Attached files
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10-Q - FORM 10-Q - Community Bankers Trust Corp | w76335e10vq.htm |
EX-31.1 - EX-31.1 - Community Bankers Trust Corp | w76335exv31w1.htm |
EX-31.2 - EX-31.2 - Community Bankers Trust Corp | w76335exv31w2.htm |
EX-32.1 - EX-32.1 - Community Bankers Trust Corp | w76335exv32w1.htm |
Exhibit 99.1
RISK FACTORS
Our operations are subject to many risks that could adversely affect our future financial
condition and performance and, therefore, the market value of our common stock. The risk factors
applicable to us are the following:
Our future success is dependent on our ability to compete effectively in the highly competitive
banking and financial services industry.
We face vigorous competition from other commercial banks, savings and loan associations,
savings banks, credit unions, mortgage banking firms, consumer finance companies, securities
brokerage firms, insurance companies, money market funds and other types of financial institutions
for deposits, loans and other financial services in our market area. A number of these banks and
other financial institutions are significantly larger than we are and have substantially greater
access to capital and other resources, as well as larger lending limits and branch systems, and
offer a wider array of banking services. Many of our nonbank competitors are not subject to the
same extensive regulations that govern us. As a result, these nonbank competitors have advantages
over us in providing certain services. This competition may reduce or limit our margins and our
market share and may adversely affect our results of operations and financial condition.
Difficult market conditions have adversely affected our industry.
Dramatic declines in the housing market over the past year, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively impacted the credit
performance of real-estate related loans and resulted in significant write-downs of asset values by
financial institutions. These write-downs, initially of asset-backed securities but spreading to
other securities and loans, have caused many financial institutions to seek additional capital, to
reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases,
to fail. Reflecting concern about the stability of the financial markets generally and the strength
of counterparties, many lenders and institutional investors have reduced or ceased providing
funding to borrowers, including to other financial institutions. This market turmoil and tightening
of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer
confidence, increased market volatility and widespread reduction of business activity generally.
The resulting economic pressure on consumers and lack of confidence in the financial markets has
adversely affected our business and results of operations. Market developments may affect consumer
confidence levels and may cause adverse changes in payment patterns, causing increases in
delinquencies and default rates, which may impact our charge-offs and provision for credit losses.
A worsening of these conditions would likely exacerbate the adverse effects of these difficult
market conditions on us and others in the financial institutions industry.
We may be adversely affected by economic conditions in our market area.
The general economic conditions in the markets in which we operate are a key component to our
success. We are headquartered in central Virginia, and our market area includes regions in
Virginia, Georgia and Maryland. Because our lending and deposit-gathering activities are
concentrated in this market, we will be affected by the general economic conditions in these areas.
Changes in the economy may influence the growth rate of our loans and deposits, the quality of the
loan portfolio and loan and deposit pricing. A significant decline in general economic condition
caused by inflation, recession, unemployment or other factors, would impact these local economic
conditions and the demand for
banking products and services generally, and could negatively affect our financial condition
and performance.
We may incur losses if we are unable to successfully manage interest rate risk.
Our future profitability will substantially depend upon our ability to maintain or increase
the spread between the interest rates earned on investments and loans and interest rates paid on
deposits and other interest-bearing liabilities. Changes in interest rates will affect our
operating performance and financial condition. The shape of the yield curve can also impact net
interest income. Changing rates will impact how fast our mortgage loans and mortgage backed
securities will have the principal repaid. Rate changes can also impact the behavior of our
depositors, especially depositors in non-maturity deposits such as demand, interest checking,
savings and money market accounts. While we attempt to minimize our exposure to interest rate risk,
we are unable to eliminate it as it is an inherent part of our business. Our net interest spread
will depend on many factors that are partly or entirely outside our control, including competition,
federal economic, monetary and fiscal policies, and industry-specific conditions and economic
conditions generally.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than
18 months. Recently, the volatility and disruption has reached unprecedented levels. In some cases,
the markets have produced downward pressure on stock prices and credit availability for certain
issuers without regard to those issuers underlying financial strength. If current levels of market
disruption and volatility continue or worsen, there can be no assurance that we will not experience
an adverse effect, which may be material, on our ability to access capital and on our business,
financial condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the
actions and commercial soundness of other financial institutions. Financial services institutions
are interrelated as a result of trading, clearing, counterparty or other relationships. We have
exposure to many different industries and counterparties, and we routinely execute transactions
with counterparties in the financial industry. As a result, defaults by, or even rumors or
questions about, one or more financial services institutions, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or
by other institutions. Many of these transactions expose us to credit risk in the event of default
of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral
held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full
amount of the financial instrument exposure due us. There is no assurance that any such losses
would not materially and adversely affect our results of operations.
