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EXCEL - IDEA: XBRL DOCUMENT - MOUNTAIN NATIONAL BANCSHARES INC | Financial_Report.xls |
EX-31.1 - EXHIBIT 31.1 - MOUNTAIN NATIONAL BANCSHARES INC | c20089exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - MOUNTAIN NATIONAL BANCSHARES INC | c20089exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - MOUNTAIN NATIONAL BANCSHARES INC | c20089exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - MOUNTAIN NATIONAL BANCSHARES INC | c20089exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-49912
MOUNTAIN NATIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Tennessee (State or other jurisdiction of incorporation or organization) |
75-3036312 (I.R.S. Employer Identification No.) |
|
300 East Main Street | ||
Sevierville, Tennessee | 37862 | |
(Address of principal executive offices) | (Zip Code) |
(865) 428-7990
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
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 Exchange Act of 1934 during the preceding 12
months (or 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, 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 þ No o
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 o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common
stock as of the latest practicable date. Common stock outstanding: 2,631,611 shares as of August 1,
2011.
MOUNTAIN NATIONAL BANCSHARES, INC.
Quarterly Report on Form 10-Q
For the quarter ended June 30, 2011
Quarterly Report on Form 10-Q
For the quarter ended June 30, 2011
Table of Contents
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 27,037,257 | $ | 30,039,647 | ||||
Federal funds sold |
7,237,291 | 2,536,173 | ||||||
Total cash and cash equivalents |
34,274,548 | 32,575,820 | ||||||
Securities available for sale |
87,450,781 | 86,316,591 | ||||||
Securities held to maturity, fair value $1,441,590 at June 30, 2011 and
$1,303,080 at December 31, 2010 |
1,348,823 | 1,317,951 | ||||||
Restricted investments, at cost |
3,846,950 | 3,843,150 | ||||||
Loans, net of allowance for loan losses of $14,189,651 at June 30, 2011 and
$10,942,414 at December 31, 2010 |
330,433,752 | 363,413,050 | ||||||
Investment in partnership |
4,344,720 | 4,303,600 | ||||||
Premises and equipment |
31,973,618 | 32,600,673 | ||||||
Accrued interest receivable |
1,383,074 | 1,495,869 | ||||||
Cash surrender value of company owned life insurance |
11,971,699 | 11,774,605 | ||||||
Other real estate owned |
9,870,404 | 13,140,698 | ||||||
Other assets |
4,500,872 | 6,424,504 | ||||||
Total assets |
$ | 521,399,241 | $ | 557,206,511 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Deposits: |
||||||||
Noninterest-bearing demand deposits |
$ | 50,657,932 | $ | 47,638,792 | ||||
NOW accounts |
53,608,086 | 57,344,798 | ||||||
Money market accounts |
49,966,061 | 49,701,122 | ||||||
Savings accounts |
23,230,999 | 23,733,795 | ||||||
Time deposits |
260,433,414 | 271,172,901 | ||||||
Total deposits |
437,896,492 | 449,591,408 | ||||||
Securities sold under agreements to repurchase |
1,150,244 | 432,016 | ||||||
Accrued interest payable |
737,968 | 719,133 | ||||||
Subordinated debentures |
13,403,000 | 13,403,000 | ||||||
Federal Home Loan Bank advances |
55,200,000 | 55,200,000 | ||||||
Other liabilities |
1,513,598 | 2,186,784 | ||||||
Total liabilities |
509,901,302 | 521,532,341 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Preferred stock, no par value; 1,000,000 shares authorized;
0 shares issued and outstanding |
| | ||||||
Common stock, $1.00 par value; 10,000,000 shares authorized; 2,631,611
issued and outstanding |
2,631,611 | 2,631,611 | ||||||
Additional paid-in capital |
42,281,013 | 42,229,713 | ||||||
Retained earnings (deficit) |
(33,356,112 | ) | (8,122,476 | ) | ||||
Accumulated other comprehensive income (loss) |
(58,573 | ) | (1,064,678 | ) | ||||
Total shareholders equity |
11,497,939 | 35,674,170 | ||||||
Total liabilities and shareholders equity |
$ | 521,399,241 | $ | 557,206,511 | ||||
See accompanying Notes to Consolidated Financial Statements
3
Table of Contents
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Six months ended June 30, | Three months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
INTEREST INCOME |
||||||||||||||||
Loans |
$ | 9,236,933 | $ | 10,418,993 | $ | 4,627,435 | $ | 5,270,558 | ||||||||
Taxable securities |
1,181,464 | 1,371,089 | 628,297 | 602,155 | ||||||||||||
Tax-exempt securities |
116,127 | 145,304 | 58,213 | 42,547 | ||||||||||||
Federal funds sold and deposits in other banks |
15,774 | 27,494 | 9,890 | 16,796 | ||||||||||||
Total interest income |
10,550,298 | 11,962,880 | 5,323,835 | 5,932,056 | ||||||||||||
INTEREST EXPENSE |
||||||||||||||||
Deposits |
2,817,804 | 4,208,498 | 1,364,505 | 2,029,316 | ||||||||||||
Federal funds purchased |
| 1,330 | | 1,330 | ||||||||||||
Repurchase agreements |
6,773 | 14,312 | 4,083 | 8,393 | ||||||||||||
Federal Reserve and Federal Home Loan Bank
advances |
1,115,472 | 1,288,433 | 560,898 | 650,277 | ||||||||||||
Subordinated debentures |
162,143 | 162,113 | 85,394 | 82,062 | ||||||||||||
Total interest expense |
4,102,192 | 5,674,686 | 2,014,880 | 2,771,378 | ||||||||||||
Net interest income |
6,448,106 | 6,288,194 | 3,308,955 | 3,160,678 | ||||||||||||
Provision for loan losses |
20,363,488 | 546,700 | 17,363,488 | 334,400 | ||||||||||||
Net interest income after provision for loan losses |
(13,915,382 | ) | 5,741,494 | (14,054,533 | ) | 2,826,278 | ||||||||||
NONINTEREST INCOME |
||||||||||||||||
Service charges on deposit accounts |
745,763 | 844,507 | 367,691 | 446,295 | ||||||||||||
Other fees and commissions |
714,016 | 682,220 | 383,417 | 355,776 | ||||||||||||
Gain on sale of mortgage loans |
40,967 | 69,330 | 18,312 | 23,617 | ||||||||||||
Investment gains and losses, net |
48,009 | 1,192,155 | 48,009 | 238,546 | ||||||||||||
Other real estate gains and losses, net |
(4,693,445 | ) | 231,953 | (4,707,118 | ) | 193,494 | ||||||||||
Other noninterest income |
332,999 | 434,025 | 191,139 | 220,996 | ||||||||||||
Total noninterest income |
(2,811,691 | ) | 3,454,190 | (3,698,550 | ) | 1,478,724 | ||||||||||
NONINTEREST EXPENSE |
||||||||||||||||
Salaries and employee benefits |
4,011,738 | 4,430,961 | 2,016,320 | 2,088,608 | ||||||||||||
Occupancy expenses |
903,383 | 867,350 | 449,375 | 418,650 | ||||||||||||
FDIC assessment expense |
795,757 | 611,753 | 443,925 | 299,441 | ||||||||||||
Other operating expenses |
3,314,791 | 2,930,493 | 1,810,237 | 1,450,505 | ||||||||||||
Total noninterest expense |
9,025,669 | 8,840,557 | 4,719,857 | 4,257,204 | ||||||||||||
Income (loss) before income tax expense (benefit) |
(25,752,742 | ) | 355,127 | (22,472,940 | ) | 47,798 | ||||||||||
Income tax expense (benefit) |
(519,106 | ) | (116,273 | ) | (618,341 | ) | (94,488 | ) | ||||||||
Net income (loss) |
$ | (25,233,636 | ) | $ | 471,400 | $ | (21,854,599 | ) | $ | 142,286 | ||||||
EARNINGS (LOSS) PER SHARE |
||||||||||||||||
Basic |
$ | (9.59 | ) | $ | 0.18 | $ | (8.30 | ) | $ | 0.05 | ||||||
Diluted |
$ | (9.59 | ) | $ | 0.18 | $ | (8.30 | ) | $ | 0.05 |
See accompanying Notes to Consolidated Financial Statements
4
Table of Contents
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
For the Six Months Ended June 30, 2011 and 2010
(unaudited)
Accumulated | ||||||||||||||||||||||||
Additional | Retained | Other | Total | |||||||||||||||||||||
Comprehensive | Common | Paid-in | Earnings | Comprehensive | Shareholders | |||||||||||||||||||
Income (Loss) | Stock | Capital | (Deficit) | Income/(Loss) | Equity | |||||||||||||||||||
BALANCE, January 1, 2010 |
$ | 2,631,611 | $ | 42,125,828 | $ | 2,328,702 | $ | 283,014 | $ | 47,369,155 | ||||||||||||||
Share-based compensation |
32,110 | 32,110 | ||||||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||
Net income |
$ | 471,400 | 471,400 | 471,400 | ||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Change in unrealized gains (losses) on
securities available-for-sale |
158,237 | 158,237 | 158,237 | |||||||||||||||||||||
Total comprehensive income |
629,637 | |||||||||||||||||||||||
BALANCE, June 30, 2010 |
2,631,611 | 42,157,938 | 2,800,102 | 441,251 | 48,030,902 | |||||||||||||||||||
BALANCE, January 1, 2011 |
$ | 2,631,611 | $ | 42,229,713 | $ | (8,122,476 | ) | $ | (1,064,678 | ) | $ | 35,674,170 | ||||||||||||
Share-based compensation |
51,300 | 51,300 | ||||||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||
Net loss |
(25,233,636 | ) | (25,233,636 | ) | (25,233,636 | ) | ||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Change in unrealized gains (losses) on
securities available-for-sale |
1,006,105 | 1,006,105 | 1,006,105 | |||||||||||||||||||||
Total comprehensive loss |
$ | (24,227,531 | ) | |||||||||||||||||||||
BALANCE, June 30, 2011 |
$ | 2,631,611 | $ | 42,281,013 | $ | (33,356,112 | ) | $ | (58,573 | ) | $ | 11,497,939 | ||||||||||||
See accompanying Notes to Consolidated Financial Statements
5
Table of Contents
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(unaudited)
Six months ended June 30, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | (25,233,636 | ) | $ | 471,400 | |||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||
Depreciation |
758,728 | 818,354 | ||||||
Net realized gains on securities available for sale |
(48,009 | ) | (1,180,631 | ) | ||||
Net realized gains on securities held to maturity |
| (11,524 | ) | |||||
Net amortization on available for sale securities |
554,020 | 271,332 | ||||||
Increase in held to maturity due to accretion |
(30,872 | ) | (31,054 | ) | ||||
Provision for loan losses |
20,363,488 | 546,700 | ||||||
Net (gain) loss on other real estate |
4,693,445 | (231,953 | ) | |||||
Gross mortgage loans originated for sale |
(1,350,699 | ) | (1,206,996 | ) | ||||
Gross proceeds from sale of mortgage loans |
1,421,766 | 1,276,326 | ||||||
Gain on sale of mortgage loans |
(40,967 | ) | (69,330 | ) | ||||
Increase in cash surrender value of life insurance |
(197,094 | ) | (198,000 | ) | ||||
Investment in partnership |
(41,120 | ) | (18,790 | ) | ||||
Share-based compensation |
51,300 | 32,110 | ||||||
Change in operating assets and liabilities: |
||||||||
Accrued interest receivable |
112,795 | 662,204 | ||||||
Accrued interest payable |
18,835 | 64,479 | ||||||
Other assets and liabilities |
735,039 | 637,527 | ||||||
Net cash provided by operating
activities |
1,767,019 | 1,832,154 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Activity in available-for-sale securities: |
||||||||
Proceeds from sales |
3,861,274 | 91,615,721 | ||||||
Proceeds from maturities, prepayments and calls |
10,870,506 | 259,205,543 | ||||||
Purchases |
(14,850,469 | ) | (310,404,414 | ) | ||||
Activity in held-to-maturity securities: |
||||||||
Proceeds from sales |
| 520,000 | ||||||
Purchases of restricted investments |
(3,800 | ) | (27,100 | ) | ||||
Loan originations and principal collections, net |
9,519,864 | 6,856,013 | ||||||
Purchase of premises and equipment |
(21,723 | ) | (169,178 | ) | ||||
Proceeds from sale of other real estate |
1,532,745 | 2,467,947 | ||||||
Net cash provided by investing
activities |
10,908,397 | 50,064,532 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net decrease in deposits |
(11,694,916 | ) | (38,471,158 | ) | ||||
Proceeds from Federal Reserve/Federal Home Loan Bank advances |
| 43,000,000 | ||||||
Matured Federal Reserve/Federal Home Loan Bank advances |
| (43,200,000 | ) | |||||
Net increase
in securities sold under agreements to repurchase |
718,228 | 1,422,287 | ||||||
Net cash used in financing activities |
(10,976,688 | ) | (37,248,871 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
1,698,728 | 14,647,815 | ||||||
CASH AND CASH EQUIVALENTS, beginning of period |
32,575,820 | 14,104,636 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 34,274,548 | $ | 28,752,451 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
Cash paid for: |
||||||||
Interest |
$ | 4,083,357 | $ | 5,610,207 | ||||
Income taxes |
| 50,000 | ||||||
Non-cash investing and financing activities: |
||||||||
Transfers from loans to other real estate owned |
3,065,846 | 2,863,416 | ||||||
Loans advanced for sales of other real estate |
| 1,485,992 | ||||||
Transfers from held-to-maturity to available-for-sale securities |
| 439,097 |
See accompanying Notes to Consolidated Financial Statements
6
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Accounting Policies
The unaudited consolidated financial statements in this report have been prepared in
conformity with U.S. generally accepted accounting principles (GAAP) for interim financial
information and with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X. The
consolidated financial statements include the accounts of Mountain National Bancshares, Inc., a
Tennessee corporation (the Company), and its subsidiaries. The Companys principal subsidiary is
Mountain National Bank, a national association (the Bank). All material intercompany accounts and
transactions have been eliminated in consolidation.
Loss contingencies, including claims and legal actions arising in the ordinary course
of business, are recorded as liabilities when the likelihood of loss is probable and
an amount or range of loss can be reasonably estimated. Management does not believe there are
now such matters that will have a material effect on the financial statements.
Certain information and note disclosures normally included in the Companys annual
audited financial statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the unaudited financial statements in this report.
Consequently, the quarterly financial statements should be read in conjunction with the notes
included herein and the notes to the audited financial statements presented in the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2010. The unaudited quarterly financial
statements reflect all adjustments that are, in the opinion of management, necessary for a fair
presentation of the results of operations for interim periods presented. All such adjustments were
of a normal, recurring nature. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the complete fiscal year.
Reclassifications: Some items in prior year financial statements were reclassified to conform
to current presentation.
Note 2. New Accounting Standards
In April 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-02, A
Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring. ASU No.
2011-02 intended to provide additional guidance to assist creditors in determining whether a
restructuring of a receivable meets the criteria to be considered a Troubled Debt Restructuring
(TDR). The amendments in this ASU are effective for the first interim or annual period beginning
on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual
period of adoption. As a result of applying these amendments, an entity may identify receivables
that are newly considered TDRs. The Company does not expect the adoption of this guidance to have a
significant impact on the financial results.
In April 2011, the FASB issued ASU No. 2011-03, Reconsideration of Effective Control for
Repurchase Agreements. ASU No. 2011-03 modifies the criteria for determining when repurchase
agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an
entity that maintains effective control over transferred financial assets must account for the
transfer as a secured borrowing rather than as a sale. The provisions of ASU No. 2011-03 remove
from the assessment of effective control the criterion requiring the transferor to have the ability
to repurchase or redeem the financial assets on substantially the agreed terms, even in the event
of default by the transferee. The FASB believes that contractual rights and obligations determine
effective control and that there does not need to be a requirement to assess the ability to
exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the
assessment of effective control. The provisions of ASU No. 2011-03 are effective prospectively for
transactions, or modifications of existing transactions, that occur on or after
January 1, 2012. Adoption of this ASU is not expected to have a material impact on the
Companys financial results.
7
Table of Contents
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The
provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive
income, the components of net income, and the components of other comprehensive income either in a
single continuous statement of comprehensive income or in two separate but consecutive statements.
In both choices, an entity is required to present each component of net income along with total net
income, each component of other comprehensive income along with a total for other comprehensive
income, and a total amount for comprehensive income. The statement(s) are required to be presented
with equal prominence as the other primary financial statements. ASU No. 2011-05 eliminates the
option to present the components of other comprehensive income as part of the statement of changes
in shareholders equity but does not change the items that must be reported in other comprehensive
income or when an item of other comprehensive income must be reclassified to net income. The
provisions of ASU No. 2011-05 are effective for the Companys interim reporting period beginning on
or after December 15, 2011, with retrospective application required. The adoption of ASU No.
2011-05 is expected to result in presentation changes to the Companys statements of income and the
addition of a statement of comprehensive income. The adoption of ASU No. 2011-05 will have no
impact on the Companys statements of condition.
8
Table of Contents
Note 3. Investment Securities
The following table summarizes the amortized cost and fair value of the
available-for-sale and held-to-maturity investment securities portfolio at June 30, 2011 and
December 31, 2010 and the corresponding amounts of unrealized gains and losses therein.
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
June 30, 2011 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U. S. Government securities |
$ | 249,974 | $ | | $ | (13 | ) | $ | 249,961 | |||||||
Obligations of states and political
subdivisions |
5,219,653 | 72,234 | (146,709 | ) | 5,145,178 | |||||||||||
Mortgage-backed
securities-residential |
81,245,673 | 880,281 | (70,312 | ) | 82,055,642 | |||||||||||
Total available-for-sale securities |
$ | 86,715,300 | $ | 952,515 | $ | (217,034 | ) | $ | 87,450,781 | |||||||
Held-to-maturity |
||||||||||||||||
Obligations of states and political
subdivisions |
$ | 1,348,823 | $ | 92,767 | $ | | $ | 1,441,590 | ||||||||
December 31, 2010 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U. S. Government securities |
$ | 249,879 | $ | | $ | (13 | ) | $ | 249,866 | |||||||
Obligations of states and political
subdivisions |
5,201,492 | 17,407 | (296,786 | ) | 4,922,113 | |||||||||||
Mortgage-backed
securities-residential |
81,754,184 | 134,557 | (744,129 | ) | 81,144,612 | |||||||||||
Total available-for-sale securities |
$ | 87,205,555 | $ | 151,964 | $ | (1,040,928 | ) | $ | 86,316,591 | |||||||
Held-to-maturity |
||||||||||||||||
Obligations of states and political
subdivisions |
$ | 1,317,951 | $ | | $ | (14,871 | ) | $ | 1,303,080 | |||||||
9
Table of Contents
The amortized cost and fair value of the investment securities portfolio are shown below
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.
June 30, 2011 | ||||||||
Amortized | Fair | |||||||
Cost | Value | |||||||
Maturity |
||||||||
Available-for-sale |
||||||||
Within one year |
$ | 249,974 | $ | 249,961 | ||||
One to five years |
266,264 | 265,634 | ||||||
Five to ten years |
1,811,630 | 1,868,399 | ||||||
Beyond ten years |
3,141,759 | 3,011,145 | ||||||
Mortgage-backed
securities-residential |
81,245,673 | 82,055,642 | ||||||
Total |
$ | 86,715,300 | $ | 87,450,781 | ||||
Held-to-maturity |
||||||||
Five to ten years |
738,804 | 785,540 | ||||||
Beyond ten years |
610,019 | 656,050 | ||||||
Total |
$ | 1,348,823 | $ | 1,441,590 | ||||
The following table summarizes the investment securities with unrealized losses at June
30, 2011 and December 31, 2010 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 | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
June 30, 2011 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Government
securities |
$ | 249,961 | $ | (13 | ) | $ | | $ | | $ | 249,961 | $ | (13 | ) | ||||||||||
Obligations of states and
political subdivisions |
1,242,524 | (23,740 | ) | 1,658,791 | (122,969 | ) | 2,901,315 | (146,709 | ) | |||||||||||||||
Mortgage-backed
securities-residential |
12,030,953 | (70,312 | ) | | | 12,030,953 | (70,312 | ) | ||||||||||||||||
Total available-for-sale |
$ | 13,523,438 | $ | (94,065 | ) | $ | 1,658,791 | $ | (122,969 | ) | $ | 15,182,229 | $ | (217,034 | ) | |||||||||
December 31, 2010 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Government
securities |
$ | 249,866 | $ | (13 | ) | $ | | $ | | $ | 249,866 | $ | (13 | ) | ||||||||||
Obligations of states and
political subdivisions |
3,632,820 | (112,755 | ) | 1,571,970 | (198,902 | ) | 5,204,790 | (311,657 | ) | |||||||||||||||
Mortgage-backed
securities-residential |
57,369,268 | (744,129 | ) | | | 57,369,268 | (744,129 | ) | ||||||||||||||||
Total available-for-sale |
$ | 61,251,954 | $ | (856,897 | ) | $ | 1,571,970 | $ | (198,902 | ) | $ | 62,823,924 | $ | (1,055,799 | ) | |||||||||
10
Table of Contents
Proceeds from sales of securities were approximately $4 million and $92 million for the
six months ended June 30, 2011 and 2010, respectively. Gross gains of $48,009 and $1,251,526 and
gross losses of $0 and $59,371 were realized on these sales during the six months ended June 30,
2011 and 2010, respectively.
