion $ 8,158 $(51,747)
Provision for loan losses (12,039) (57,045)
Accelerated depreciation 13,507 11,235
FHLB stock dividends 7,668 --
Other, net (9,285) 6,821
------------------------
$ 8,009 $(90,736)
========================
</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>
1999 1998
---- ----
<S> <C> <C>
Tax expense at statutory rate $ 364,700 $ 240,422
Increase (decrease) in taxes resulting from:
Tax-exempt interest (55,949) (23,821)
Amortization of goodwill 6,080 6,080
State income taxes net of
Federal income tax 43,344 28,804
Other, net 4,213 799
-------------------------
$ 362,388 $ 252,284
=========================
</TABLE>
The components of the net deferred tax asset/liability recognized by the
Company at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax liabilities:
FHLB stock dividends $ (7,668) $ --
Unrealized gain on securities available for sale -- (77,900)
Accumulated depreciation (63,704) (50,197)
Other, net -- (4,031)
-----------------------
Total liabilities (71,372) (132,128)
-----------------------
Deferred tax assets:
Accrual to cash conversion 6,017 14,175
Allowances for loan losses 153,196 141,157
Unrealized loss on securities available for sale 514,765 --
Other, net 5,254 --
----------------------
Total assets 679,232 155,332
----------------------
Net deferred tax asset/liability $ 607,860 $ 23,204
======================
</TABLE>
F - 21
<PAGE> 54
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
10. 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>
1999 1998
---- ----
<S> <C> <C>
Commitments to extend credit $6,335,646 $6,207,812
Standby letters of credit 91,825 82,000
--------------------------
$6,427,471 $6,289,812
==========================
</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.
11. 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,
1999 and 1998 was $426,000 and $402,000, respectively.
F - 22
<PAGE> 55
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
12. Stockholder's Equity
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval.
13. 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, 1999
-------------------------------------------
Capital Adequacy Prompt Corrective Action
---------------------------- -----------------------------
Required Actual Required Actual
-------- ------ -------- ------
(In Thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier I Capital (to
average assets) $4,333 4.00% $7,466 6.90% $4,333 4.00% $7,466 6.90%
====== ====== ====== ====== ====== ===== ====== ======
Tier I Capital (to risk-
weighted assets) $2,672 4.00% $7,466 11.18% $2,672 4.00% $7,466 11.18%
====== ====== ====== ====== ====== ===== ====== ======
Total Capital (to risk-
weighted assets) $5,343 8.00% $8,301 12.43% $5,343 8.00% $8,301 12.43%
====== ====== ====== ====== ====== ===== ====== ======
</TABLE>
F - 23
<PAGE> 56
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
Capital Adequacy Prompt Corrective Action
------------------------------- -------------------------------
Required Actual Required Actual
-------- ------ -------- ------
(In Thousands) 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>
Bases solely upon the foregoing ratios the Bank would be considered "well
capitalized" within applicable Federal banking regulatory guidelines.
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, 1999, that the Bank and Company
meet all capital requirements to which they are subject. 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> 57
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
14. Condensed Financial Information
Following is condensed financial information of Volunteer Bancorp, Inc.
(Parent Company Only):
Volunteer Bancorp, Inc.
(Parent Company Only)
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
-------------------------
1999 1998
---- ----
<S> <C> <C>
Assets:
Cash $ 88,708 $ 82,458
Investment in subsidiary 6,626,162 7,173,016
Goodwill 167,025 184,908
Deferred income taxes 10,703 14,267
Tax benefit receivable 27,627 28,471
----------------------------
$6,920,225 $7,483,120
============================
Liabilities and stockholders' equity
Long-term debt $2,790,000 $3,045,000
Accrued interest payable 40,286 37,555
Stockholders' equity 4,089,939 4,400,565
----------------------------
$6,920,225 $7,483,120
============================
</TABLE>
Volunteer Bancorp, Inc.
(Parent Company Only)
Condensed Statements of Earnings
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1999 1998
---- ----
<S> <C> <C>
Income:
Dividends from subsidiary $460,028 $ 240,721
------------------------
Expenses:
Interest 207,756 235,528
Professional services 43,984 53,275
Other expenses 11,167 10,990
------------------------
Total expense 262,907 299,793
------------------------
Income (loss) before tax benefit and equity in
undistributed subsidiary income 197,121 (59,072)
Tax benefit 93,010 107,020
Equity in undistributed subsidiary income 420,125 406,893
------------------------
Net income $710,256 $ 454,841
========================
</TABLE>
F - 25
<PAGE> 58
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
Volunteer Bancorp, Inc.
