10-Q 1 d350298d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from             to             

Commission file number 000-22473

 

 

VOLUNTEER BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Tennessee   62-1271025
(State of Incorporation)   (I.R.S. Employer Identification No.)

210 East Main Street

Rogersville, TN 37857

(Address of principal executive offices)(Zip Code)

(423) 272-2200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

Indicate by check whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ¨    No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)     Yes  ¨    No  x

As of the close of business on March 31, 2012, there were 496,277 shares of the Registrant’s common stock outstanding.

 

 

 


Table of Contents

VOLUNTEER BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

 

   PART I   

ITEM 1.

   CONSOLIDATED FINANCIAL STATEMENTS – VOLUNTEER BANCORP, INC.      1   

ITEM 2.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF VOLUNTEER BANCORP, INC.      25   

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      28   

ITEM 4.

   CONTROLS AND PROCEDURES      28   
   PART II   

ITEM 1.

   LEGAL PROCEEDINGS      28   

ITEM 1A.

   RISK FACTORS      28   

ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      28   

ITEM 3.

   DEFAULTS UPON SENIOR SECURITIES      28   

ITEM 5.

   OTHER INFORMATION      28   

ITEM 6.

   EXHIBITS      29   


Table of Contents

Item 1. Financial Statements

VOLUNTEER BANCORP, INC.

Consolidated Balance Sheets

March 31, 2012 (Unaudited) and December 31, 2011

 

     March 31,
2012
    December 31,
2011
 
Assets     

Cash and due from banks

   $ 21,777,371      $ 5,700,328   

Federal funds sold

     —          600,000   
  

 

 

   

 

 

 

Cash and cash equivalents

     21,777,371        6,300,328   

Securities available for sale

     13,433,644        15,277,191   

Loans receivable, net of allowance for loan losses of $2,564,122 and $3,044,771

     82,362,146        93,626,819   

Federal Home Loan Bank stock

     494,000        494,000   

Accrued interest receivable

     485,076        609,355   

Premises and equipment, net

     3,069,353        3,066,531   

Other real estate owned, net

     6,586,397        5,505,959   

Bank owned life insurance

     2,708,034        2,686,820   

Other assets

     343,640        479,776   
  

 

 

   

 

 

 

Total assets

   $ 131,259,661      $ 128,046,779   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Deposits:

    

Non-interest-bearing

   $ 16,756,141      $ 15,453,959   

Interest-bearing

     99,810,430        97,887,929   
  

 

 

   

 

 

 

Total deposits

     116,566,571        113,341,888   

Accrued interest payable

     503,108        504,338   

Note payable—major stockholder

     830,500        830,500   

Notes payable—directors

     160,000        160,000   

Federal Home Loan Bank advances

     8,500,000        8,500,000   

Subordinated debentures

     3,093,000        3,093,000   

Other liabilities

     226,274        216,603   
  

 

 

   

 

 

 

Total liabilities

     129,879,453        126,646,329   
  

 

 

   

 

 

 

Common stock, $0.01 par value; 1,000,000 shares authorized; 496,277 shares issued and outstanding

     4,962        4,962   

Additional paid-in capital

     306,834        296,453   

Retained earnings

     1,323,730        1,370,939   

Accumulated other comprehensive loss, net

     (255,318     (271,904
  

 

 

   

 

 

 

Total stockholders’ equity

     1,380,208        1,400,450   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 131,259,661      $ 128,046,779   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

VOLUNTEER BANCORP, INC.

Consolidated Statements of Operations

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     2012     2011  

Interest income

    

Loans, including fees

   $ 1,177,248      $ 1,306,111   

Securities

    

Taxable

     15,883        62,982   

Tax exempt

     35,922        53,998   

Federal funds sold and other

     10,154        1,996   
  

 

 

   

 

 

 
     1,239,207        1,425,087   

Interest expense

    

Deposits

     226,810        346,838   

Other borrowings

     40,576        26,183   
  

 

 

   

 

 

 
     267,386        373,021   

Net interest income

     971,821        1,052,066   

Provision for loan losses

     —          5,967   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     971,821        1,046,099   

Noninterest income

    

Service charges

     44,109        60,339   

Gain on sale of securities

     54,731        258,285   

Gain on sale of loans

     202,674        —     

Gain on sale of premises and equipment

     —          13,377   

Other

     66,524        49,173   
  

 

 

   

 

 

 
     368,038        381,174   

Noninterest expenses

    

Salaries and employee benefits

     616,165        624,549   

Occupancy expenses

     68,006        76,535   

Furniture and equipment

     69,050        67,276   

Data processing

     68,852        61,275   

Audit and professional fees

     173,021        80,379   

Insurance and bond expense

     51,313        22,041   

Other real estate and collection expense

     133,430        111,914   

FDIC assessment expense

     80,000        96,757   

Director fees

     —          21,000   

Other

     127,231        125,875   
  

 

 

   

 

 

 
     1,387,068        1,287,601   
  

 

 

   

 

 

 

Income (loss) before income taxes

     (47,209     139,672   

Income tax expense (benefit)

     —          —     
  

 

 

   

 

 

 

Net income (loss)

   $ (47,209   $ 139,672   
  

 

 

   

 

 

 

Basic and diluted earnings (loss) per share

   $ (.10   $ .28   

Average common shares outstanding

     496,277        496,277   

See notes to consolidated financial statements

 

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VOLUNTEER BANCORP, INC.

Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     2012     2011  

Net income (loss)

   $ (47,209   $ 139,672   

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities arising during period

     16,586        (262,663

Reclassification of realized amount

     (54,731     (258,285
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (38,145     (520,948

Income taxes related to other comprehensive income (loss)

     —          —     

Other comprehensive income (loss), net of income taxes

     (38,145     (520,948
  

 

 

   

 

 

 

Total comprehensive income (loss)

   $ (85,354   $ (381,276
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

VOLUNTEER BANCORP, INC.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2012 and 2011

(Unaudited)

 

     2012     2011  

Cash flows from operating activities

    

Net income (loss)

   $ (47,209   $ 139,672   

Adjustments to reconcile net income (loss) to net cash from operating activities

    

Depreciation expense

     46,496        48,390   

Imputed interest on noninterest bearing note payable

     10,381        —     

Premium amortization of securities, net

     76,837        3,254   

Provision for loan losses

     —          5,967   

Gain on sales of securities

     (54,731     (258,285

Gain on sale of loans

     (202,674     —     

Gain on sale of premises and equipment

     —          (13,377

Gain on sale of other real estate owned

     (27,550     —     

Write downs of other real estate owned

     175,070        1,354   

Increase in bank owned life insurance

     (21,214     (21,447

Changes in:

    