During the first quarter of 2010, the Bank sold one security classified as held-to-maturity.
The remaining held-to-maturity security in the Banks portfolio was reclassified as available for
sale. The approximately $1.3 million residual balance in held-to-maturity securities at June 30,
2011 represents securities held in the portfolio of MNB Investments, Inc., a consolidated
subsidiary of the Bank. MNB Investments, Inc. does not intend and it is not more likely than not
that it would be required to sell these securities prior to maturity.
Proceeds from sales of securities available for sale were approximately $4 million and $11
million for the three months ended June 30, 2011 and 2010, respectively. Gross gains of $48,009 and
$238,547 and no losses were realized on these sales during the second quarter of 2011 and 2010,
respectively.
Other-Than-Temporary-Impairment
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a
quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
In determining OTTI, management considers many factors, including: (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic
conditions, and (4) whether the entity has the intent to sell the debt security or more likely than
not will be required to sell the debt security before its anticipated recovery. The assessment
of whether an other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity
intends to sell the security or it is more likely than not it will be required to sell the
security before recovery of its amortized cost basis, less any current-period credit loss. If
an entity intends to sell or it is more likely than not it will be required to sell the security
before recovery of its amortized cost basis, less any current-period credit loss, the OTTI
shall be recognized in earnings equal to the entire difference between the investments amortized
cost basis and its fair value at the balance sheet date. Otherwise, the OTTI shall be separated
into the amount representing the credit loss and the amount related to all other factors. The
amount of the total OTTI related to the credit loss is determined based on the present
value of cash flows expected to be collected and is recognized in earnings. The amount of
the total OTTI related to other factors is recognized in other comprehensive income (loss), net of
applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings
becomes the new amortized cost basis of the investment.
As of June 30, 2011, the Companys securities portfolio consisted of 84 securities, 18 of
which were in an unrealized loss position. The majority of unrealized losses are related to the
Companys mortgage-backed securities and obligations of states and political subdivisions, as
discussed below.
Unrealized losses on mortgage-backed securities and obligations of states and political
subdivisions have not been recognized into income because the issuer(s) bonds are of high credit
quality, the decline in fair value is largely due to changes in interest rates and other market
conditions, and because the Company does not have the intent to sell these securities and it is
likely that it will not be required to sell the securities before their anticipated recovery. The
Company does not consider these securities to be other-than-temporarily impaired at June 30, 2011.
11
Table of Contents
Note 4. Net Earnings (Loss) Per Common Share
Net earnings (loss) per common share are based on the weighted average number of common shares
outstanding during the period. Diluted earnings per common share include the effects of potential
common shares outstanding, including shares issuable upon the exercise of options for which the
exercise price is lower than the market price of the common stock, during the period.
The following is a summary of the basic and diluted earnings (loss) per share calculation for
the three and six months ended June 30, 2011 and 2010:
Six-Months Ended | Three-Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic earnings (loss) per share calculation: |
||||||||||||||||
Numerator Net income (loss) |
$ | (25,233,636 | ) | $ | 471,400 | $ | (21,854,599 | ) | $ | 142,286 | ||||||
Denominator Average common shares outstanding |
2,631,611 | 2,631,611 | 2,631,611 | 2,631,611 | ||||||||||||
Basic net income (loss) per share |
$ | (9.59 | ) | $ | 0.18 | $ | (8.30 | ) | $ | 0.05 | ||||||
Diluted earnings (loss) per share calculation: |
||||||||||||||||
Numerator Net income (loss) |
(25,233,636 | ) | 471,400 | (21,854,599 | ) | 142,286 | ||||||||||
Denominator Average common shares outstanding |
2,631,611 | 2,631,611 | 2,631,611 | 2,631,611 | ||||||||||||
Dilutive shares contingently issuable |
| | | | ||||||||||||
Average dilutive common shares
outstanding |
2,631,611 | 2,631,611 | 2,631,611 | 2,631,611 | ||||||||||||
Diluted net income (loss) per share |
$ | (9.59 | ) | $ | 0.18 | $ | (8.30 | ) | $ | 0.05 |
During the six months ended June 30, 2011 and 2010, there were options for the purchase of
117,148 and 122,133 shares, respectively, outstanding during each time period that were
antidilutive. During the three months ended June 30, 2011 and 2010, there were options for the
purchase of 117,148 and 122,133 shares, respectively, outstanding during each time period that were
antidilutive. These shares were accordingly excluded from the calculations above.
12
Table of Contents
Note 5. Loans and Allowance for Loan Losses
At June 30, 2011 and December 31, 2010, the Banks loans consisted of the following (in
thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Mortgage loans on real estate: |
||||||||
Residential 1-4 family |
$ | 75,421 | $ | 86,403 | ||||
Residential multifamily |
6,079 | 6,147 | ||||||
Commercial real estate |
131,551 | 133,917 | ||||||
Construction and land
development |
69,513 | 83,543 | ||||||
Second mortgages |
7,554 | 8,880 | ||||||
Equity lines of credit |
25,064 | 25,391 | ||||||
315,182 | 344,281 | |||||||
Commercial loans |
24,395 | 24,944 | ||||||
Consumer installment loans: |
||||||||
Personal |
2,803 | 2,855 | ||||||
Credit cards |
2,243 | 2,275 | ||||||
5,046 | 5,130 | |||||||
Total Loans |
344,623 | 374,355 | ||||||
Less: Allowance for loan losses |
(14,190 | ) | (10,942 | ) | ||||
Loans, net |
$ | 330,433 | $ | 363,413 | ||||
Loans held for sale at June 30, 2011 and December 31, 2010 were $186,400 and $216,500,
respectively. These loans are included in residential 1-4 family loans in the table above.
Loans are stated at unpaid principal balances, less the allowance for loan losses. The
recorded investment in loans presented throughout the Notes to the Consolidated Financial
Statements is defined as the outstanding principal balance of loans. Interest income is accrued on
the unpaid principal balance.
13
Table of Contents
The following table presents the recorded investment in loans and the balance in the allowance
for loan losses (ALLL) by portfolio segment and based on impairment method as of June 30, 2011
and December 31, 2010 (in thousands):
Collectively Evaluated | Individually Evaluated | |||||||||||||||||||||||
for Impairment | for Impairment | Total | ||||||||||||||||||||||
June 30, | December 31, | June 30, | December 31, | June 30, | December 31, | |||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Construction and development |
$ | 37,243 | $ | 42,026 | $ | 32,270 | $ | 41,517 | $ | 69,513 | $ | 83,543 | ||||||||||||
Residential real estate |
92,349 | 97,639 | 21,769 | 29,182 | 114,118 | 126,821 | ||||||||||||||||||
Commercial real estate |
106,501 | 112,389 | 25,050 | 21,529 | 131,551 | 133,918 | ||||||||||||||||||
Commercial |
24,387 | 24,831 | 8 | 113 | 24,395 | 24,944 | ||||||||||||||||||
Consumer/other |
2,765 | 2,839 | 38 | 15 | 2,803 | 2,854 | ||||||||||||||||||
Credit cards |
2,243 | 2,275 | | | 2,243 | 2,275 | ||||||||||||||||||
Total ending loan balance |
$ | 265,488 | $ | 281,999 | $ | 79,135 | $ | 92,356 | $ | 344,623 | $ | 374,355 | ||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Construction and development |
$ | 2,384 | $ | 1,445 | $ | 1,567 | $ | 1,647 | $ | 3,951 | $ | 3,092 | ||||||||||||
Residential real estate |
3,296 | 1,653 | 526 | 2,444 | 3,822 | 4,097 | ||||||||||||||||||
Commercial real estate |
3,496 | 1,444 | 1,003 | 617 | 4,499 | 2,061 | ||||||||||||||||||
Commercial |
452 | 395 | | 1 | 452 | 396 | ||||||||||||||||||
Consumer/other |
106 | 97 | | 1 | 106 | 98 | ||||||||||||||||||
Credit cards |
260 | 121 | | | 260 | 121 | ||||||||||||||||||
Unallocated |
1,100 | 1,077 | | | 1,100 | 1,077 | ||||||||||||||||||
Total ending allowance
balance |
$ | 11,094 | $ | 6,232 | $ | 3,096 | $ | 4,710 | $ | 14,190 | $ | 10,942 | ||||||||||||
The following table details the changes in the allowance for loan losses for the three
and six months ended June 30, 2011 by portfolio segment (in thousands):
Construction and | Residential | Commercial | Consumer / | Credit | ||||||||||||||||||||||||||||
Development | Real Estate | Real Estate | Commercial | Other | Cards | Unallocated | Total | |||||||||||||||||||||||||
Six months ended June 30, 2011 |
||||||||||||||||||||||||||||||||
Beginning balance |
$ | 3,092 | $ | 4,097 | $ | 2,061 | $ | 396 | $ | 98 | $ | 121 | $ | 1,077 | $ | 10,942 | ||||||||||||||||
Charged-off loans |
(7,620 | ) | (7,657 | ) | (1,703 | ) | (81 | ) | (33 | ) | (104 | ) | | (17,198 | ) | |||||||||||||||||
Recovery of previously
charged-off loans |
17 | 6 | 49 | | 8 | 2 | 82 | |||||||||||||||||||||||||
Provision for loan losses |
8,462 | 7,376 | 4,092 | 137 | 33 | 241 | 23 | 20,364 | ||||||||||||||||||||||||
Ending balance |
$ | 3,951 | $ | 3,822 | $ | 4,499 | $ | 452 | $ | 106 | $ | 260 | $ | 1,100 | $ | 14,190 | ||||||||||||||||
Three months ended June 30, 2011 |
||||||||||||||||||||||||||||||||
Beginning balance |
$ | 3,959 | $ | 3,869 | $ | 1,432 | $ | 610 | $ | 46 | $ | 121 | $ | | $ | 10,037 | ||||||||||||||||
Charged-off loans |
(6,781 | ) | (4,831 | ) | (1,478 | ) | (81 | ) | (18 | ) | (49 | ) | | (13,238 | ) | |||||||||||||||||
Recovery of previously
charged-off loans |
17 | 5 | 1 | | 3 | 1 | | 27 | ||||||||||||||||||||||||
Provision for loan losses |
6,756 | 4,779 | 4,544 | (77 | ) | 75 | 187 | 1,100 | 17,364 | |||||||||||||||||||||||
Ending balance |
$ | 3,951 | $ | 3,822 | $ | 4,499 | $ | 452 | $ | 106 | $ | 260 | $ | 1,100 | $ | 14,190 | ||||||||||||||||
14
Table of Contents
A summary of transactions in the ALLL for the three and six months ended June 30, 2010 is as
follows (in thousands):
Six Months Ended | Three Months Ended | |||||||
June 30, 2010 | June 30, 2010 | |||||||
Beginning balance |
$ | 11,353 | $ | 10,975 | ||||
Charged-off loans |
(1,945 | ) | (1,336 | ) | ||||
Recovery of previously
charged-off loans |
419 | 400 | ||||||
Provision for loan losses |
547 | 335 | ||||||
Ending balance |
$ | 10,374 | $ | 10,374 | ||||
Credit Quality Indicators:
The Company uses several credit quality indicators, which are updated at least annually, to
manage credit risk in an ongoing manner. The Company categorizes loans into risk categories based
on relevant information about the ability of borrowers to service their debt such as the following:
current financial information, historical payment experience, credit documentation, public
information and current economic trends, among other factors. The Company uses an internal credit
risk rating system that categorizes loans into pass, special mention or classified categories.
Credit risk ratings are applied to all loans individually with the exception of credit cards.
The following are the definitions of the Companys risk ratings:
Pass:
|
Loans that are not adversely rated, are contractually current as to principal and interest and are otherwise in compliance with the contractual terms of the loan or lease agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass. | |
Special
|
Mention: Loans classified as special mention have a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions credit position at some future date. | |
Substandard/ Accruing: |
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. | |
Substandard/ Nonaccrual: |
A loan classified as nonaccrual has all the deficiencies of a loan graded substandard but collection of the full amount of principal and interest owed is uncertain or unlikely and collateral support, if any, may be weak. | |
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 estimations, facts, conditions and values, highly questionable and improbable. Doubtful loans include only the portion of each specific loan deemed uncollectible and the classification can change as certain current information and facts are ascertained. |
15
Table of Contents
The following table presents by class and by risk category, the recorded investment in the
Companys loans as of June 30, 2011 and December 31, 2010 (in thousands):
As of June 30, 2011 | ||||||||||||||||||||||||
Not | Special | Substandard | Substandard | |||||||||||||||||||||
Rated | Pass | Mention | Accruing | Nonaccrual | Doubtful | |||||||||||||||||||
Construction and development |
$ | | $ | 29,020 | $ | 3,618 | $ | 14,369 | $ | 21,555 | $ | 951 | ||||||||||||
Commercial real estate mortgage |
| 103,815 | 3,287 | 13,179 | 11,270 | | ||||||||||||||||||
Commercial and industrial |
| 23,196 | 156 | 1,043 | | | ||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||
Residential mortgage |
| 50,527 | 2,988 | 11,964 | 9,942 | | ||||||||||||||||||
Home equity and
junior liens |
| 29,239 | 257 | 2,707 | 415 | | ||||||||||||||||||
Multi-family |
| 4,097 | | 1,982 | | | ||||||||||||||||||
Total residential real estate |
| 83,863 | 3,245 | 16,653 | 10,357 | | ||||||||||||||||||
Consumer and other |
| 2,634 | 26 | 118 | 25 | | ||||||||||||||||||
Credit cards |
2,243 | | | | | | ||||||||||||||||||
Total |
$ | 2,243 | $ | 242,528 | $ | 10,332 | $ | 45,362 | $ | 43,207 | $ | 951 | ||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||
Not | Special | Substandard | Substandard | |||||||||||||||||||||
Rated | Pass | Mention | Accruing | Nonaccrual | Doubtful | |||||||||||||||||||
Construction and development |
$ | | $ | 36,086 | $ | 284 | $ | 19,244 | $ | 26,977 | $ | 952 | ||||||||||||
Commercial real estate mortgage |
| 99,649 | 1,044 | 26,863 | 6,362 | | ||||||||||||||||||
Commercial and industrial |
| 24,274 | 207 | 395 | 67 | | ||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||
Residential mortgage |
| 54,332 | 2,905 | 11,720 | 17,446 | | ||||||||||||||||||
Home equity and
junior liens |
| 30,841 | 669 | 1,561 | 1,201 | | ||||||||||||||||||
Multi-family |
| 4,454 | | 1,692 | | | ||||||||||||||||||
Total residential real estate |
| 89,627 | 3,574 | 14,973 | 18,647 | | ||||||||||||||||||
Consumer and other |
| 2,755 | 41 | 59 | | | ||||||||||||||||||
Credit cards |
2,275 | | | | | | ||||||||||||||||||
Total |
$ | 2,275 | $ | 252,391 | $ | 5,150 | $ | 61,534 | $ | 52,053 | $ | 952 | ||||||||||||
16
Table of Contents
The following table presents the aging of the recorded investment in past due loans,
including the payment status of loans on non-accrual which have been incorporated into the table,
as of June 30, 2011 and December 31, 2010 by class of loans (in thousands):
As of June 30, 2011 | ||||||||||||||||||||||||
30-59 | 60-89 | Greater Than | ||||||||||||||||||||||
Days | Days | 90 Days | Total | Total | ||||||||||||||||||||
Past Due | Past Due | Past Due | Past Due | Current | Loans | |||||||||||||||||||
Construction and development |
$ | 644 | $ | 500 | $ | 1,552 | $ | 2,696 | $ | 66,817 | $ | 69,513 | ||||||||||||
Commercial real estate mortgage |
1,985 | 2,419 | 1,970 | 6,374 | 125,177 | 131,551 | ||||||||||||||||||
Commercial and industrial |
| 48 | 196 | 244 | 24,151 | 24,395 | ||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||
Residential mortgage |
3,001 | 1,216 | 2,184 | 6,401 | 69,020 | 75,421 | ||||||||||||||||||
Home equity and
junior liens |
119 | 95 | 183 | 397 | 32,221 | 32,618 | ||||||||||||||||||
Multi-family |
285 | | | 285 | 5,794 | 6,079 | ||||||||||||||||||
Total residential real estate |
3,405 | 1,311 | 2,367 | 7,083 | 107,035 | 114,118 | ||||||||||||||||||
Consumer and other |
8 | | | 8 | 2,795 | 2,803 | ||||||||||||||||||
Credit cards |
19 | | | 19 | 2,224 | 2,243 | ||||||||||||||||||
Total |
$ | 6,061 | $ | 4,278 | $ | 6,085 | $ | 16,424 | $ | 328,199 | $ | 344,623 | ||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||
30-59 | 60-89 | Greater Than | ||||||||||||||||||||||
Days | Days | 90 Days | Total | Total | ||||||||||||||||||||
Past Due | Past Due | Past Due | Past Due | Current | Loans | |||||||||||||||||||
Construction and development |
$ | 265 | $ | 49 | $ | 394 | $ | 708 | $ | 82,835 | $ | 83,543 | ||||||||||||
Commercial real estate mortgage |
214 | 326 | 2,573 | 3,113 | 130,805 | 133,918 | ||||||||||||||||||
Commercial and industrial |
| | | | 24,944 | 24,944 | ||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||
Residential mortgage |
948 | 2,580 | | 3,528 | 82,875 | 86,403 | ||||||||||||||||||
Home equity and
junior liens |
| 409 | 62 | 471 | 33,800 | 34,271 | ||||||||||||||||||
Multi-family |
| | | | 6,146 | 6,146 | ||||||||||||||||||
Total residential real estate |
948 | 2,989 | 62 | 3,999 | 122,821 | 126,820 | ||||||||||||||||||
Consumer and other |
14 | 10 | | 24 | 2,831 | 2,855 | ||||||||||||||||||
Credit cards |
43 | 1 | 19 | 63 | 2,212 | 2,275 | ||||||||||||||||||
Total |
$ | 1,484 | $ | 3,375 | $ | 3,048 | $ | 7,907 | $ | 366,448 | $ | 374,355 | ||||||||||||
All interest accrued but not collected for loans that are placed on nonaccrual or
charged off is reversed against interest income. The interest on these loans is accounted for on
the cash-basis or cost-recovery method, until qualifying for return to accrual. Generally, loans
are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured, which usually requires a minimum of six
months sustained repayment performance.
Nonperforming loans include both smaller balance homogeneous loans that are collectively
evaluated for impairment and individually classified as impaired loans.
