UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
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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: 000-49912
MOUNTAIN NATIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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Tennessee
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75-3036312 |
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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300 East Main Street, Sevierville, Tennessee
(Address of principal executive offices)
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37862
(Zip code) |
(865) 428-7990
(Registrants telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $1.00 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (of for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. 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.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act).
Yes o No þ
State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the last business day of the registrants
most recently completed second fiscal quarter: $39,474,165.
There were 2,631,611 shares of Common Stock outstanding as of February 28, 2010.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for the 2010 Annual Meeting of
Shareholders (the 2010 Proxy Statement) are incorporated by reference into Part III of this
Report. Other than those portions of the 2010 Proxy Statement specifically incorporated by
reference herein pursuant to Part III, no other portions of the 2010 Proxy Statement shall be
deemed so incorporated.
MOUNTAIN NATIONAL BANCSHARES, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2009
Table of Contents
PART I
Forward-Looking Statements
Certain of the statements made herein under the caption Managements Discussion and Analysis
of Financial Condition and Results of Operations, and elsewhere, are forward-looking statements
within the meaning and subject to the protections of Section 27A of the Securities Act of 1933 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 the actual results, performance or achievements of Mountain National
Bancshares, Inc. (Mountain National or the Company) 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, seek, attempt,
would, believe, contemplate, expect, estimate, continue, plan, point to, project,
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,
without limitation, those set forth in Item 1A. Risk Factors below and the following factors:
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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; |
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deterioration in the financial condition of borrowers resulting in significant
increases in loan losses and provisions for those losses; |
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lack of sustained growth in the economy in the Sevier County and Blount County,
Tennessee area; |
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government monetary and fiscal policies as well as legislative and regulatory
changes, including changes in banking, securities and tax laws and regulations; |
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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; |
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the effects of competition from a wide variety of local, regional, national and
other providers of financial, investment, and insurance services; |
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the failure of assumptions underlying the establishment of reserves for possible
loan losses and other estimates; |
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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; |
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the effects of failing to comply with our regulatory commitments; |
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changes in accounting policies, rules and practices; |
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changes in technology or products that may be more difficult, or costly, or less
effective, than anticipated; |
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the effects of war or other conflicts, acts of terrorism or other catastrophic
events that may affect general economic conditions; |
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results of regulatory examinations; and |
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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 are attributable to us are
expressly qualified in their entirety by this cautionary notice. Except as required by the federal
securities laws we 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.
The Company
Mountain National is a bank holding company registered with the Board of Governors of the
Federal Reserve System (Federal Reserve) under the Bank Holding Company Act of 1956, as amended
(the BHC Act). The Company provides a full range of banking services through its banking
subsidiary, Mountain National Bank (the Bank).
For the purposes of the discussions in this report, the words we, us, and our refer to
the combined entities of the Company and the Bank unless otherwise indicated or evident. The
Companys main office is located at 300 East Main Street, Sevierville, Tennessee 37862. The
Company was incorporated as a business corporation in March 2002 under the laws of the State of
Tennessee for the purpose of acquiring 100% of the issued and outstanding shares of common stock
of the Bank. Effective July 1, 2002, the Company and the Bank entered into a reorganization
pursuant to which the Company acquired 100% of the outstanding shares of the Bank and the
shareholders of the Bank became the shareholders of the Company. In June 2003, the Company
received approval from the Federal Reserve Bank of Atlanta to become a bank holding company.
At December 31, 2009, the assets of the Company consisted primarily of its ownership of the
capital stock of the Bank.
The Company is authorized to engage in any activity permitted by law to a corporation, subject
to applicable federal and state regulatory restrictions on the activities of bank holding
companies. The Companys holding company structure provides it with greater flexibility than the
Bank would otherwise have relative to expanding and diversifying its business activities through
newly formed subsidiaries or through acquisitions. While management of the Company has no present
plans to engage in any other business activities, management may from time to time study the
feasibility of establishing or acquiring subsidiaries to engage in other business activities to the
extent permitted by law.
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The Bank
The Bank is organized as a national banking association. The Bank applied to the Office of
the Comptroller of the Currency (the OCC), and the Federal Deposit Insurance Corporation, (the
FDIC), on February 16, 1998, to become an insured national banking association. The Bank
received approval from the OCC to organize as a national banking association on June 16, 1998 and
commenced business on November 23, 1998. The Banks principal business is to accept demand and
savings deposits from the general public and to make residential mortgage, commercial and consumer
loans.
Our Banking Business
General. Our banking business consists primarily of traditional commercial banking
operations, including taking deposits and originating loans. We conduct our banking activities from
our main office located in Sevierville, Tennessee and through eight additional branch offices in
Sevier County, Tennessee, as well as a regional headquarters and two branch offices in Blount
County, Tennessee. We operate two branch offices in Gatlinburg, two branch offices in Pigeon Forge,
a branch office in Seymour, a branch office in Kodak, two branch offices in Sevierville, all in
Sevier County, and two branch offices and our Blount County regional headquarters in Maryville,
Blount County, Tennessee. The retail nature of our commercial banking operations allows for
diversification in the number of our depositors and borrowers, and we do not believe that we are
dependent on a single or a few customers.
We offer a variety of retail banking services. We seek savings and other time and demand
deposits from consumers and businesses in our primary market area by offering a full range of
deposit accounts, including savings, demand deposit, retirement, including individual retirement
accounts, or IRAs, and professional and checking accounts, as well as certificates of deposit.
We use the deposit funds we receive to originate mortgage, commercial and consumer loans, and to
make other authorized investments. In addition, we currently maintain 21 full-service ATMs
throughout our market area. Because the Bank is a member of a number of payment systems networks,
Bank customers may also access banking services through ATMs and point of sale terminals throughout
the world. In addition to traditional deposit-taking and lending services, we also provide a
variety of checking accounts, savings programs, night depository services, safe deposit facilities
and credit card plans.
The banking industry is significantly affected by prevailing economic conditions, as well as
government policies and regulations concerning, among other things, monetary and fiscal affairs,
the housing industry and financial institutions. Deposits at commercial banks are influenced by
economic conditions, including interest rates and competing investment instruments, levels of
personal income and savings, among others. Lending activities are also influenced by a number of
economic factors, including demand for and supply of housing, conditions in the construction
industry, local economic and seasonal factors and availability of funds. Our primary sources of
funding for lending activities include savings and demand deposits, income from investments, loan
principal payments and borrowings. For additional information relating to our deposits and loans,
refer to Managements Discussion and Analysis of Financial Condition and Results of Operations.
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Market Areas. Our primary market areas are Sevier and Blount Counties, contiguous
counties located in eastern Tennessee. We intend to continue our focus on these primary market
areas in the future. Additionally, even with our current market area focus, some of our business
may come from other areas contiguous to our primary market area.
Lending Activities
General. We concentrate on developing a diversified loan portfolio consisting of first
mortgage loans secured by residential properties, loans secured by commercial properties and other
commercial and consumer loans.
Real Estate Lending. We originate permanent and construction loans having terms in the
case of the permanent loans of up to 30 years that are typically secured by residential real estate
comprised of single-family dwellings and multi-family dwellings of up to four units. All of our
residential real estate loans consist of conventional loans that are not insured or guaranteed by
government agencies. We also originate and hold in our portfolio traditional fixed-rate mortgage
loans in appropriate circumstances.
Consumer Lending. We originate consumer loans that typically fall into the following
categories:
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loans secured by junior liens on real estate, including home
improvement and home equity loans, which have an average maturity of about three
years and generally are limited to 80% of appraised value, and home equity lines
of credit; |
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loans secured by personal property, such as automobiles, recreational
vehicles or boats, which typically have 36 to 60 month maturities; |
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loans to our depositors secured by their time deposit accounts or
certificates of deposit; |
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unsecured personal loans and personal lines of credit; and |
Consumer loans generally entail greater risk than residential mortgage loans, particularly in
the case of consumer loans that are unsecured or that are secured by rapidly depreciating assets
such as automobiles. Where consumer loans are unsecured or secured by depreciating assets, the
absence of collateral or the insufficiency of any repossessed collateral to serve as an adequate
source of repayment of the outstanding loan balance poses greater risk of loss to us. When a
deficiency exists between the outstanding balance of a defaulted loan and the value of collateral
repossessed, the borrowers financial instability and life situations that led to the default
(which may include job loss, divorce, illness or personal bankruptcy, among other things) often do
not warrant substantial further collection efforts. Furthermore, the application of various federal
and state laws, including federal bankruptcy and state insolvency laws, may limit the amount that
we can recover in the event a consumer defaults on an unsecured or undersecured loan.
Construction Lending. We offer single-family residential construction loans to
borrowers for construction of one-to-four family residences in our primary market area. Generally,
we limit
our construction lending to construction-permanent loans and make these loans to individuals
building their primary residences. We also originate construction loans to selected local builders
for construction of single-family dwellings.
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Our construction loans may have fixed or adjustable interest rates and are underwritten in
accordance with the same standards that we apply to permanent mortgage loans, with the exception
that our construction loans generally provide for disbursement of the loan amount in stages during
a construction period of up to 12 months, during which period the borrower is required to make
monthly payments of accrued interest on the outstanding loan balance. We typically require a
maximum loan-to-value ratio of 80% on construction loans we originate. While our construction
loans generally convert to permanent loans following construction, the construction loans we extend
to builders generally require repayment in full upon the completion of construction, or,
alternatively, may be assumed by the borrower.