Accrued interest receivable

     124,279        29,123   

Other assets

     136,136        (24,529

Accrued interest payable

     (1,230     (79,181

Other liabilities

     9,671        97,342   
  

 

 

   

 

 

 

Net cash from operating activities

     224,262        (71,717
  

 

 

   

 

 

 

Cash flows from investing activities

    

Activity in available for sale securities Purchases

     (5,201,830     (3,740,749

Proceeds from sales, calls, maturities and principal pay-downs

     7,039,857        6,545,925   

Activity in held to maturity securities Proceeds from principal pay-downs

     —          7,892   

Net change in loans

     4,234,012        2,147,038   

Proceeds from sale of premises and equipment

     —          13,377   

Proceeds from sale of loans

     4,971,460        —     

Proceeds from sale of other real estate owned

     1,033,917        —     

Purchases of premises and equipment, net

     (49,318     (1,849
  

 

 

   

 

 

 

Net cash from investing activities

     12,028,098        4,971,634   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net change in deposits

     3,224,683        1,608,731   

Net change in securities sold under repurchase agreements

     —          (106,500
  

 

 

   

 

 

 

Net cash from financing activities

     3,224,683        1,502,231   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

   $ 15,477,043      $ 6,402,148   

Cash and cash equivalents at beginning of period

     6,300,328        6,163,514   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 21,777,371      $ 12,565,662   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 268,616      $ 452,202   

Income taxes paid

     —          —     

Supplemental non-cash disclosures:

    

Transfers from loans to other real estate owned

   $ 2,261,875      $ 848,520   

See notes to consolidated financial statements

 

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VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

Note 1—Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Volunteer Bancorp, Inc. and its wholly-owned subsidiary, The Citizens Bank of East Tennessee (the “Bank”) (collectively “the Company,” “we,” “us,” or “our”) and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) and disclosures necessary to summarize fairly the consolidated financial position of the Company as of March 31, 2012 and December 31, 2011 and the related consolidated statements of operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2012 and 2011. The interim financial statements should be read in conjunction with the notes to the financial statements presented in the Company’s latest annual report on Form 10-K as filed with the Securities and Exchange Commission. The results for interim periods are not necessarily indicative of results to be expected for the complete fiscal year.

Going Concern and Related Issues

A fundamental principle of the preparation of financial statements in accordance with accounting principles generally accepted in the United States of America is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and satisfaction of liabilities occurring in the ordinary course of business. In accordance with this requirement, the Company has prepared its consolidated financial statements on a going concern basis.

The Company experienced substantial losses in 2009, 2010 and 2011. Furthermore, non-performing assets are over 8% of total assets and over 745% of total stockholders’ equity at December 31, 2011. As discussed in more detail later, the Bank is not in compliance with minimum capital requirements set forth in the consent order with bank regulatory authorities.

The vast majority of the Company’s losses are a result of loan losses and non-performing assets related to commercial real estate and development. Management believes it has identified the problems and properly provided for them. However, further declines in values will adversely affect those assets and could result in more losses.

In January 2010, the Bank consented to a FDIC requirement to maintain a Tier 1 capital to average assets ratio of 8%, minimum Tier 1 capital to risk-weighted assets ratio of 10% and total capital to risk-weighted assets ratio of 12%. The Bank did not meet these capital requirements as of March 31, 2012 or December 31, 2011. See Note 8 to the notes to consolidated financial statements for additional disclosures related to regulatory capital.

 

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Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 1—Basis of Presentation (continued)

 

The Company’s Board of Directors and management team have initiated specific plans to reduce credit risk, ensure adequate levels of liquidity, reduce overhead expenses, and improve capital ratios. Key components to those plans involve shrinking targeted assets, improving asset quality while building a higher quality balance sheet. The Company has maintained adequate liquidity and is committed to maintaining and increasing liquidity as needed. The Company has reduced staff and other controllable expenses and will continue these efforts into the future. The Company continues to pursue additional sources of capital.

The Bank is also exploring the possibility of exiting some lines of business and expanding into others that do not require as much capital. Future growth is targeted on the traditional community bank model.

There can be no assurance that our plans, described above, will successfully resolve all of the concerns of the banking regulatory authorities or return the Company to profitability. These events and uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Note 2—New Accounting Standards

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and international accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some provisions that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition, but the additional disclosures are included in Note 5.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The adoption of this amendment changed the presentation of the statement of comprehensive income for the Company to two consecutive statements instead of presenting comprehensive income as part of the consolidated statement of stockholders’ equity. The adoption of this amendment had no impact on the consolidated financial statements as the prior presentation of comprehensive income was in compliance with this amendment.

 

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Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 3—Securities

The amortized cost and fair value of securities available for sale and held to maturity securities at March 31, 2012 and December 31, 2011 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

      Amortized
Cost
     Unrealized
Gains
     Gross
Unrealized
Losses
    Gross
Fair
Value
 

March 31, 2012

          

Available for sale

          

U.S. government sponsored entities and agencies

   $ 3,287,837       $ 28,371       $ (52   $ 3,316,156   

State and political subdivision

     1,057,011         2,612         (2,556     1,057,067   

Mortgage-backed: residential

     717,512         3,508         —          721,020   

Collateralized mortgage obligations

     8,394,364         24,536         (79,499     8,339,401   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 13,456,724       $ 59,027       $ (82,107   $ 13,433,644   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

          

Available for sale

          

U.S. government sponsored entities and agencies

   $ 2,332,948       $ 9,376       $ (49   $ 2,342,275   

State and political subdivision

     6,013,178         3,546         (79,416     5,937,308   

Mortgage-backed: residential

     764,990         2,125         —          767,115   

Collateralized mortgage obligations

     6,205,741         35,665         (10,913     6,230,493   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 15,316,857       $ 50,712       $ (90,378   $ 15,277,191   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 3—Securities (continued)

 

The proceeds from sales of securities and the associated gross gains and losses for the three months ended March 31, 2012 and March 31, 2011 are listed below:

 

     March 31, 2012      March31, 2011  

Proceeds

   $ 6,356,801       $ 4,420,719   

Gross gains

     57,521         258,285   

Gross losses

     2,790         —     

The amortized cost and fair value of securities are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

     March 31, 2012  
     Amortized
Cost
     Fair
Value
 

Available for sale

     

One to five years

   $ 363,931       $ 365,152   

Five to ten years

     1,314,648         1,319,003   

Beyond ten years

     2,666,269         2,689,068   

Mortgage backed: residential

     717,512         721,020   

Collateralized mortgage obligations

     8,394,364         8,339,401   
  

 

 

    

 

 

 

Total

   $ 13,456,724       $ 13,433,644   
  

 

 

    

 

 

 

Securities pledged at March 31, 2012 and December 31, 2011 had a carrying amount of $4,031,622 and $6,664,860, respectively, and were pledged to secure public deposits, federal funds lines of credit, and securities sold under repurchase agreements.