We may be adversely impacted by changes in the condition of financial markets.
We are directly and indirectly affected by changes in market conditions. Market risk generally
represents the risk that values of assets and liabilities or revenues will be adversely affected by
changes in market conditions. Market risk is inherent in the financial instruments associated with
our operations and activities including loans, deposits, securities, short-term borrowings,
long-term debt, trading account assets and liabilities, and derivatives. Just a few of the market
conditions that may shift from time to time, thereby exposing us to market risk, include
fluctuations in interest and currency exchange rates, equity and futures prices, and price
deterioration or changes in value due to changes in market perception or
actual credit quality of issuers. Accordingly, depending on the instruments or activities
impacted, market risks can have adverse effects on our results of operations and our overall
financial condition.
Our concentration in loans secured by real estate may increase our future credit losses, which
would negatively affect our financial results.
We offer a variety of secured loans, including commercial lines of credit, commercial term
loans, real estate, construction, home equity, consumer and other loans. Approximately 91% of our
loans are secured by real estate, both residential and commercial, substantially all of which are
located in our market area. A major change in the regions real estate market, resulting in a
deterioration in real estate values, or in the local or national economy, including changes caused
by raising interest rates, could adversely affect our customers ability to pay these loans, which
in turn could adversely impact us. Risk of loan defaults and foreclosures are inherent in the
banking industry, and we try to limit our exposure to this risk by carefully underwriting and
monitoring our extensions of credit. We cannot fully eliminate credit risk, and as a result credit
losses may occur in the future.
If our allowance for loan losses becomes inadequate, our results of operations may be adversely
affected.
An essential element of our business is to make loans. We maintain an allowance for loan
losses that we believe is a reasonable estimate of known and inherent losses in our loan portfolio.
Through a periodic review and analysis of the loan portfolio, management determines the adequacy of
the allowance for loan losses by considering such factors as general and industry-specific market
conditions, credit quality of the loan portfolio, the collateral supporting the loans and financial
performance of our loan customers relative to their financial obligations to us. The amount of
future losses is impacted by changes in economic, operating and other conditions, including changes
in interest rates, which may be beyond our control. Actual losses may exceed our current estimates.
Rapidly growing loan portfolios are, by their nature, unseasoned. Estimating loan loss allowances
for an unseasoned portfolio is more difficult than with seasoned portfolios, and may be more
susceptible to changes in estimates and to losses exceeding estimates. Although we believe the
allowance for loan losses is a reasonable estimate of known and inherent losses in our loan
portfolio, we cannot fully predict such losses or assert that our loan loss allowance will be
adequate in the future. Future loan losses that are greater than current estimates could have a
material impact on our future financial performance.
Banking regulators periodically review our allowance for loan losses and may require us to
increase our allowance for loan losses or recognize additional loan charge-offs, based on credit
judgments different than those of our management. Any increase in the amount of our allowance or
loans charged-off as required by these regulatory agencies could have a negative effect on our
operating results.
Nonperforming assets take significant time to resolve and adversely affect our results of
operations and financial condition.
Our nonperforming assets adversely affect our net income in various ways. Until economic and
market conditions improve, we expect to continue to incur additional losses relating to an increase
in nonperforming loans. We do not record interest income on non-accrual loans, thereby adversely
affecting our income and increasing loan administration costs. When we receive collateral through
foreclosures and similar proceedings, we are required to mark the related loan to the then fair
market value of the collateral less estimated selling costs, which may result in a loss. An
increase in the level of nonperforming assets also increases our risk profile and may impact the
capital levels our regulators believe is appropriate in light of such risks. We utilize various
techniques such as loan sales, workouts and restructurings to manage our problem assets. Decreases
in the value of these problem assets, the underlying collateral, or in
the borrowers performance or financial condition, could adversely affect our business,
results of operations and financial condition.