Construction lending affords us the opportunity to earn higher interest rates and fees with
shorter terms to maturity than does single-family permanent mortgage lending. Construction lending,
however, is generally considered to involve a higher degree of risk than single-family permanent
mortgage lending because of the inherent difficulty in estimating both a propertys value at
completion of the project and the projected cost of the project. If the estimate of construction
cost proves to be inaccurate, we may be required to advance funds beyond the amount originally
committed to complete the project. If the estimate of value upon completion proves inaccurate, we
may be confronted at, or prior to, the maturity of the loan with collateral of insufficient value
to assure full repayment. Construction projects may also be jeopardized by downturns in the economy
or demand in the area where the project is being undertaken, disagreements between borrowers and
builders and by the failure of builders to pay subcontractors. Loans to builders to construct homes
for which no purchaser has been identified carry more risk because the builders ability to repay
the loan is often dependent on the builders ability to sell the property prior to the time the
construction loan becomes due.
Commercial Lending. We originate secured and unsecured loans for commercial,
corporate, business and agricultural purposes, and we engage in commercial real estate activities
consisting of loans for hotels, motels, restaurants, retail store outlets and service providers
such as insurance agencies. Currently, we concentrate our commercial lending efforts on originating
loans to small businesses for purposes of providing working capital, capital improvements, and
construction and leasehold improvements. These loans typically have one-year maturities, if they
are unsecured loans, or, in the case of small business loans secured by real estate, have an
average maturity of five years. We also participate in the Small Business Administrations
guaranteed commercial loan program.
Commercial lending, while generally considered to involve a higher degree of credit risk than
long-term financing of residential properties, generally provides higher yields and greater
interest rate sensitivity than do residential mortgage loans. Commercial loans are generally
adjustable rate loans or loans that have short-term maturities of one to three years. The higher
risks inherent in commercial lending include risks specific to the business venture, delays in
leasing the collateral and excessive collateral dependency, vacancy, delays in obtaining or
inability to obtain permanent financing and difficulties we may experience in exerting influence
over or acquiring the collateral following a borrowers default. Moreover, commercial loans often
carry larger loan balances to single borrowers or groups of related borrowers than do residential
real estate loans. With respect to commercial real estate lending, the borrowers ability to
make principal and interest payments on loans secured by income-producing properties is typically
dependent on the successful operation of the related real estate project and thus may be subject to
a greater extent to adverse conditions in the real estate market or in the economy generally. We
attempt to mitigate the risks inherent in commercial lending by, among other things, securing our
loans with adequate collateral and extending commercial loans only to persons located in our
primary market area.
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Creditworthiness and Collateral. We require each prospective borrower to
complete a detailed loan application which we use to evaluate the applicants creditworthiness. All
loan applications are reviewed and approved or disapproved in accordance with guidelines
established by the Banks Board of Directors. We also require that loan collateral be appraised by
an in house evaluation or by independent appraisers approved by the Banks Board of Directors and
require borrowers to maintain fire and casualty insurance on collateral in accordance with
guidelines established by the Banks Board of Directors. Title insurance is required for most real
property collateral.
Loan Originations. We originate loans primarily for our own portfolio but, subject to
market conditions, we may sell certain loans we originate in the secondary market. Initially, most
of our loans are originated based on referrals and to walk-in customers. We also use various
methods of local advertising to stimulate originations.
Secondary Market Activities. We engage in secondary mortgage market activities,
principally the sale of certain residential mortgage loans on a servicing-released basis, subject
to market conditions. Secondary mortgage market activities permit us to generate fee income and
sale income to supplement our principal source of income net interest income resulting from the
interest margin between the yield on interest-earning assets like loans and investment securities
and the interest paid on interest-bearing liabilities such as savings deposits, time deposit
certificates and funds borrowed by the Bank.
From time to time we originate a limited number of permanent, conventional residential
mortgage loans that we sell on a servicing-released basis to private institutional investors such
as savings institutions, banks, life insurance companies and pension funds. We originate these
loans on terms and conditions similar to those required for sale to the Federal Home Loan Mortgage
Corporation (FHLMC), and the Federal National Mortgage Association (FNMA), except that we
occasionally offer these loans with higher dollar limits than are permissible for FHLMC or
FNMA-eligible loans.
The loan-to-value ratios we require for the residential mortgage loans we originate are
determined based on guidelines established by the Banks Board of Directors pursuant to applicable
law.
Income from Lending Activities. Our lending activities generate interest and loan
origination fee income. Loan origination fees are calculated as a percentage of the principal
amount of the mortgage loans we originate and are charged to the borrower by the Bank for
originating the loan. We also receive loan fees and charges related to existing loans, which
include late charges and assumption fees.
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Loan Delinquencies and Defaults. When a borrower fails to make a required loan payment
for 30 days, we classify the loan as delinquent. If the delinquency exceeds 90 days and is not
cured through the Banks normal collection procedures, we institute more formal recovery efforts.
If a foreclosure action is initiated and the loan is not reinstated, paid in full or refinanced,
the property is sold at a judicial or trustee sale at which, in some instances, the Bank acquires
the property. Thereafter, such acquired property is recorded in the Banks records as other real
estate owned (OREO) until the property is sold. In some cases, we may finance sales of OREO,
which may involve our origination of loans to facilitate that typically involve a lower down
payment or a longer term.
Investment Activities
Our investment securities portfolio is an integral part of our total assets and liabilities
management strategy. We use our investments, in part, to further our interest rate risk management
objective of reducing our sensitivity to interest-rate fluctuations. Our primary objective in
making investment determinations with respect to our securities portfolio is to achieve a high
degree of maturity and rate matching between these assets and our interest-bearing liabilities. In
order to achieve this goal, we concentrate our investments, which constituted approximately 23% of
our total assets at December 31, 2009, in U.S. government securities or other securities of similar
low risk. The U.S. government and other investment-grade securities in which we invest typically
have maturities ranging from 30 days to 30 years.
Sources of Funds
General. Deposits are the primary source of funds we use to support our lending
activities and other general business activities. Other sources of funds include loan repayments,
loan sales and borrowings. Although deposit activity is significantly influenced by fluctuations in
interest rates and general market conditions, loan repayments are a relatively stable source of
funds. We also use short-term borrowings to compensate in periods where our normal funding sources
are insufficient to satisfy our funding needs. We use long-term borrowings to support extended
activities and to extend the term of our liabilities.
Deposits. We offer a variety of programs designed to attract both short-term and
long-term deposits from the general public in our market areas. These programs include savings
accounts, NOW accounts, demand deposit accounts, money market deposit accounts, fixed-rate and
variable-rate certificate of deposit accounts of varying maturities, retirement accounts and
certain other accounts. We particularly focus on promoting long-term deposits, such as IRA accounts
and certificates of deposit. Additionally, we use brokered deposits that are comparable to our
traditional certificates of deposit.
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Borrowings. The Bank became a member of the Federal Home Loan Bank of Cincinnati (the
FHLB of Cincinnati) in December 2001. The FHLB of Cincinnati functions as a central reserve bank
that provides credit for member institutions. As a member, the Bank is required to own capital
stock in the FHLB of Cincinnati. Membership in the FHLB of Cincinnati entitles the Bank, provided
certain standards related to creditworthiness have been met, to apply for advances on the security
of the FHLB of Cincinnati stock it holds as well as on the security of certain of its residential
mortgage loans, commercial loans and other assets (principally, its investment securities that are
obligations of, or guaranteed by, the United States). The FHLB of Cincinnati
makes advances to the Bank pursuant to several different credit programs. Each credit program
has its own interest rate and range of maturities. Interest rates on FHLB of Cincinnati advances
are generally variable and adjust to reflect actual conditions existing in the credit markets. The
uses for which we may employ funds received pursuant to FHLB of Cincinnati advances are prescribed
by the various lending programs, which also prescribe borrowing limitations. Acceptable uses
prescribed by the FHLB of Cincinnati have included expansion of residential mortgage lending and
funding short-term liquidity needs. Depending on the particular credit program under which we
borrow, borrowing limitations are generally based on the FHLB of Cincinnatis assessment of our
creditworthiness. The FHLB of Cincinnati is required to review the credit limitations and standards
to which we are subject at least once every six months.
Financing. In August of 1998, the Bank completed an offering of common stock which
yielded proceeds of $12,000,000. On November 7, 2003, the Company completed the sale, through its
wholly owned statutory trust subsidiary, MNB Capital Trust I, of $5,500,000 of trust preferred
securities, which we refer to as Capital Securities I, which mature on December 31, 2033, and
have a liquidation amount of $50,000 per Capital Security. Interest on the Capital Securities I is
to be paid quarterly on the last day of each March, June, September and December and is reset
quarterly based on the three-month LIBOR plus 305 basis points. The Company used the net proceeds
from the offering of Capital Securities I to pay off an outstanding line of credit.
On June 20, 2006, the Company completed the sale, through its wholly owned statutory trust
subsidiary, MNB Capital Trust II, of $7,500,000 of trust preferred securities, which we refer to as
Capital Securities II, which mature on July 7, 2036, and have a liquidation amount of $1,000 per
Capital Security. Interest on the Capital Securities II is to be paid quarterly on the seventh day
of each January, April, July and October and is reset quarterly based on the three-month LIBOR plus
160 basis points. The Company used the net proceeds from the offering of Capital Securities II to
increase regulatory capital for the Company and for operating funds for the Bank.
During the third quarter of 2005, the Company sold 416,500 shares of common stock. This sale
resulted in an increase in common stock and surplus of approximately $9,896,500. In connection with
the offering, there were 416,500 warrants issued, one warrant for each share of stock sold, that
had an exercise price of $25.20 per warrant. The warrants could be exercised beginning after one
year from the date of the sale of the common stock, and had to be exercised no later than two years
from the date of the sale. The final day to exercise the common stock warrants was September 7,
2007. During the period in which they could be exercised, 476,194 out of 482,151 (adjusted for 5%
stock dividends) warrants were exercised at a weighted average exercise price of $21.77 (adjusted
for 5% stock dividends). The total corresponding increase to shareholders equity from the
conversion of the stock warrants to common stock from September 7, 2006 to September 7, 2007, the
period the warrants could be exercised, was approximately $10,367,000.