17
Table of Contents
The following table presents the recorded investment in nonperforming loans by class of loans
as of June 30, 2011 and December 31, 2010 (in thousands):
As of June 30, 2011 | ||||||||
Loans Past Due Over | ||||||||
Nonaccrual | 90 Days Still Accruing | |||||||
Construction and development |
$ | 22,506 | $ | | ||||
Commercial real estate mortgage |
11,270 | 300 | ||||||
Commercial and industrial |
| 196 | ||||||
Residential real estate |
||||||||
Residential mortgage |
9,942 | | ||||||
Home equity and
junior liens |
415 | 55 | ||||||
Total residential real estate |
10,357 | 55 | ||||||
Consumer and other |
25 | | ||||||
Total nonperforming loans |
$ | 44,158 | $ | 551 | ||||
As of December 31, 2010 | ||||||||
Loans Past Due Over | ||||||||
Nonaccrual | 90 Days Still Accruing | |||||||
Construction and development |
$ | 27,929 | $ | | ||||
Commercial real estate mortgage |
6,362 | 413 | ||||||
Commercial and industrial |
67 | | ||||||
Residential real estate |
||||||||
Residential mortgage |
17,446 | | ||||||
Home equity and
junior liens |
1,201 | | ||||||
Total residential real estate |
18,647 | | ||||||
Credit cards |
| 19 | ||||||
Total nonperforming loans |
$ | 53,005 | $ | 432 | ||||
18
Table of Contents
The following table presents loans individually evaluated for impairment by class of
loans as of June 30, 2011 and December 31, 2010 (in thousands):
As of June 30, 2011 | ||||||||||||
Unpaid | Allowance for | |||||||||||
Principal | Recorded | Loan Losses | ||||||||||
Balance | Investment | Allocated | ||||||||||
With no related allowance recorded: |
||||||||||||
Construction and development |
$ | 20,199 | $ | 13,680 | $ | | ||||||
Commercial real estate mortgage |
5,915 | 3,968 | | |||||||||
Commercial and industrial |
88 | 8 | | |||||||||
Residential real estate |
||||||||||||
Residential mortgage |
13,000 | 8,222 | | |||||||||
Home equity and
junior liens |
417 | 246 | | |||||||||
Total residential real estate |
13,417 | 8,468 | | |||||||||
Consumer and other |
38 | 38 | | |||||||||
Total with no related allowance recorded |
$ | 39,657 | $ | 26,162 | $ | | ||||||
With an allowance recorded: |
||||||||||||
Construction and development |
$ | 18,852 | $ | 18,590 | $ | 1,567 | ||||||
Commercial real estate mortgage |
21,133 | 21,082 | 1,003 | |||||||||
Residential real estate |
||||||||||||
Residential mortgage |
12,063 | 12,050 | 434 | |||||||||
Home equity and
junior liens |
1,251 | 1,251 | 92 | |||||||||
Total residential real estate |
13,314 | 13,301 | 526 | |||||||||
Total with an allowance recorded |
$ | 53,299 | $ | 52,973 | $ | 3,096 | ||||||
Total impaired loans |
$ | 92,956 | $ | 79,135 | $ | 3,096 | ||||||
As of December 31, 2010 | ||||||||||||
Unpaid | Allowance for | |||||||||||
Principal | Recorded | Loan Losses | ||||||||||
Balance | Investment | Allocated | ||||||||||
With no related allowance recorded: |
||||||||||||
Construction and development |
$ | 18,005 | $ | 13,216 | $ | | ||||||
Commercial real estate mortgage |
5,559 | 4,834 | | |||||||||
Residential real estate |
||||||||||||
Residential mortgage |
4,358 | 4,336 | | |||||||||
Home equity and
junior liens |
468 | 468 | | |||||||||
Total residential real estate |
4,826 | 4,804 | | |||||||||
Total with no related allowance recorded |
$ | 28,390 | $ | 22,854 | $ | | ||||||
With an allowance recorded: |
||||||||||||
Construction and development |
$ | 28,505 | $ | 28,301 | $ | 1,647 | ||||||
Commercial real estate mortgage |
16,743 | 16,695 | 617 | |||||||||
Commercial and industrial |
113 | 113 | 1 | |||||||||
Residential real estate |
||||||||||||
Residential mortgage |
22,349 | 22,298 | 2,335 | |||||||||
Home equity and
junior liens |
388 | 388 | 17 | |||||||||
Multi-family |
1,692 | 1,692 | 92 | |||||||||
Total residential real estate |
24,429 | 24,378 | 2,444 | |||||||||
Consumer and other |
15 | 15 | 1 | |||||||||
Total with an allowance recorded |
$ | 69,805 | $ | 69,502 | $ | 4,710 | ||||||
Total impaired loans |
$ | 98,195 | $ | 92,356 | $ | 4,710 | ||||||
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Table of Contents
The following table presents by class, information related to the average recorded
investment and interest income recognized on impaired loans for the three and six months ended June
30, 2011 (in thousands):
Six Months Ended June 30, 2011 | Three Months Ended June 30, 2011 | |||||||||||||||
Average Recorded | Interest Income | Average Recorded | Interest Income | |||||||||||||
Investment | Recognized | Investment | Recognized | |||||||||||||
With no related allowance recorded: |
||||||||||||||||
Construction and development |
$ | 12,901 | $ | 17 | $ | 12,744 | $ | 8 | ||||||||
Commercial real estate mortgage |
4,749 | 15 | 4,707 | 7 | ||||||||||||
Commercial and industrial |
3 | 1 | 4 | 1 | ||||||||||||
Residential real estate |
||||||||||||||||
Residential mortgage |
6,813 | 6 | 8,052 | 3 | ||||||||||||
Home equity and
junior liens |
659 | | 754 | | ||||||||||||
Total residential real estate |
7,472 | 6 | 8,806 | 3 | ||||||||||||
Consumer and other |
13 | 1 | 19 | 1 | ||||||||||||
Total with no related allowance recorded |
$ | 25,138 | $ | 40 | $ | 26,280 | $ | 20 | ||||||||
With an allowance recorded: |
||||||||||||||||
Construction and development |
$ | 24,942 | $ | 196 | $ | 23,263 | $ | 99 | ||||||||
Commercial real estate mortgage |
18,039 | 270 | 18,712 | 135 | ||||||||||||
Commercial and industrial |
75 | | 57 | | ||||||||||||
Residential real estate |
||||||||||||||||
Residential mortgage |
17,278 | 269 | 14,768 | 178 | ||||||||||||
Home equity and
junior liens |
987 | 23 | 1,286 | 11 | ||||||||||||
Multi-family |
1,128 | | 846 | | ||||||||||||
Total residential real estate |
19,393 | 292 | 16,900 | 189 | ||||||||||||
Consumer and other |
10 | | 7 | | ||||||||||||
Total with an allowance recorded |
$ | 62,459 | $ | 758 | $ | 58,939 | $ | 423 | ||||||||
Total impaired loans |
$ | 87,597 | $ | 798 | $ | 85,219 | $ | 443 | ||||||||
For the three and six months ended June 30, 2011, the amount of interest income
recognized by the Company within the period that the loans were impaired was primarily related to
loans modified in a troubled debt restructuring that remained on accrual status. For the three and
six months ended June 30, 2011, the amount of interest income recognized using a cash-basis method
of accounting during the period that the loans were impaired was not material.
Troubled Debt Restructurings:
Impaired loans also include loans that the Bank may elect to formally restructure due to the
weakening credit status of a borrower such that the restructuring may facilitate a repayment plan
that
minimizes the potential losses, if any, that the Bank may have to otherwise incur. These loans are
classified as impaired loans and, if on nonaccruing status as of the date of the restructuring, the
loans are included in the nonperforming loan balances noted above. Not included in nonperforming
loans are loans that have been restructured that were performing as of the restructure date.
20
Table of Contents
The Company had allocated approximately $2,380,000 and $3,700,000 of specific reserves to
customers whose loan terms have been modified in TDRs as of June 30, 2011 and December 31, 2010,
respectively. The decrease in specific reserves allocated to TDRs during the first six months of
2011 of approximately $1,320,000 was primarily attributable to partial chargeoffs of collateral
dependent loans that are also TDRs. The Company had approximately $75,688,000 outstanding to
customers whose loans were classified as TDRs at June 30, 2011 as compared to approximately
$82,443,000 at December 31, 2010. Currently, the Company has committed to lend additional amounts
totaling approximately $1,154,000 related to loans classified as TDRs. At June 30, 2011 and
December 31, 2010, there were approximately $35,685,000 and $35,752,000, respectively, of accruing
restructured loans that remain in a performing status; however, these loans are included in
impaired loan totals.
Note 6. Comprehensive Income (Loss)
Comprehensive income (loss) is made up of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) is made up of changes in the unrealized gain (loss) on
securities available for sale. Comprehensive income (loss) for the three and six months ended June
30, 2011 was ($21,370,720) and ($24,227,531), respectively, as compared to $573,935 and $629,637
for the three and six months ended June 30, 2010, respectively.
Note 7. 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 value:
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 entitys own assumptions
about the assumptions that market participants would use in pricing an asset or liability. |
The Company used the following methods and significant assumptions to estimate the fair value
of each type of financial instrument:
Investment Securities Available for Sale Securities classified as available for sale are
reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair
value measurements from an independent service provider. The fair value measurements consider
observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury
yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit
information and the securities terms and conditions, among other things.
Impaired Loans The fair value of impaired loans with specific allocations of the allowance
for loan losses may be 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 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. If the
recorded investment in an impaired loan exceeds the measure of fair value, a valuation allowance
may be established as a component of the allowance for loan losses or the expense is recognized as
a charge-off. As a result of partial charge-offs, certain impaired loans are carried at fair value
with no allocation. Certain impaired loans are not measured at fair value, which generally includes
troubled debt restructurings that are measured for impairment based upon the present value of
expected cash flows discounted at the loans original effective interest rate, and are excluded
from the assets measured on a nonrecurring basis.
21
Table of Contents
Other Real Estate The fair value of other real estate (ORE) is generally based on current
appraisals, comparable sales, and other estimates of value obtained principally from independent
sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan
balance over the fair value of the real estate held as collateral is treated as a charge against
the ALLL. Gains or losses on sale and any subsequent adjustments to the value are recorded as a
gain or loss on ORE. ORE is classified within Level 3 of the hierarchy.
Assets and Liabilities Measured on a Recurring Basis
The following table summarizes assets and liabilities measured at fair value on a recurring
basis as of June 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs
within the fair value hierarchy utilized to measure fair value:
Fair Value Measurements at | ||||||||
June 30, 2011 Using: | ||||||||
Significant Other | ||||||||
Observable Inputs | ||||||||
Carrying Value | (Level 2) | |||||||
Assets: |
||||||||
Available for sale securities: |
||||||||
U. S. Government securities |
$ | 249,961 | $ | 249,961 | ||||
Obligations of states and political
subdivisions |
5,145,178 | 5,145,178 | ||||||
Mortgage-backed securities-residential |
82,055,642 | 82,055,642 | ||||||
Total available for sale securities |
$ | 87,450,781 | $ | 87,450,781 | ||||
Fair Value Measurements at | ||||||||
December 31, 2010 Using: | ||||||||
Significant Other | ||||||||
Observable Inputs | ||||||||
Carrying Value | (Level 2) | |||||||
Assets: |
||||||||
Available for sale securities: |
||||||||
U. S. Government securities |
$ | 249,866 | $ | 249,866 | ||||
Obligations of states and
political subdivisions |
4,922,113 | 4,922,113 | ||||||
Mortgage-backed securities
-residential |
81,144,612 | 81,144,612 | ||||||
Total available for sale
securities |
$ | 86,316,591 | $ | 86,316,591 | ||||
For the three and six months ended June 30, 2011, there were no transfers between Level
1 and Level 2.
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Table of Contents
Assets and Liabilities Measured on a Non-Recurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis, that is,
the instruments are not measured at fair value on an ongoing basis but are subject to fair value
adjustments in certain circumstances (for example, when there is evidence of impairment). The
following table summarizes assets and liabilities measured at fair value on a non-recurring basis
as of June 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within
the fair value hierarchy utilized to measure fair value:
Fair Value Measurements at | ||||||||
June 30, 2011 Using: | ||||||||
Significant | ||||||||
Unobservable Inputs | ||||||||
Carrying Value | (Level 3) | |||||||
Assets: |
||||||||
Impaired loans: |
||||||||
Construction and
development |
$ | 16,658,199 | $ | 16,658,199 | ||||
Commercial real estate |
4,278,883 | 4,278,883 | ||||||
Residential real estate |
7,020,427 | 7,020,427 | ||||||
Total impaired loans |
27,957,509 | 27,957,509 | ||||||
Other real estate: |
||||||||
Construction and
development |
2,405,955 | 2,405,955 | ||||||
Commercial real estate |
1,405,000 | 1,405,000 | ||||||
Residential real estate |
5,809,449 | 5,809,449 | ||||||
Total other real estate |
9,620,404 | 9,620,404 | ||||||
Total Assets Measured at Fair
Value on a Non-Recurring Basis |
$ | 37,577,913 | $ | 37,577,913 | ||||
Fair Value Measurements at | ||||||||
December 31, 2010 Using: | ||||||||
Significant | ||||||||
Unobservable Inputs | ||||||||
Carrying Value | (Level 3) | |||||||
Assets: |
||||||||
Impaired loans: |
||||||||
Construction and
development |
$ | 8,826,040 | $ | 8,826,040 | ||||
Commercial real estate |
3,378,152 | 3,378,152 | ||||||
Residential real estate |
4,045,756 | 4,045,756 | ||||||
Total impaired loans |
16,249,948 | 16,249,948 | ||||||
Other real estate: |
||||||||
Construction and
development |
2,229,161 | 2,229,161 | ||||||
Commercial real estate |
1,404,833 | 1,404,833 | ||||||
Residential real estate |
7,518,670 | 7,518,670 | ||||||
Total other real estate |
11,152,664 | 11,152,664 | ||||||
Total Assets Measured at Fair
Value on a Non-Recurring Basis |
$ | 27,402,612 | $ | 27,402,612 | ||||
23
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At June 30, 2011, impaired loans measured at fair value, which are evaluated for impairment
using the fair value of collateral, had a carrying amount of $29,034,438, with a valuation
allowance of $1,076,929 resulting in an additional provision for loan losses of $6,054,653 and
$8,079,066 for the three-and six-months periods ended June 30, 2011, respectively. At December 31,
2010, impaired loans measured at fair value had a carrying amount of $17,718,189, with a valuation
allowance of $1,468,241 resulting in an additional provision for loan losses of $4,514,585 for the
year ended December 31, 2010. Impaired loans carried at fair value include loans that have been
written down to fair value through the partial charge-off of principal balance. Accordingly, these
loans do not have a specific valuation allowance as their balances represent fair value.
The June 30, 2011 carrying amount of ORE includes net valuation adjustments of approximately
$4,769,000 and $4,802,000 for the three and six months ended June 30, 2011, respectively. The
December 31, 2010 carrying amount of ORE includes net valuation adjustments of approximately
$1,211,000. Valuation adjustments include both charge offs and holding gains and losses. The fair
value of ORE is based upon appraisals performed by qualified, licensed appraisers. Appraisals are
obtained at the time of foreclosure and at least annually thereafter or more often if management
determines property values have significantly declined.
Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Companys entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the Companys
financial instruments, fair value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature; involve uncertainties and matters of
judgment; and, therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. Accordingly, the aggregate fair value amounts presented are not
intended to represent the underlying value of the Company.
Fair value estimates are based on existing financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
Cash and cash equivalents:
For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value.
Investment Securities:
The fair value of securities is estimated as previously described for securities available for
sale, and in a similar manner for securities held to maturity.
Restricted investments:
Restricted investments consist of Federal Home Loan Bank (FHLB) and Federal Reserve Bank
stock. It is not practicable to determine the fair value due to restrictions placed on the
transferability of the stock.
24
Table of Contents
Loans:
The fair value of loans is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates, adjusted for credit risk and servicing
costs. The estimate of maturity is based on historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of current economic and lending
conditions. The allowance for loan losses is considered a reasonable discount for credit risk.
Deposits:
The fair value of deposits with no stated maturity, such as demand deposits, money market
accounts, and savings deposits, is equal to the amount payable on demand. The fair value of time
deposits is based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining maturities.
Federal funds purchased, Federal Reserve Bank advances and securities sold under agreements to
repurchase:
The estimated value of these liabilities, which are extremely short term, approximates their
carrying value.
Subordinated debentures:
For the subordinated debentures with a floating interest rate tied to LIBOR, the fair value is
based on the discounted value of contractual cash flows. The discount rate is estimated using the
most recent offering rates available for subordinated debentures of similar amounts and remaining
maturities.
Federal Home Loan Bank advances:
For FHLB advances the fair value is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for FHLB advances of similar
amounts and remaining maturities.
Accrued interest receivable and payable:
The carrying amounts of accrued interest receivable and payable approximate their fair value.
Commitments to extend credit, letters of credit and lines of credit:
The fair value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed rates. The fair values
of these commitments are insignificant and are not included in the table below.
25
Table of Contents
The carrying amounts and estimated fair values of the Companys financial instruments at June
30, 2011 and December 31, 2010, not previously presented, are as follows (in thousands):
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 34,275 | $ | 34,275 | $ | 32,576 | $ | 32,576 | ||||||||
Investment securities held to
maturity |
1,349 | 1,442 | 1,318 | 1,303 | ||||||||||||
Restricted investments |
3,847 | N/A | 3,843 | N/A | ||||||||||||
Loans, net |
330,434 | 319,764 | 363,413 | 358,587 | ||||||||||||
Accrued interest receivable |
1,383 | 1,383 | 1,496 | 1,496 | ||||||||||||
Liabilities: |
||||||||||||||||
Noninterest-bearing demand deposits |
$ | 50,658 | $ | 50,658 | $ | 47,639 | $ | 47,639 | ||||||||
NOW accounts |
53,608 | 53,608 | 57,345 | 57,345 | ||||||||||||
Savings and money market accounts |
73,197 | 73,197 | 73,435 | 73,435 | ||||||||||||
Time deposits |
260,433 | 261,253 | 271,173 | 272,304 | ||||||||||||
Subordinated debentures |
13,403 | 7,338 | 13,403 | 7,276 | ||||||||||||
Federal funds purchased and
securities
sold under agreements to repurchase |
1,150 | 1,150 | 432 | 432 | ||||||||||||
Federal Reserve/Federal Home Loan
Bank advances |
55,200 | 61,161 | 55,200 | 61,136 | ||||||||||||
Accrued interest payable |
738 | 738 | 719 | 719 |
Note 8. Regulatory Matters
The Bank and Company are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action applicable to the Bank, the Bank and
Company must meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank
and Company to maintain minimum amounts and ratios of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). In addition, the Companys and the Banks regulators may impose additional
capital requirements on financial institutions and their bank subsidiaries, like the Company and
the Bank, beyond those provided for statutorily, which standards may be in addition to, and require
higher levels of capital, than the general statutory capital adequacy requirements. As discussed
below, the Bank has agreed to maintain certain of its capital ratios above minimum statutory
levels. As of June 30, 2011 and discussed below, the Bank failed to meet all capital adequacy
requirements to which it is subject.
26
Table of Contents
The Bank
has entered into a formal written agreement in which it made certain commitments to the OCC,
including commitments to, among other things, implement a program to reduce the high level of
credit risk in the Bank including strengthening credit underwriting and problem loan workouts and
collections, reduce its level of criticized assets, implement a concentration risk management
program related to commercial real estate lending, improve procedures related to the maintenance of
the Banks ALLL, strengthen the Banks internal loan review program, strengthen the Banks loan
workout department, and develop a liquidity plan that improves the Banks reliance on wholesale
funding sources.
In February 2010, the Bank agreed to an OCC minimum capital requirement (IMCR) to maintain a
minimum Tier 1 capital to average assets ratio of 9% and a minimum total capital to risk-weighted
assets ratio of 13%. The OCC imposed this requirement to maintain capital at higher levels than
those required by applicable federal regulations because the OCC believed that the Banks capital
levels were less than satisfactory given the level of credit risk in the Bank, specifically the
high level of nonperforming assets and provision for loan losses. As noted below under Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations Funding
Resources, Capital Adequacy and Liquidity, the Bank had 4.61% of Tier 1 capital to average assets
and 7.69% of total risk-based capital to risk-weighted assets ratio at June 30, 2011, and was therefore not in
compliance with the IMCR. As a result, the OCC may bring additional enforcement actions, including
a consent order or a capital directive, against the Bank. Based upon its capital levels at June 30,
2011, the Banks capital shortfall was approximately $23,374,000 for the Tier 1 capital to average
assets requirement and approximately $20,342,000 for the total capital to risk-weighted assets
requirement.