In addition, the resolution of nonperforming assets requires significant commitments of time
from management and staff, which can be detrimental to performance of their other responsibilities.
Such resolution may also require the assistance of third parties, and thus the expense associated
with it. There can be no assurance that we will avoid further increases in nonperforming loans in
the future.
Our accounting with respect to assets covered under the FDIC shared-loss agreements is not
complete, and we may need to restate our results of operations for our 2009 interim periods.
On January 30, 2009, the Bank entered into a purchase and assumption agreement with the FDIC,
as receiver, for SFSB. The Bank assumed all deposit liabilities and purchased certain assets of
SFSB. In connection with the SFSB transaction, the Bank entered into two shared-loss agreements
with the FDIC with respect to the loan and foreclosed real estate assets purchased. Under the
shared-loss agreements, the FDIC will reimburse the Bank for 80% of all losses, including expenses
associated with liquidating and maintaining properties arising from covered loan assets, on the
first $118 million of all losses on such covered loans, and for 95% of losses on covered loans
thereafter.
To date, we have accounted for this transaction in accordance with FSAB ASC 805, which
requires us to record the assets acquired and liabilities assumed at their fair values. In
addition, impaired loans that were acquired are accounted for under FASB ASC 310-30 (SOP 03-3,
"Accounting for Certain Loans or Debt Securities Acquired in a Transfer). In order to be able to
present the appropriate accounting presentation under this guidance, we must review the details of
each loan individually, and not on a pooled basis. Due to the volume of data that is necessary for
us to evaluate for this purpose, we have recorded provisional amounts for the covered loans and
related FDIC receivable for the period ended September 30, 2009. As a result, material adjustments
to the provisional amounts may be necessary once we complete our evaluation. In addition, due to
the existence of the FDIC shared-loss agreements, we are in the process, after application of data
on a per loan basis, of identifying the value of the FDIC receivable asset and will account for
this asset separately from the loans covered by the shared-loss agreements.
While we expect that full application of the SFSB transaction under FASB ASC 805 and FASB ASC
310-30 will be applied with the filing of our Annual Report on Form 10-K for the year ended
December 31, 2009, we also expect that we may file amendments to the Quarterly Reports on Form 10-Q
that we have filed in 2009 to reflect this revised accounting presentation. We cannot make any
assurance that these adjustments will not materially change our financial condition and results of
operations, as previously reported.
The failure of our Board and management to implement and maintain effective risk management
programs may adversely affect our operations.
As a banking organization, we are exposed to a variety of risks across our operations. We
define risk generally as the danger of not achieving our financial, operating, or strategic goals
as planned. As a result, to ensure our long-term corporate success, we must effectively identify
and analyze risks and then manage or mitigate them through appropriate control measures. We have
developed a plan to establish and maintain effective risk management programs to address oversight,
control, and supervision of the management, major operations and activities across our
functional areas. We believe that this plan enables us to recognize and analyze risks early on and
to take the appropriate action.
It is important to note that our organization has grown substantially over the past 18 months.
In May 2008, we merged with each of BOE Financial Services of Virginia, Inc., the then holding company for our wholly-owned operating subsidiary, Essex Bank
(the Bank), and TransCommunity Financial Corporation, the holding
company for TransCommunity Bank, N.A., and, in July 2008, TransCommunity Bank merged into the Bank. In
November 2008, the Bank acquired certain assets and assumed all deposit liabilities of The Community Bank in Georgia and, in
January 2009, the Bank acquired certain assets and assumed all deposit liabilities of Suburban Federal Savings Bank. This
significant growth has put considerable strain on our organizational structure and the
effectiveness of risk management programs that are appropriate for the various functions of an
organization of our size and complexity. Furthermore, this growth has strained our control
structure, including the structure that supports the effective application of policies and the
execution of procedures within the operation of financial reporting controls.
We have put in place internal remediation plans that address concerns that have arisen in
maintaining the effectiveness of our risk management programs. While our Board and management are
working diligently to ensure that our organization implements and maintains effective risk
management programs, any failure to do so may adversely affect our operations. As a result, we may
not be able to achieve our financial, operational and strategic goals.
We have identified a material weakness and significant deficiencies in our internal control over
financial reporting that may adversely affect our ability to properly account for non-routine
transactions.