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Competition
We face significant competition in our primary market areas from a number of sources,
including eight commercial banks and one savings institution in Sevier County and twelve commercial
banks and one savings institution in Blount County. As of June 30, 2009, there were 57 commercial
bank branches and three savings institutions branches located in Sevier County and 52 commercial
bank branches and one savings institution branch located in Blount County.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and other federal and
state laws have resulted in increased competition from both conventional banking institutions and
other businesses offering financial services and products. Mortgage banking firms, finance
companies, real estate investment trusts, insurance companies, leasing companies and certain
government agencies provide additional competition for loans and for certain financial services. We
also compete for deposit accounts with a number of other financial intermediaries, including
securities brokerage firms, money market mutual funds, government and corporate securities and
credit unions. The primary criteria on which institutions compete for deposits and loans are
interest rates, loan origination fees and range of services offered.
As evidenced by our historical deposit and loan growth, notwithstanding the net reduction in
loans during 2009, and as described in Managements Discussion and Analysis of Financial Condition
and Results of Operations, we have been able to compete with our larger, more established
competitors by attracting customers from existing financial institutions as well as from growth in
our communities by focusing on providing a high level of customer service and by providing the
products most important to our customers. During our operating history, we have been successful in
hiring a staff with significant local bank experience that shares our commitment to providing our
customers with the highest levels of customer service. While focusing on customer service, we are
also able to offer our customers most of the banking services offered by our local competitors,
including Internet banking, investment services and sweep accounts.
Employees
We currently employ a total of 181 employees, including 180 full time employees. We are not a
party to any collective bargaining agreements with our employees, and we consider relations with
our employees to be good.
Seasonality
Due to the predominance of the tourism industry in Sevier County, a significant portion of our
commercial loan portfolio is concentrated within that industry. The predominance of the tourism
industry also makes our business more seasonal in nature than may be the case with banks and
financial institutions in other market areas. Deposit growth generally slows during the first
quarter each year and then increases during each of the last three quarters. Our cost of funds
tends to increase during the first quarter each year due to our dependence on borrowed funds that
typically have a higher interest rate than our core deposits. The tourism industry in Sevier County
has remained relatively stable during the past couple of years, particularly with respect to
overnight rentals and hospitality services, and management does not anticipate any significant
changes in that trend in the future.
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Supervision and Regulation
Supervision and Regulation
Bank holding companies and banks are extensively regulated under federal and state law. This
discussion is qualified in its entirety by reference to the particular statutory and regulatory
provisions referred to below and is not intended to be a complete description of the statutes or
regulations applicable to the Companys and the Banks business. Supervision, regulation, and
examination of the Company and the Bank and their respective subsidiaries by the bank regulatory
agencies are intended primarily for the protection of bank depositors rather than holders of
Company capital stock. Any change in applicable law or regulation may have a material effect on the
Companys business.
Bank Holding Company Regulation
The Company, as a bank holding company, is subject to supervision and regulation by the Board
of Governors of the Federal Reserve under the BHC Act. Bank holding companies are generally limited
to the business of banking, managing or controlling banks, and other activities that the Federal
Reserve determines to be so closely related to banking, or managing or controlling banks, as to be
a proper incident thereto. The Company is required to file with the Federal Reserve periodic
reports and such other information as the Federal Reserve may request. The Federal Reserve examines
the Company and may examine non-bank subsidiaries the Company may acquire.
The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition
by a bank holding company of direct or indirect ownership or control of more than 5% of the voting
shares or substantially all the assets of any bank, or for a merger or consolidation of a bank
holding company with another bank holding company. With certain exceptions, the BHC Act prohibits a
bank holding company from acquiring direct or indirect ownership or control of voting shares of any
company which is not a bank or bank holding company, and from engaging directly or indirectly in
any activity other than banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company, may, however, engage in or acquire an interest in
a company that engages in activities which the Federal Reserve has determined by regulation or
order to be so closely related to banking or managing or controlling banks as to be a proper
incident thereto.
The Gramm-Leach-Bliley Act of 1999 (the GLB Act) substantially revised the statutory
restrictions separating banking activities from certain other financial activities. Under the GLB
Act, bank holding companies that are well-capitalized and well-managed, as defined in Federal
Reserve Regulation Y, which have and maintain satisfactory Community Reinvestment Act (CRA)
ratings, and meet certain other conditions, can elect to become financial holding companies.
Financial holding companies and their subsidiaries are permitted to acquire or engage in previously
impermissible activities such as insurance underwriting, securities underwriting, travel agency
activities, broad insurance agency activities, merchant banking, and other activities that the
Federal Reserve determines to be financial in nature or complementary thereto. In addition, under
the merchant banking authority added by the GLB Act and Federal Reserve regulation, financial
holding companies are authorized to invest in
companies that engage in activities that are not financial in nature, as long as the financial
holding company makes its investment with the intention of limiting the term of its investment and
does not manage the company on a day-to-day basis, and the invested company does not cross-market
with any of the financial holding companys controlled depository institutions. Financial holding
companies continue to be subject to the overall oversight and supervision of the Federal Reserve,
but the GLB Act applies the concept of functional regulation to the activities conducted by
subsidiaries. For example, insurance activities would be subject to supervision and regulation by
state insurance authorities. While the Company has no present plans to become a financial holding
company, it may elect to do so in the future in order to exercise the broader activity powers
provided by the GLB Act. The GLB Act also includes consumer privacy provisions, and the federal
bank regulatory agencies have adopted extensive privacy rules implementing the GLB Act.
10
The Company is a legal entity separate and distinct from the Bank. Various legal limitations
restrict the Bank from lending or otherwise supplying funds to the Company. The Company and the
Bank are subject to Section 23A of the Federal Reserve Act and Federal Reserve Regulation W
thereunder. Section 23A defines covered transactions, which include extensions of credit, and
limits a banks covered transactions with any affiliate to 10% of such banks capital and surplus.
All covered and exempt transactions between a bank and its affiliates must be on terms and
conditions consistent with safe and sound banking practices, and banks and their subsidiaries are
prohibited from purchasing low-quality assets from the banks affiliates. Finally, Section 23A
requires that all of a banks extensions of credit to its affiliates be appropriately secured by
acceptable collateral, generally United States government or agency securities. The Company and the
Bank also are subject to Section 23B of the Federal Reserve Act, which generally limits covered and
other transactions among affiliates to be on terms, including credit standards, that are
substantially the same or at least as favorable to the bank or its subsidiary as those prevailing
at the time for similar transactions with unaffiliated companies.
The BHC Act permits acquisitions of banks by bank holding companies, such that Mountain
National and any other bank holding company located in Tennessee may acquire a bank located in any
other state, and any bank holding company located outside Tennessee may lawfully acquire any bank
based in another state, subject to certain deposit-percentage, age of bank charter requirements,
and other restrictions. Federal law also permits national and state-chartered banks to branch
interstate through acquisitions of banks in other states. Under Tennessee law, in order for an
out-of-state bank or bank holding company to establish a branch in Tennessee, the bank or bank
holding company must purchase an existing bank, bank holding company, or branch of a bank in
Tennessee which has been in existence for at least three years. De novo interstate branching is
permitted under Tennessee law on a reciprocal basis. The Bank is eligible to be acquired by any
bank or bank holding company, whether inter-or intrastate, since it has been in existence for more
than three years.
Federal Reserve policy requires a bank holding company to act as a source of financial
strength and to take measures to preserve and protect bank subsidiaries in situations where
additional investments in a troubled bank may not otherwise be warranted. In addition, under the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), where a bank
holding company has more than one bank or thrift subsidiary, each of the bank holding companys
subsidiary depository institutions are responsible for any losses to the FDIC as a result of an
affiliated depository institutions failure. As a result, a bank holding company may be
required to loan money to its subsidiaries in the form of capital notes or other instruments that
qualify as capital under regulatory rules. However, any loans from the holding company to such
subsidiary banks likely will be unsecured and subordinated to such banks depositors and perhaps to
other creditors of the bank.
11
Bank Regulation
The Bank is subject to supervision, regulation, and examination by the OCC which monitors all
areas of the operations of the Bank, including reserves, loans, mortgages, issuances of securities,
payment of dividends, establishment of branches, capital adequacy, and compliance with laws. The
Bank is a member of the FDIC and, as such, its deposits are insured by the FDIC to the maximum
extent provided by law. See FDIC Insurance Assessments.
While the OCC has authority to approve branch applications, national banks are required by the
National Bank Act to adhere to branching laws applicable to state chartered banks in the states in
which they are located. With prior regulatory approval, Tennessee law permits banks based in the
state to either establish new or acquire existing branch offices throughout Tennessee and in other
states on a reciprocal basis. Mountain National and any other national or state-chartered bank
generally may branch across state lines by merging with banks in other states if allowed by the
applicable states laws. Tennessee law, with limited exceptions, currently permits branching across
state lines either through interstate merger or branch acquisition. Tennessee, however, only
permits an out-of-state bank, short of an interstate merger, to branch into Tennessee through
branch acquisition if the home state of the out-of-state bank permits Tennessee-based banks to
acquire branches there.
The OCC has adopted a series of revisions to its regulations, including expanding the powers
exercisable by operating subsidiaries of the Bank. These changes also modernize and streamline
corporate governance, investment and fiduciary powers. The OCC also has the ability to preempt
state laws purporting to regulate the activities of national banks.
The OCC has adopted the Federal Financial Institutions Examination Councils (FFIEC) rating
system and assigns each financial institution a confidential composite rating based on an
evaluation and rating of six essential components of an institutions financial condition and
operations including Capital Adequacy, Asset Quality, Management, Earnings, Liquidity and
Sensitivity to market risk, as well as the quality of risk management practices. For most
institutions, the FFIEC has indicated that market risk primarily reflects exposures to changes in
interest rates. When regulators evaluate this component, consideration is expected to be given to:
(i) managements ability to identify, measure, monitor, and control market risk; (ii) the
institutions size; (iii) the nature and complexity of its activities and its risk profile; and
(iv) the adequacy of its capital and earnings in relation to its level of market risk exposure.