(Parent Company Only)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1999 1998
---- -----
<S> <C> <C>
Operating Activities:
Net income (loss) $ 710,256 $ 454,841
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed subsidiary earnings (420,125) (406,893)
Deferred income taxes 3,564 1,961
Amortization 17,883 17,883
Decrease in other assets 844 59,782
Increase (decrease) in other liabilities 2,731 (5,195)
------------------------
Net cash provided (used) by operating activities 315,153 122,379
------------------------
Financing activities:
Dividends paid (53,903) --
Repayment of note payable (255,000) (220,000)
------------------------
Net cash(used) provided by financing activities (308,903) (220,000)
------------------------
Change in cash and equivalents 6,250 (97,621)
Cash and equivalents - beginning 82,458 180,079
------------------------
Cash and equivalents - ending $ 88,708 $ 82,458
========================
</TABLE>
Volunteer Bancorp, Inc.
(Parent company only)
Condensed Statements of Comprehensive Income
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1999 1998
---- ----
<S> <C> <C>
Net income $ 710,256 $454,481
---------------------
Other comprehensive income:
Company's share of subsidiary's other comprehensive
(loss) income, net of tax (966,979) 75,020
---------------------
Total comprehensive (loss) income $(256,723) $529,501
=====================
</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 12 and 13).
F - 26
<PAGE> 59
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
15. Fair Value of Financial Instruments
The fair value of financial instruments at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 8,031,055 $ 8,031,055 $ 2,287,388 $ 2,287,388
Federal funds sold 575,290 575,290 4,515,263 4,515,263
Investment securities: 26,788,770 26,726,484 27,450,577 27,461,027
Loans, net 66,732,428 65,878,125 58,214,045 58,145,300
-----------------------------------------------------------------
$102,127,543 $101,210,954 $92,467,273 $92,408,978
=================================================================
Financial liabilities:
Deposits $ 94,824,047 $ 94,945,727 $87,665,132 $87,924,335
Securities sold under
repurchase agreements 1,321,090 1,321,090 1,462,130 1,462,130
FHLB advances 4,500,000 4,500,000 -- --
Long-term debt 2,790,000 2,790,000 3,045,000 3,045,000
-----------------------------------------------------------------
$103,435,137 $103,556,817 $92,172,262 $92,431,465
=================================================================
Unrecognized financial
instruments:
Commitments to extend
credit $ -- $ -- $ -- $ --
Standby letters of credit $ -- $ -- $ -- $ --
-----------------------------------------------------------------
$ -- $ -- $ -- $ --
=====================================================-===========
</TABLE>
F - 27
<PAGE> 60
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument for which it is practicable to
estimate that value:
Cash and Federal funds sold:
For these short-term instruments, the carrying value is a
reasonable estimate of fair value.
Investments:
Fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans, net
The fair value of fixed rate loans is estimated by discounting
expected future cash flows using current rates at which similar
fixed rate loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. The carrying value
of variable rate loans is assumed to approximate fair value.
Deposits:
The fair value of demand deposits, IRAs, savings accounts and NOW
and money market accounts is the amount payable on demand at the
reporting date. The fair value of fixed-rate-maturity certificates
of deposits is estimated using the rates currently offered for
deposits of similar remaining maturities using a discounted cash
flow method.
Securities sold under repurchase agreements:
The fair value of fixed-rate term securities sold under repurchase
agreements is estimated using the rates currently in effect offered
for repurchase agreements of similar remaining maturities using a
discounted cash flow method.
FHLB advances:
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.
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> 61
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
16. 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 contributed $7,588 to the plan for the year ended December
31, 1999. The Bank did not make any contributions to the plan for the year
ended December 31, 1998.
17. Securities Sold Under Repurchase Agreements
At December 31, 1999 and 1998, the book value of the securities sold under
repurchase agreements, including accrued interest, was $2,255,041 and
$1,808,718, respectively. The maximum amount outstanding during 1999 and
1998 was $1,861,726 and $1,790,341, respectively. The daily average of
outstanding agreements during 1999 and 1998 was $1,643,233 and $1,680,071,
respectively. The securities underlying the agreements are maintained under
the Bank's control.
18. Reclassification
Certain reclassifications have been made to the December 31, 1998 financial
statements in order to conform with the presentation of the December 31,
1999 financial statements.