In the fourth quarter of 2010, the OCC informed the Bank that, because the OCC does not
believe that the Bank has fully satisfied the requirements of the formal written agreement, it will
be requested to replace the formal written agreement with a consent order (the Consent Order)
containing commitments for further improvements in the Banks operations. As of June 30, 2011, the
Bank has not received further notification as to the Consent Order or its proposed terms or given a
time frame for which it might be requested to replace the formal written agreement.
As
a result of the Banks losses in the second quarter of 2011, it
is considered undercapitalized under applicable prompt corrective action regulations, and as a result, the Bank may not accept, renew or rollover brokered deposits or pay interest
on deposits above certain federally-established rates. The Banks total risk-based capital to
risk-weighted assets ratio of 7.69% requires an increase of risk-based capital of approximately
$1,175,000 to achieve the 8.00% ratio for the Bank to return to the adequately capitalized
minimum under capital adequacy regulations.
Under the OCCs prompt corrective action regulations, because it is undercapitalized, the Bank is required to
file a capital restoration plan with the OCC before September 15, 2011, and is subject to certain other restrictions
restricting payment of capital distributions or management fees, restricting asset growth and requiring prior approval
of asset expansion proposals. The capital restoration plan is required to specify the steps the Bank will take to
become adequately capitalized, the levels of capital to be attained each year the plan is in effect, the steps the
Bank will take to comply with the growth and other restrictions applicable to it and the types and levels of activities
it will engage in.
The Compliance Committee meets monthly and submits quarterly progress reports to the OCC
addressing ongoing actions taken by the Board of Directors and management to address the
deficiencies noted in Articles III through IX of the formal written agreement. A summary of the
actions taken regarding each Article are outlined below:
Article III Credit Risk The Board of Directors has approved a Credit Risk
Management Program with primary emphasis on oversight of the credit process, credit
granting and underwriting processes, credit administration, measurement and
monitoring and internal controls of the credit process. This program also
incorporates the Credit Policy (including CRE concentrations), Loan Review Policy
and Special Assets Department Policy as the primary written guidance documents for
granting credit, administering the loan portfolio and monitoring credit risk. The
Credit Risk Officer prepares a quarterly assessment of credit risk which is reviewed
and approved by the Compliance Committee and full Board of Directors prior to
submission to the OCC. |
27
Table of Contents
Article IV Criticized Assets Managements efforts are guided by a written,
Board approved program detailing actions that will be taken to eliminate the basis
of criticism for all criticized loan relationships. As part of this program,
detailed action plans are developed for all criticized assets that reflect the most
current information available regarding repayment capacity, collateral protection
and proposed actions to eliminate the bases of criticism. The action plans are
reviewed by the Compliance Committee quarterly prior to submission to the OCC. |
Article V Concentrations of Credit and CRE Concentration Risk Management The
Board of Directors has approved a comprehensive CRE Concentrations Risk Management
Program detailing all aspects of the Banks efforts to comply with the guidance
established in Interagency Bulletin 2006-46 which has been implemented into the
Credit Policy. Comprehensive underwriting guidelines for CRE loans have been
developed and incorporated into the policy. The guidelines include a minimum debt
coverage ratio, collateral margins that are more stringent than those allowed by the
regulatory guidelines and minimum cash equity requirements, along with additional
underwriting standards. Portfolio level stress testing has been incorporated and is
performed quarterly and detailed reports are provided to management and the Board of
Directors. In addition, a report of primary concentrations by NAICS industry codes
is provided to the Compliance Committee, Board of Directors and the OCC on a
quarterly basis. |
Article VI Allowance for Loan and Lease Losses Management operates under the
guidance of a comprehensive, Board approved Allowance for Loan and Lease Loss
Policy. The policy establishes authority for analyzing and preparing the ALLL
calculation in accordance with US GAAP and OCC Bulletin 2006-47. The Board receives
a detailed report of the ALLL calculation and support documentation for review and
approval at least quarterly. The quarterly ALLL calculation and supporting
documentation is provided to the OCC. |
Article VII Loan Review and Problem Loan Identification The Board of Directors
has approved a comprehensive Loan Review Policy and Program that details the scope
and coverage of the Banks loan review activities. Quarterly loan reviews are
performed by
an external consultant. This review includes analysis of risk-grades assigned to
each loan by management resulting in further discussion if there is a disagreement.
Management is responsible for identification of problem loans including collateral
dependent loans, nonaccrual loans and determining specific losses and reserve
levels. This process is intended to help control the level of losses given the
Banks elevated level of problem loans. |
Article VIII Loan Workout Department The departments activities are guided by
a comprehensive Special Assets Department Policy approved by the Board of Directors.
The policy identifies assets that will be managed by the Special Assets Department,
standards for managing loans including interest accrual status and identification of
collateral dependent loans and loans included in troubled debt restructurings. The
Special Assets Department is independent from Bank management and reports directly
to the Board of Directors. |
Article IX Liquidity Plan The Funds Management Policy, approved by the Board
of Directors, guides management with regards to the Banks plan. The Bank has
developed a comprehensive Liquidity/Contingency Funding Plan to further enhance
liquidity management. The board and management continue to take actions to improve
the Banks liquidity position and maintain adequate sources of stable funding. |
28
Table of Contents
All actions are continuous and ongoing and subject to review and revision by the OCC. The OCC,
at its sole discretion, will notify the Bank when it determines the Bank to be in compliance with
all articles of the formal written agreement.
Since the Bank agreed to the capital requirement, certain actions have been taken, and are
ongoing, that are designed to improve the Banks capital ratios by influencing the underlying
metrics. The reduction of total assets of the Bank can have an impact on the Tier 1 capital ratio.
Since December 31, 2009 the Bank has reduced total assets approximately $119,000,000 from
approximately $640,000,000 to approximately $521,000,000 at June 30, 2011. This reduction in assets
was accomplished by reducing wholesale funding including brokered deposits and Federal Home Loan
Bank advances as well as the reduction of public funds deposits. Additionally, loans outstanding
and the bond investment portfolio were reduced subsequent to the capital requirement. Expense
reduction measures were put in place during the first and second quarters of 2010 which included a
significant reduction of salaries and benefits. In addition, the Company is actively exploring
other potential strategic transactions that could provide additional capital for the Bank,
including private equity financing, issuance of shares to existing shareholders or other strategic
transactions.
During the second quarter of 2011, managements actions regarding its change in the strategic
plan involving liquidation of certain impaired loans as described under Allowance for Loan Losses
below had a significant impact on the regulatory capital ratios. Additionally, the decrease in the
Companys ORE balance during the quarter had an impact on regulatory capital ratios and was
primarily the result of managements decision to record a sizable valuation allowance against its
portfolio with the intention of liquidating these nonperforming assets more expeditiously than what
was experienced and projected at the previous price levels, also as part of the change in the
strategic plan as discussed in more detail under Noninterest Expense below. Also, during the
quarter, the Banks increase of the deferred tax asset valuation allowance as discussed in more
detail under Income Taxes below reduced the income tax benefit that would have typically been
recognized and had a significant impact on regulatory capital. The cumulative effect of these
actions reduced the Banks capital ratios to the levels noted above. The Companys ratios were
further impacted due to the reduction in the amount of Trust Preferred Securities allowed in the
calculation of their regulatory capital ratios.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis is designed to provide a better understanding of various
factors related to the financial condition and results of operations of the Company and its
subsidiaries, including the Bank. This section should be read in conjunction with the financial
statements and notes thereto which are contained in Item 1 above and the Companys Annual Report on
Form 10-K for the year ended December 31, 2010, including Managements Discussion and Analysis of
Financial Condition and Results of Operations.
To better understand financial trends and performance, the Companys management analyzes
certain key financial data in the following pages. This analysis and discussion reviews the
Companys results of operations and financial condition for the three and six months ended June 30,
2011. This discussion is intended to supplement and highlight information contained in the
accompanying unaudited consolidated financial statements as of and for the three- and six-month
periods ended June 30, 2011. The Company has also provided some comparisons of the financial data
for the three- and six-month periods ended June 30, 2011, against the same period in 2010, as well
as the Companys year-end results as of and for the year ended December 31, 2010, to illustrate
significant changes in performance and the possible results of trends revealed by that historical
financial data. This discussion should be read in conjunction with our financial statements and
notes thereto, which are included under Item 1 above.
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Table of Contents
Special Cautionary Notice Regarding Forward-Looking Statements
Certain of the statements made herein are forward-looking statements within the meaning of,
and subject to the protections of Section 27A of the Securities Act of 1933, as amended, (the
Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act).
Forward-looking statements include statements with respect to our beliefs, plans, objectives,
goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and
involve known and unknown risks, uncertainties and other factors, which may be beyond our control,
and which may cause our actual results, performance or achievements to be materially different from
future results, performance or achievements expressed or implied by such forward-looking
statements.
All statements other than statements of historical fact are statements that could be
forward-looking statements. You can identify these forward-looking statements through our use of
words such as may, will, anticipate, assume, should, indicate, attempt, would,
believe, contemplate, expect, seek, estimate, continue, plan, point to, project,
predict, could, intend, target, potential, and other similar words and expressions of the
future. These forward-looking statements may not be realized due to a variety of factors,
including those risk factors set forth in the Companys Annual Report on Form 10-K for the year
ended December 31, 2010, the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 and below under Part II, Item 1A. Risk Factors and, without limitation:
| the effects of greater than anticipated deterioration in economic and business
conditions (including in the residential and commercial real estate construction and
development segment of the economy) nationally and in our local market; |
||
| deterioration in the financial condition of borrowers resulting in significant
increases in loan losses and provisions for those losses; |
||
| increased levels of non-performing and repossessed assets; |
||
| lack of sustained growth in the economy in the Sevier County and Blount County,
Tennessee area; |
||
| government monetary and fiscal policies as well as legislative and regulatory
changes, including changes in banking, securities and tax laws and regulations; |
||
| the risks of changes in interest rates on the levels, composition and costs of
deposits, loan demand, and the values of loan collateral, securities, and interest
sensitive assets and liabilities; |
||
| the effects of competition from a wide variety of local, regional, national and
other providers of financial, and investment services; |
||
| the failure of assumptions underlying the establishment of reserves for possible
loan losses and other estimates; |
||
| the risks of mergers, acquisitions and divestitures, including, without limitation,
the related time and costs of implementing such transactions, integrating operations as
part of these transactions and the possible failure to achieve expected gains, revenue
growth and/or expense savings from such transactions; |
||
| the effects of failing to comply with our regulatory commitments; |
||
| changes in accounting policies, rules and practices; |
||
| changes in technology or products that may be more difficult, or costly, or less
effective, than anticipated; |
||
| the effects of war or other conflicts, acts of terrorism or other catastrophic
events that may affect general economic conditions; |
||
| results of regulatory examinations; |
||
| the remediation efforts related to the Companys material weakness in internal
control over financial reporting; |
||
| the ability to raise additional capital; |
30
Table of Contents
| the prepayment of FDIC insurance premiums and higher FDIC assessment rates; |
||
| the effects of negative publicity; |
||
| the effectiveness of the Companys activities in improving, resolving or liquidating
lower quality assets; |
||
| the Companys recording of a further allowance related to its deferred tax asset;
and |
||
| other factors and information described in this report and in any of our other
reports that we make with the Securities and Exchange Commission (the Commission)
under the Exchange Act. |
All written or oral forward-looking statements that are made by or attributable to us are
expressly qualified in their entirety by this cautionary notice. Except as required by the Federal
securities laws, we have no obligation and do not undertake to update, revise or correct any of the
forward-looking statements after the date of this report, or after the respective dates on which
such statements otherwise are made.
Recent Regulatory Developments
In the first quarter of 2009, the OCC conducted an examination of the Bank and found that the
Banks condition had significantly deteriorated since the OCCs most recent examination of the
Bank. The Banks asset quality and earnings had both significantly declined since the OCCs last
examination of the Bank and the Banks dependence on brokered deposits and other sources of
non-core funding was too high.
Despite the Banks efforts to comply with the requirements of the examination report, the OCC
concluded that the Bank had not satisfactorily responded to the matters requiring attention
identified in the examination report and requested that the Bank consent to the issuance of a
formal written agreement with the OCC in order to improve its asset quality and reduce losses and
to correct weaknesses that were the subject of examination criticism. Following discussions with
the OCC, the Banks board of directors entered into a formal written agreement requiring that the
Bank take a number of actions to improve the Banks operations including the following:
| reduce the high level of credit risk and strengthen the Banks credit underwriting,
particularly in the commercial real estate portfolio, including improving its management
and training of commercial real estate lending personnel; |
||
| strengthen its problem loan workouts and collection department; |
||
| improve its loan review program, including its internal loan review staffing; |
||
| reduce the level of criticized assets and the concentrations of commercial real estate
loans; |
||
| improve its credit underwriting standards for commercial real estate; |
||
| engage in portfolio stress testing and sensitivity analysis of the Banks commercial
real estate concentrations; |
||
| improve its methodology of calculating the allowance for loan and lease losses; and |
||
| reduce its levels of brokered deposits and other wholesale funding. |
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Since its issuance, the board of directors and members of the Banks management have sought to
comply with the terms of the formal written agreement and have taken a number of actions in an
effort to so comply, including:
| the hiring of a new Chief Credit Officer, a new Loan Review Officer and other credit
personnel; |
||
| the retention of a third party loan reviewer to review over 80 percent of the total
outstanding loans in the loan portfolio; |
||
| the adoption of action plans for all criticized assets, along with revised procedures
for eliminating the basis for criticism of problem credit and disposing of nonperforming
assets; |
||
| the adoption of a revised credit risk management program and enhanced credit risk review
process; |
||
| improvements to the Banks allowance methodology; |
||
| implementation of a full-time special assets department with improvised policies; and |
||
| adoption of revised liquidity plans. |
Following its most recent examination by the OCC in the first quarter of 2010, the Bank has
sought to further improve its strategic, capital and liquidity planning, reviewed the results of a
management study, further improved its policies on recognition of non-accrual loans, incorporated a
historical loss rates migration analysis into its quarterly determination of the allowance for loan
losses and further refined its credit policies and credit review process.
Although the Bank has instituted a number of improvements to its practices in an effort to
comply with the terms of the formal written agreement, the OCC has informed the Bank that, because
the OCC does not believe that the Bank has fully satisfied the requirements of the formal written
agreement, it will be requested to replace the formal written agreement with a consent order (the
Consent Order) containing requirements for further
improvements in the Banks operations. The requirements of the
Consent Order are not currently known to the Bank. Based on its
capital levels at June 30, 2011, the Banks capital shortfall was approximately $23,374,000 for the
Tier 1 capital to average assets requirement and $20,342,000 for the total capital to risk-weighted
assets requirement.
As
a result of the Banks losses in the second quarter of 2011, it
is considered undercapitalized under applicable prompt corrective action regulations, and as a result, the Bank
cannot accept, renew or roll over brokered deposits
or pay interest on deposits above certain federally established
rates. In addition, the Bank will be required to file a capital restoration plan with the OCC before
September 15, 2011, and is subject to certain other restrictions restricting payment of
capital distributions or management fees, restricting asset growth and requiring prior approval
of asset expansion proposals. The capital restoration plan is required to specify the steps the
Bank will take to become adequately capitalized, the levels of capital to be attained
each year the plan is in effect, the steps the Bank will take to comply with the growth and other
restrictions applicable to it and the types and levels of activities it will engage in.
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Overview
We conduct our operations, which consist primarily of traditional commercial banking
operations, through the Bank. Through the Bank we offer a broad range of traditional banking
services
from our corporate headquarters in Sevierville, Tennessee, our Blount County regional
headquarters in Maryville, Tennessee, through eight additional branches in Sevier County,
Tennessee, and two additional branches in Blount County, Tennessee. Our banking operations
primarily target individuals and small businesses in Sevier and Blount Counties and the surrounding
area. The retail nature of the Banks commercial banking operations allows for diversification of
depositors and borrowers, and we believe that the Bank is not dependent upon a single or a few
customers. But, due to the predominance of the tourism industry in Sevier County, a significant
portion of the Banks commercial loan portfolio is concentrated within that industry, including the
residential real estate and commercial real estate segments of that industry. The predominance of
the tourism industry also makes our business more seasonal in nature, particularly with respect to
deposit levels, than may be the case with banks in other market areas. The tourism industry in
Sevier County has remained relatively strong during recent years and we anticipate that this trend
will continue during the remainder of 2011. Additionally, we have a significant concentration of
commercial and residential real estate construction and development loans. Economic downturns
relating to sales of these types of properties have adversely affected the Banks operations
creating risk independent of the tourism industry.
In addition to our twelve existing locations, we own one property in Knox County for use in
future branch expansion. This property is not currently under development. Management does not
anticipate construction of any additional branches during 2011.
The net loss for the three- and six-month periods ended June 30, 2011 as compared to net
income for the same periods during 2010 was as follows:
6/30/2011 | 6/30/2010 | $ change | ||||||||||
Net Income (Loss) |
||||||||||||
Six months ended |
(25,233,636 | ) | 471,400 | (25,705,036 | ) | |||||||
Three months ended |
(21,854,599 | ) | 142,286 | (21,996,885 | ) |
The net loss for the second quarter and first six months of 2011 was primarily attributable to
the Companys provision for loan losses as discussed in more detail below under Provision for Loan
Losses. The decrease from net income for the second quarter and first six months of 2010 to a net
loss for the same periods during 2011 was also the result of an increase in net loss on ORE related
to the Bank recording a significant ORE valuation allowance as discussed in more detail under
Noninterest Expense below. Additionally, there was a reduction in net investment gains, included in
noninterest income, during the six months ended June 30, 2011 compared to the same period in 2010,
as discussed in more detail below under Noninterest Income.
Basic and diluted earnings per share decreased from basic and diluted earnings per share of
$0.18, in the first six months of 2010 to basic and diluted loss per share of ($9.59), in the first
six months of 2011. During the second quarter of 2011, basic and diluted loss per share decreased
to ($8.30) from basic and diluted earnings per share of $0.05 in the second quarter of 2010. The
change in net loss per share for the three and six months ended June 30, 2011, as compared to net
earnings per share for the same periods in 2010, was due primarily to the change from net income in
the second quarter and first six months of 2010 to a net loss in the second quarter and first six
months of 2011.
The change in total assets, total liabilities and shareholders equity for the six months
ended June 30, 2011, was as follows:
6/30/11 | 12/31/10 | $ change | % change | |||||||||||||
Total Assets |
$ | 521,399,241 | $ | 557,206,511 | $ | (35,807,270 | ) | -6.43 | % | |||||||
Total Liabilities |
509,901,302 | 521,532,341 | (11,631,039 | ) | -2.23 | % | ||||||||||
Shareholders Equity |
11,497,939 | 35,674,170 | (24,176,231 | ) | -67.77 | % |
33
Table of Contents
The net decrease in total assets was primarily the result of a decrease in net loans of
approximately $33 million and a decrease in ORE of approximately $3 million, as discussed in more
detail below under Loans. The net decrease in total liabilities was primarily attributable to a
decrease in time deposits of approximately $11 million and a decrease in NOW accounts of
approximately $4 million, as discussed in more detail below under Deposits.
The decrease in shareholders equity was primarily attributable to the net loss for the six
months ended June 30, 2011.