Market risk is rated based upon, but not limited to, an assessment of the sensitivity of the
financial institutions earnings or the economic value of its capital to adverse changes in
interest rates, foreign exchange rates, commodity prices, or equity prices; managements ability to
identify, measure, monitor, and control exposure to market risk; and the nature and complexity of
interest rate risk exposure arising from nontrading positions.
12
As a result of a regulatory examination during the 2009 first quarter, the Bank made certain
commitments to its primary federal regulator during the second quarter of 2009, including
commitments to, among other things, implement a written 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 Allowance for Loan and Lease Losses, 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. The Company has already taken many of these actions
and does not believe compliance with these commitments will have a materially adverse impact on its
operations; however, failure to comply with these commitments may result in the Banks primary
federal regulator imposing additional limitations, restraints, conditions or commitments on the
Bank.
The GLB Act requires banks and their affiliated companies to adopt and disclose privacy
policies regarding the sharing of personal information they obtain from their customers with third
parties. The GLB Act also permits bank subsidiaries to engage in financial activities through
subsidiaries similar to those permitted to financial holding companies. See the discussion
regarding the GLB Act in Bank Holding Company Regulation above.
Community Reinvestment Act
The Company and the Bank are subject to the CRA and the federal banking agencies regulations.
Under the CRA, all banks and thrifts have a continuing and affirmative obligation, consistent with
their safe and sound operation to help meet the credit needs for their entire communities,
including low and moderate income neighborhoods. The CRA requires a depository institutions
primary federal regulator, in connection with its examination of the institution, to assess the
institutions record of assessing and meeting the credit needs of the communities served by that
institution, including low- and moderate-income neighborhoods. The regulatory agencys assessment
of the institutions record is made available to the public. Further, such assessment is required
of any institution which has applied to: (i) charter a national bank; (ii) obtain deposit insurance
coverage for a newly-chartered institution; (iii) establish a new branch office that accepts
deposits; (iv) relocate an office; (v) merge or consolidate with, or acquire the assets or assume
the liabilities of, a federally regulated financial institution, or (vi) expand other activities,
including engaging in financial services activities authorized by the GLB Act. A less than
satisfactory CRA rating will slow, if not preclude, expansion of banking activities and prevent a
company from becoming a financial holding company. The Bank has a satisfactory CRA rating.
The GLB Act and federal bank regulations have made various changes to the CRA. Among other
changes, CRA agreements with private parties must be disclosed and annual CRA reports must be made
to a banks primary federal regulator. A bank holding company will not be permitted to become or
remain a financial holding company and no new activities authorized under the GLB Act may be
commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries
received less than a satisfactory CRA rating in its latest CRA examination. Under current OCC
regulations, the Bank has intermediate small bank status. The requirements for an intermediate
small bank to meet its CRA objectives are more stringent than those for a small bank, but less so
than those for large banks.
13
The Bank is also subject to, among other things, the provisions of the Equal Credit
Opportunity Act (the ECOA) and the Fair Housing Act (the FHA), both of which prohibit
discrimination based on race or color, religion, national origin, sex, and familial status in any
aspect of a consumer or commercial credit or residential real estate transaction. In 1994, the
Department of Housing and Urban Development, the Department of Justice (the DOJ), and the federal
banking agencies issued an Interagency Policy Statement on Discrimination in Lending in order to
provide guidance to financial institutions in determining whether discrimination exists, how the
agencies will respond to lending discrimination, and what steps lenders might take to prevent
discriminatory lending practices. The DOJ has also increased its efforts to prosecute what it
regards as violations of the ECOA and FHA.
Sarbanes-Oxley Act
We are required to comply with various corporate governance and financial reporting
requirements under the Sarbanes-Oxley Act of 2002, as well as rules and regulations adopted by the
SEC and the Public Company Accounting Oversight Board thereunder. In particular, we are required to
include management reports on internal controls as part of our annual report for the year ended
December 31, 2009, pursuant to Section 404 of the Sarbanes-Oxley Act. We have spent significant
amounts of time and money on compliance with these rules and anticipate a similar burden going
forward. We completed our assessment of our internal controls in a timely manner and managements
report on internal controls is included in Item 9A(T) of this report. Our failure to comply with
these internal control rules may materially adversely affect our reputation, our ability to obtain
the necessary certifications to our financial statements, and the values of our securities.
Emergency Economic Stabilization Act
On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (the
EESA), which provides the U. S. Secretary of the Treasury with broad authority to implement
certain actions to help restore stability and liquidity to U.S. markets. Several programs have been
initiated by the U.S. Treasury, the Board of Governors of the Federal Reserve and the FDIC to
stabilize the financial system. The U.S. Treasurys Troubled Asset Relief Program and Capital
Purchase Program (the TARP/CPP) was created to invest up to $250 billion into banks and savings
institutions of all sizes. The program is voluntary and requires an institution to comply with a
number of restrictions and provisions, including limits on executive compensation, stock
redemptions and declaration of dividends. The Company decided, after very careful consideration,
not to participate in this program. The Company and the Bank are both well-capitalized and
management believes the Company and the Bank will continue to be well-capitalized going forward.
The FDIC also began to temporarily provide a 100% guarantee of the senior debt of all FDIC insured
institutions, as well as deposits in noninterest-bearing deposit accounts under its Temporary
Liquidity Guarantee Program (the TLGP). The Bank continues to participate in the transaction
account guarantee program, which expires on June 30, 2010. Under the transaction account guarantee
program, an institution can provide full coverage on non-interest bearing transaction accounts for
an annual assessment of 10, 20 or 25 basis points, depending on the institutions risk category, of
any deposit amounts exceeding the $250,000 deposit insurance limit, in addition to the normal
risk-based assessment. The Banks participation in the transaction account guarantee component of
the TLGP is discussed in more detail under FDIC Insurance Assessments below.
14
Payments of Dividends
The Company is a legal entity separate and distinct from the Bank. The prior approval of the
OCC is required if the total of all dividends declared by a national bank (such as the Bank) in any
calendar year will exceed the sum of such banks net profits for the year and its retained net
profits for the preceding two calendar years, less any required transfers to surplus. Federal law
also prohibits any national bank from paying dividends that would be greater than such banks
undivided profits after deducting statutory bad debts in excess of such banks allowance for
possible loan losses.
In addition, the Company and the Bank are subject to various general regulatory policies and
requirements relating to the payment of dividends, including requirements to maintain adequate
capital above regulatory minimums. The appropriate federal regulatory authority is authorized to
determine under certain circumstances relating to the financial condition of a national or state
member bank or a bank holding company that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment thereof. The OCC and the Federal Reserve have indicated that
paying dividends that deplete a national or state member banks capital base to an inadequate level
would be an unsound and unsafe banking practice. The OCC and the Federal Reserve have each
indicated that depository institutions and their holding companies should generally pay dividends
only out of current operating earnings.
As of December 31, 2009, the Bank could, without prior approval, declare dividends of
approximately $3,727,000. Pursuant to federal banking regulations and due to losses incurred in
2009, beginning in 2010, the Bank and the Company had no net retained profits from the previous two
years available for dividend payments. The Bank and the Company may not, subsequent to January 1,
2010, without prior consent, pay any dividends until such time that current year profits exceed the
net losses and dividends of the prior two years.
Capital
The Federal Reserve and the OCC have risk-based capital guidelines for bank holding companies
and national banks, respectively. These guidelines require a minimum ratio of capital to
risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of
credit) of 8%. At least half of the total capital must consist of common equity, retained earnings,
noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred
stock, less goodwill and other specified intangible assets (Tier 1 capital). Additionally,
qualified trust preferred securities and other restricted capital elements such as minority
interests in the equity accounts of consolidated subsidiaries are permitted to be included as Tier
1 capital up to 25% of core capital, net of goodwill and intangibles. The Company expects that it
will continue to treat its $13 million of trust preferred securities as Tier 1 capital subject to
the limits listed above. Voting common equity must be the predominant form of capital. The
remainder may consist of non-qualifying preferred stock, qualifying subordinated, perpetual, and/or
mandatory convertible debt, up to 45% of pretax unrealized holding gains on available for sale
equity securities with readily determinable market values that are prudently valued, and a limited
amount of any loan loss allowance (Tier 2 capital and, together with Tier 1 capital, Total
Capital).
15
In addition, the Federal Reserve and the OCC have established minimum leverage ratio
guidelines for bank holding companies and national banks, which provide for a minimum leverage
ratio of Tier 1 capital to adjusted average quarterly assets (leverage ratio) equal to 3%, plus
an additional cushion of 1.0% to 2.0%, if the institution has less than the highest regulatory
rating. The guidelines also provide that institutions experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets. Higher capital may be
required in individual cases depending upon a bank holding companys risk profile. All bank holding
companies and banks are expected to hold capital commensurate with the level and nature of their
risks, including the volume and severity of their problem loans. Lastly, the Federal Reserves
guidelines indicate that the Federal Reserve will continue to consider a tangible Tier 1 leverage
ratio (deducting all intangibles) in evaluating proposals for expansion or new activity.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other
things, requires the federal banking agencies to take prompt corrective action regarding
depository institutions that do not meet minimum capital requirements. FDICIA establishes five
capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. A depository institutions capital tier will
depend upon how its capital levels compare to various relevant capital measures and certain other
factors, as established by regulation.