The following table summarizes the investment securities with unrealized losses at March 31, 2012 and December 31, 2011 aggregated by major security type and length of time in a continuous unrealized loss position:

 

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

March 31, 2012

               

Available for sale

               

U.S. government-sponsored entities

   $         $ —        $ 16,190       $ (52   $ 16,190       $ (52

State and political subdivisions

     466,053         (2,556   $ —           —          466,053         (2,556

Collateralized mortgage obligations

     4,781,620         (79,499     —           —          4,781,620         (79,499
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 5,247,673       $ (82,055   $ 16,190       $ (52   $ 5,263,863       $ (82,107
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 3—Securities (continued)

 

 

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

December 31, 2011

               

Available for sale

               

U.S. government-sponsored entities and agencies

   $ —         $ —          16,529       $ (49   $ 16,529       $ (49

State and political subdivisions

     4,023,251         (79,416     —           —          4,023,251         (79,416

Collateralized mortgage obligations

     2,994,437         (10,913     —           —          2,994,437         (10,913
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 7,017,688       $ (90,329   $ 16,529       $ (49   $ 7,034,217       $ (90,378
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Unrealized losses on securities have not been recognized into income because the issuers are of high credit quality (rated AA or higher), management does not intend to sell the securities and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the securities approach maturity.

Note 4—Loans and Allowance for Loan Losses

Categories of loans include:

 

     March 31,
2012
    December 31,
2011
 

Construction & Development

   $ 5,746,273      $ 8,083,567   

Commercial real estate

     25,130,746        26,602,015  

Residential real estate

     44,393,032        50,328,259   

Other real estate

     3,567,086        3,402,384   

Commercial

     3,933,912        5,782,158   

Consumer

     2,155,219        2,473,207   
  

 

 

   

 

 

 

Total loans

     84,926,268        96,671,590   

Less allowance for loan losses

     (2,564,122     (3,044,771
  

 

 

   

 

 

 

Net loans

   $ 82,362,146      $ 93,626,819   
  

 

 

   

 

 

 

 

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VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 4—Loans and Allowance for Loan Losses (continued)

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ending March 31, 2012 and March 31, 2011.

 

March 31, 2012

   Construction
&
Development
    Commercial
Real Estate
    Residential
Real Estate
    Other
Real
Estate
     Commercial     Consumer     Total  

Allowance for loan losses:

               

Beginning Balance

   $ 1,099,013      $ 1,383,158      $ 219,396      $ 99,979       $ 234,150      $ 9,075      $ 3,044,771   

Provision for loan losses

     376,398        (387,069     79,893        4,071         (67,503     (5,790     —     

Loans Charged-off

     (445,016     (43,314     (1     —           —          —          (488,331

Recoveries

     —          1,267        197        —           1,422        4,796        7,682   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total Ending Allowance Balance

   $ 1,030,395     $ 954,042      $ 299,485      $ 104,050       $ 168,069     $ 8,081     $ 2,564,122   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

March 31, 2011

   Construction
&
Development
    Commercial
Real Estate
    Residential
Real Estate
    Other Real
Estate
    Commercial     Consumer     Total  

Allowance for loan losses:

              

Beginning Balance

   $ 752,645      $ 2,251,106      $ 310,458      $ 126,751      $ 270,048      $ 12,331      $ 3,723,339   

Provision for loan losses

     (259,131     416,636        (17,126     (17,147     (108,851     (8,414     5,967   

Loans Charged-off

     (516     (898,853     (2,866     —          —          (578     (902,813

Recoveries

     515        —          —          —          1,422        5,110        7,047   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Ending Allowance Balance

   $ 493,513     $ 1,768,889      $ 290,466      $ 109,604      $ 162,619     $ 16,863     $ 2,833,540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 4—Loans and Allowance for Loan Losses (continued)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on the impairment method as of March 31, 2012 and December 31, 2011. The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

 

March 31, 2012

   Construction
&
Development
     Commercial
Real Estate
     Residential
Real Estate
     Other
Real
Estate
     Commercial      Consumer      Total  

Allowance for loan losses:

                    

Ending allowance balance attributable to loans:

                    

Individually evaluated for impairment

   $ 963,155       $ 343,673       $ 200,819       $ 81,444       $ —         $ —         $ 1,589,091   

Collectively evaluated

     67,240         610,369         98,666         22,606         168,069         8,081         975,031   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,030,395       $ 954,042       $ 299,485       $ 104,050       $ 168,069       $ 8,081       $ 2,564,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Individually evaluated for impairment

   $ 2,422,903       $ 4,718,724       $ 1,257,823       $ 1,866,823       $ —         $ —         $ 10,266,273   

Collectively evaluated

     3,323,370         20,412,022         43,135,208         1,700,263         3,933,912         2,155,219         74,659,995   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 5,746,273       $ 25,130,746       $ 44,393,031       $ 3,567,086       $ 3,933,912       $ 2,155,219       $ 84,926,268   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

   Construction
&
Development
     Commercial
Real  Estate
     Residential
Real  Estate
     Other Real
Estate
     Commercial      Consumer      Total  

Allowance for loan losses:

                    

Ending allowance balance attributable to loans:

                    

Individually evaluated for impairment

   $ 1,039,138       $ 821,079       $ 156,088       $ 79,271       $ —         $ —         $ 2,095,576   

Collectively evaluated

     59,875         562,079         63,308         20,708         234,150         9,075         949,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,099,013       $ 1,383,158       $ 219,396       $ 99,979       $ 234,150       $ 9,075       $ 3,044,771   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Individually evaluated for impairment

   $ 4,815,227       $ 5,395,556       $ 1,250,568       $ 1,866,823       $ —         $ —         $ 13,328,174   

Collectively evaluated

     3,268,340         21,206,459         49,077,691         1,535,561         5,782,158         2,473,207         83,343,416   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 8,083,567       $ 26,602,015       $ 50,328,259       $ 3,402,384       $ 5,782,158       $ 2,473,207       $ 96,671,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 4—Loans and Allowance for Loan Losses (continued)

 

Year to date information on impaired loans is as follows:

 

     March 31, 2012      March 31, 2011  

Average of individually impaired loans during the period:

     

Construction & Development

   $ 3,619,065       $ 5,905,941   

Commercial real estate

     5,057,140         4,575,882   

Residential real estate

     1,254,195         1,170,646   

Other real estate

     1,866,823         1,871,147   

Commercial

     —           —     

Consumer

     —           —     
  

 

 

    

 

 

 

Total

     11,797,223         13,523,616   
  

 

 

    

 

 

 

Interest income recognized during impairment (three months ending March 31, 2012 and March 31, 2011):

     

Construction & Development

     4,926         5,018   

Commercial real estate

     26,740         4,612   

Residential real estate

     6,826         10,762   

Other real estate

     9,617         9,564   

Commercial

     —           —     

Consumer

     —           —     
  

 

 

    

 

 

 

Total

     48,109         29,956   
  

 

 

    

 

 

 

For the three months ended March 31, 2012 and 2011, the Company did not recognize any interest income under the cash-basis method of accounting.