As we have grown and expanded, we have acquired and added, and expect to continue to acquire
and add, businesses and other activities that complement our core retail and commercial banking
functions. Such acquisitions or additions frequently involve complex operational and financial
reporting issues. While we make every effort to thoroughly understand any new activity or acquired
entitys business and plan for proper integration into our company, we can give no assurance that
we will not encounter operational and financial reporting difficulties.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting is a process designed under the
supervision of our chief executive officer and chief financial officer to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external
purposes in accordance with generally accepted accounting principles. In the Annual Report on
Form 10-K for the year ended December 31, 2008, managements assessment of the effectiveness of our
internal control over financial reporting cited a material weakness regarding the accounting for
non-routine transactions. While management is not required to re-assess the effectiveness of
internal control over financial reporting during the fiscal year, we have concluded that this
material weakness continues to exist as of September 30, 2009. Specifically, our financial and
accounting department has lacked sufficient resources and expertise to properly account for certain
non-routine transactions, our policies and procedures have not provided for timely review of
significant non-routine transactions and related accounting entries and we have not maintained
sufficient documentation related to the application of GAAP to significant non-routine
transactions.
In addition, our financial and accounting department is currently understaffed for the
responsibilities that it has had in recent fiscal quarters. While we have a chief financial officer
and a chief accounting officer, we have not had a controller since April 2009. Our financial and
accounting department has also had to evaluate numerous non-routine accounting issues in addition
to focusing on our day-to-day fiscal operations and periodic filings with the Commission. For
example, we acquired the operations of Suburban Federal in January 2009, and the on-going consolidation of
those operations and analysis of unprecedented accounting issues relating to shared-loss agreements
with the FDIC have strained the resources that we have presently available.
To address the issues described above, we continue to take appropriate remediation steps. We
are evaluating our financial accounting staff levels and expertise and are implementing appropriate
oversight and review procedures. Additional information on these and other actions is disclosed in
our Quarterly Report on Form 10-Q for the period ended September 30, 2009.
Despite efforts to strengthen our internal and disclosure controls, we may identify additional
other internal or disclosure control deficiencies in the future. Any failure to maintain effective
controls or timely effect any necessary improvement of our internal and disclosure controls could,
among other things, result in losses from fraud or error, harm our reputation or cause investors to
lose confidence in our reported financial information, all of which could have a material adverse
effect on our results of operation and financial condition.
We may be required to write down goodwill and other intangible assets, causing our financial
condition and results to be negatively affected.
When we acquire a business, a portion of the purchase price of the acquisition is allocated to
goodwill and other identifiable intangible assets. The excess of the purchase price over the fair
value of the net identifiable tangible and intangible assets acquired determines the amount of the
purchase price that is allocated to goodwill acquired. At September 30, 2009, our goodwill and
other identifiable intangible assets were approximately $30.1 million. Under current accounting
standards, if we determine that goodwill or intangible assets are impaired, we would be required to
write down the value of these assets. We will conduct an annual review to determine whether
goodwill and other identifiable intangible assets are impaired. As of May 31, 2009, the one-year
anniversary date of our mergers with TransCommunity Financial and BOE Financial, we recorded a
goodwill impairment charge of $24.0 million.
We cannot provide assurance whether we will be required to take an impairment charge in the
future. Any impairment charge would have a negative effect on its shareholders equity and
financial results and may cause a decline in our stock price.
Banking regulators have broad enforcement power, but regulations are meant to protect depositors,
and not investors.
We are subject to supervision by several governmental regulatory agencies, including the
Federal Reserve Bank of Richmond and the Bureau of Financial Institutions of the Commonwealth of
Virginia. Bank regulations, and the interpretation and application of them by regulators, are
beyond our control, may change rapidly and unpredictably and can be expected to influence earnings
and growth. In addition, these regulations may limit our growth and the return to investors by
restricting activities such as the payment of dividends, mergers with, or acquisitions by, other
institutions, investments, loans and interest rates, interest rates paid on depositors and the
opening of new branch offices. Although these regulations impose costs on us, they are intended to
protect depositors, and should not be assumed to protect the interest of shareholders. The
regulations to which we are subject may not always be in the best interest of investors.
Acquisition opportunities may present challenges.