19. Impact of Recently Issued Accounting Standards
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." Statement No. 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting methodology
that includes disclosure of certain financial information that historically
has not been recognized in the calculation of net income.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137, is effective for fiscal quarters
beginning after June 15, 2000 unless adopted earlier. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency
F - 29
<PAGE> 62
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. Adoption by the
Company is not expected to have any material impact upon financial position
or results of operations.
20. Selected Quarterly Financial Data (Unaudited)
Summarized below are selected financial data regarding results of
operations for the periods indicated.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------------------------------------------------------------------------
1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $1,865,059 $1,961,650 $2,021,179 $2,056,270 $7,904,158
Net interest income 826,968 907,353 948,889 907,096 3,590,306
Provision for loan losses 60,000 60,000 60,000 60,000 240,000
Non-interest income 112,042 91,870 90,094 87,378 381,384
Non-interest expense 671,479 647,997 651,014 688,554 2,659,044
Income before income taxes 207,531 291,226 327,969 245,920 1,072,646
(benefit) expense
Net income $ 141,016 $ 192,507 $ 209,277 $ 167,456 $ 710,256
==========================================================================
Common shares outstanding 539,027 539,027 539,027 539,027 539,027
==========================================================================
Net income per
common share outstanding $ 0.26 $ 0.36 $ 0.39 $ 0.31 $ 1.32
==========================================================================
</TABLE>
F - 30
<PAGE> 63
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<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
(benefit) 103,556 154,382 227,969 221,218 707,125
Net income $ 60,009 $ 101,255 $ 148,048 $ 145,529 $ 454,841
==========================================================================
Common shares outstanding 539,027 539,027 539,027 539,027 539,027
==========================================================================
Net income per
common share outstanding $ 0.11 $ 0.19 $ 0.27 $ 0.27 $ 0.84
==========================================================================
</TABLE>
F - 31
<PAGE> 64
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 19, 2000
Nashville, Tennessee
F - 32
<PAGE> 65
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Balance Sheet
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Volunteer Citizens Bank Consolidated
Bancorp, of East Volunteer
Inc. Tennessee Bancorp, Inc
ASSETS (Parent) (Subsidiary) Eliminations and Subsidiary
------ -------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 88,708 $ 8,031,055 $ (88,708) $ 8,031,055
Federal funds sold -- 575,290 -- 575,290
Investment in subsidiary 6,626,162 -- (6,626,162) --
Investment securities -- 26,788,770 -- 26,788,770
Loans, net -- 66,732,428 -- 66,732,428
Accrued interest receivable -- 1,028,360 -- 1,028,360
Premises and equipment -- 4,074,250 -- 4,074,250
Goodwill 167,025 -- -- 167,025
Deferred income taxes 10,703 597,157 -- 607,860
Other assets 27,627 464,694 (27,627) 464,694
-----------------------------------------------------------------------
Total assets $6,920,225 $108,292,004 $(6,742,497) $108,469,732
=======================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ -- $ 94,912,755 $ (88,708) $ 94,824,047
Long-term debt 2,790,000 -- -- 2,790,000
Accrued interest payable 40,286 811,108 -- 851,394
FHLB advances -- 4,500,000 -- 4,500,000
Securities sold under
repurchase agreements -- 1,321,090 -- 1,321,090
Other liabilities -- 120,889 (27,627) 93,262
------------------------------------------------------------------------
Total liabilities 2,830,286 101,665,842 (116,335) 104,379,793
------------------------------------------------------------------------
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 3,007,929 1,731,526 (1,731,526) 3,007,929
Accumulated other
comprehensive income (839,880) (839,880) 839,880 (839,880)
------------------------------------------------------------------------
Total stockholders' equity 4,089,939 6,626,162 (6,626,162) 4,089,939
------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 6,920,225 $ 108,292,004 $(6,742,497) $ 108,469,732
========================================================================
</TABLE>
F-33
<PAGE> 66
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Balance Sheet
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Volunteer Citizens Bank Consolidated
Bancorp, of East Volunteer
Inc. Tennessee Bancorp, Inc
ASSETS (Parent) (Subsidiary) Eliminations and Subsidiary
------ -------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 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 - 34