 

12


Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 4—Loans and Allowance for Loan Losses (continued)

 

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011:

 

     As of March 31, 2012  
     Recorded
Investment/Unpaid
Principal Balance
     Allowance
For Loan  Losses
Allocated
 

With no related allowance recorded:

     

Construction & Development

   $ 176,306       $ —     

Commercial real estate

     1,157,036        —     

Residential real estate

     20,002         —     

Other real estate

     —           —     

Commercial

     —           —     

Consumer

     —           —     

With an allowance recorded:

     

Construction & Development

     2,246,597         963,155   

Commercial real estate

     3,561,688        343,673  

Residential real estate

     1,237,821         200,819   

Other real estate

     1,866,823         81,444   

Commercial

     —           —     

Consumer

     —           —     
  

 

 

    

 

 

 

Total

   $ 10,266,273       $ 1,589,091   
  

 

 

    

 

 

 

 

     As of December 31, 2011  
     Recorded
Investment/Unpaid
Principal Balance
     Allowance
For Loan  Losses
Allocated
 

With no related allowance recorded:

     

Construction & Development

   $ 378,360       $ —     

Commercial real estate

     3,063,094        —     

Residential real estate

     20,002         —     

Other real estate

     —           —     

Commercial

     —           —     

Consumer

     —           —     

With an allowance recorded:

     

Construction & Development

     4,436,867         1,039,138   

Commercial real estate

     2,332,462        821,079   

Residential real estate

     1,230,566         156,088   

Other real estate

     1,866,823        79,271   

Commercial

     —           —     

Consumer

     —           —     
  

 

 

    

 

 

 

Total

   $ 13,328,174       $ 2,095,576   
  

 

 

    

 

 

 

The recorded investment in loans excluded accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is reduced for net charge-offs and cash-basis interest recognized represents interest income that is recognized on a cash-basis method of accounting.

 

13


Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 4—Loans and Allowance for Loan Losses (continued)

 

The recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans are summarized below:

 

     As of March 31, 2012  
     Nonaccrual      Loans Past Due
Over 90 Days and
Still Accruing
 

Construction & Development

   $ 1,819,541       $ —     

Commercial real estate

     3,646,632         —     

Residential real estate

     869,496         3,633   

Other real estate

     1,255,130         —     

Commercial

     —           —     

Consumer

     10,667         —     
  

 

 

    

 

 

 

Total

   $ 7,601,466       $ 3,633   
  

 

 

    

 

 

 

 

     As of December 31, 2011  
     Nonaccrual      Loans Past Due
Over 90 Days and
Still Accruing
 

Construction & Development

   $ 3,991,562       $ —     

Commercial real estate

     4,313,940         —     

Residential real estate

     866,162         —     

Other real estate

     1,255,130         —     

Commercial

     —           —     

Consumer

     11,746         —     
  

 

 

    

 

 

 

Total

   $ 10,438,540       $ —     
  

 

 

    

 

 

 

Nonaccrual loans and loans past due 90 days still on accrual include individually classified impaired loans.

The following tables present the aging of the recorded investment in past due loans by class of loans. Non-accrual loans are included and have been categorized based on their payment status:

 

     30-90
Days
Past Due
     Over 90
Days
Past Due
     Total
Past Due
     Loans Not
Past Due
     Total  

March 31, 2012

              

Construction & Development

   $ 617,657       $ —         $ 617,657       $ 5,128,616       $ 5,746,273   

Commercial real estate

     500,881         275,000         775,881         24,354,865         25,130,746   

Residential real estate

     1,197,167         13,317         1,210,484         43,182,547         44,393,031   

Other real estate

     656,378         1,255,130         1,911,508         1,655,578         3,567,086   

Commercial

     21,232         —           21,232         3,912,680         3,933,912   

Consumer

     34,841        —           34,841        2,120,378         2,155,219   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,028,156       $ 1,543,447       $ 4,571,603       $ 80,354,665       $ 84,926,268   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 4—Loans and Allowance for Loan Losses (continued)

 

     30-90
Days
Past Due
     Over 90
Days
Past Due
     Total
Past Due
     Loans Not
Past Due
     Total  

December 31, 2011

              

Construction & Development

   $ 428,056       $ 979,656       $ 1,407,712       $ 6,675,855       $ 8,083,567   

Commercial real estate

     190,058        925,850        1,115,908        25,486,107        26,602,015  

Residential real estate

     1,731,167         —           1,731,167         48,597,092         50,328,259   

Other real estate

     51,154         1,255,130         1,306,284         2,096,100         3,402,384   

Commercial

     10,961         —           10,961         5,771,197         5,782,158   

Consumer

     27,205         —           27,205         2,446,002         2,473,207   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,438,601       $ 3,160,636       $ 5,599,237       $ 91,072,353       $ 96,671,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings:

The Company reported total troubled debt restructurings of $5,419,465 as of March 31, 2012 and $7,661,000 as of December 31, 2011. Specific allocations of $849,926 and $1,491,312 were reported for the troubled debt restructurings as of March 31, 2012 and December 31, 2011, respectively. The Company has no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings. Troubled debt restructurings are included in impaired loans.

During the period ending March 31, 2012, there were no additional loans modified as troubled debt restructurings. The modification of the terms of such loans would include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

No payment defaults or charge-offs were reported for troubled debt restructurings during the three month period ending March 31, 2012. A default is when a loan is past due by greater than 90 days.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $100,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

 

15


Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 4—Loans and Allowance for Loan Losses (continued)

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. All loans in all loan categories are assigned risk ratings. Based on the most recent analyses performed, the risk category of loans by class of loans is as follows:

 

     March 31, 2012  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Construction & Development

   $ 3,209,824       $ —         $ 2,536,449         —         $ 5,746,273   

Commercial real estate

     20,318,192        —           4,812,554        —           25,130,746  

Residential real estate

     42,707,009         —           1,686,022         —           44,393,031   

Other real estate

     1,650,409         —           1,916,677         —           3,567,086   

Commercial

     3,769,374         —           164,538         —           3,933,912   

Consumer

     2,144,552         —           10,667         —           2,155,219   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 73,799,361       $ —         $ 11,126,907       $ —         $ 84,926,268   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Pass      Special
Mention
     Substandard      Doubtful      Total  

Construction & Development

   $ 3,253,824       $ —         $ 4,829,743       $ —         $ 8,083,567   

Commercial real estate

     21,110,922        —           5,491,093        —           26,602,015   

Residential real estate

     48,628,368         —           1,699,891         —           50,328,259   

Other real estate

     1,484,407         —           1,917,977         —           3,402,384   

Commercial

     5,628,312         —           153,846         —           5,782,158   

Consumer

     2,459,918         —           13,289         —           2,473,207   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 82,565,751       $ —         $ 14,105,839       $ —         $ 96,671,590   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 5—Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. At the time a loan is considered impaired, it is valued at the lower of cost or fair value. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (“OREO”) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

17


Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 5—Fair Value (continued)

 

Assets measured at fair value on a recurring basis are summarized below.