All of the federal banking agencies have adopted regulations establishing relevant capital
measures and relevant capital levels. The relevant capital measures are the Total Capital ratio,
Tier 1 capital ratio, and the leverage ratio. Under the regulations, a national bank will be (i)
well capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 capital ratio of 6% or
greater, and a leverage ratio of at least 5%, and is not subject to any written agreement, order,
capital directive, or prompt corrective action directive by a federal bank regulatory agency to
meet and maintain a specific capital level for any capital measure, (ii) adequately capitalized if
it has a Total Capital ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater, and a
leverage ratio of 4% or greater (3% in certain circumstances), (iii) undercapitalized if it has a
Total Capital ratio of less than 8%, or a Tier 1 capital ratio of less than 4% (3% in certain
circumstances), (iv) significantly undercapitalized if it has a total capital ratio of less than 6%
or a Tier I capital ratio of less than 3%, or a leverage ratio of less than 3%, or (v) critically
undercapitalized if its tangible equity is equal to or less than 2% of average quarterly tangible
assets.
Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately
established for a financial institution could subject a bank or bank holding company to a variety
of enforcement remedies, including issuance of a capital directive, the termination of deposit
insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the
rates of interest that the institution may pay on its deposits and other restrictions on its
business. As described above, significant additional restrictions can be imposed on FDIC-insured
depository institutions that fail to meet applicable capital requirements.
During the first quarter of 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%. Had the agreement been effective as of December 31, 2009, the Bank would have been in
compliance with these new minimum requirements.
16
As of December 31, 2009, the consolidated capital ratios of the Company and Bank were as
follows:
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Regulatory Minimum to |
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Regulatory Minimum |
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be Adequately Capitalized |
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to be Well Capitalized |
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Company |
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Bank |
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Tier 1 capital ratio |
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4.0 |
% |
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6.0 |
% |
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12.89 |
% |
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12.75 |
% |
Total capital ratio |
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8.0 |
% |
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10.0 |
% |
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14.16 |
% |
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14.02 |
% |
Leverage ratio |
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|
3.0-5.0 |
% |
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5.0 |
% |
|
|
9.23 |
% |
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|
9.14 |
% |
FDICIA
FDICIA directs that each federal banking regulatory agency prescribe standards for depository
institutions and depository institution holding companies relating to internal controls,
information systems, internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth compensation, a maximum ratio of classified assets to capital, minimum
earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly
traded shares, and such other standards as the federal regulatory agencies deem appropriate.
FDICIA generally prohibits a depository institution from making any capital distribution
(including payment of a dividend) or paying any management fee to its holding company if the
depository institution would thereafter be undercapitalized. Undercapitalized depository
institutions are subject to growth limitations and are required to submit a capital restoration
plan for approval. For a capital restoration plan to be acceptable, the depository institutions
parent holding company must guarantee that the institution will comply with such capital
restoration plan. The aggregate liability of the parent holding company is limited to the lesser of
5% of the depository institutions total assets at the time it became undercapitalized and the
amount necessary to bring the institution into compliance with applicable capital standards.
FDICIA also contains a variety of other provisions that may affect the operations of the
Company and the Bank, including reporting requirements, regulatory standards for real estate
lending, truth in savings provisions, the requirement that a depository institution give 90 days
prior notice to customers and regulatory authorities before closing any branch, and a prohibition
on the acceptance or renewal of brokered deposits by depository institutions that are not well
capitalized or are adequately capitalized and have not received a waiver from the FDIC. The Company
and the Bank are considered well capitalized, and brokered deposits are not restricted.
Enforcement Policies and Actions
The Federal Reserve and the OCC monitor compliance with laws and regulations. Violations of
laws and regulations, or other unsafe and unsound practices, may result in these agencies imposing
fines or penalties, cease and desist orders, or taking other enforcement actions. Under certain
circumstances, these agencies may enforce these remedies directly against
officers, directors, employees and others participating in the affairs of a bank or bank holding
company.
17
Fiscal and Monetary Policy
Banking is a business that depends on interest rate differentials. In general, the difference
between the interest paid by a bank on its deposits and its other borrowings, and the interest
received by a bank on its loans and securities holdings, constitutes the major portion of a banks
earnings. Thus, the earnings and growth of Mountain National and the Bank are subject to the
influence of economic conditions generally, both domestic and foreign, and also to the monetary and
fiscal policies of the United States and its agencies, particularly the Federal Reserve. The
Federal Reserve regulates the supply of money through various means, including open market dealings
in United States government securities, the discount rate at which banks may borrow from the
Federal Reserve, and the reserve requirements on deposits. The nature and timing of any changes in
such policies and their effect on Mountain National and its subsidiary cannot be predicted. During
2008, the Federal Reserve reduced the target federal funds rate seven times for a total of 4.00 -
4.25%. The year-end target federal funds rate was expressed as a range from 0.00 0.25%. During
2008, the Federal Reserve also reduced the discount rate eight times for a total of 4.25%. The
target federal funds and discount rates in effect at December 31, 2008 were unchanged throughout
2009.
FDIC Insurance Assessments
The FDIC has adopted a risk-based assessment system for insured depository institutions that
takes into account the risks attributable to different categories and concentrations of assets and
liabilities. In early 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005, which
made certain changes to the Federal deposit insurance program. These changes included merging the
Bank Insurance Fund (BIF) and the Savings Association Insurance Fund, increasing retirement
account coverage to $250,000 and providing for inflationary adjustments to general coverage
beginning in 2010, providing the FDIC with authority to set the funds reserve ratio within a
specified range, and requiring dividends to banks if the reserve ratio exceeds certain levels. The
new statute grants banks an assessment credit based on their share of the assessment base on
December 31, 1996, and the amount of the credit can be used to reduce assessments in any year
subject to certain limitations. Because it was not organized until 1998, the Bank was not eligible
to receive this one-time assessment credit.
Beginning in October 2008, the FDIC temporarily increased FDIC deposit insurance coverage per
separately insured depositor to $250,000. The standard coverage limit was originally set to return
to $100,000 on January 1, 2010, however; in May 2009, the FDIC extended the $250,000 maximum
through December 31, 2013. On January 1, 2014, the standard coverage limit is scheduled to return
to $100,000 for all deposit accounts, except for certain retirement accounts.
Also in October 2008, the FDIC introduced the TLGP, a program designed to improve the
functioning of the credit markets and to strengthen capital in the financial system during this
period of economic distress. The TLGP has two components: 1) a debt guarantee program, guaranteeing
newly issued senior unsecured debt, and 2) a transaction account guarantee program, providing a
full guarantee of noninterest-bearing deposit transaction accounts,
Negotiable Order of Withdrawal (or NOW) accounts paying less than 0.5% annual interest, and
Interest on Lawyers Trust Accounts, regardless of the amount. The Bank did not participate in the
debt guarantee program. The Bank is presently participating in the transaction account guarantee
program and, as such, all funds in covered accounts held through June 30, 2010 will be covered with
a full guarantee. In connection with this guarantee, a 10, 20 or 25 basis point annual rate
surcharge, depending on the institutions risk category, will be assessed on amounts in covered
accounts exceeding $250,000.
18
FDIC-insured depository institutions are required to pay deposit insurance premiums based on
the risk an institution poses to the BIF. In order to restore reserves and ensure that the BIF will
be able to adequately cover losses from future bank failures, the FDIC approved new deposit
insurance rules in November 2009. These rules modify the way the assessment system differentiates
risks among insured institutions and implements changes in assessment rates, including base
assessment rates, in order to increase assessment revenue. The FDICs new deposit insurance rules
required insured depository institutions to prepay their estimated quarterly risk-based assessments
for all of 2010, 2011 and 2012. On December 30, 2009, the Bank prepaid its assessment in the amount
of approximately $4 million related to years 2010 through 2012. In addition, the annual assessment
rate will increase uniformly by three basis points beginning in 2011. Continuing declines in the
BIF may result in the FDIC imposing additional assessments in the future, which could adversely
affect the Companys capital levels and earnings.
In addition to BIF assessments, all FDIC-insured depository institutions must pay an annual
assessment to provide funds for the repayment of debt obligations of the Financing Corporation
(FICO). The FICO is a government-sponsored entity that was formed to borrow the money necessary
to carry out the closing and ultimate disposition of failed thrift institutions by the Resolution
Trust Corporation. The FICO assessments are set quarterly and ranged from 1.12 basis points in the
first quarter of 2008 to 1.14 basis points in the last quarter of 2008 and from 1.04 basis points
in the first quarter of 2009 to 1.02 basis points in the last quarter of 2009. The FICO assessment
rate for the first quarter of 2010 is 1.06 basis points.
During the two years ended December 31, 2009 and 2008, the Bank paid approximately $55,000 and
$49,000, respectively, in FICO assessments. The Bank paid approximately $5,613,000 during 2009 for
FDIC deposit insurance premiums, including approximately $5,000 for premiums related to the
transaction account guarantee program, approximately $306,000 as a special one-time assessment to
provide additional reserves for the BIF and approximately $4,144,000 in prepaid quarterly risk
based assessments for all of 2010, 2011 and 2012, as described above.
Other Laws and Regulations
The International Money Laundering Abatement and Anti-Terrorism Funding Act of 2001 specifies
know your customer requirements that obligate financial institutions to take actions to verify
the identity of the account holders in connection with opening an account at any U.S. financial
institution. Banking regulators will consider compliance with this Acts money laundering
provisions in acting upon acquisition and merger proposals, and sanctions for violations of this
Act can be imposed in an amount equal to twice the sum involved in the violating transaction, up to
$1 million.