Balance Sheet Analysis
The following table presents an overview of selected period-end balances at June 30, 2011 and
December 31, 2010, as well as the dollar and percentage change for each:
6/30/11 | 12/31/10 | $ change | % change | |||||||||||||
Cash and equivalents |
$ | 34,274,548 | $ | 32,575,820 | $ | 1,698,728 | 5.21 | % | ||||||||
Loans |
344,623,403 | 374,355,464 | (29,732,061 | ) | -7.94 | % | ||||||||||
Allowance for loan losses |
14,189,651 | 10,942,414 | 3,247,237 | 29.68 | % | |||||||||||
Investment securities |
88,799,606 | 87,634,542 | 1,165,064 | 1.33 | % | |||||||||||
Premises and equipment |
31,973,618 | 32,600,673 | (627,055 | ) | -1.92 | % | ||||||||||
Other real estate owned |
9,870,404 | 13,140,698 | (3,270,294 | ) | -24.89 | % | ||||||||||
Noninterest-bearing deposits |
50,657,932 | 47,638,792 | 3,019,140 | 6.34 | % | |||||||||||
Interest-bearing deposits |
387,238,560 | 401,952,616 | (14,714,056 | ) | -3.66 | % | ||||||||||
Total deposits |
437,896,492 | 449,591,408 | (11,694,916 | ) | -2.60 | % | ||||||||||
Federal Reserve/Federal Home
Loan Bank advances |
$ | 55,200,000 | $ | 55,200,000 | $ | | 0.00 | % |
Loans
At June 30, 2011, loans comprised 75.1% of the Banks earning assets. The decrease in our loan
portfolio was primarily attributable to a decrease in construction and land development loans and
1-4 family residential loans, which was primarily the result of recording net charge-offs of
approximately $17 million during the first six months of 2011 as discussed in more detail under
Provision for Loan Losses. Additionally, the general pay down of loan balances pursuant to
managements strategy to reduce loans in order to reduce asset levels in light of capital
reductions contributed to the overall decrease in loans. Total earning assets, as a percentage of
total assets, were 88.1% at June 30, 2011, compared to 86.8% at December 31, 2010, and 87.1% at
June 30, 2010. Total earning assets relative to total assets increased for the six-month period
ended June 30, 2011 and as compared to June 30, 2010 due to the continued decrease in total assets.
The average yield on loans, including loan fees, during the first six months of 2011 was 5.08%
compared to 5.20% for the first six months of 2010. The decrease in the average yield on loans was
the result of several factors including the increase in TDRs involving interest rate concessions
and the continued significant level of average non-accrual loans as a percentage of our loan
portfolio.
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Table of Contents
The following table presents the Companys ORE activity by property type during the first six
months of 2011:
December 31, | Gain/(Loss) | Valuation | June 30, | |||||||||||||||||||||
2010 | Additions | Sales | on Sale | Adjustments | 2011 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Construction, land development
and other land |
$ | 2,595 | $ | 1,056 | $ | | $ | | $ | (995 | ) | $ | 2,656 | |||||||||||
1-4 family residential properties |
3,799 | 1,872 | (889 | ) | (96 | ) | (1,252 | ) | 3,434 | |||||||||||||||
Multifamily residential properties |
4,640 | | | | (2,265 | ) | 2,375 | |||||||||||||||||
Nonfarm nonresidential properties |
2,107 | 400 | (644 | ) | (58 | ) | (400 | ) | 1,405 | |||||||||||||||
Total |
$ | 13,141 | $ | 3,328 | $ | (1,533 | ) | $ | (154 | ) | $ | (4,912 | ) | $ | 9,870 | |||||||||
The decrease in the Companys ORE balance during the six month period ended June 30, 2011
was primarily the result of managements decision, with concurrence of the Board of Directors, to
record a sizable valuation allowance against its portfolio during the second quarter with the
intention of liquidating these nonperforming assets more expeditiously than what was experienced
and projected at the previous price levels. Management, with concurrence of the Board of Directors,
determined that certain properties held in ORE were not likely to be successfully disposed of in an
acceptable time-frame using routine marketing efforts. It became apparent that certain properties
were going to require extended holding periods to sell the properties at recent appraised values.
Given our change in strategy to reduce nonperforming assets in an accelerated manner, management
adjusted downward the valuations for certain properties in our ORE portfolio to reflect the likely
net realizable value achievable by aggressively marketing these properties. Additionally, the
foreclosure of additional properties exceeded the sale of properties previously held as ORE. One
property, an operating nightly condominium rental operation located in Pigeon Forge, Tennessee,
which previously secured a loan for approximately $5,116,000, represents approximately $2,375,000,
or 24%, of the ORE balance at June 30, 2011 (included in multifamily residential properties in the
table above). The condominiums are currently under management contract with an experienced nightly
rental management company as we seek to market the sale of the properties.
Allowance for Loan Losses
The allowance for loan losses represents managements assessment and estimates of the risks
associated with extending credit and its evaluation of the quality of our loan portfolio. This
evaluation is based on the provisions of US GAAP and, as such, management believes the allowance
for loan losses is appropriate at each balance sheet date according to the requirements of US GAAP.
Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses
and the appropriate provision required to maintain the allowance for loan losses at a level
believed to be adequate to absorb probable incurred loan losses. In assessing the adequacy of the
allowance, management reviews the size, quality and risk of loans in the portfolio. Management also
considers such factors as the Banks loan loss experience, the amount of past due and nonperforming
loans, impairment of loans, specific known risks, the status, amounts and values of nonperforming
assets (including loans), underlying collateral values securing loans, current and anticipated
economic conditions and other factors which affect the allowance
for potential credit losses. Based on an analysis of the credit quality of the loan portfolio
prepared by the Banks risk officer, the CFO presents a quarterly analysis of the adequacy of the
allowance for loan losses for review by our board of directors.
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Table of Contents
Our allowance for loan losses is also subject to regulatory examinations and determinations as
to adequacy, which may take into account such factors as the methodology used to calculate the
allowance and the level of risk in the loan portfolio. During their routine examinations of banks,
regulatory agencies may advise a bank to make additional provisions to its allowance for loan
losses, which would negatively impact a banks results of operations, when the opinion of the
regulators regarding credit evaluations and allowance for loan loss methodology differ materially
from those of the banks management.
Concentrations of credit risk typically involve loans to one borrower, an affiliated group of
borrowers, borrowers engaged in or dependent upon the same industry, or a group of borrowers whose
loans are secured by the same type of collateral. Our most significant concentration of credit
risks lies in the high proportion of our loans to businesses and individuals dependent on the
tourism industry and loans to subdividers and developers of land. The Bank assesses loan risk by
primary concentrations of credit by industry and loans directly related to the tourism industry are
monitored carefully. At June 30, 2011, approximately $162 million in loans, or 47% of our total loans,
were to businesses and individuals whose ability to repay depends to a significant extent on the
tourism industry in the markets we serve as compared to approximately $192 million in loans, or 51%
of our total loans, at December 31, 2010. The most significant decreases in this category were loans to
overnight rentals by agency and loans to subdividers and developers which decreased approximately
$16 million and $14 million, respectively.
While it is the Banks policy to charge off in the current period loans for which a loss is
considered confirmed, there are additional risks of losses which cannot be quantified precisely or
attributed to particular loans or classes of loans. Because the risk of loss includes unpredictable
factors, such as the state of the economy and conditions affecting individual borrowers,
managements judgments regarding the appropriate size of the allowance for loan losses is
necessarily approximate and imprecise, and involves numerous estimates and judgments that may
result in an allowance that is insufficient to absorb all incurred loan losses.
Management is not aware of any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been identified and sufficiently provided for in the
allowance for loan losses which (1) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results, liquidity, or
capital resources, or (2) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
Individually impaired loans are loans that the Bank does not expect to collect all amounts due
according to the contractual terms of the loan agreement and include any loans that meet the
definition of a TDR, as discussed in more detail below. In some cases, collection of amounts due
becomes dependent on liquidating the collateral securing the impaired loan. Collateral dependent
loans do not necessarily result in the loss of principal or interest amounts due; rather the cash
flow is disrupted until the underlying collateral can be liquidated. As a result, the Banks
impaired loans may exceed nonaccrual loans which are placed on nonaccrual status when questions
arise about the future collectability of interest due on these loans. The status of impaired loans
is subject to change based on the borrowers financial position.
Problem loans are identified and monitored by the Banks watch list report which is generated
during the loan review process. This process includes review and analysis of the borrowers
financial statements and cash flows, delinquency reports and collateral valuations. The watch list
includes all loans determined to be impaired. Management determines the proper course of action
relating to these loans and receives monthly updates as to the status of the loans.
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Table of Contents
The following table presents impaired loans as of June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Impaired | % of total | Impaired | % of total | |||||||||||||
Loans | loans | Loans | loans | |||||||||||||
($ in thousands) | ||||||||||||||||
Construction, land development
and other land loans |
$ | 32,270 | 9.36 | % | $ | 41,517 | 11.09 | % | ||||||||
Commercial real estate |
25,050 | 7.27 | % | 21,529 | 5.75 | % | ||||||||||
Consumer real estate |
21,769 | 6.32 | % | 29,182 | 7.80 | % | ||||||||||
Other loans |
46 | 0.01 | % | 128 | 0.03 | % | ||||||||||
Total |
$ | 79,135 | 22.96 | % | $ | 92,356 | 24.67 | % | ||||||||
The decrease in impaired loans from December 31, 2010 to June 30, 2011 was primarily the
result of the partial charge-off of collateral dependent loans during the first two quarters of
2011. Otherwise, the sustained, high level of impaired loans continues to relate to the weak
residential and commercial real estate market in the Banks market areas. Within this segment of
the portfolio, the Bank has traditionally made loans to, among other borrowers, home builders and
developers of land. These borrowers have continued to experience stress during the current real
estate recession due to a combination of declining demand for residential real estate, excessive
volume of properties available and the resulting price and collateral value declines. In addition,
housing starts in the Banks market areas continue to be at historically low levels. An extended
recessionary period in real estate will likely cause the Banks real estate mortgage loans, which
include construction and land development loans, to continue to underperform and may result in
increased levels of impaired loans and non-performing assets, which may negatively impact the
Companys results of operations.
Collateral dependent loans are recorded at the lower of cost or the appraised value net of
estimated selling costs. Repayment of these loans is anticipated to be from the sale or liquidation
of the collateral securing the loans. Management obtains independent appraisals of the collateral
securing collateral dependent loans at least annually, or more frequently during periods of
significant devaluation of real estate, from independent licensed real estate appraisers and the
carrying amount of the loans that exceed the appraised value net of estimated selling costs is
taken as a charge against the allowance for loan losses and may result in additional charges to the
provision expense. All loans considered collateral dependent are nonaccrual loans and included in
the nonperforming loan balances. Management has recorded partial charge offs on these collateral
dependent loans totaling approximately $13,660,000 as of June 30, 2011.
During the economic recession that began during 2008 through the first quarter of 2011,
management has attempted to work with borrowers experiencing financial difficulty. Management
placed particular emphasis on TDRs for borrowers that were unable to meet the terms of their
original contractual agreement, primarily, due to diminished cash flow. During the second quarter
of 2011, management re-evaluated the Banks strategic plan and made the decision it could no longer
continue to renew TDRs with respect to a significant portion of the impaired loans. This decision
was based on
managements continuing review and analysis of the loan portfolio, the extended time period
required to rehabilitate certain TDRs, the lack of improvement in the performance of certain
borrowers, the continuing economic decline of real estate values in the local markets, the extended
economic downturn projected for both the local and national markets and increasing regulatory
scrutiny.
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During the second quarter of 2011, management, with the concurrence of the Board of Directors,
determined that the liquidation of certain impaired loans would be a part of the strategy to reduce
nonperforming assets similar to the strategy taken with other real estate owned. This liquidation
process, involving determination the loans were collateral dependent, resulted in a charge to the
provision for loan loss expense of approximately $13,561,000 of the approximately $17,363,000
expensed during the quarter. It is managements intention to liquidate these loans within twelve
months or less which will result in reducing non-performing assets. This liquidation process
involves foreclosure of the real estate securing these loans or allowing borrowers to utilize short
sales, the sale of the real estate at a price less than the balance of the loan secured by the real
estate. The determination of the fair value of the real estate and resultant charge off to the
ALLL is based on current estimations of short-term liquidation values. Management has determined
these values on a property by property evaluation with the intention of achieving short-term
liquidation rather than utilizing a more normal marketing approach of twelve months or longer. The
resulting liquidation values for the collateral dependent loans are less than the values management
would have otherwise recorded for these loans had the decision not been made to liquidate.
Certain impaired loans were TDRs prior to the determination they were collateral dependent.
The following table presents the recorded investment in collateral dependent loans and TDRs
considered collateral dependent at June 30, 2011 and December 31, 2010 (in thousands):
Balance | Net | Miscellaneous | Balance | |||||||||||||||||||||||||||||
December 31, | Number | Additions/ | Charge | Payoffs/ | Principal | June 30, | Number | |||||||||||||||||||||||||
2010 | of Loans | Deletions | Offs | Foreclosures | Changes | 2011 | of Loans | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||
Construction and development |
$ | 16,007 | 18 | $ | 6,130 | $ | (6,782 | ) | $ | (1,232 | ) | $ | (79 | ) | $ | 14,044 | 17 | |||||||||||||||
Commercial real estate mortgage |
4,743 | 6 | 804 | (1,587 | ) | (438 | ) | (7 | ) | 3,515 | 7 | |||||||||||||||||||||
Commercial and industrial |
| | 88 | (80 | ) | | | 8 | 1 | |||||||||||||||||||||||
Residential real estate |
||||||||||||||||||||||||||||||||
Residential mortgage |
8,054 | 12 | 4,710 | (4,942 | ) | (175 | ) | (17 | ) | 7,630 | 19 | |||||||||||||||||||||
Home equity and junior liens |
| | 416 | (170 | ) | | | 246 | 2 | |||||||||||||||||||||||
Total residential real estate |
8,054 | 12 | 5,126 | (5,112 | ) | (175 | ) | (17 | ) | 7,876 | 21 | |||||||||||||||||||||
Consumer and other |
| | 13 | | | | 13 | 1 | ||||||||||||||||||||||||
Total |
$ | 28,804 | 36 | $ | 12,161 | $ | (13,561 | ) | $ | (1,845 | ) | $ | (103 | ) | $ | 25,456 | 47 | |||||||||||||||
At December 31, 2010 there were thirty-six loans considered collateral dependent with
balances totaling approximately $28,804,000 as compared to forty-seven loans with balances totaling
approximately $25,456,000 at June 30, 2011. Collateral dependent loans that are also reported as
TDRs were approximately $22,214,000 at December 31, 2010 and approximately $23,281,000 at June 30,
2011. During the second quarter of 2011 approximately $13,561,000 was charged off to the ALLL as a
result of the write down of these collateral dependent loans based on managements estimate of the
net realizable
proceeds from the near-term liquidation of the collateral as part of the strategy to reduce
non-performing assets.
Due to the weakening credit status of a borrower, we may elect to formally restructure certain
loans to facilitate a repayment plan that minimizes the potential losses, if any, that we might
incur. All restructured loans are classified as impaired loans and, if on nonaccruing status as of
the date of restructuring, the loans are included in the nonperforming loan balances. Not included
in nonperforming loans are loans that have been restructured that were performing as of the
restructure date. At June 30, 2011 and December 31, 2010, there were $35.7 million and $35.8
million, respectively, of accruing restructured loans that remain in a performing status.
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Table of Contents
TDRs are restructured loans due to a borrower experiencing financial difficulty and the Bank
granting concessions it would not normally otherwise grant. These concessions generally include a
reduced interest rate for a limited period of time to allow the borrower to improve their economic
position, especially during this period of economic downturn. Management has made an attempt to
identify all loans where, by granting certain concessions, borrowers have additional time to
recover from the economic downturn, and in certain instances, have been able to significantly
reduce or repay their loans. The Bank reviews each problem loan separately when determining
specific concessions to grant. Our loan modifications have taken the form of reduction in interest
rate for a specified period, usually 12 to 24 months, extension of amortization period and/or
revision of scheduled payments. During 2011, management has identified problem loans that have not
improved sufficiently to warrant further concessions and take appropriate actions to liquidate
these loans.
TDRs at June 30, 2011 totaled approximately $75,688,000 which is 95.6% of total impaired
loans. The TDRs related primarily to construction and development loans totaling approximately
$31,090,000, or 39.3% of impaired loans, 1-4 family residential loans totaling approximately
$20,273,000, or 25.6% of impaired loans and commercial real estate loans totaling approximately
$24,304,000, or 30.7% of impaired loans. The Banks TDRs are due to lack of real estate sales and
weak or insufficient cash flows of the guarantors of the loans due to the current economic climate.
The majority of the TDRs are for a limited term, in most instances, of one to two years.
The Banks allowance for loan losses as a percentage of total loans at June 30, 2011 and
December 31, 2010 was as follows:
Allowance for | Total | % of total | ||||||||||
loan losses | loans | loans | ||||||||||
($ in thousands) | ||||||||||||
As of: |
||||||||||||
June 30, 2011 |
$ | 14,190 | $ | 344,623 | 4.12 | % | ||||||
December 31, 2010 |
10,942 | 374,355 | 2.92 | % |
Our allowance for loan losses increased approximately $3,248,000 during the first six months
of 2011 since provision for loan losses exceeded net charge-offs. The allowance for loan losses as a
percentage of total loans and non-accrual loans at June 30, 2011 was 4.12% and 32.13%,
respectively, compared to 2.92% and 20.64%, respectively, at December 31, 2010. The allowance for
loan losses attributable to loans collectively evaluated for impairment, also identified as the
general component and described in more detail in the following paragraph, increased 197 basis
points during the first six months of 2011 from 2.21% at December 31, 2010, to 4.18% at June 30,
2011. Management continues to evaluate and adjust our allowance for loan losses, and presently
believes the allowance for loan losses is adequate to provide for probable losses inherent in the
loan portfolio. Management believes the loans, including those loans that were delinquent at June
30, 2011, that will result in additional charge-offs have been identified and adequate provision
has been made in the allowance for loan loss balance. No assurance can
be given, however, that adverse economic circumstances, declines in real estate values or other
events or changes in borrowers financial conditions, particularly borrowers in the real estate
construction and development business, will not result in increased losses in the Banks loan
portfolio or in the need for increases in the allowance for loan losses through additional
provision expense in future periods.
Within the allowance, there are specific and general loss components as disclosed in more
detail under Note 5. Loans and Allowance for Loan Losses. The specific loss component is assessed
for non-homogeneous loans that management believes to be impaired. Loans are considered to be
impaired when it is determined that the obligor will not pay all contractual principal and interest
due. For loans determined to be impaired, the loans carrying value is compared to its fair value
using one of the following fair value measurement techniques: present value of expected future cash
flows, observable market price, or fair value of the associated collateral less costs to sell. An
allowance is established when the fair value is lower than the carrying value of that loan. The
general component covers non-classified and classified non-impaired loans and is based on a five
year loss migration analysis, updated quarterly, that tracks the five year historic progression of
loans through the risk grade categories and indicates estimated loss ratios based on the Banks
loan risk grading system for real estate and commercial and industrial loans. The loan categories
comprise approximately 98.5% and 98.6% of loans at June 30, 2011 and December 31, 2010,
respectively, and are segregated by Call Report classification and/or risk grade and are adjusted
for certain environmental factors management believes to be relevant. The estimated loss ratio,
weighted heavily for the most recent two years, is applied against each segregated classification.
Consumer loans, which comprise approximately 1.5% and 1.4% of loans at June 30, 2011 and December
31, 2011, respectively, have an allowance established for non-classified and classified
non-impaired loans based upon a five calendar year plus current year to date historical loss
factor. This loss factor, also adjusted for certain environmental factors, is applied against the
segregated categories that are determined by product type.
39
Table of Contents
Past Due Loans
The following table presents the Banks delinquent and nonaccrual loans for the periods
indicated:
Past due 30 to | Past due 90 days | |||||||||||||||||||||||
89 days and still | % of total | or more and | % of total | % of total | ||||||||||||||||||||
accruing | loans | still accruing | loans | Nonaccrual | loans | |||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
As of June 30, 2011 |
||||||||||||||||||||||||
Construction, land development
and other land loans |
$ | 185 | 0.05 | % | $ | | 0.00 | % | $ | 22,506 | 6.53 | % | ||||||||||||
Commercial real estate |
597 | 0.17 | % | 300 | 0.09 | % | 11,270 | 3.27 | % | |||||||||||||||
Consumer real estate |
1,104 | 0.32 | % | 55 | 0.02 | % | 10,357 | 3.01 | % | |||||||||||||||
Commercial loans |
49 | 0.01 | % | 196 | 0.06 | % | | 0.00 | % | |||||||||||||||
Consumer loans |
26 | 0.01 | % | | 0.00 | % | 25 | 0.01 | % | |||||||||||||||
Total |
$ | 1,961 | 0.57 | % | $ | 551 | 0.16 | % | $ | 44,158 | 12.81 | % | ||||||||||||
As of December 31, 2010 |
||||||||||||||||||||||||
Construction, land development
and other land loans |
$ | 265 | 0.07 | % | $ | | 0.00 | % | $ | 27,929 | 7.46 | % | ||||||||||||
Commercial real estate |
541 | 0.14 | % | 413 | 0.11 | % | 6,362 | 1.70 | % | |||||||||||||||
Consumer real estate |
1,130 | 0.30 | % | | 0.00 | % | 18,647 | 4.98 | % | |||||||||||||||
Commercial loans |
| 0.00 | % | | 0.00 | % | 67 | 0.02 | % | |||||||||||||||
Consumer loans |
68 | 0.02 | % | 19 | 0.01 | % | | 0.00 | % | |||||||||||||||
Total |
$ | 2,004 | 0.54 | % | $ | 432 | 0.12 | % | $ | 53,005 | 14.16 | % | ||||||||||||
Delinquent and nonaccrual loans at both June 30, 2011 and December 31, 2010 consisted
primarily of construction and land development loans and commercial and consumer real estate loans.