 

     Fair Value Measurements at March 31, 2012  
     Quoted Prices
in Active
Markets for
Identical Assets
(Level  1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Assets:

        

Securities available-for-sale

        

U.S. government-sponsored entities and agencies

   $ —         $ 3,316,156       $ —     

State and political subdivision

     —           1,057,067         —     

Mortgage-backed: residential

     —           721,020         —     

Collateralized mortgage obligations

     —           8,339,401         —     
  

 

 

    

 

 

    

 

 

 

Total investment securities

   $ —         $ 13,433,644       $ —     
  

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at December 31, 2011  
     Quoted Prices
in Active
Markets for
Identical Assets
(Level  1)
     Significant Other
Observable Inputs 
(Level 2)
     Significant
Unobservable

Inputs
(Level 3)
 

Assets:

        

Securities available-for-sale

        

U.S. government-sponsored entities and agencies

   $ —         $ 2,342,275       $ —     

State and political subdivision

     —           5,937,308         —     

Mortgage-backed: residential

     —           767,115         —     

Collateralized mortgage obligations

     —           6,230,493         —     
  

 

 

    

 

 

    

 

 

 

Total investment securities

   $ —         $ 15,277,191       $ —     
  

 

 

    

 

 

    

 

 

 

Financial assets measured at fair value on a non-recurring basis are summarized below:

 

     Fair Value Measurements at March 31, 2012  
     Quoted Prices
in Active
Markets for
Identical Assets
(Level  1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Impaired loans with specific allocations:

        

Construction and development

   $ —         $ —         $ 1,459,748   

Commercial real estate

     —           —           4,375,051   

Residential real estate

     —           —           1,057,004   

Other real estate

     —           —           1,785,379   

Commercial

     —           —           —     

Consumer

     —           —           —     

Other real estate owned:

        

Construction and development

   $ —         $ —         $ 2,261,238   

Commercial real estate

     —           —           1,151,480   

Residential

     —           —           104,960   

Commercial

     —           —           402,362   

 

18


Table of Contents

VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 5—Fair Value (continued)

 

     Fair Value Measurements at December 31, 2011  
     Quoted Prices
in Active
Markets for
Identical Assets
(Level  1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Impaired loans with specific allocations:

        

Construction and development

   $ —         $ —         $ 3,397,729   

Commercial real estate

     —           —           1,511,383   

Residential real estate

     —           —           1,074,478   

Other real estate

     —           —           1,787,552   

Commercial

     —           —           —     

Consumer

     —           —           —     

Other real estate owned:

        

Construction and development

   $ —         $ —         $ 2,261,238   

Commercial real estate

     —           —           1,151,480   

Residential

     —           —           841,757   

Commercial

     —           —           402,362   

Impaired loans with specific allowance for loan loss allocations, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $10,266,273 with a valuation allowance of $1,589,091 at March 31, 2012, resulting in no additional provision for loan losses for the three month period ended March 31, 2012.

Impaired loans with specific allowance for loan loss allocations, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $9,866,718 with a valuation allowance of $2,095,576 at December 31, 2011. Impaired loans measured at fair value resulted in $5,967 additional provision for loan losses for the three months ended March 31, 2011.

Other real estate owned, with a valuation allowance, had a net carrying value of $3,920,040 at March 31, 2012 and $4,657,837 at December 31, 2011. Total writedowns of other real estate owned for the three months ended March 31, 2012 and 2011 were approximately $148,000 and $1,000, respectively.

In determining the net realizable value of the underlying collateral for impaired loans and OREO properties, we primarily rely on third party appraisals. We obtain appraisals on an annual basis for impaired loans and OREO properties. Appraisals are reviewed by an employee independent of the loan production process and large and/or more complicated appraisals are reviewed by a certified appraiser. These appraisal values are discounted from 8% to 40% in consideration of charges we expect would be incurred in event of foreclosure. These charges can include realtor commissions, attorney fees, insurance, and other adjustments management believes accurately reflect the value since the time of appraisal. In addition to the discounts taken, our calculation of net realizable value considers any other liens in place on the underlying collateral.

Of the $10,266,273 impaired loan portfolio at March 31, 2012, $8,932,932 were carried at fair value as a result of the aforementioned charge-offs and specific valuation allowances. The remaining $1,333,341 of impaired loans were carried at cost at March 31, 2012, as the fair value of the collateral on these loans exceeded the book value for each individual loan.

 

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VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 5—Fair Value (continued)

 

Of the $6,586,397 in OREO properties at March 31, 2012, $3,920,040 were carried at fair value as a result of the aforementioned charge-offs and specific valuation allowances. The remaining $2,666,357 of impaired loans were carried at cost at March 31, 2012, as the fair value of the collateral on these loans exceeded the book value for each individual loan.

The carrying amounts and estimated fair values of financial instruments, not previously presented, were as follows:

 

            Fair Value Measurements at
March 31, 2012 Using:
 
     Carrying Amount      Level 1      Level 2      Level 3      Total  
     (In thousands)  

Financial assets

              

Cash and cash equivalents

   $ 21,777       $ 21,777       $ —         $ —         $ 21,777   

Loans, net

     82,362         —           —           81,768         81,768   

Accrued interest receivable

     485         —           45         440         485   

Federal Home Loan Bank stock

     494         —           —           —           N/A   

Financial liabilities

              

Deposits

   $ 116,567       $ 39,450       $ 72,192       $ —         $ 116,462   

Federal Home Loan Bank advances

     8,500         —           8,500         —           8,500   

Subordinated debentures

     3,093         —           —           1,764         1,764   

Accrued interest payable

     503         53         183         267         503   

Note payable—major stockholder

     831         —           —           831         831   

Note payable—directors

     160         —           —           160         160   

The carrying amounts and estimated fair values of financial instruments at December 31, 2011 are as follows:

 

      Carrying
Amount
     Fair
Value
 
     (In thousands)  

December 31, 2011

     

Financial assets

     

Cash and cash equivalents

   $ 6,300       $ 6,300   

Securities available for sale

     15,277         15,277   

Loans, net

     93,627         93,110   

Federal Home Loan Bank stock

     494         N/A   

Accrued interest receivable

     609         609   

Financial liabilities

     

Deposits

   $ 113,342       $ 113,463   

Federal Home Loan Bank advances

     8,500         8,500   

Subordinated debentures

     3,093         1,734   

Accrued interest payable

     504         504   

Note payable—major stockholder

     831         831   

Note payable—directors

     160         160   

 

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VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 5—Fair Value (continued)

 

Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt, and loans and deposits that reprice frequently and fully. Security fair values are as stated previously. It was not practicable to determine the fair value of FHLB stock due to restrictions placed on its transferability. For loans or deposits and for deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are as stated previously. The fair value of subordinated debentures was determined based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not considered material and is not presented.