19
Under the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the USA PATRIOT Act), financial institutions are
subject to prohibitions against specified financial transactions and account relationships as well
as to enhanced due diligence and know your customer standards in their dealings with foreign
financial institutions and foreign customers. For example, the enhanced due diligence policies,
procedures, and controls generally require financial institutions to take reasonable steps:
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to conduct enhanced scrutiny of account relationships to guard against money laundering
and report any suspicious transaction; |
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to ascertain the identity of the nominal and beneficial owners of, and the source of
funds deposited into, each account as needed to guard against money laundering and report
any suspicious transactions; |
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to ascertain for any foreign bank, the shares of which are not publicly traded, the
identity of the owners of the foreign bank, and the nature and extent of the ownership
interest of each such owner; and |
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to ascertain whether any foreign bank provides correspondent accounts to other foreign
banks and, if so, the identity of those foreign banks and related due diligence
information. |
The USA PATRIOT Act requires financial institutions to establish anti-money laundering
programs, and sets forth minimum standards for these programs, including:
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the development of internal policies, procedures, and controls; |
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the designation of a compliance officer; |
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an ongoing employee training program; and |
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an independent audit function to test the programs. |
In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules
increasing the cooperation and information sharing between financial institutions, regulators, and
law enforcement authorities regarding individuals, entities and organizations engaged in, or
reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering
activities.
Statistical Information
Certain statistical and financial information (as required by Guide 3, Statistical Disclosure
by Bank Holding Companies of the Exchange Act Industry Guides) is included in response to Item 7
of this Annual Report on Form 10-K.
20
Negative developments in the U.S. and local economy and in local real estate markets have adversely
impacted the Companys operations and results and may continue to adversely impact our results in
the future.
Economic conditions in the markets in which the Company operates have deteriorated
significantly since early 2008. As a result, the Company has experienced a reduction in its
earnings, resulting primarily from provisions for loan losses related to declining collateral
values in its construction and development loan portfolio. Although the Federal Reserve has issued
statements that economic data suggests strongly that the recession ended in the latter half of
2009, the Company believes that this difficult economic environment will continue at least into the
first half of 2010, and the Company expects that its results of operations will continue to be
negatively impacted as a result. There can be no assurance that the economic conditions that have
adversely affected the financial services industry, and the capital, credit and real estate markets
generally or the Company in particular, will improve, in which case the Company could continue to
experience reduced earnings and write-downs of assets, and could face capital and liquidity
constraints or other business challenges.
We have a concentration of credit exposure to borrowers dependent on the tourism industry.
Due to the predominance of the tourism industry in Sevier County, Tennessee, which is adjacent
to the Great Smoky Mountains National Park and the home of the Dollywood theme park, a significant
portion of the Banks commercial loan portfolio is concentrated within that industry. The
predominance of the tourism industry also makes our business more seasonal in nature than may be
the case with banks in other market areas. The Bank maintains eleven primary concentrations of
credit by industry, of which seven are directly related to the tourism industry. At December 31,
2009, approximately $200 million in loans, representing approximately 49% 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. We also have additional loans that would be considered related to
the tourism industry in addition to the seven categories included in the industry concentration
amounts noted above. The tourism industry in Sevier County has remained relatively stable during
recent years and we do not anticipate any significant changes in this trend; however, if the
tourism industry does experience an economic slowdown and, as a result, the borrowers in this
industry are unable to perform their obligations under their existing loan agreements, our earnings
could be negatively impacted, causing the value of our common stock to decline.
A portion of our loan portfolio is secured by homes that are being built for sale as vacation homes
or as second homes for out of market investors or homes that are used to generate rental income.
Our borrowers rely to some extent upon rental income to service real estate loans secured by
rental properties, or they rely upon sales of the property for construction and development loans
secured by homes that have been built for sale to investors living outside of our market area as
investment properties, second homes or as vacation homes. If tourism levels in our market area or
the rates that visitors are willing to pay for lodging were to decline significantly,
the rental income that some of our borrowers utilize to service their obligations to us may
decline as well and these borrowers may have difficulty meeting their obligations to us which could
adversely impact our results of operations. In addition, sales of vacation homes and second homes
to investors living outside of our market area have slowed and are expected to remain at reduced
levels throughout 2010. Borrowers that are developers or builders whose loans are secured by these
vacation and second homes and whose ability to repay their obligations to us is dependent on the
sale of these properties may have difficulty meeting their obligations to us if these properties
are not sold timely or at values in excess of their loan amount which could adversely impact our
results of operations.
21
Our business is subject to local real estate market and other local economic conditions.
Adverse market or economic conditions in the State of Tennessee may disproportionately
increase the risk our borrowers will be unable to timely make their loan payments. The market value
of the real estate securing loans as collateral has been adversely affected by unfavorable changes
in market and economic conditions. As of December 31, 2009, approximately 91% of our loans were
secured by real estate. Of this amount, approximately 34% were commercial real estate loans, 32%
were residential real estate loans and 24% were construction and development loans. Any sustained
period of increased payment delinquencies, foreclosures or losses caused by adverse market or
economic conditions in the markets we serve or in the State of Tennessee, like those we are
currently experiencing, will continue to adversely affect the value of our assets, our revenues,
results of operations and financial condition. In addition, construction and development lending is
generally considered to have high credit risks because the principal is concentrated in a limited
number of loans with repayment dependent on the successful operation of the related real estate
project. Consequently, these loans are more sensitive to adverse conditions in the real estate
market or the general economy. Throughout 2009, the number of newly constructed homes or lots sold
in our market areas continued to decline, negatively affecting collateral values and contributing
to increased provision expense and higher levels of non-performing assets. A continued reduction in
residential real estate market prices and demand could result in further price reductions in home
and land values adversely affecting the value of collateral securing the construction and
development loans that we hold. These adverse economic and real estate market conditions may lead
to further increases in non-performing loans and other real estate owned, increased charge offs
from the disposition of non-performing assets, and increases in provision for loan losses, all of
which would negatively impact our financial condition and results of operations.
We are geographically concentrated in Sevier County and Blount County, Tennessee, and changes in
local economic conditions impact our profitability.
We operate primarily in Sevier County and Blount County, Tennessee, and substantially all of
our loan customers and most of our deposit and other customers live or have operations in Sevier
and Blount Counties. Accordingly, our success significantly depends upon the growth in population,
income levels, deposits and housing starts in both counties, along with the continued attraction of
business ventures to the area. Our profitability is impacted by the changes in general economic
conditions in this market. Economic conditions in our area weakened during 2009, negatively
affecting our operations, particularly the real estate construction and development segment of our
loan portfolio. We cannot assure you that economic conditions in our market will improve during
2010 or thereafter, and continued weak economic conditions could reduce our
growth rate, affect the ability of our customers to repay their loans to us and generally
affect our financial condition and results of operations.
22
We are less able than a larger institution to spread the risks of unfavorable local economic
conditions across a large number of diversified economies. Moreover, we cannot give any assurance
that we will benefit from any market growth or return of more favorable economic conditions in our
primary market areas if they do occur.
We could sustain losses if our asset quality declines.
Our earnings are significantly affected by our ability to properly originate, underwrite and
service loans. A significant portion of our loans are real estate based or made to real estate
based borrowers, and the credit quality of such loans has deteriorated and could deteriorate
further if real estate market conditions continue to decline or fail to stabilize nationally or,
more importantly, in our market areas. We have sustained losses, and could continue to sustain
losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond
to further deterioration in asset quality in a timely manner. Problems with asset quality could
cause our interest income and net interest margin to decrease and our provisions for loan losses to
increase, which could adversely affect our results of operations and financial condition.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will
decrease.
If loan customers with significant loan balances fail to repay their loans according to the
terms of these loans, our earnings would suffer. We make various assumptions and judgments about
the collectability of our loan portfolio, including the creditworthiness of our borrowers and the
value of any collateral securing the repayment of our loans. We maintain an allowance for loan
losses in an attempt to cover probable incurred losses inherent to the risks associated with
lending. In determining the size of this allowance, we rely on an analysis of our loan portfolio
based on volume and types of loans, internal loan classifications, trends in classifications,
volume and trends in delinquencies, nonaccruals and charge-offs, national and local economic
conditions, other factors and other pertinent information. If our assumptions are inaccurate, our
current allowance may not be sufficient to cover probable incurred loan losses, and additional
provisions may be necessary which would decrease our earnings.
In addition, federal and state regulators periodically review our loan portfolio and may
require us to increase our provision for loan losses or recognize loan charge-offs. Their
conclusions about the quality of our loan portfolio may be different than ours. Any increase in our
allowance for loan losses or loan charge-offs as required by these regulatory agencies could have a
negative effect on our operating results. Moreover, additions to the allowance may be necessary
based on changes in economic and real estate market conditions, new information regarding existing
loans, identification of additional problem loans and other factors, both within and outside of our
managements control. These additions may require increased provision expense which would
negatively impact our results of operations.
23
We have increased levels of other real estate owned, primarily as a result of foreclosures, and we
anticipate higher levels of foreclosed real estate expense.
As we have begun to resolve non-performing real estate loans, we have increased the level of
foreclosed properties, primarily those acquired from builders and from residential land developers.
Foreclosed real estate expense consists of three types of charges: maintenance costs, valuation
adjustments to appraisal values and gains or losses on disposition. These charges will likely
remain at above historical levels as our level of other real estate owned remains elevated, and
also if local real estate values continue to decline, negatively affecting our results of
operations.
Competition with other banking institutions could adversely affect our profitability.
We face significant competition in our primary market areas from a number of sources,
currently including eight commercial banks and one savings institution in Sevier County and twelve
commercial banks and one savings institution in Blount County. As of June 30, 2009, there were 57
commercial bank branches and three savings institutions branches located in Sevier County and 52
commercial bank branches and one savings institution branch located in Blount County. Most of our
competitors have been in existence for a longer period of time, are better established, have
substantially greater financial resources and have more extensive facilities than we do. Because of
the size and established presence of our competitors in our market area, these competitors have
longer-term customer relationships than we maintain and are able to offer a wider range of services
than we offer.
Fluctuations in interest rates could reduce our profitability.