The Banks delinquent loan balances tend to fluctuate relative to, among other things, the
seasonality and performance of the tourism industry in our market area. The balance of delinquent
loans was largely unchanged from December 31, 2010 to June 30, 2011. The decrease in nonaccrual
loans was primarily the result of increased charge-offs related to our strategy change to more
aggressively dispose of certain nonperforming assets. There continues to be stress in the local
real estate market as discussed in more detail below. Certain nonaccrual loans are carried on a
cash basis nonaccrual status until an acceptable payment history can be established to support
placing the loan back on accrual. During this time, the loans continue to be reported as
non-performing assets while payments are being collected.
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Table of Contents
Notwithstanding the general favorable trends in tourism in Sevier County, residential and
commercial real estate sales continued to be weak during first six months of 2011, following the
same pattern that began during the second half of 2008 and continued throughout 2009 and 2010. The reduced
sales have negatively impacted past due, nonaccrual and charged-off loans. Price declines from 2009
to the present have had an adverse impact on overall real estate values. These trends have had the
greatest effect on the construction and development and commercial real estate portfolios resulting
in the significant increase in nonaccrual loans beginning in 2009 and continuing through the first
quarter of 2011. Many of the borrowers in these
categories are dependent upon real estate sales to generate the cash flows used to service their
debt. Since real estate sales have been depressed, many of these borrowers have experienced greater
difficulty meeting their obligations, and to the extent that sales remain depressed, these
borrowers may continue to have difficulty meeting their obligations.
Investment Securities
Our investment portfolio consists of U.S. Treasury securities, securities of U.S. government
agencies, mortgage-backed securities and municipal securities. The investment securities portfolio
is the second largest component of our earning assets and represented 17.0% of total assets at
quarter-end, up from 15.7% at December 31, 2010, reflecting an increase in investment securities
and a decrease in total assets during the first six months of 2011. The approximately $1 million
increase in investment securities during the six months ended June 30, 2011 was primarily
attributable to increased pledging related to the Banks secured lines of credit. As an integral
component of our asset/liability management strategy, we manage our investment securities portfolio
to maintain liquidity, balance interest rate risk and augment interest income. In addition to
meeting pledging requirements for borrowings, we also use our investment securities portfolio to
secure public deposits. The average yield on our investment securities portfolio during the first
six months of 2011 was 2.82% versus 2.12% for the first six months of 2010 reflecting a shift in
the composition of our portfolio. During the first six months of 2010, the Bank was in the process
of liquidating a significant portion of its investment securities portfolio as a result of
decreased pledging requirements related to public funds deposits. Therefore, the majority of the
segment intended for liquidation had been transferred to shorter term, lower yielding investments.
During the first six months of 2011, the Banks portfolio allocation by type of security was more
historically characteristic. Net unrealized gains (losses) on securities available for sale,
included in accumulated other comprehensive income (loss), decreased by approximately $1,522,000,
net of income taxes, during the first six months of
2011 from a net unrealized loss of approximately $1,064,000 at December 31, 2010, to a net
unrealized gain of approximately $457,000 at June 30, 2011.
41
Table of Contents
Deposits
The table below sets forth the total balances of deposits by type as of June 30, 2011 and
December 31, 2010, and the dollar and percentage change in balances over the intervening period:
June 30, | December 31, | $ | % | |||||||||||||
2011 | 2010 | change | change | |||||||||||||
(in thousands) | ||||||||||||||||
Non-interest bearing accounts |
$ | 50,658 | $ | 47,638 | $ | 3,020 | 6.34 | % | ||||||||
NOW accounts |
53,608 | 57,345 | (3,737 | ) | -6.52 | % | ||||||||||
Money market accounts |
49,966 | 49,701 | 265 | 0.53 | % | |||||||||||
Savings accounts |
23,231 | 23,734 | (503 | ) | -2.12 | % | ||||||||||
Certificates of deposit |
219,991 | 222,550 | (2,559 | ) | -1.15 | % | ||||||||||
Brokered deposits |
19,960 | 27,019 | (7,059 | ) | -26.13 | % | ||||||||||
Individual retirement accounts |
20,482 | 21,604 | (1,122 | ) | -5.19 | % | ||||||||||
TOTAL DEPOSITS |
$ | 437,896 | $ | 449,591 | $ | (11,695 | ) | -2.60 | % |
The balance in NOW accounts primarily consists of public funds deposits that are
generally obtained through a bidding process under varying terms.
The decrease in certificates of deposit was the result of seasonal reductions. At June 30,
2011, brokered deposits represented approximately 4.6% of total deposits and management intends to
seek to further reduce the level of brokered deposits approximately $3 million during the remainder
of 2011 based on scheduled maturities. As a result of the Banks losses in the second quarter
of 2011, it is now considered undercapitalized under applicable prompt corrective
action regulations, and, as a result, the Bank may not
accept, renew or roll over brokered deposits. As of June 30,
2011, brokered deposits maturing in the next 24 months totaled approximately $16.7 million. Funding
sources for the maturing brokered deposits include, among other sources: our cash account at the
Federal Reserve Bank of Atlanta; growth, if any, of core deposits from current and new retail and
commercial customers; scheduled repayments on existing loans; and the possible pledge or sale of
investment securities.
Because the Bank
is undercapitalized, it is also not permitted to pay interest on deposits at rates that are more than 75
basis points above the rate applicable to the applicable market of the Bank as determined by the
FDIC. These interest rate limitations may limit the ability of the Bank to increase or maintain
core deposits from current and new deposit customers.
The total average cost of interest-bearing deposits (including demand, savings and certificate
of deposit accounts) for the six-month period ended June 30, 2011 was 1.47%, down from 1.81% for
the same period a year ago primarily reflecting the continued downward repricing of the Banks time
deposits as they mature and are renewed at current market rates. Additionally, the average cost of
interest bearing demand and savings deposits decreased due to rate reductions. Competitive
pressures in our markets, however, have limited, and are likely to continue to limit, our ability
to realize the full effect of the ongoing low interest rate environment.
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Table of Contents
Funding Resources, Capital Adequacy and Liquidity
Our funding sources primarily include deposits and repurchase accounts. The Bank, being
situated in a market area that relies on tourism as its principal industry, can be subject to
periods of reduced deposit funding because tourism in Sevier County and Blount County is seasonably
slower in the winter months. The Bank manages seasonal deposit outflows through its secured and
unsecured Federal Funds lines of credit at several correspondent banks. Available lines totaled $33
million with $12.5 million secured and accessible as of June 30, 2011, and are available on one
days notice. The Bank also has a cash management line of credit in the amount of $100 million from
the FHLB as well as a line of credit from the Federal Reserve Discount Window that totaled
approximately $15 million at June 30, 2011, none of which was borrowed as of that date. The
borrowing capacity can be increased based on the amount of collateral pledged.
Capital adequacy is important to the Banks continued financial safety and soundness and
growth. Our banking regulators have adopted risk-based capital and leverage guidelines to measure
the capital adequacy of national banks. In addition, the Companys and the Banks regulators may
impose additional capital requirements on financial institutions and their bank subsidiaries, like
the Company and the Bank, beyond those provided for statutorily, which standards may be in addition
to, and require higher levels of capital, than the general capital adequacy guidelines. As
discussed below, the Bank is currently required by the OCC to maintain a Tier 1 leverage capital ratio of 9% and a total risk-based capital ratio of 13% and has failed to satisfy
this requirement, as well as the requirements for being considered adequately capitalized,
as of June 30, 2011.
Following passage of the Dodd Frank Wall Street Reform and Consumer Protection Act (the
Reform Act), the Federal Reserve Board is required to adopt regulations requiring
bank holding companies like the Company to be subject to capital requirements that
are at least as severe as those imposed on banks under current federal regulations. Trust preferred
and cumulative preferred securities will no longer be deemed Tier 1 capital for bank holding
companies with
over $10 billion in total assets at December 31, 2009 following passage of the Reform Act, but
trust preferred securities issued by bank holding companies with under $10 billion in total assets
at December 31, 2009 will be grandfathered in and continue to count as Tier 1 capital, subject to
limitation based on a percentage of core capital. Accordingly, the Companys trust preferred
securities will continue to count as Tier 1 capital. Since regulations implementing the statutory
minimum capital requirements for bank holding companies have not yet been promulgated, the
Company is not yet subject to such requirements.
The table below
sets forth the Companys capital ratios as of the periods indicated along with the anticipated
requirement once implementing regulations are adopted.
June 30, 2011 |
December
31, 2010 |
|||||||
Tier 1 Risk-Based Capital |
4.02 | % | 11.87 | % | ||||
Anticipated Regulatory Minimum |
4.00 | % | 4.00 | % | ||||
Total Risk-Based Capital |
7.31 | % | 13.27 | % | ||||
Anticipated Regulatory Minimum |
8.00 | % | 8.00 | % | ||||
Tier 1 Leverage |
2.89 | % | 8.34 | % | ||||
Anticipated Regulatory Minimum |
4.00 | % | 4.00 | % |
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Table of Contents
The table below sets forth the Banks capital ratios as of the periods indicated.
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Tier 1 Risk-Based Capital |
6.41 | % | 11.97 | % | ||||
Regulatory Minimum |
4.00 | % | 4.00 | % | ||||
Well-capitalized minimum |
6.00 | % | 6.00 | % | ||||
Total Risk-Based Capital |
7.69 | % | 13.23 | % | ||||
Regulatory Minimum |
8.00 | % | 8.00 | % | ||||
Well-capitalized minimum |
10.00 | % | 10.00 | % | ||||
Level required by OCC (see below) |
13.00 | % | 13.00 | % | ||||
Tier 1 Leverage |
4.61 | % | 8.41 | % | ||||
Regulatory Minimum |
4.00 | % | 4.00 | % | ||||
Well-capitalized minimum |
5.00 | % | 5.00 | % | ||||
Level required by OCC (see below) |
9.00 | % | 9.00 | % |
In February 2010, the Bank agreed to an OCC requirement to maintain a minimum Tier 1
capital to average assets ratio of 9% and a minimum total capital to risk-weighted assets ratio of
13%. As noted above, the Bank had 4.61% of Tier 1 capital to average assets and 7.69% of total
capital to risk-weighted assets at June 30, 2011 and thus was not in compliance with such
requirements. The Banks Tier 1 capital at June 30, 2011 was approximately $23,374,000 below the
amount needed to meet the agreed-upon Tier 1 capital to average assets ratio of 9%. The Banks
total risk-based capital at June 30, 2011 was approximately $20,342,000 below the amount needed to
meet the agreed-upon total capital to risk-weighted assets ratio of 13%. As a result of its
non-compliance with these requirements, the OCC may bring further enforcement actions, including a
consent order, against the Bank. Under the OCCs prompt corrective action regulations,
because it is undercapitalized, the Bank is required to file a capital restoration
plan with the OCC before September 15, 2011, and is subject to certain other restrictions
restricting payment of capital distributions or management fees, restricting asset growth
and requiring prior approval of asset expansion proposals. The capital restoration plan is
required to specify the steps the Bank will take to become adequately capitalized, the
levels of capital to be attained each year the plan is in effect, the steps the Bank will take
to comply with the growth and other restrictions applicable to it and the types and levels of
activities it will engage in. Due to the change in the strategic plan involving liquidation of certain impaired
loans and the write-down of the ORE balance during the second quarter, a significant net loss was
recorded. This net loss also included an increase to the Banks and the Companys
deferred tax asset valuation allowance. Also, there was a reduction of the amount of Trust Preferred Securities allowed to be included in
the Companys Tier 1 leverage and Total Risk-Based capital balances that resulted in both the Tier
1 Leverage and Total Risk-Based capital ratios falling below the regulatory minimum ratios for the
Company to be deemed adequately capitalized under anticipated capital
adequacy regulations. These items were the primary causes of the reduction in both the Banks
and the Companys capital and regulatory capital ratios. The Company is actively exploring other
potential transactions to raise capital at the holding company that could provide additional
capital for the Bank. In view of the current levels of problem assets, the continuing depressed economy, the restrictions
on origination of commercial and nonresidential loans contained in the formal written agreement, the longer periods of
time necessary to workout problem assets in the current economy and uncertainty surrounding the
Banks future ability to pay dividends to the Company, the Board of Directors and
management are exploring additional sources of capital and funding to support its working capital
needs. In the current economic environment, however, there can be no assurance that it will be
able to do so or, if it can, what the cost of doing so will be.
The Banks total risk-based capital to
risk-weighted assets ratio of 7.69% requires an increase of risk-based capital of approximately
$1,175,000 to achieve the 8.00% ratio for the Bank to return to the adequately capitalized
minimum under capital adequacy regulations.
Liquidity is the ability of a company to convert assets into cash or cash equivalents without
significant loss. Our liquidity management involves maintaining our ability to meet the day-to-day
cash flow requirements of our customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity management, we would
not be able to perform the primary function of a financial intermediary and would, therefore, not
be able to meet the production and growth needs of the communities we serve.
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Table of Contents
The Companys primary source of liquidity is dividends paid to it by the Bank and cash that
has not been injected into the Bank. The Bank is required by federal law to obtain the prior
approval of the OCC for payments of dividends if the total of all dividends declared by its board
of directors in any year will exceed (1) the total of its net profits for that year, plus (2) its
retained net profits of the preceding two years, less any required transfers to surplus. Given the
losses experienced by the Bank during 2009 and 2010, the Bank may not, without the prior approval
of the OCC, pay any dividends to the Company until such time that current year profits exceed the
net losses and dividends of the prior two years. Generally, federal regulatory policy discourages
payment of holding company or bank dividends if the holding company or its subsidiaries are
experiencing losses. Accordingly, until such time as it may receive dividends from the Bank, the
Company must service its interest payment on its subordinated indebtedness from its available cash
balances, if any.
On December 14, 2010, the Company exercised its rights to defer regularly scheduled interest
payments on all of its issues of junior subordinated debentures relating to outstanding trust
preferred securities. Management cannot currently project the length of time it will be necessary
to extend the deferral of these payments and therefore anticipates deferring payment indefinitely.
The regular scheduled interest payments will continue to be accrued for payment in the future and
reported as an expense for financial statement purposes. At June 30, 2011, total interest accrued
for these deferred payments was approximately $255,000.
Supervisory guidance from the Federal Reserve Board indicates that bank holding companies that
are experiencing financial difficulties generally should eliminate, reduce or defer dividends on
Tier 1 capital instruments including trust preferred securities, preferred stock or common stock,
if the holding company needs to conserve capital for safe and sound operation and to serve as a
source of strength to its
subsidiaries. The Company has informally committed to the Federal Reserve Board that it will
not (1) declare or pay dividends on the Companys common or preferred stock, or (2) incur any
additional indebtedness without in each case, the prior written approval of the Federal Reserve
Board.
The primary function of asset and liability management is not only to assure adequate
liquidity in order for us to meet the needs of our customer base, but also to maintain an
appropriate balance between interest-sensitive assets and interest-sensitive liabilities so that we
can also meet the investment objectives of our shareholders. Daily monitoring of the sources and
uses of funds is necessary to maintain an acceptable cash position that meets both the needs of our
customers and the objectives of our shareholders. In a banking environment, both assets and
liabilities are considered sources of liquidity funding and both are therefore monitored on a daily
basis.
Off-Balance Sheet Arrangements
Our only material off-balance sheet arrangements consist of commitments to extend credit and
standby letters of credit issued in the ordinary course of business to facilitate customers
funding needs or risk management objectives.
Commitments and Lines of Credit
In the ordinary course of business, the Bank has granted commitments to extend credit and
standby letters of credit to approved customers. Generally, these commitments to extend credit
have been granted on a temporary basis for seasonal or inventory requirements and have been
approved by the loan committee. These commitments are recorded in the financial statements as they
are funded. Commitments generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitment amounts expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash requirements.
45
Table of Contents
Following is a summary of the commitments outstanding at June 30, 2011 and December 31, 2010.
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(in thousands) | ||||||||
Commitments to extend credit |
$ | 37,314 | $ | 41,155 | ||||
Standby letters of credit |
6,363 | 5,288 | ||||||
TOTALS |
$ | 43,677 | $ | 46,443 |
Commitments to extend credit include unused commitments for open-end lines secured by 1-4
family residential properties, commitments to fund loans secured by commercial real estate,
construction loans, land development loans, and other unused commitments. Commitments to fund
commercial real estate, construction, and land development loans increased by approximately
$336,000 to approximately $8,040,000 at June 30, 2011, compared to commitments of approximately
$7,704,000 at December 31, 2010, however; demand for these lines of credit remains low reflecting
current economic conditions in our market.