Note 6—Subordinated Debentures

The Company began deferring the interest payments on its subordinated debentures during the third quarter of 2010. These payments may be deferred a total of five years. As of March 31 2012, there was approximately $150,000 of accrued and unpaid interest on the debentures. For more information on these debentures, see the notes to the consolidated financial statements filed with the Company’s annual report on Form 10-K.

Note 7 – Consent Order and Action Plans

On January 28, 2010, the Bank entered into a Consent Order (the “Consent Order”) with the Federal Deposit Insurance Corporation (“FDIC”). As is customary for orders of this type, the Bank entered into the Consent Order without admitting or denying any charges of unsafe and unsound practices or violations of law or regulations. On June 22, 2011, the Bank also executed a written agreement (the “Agreement”) with the Tennessee Department of Financial Institutions (“TDFI”).

On May 26, 2010, the Company entered into an agreement (the “FRB Agreement”) with the Federal Reserve Board (“FRB”). The Company is to act as a source of financial strength for the Bank. Accordingly in this FRB Agreement, the Company is required to obtain written permission before any of the following actions are taken: payment or receipt of any dividends from the Bank, payments on the subordinated debentures (see Note 6) or Trust Preferred Securities, or the purchase or redemption of any stock. In addition, under the FRB Agreement, the Company may not incur, increase, or guarantee any debt without prior written approval of the FRB.

The Consent Order, the Agreement, and the FRB Agreement (collectively, the “Action Plans”) contain substantially similar terms and are based on the findings of the FDIC and TDFI during their joint examination of the Bank that commenced on September 14, 2009. The Action Plans represent agreement between the Bank, on the one hand, and the FDIC, the TDFI, and the FRB, respectively, on the other hand as to areas of the Bank’s or Company’s operations that warrant improvement and require the Bank or Company to present plans for making those improvements. The Action Plans impose no fines or penalties on the Bank or Company.

 

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VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 7 – Consent Order and Action Plans (continued)

 

Under the terms of each Action Plan, the Bank cannot declare or pay cash dividends without the prior written consent of certain officials of the FDIC and TDFI (the “Joint Officials”). In addition, the Bank is restricted from extending additional credit to certain borrowers whose existing credit has been classified as “loss”, “doubtful”, or “substandard” or has been charged off the books of the Bank and, in each case, is uncollected. The Action Plans also require the Bank to provide the Joint Officials 60 days prior written notice of any proposed changes in the Bank’s management, along with background information on any proposed new management officials. The Action Plans also contain requirements ranging from a capital directive, which requires the Bank to achieve and maintain minimum regulatory capital levels in excess of the statutory minimums to be well-capitalized, to developing a liquidity risk management and contingency funding plan, in connection with which we will be subject to limitations on the maximum interest rates the Bank can pay on deposit accounts. The Bank is also restricted from accepting brokered deposits. The Action Plans require the development of various programs and procedures to improve asset quality as well as routine reporting on progress toward compliance with the Action Plans to the Board of Directors, the FDIC, the TDFI, and the FRB.

The Order requires the Bank to maintain Tier 1 capital to average total assets of 8%, Tier 1 risk based capital to risk-weighted assets of 10% and total risk based capital to total risk weighted assets of 12%.

The Bank has provided quarterly written progress reports to the Joint Officials through the first quarter of 2012. Management plans to conform to all conditions of the Action Plans and is implementing its plan to return capital levels to prescribed levels.

Management and the Board of Directors have carefully considered the impact of the Action Plans on the Bank’s current and future operations. Areas that have received additional attention as a result of the Action Plans include the Bank’s liquidity position, overall balance sheet structure, capital and earnings. The Bank has considered the impact of deposit interest rate restrictions that may impair the Bank’s ability to raise local certificates of deposit. The Bank’s earnings have been negatively impacted due to recent regulatory criticism. One example of the negative impact on earnings is that increased FDIC insurance premiums have been incurred and will continue to be at an elevated level until the Bank’s overall condition improves.

Noncompliance with the Action Plans could subject the Bank to an array of penalties ranging from the assessment of civil money penalties against the Bank and/or any or all of its officers and directors contributing to the violation, to a termination of the Bank’s deposit insurance for more egregious violations of applicable bank rules and regulations. The Bank is not aware of any penalties that were the result of any noncompliance with the Action Plans.

The Bank’s current regulatory status also subjects it to certain other requirements of law apart from the Action Plans. For example, the Bank and the Company are subject to restrictions under the FDIC’s regulations governing golden parachute payments, which generally prohibit entering into and paying certain severance payments to directors and senior executive officers without prior FDIC approval in the case of the Bank and FRB and FDIC approval in the case of the Company. The Company made no such payments during the five preceding years even without the restrictions. In addition, the Bank is currently unable to submit bids to the FDIC for the acquisition of any failed banks.

 

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VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 8—Capital Requirements

 

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 Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital 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 amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, 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 following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined).

As of March 31, 2012, the Bank’s capital ratios categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action.

Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution (such as those to which the Bank is subject under the Action Plans) could subject a bank or bank holding company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business. As described below, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.

The Action Plans the Bank was issued by regulators requires the Bank to maintain Tier 1 capital to average total assets of 8%, Tier 1 risk based capital to risk-weighted assets of 10% and total risk based capital to total risk weighted assets of 12%. As of March 31, 2012, the Bank was not in compliance with these capital requirements. The Bank’s actual capital amounts, ratios and minimum capital requirements per the Action Plans are presented in the table below. Dollar amounts are presented in thousands.