<PAGE> 67
VOLUNTEER BANCORP, INC
Consolidating Statement of Earnings
December 31, 1999
- --------------------------------------------------------------------------------
<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 $ -- $ 6,082,587 $ -- $6,082,587
Interest on federal funds -- 102,471 -- 102,471
Interest and dividends on
investments:
Taxable -- 1,531,867 -- 1,531,867
Exempt from federal income taxes -- 187,233 -- 187,233
-----------------------------------------------------------------------
Total interest income -- 7,904,158 -- 7,904,158
-----------------------------------------------------------------------
Interest expense:
Interest on deposits -- 3,960,862 -- 3,960,862
Interest on other borrowed funds 207,756 145,234 -- 352,990
-----------------------------------------------------------------------
Total interest expense 207,756 4,106,096 -- 4,313,852
-----------------------------------------------------------------------
Net interest income (207,756) 3,798,062 -- 3,590,306
Provision for possible loan losses -- 240,000 -- 240,000
-----------------------------------------------------------------------
Net interest income after loan
provision (207,756) 3,558,062 -- 3,350,306
-----------------------------------------------------------------------
Non-interest income:
Equity in earnings of subsidiary 880,153 -- (880,153) --
Service charges -- 204,185 -- 204,185
Other income -- 177,199 -- 177,199
-----------------------------------------------------------------------
880,153 381,384 (880,153) 381,384
-----------------------------------------------------------------------
Non-interest expense:
Salaries and benefits -- 1,434,578 -- 1,434,578
Other 55,151 1,169,317 -- 1,224,468
-----------------------------------------------------------------------
55,151 2,603,895 -- 2,659,046
-----------------------------------------------------------------------
Income before taxes 617,246 1,335,551 (880,153) 1,072,644
Income tax (benefit) expense (93,010) 455,398 -- 362,388
-----------------------------------------------------------------------
Net income $ 710,256 $ 880,153 $ (880,153) $ 710,256
=============================================================-=========
</TABLE>
F - 35
<PAGE> 68
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 - 36
<PAGE> 69
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Statement of Cash Flows
December 31, 1999
- --------------------------------------------------------------------------------
<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 $ 710,256 $ 880,153 $(880,153) $ 710,256
Adjustments to reconcile net
income to net cash provided by
operating activities:
Subsidiary earnings undistributed (420,125) -- 420,125 --
Deferred income taxes 3,564 4,445 -- 8,009
Provision for loan losses -- 240,000 -- 240,000
Depreciation and amortization 17,883 230,502 -- 248,385
Securities (gains) -- (40,742) -- (40,742)
FHLB stock dividends -- (20,200) -- (20,200)
Decrease (increase) in other
assets 844 (444,095) (844) (444,095)
Increase in other liabilities 2,731 (327,287) 844 (323,712)
----------------------------------------------------------------------
Net cash provided by operating
activities 315,153 522,776 (460,028) 377,901
----------------------------------------------------------------------
Cash Flows From Investing
Activities:
(Increase) in investment securities -- (836,895) -- (836,895)
(Increase) in loans -- (8,758,383) -- (8,758,383)
Capital expenditures -- (187,901) -- (187,901)
----------------------------------------------------------------------
Net cash (used) by investing
activities -- (9,783,179) -- (9,783,179)
----------------------------------------------------------------------
Cash Flows From Financing
Activities:
Increase in deposits -- 7,165,165 (6,250) 7,158,915
Increase in securities sold under
repurchase agreements -- (141,040) -- (141,040)
FHLB advances -- 4,500,000 -- 4,500,000
Dividends paid (53,903) (460,028) 460,028 (53,903)
Repayment of long-term debt (255,000) -- -- (255,000)
----------------------------------------------------------------------
Net cash (used) provided from
financing activities (308,903) 11,064,097 453,778 11,208,972
----------------------------------------------------------------------
Change in cash and equivalents 6,250 1,803,694 (6,250) 1,803,694
Cash and equivalents - beginning 82,458 6,802,651 (82,458) 6,802,651
----------------------------------------------------------------------
Cash and equivalents - ending $ 88,708 $ 8,606,345 $ (88,708) $ 8,606,345
======================================================================
</TABLE>
F - 37
<PAGE> 70
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)
(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 provided from financing
activities (220,000) 18,484,852 338,342 18,603,194
----------------------------------------------------------------------