46
Table of Contents
Income Statement Analysis
The following tables set forth the amount of our average balances, interest income or interest
expense for each category of interest-earning assets and interest-bearing liabilities and the
average interest
rate for total interest-earning assets and total interest-bearing liabilities, net interest
spread and net interest margin for the three and six months ended June 30, 2011 and 2010 (dollars
in thousands):
Net Interest Income Analysis
For the Six Months Ended June 30, 2011 and 2010
(in thousands, except rates)
For the Six Months Ended June 30, 2011 and 2010
(in thousands, except rates)
Average Balance | Income/Expense | Yield/Rate | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 366,591 | $ | 404,411 | $ | 9,237 | $ | 10,419 | 5.08 | % | 5.20 | % | ||||||||||||
Investment Securities: |
||||||||||||||||||||||||
Available for sale |
87,508 | 139,253 | 1,170 | 1,390 | 2.70 | % | 2.01 | % | ||||||||||||||||
Held to maturity |
1,331 | 1,424 | 31 | 31 | 4.70 | % | 4.39 | % | ||||||||||||||||
Equity securities |
3,844 | 3,830 | 96 | 96 | 5.04 | % | 5.05 | % | ||||||||||||||||
Total securities |
92,683 | 144,507 | 1,297 | 1,517 | 2.82 | % | 2.12 | % | ||||||||||||||||
Federal funds sold and other |
10,582 | 19,959 | 16 | 27 | 0.30 | % | 0.27 | % | ||||||||||||||||
Total interest-earning
assets |
469,856 | 568,877 | 10,550 | 11,963 | 4.53 | % | 4.24 | % | ||||||||||||||||
Nonearning assets |
65,810 | 73,957 | ||||||||||||||||||||||
Total Assets |
$ | 535,666 | $ | 642,834 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest bearing deposits: |
||||||||||||||||||||||||
Interest bearing
demand deposits |
104,236 | 138,507 | 510 | 778 | 0.99 | % | 1.13 | % | ||||||||||||||||
Savings deposits |
23,092 | 22,300 | 83 | 136 | 0.72 | % | 1.23 | % | ||||||||||||||||
Time deposits |
258,543 | 308,669 | 2,225 | 3,294 | 1.74 | % | 2.15 | % | ||||||||||||||||
Total interest bearing deposits |
385,871 | 469,476 | 2,818 | 4,208 | 1.47 | % | 1.81 | % | ||||||||||||||||
Securities sold under agreements
to repurchase |
795 | 1,918 | 7 | 14 | 1.78 | % | 1.47 | % | ||||||||||||||||
Federal Home Loan Bank advances
and other borrowings |
55,200 | 64,990 | 1,115 | 1,291 | 4.07 | % | 4.01 | % | ||||||||||||||||
Subordinated debt |
13,403 | 13,403 | 162 | 162 | 2.44 | % | 2.44 | % | ||||||||||||||||
Total interest-bearing liabilities |
455,269 | 549,787 | 4,102 | 5,675 | 1.82 | % | 2.08 | % | ||||||||||||||||
Noninterest-bearing deposits |
45,375 | 42,897 | | | ||||||||||||||||||||
Total deposits and interest-
bearings liabilities |
500,644 | 592,684 | 4,102 | 5,675 | 1.65 | % | 1.93 | % | ||||||||||||||||
Other liabilities |
2,287 | 2,566 | ||||||||||||||||||||||
Shareholders equity |
32,735 | 47,584 | ||||||||||||||||||||||
$ | 535,666 | $ | 642,834 | |||||||||||||||||||||
Net interest income |
$ | 6,448 | $ | 6,288 | ||||||||||||||||||||
Net interest spread (1) |
2.71 | % | 2.16 | % | ||||||||||||||||||||
Net interest margin (2) |
2.77 | % | 2.23 | % |
(1) | Yields realized on interest-earning assets less the rates paid on interest-bearing liabilities. |
|
(2) | Net interest margin is the result of annualized net interest income divided by average interest-
earning assets for the period. |
47
Table of Contents
Net Interest Income Analysis
For the Three Months Ended June 30, 2011 and 2010
(in thousands, except rates)
For the Three Months Ended June 30, 2011 and 2010
(in thousands, except rates)
Average Balance | Income/Expense | Yield/Rate | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans |
$ | 361,805 | $ | 401,946 | $ | 4,628 | $ | 5,271 | 5.13 | % | 5.26 | % | ||||||||||||
Investment Securities: |
||||||||||||||||||||||||
Available for sale |
87,507 | 131,367 | 622 | 582 | 2.85 | % | 1.78 | % | ||||||||||||||||
Held to maturity |
1,339 | 1,278 | 16 | 15 | 4.79 | % | 4.71 | % | ||||||||||||||||
Equity securities |
3,846 | 3,842 | 48 | 48 | 5.01 | % | 5.01 | % | ||||||||||||||||
Total securities |
92,692 | 136,487 | 686 | 645 | 2.97 | % | 1.90 | % | ||||||||||||||||
Federal funds sold and other |
13,247 | 16,844 | 10 | 16 | 0.30 | % | 0.38 | % | ||||||||||||||||
Total interest-earning
assets |
467,744 | 555,277 | 5,324 | 5,932 | 4.57 | % | 4.28 | % | ||||||||||||||||
Nonearning assets |
65,742 | 74,870 | ||||||||||||||||||||||
Total Assets |
$ | 533,486 | $ | 630,147 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Interest bearing deposits: |
||||||||||||||||||||||||
Interest bearing
demand deposits |
102,973 | 121,475 | 248 | 332 | 0.97 | % | 1.10 | % | ||||||||||||||||
Savings deposits |
23,032 | 22,594 | 41 | 63 | 0.71 | % | 1.12 | % | ||||||||||||||||
Time deposits |
259,072 | 308,885 | 1,076 | 1,634 | 1.67 | % | 2.12 | % | ||||||||||||||||
Total interest bearing deposits |
385,077 | 452,954 | 1,365 | 2,029 | 1.42 | % | 1.80 | % | ||||||||||||||||
Securities sold under agreements
to repurchase |
966 | 2,262 | 4 | 8 | 1.66 | % | 1.42 | % | ||||||||||||||||
Federal Home Loan Bank advances
and other borrowings |
55,200 | 67,056 | 561 | 652 | 4.08 | % | 3.90 | % | ||||||||||||||||
Subordinated debt |
13,403 | 13,403 | 85 | 82 | 2.54 | % | 2.45 | % | ||||||||||||||||
Total interest-bearing liabilities |
454,646 | 535,675 | 2,015 | 2,771 | 1.78 | % | 2.07 | % | ||||||||||||||||
Noninterest-bearing deposits |
46,043 | 43,336 | | | ||||||||||||||||||||
Total deposits and interest-
bearings liabilities |
500,689 | 579,011 | 2,015 | 2,771 | 1.61 | % | 1.92 | % | ||||||||||||||||
Other liabilities |
2,159 | 3,472 | ||||||||||||||||||||||
Shareholders equity |
30,638 | 47,664 | ||||||||||||||||||||||
$ | 533,486 | $ | 630,147 | |||||||||||||||||||||
Net interest income |
$ | 3,309 | $ | 3,161 | ||||||||||||||||||||
Net interest spread (1) |
2.79 | % | 2.21 | % | ||||||||||||||||||||
Net interest margin (2) |
2.84 | % | 2.28 | % |
(1) | Yields realized on interest-earning assets less the rates paid on interest-bearing liabilities. |
|
(2) | Net interest margin is the result of annualized net interest income divided by average interest-earning assets for the period. |
48
Table of Contents
The following tables set forth the extent to which changes in interest rates and changes in
volume of interest-earning assets and interest-bearing liabilities have affected our interest
income and interest expense during the periods indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes attributable to (1)
change in volume (change in volume multiplied by previous year rate); (2) change in rate (change in
rate multiplied by current year volume); and (3) a combination of change in rate and change in
volume. The changes in interest income and interest expense attributable to both volume and rate
have been allocated proportionately to the change due to volume and the change due to rate.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
2011 Compared to 2010 | ||||||||||||
Increase (decrease) | ||||||||||||
due to change in | ||||||||||||
Rate | Volume | Total | ||||||||||
(dollars in thousands) | ||||||||||||
Six months ended June 30, 2011 and 2010 |
||||||||||||
Income from interest-earning assets: |
||||||||||||
Interest and fees on loans |
$ | (216 | ) | $ | (966 | ) | $ | (1,182 | ) | |||
Interest on securities |
323 | (543 | ) | (220 | ) | |||||||
Interest on Federal funds sold and other |
2 | (13 | ) | (11 | ) | |||||||
Total interest income |
109 | (1,522 | ) | (1,413 | ) | |||||||
Expense from interest-bearing liabilities: |
||||||||||||
Interest on interest-bearing deposits |
(131 | ) | (190 | ) | (321 | ) | ||||||
Interest on time deposits |
(530 | ) | (539 | ) | (1,069 | ) | ||||||
Interest on other borrowings |
16 | (199 | ) | (183 | ) | |||||||
Total interest expense |
(645 | ) | (928 | ) | (1,573 | ) | ||||||
Net interest income |
$ | 754 | $ | (594 | ) | $ | 160 | |||||
Three months ended June 30, 2011 and 2010 |
||||||||||||
Income from interest-earning assets: |
||||||||||||
Interest and fees on loans |
$ | (117 | ) | $ | (526 | ) | $ | (643 | ) | |||
Interest on securities |
248 | (207 | ) | 41 | ||||||||
Interest on Federal funds sold and other |
(3 | ) | (3 | ) | (6 | ) | ||||||
Total interest income |
128 | (736 | ) | (608 | ) | |||||||
Expense from interest-bearing liabilities: |
||||||||||||
Interest on interest-bearing deposits |
(56 | ) | (50 | ) | (106 | ) | ||||||
Interest on time deposits |
(293 | ) | (265 | ) | (558 | ) | ||||||
Interest on other borrowings |
26 | (118 | ) | (92 | ) | |||||||
Total interest expense |
(323 | ) | (433 | ) | (756 | ) | ||||||
Net interest income |
$ | 451 | $ | (303 | ) | $ | 148 |
49
Table of Contents
The following is a summary of our results of operations (dollars in thousands except per share
amounts):
Six months ended | Three months ended | |||||||||||||||||||||||||||||||
6/30/11 | 6/30/10 | $ change | % change | 6/30/11 | 6/30/10 | $ change | % change | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Interest income: |
||||||||||||||||||||||||||||||||
Loans |
$ | 9,237 | $ | 10,419 | (1,182 | ) | -11.34 | % | $ | 4,628 | $ | 5,271 | (643 | ) | -12.20 | % | ||||||||||||||||
Securities |
1,297 | 1,517 | (220 | ) | -14.50 | % | 686 | 644 | 42 | 6.52 | % | |||||||||||||||||||||
Fed funds sold/other |
16 | 27 | (11 | ) | -40.74 | % | 10 | 17 | (7 | ) | -41.18 | % | ||||||||||||||||||||
Total Interest income |
10,550 | 11,963 | (1,413 | ) | -11.81 | % | 5,324 | 5,932 | (608 | ) | -10.25 | % | ||||||||||||||||||||
Interest Expense: |
||||||||||||||||||||||||||||||||
Deposits |
2,818 | 4,208 | (1,390 | ) | -33.03 | % | 1,365 | 2,029 | (664 | ) | -32.73 | % | ||||||||||||||||||||
Other borrowed funds |
1,284 | 1,467 | (183 | ) | -12.47 | % | 650 | 742 | (92 | ) | -12.40 | % | ||||||||||||||||||||
Total interest expense |
4,102 | 5,675 | (1,573 | ) | -27.72 | % | 2,015 | 2,771 | (756 | ) | -27.28 | % | ||||||||||||||||||||
Net interest income |
6,448 | 6,288 | 160 | 2.54 | % | 3,309 | 3,161 | 148 | 4.68 | % | ||||||||||||||||||||||
Provision for loan losses |
20,363 | 547 | 19,816 | 3622.67 | % | 17,363 | 334 | 17,029 | 5098.50 | % | ||||||||||||||||||||||
Net interest income after
provision for loan losses |
(13,915 | ) | 5,741 | (19,656 | ) | -342.38 | % | (14,054 | ) | 2,827 | (16,881 | ) | -597.13 | % | ||||||||||||||||||
Noninterest income |
(2,812 | ) | 3,454 | (6,266 | ) | -181.41 | % | (3,699 | ) | 1,478 | (5,177 | ) | -350.27 | % | ||||||||||||||||||
Noninterest expense |
9,026 | 8,840 | 186 | 2.10 | % | 4,720 | 4,257 | 463 | 10.88 | % | ||||||||||||||||||||||
Net income (loss) before
income tax benefit |
(25,753 | ) | 355 | (26,108 | ) | -7354.37 | % | (22,473 | ) | 48 | (22,521 | ) | -46918.75 | % | ||||||||||||||||||
Income tax benefit |
(519 | ) | (116 | ) | (403 | ) | -347.41 | % | (618 | ) | (94 | ) | (524 | ) | -557.45 | % | ||||||||||||||||
Net income (loss) |
$ | (25,234 | ) | $ | 471 | $ | (25,705 | ) | -5457.54 | % | $ | (21,855 | ) | $ | 142 | $ | (21,997 | ) | -15490.85 | % | ||||||||||||
Net Interest Income and Net Interest Margin
Interest Income
The interest income and fees earned on loans are the largest contributing element of interest
income. The decrease in this component of interest income for the six months ended June 30, 2011 as
compared to the same period in 2010 was primarily the result of a decrease in the volume of average
loans as well as a decrease in the average rate earned on loans. Average loans outstanding
decreased approximately $37,820,000, or 9.4%, from June 30, 2010 to June 30, 2011. The decrease in
the average yield on loans was the result of several factors including the increase in TDRs
involving interest rate concessions and the continued significant level of average non-accrual
loans as a percentage of our loan portfolio, as presented in more detail below under Net Interest
Margin. Interest income on securities decreased during the six-month period ended June 30, 2011 as
compared to the same period in 2010 due to the approximately $51,824,000, or 35.9%, decrease in the
volume of average securities from June 30, 2010 to June 30, 2011. Partially offsetting the
reduction in volume, the yield earned on securities increased 70 basis points during the first six
months of 2011 as compared to the same period in 2010 reflecting a redistribution of the portfolio
from lower to higher yielding investments at June 30, 2011 when compared to June 30, 2010.
Additionally, interest income on federal funds sold/other decreased due to a decrease in the
average balance outstanding.
Interest income decreased for the three-month period ended June 30, 2011 as compared to the
three-month period ended June 30, 2010 as a result of the same factors mentioned in the above
paragraph. However, the 107 basis point increase in the yield earned on investment securities
during the second quarter of 2011 when compared to the second quarter of 2010 caused an increase in
interest income despite the approximately $43,795,000, or 32.1%, decrease in the average volume of
securities outstanding for the periods compared.
50
Table of Contents
Interest Expense
The decrease in interest expense for the six months ended June 30, 2011 as compared to the
same period in 2010 was attributable to the reduction in both the volume and the average cost of
the Banks interest-bearing liabilities, predominantly the volume and cost of time and interest
bearing demand deposits. The average balance of total interest bearing deposits, the largest
component of interest-bearing liabilities, decreased approximately $83,605,000, or 17.8%, for the
first six months of 2011 compared to the first six months of 2010. Additionally, the average rate
paid on total interest bearing deposits decreased 34 basis points between the two periods
contributing to the net decrease in deposit interest expense. Interest expense on FHLB advances and
other borrowings decreased during the six-month period ended June 30, 2011 compared to the same
period in 2010 due to a decrease in the average borrowed funds balance of approximately $9,790,000,
or 15.1%, during the periods compared. The average rate paid on these liabilities increased 6 basis
points, slightly offsetting the reduction in interest expense. During the first six months of 2010,
we had, from time to time, borrowings outstanding from the Federal Reserve Discount Window. These
borrowings generally cost less than our outstanding FHLB advances, consequently reducing the
average cost of this category during the first six months of 2010 as compared to the same period in
2011. The average balance and cost of subordinated debentures did not change from June 30, 2010 to
June 30, 2011. Therefore, the related interest expense was unchanged for the periods compared.
Interest bearing deposits consist of interest bearing demand deposits, savings and time
deposits. As stated above, the cost of our interest bearing deposits decreased for the first six
months of 2011 compared to the first six months of 2010. The largest factor contributing to the
overall reduction in expense was a reduction in the average balance of time deposits from the first
six months of 2010 to the first six months of 2011 of approximately $50,126,000, or 16.2%, followed
by a reduction in the average rate paid on these time deposits of 41 basis points between the
periods compared. Additionally, the average balance of interest bearing demand deposits decreased
approximately $34,271,000, or 24.7%, during the first six months of 2011 when compared to the first
six months of 2010, primarily due to a decrease in average public funds deposits resulting from
managements 2009 strategic initiative that involved not bidding to retain the deposits of certain
municipal entities. The rate paid on these deposits decreased 14 basis points during the same time
period.
Interest expense decreased for the three-month period ended June 30, 2011 as compared to the
three-month period ended June 30, 2010 as a result of the same factors mentioned in the above
paragraph.
Net Interest Income
The increase in net interest income before the provision for loan losses for the three- and
six-month periods ended June 30, 2011 when compared to the same periods in 2010 was primarily the
result of the decrease in interest expense on deposits and FHLB advances. Decreases in interest
income, mostly related to loans, largely offset the decreased interest expenses. Net interest
income for the two periods was also influenced by decreases in the volume of interest-earning
assets and interest-bearing liabilities as well as decreases in rates earned and paid on these
interest-sensitive balances.
Net Interest Margin
Our net interest margin, the difference between the yield on earning assets, including loan
fees, and the rate paid on funds to support those assets, increased 56 and 54 basis points,
respectively, for the second quarter and first six months of 2011 compared to the same periods in
2010. The increase in our net interest margin reflects an increase in the average spread during the
first six months of 2011 between the rates we earned on our interest-earning assets, which had an
increase in overall yield of 29 basis points to 4.53% at June 30, 2011, as compared to 4.24% at
June 30, 2010, and the rates we paid on interest-bearing liabilities, which had a decrease of 26
basis points in the overall rate to 1.82% at June 30, 2011, versus 2.08% at June 30, 2010. During
the second quarter of 2011, our interest-earning assets had an increase in overall yield of 29
basis points to 4.57% at June 30, 2011, as compared to 4.28% at June 30, 2010, while our
interest-bearing liabilities had a decrease of 29 basis points in the overall rate to 1.78% at June
30, 2011, versus 2.07% at June 30, 2010.
51
Table of Contents
Our net interest margin continues to be negatively impacted by the high level of nonaccrual
loans as well as TDRs involving interest rate concessions. The following table presents the average
balances and net changes for loans, nonaccrual loans and TDRs, as well as the ratio of nonaccrual
loans and TDRs to total loans for the three and six months ended June 30, 2011 and 2010.
6/30/11 | 6/30/10 | $ change | % change | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Six months ended |
||||||||||||||||
Average loans |
366,591 | 404,411 | (37,820 | ) | -9.35 | % | ||||||||||
Average nonaccrual loans |
51,992 | 55,598 | (3,606 | ) | -6.49 | % | ||||||||||
Average TDRs |
76,486 | 52,094 | 24,392 | 46.82 | % | |||||||||||
Average nonaccrual
loans / average loans |
14.2 | % | 13.7 | % | ||||||||||||
Average TDRs
/ average loans |
20.9 | % | 12.9 | % | ||||||||||||
Three months ended |
||||||||||||||||
Average loans |
361,805 | 401,946 | (40,141 | ) | -9.99 | % | ||||||||||
Average nonaccrual loans |
49,906 | 59,587 | (9,681 | ) | -16.25 | % | ||||||||||
Average TDRs |
78,955 | 59,526 | 19,429 | 32.64 | % | |||||||||||
Average nonaccrual
loans / average loans |
13.8 | % | 14.8 | % | ||||||||||||
Average TDRs
/ average loans |
21.8 | % | 14.8 | % |
The net interest margin was positively affected by an increase in the average balance of
noninterest-bearing deposits of approximately $2,707,000, or 6.2%, from the second quarter of 2010
to the second quarter of 2011. The average balance of noninterest-bearing deposits increased
approximately $2,478,000, or 5.8%, during the first six months of 2011 when compared to the same
period in 2010. The effects of these changes will continue as long as and to the extent that the
average balances of nonaccrual loans, TDRs and noninterest-bearing deposits remain elevated.
Provision For Loan Losses
The provision for loan losses represents a charge to earnings necessary to establish an
allowance
for loan losses and is based on managements evaluation of economic conditions, volume and
composition of the loan portfolio, historical charge-off experience, the level of non-performing
and past due loans, and other indicators derived from reviewing the loan portfolio. Management
performs such reviews quarterly and makes appropriate adjustments to the level of the allowance for
loan losses as a result of these reviews.
52
Table of Contents
As mentioned above in the section titled Allowance for Loan Losses, management determines the
necessary amount, if any, to increase the allowance account through the provision for loan losses.
Although total loans decreased approximately $30 million during the first six months of 2011, the
increased level of provision for loan loss expense during the second quarter and first six months
of 2011 was due to increased charge-offs, the majority of which were associated with our amended
strategy to aggressively liquidate certain nonperforming assets. The resulting recorded values
reflect continued deterioration in the real estate segment of the Companys loan portfolio,
particularly construction and land development, as well as the persistently slow economic
conditions. Continuing reductions in property values and the reduced volume of sales of developed
and undeveloped land has led to an increase of impaired loans determined to be collateral
dependent. As the collateral value for these land loans has declined significantly during 2010 and
into 2011, related charge-offs and provision expense have been incurred. Notwithstanding the
assessments made as part of our liquidation strategy, management has continued its ongoing review
of the loan portfolio with particular emphasis on construction and land development loans and while
we believe we have identified and adequately provided for losses present in the loan portfolio, due
to the necessarily approximate and imprecise nature of the allowance for loan loss estimate,
certain projected scenarios may not occur as anticipated. Additionally, further deterioration of
factors relating to the loan portfolio, such as conditions in the local and national economy and
the local real estate market, could have an added adverse impact and require additional provision
expense and higher allowance levels.
The following table summarizes our loan loss experience and provision for loan losses for the
three and six months ended June 30, 2011 and 2010.
Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Charge-offs: |
||||||||||||||||
Construction and land development |
$ | 7,620 | $ | 517 | $ | 6,781 | $ | 227 | ||||||||
Equity Lines of Credit |
252 | 81 | 243 | 27 | ||||||||||||
Residential 1-4 family |
6,809 | 221 | 4,020 | 108 | ||||||||||||
Second mortgages |
594 | | 568 | | ||||||||||||
Residential multifamily |
2 | | | | ||||||||||||
Commercial real estate |
1,703 | 700 | 1,478 | 652 | ||||||||||||
Commercial loans |
81 | 211 | 81 | 211 | ||||||||||||
Consumer loans |
137 | 215 | 67 | 111 | ||||||||||||
Recoveries: |
||||||||||||||||
Construction and land development |
(17 | ) | (388 | ) | (17 | ) | (388 | ) | ||||||||
Equity Lines of Credit |
(1 | ) | (1 | ) | | | ||||||||||
Residential 1-4 family |
(3 | ) | | (3 | ) | | ||||||||||
Residential multifamily |
(2 | ) | | (2 | ) | | ||||||||||
Commercial real estate |
(49 | ) | | (1 | ) | | ||||||||||
Consumer loans |
(10 | ) | (30 | ) | (4 | ) | (12 | ) | ||||||||
Net charge-offs |
17,116 | 1,526 | 13,211 | 936 | ||||||||||||
Average balance of loans outstanding |
366,591 | 404,411 | 361,805 | 401,946 | ||||||||||||
Annualized net charge-offs as % of
average loans |
9.42 | % | 0.76 | % | 14.65 | % | 0.93 | % | ||||||||
Provision for loan losses |
20,363 | 547 | 17,363 | 334 |
As noted in the table above, the majority of net charge-offs during the second quarter
and first six months of 2011 were related to construction and land development loans followed by
residential 1-4 family real estate loans. As discussed above, the large volume of charge-offs are
the result of managements initiative to begin clearing up certain non-performing assets more
expeditiously than was previously anticipated.
53
Table of Contents
Non-Interest Income
Non-interest income represents the total of all sources of income, other than interest-related
income, which are derived from various service charges, fees and commissions charged for bank
services. The decrease in non-interest income for the three and six months ended June 30, 2011, was primarily
attributable to the net loss on ORE. During the second quarter of 2011, in an effort to liquidate
certain nonperforming assets, management enacted a strategy that involved recording a significant
valuation allowance against its ORE portfolio as discussed under Loans. The approximately $4.6
million valuation allowance was primarily recognized as a loss on ORE. Non-interest income
decreased for the six months ended June 30, 2011 due to investment gains recognized during the
first quarter of 2010, related to managements strategy to manage liquidity and pledging
requirements discussed in more detail above under Investment Securities. Investment gains were a
less significant part of non-interest income for the six months ended June 30, 2011. The decrease
in non-interest income for the three and six month periods ended June 30, 2011 was also affected by
a reduction in deposit service charges, primarily non-sufficient fee income from overdrafts of
demand deposit accounts, as well as a decrease in other noninterest income which was largely the
result of a decrease in income generated by the Banks investment in Appalachian Fund for Growth
II, LLC.
The following table presents the main components that make up the changes in non-interest
income:
Six months ended | Three months ended | |||||||||||||||||||||||||||||||
6/30/11 | 6/30/10 | $ change | % change | 6/30/11 | 6/30/10 | $ change | % change | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Net gain (loss) on other real estate |
(4,693 | ) | 232 | (4,925 | ) | -2122.84 | % | (4,707 | ) | 193 | (4,900 | ) | -2538.86 | % | ||||||||||||||||||
Investment gains and losses, net |
$ | 48 | $ | 1,192 | (1,144 | ) | -95.97 | % | $ | 48 | $ | 239 | (191 | ) | -79.92 | % | ||||||||||||||||
Service charges on deposit accounts |
746 | 845 | (99 | ) | -11.72 | % | 368 | 446 | (78 | ) | -17.49 | % | ||||||||||||||||||||
Other noninterest income |
333 | 434 | (101 | ) | -23.27 | % | 191 | 221 | (30 | ) | -13.57 | % | ||||||||||||||||||||
Gain on sale of mortgage loans |
41 | 69 | (28 | ) | -40.58 | % | 18 | 24 | (6 | ) | -25.00 | % | ||||||||||||||||||||
Other fees and commissions |
714 | 682 | 32 | 4.69 | % | 383 | 356 | 27 | 7.58 | % |
Non-Interest Expense
The Companys net loss during the three and six months ended June 30, 2011 was slightly
impacted by the increase in non-interest expense. Total non-interest expense represents the total
costs of operating overhead, such as salaries, employee benefits, building and equipment costs,
telephone costs and marketing costs. The increase in non-interest expense for the three and six
months ended June 30, 2011, when compared to the same periods in 2010, was primarily the result of
an increase in FDIC assessment expense, consultant/advisory fees and legal fees. The increase in
consultant/advisory and legal fees is primarily related to the Companys ongoing pursuit of capital
development opportunities as well as compliance with the formal written agreement. The increase in
non-interest expense was positively impacted by a decrease in salary and employee benefit expenses
for the three and six months ended June 30, 2011, which is the result of several cost cutting
measures implemented during the first quarter of 2010 including staff reductions as well as
reductions in remaining employees salaries, health insurance costs, 401(k) match expenses and fees
paid to members of the board of directors, among other things. Additionally, ORE expense related to
maintenance and upkeep of our foreclosed properties decreased for the six-month period ended June
30, 2011 as compared to the first six months of 2010, but increased during the second quarter of
2011 as compared to the second quarter of 2010.
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The following table presents the main components that make up the changes in non-interest
expense:
Six months ended | Three months ended | |||||||||||||||||||||||||||||||
6/30/11 | 6/30/10 | $ change | % change | 6/30/11 | 6/30/10 | $ change | % change | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Salaries and employee benefits |
$ | 4,012 | $ | 4,431 | (419 | ) | -9.46 | % | $ | 2,016 | $ | 2,089 | (73 | ) | -3.49 | % | ||||||||||||||||
FDIC assessment expense |
796 | 612 | 184 | 30.07 | % | 444 | 299 | 145 | 48.49 | % | ||||||||||||||||||||||
Consultant/advisory fees |
286 | 101 | 185 | 183.17 | % | 173 | 65 | 108 | 166.15 | % | ||||||||||||||||||||||
Legal fees |
231 | 87 | 144 | 165.52 | % | 181 | 47 | 134 | 285.11 | % | ||||||||||||||||||||||
Other real estate expense |
315 | 328 | (13 | ) | -3.96 | % | 162 | 122 | 40 | 32.79 | % | |||||||||||||||||||||
Occupancy expenses |
903 | 867 | 36 | 4.15 | % | 449 | 419 | 30 | 7.16 | % |
Income Taxes
The Companys income tax expense (benefit) for the three and six months ended June 30, 2011
and 2010 is presented in the following table:
Provision for Income Taxes and Effective Tax Rates
(dollars in thousands)
(dollars in thousands)
Six months ended | Three months ended | |||||||||||||||
6/30/11 | 6/30/10 | 6/30/11 | 6/30/10 | |||||||||||||
Provision expense
(benefit) |
(519 | ) | (116 | ) | (618 | ) | (94 | ) | ||||||||
Pre-tax income (loss) |
(25,753 | ) | 355 | (22,473 | ) | 48 | ||||||||||
Effective tax rate |
2.02 | % | -32.68 | % | 2.75 | % | -195.83 | % |
During the second quarter and first six months of 2011, the Banks effective income tax rate
was primarily the result of increasing the deferred tax asset valuation allowance. Recording a
valuation allowance requires recognition of tax expense which, if large enough and when applied to
a pretax loss, causes a negative effective tax rate. During the three and six months ended June 30,
2011, a more
significant income tax benefit would have typically been recognized based on the Companys pre-tax
net loss. However, we recorded a deferred tax asset valuation allowance that was large enough to
offset a substantial amount of the tax benefit generated by the net loss. Additionally, tax exempt
income has the effect of increasing a taxable loss, therefore increasing effective tax rates as a
percentage of pretax income. This is the opposite effect on tax rates when a company has pretax
income. During the second quarter and first six months of 2010, the Banks tax exempt income was
enough to offset its taxable income resulting in a net tax benefit during each period and a
negative effective tax rate. Tax exempt income effectively reduces the statutory tax rate and, as
was the case for the three and six months ended June 30, 2010, can potentially reduce the rate
below zero.
For each period presented above, the effective tax rate was positively impacted by the
continuing tax benefits generated from MNB Real Estate, Inc., which is a real estate investment
trust subsidiary formed during the second quarter of 2005. The income generated from tax-exempt
municipal bonds and bank owned life insurance also continues to improve our effective tax rate.
Additionally, during 2006, the Bank became a partner in Appalachian Fund for Growth II, LLC with
three other Tennessee banking institutions. This partnership has invested in a program that is
expected to generate a federal tax credit in the amount of approximately $200,000 during 2011. The
program is also expected to generate a one-time state tax credit in the amount of $200,000 to be
utilized over a maximum of 20 years to offset state tax liabilities.
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The Company had net deferred tax assets of approximately $379,000 as of June 30, 2011. A
valuation allowance is recognized for a deferred tax asset if, based on the weight of available
evidence, it is more-likely-than-not that some portion of the entire deferred tax asset will not be
realized. In making such judgments, significant weight is given to evidence that can be objectively
verified. As a result of increased credit losses, the Company entered into a three-year cumulative
pre-tax loss position in 2010. A cumulative loss position is considered significant negative
evidence in assessing the realizability of a deferred tax asset which is difficult to overcome. The
Companys estimate of the realization of its deferred tax assets was based on future reversals of
existing taxable temporary differences and taxable income in prior carry back years. The Company
did not consider future taxable income in determining the realizability of its deferred assets.
During the second quarter and first six months of 2011, we recorded an additional valuation
allowance of approximately $8,195,000 and $9,475,000, respectively. The timing of the reversal of
the valuation allowance is dependent on our assessment of future events and will be based on the
circumstances that exist as of that future date.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures, as defined in
Rule 13a-15(e) promulgated under the Exchange Act, that are designed to ensure that
information required to be disclosed in the Companys reports and other information filed with the
Commission, under the Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the Commissions rules and forms, and that such information is accumulated and
communicated to the management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
The Company carried out an evaluation, under the supervision and with the participation of
management, including the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon the foregoing, the Chief Executive Officer along
with the Chief Financial Officer concluded that certain deficiencies identified in internal
controls and procedures created a material weakness and resulted in the Companys disclosure
controls and procedures not being effective to ensure that information required to be disclosed in
the Companys reports under the Exchange Act was recorded, summarized and reported within the time
periods specified in the Commissions rules and forms
as of the end of the period covered by this report. Based on this determination of the existence of
a material weakness, which began during the fourth quarter of 2010, management identified certain
areas requiring internal control and procedure improvements.
Changes in Internal Control over Financial Reporting
During Managements assessment of the Companys internal control over financial reporting at
December 31, 2010, the following deficiencies were noted: 1) Loans determined to be collateral
dependent were not properly identified in a timely manner which created a material internal control
deficiency. Procedures have been put in place by the Banks Special Assets Department to ensure
loans that are dependent upon the sale of the underlying collateral for repayment are properly
identified and documented when the determination is made the loan is collateral dependent and this
information is incorporated in the allowance for loan loss calculation. 2) Appraisals and appraisal
reviews from an independent third-party appraiser or collateral valuations performed internally for
loans determined to be collateral dependent were not ordered, received or reviewed prior to the
reporting date which could result in overstatement of loans and income and understatement of the
provision for loan losses, charge off and the allowance for loan losses. The Special Assets
Department has created procedures and updated the Appraisal Policy to address this deficiency. The
remediation plan for these internal control deficiencies is noted below. Other than the items noted
above, during the second quarter of 2011 there were no other changes in the Companys internal
control over financial reporting that have materially affected, or that are reasonably likely to
materially affect, the Companys internal control over financial reporting.
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During the first quarter of 2011, management took the following remediation actions regarding
the above referenced internal control deficiencies:
1) | During the first quarter of 2011, the OCC, during their regular safety and soundness
exam, determined several loans were not properly identified by the Bank as collateral
dependent as of December 31, 2010. Collateral dependent loans require a charge off of the
loan balance if the recorded investment in the loan exceeds the underlying collateral value
net of cost to sell. To make the determination the proper recorded investment has been
recorded, the current appraised value of the collateral must be obtained. The Special
Assets Department, formed during 2009, is in charge of complying with these requirements.
During the first quarter of 2011, procedures were put in place in the Special Assets
Department to comply with these requirements and the results of their efforts have been
incorporated into the financial statements as of March 31, 2011. |
2) | As noted in item 1, collateral dependent loans require the Bank to obtain a current
appraisal or collateral valuation performed internally to allow for the determination as to
whether there is sufficient collateral securing the loan. In addition to the requirement of
obtaining the appraisal, the appraisal must be reviewed by an independent third-party
appraiser charged with determining the appraisal has been properly performed. After the
review, the Special Assets Department determines if the appraisal is acceptable, then
provides valuation information to the Accounting Department to incorporate the results into
the calculation of the allowance for loan losses. Failure to comply with any of these steps
could result in the overstatement of both assets and income. The Special Assets Department,
as noted in item 1, is in charge of complying with these requirements and during the first
quarter of 2011, procedures were put in place to comply with these requirements and the
results of their efforts have been incorporated into the financial statements as of June
30, 2011. |
3) | During the first quarter of 2011, Management sought to ensure proper controls are in
place so that when either evidence of impairment of a loan exists or prior to the annual
appraisal date, the Special Assets Department will order appraisals or collateral
valuations in a timely manner to allow for proper review and incorporation of the results
into the allowance for loan loss calculation. Additional controls have also been developed
and incorporated into the process to assure a potential impairment is recorded when
appraisal or valuation and review process is not complete as of a reporting date. |
4) | The Bank has revised its policy and procedures to require independent third-party
appraisals or collateral valuations performed internally for all loans considered to be
impaired, classified or worse. The Special Assets Department, as noted in item 1, is in
charge of complying with these requirements and during the first quarter of 2011,
procedures were put in place to comply with these requirements and the results of their
efforts have been incorporated into the financial statements as of June 30, 2011. |
The identified material weakness in our internal controls over financial reporting will not be
considered remediated until the new controls are fully implemented, in operation for a sufficient
period of time, tested, and concluded by management to be operating effectively. Management
anticipates that this remediation process will be completed by December 31, 2011 and that the
Companys internal controls over financial reporting, with respect to this identified material
weakness, will be deemed effective. There are no material costs associated with correcting the
control deficiencies described above.
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PART II OTHER INFORMATION
ITEM 1A. | RISK FACTORS |
Except as set forth below and in the Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2011, there were no material changes to the risk factors previously disclosed in
Part I, Item 1A, of the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2010:
An inability to improve
our regulatory capital position could adversely affect our operations and future prospects.
Our ability to remain in operation
as a financial institution is dependent on our ability to raise sufficient capital or reduce our
assets to improve our regulatory capital position. At June 30, 2011, the Bank was classified
as undercapitalized, which restricts its operations. As a result of its reduced capital levels,
the Bank is required to file a capital restoration plan with the OCC before September 15, 2011.
The capital restoration plan is required to specify the steps the Bank will take to become
adequately capitalized, the levels of capital to be attained each year the plan is in effect,
the steps the Bank will take to comply with the growth and other restrictions applicable to it
and the types and levels of activities it will engage in. In addition, the Company is actively
exploring other potential strategic transactions that could provide additional capital for the
Bank, including private equity financing, issuance of shares to existing shareholders or other
strategic transactions. The Company will be required to guarantee
the Banks capital restoration
plan submitted under the prompt corrective action regulations. If the Bank fails to comply with
the terms of the capital restoration plan that it submits to the OCC, the Company will be
obligated to pay to the Bank the lesser of five percent of the
Banks total assets at the time
the Bank was undercapitalized, or the amount which is necessary to bring the Bank into compliance
with all adequately capitalized standards at the time it failed to comply.
In order for the Bank to
achieve and maintain capital levels above those that the Bank has agreed with the OCC to maintain,
we will have to raise additional capital.
The Bank is currently required
by the OCC to maintain a Tier 1 leverage capital ratio of 9% and a total risk-based capital ratio
of 13%, and has failed to satisfy this requirement, as well as the requirements for being
considered adequately capitalized, as of June 30, 2011. In order to achieve these capital
levels, we will be required to raise additional capital. Our ability to raise additional capital
depends to a significant extent on our financial performance and on forces outside of our control.
Accordingly, we may not be able to raise the capital necessary to ensure that the Bank achieves
the capital maintenance requirements of the IMCR. If the Bank is unable to achieve these capital
requirements, it may face additional regulatory constraints and the ability of the Bank to
continue as a going concern may be materially impaired.
Our inability to accept, renew or roll over brokered deposits without the prior approval of the
FDIC could adversely affect our liquidity.
As of June 30, 2011, we had approximately $20 million in brokered certificates of deposit which
represented approximately 5% of our total deposits. Because the Banks capital level declined as a
result of second quarter losses, the Bank is now considered
undercapitalized under capital
adequacy regulations. As long as it is considered an undercapitalized institution, the Bank
may not accept, renew or roll over brokered deposits. As of June
30, 2011, brokered deposits maturing in the next 24 months totaled approximately $17 million.
Funding sources for the maturing brokered deposits include, among other sources: our cash account
at the Federal Reserve Bank of Atlanta; overnight federal funds sold
to correspondent banks; growth, if any, of core deposits from current and new
retail and commercial customers; scheduled repayments on existing loans; and the possible pledge or
sale of investment securities. Because the Bank is
undercapitalized, it is also not permitted to offer to pay interest on deposits
at rates that are more than 75 basis points above the national rate unless the FDIC determines we
are in a high rate area. These interest rate limitations may limit the ability of the Bank to
increase or maintain core deposits from current and new deposit customers. The limitations on our
ability to accept, renew or roll over brokered deposits, or pay more than 75 basis points above the
national rate could adversely affect our liquidity.
As the Banks capital levels decline, the amount that it can lend any one borrower is reduced.
As the Banks capital levels decline, the amount that it can lend any one borrower is reduced. At
June 30, 2011, the Banks legal lending limit under applicable regulations (based upon the maximum
legal lending limits of 25% of capital and surplus) was $5,816,000. As the Banks capital levels
have declined, its legal lending limit has been reduced. If the legal lending limit is reduced
below the level of credit, including lines of credit, that the Bank has extended to a borrower, it
can no longer renew or continue undrawn credit lines or make additional loans or advances to its
largest borrower relationships, and its ability to renew outstanding loans to such customers is
extremely limited. Additionally, if the Bank seeks to reduce the amount of credit that it has
extended to a particular borrower because of a reduction in its legal lending limit, the borrower
may decided to move its loan relationships to another financial institution with
legal lending limits high enough to accommodate the borrowers relationships. A loss of loan
customers as a result of being subject to lower lending limits, could negatively impact the Banks
liquidity and results of operations.
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ITEM 6. | EXHIBITS |
Exhibits
The following exhibits are filed as a part of or incorporated by reference in this report:
Exhibit No. | Description | |||
3.1 | Charter of the Company (1) |
|||
3.2 | Amended and Restated Bylaws of the Company, as amended (2) |
|||
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended |
|||
31.2 | Certification of the Senior Vice President and Chief Financial Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended |
|||
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of the Senior Vice President and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|||
101 | Interactive Data File |
(1) | Incorporated by reference to the Registrants Registration Statement on Form S-1 (333-168281)
as filed with the Securities and Exchange Commission on July 22, 2010. |
|
(2) | Incorporated by reference to the Registrants Form 8-K as filed with the Securities and Exchange
Commission March 31, 2010. |
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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.
MOUNTAIN NATIONAL BANCSHARES, INC. |
||||
Date: August 22, 2011 | /s/ Dwight B. Grizzell | |||
Dwight B. Grizzell | ||||
President and Chief Executive Officer | ||||
Date: August 22, 2011 | /s/ Richard A. Hubbs | |||
Richard A. Hubbs | ||||
Senior Vice President and Chief Financial Officer |
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EXHIBIT INDEX
Exhibit No. | Description | |||
3.1 | Charter of the Company (1) |
|||
3.2 | Amended and Restated Bylaws of the Company, as amended (2) |
|||
31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended |
|||
31.2 | Certification of the Senior Vice President and Chief Financial Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended |
|||
32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
32.2 | Certification of the Senior Vice President and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|||
101 | Interactive
Data File |
(1) | Incorporated by reference to the Registrants Registration Statement on Form S-1 (333-168281)
as filed with the Securities and Exchange Commission on July 22, 2010. |
|
(2) | Incorporated by reference to the Registrants Form 8-K as filed with the Securities and
Exchange Commission on March 31, 2010. |
61