 

     Actual     To Comply With
Minimum  Capital
Requirements
Per Consent Order
    Excess (Deficit)
To Comply With
Requirements
Per Consent Order
 

March 31, 2012

   Amount      Ratio     Amount      Ratio     Amount     Ratio  

Total Capital to Risk Weighted Assets

   $ 6,814         8.64   $ 9,469         12.00   $ (4,677     (3.36 )% 

Tier 1 Capital to Risk Weighted Assets

   $ 5,807         7.36   $ 7,891         10.00   $ (2,084     (2.64 )% 

Tier 1 Capital to Average Assets—Leverage

   $ 5,807         4.43   $ 10,484         8.00   $ (4,677     (3.57 )% 

 

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VOLUNTEER BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(Unaudited)

 

Note 8—Capital Requirements (continued)

 

 

     Actual     To Comply With
Minimum Capital
Requirements
Per Consent Order
    Excess (Deficit)
To Comply With
Requirements
Per Consent Order
 

December 31, 2011

   Amount      Ratio     Amount      Ratio     Amount     Ratio  

Total Capital to Risk Weighted Assets

   $ 6,883         7.72   $ 10,699         12.00   $ (3,816     (4.28 )% 

Tier 1 Capital to Risk Weighted Assets

   $ 5,745         6.44   $ 8,916         10.00   $ (3,171     (3.56 )% 

Tier 1 Capital to Average Assets—Leverage

   $ 5,745         4.37   $ 10,506         8.00   $ (4,761     (3.63 )% 

No cash dividends were paid to stockholders in either 2012 or 2011. The Company’s principal source of funds is dividends received from the Bank. In accordance with the Action Plans with the FDIC and TDFI, no dividend can be paid from the Bank to the holding company without prior approval by the FDIC. In addition, the Company is restricted from paying dividends while deferring interest payments on the subordinated debt.

 

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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. For a list of these factors, please refer to “Cautionary Notice Regarding Forward-Looking Statements” in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011.

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

Our total assets increased 2.5% to $131.3 million at March 31, 2012 from $128.0 million at December 31, 2011. The increase was due to an increase in deposits of $3.3 million, or 2.8%, to $116.6 million at March 31, 2012 from $113.3 million at December 31, 2011. Net loans decreased $11.3 million to 82.4 million at March 31, 2012 from $93.6 million at December 31, 2011. These changes fueled the increase in cash and equivalents of $15.5 million to $21.8 million from $6.3 million at December 31, 2011.

The decrease in our loan portfolio during the period ended March 31, 2012 was primarily due to the sale of $4.8 million of residential real estate loans, principal paydowns of $4.6 million and a decrease of $2.3 million from loans being placed in foreclosure. The decreases in our loan segments were in Construction and Land Development loans of $2.3 million, Commercial Real Estate loans of $1.5 million, Residential Real Estate of $5.9 million, Commercial loans of $1.7 million and Consumer loans of $.5 million.

Our securities portfolio decreased $1.8 million to $13.4 million at March 31, 2012 due to sales of some securities for a net gain during the period. We expect to invest a portion of the increase in cash in investments and some will be utilized to fund loan growth in Small Business Administration loans. This increase in cash of $15.5 million has greatly increased our liquidity and in the opinion of management, it is adequate to cover our current obligations.

The allowance for loan losses was $2.6 million, or 3.0% of total loans at March 31, 2012, compared to $3.0 million, or 3.1% of total loans at December 31, 2011. Total impaired loans were $10.3 million at March 31, 2012, a decrease of $3.0 million, or 22.6%, compared to $13.3 million at December 31, 2011. The impaired loans with an allocated allowance decreased to $8.9 million at March 31, 2012 from $9.9 million at December 31, 2011. The decreases in these amounts correspond to the transfers to Other Real Estate Owned (“OREO”) of $2.3 million plus amounts charged off of $.5 million relating to those transfers to OREO. For some impaired loans recorded at the fair value of the collateral, the underlying asset values increased during the period. For other impaired loans, the fair value of the collateral decreased. The allowance for loan losses as a percentage of impaired loans increased to 23.0% at March 31, 2012 compared to 21.6% at December 31, 2011. Management believes that our calculation of the allowance for loan losses is adequate to cover probable and incurred losses in our loan portfolio.

Deposits increased $3.3 million, or 2.8%, to $116.6 million at March 31, 2012 from $113.3 million at December 31, 2011. The increase was primarily attributable to a $1.3 million increase in demand deposits and a $1.4 million increase in money market deposit accounts. Most of this increase is due to a normal fluctuation of balances at Christmas time and then an increase when tax refunds are collected by customers.

We had advances from the Federal Home Loan Bank of Cincinnati of $8.5 million as of March 31, 2012 and December 31, 2011. We have additional credit available under a blanket pledge of one to four family loans with the Federal Home Loan Bank of Cincinnati of approximately $6.1 million at March 31, 2012.

 

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Table of Contents

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Total equity remained virtually unchanged at $1.4 million at March 31, 2012 compared to $1.4 million at December 31, 2011. The net loss of $47,000 was offset by an increase in accumulated other comprehensive income and additional paid-in capital. The change in additional paid-in capital was due to a capital contribution related to imputed interest on the note payable to stockholder which currently has a contracted interest rate of 0%. While overall capital stayed approximately the same as December 31, 2011, management worked to position our assets in lower risk categories for capital purposes. Securities with higher risk weights were sold and replaced with 0% risk weights. As mentioned earlier, the decrease in loans also helped us achieve better risk-based capital. For a discussion of capital requirements, see Note 8 to the Notes to Consolidated Financial Statements.

Comparison of Operating Results for the Three Months Ended March 31, 2012 and March 31, 2011

General. Net loss decreased to $47,000 for the three months ended March 31, 2012 compared to income of $140,000 for the three months ended March 31, 2011. The decrease reflected a decline in net interest income of $80,000 to $972,000 for the three months ended March 31, 2012 from $1.1 million for the three months ended March 31, 2011. In addition, noninterest expense increased $99,000 to $1.4 million at March 31, 2012, from $1.3 million for the three months ended March 31, 2011.

Interest Income. Interest income decreased $186,000, or 13.0%, to $1.2 million for the three months ended March 31, 2012 from $1.4 million for the three months ended March 31, 2011. The decrease was largely due to a decrease in the average balance of loans for the three months ended March 31, 2012 to $93.4 million from $104.2 million for the three months ended March 31, 2011, which was partially offset by an increase in the yield on loans to 5.04% for the three months ended March 31, 2012, compared to 5.02% for the three months ended March 31, 2011.

Interest income on loans decreased $129,000, or 9.9%, to $1.2 million for the three months ended March 31, 2012 from $1.3 million for the three months ended March 31, 2011, reflecting shrinkage in our loan portfolio as noted above. Interest income on investment securities decreased to $52,000 for the three months ended March 31, 2012 from $117,000 for the three months ended March 31, 2011, reflecting the lower yielding investments that were purchased after the sale of most of our securities portfolio during 2011 and the first quarter of 2012.

Interest Expense. Interest expense decreased $106,000, or 28.3%, to $267,000 for the three months ended March 31, 2012 from $373,000 for the three months ended March 31, 2011. The decrease reflected a decrease in the average rate paid on deposits in the three months ended March 31, 2012 to .78% from 1.19% in the three months ended March 31, 2011 as well as a decrease of $898,000 in the average balance of such deposits to $116.1 million for the three months ended March 31, 2012 from $117.0 million for the three months ending March 31, 2011.