Change in cash and equivalents (97,621) (622,931) 97,621 (622,931)
Cash and equivalents - beginning 180,079 7,425,582 (180,079) 7,425,582
----------------------------------------------------------------------
Cash and equivalents - ending $ 82,458 $ 6,802,651 $ (82,458) $ 6,802,651
======================================================================
</TABLE>
F - 38
<PAGE> 71
VOLUNTEER BANCORP, INC. AND SUBSIDIARY
Consolidating Statements of Comprehensive Income
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999
- -----------------------------------------------------------------------------------------------------------------
Citizens Consolidated
Volunteer Bank Volunteer
Bancorp, of East Bancorp, Inc
Inc. Tennessee and
(Parent) (Subsidiary) Eliminations Subsidiary
-------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Net income $ 710,256 $ 880,153 $ (880,153) $ 710,256
----------------------------------------------------------------
Other comprehensive income, before tax:
Unrealized (loss) on securities available
or sale:
Unrealized holding (losses) arising
during the period -- (1,600,386) -- (1,600,386)
Less: reclassification adjustments for
gains included in net income -- 40,742 -- 40,742
----------------------------------------------------------------
Other comprehensive income -- (1,559,644) -- (1,559,644)
Income taxes -- 592,665 -- 592,665
----------------------------------------------------------------
Other comprehensive income net of
income taxes -- (966,979) -- (966,979)
Company's share of subsidiary's other
comprehensive income, net of tax (966,979) -- 966,979 --
----------------------------------------------------------------
Total comprehensive income $(256,723) $ (86,826) $ 86,826 $ (256,723)
================================================================
<CAPTION>
December 31, 1998
- ---------------------------------------------------------------------------------------------------------------
<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
================================================================
</TABLE>
F - 39
<PAGE> 72
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 30, 2000
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 30, 2000
- ---------------------------
William E. Phillips
/s/ H. Lyons Price Secretary/Treasurer and Director March 30, 2000
- --------------------------- (principal financial and accounting officer)
H. Lyons Price
/s/ Reed D. Matney President and Director March 30, 2000
- --------------------------- (principal executive officer)
Reed D. Matney
Director March __, 2000
- ---------------------------
Carlin Green
/s/ Douglas Price Director March 30, 2000
- ---------------------------
Douglas Price
/s/ Gary Varnell Director March 30, 2000
- ---------------------------
Gary Varnell
Director March __, 2000
- ---------------------------
Truett Pierce
/s/ George Brooks Director March 30, 2000
- ---------------------------
George Brooks
Director March __, 2000
- ---------------------------
Shirley Price
/s/ Eddie Freeman Director March 30, 2000
- ---------------------------
Eddie Freeman
Director March __, 2000
- ---------------------------
Neil Miller
/s/ Lawrence Gray Director March 30, 2000
- ---------------------------
Lawrence Gray
Director March __, 2000
- ---------------------------
Scott Collins
Director March __, 2000
- ---------------------------
Leon Gladson
</TABLE>
<PAGE> 1
Exhibit 21.1
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 19, 2000, related to the consolidated balance sheets of Volunteer
Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, 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, 1999,
for Volunteer Bancorp, Inc.
Welch & Associates, Ltd.
Nashville, Tennessee
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,031,055
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 575,290
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,691,141
<INVESTMENTS-CARRYING> 1,097,629
<INVESTMENTS-MARKET> 1,035,343
<LOANS> 67,574,756
<ALLOWANCE> 842,328
<TOTAL-ASSETS> 108,469,732
<DEPOSITS> 94,824,047
<SHORT-TERM> 5,821,090
<LIABILITIES-OTHER> 944,656
<LONG-TERM> 2,790,000
0
0
<COMMON> 5,390
<OTHER-SE> 4,084,549
<TOTAL-LIABILITIES-AND-EQUITY> 108,469,732
<INTEREST-LOAN> 6,082,587
<INTEREST-INVEST> 1,719,100
<INTEREST-OTHER> 102,471
<INTEREST-TOTAL> 7,904,158
<INTEREST-DEPOSIT> 3,960,862
<INTEREST-EXPENSE> 4,313,852
<INTEREST-INCOME-NET> 3,590,306
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> 40,742
<EXPENSE-OTHER> 2,659,046
<INCOME-PRETAX> 1,072,644
<INCOME-PRE-EXTRAORDINARY> 710,256
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 710,256
<EPS-BASIC> 1.32
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 8.37
<LOANS-NON> 264,348
<LOANS-PAST> 221,180
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 810,563
<CHARGE-OFFS> 215,341
<RECOVERIES> 7,106
<ALLOWANCE-CLOSE> 842,328
<ALLOWANCE-DOMESTIC> 842,328
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