We continually evaluate opportunities to acquire other businesses. However, we may not have
the opportunity to make suitable acquisitions on favorable terms in the future, which could
negatively impact the growth of our business. We expect that other banking and financial companies,
many of which have significantly greater resources, will compete with us to acquire compatible
businesses. This competition could increase prices for acquisitions that we would likely pursue,
and our competitors may have greater resources than we do. Also, acquisitions of regulated
businesses such as banks are subject to various regulatory approvals. If we fail to receive the
appropriate regulatory approvals, we will not be able to consummate an acquisition that we believe
is in our best interests.
Any future acquisitions may result in unforeseen difficulties, which could require significant
time and attention from our management that would otherwise be directed at developing our existing
business. In addition, we could discover undisclosed liabilities resulting from any acquisitions
for which we may become responsible. Further, the benefits that we anticipate from these
acquisitions may not develop.
We may not be able to successfully manage our growth or implement our growth strategies, which may
adversely affect our results of operations and financial condition.
During the past 18 months, we have experienced significant growth, and a key aspect of our
business strategy is continued growth and expansion in the future. Our ability to continue to grow
depends, in part, upon our ability to:
| open new branch offices or acquire existing branches or other financial institutions; | ||
| attract deposits to those locations and cross-sell new and existing depositors additional products and services; and | ||
| identify attractive loan and investment opportunities. |
We may not be able to successfully implement our growth strategy if we are unable to identify
attractive markets, locations or opportunities to expand. Our ability to successfully manage our
growth will also depend upon our ability to maintain capital levels sufficient to support this
growth, maintain effective cost controls and adequate asset quality such that earnings are not
adversely impacted to a material degree.
As we continue to implement our growth strategy by opening new branches or acquiring branches
or other banks, we expect to incur increased personnel, occupancy and other operating expenses. In
the case of new branches, we must absorb those higher expenses while we begin to generate new
deposits, and there is a further time lag involved in redeploying new deposits into attractively
priced loans and other higher yielding earning assets. Thus, our plans to branch aggressively could
depress our earnings in the short run, even if we efficiently execute our branching strategy.
A loss of our senior officers could impair our relationship with our customers and adversely affect
our business.
Many community banks attract customers based on the personal relationships that the banks
officers and customers establish with each other and the confidence that the customers have in the
officers. We depend on the performance of our senior officers. These officers have many years of
experience in the banking industry and have numerous contacts in our market area. The loss of the
services of any of our senior officers, or the failure of any of them to perform management
functions in the manner anticipated by our board of directors, could have a material adverse effect
on our business. Our success will be dependent upon the boards ability to attract and retain
quality personnel, including these individuals.
Our ability to pay dividends is limited and we may be unable to pay future dividends.
Our ability to pay dividends is limited by regulatory restrictions and the need to maintain
sufficient capital in our organization. The ability of our bank subsidiary to
pay dividends to us is limited by the Banks obligations to maintain sufficient capital, earnings
and liquidity and by other general restrictions on their dividends under federal and state bank
regulatory requirements.
In addition, as a bank holding company, our ability to declare and pay dividends is subject to
the guidelines of the Board of Governors of the Federal Reserve System regarding capital adequacy
and dividends. The Federal Reserve guidelines generally require us to review the effects of the
cash payment of dividends on common stock and other Tier 1 capital instruments (i.e., perpetual
preferred stock and trust preferred debt) on our financial condition. These guidelines also require
that we review our net income for the current and past four quarters, and the level of dividends on
common stock and other Tier 1 capital instruments for those periods, as well as our projected rate
of earnings retention.
Under the Federal Reserves policy, the board of directors of a bank holding company should
also consider different factors to ensure that its dividend level is prudent relative to the
organizations financial position and is not based on overly optimistic earnings scenarios such as
any potential events that may occur before the payment date that could affect its ability to pay
while still maintaining a strong financial position. As a general matter, the Federal Reserve has
indicated that the board of directors of a bank holding company should consult with the Federal
Reserve and eliminate, defer, or significantly reduce the bank holding companys dividends if: (i)
its net income available to shareholders for the past four quarters, net of dividends previously
paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate
of earnings retention is not consistent with its capital needs and overall current and
prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its
minimum regulatory capital adequacy ratios. If we do not satisfy these regulatory requirements or
the Federal Reserves policies, we will be unable to pay dividends on our common stock.