Net Interest Income. Net interest income decreased $80,000 for the three months ended March 31, 2012. The decrease resulted from a decrease in our net interest rate margin from 3.49% for the three months ended March 31, 2011 to 3.31% for the three months ended March 31, 2012. The decreases in our net interest margin were largely due to our declining loan balances and yield on securities described above.

Provision for Loan Losses. We recorded no provision for loan losses for the three months ended March 31, 2012, compared to $6,000 for the three months ended March 31, 2011. While there were increases in specific reserves on some loans, some valuations on impaired loans valued at the fair value of collateral increased during the period which decreased the specific reserve related to these loans. At the same time, loan balances decreased significantly, as described earlier, thus causing no additional provision for loans losses to be necessary.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Noninterest Income. Noninterest income decreased $13,000 to $368,000 for the three months ended March 31, 2012 from $381,000 for the three months ended March 31, 2011. Service charges decreased $16,000 for the three months ended March 31, 2012 compared to the same period in 2011. This was due to a decrease in overdraft fees. We recognized a gain of $203,000 on the sale of $4.8 million of residential real estate loans for the three months ended March 31, 2012, while there were no transactions of this type for the three months ended March 31, 2011. Gains on sale of securities decreased to $55,000 during the three months ended March 31, 2012, compared to $258,000 in the same period in 2011. For the period ended March 31, 2011, we had gains of $13,000 on the sale of fixed assets while there were no sales of this type during the three months ended March 31, 2012. Other income increased $17,000 to $67,000 for the three months ended March 31, 2012 due to an increase in income from OREO properties.

Noninterest Expense. Noninterest expense increased $99,000, or 7.7%, to $1.4 million for the three months ended March 31, 2012, compared to $1.3 million for the three months ended March 31, 2011. The increase was due to an increase in audit and professional fees of $93,000 due to the cost of additional services related to the audit and filing of reports as a public company. Insurance and bond expense increased $29,000 due to the increased cost of insurance based on our risk profile. The Directors also waived their fees for services to the Company which amounted to a savings of $21,000 for the three months ended March 31, 2012.

Income Tax Expense. No income tax expense was recorded for the period. We have established a full valuation allowance, therefore, no tax benefit is being recognized.

 

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Item 3 Quantitative And Qualitative Disclosures About Market Risk

Disclosures of quantitative and qualitative market risk are not required by smaller reporting companies, such as the Company.

Item 4. Controls and Procedures

As defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported on a timely basis, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company’s disclosure controls and procedures include components of the Company’s internal control over financial reporting. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of March 31, 2012. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended March 31, 2012, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1. Legal Proceedings

Other than as discussed in Note 7 to Notes to Consolidated Financial Statements, in the opinion of management, there is no proceeding pending or, to the knowledge of management, threatened, in which an adverse decision could result in a material adverse change in the consolidated financial condition or results of operations of the Company.

Item 1A. Risk Factors

There have been no material changes to our risk factors as disclosed in our latest annual report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 5. Other Information

None.

 

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Item 6. Exhibits

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q or are referenced to a prior filing and are listed on the Exhibit Index below.

Exhibit Index

 

 

Exhibit

Number

  

Description of Document

3.1*    Articles of Incorporation of Volunteer Bancorp, Inc., as amended, filed as Exhibit 3.1 of the Company’s Form 10-K dated December 31, 2011 and incorporated herein by reference
3.2*    Bylaws of Volunteer Bancorp, Inc., filed as Exhibit 3.2 of the Company’s Form 10-K dated December 31, 2011 and incorporated herein by reference
10.1*    Stock Purchase Agreement, dated April 13, 2006, among Ralph T. Hurley, Willa Dean Hurley and Volunteer Bancorp, Inc., filed as Exhibit 10.1 of the Company’s Form 10-K dated December 31, 2011 and incorporated herein by reference
10.2*    Amended Stock Purchase Agreement, dated June 16, 2008, among Ralph T. Hurley, Willa Dean Hurley and Volunteer Bancorp, Inc., filed as Exhibit 10.2 of the Company’s Form 10-K dated December 31, 2011 and incorporated herein by reference
10.3*    Second Amended Stock Purchase and Trust Agreement, dated November 10, 2010, among Ralph T. Hurley, Willa Dean Hurley and Volunteer Bancorp, Inc., filed as Exhibit 10.3 of the Company’s Form 10-K dated December 31, 2011 and incorporated herein by reference
10.4*    Consent Order, dated January 28, 2010, issued by Federal Deposit Insurance Corporation to The Citizens Bank of East Tennessee, filed as Exhibit 10.4 of the Company’s Form 10-K dated December 31, 2011 and incorporated herein by reference
10.5*    Written Agreement, dated June 22, 2011, between Tennessee Department of Financial Institutions and The Citizens Bank of East Tennessee, filed as Exhibit 10.5 of the Company’s Form 10-K dated December 31, 2011 and incorporated herein by reference
10.6*    Written Agreement, dated May 26, 2010, between Federal Reserve Bank of Atlanta and Volunteer Bancorp, Inc., filed as Exhibit 10.6 of the Company’s Form 10-K dated December 31, 2011 and incorporated herein by reference
10.7*    Mortgage Loan Participation Sale Agreement, dated March 21, 2012, between The Citizens Bank of East Tennessee and Old Town Bank, filed as Exhibit 99.1 of the Company’s Form 8-K dated March 27, 2012 and incorporated herein by reference

 

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10.8*    Mortgage Loans Master Participation Certificate and Agreement, dated March 21, 2012, between The Citizens Bank of East Tennessee and Old Town Bank, filed as Exhibit 99.2 of the Company’s Form 8-K dated March 27, 2012 and incorporated herein by reference
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
101    The following financial information from Volunteer Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 filed with the SEC on May 15, 2012, formatted in XBRL includes: (i) Consolidated Balance Sheets at March 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations for the fiscal periods ended March 31, 2012 and 2011, (iii) Consolidated Statements of Comprehensive Income (Loss) for the fiscal periods ended March 31, 2012 and 2011, (iv) Consolidated Statements of Cash Flows for the fiscal periods ended March 31, 2012 and 2011, and (v) Notes to Consolidated Financial Statements.

 

* Filed previously

 

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Volunteer Bancorp, Inc.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   
      Volunteer Bancorp, Inc.
      (Registrant)
DATE: May 15, 2012       /s/ Douglas E. Rehm
      Douglas E. Rehm
      President and Chief Executive Officer
DATE: May 15, 2012       /s/ Benjamin R. Lindley
      Benjamin R. Lindley
      Chief Financial Officer

 

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