Changes in interest rates may affect our level of interest income, the primary component of
our gross revenue, as well as the level of our interest expense, our largest recurring expenditure.
Interest rate fluctuations are caused by many factors which, for the most part, are not under our
direct control. For example, national monetary policy plays a significant role in the determination
of interest rates. Additionally, competitor pricing and the resulting negotiations that occur with
our customers also impact the rates we collect on loans and the rates we pay on deposits.
As interest rates change, we expect that we will periodically experience gaps in the
interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing
liabilities will be more sensitive to changes in market interest rates than our interest-earning
assets, or vice versa. In either event, if market interest rates should move contrary to our
position, this gap may work against us, and our earnings may be negatively affected.
Changes in the level of interest rates also may negatively affect our ability to originate
real estate loans, the value of our assets and our ability to realize gains from the sale of our
assets, all of which ultimately affect our earnings.
24
Liquidity needs could adversely affect our results of operations and financial condition.
We rely on dividends from the Bank, which are limited as a result of the Banks loss in 2009,
as our primary source of funds, and the Bank relies on customer deposits and loan
repayments as its primary source of funds. While scheduled loan repayments are a relatively stable
source of funds, they are subject to the ability of borrowers to repay the loans. The ability of
borrowers to repay loans can be adversely affected by a number of factors, including changes in
economic conditions, adverse trends or events affecting business industry groups, reductions in
real estate values or markets, business closings or lay-offs, inclement weather, natural disasters,
and international instability. Additionally, deposit levels may be affected by a number of factors,
including rates paid by competitors, general interest rate levels, returns available to customers
on alternative investments, and general economic conditions. We rely to a significant degree on
national time deposits and brokered deposits, which may be more volatile and expensive than local
time deposits. Accordingly, we may be required from time to time to rely on secondary sources of
liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB of
Cincinnati advances and federal funds lines of credit from correspondent banks. To utilize brokered
deposits and national market time deposits without additional regulatory approvals, the Bank must
remain well capitalized and must not become subject to a formal enforcement action that requires
the Bank to maintain capital levels above those required to be well capitalized under the prompt
corrective action provisions of the FDICIA. While we believe that these sources are currently
adequate, there can be no assurance they will be sufficient to meet future liquidity demands.
Our ability to maintain required capital levels and adequate sources of funding and liquidity could
be impacted by changes in the capital markets and deteriorating economic and market conditions.
The Company and the Bank are required to maintain certain capital levels established by
banking regulations or specified by bank regulators. We must also maintain adequate funding sources
in the normal course of business to support our operations and fund outstanding liabilities. Our
ability to maintain capital levels, sources of funding and liquidity could be impacted by changes
in the capital markets in which we operate and deteriorating economic and market conditions.
Additionally, the Bank has agreed with the OCC that it will maintain its Tier 1 leverage capital
ratio at a minimum of 9% and its total risk-based capital ratio at a minimum of 13%. Failure to
meet applicable capital guidelines or to satisfy certain other regulatory requirements could
subject the Bank to a variety of enforcement remedies available to the federal regulatory
authorities.
Our common stock is currently traded on the over-the-counter, or OTC, bulletin board and has
substantially less liquidity than the average stock quoted on a national securities exchange.
Although our common stock is publicly traded on the OTC bulletin board, our common stock has
substantially less daily trading volume than the average trading market for companies quoted on the
Nasdaq Global Market, or any national securities exchange. 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.
The market price of our common stock has fluctuated significantly, and may fluctuate in the
future. These fluctuations may be unrelated to our performance. General market or industry
price declines or overall market volatility in the future could adversely affect the price of
our common stock, and the current market price may not be indicative of future market prices.
25
Loss of our senior executive officers or other key employees could impair our relationship with our
customers and adversely affect our business.
We have assembled a senior management team which has substantial background and experience in
banking and financial services and in the Sevier County and Blount County, Tennessee banking
markets. Loss of the services of any of these key personnel could negatively impact our business
because of their skills, years of industry experience, customer relationships and the potential
difficulty of promptly replacing them.
Our business is dependent on technology, and an inability to invest in technological improvements
may adversely affect our results of operations and financial condition.
The financial services industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to better serving
customers, the effective use of technology increases efficiency and enables financial institutions
to reduce costs. We have made significant investments in data processing, management information
systems and internet banking accessibility. Our future success will depend in part upon our ability
to create additional efficiencies in our operations through the use of technology, particularly in
light of our past and projected growth strategy. Many of our competitors have substantially greater
resources to invest in technological improvements. There can be no assurance that our technological
improvements will increase our operational efficiency or that we will be able to effectively
implement new technology-driven products and services or be successful in marketing these products
and services to our customers.
We are subject to various statutes and regulations that may limit our ability to take certain
actions.
We operate in a highly regulated industry and are subject to examination, supervision, and
comprehensive regulation by various regulatory agencies. Our compliance with these regulations is
costly and restricts certain of our activities, including payment of dividends, mergers and
acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and
locations of offices. We are also subject to capitalization guidelines established by our
regulators, which require us to maintain specified levels of capital. As economic conditions
deteriorate, our regulators may review our operations with more scrutiny and we may be subject to
increased regulatory oversight which could adversely affect our operations.
Significant changes in laws and regulations applicable to the banking industry have been
recently adopted and others are being considered in Congress. We cannot predict the effects of
these changes on our business and profitability. Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding companies, our cost of
compliance could adversely affect our ability to operate profitably.
26
National or state legislation or regulation may increase our expenses and reduce earnings.
Federal bank regulators are increasing regulatory scrutiny, and additional restrictions on
financial institutions have been proposed by regulators and by Congress. Changes in tax law,
federal legislation, regulation or policies, such as bankruptcy laws, deposit insurance, consumer
protection laws, and capital requirements, among others, can result in significant increases in our
expenses and/or charge-offs, which may adversely affect our earnings. Changes in state or federal
tax laws or regulations can have a similar impact. Many state and municipal governments, including
the State of Tennessee, are under financial stress due to the economy. As a result, these
governments could seek to increase their tax revenues through increased tax levies which could have
a meaningful impact on our results of operations. Furthermore, financial institution regulatory
agencies are expected to continue to be very aggressive in responding to concerns and trends
identified in examinations, including the continued issuance of additional formal or informal
enforcement or supervisory actions. These actions, whether formal or informal, could result in our
agreeing to limitations or to take actions that limit our operational flexibility, restrict our
growth or increase our capital or liquidity levels. Failure to comply with any formal or informal
regulatory restrictions, including informal supervisory actions, could lead to further regulatory
enforcement actions. Negative developments in the financial services industry and the impact of
recently enacted or new legislation in response to those developments could negatively impact our
operations by restricting our business operations, including our ability to originate or sell
loans, and adversely impact our financial performance. In addition, industry, legislative or
regulatory developments may cause us to materially change our existing strategic direction, capital
strategies, compensation or operating plans.
Legislative and regulatory initiatives that were enacted in response to the financial crisis are
beginning to wind down.
The U.S. federal, state and foreign governments have taken various actions in an attempt to
deal with the worldwide financial crisis that began in the second half of 2008 and the severe
decline in the global economy. Some of these programs are beginning to expire and the impact of the
wind down on the financial sector and on the economic recovery is unknown. In the United States,
EESA was enacted on October 3, 2008 and the American Recovery and Reinvestment Act of 2009 was
enacted on February 17, 2009. The Transaction Account Guarantee portion of the FDICs Temporary
Liquidity Guarantee Program, which guarantees noninterest bearing transaction accounts on an
unlimited basis is scheduled to continue until June 30, 2010.
Although we have initiated efforts to reduce our reliance on noncore funding, this type of funding
still represents a significant component of our funding base.
In addition to the traditional core deposits, such as demand deposit accounts, interest
checking, money market savings and certificates of deposits, we utilize several noncore funding
sources, such as brokered certificates of deposit, FHLB of Cincinnati advances, federal funds
purchased and other sources. We utilize these noncore funding sources to supplement core funding
deficits. The availability of these noncore funding sources is subject to broad economic conditions
and, as such, the cost of funds may fluctuate significantly and/or be restricted, thus impacting
our net interest income, our immediate liquidity and/or our access to additional liquidity.
27
Brokered certificates of deposit have received scrutiny from regulators in recent months. We
impose upon ourselves limitations as to the absolute level of brokered deposits we may have on our
balance sheet at any point in time, and we have committed to bank regulators to reduce our reliance
on brokered deposits. The pricing of these deposits are subject to the broader wholesale funding
market and the depositors views on our financial strength and may fluctuate significantly in a
very short period of time. Additionally, the availability of these deposits is impacted by overall
market conditions as investors determine whether to invest in less risky certificates of deposit or
in riskier debt and equity markets. As money flows between these various investment instruments,
market conditions will impact the pricing and availability of brokered funds, which may negatively
impact our liquidity and cost of funds.
We impose certain internal limits as to the absolute level of noncore funding we will incur at
any point in time. Should we exceed those limitations, we may need to modify our growth plans,
liquidate certain assets, participate loans to correspondents or execute other actions to allow for
us to return to an acceptable level of noncore funding within a reasonable amount of time.
If the federal funds rate remains at current extremely low levels, our net interest margin, and
consequently our net earnings, may be negatively impacted.
Because of significant competitive deposit pricing pressures in our market and the negative
impact of these pressures on our cost of funds, coupled with the fact that a significant portion of
our loan portfolio has variable rate pricing that moves in concert with changes to the Federal
Reserve Board of Governors federal funds rate (which is at an extremely low rate as a result of
the current recession), we experienced net interest margin compression throughout 2008 and 2009.
Because of these competitive pressures, we were unable to lower the rate that we pay on
interest-bearing liabilities to the same extent and as quickly as the yields we charged on
interest-earning assets. As a result, our net interest margin, and consequently our profitability,
was negatively impacted.