We also are subject to certain limitations on our ability to pay dividends as a result of our
issuance of preferred stock to the U.S. Department of the Treasury pursuant to the Capital Purchase Program. The
preferred stock is in a superior ownership position compared to our common stock. Dividends must be
paid to the
preferred stock holder before they can be paid to our common stockholders. In addition,
prior to
December 19, 2011, unless we have redeemed the preferred stock or the Department of the Treasury has
transferred the preferred stock to a third party, the consent of the Department of the Treasury will be required for
us to increase our common stock dividend or repurchase our common stock or other equity or capital
securities, other than in certain circumstances.
If the dividends on the preferred stock have not been paid for an aggregate of six quarterly
dividend periods or more, whether or not consecutive, our authorized number of directors will be
automatically increased by two and the holders of the preferred stock will have the right to elect
those directors at our next annual meeting or at a special meeting called for that purpose. These
two directors will be elected annually and will serve until all accrued and unpaid dividends for
all past dividend periods have been declared and paid in full. These restrictions could limit our
ability to pay dividends on our common stock.
The FDIC has increased deposit insurance premiums to restore and maintain the federal deposit
insurance fund, which has increased our costs and could adversely affect our business.
The FDIC recently adopted a final rule revising its risk-based assessment system, effective
April 1, 2009. The changes to the assessment system involve adjustments to the risk-based
calculation of an institutions unsecured debt, secured liabilities and brokered deposits. The
potential increase in FDIC deposit insurance premiums could have a significant impact on us.
On May 22, 2009, the FDIC imposed a special deposit insurance assessment of 5 basis points on
each insured institutions total assets less Tier 1 capital. This emergency assessment was
calculated based on the insured institutions assets at June 30, 2009 and was collected on
September 30, 2009. This special assessment is in addition to the regular quarterly risk-based
assessment. The FDIC has announced that an additional special assessment in 2009 of up to 5 basis
points is probable maintain property of assessments.
The FDIC deposit insurance fund may suffer additional losses in the future due to bank
failures. There can be no assurance that there will not be additional significant deposit insurance
premium increases in order to restore the insurance funds reserve ratio.
Our participation in the U.S. Department of the Treasurys Capital Purchase Program imposes
restrictions on us that limit our ability to perform certain equity transactions, including the
payment of dividends and common stock purchases.
On December 19, 2008, we issued and sold $17.7 million in preferred stock and a warrant to
purchase our common stock to the Department of the Treasury as part of its Capital Purchase
Program. The preferred shares will pay a cumulative dividend rate of five percent per annum for the
first five years and will reset to a rate of nine percent per annum after year five. The dividends,
and potential increase in dividends if we do not redeem the preferred stock, may significantly
impact our operating results, liquidity, and capital position.
The preferred shares are non-voting, other than class voting rights on matters that could
adversely affect the shares. The preferred shares will be callable at par after December 19, 2011.
Prior to that time, unless we have redeemed all of the preferred stock or the Department of the
Treasury has transferred all of the preferred stock to a third party, we are limited in the payment
of dividends on our common stock to the current quarterly dividend of $0.04 per share without prior
regulatory approval. In addition, our participation limits our ability to repurchase shares of our
common stock, with certain exceptions, which include repurchases of shares to offset share dilution
from equity-based compensation.
Our participation in the Department of the Treasurys Capital Purchase Program imposes restrictions
on executive compensation corporate governance, which may affect our ability to retain or attract
qualified executive officers.
Companies participating in the Capital Purchase Program must adopt the Department of the
Treasurys standards for executive compensation and corporate governance for the period during
which the Department of the Treasury holds preferred stock issued under this program. These
standards generally apply to the chief executive officer, chief financial officer, plus the next
three most highly compensated executive officers.
Because we are dependent upon the services of our current executive management team, the
unexpected loss of executive officers or the inability to recruit qualified personnel in the future
due to these compensation limitations, could have an adverse effect on our business, financial
condition, or operating results.
The impact on us of recently enacted legislation, in particular the Emergency Economic
Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and their
implementing regulations, and actions by the FDIC, cannot be predicted at this time.
The federal government has recently enacted legislation and other regulations in an effort to
stabilize the U.S. financial system. The Emergency Economic Stabilization Act of 2008 (the EESA)
provided the Department of the Treasury with the authority to, among other things, purchase up to
$700 billion of mortgages, mortgage-backed securities and certain other financial instruments from
financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial
markets. The Department of the Treasury subsequently announced a program under the EESA pursuant to
which it would make senior preferred stock investments in participating financial institutions. The
Federal Deposit Insurance Corporation announced the development of a guarantee program under the
systemic risk exception to the Federal Deposit Act pursuant to which the FDIC would offer a
guarantee of certain financial institution indebtedness in exchange for an insurance premium to be
paid to the FDIC by issuing financial institutions. More recently, the American Recovery and
Reinvestment Act of 2009 (the ARRA) amends certain provisions of the EESA and contains a wide
array of provisions aimed at stimulating the U.S. economy.
The programs established or to be established under the EESA, the ARRA and other troubled
asset relief programs may have adverse effects upon us. We may face increased regulation of our
industry. Compliance with such regulation may increase our costs and limit our ability to pursue
business opportunities. Also, participation in specific programs may subject us to additional
restrictions. Similarly, programs established by the FDIC under the systemic risk exception,
whether we participate or not, may have an adverse effect on us. The Bank is participating in
the FDIC temporary liquidity guarantee program, and such program likely will require the payment of
additional insurance premiums to the FDIC. We may be required to pay significantly higher FDIC
premiums because market developments have significantly depleted the insurance fund of the FDIC and
reduced the ratio of reserves to insured deposits. The effects of participating or not
participating in any such programs, and the extent of our participation in such programs cannot
reliably be determined at this time.
Our businesses and earnings are impacted by governmental, fiscal and monetary policy.
We are affected by domestic monetary policy. For example, the Federal Reserve Board regulates
the supply of money and credit in the United States and its policies determine in large part our
cost of funds for lending, investing and capital raising activities and the return we earn on those
loans and investments, both of which affect our net interest margin. The actions of the Federal
Reserve Board also
can materially affect the value of financial instruments we hold, such as loans and debt
securities, and its policies also can affect our borrowers, potentially increasing the risk that
they may fail to repay their loans. Our businesses and earnings also are affected by the fiscal or
other policies that are adopted by various regulatory authorities of the United States. Changes in
fiscal or monetary policy are beyond our control and hard to predict.
Our profitability and the value of any equity investment in us may suffer because of rapid and
unpredictable changes in the highly regulated environment in which we operate.
We are subject to extensive supervision by several governmental regulatory agencies at the
federal and state levels. Recently enacted, proposed and future banking and other legislation and
regulations have had, and will continue to have, or may have a significant impact on the financial
services industry. These regulations, which are generally intended to protect depositors and not
our shareholders, and the interpretation and application of them by federal and state regulators,
are beyond our control, may change rapidly and unpredictably, and can be expected to influence our
earnings and growth. Our success depends on our continued ability to maintain compliance with these
regulations. Many of these regulations increase our costs and thus place other financial
institutions that may not be subject to similar regulation in stronger, more favorable competitive
positions.
If we need additional capital in the future to continue our growth, we may not be able to obtain it
on terms that are favorable. This could negatively affect our performance and the value of our
common stock.
Our business strategy calls for continued growth. We anticipate that we will be able to
support this growth through the generation of additional deposits at existing and new branch
locations, as well as expanded loan and other investment opportunities. However, we may need to
raise additional capital in the future to support our continued growth and to maintain desired
capital levels. Our ability to raise capital through the sale of additional equity securities or
the placement of financial instruments that qualify as regulatory capital will depend primarily
upon our financial condition and the condition of financial markets at that time. We may not be
able to obtain additional capital in the amounts or on terms satisfactory to us. Our growth may be
constrained if we are unable to raise additional capital as needed.
The trading volume in our common stock is less than that of other larger financial services
companies.
Although our common stock is listed for trading on NYSE Amex (formerly known as NYSE Alternext
US), the trading volume in our common stock is less than that of other larger financial services
companies. A public trading market having the desired characteristics of depth, liquidity and
orderliness depends on the presence in the marketplace of willing buyers and sellers of our common
stock at any given time. This presence depends on the individual decisions of investors and general
economic and market conditions over which we have no control. Given the lower trading volume of our
common stock, significant sales of our common stock, or the expectation of these sales, could cause
our stock price to fall.