We have a significant deferred tax asset and cannot give any assurance that it will be fully
realized.
We had net deferred tax assets of approximately $5 million as of December 31, 2009. We did not
establish a valuation allowance against our net deferred tax assets as of December 31, 2009 because
we believe that it is more likely than not that all of these assets will be realized. In evaluating
the need for a valuation allowance, we considered the reversal of deferred tax liabilities, the
ability to carryback losses to prior years, tax planning strategies and estimated future taxable
income based on management prepared forecasts. This process required significant judgment by
management about matters that are by nature uncertain. If future events differ significantly from
our current forecasts, we may need to establish a valuation allowance, which could have a material
adverse effect on our results of operations and financial condition.
28
Holders of the Companys junior subordinated debentures have rights that are senior to those of the
Companys common shareholders.
At December 31, 2009, the Company had outstanding trust preferred securities from special
purpose trusts and accompanying junior subordinated debentures totaling $13.4 million.
Payments of the principal and interest on the trust preferred securities of these trusts are
conditionally guaranteed by the Company. Further, the accompanying junior subordinated debentures
the Company issued to the trusts are senior to the Companys shares of common stock and preferred
stock. As a result, the Company must make payments on the junior subordinated debentures before any
dividends can be paid on its common stock and, in the event of the Companys bankruptcy,
dissolution or liquidation, the holders of the junior subordinated debentures must be satisfied
before any distributions can be made on the Companys common stock. The Company has the right to
defer distributions on its junior subordinated debentures (and the related trust preferred
securities) for up to five years, during which time no dividends may be paid on its common stock.
If losses continue or if our financial condition deteriorates, we may be required to cease paying
dividends on our common stock and to defer distributions on our junior subordinated debentures.
If a change in control or change in management is delayed or prevented, the market price of our
common stock could be negatively affected.
Certain federal and state regulations may make it difficult, and expensive, to pursue a tender
offer, change in control or takeover attempt that our board of directors opposes. As a result, our
shareholders may not have an opportunity to participate in such a transaction, and the trading
price of our stock may not rise to the level of other institutions that are more vulnerable to
hostile takeovers.
An investment in the Companys common stock is not an insured deposit.
The Companys common stock is not a bank deposit and, therefore, is not insured against loss
by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment
in the Companys common stock is inherently risky for the reasons described in this Risk Factors
section and elsewhere in this report and is subject to the same market forces that affect the price
of common stock in any company. As a result, if you acquire the Companys stock, you could lose
some or all of your investment.
The Bank currently operates from its main office in Sevierville, Tennessee, its Blount County
regional headquarters in Maryville, Tennessee, and ten branch offices located in Gatlinburg,
Pigeon Forge, Seymour, Kodak and Maryville, Tennessee. The main office, which is located at 300
East Main, Sevierville, Tennessee 37862, contains approximately 24,000 square feet and is owned by
the Bank.
The Blount County regional headquarters opened for business during the first quarter of 2009
and is located at 1820 W. Broadway, Maryville, Tennessee. The building contains approximately
12,000 square feet and is owned by the Bank.
The first Gatlinburg branch was built in 1999 and is located at 960 E. Parkway. It contains
approximately 4,800 square feet. The Bank leases the land at this location. The lease expires in
2013 and includes renewal options for twelve additional five-year terms.
29
The second Gatlinburg branch is a walk-up branch leased by the Bank located at 745 Parkway,
which lies in the heart of the Gatlinburg tourist district. The lease expires in 2010 and includes
two five-year renewal options through 2020.
The Pigeon Forge branch, owned by the Bank, contains approximately 3,800 square feet and is
located at 3104 Teaster Lane, Pigeon Forge, Tennessee.
The second Pigeon Forge branch, owned by the Bank, contains approximately 3,800 square feet
and is located at 242 Wears Valley Road, Pigeon Forge, Tennessee.
The Seymour branch, owned by the Bank, contains approximately 3,800 square feet and is
located on Chapman Highway, Seymour, Tennessee.
The Kodak branch, owned by the Bank, contains approximately 3,800 square feet and is located
on Winfield Dunn Parkway Highway 66, Sevierville, Tennessee.
The Collier Drive branch, owned by the Bank, contains approximately 3,800 square feet and is
located at 470 Collier Drive, Sevierville, Tennessee.
The West Maryville branch, owned by the Bank, contains approximately 4,800 square feet and is
located at 2403 US Highway 411 South, Maryville, Tennessee.
The Justice Center branch opened for business during the second quarter of 2008 and is
located on land leased by the Bank at 1002 E. Lamar Alexander Parkway, Maryville, Tennessee. The
branch contains approximately 3,900 square feet. The lease expires in 2013 and includes renewal
options for six additional five-year terms.
The Newport Highway branch opened for business during the second quarter of 2009 and is
located at 305 New Riverside Drive, Sevierville, Tennessee on land owned by the Bank. The branch
contains approximately 3,800 square feet.
The Operations Center, owned by the Bank, contains approximately 40,000 square feet and is
located on Red Bank Road in Sevierville, Tennessee. We completed construction of a 16,000 square
foot addition, which is included in the 40,000 square foot total, during the first quarter of
2009.
In addition to our thirteen existing locations including the Operations Center, we hold one
property in Knox County, Tennessee, which we intend to use as a future branch site.
Management believes that the physical facilities maintained by the Bank are suitable for its
current operations and that all properties are adequately covered by insurance.
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ITEM 3. |
|
LEGAL PROCEEDINGS |
The Company is not aware of any material pending legal proceedings to which the Company or
the Bank is a party or to which any of their properties are subject, other than ordinary routine
legal proceedings incidental to the business of the Bank.
30
|
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ITEM 4. |
|
REMOVED AND RESERVED |
PART II
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ITEM 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
There is not a large market for the Companys shares, which are quoted on the OTC Bulletin
Board under the symbol MNBT and are not traded on any national exchange. Trading is generally
limited to private transactions and, therefore, there is limited reliable information available as
to the number of trades or the prices at which our stock has traded. Management has reviewed the
limited information available regarding the range of prices at which the Companys common stock
has been sold. The following table sets forth, for the calendar periods indicated, the range of
high and low reported sales prices. This data is provided for information purposes only and should
not be viewed as indicative of the actual or market value of our common stock:
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|
|
|
|
|
|
|
|
|
|
Market Price Range |
|
|
|
Per Share |
|
Year/Period |
|
High |
|
|
Low |
|
2009: |
|
$ |
16.75 |
|
|
$ |
8.00 |
|
First Quarter |
|
|
16.75 |
|
|
|
11.00 |
|
Second Quarter |
|
|
16.50 |
|
|
|
12.50 |
|
Third Quarter |
|
|
15.00 |
|
|
|
9.00 |
|
Fourth Quarter |
|
|
10.50 |
|
|
|
8.00 |
|
|
|
|
|
|
|
|
|
|
2008: |
|
$ |
25.00 |
|
|
$ |
16.20 |
|
First Quarter |
|
|
25.00 |
|
|
|
20.00 |
|
Second Quarter |
|
|
25.00 |
|
|
|
19.90 |
|
Third Quarter |
|
|
22.00 |
|
|
|
18.00 |
|
Fourth Quarter |
|
|
18.50 |
|
|
|
16.20 |
|
These quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions. They have been adjusted to reflect the five
percent stock dividend issued March 2008.
As of the date of this filing, the Company has approximately 2,000 holders of record of its
common stock. The Company has no other class of securities issued or outstanding.
Dividends from the Bank are the Companys primary source of funds to pay dividends on its
capital stock. Under the National Bank Act, the Bank may, in any calendar year, without the
approval of the OCC, pay dividends to the extent of net profits for that year, plus retained net
profits for the preceding two years (less any required transfers to surplus). Given the losses
incurred by the Bank in 2009, the Banks ability to pay dividends to the Company beginning on
January 1, 2010 is limited. The need to maintain adequate capital in the Bank also limits
dividends that may be paid to the Company. The OCC and Federal Reserve have the general authority
to limit the dividends paid by insured banks and bank holding companies, respectively, if such
payment may be deemed to constitute an unsafe or unsound practice. If, in the particular
circumstances, the OCC determines that the payment of dividends would constitute an unsafe or
unsound banking practice, the OCC may, among other things, issue a cease and desist order
prohibiting the payment of dividends. Additional information regarding restrictions on the ability
of the Bank to pay dividends to the Company is contained in this report under Item 1 Business-
Supervision and Regulation.
31
On March 7, 2008, we issued a five percent stock dividend to stockholders of record as of
February 15, 2008. In lieu of fractional shares, we made a cash payment totaling $17,802, based on
a price of $24.00 per share. The total number of shares issued pursuant to the dividend was
124,718.
During November 2008, the Board of Directors approved a special cash dividend of $0.38 per
issued and outstanding share of Common Stock for stockholders of record as of November 26, 2008.
The dividend totaling approximately $1,013,000 was paid on December 15, 2008.
Issuer Purchases of Equity Securities
The Company made no repurchases of its Common Stock during the fourth quarter of 2009.
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ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
To better understand financial trends and performance, our management analyzes certain key
financial data in the following pages. This analysis and discussion reviews our results of
operations for the two-year period ended December 31, 2009, and our financial condition at December
31, 2008 and 2009. We have provided comparisons of financial data as of and for the fiscal years
ended December 31, 2008 and 2009, to illustrate significant changes in performance and the possible
results of trends revealed by that historical financial data. The following discussion should be
read in conjunction with our consolidated audited financial statements, including the notes
thereto, and the selected consolidated financial data presented elsewhere in this Annual Report on
Form 10-K.
Overview
We conduct our business, which consists primarily of traditional commercial banking
operations, through our wholly owned subsidiary, Mountain National Bank. Through the Bank we offer
a broad range of traditional banking services from our corporate headquarters in Sevierville,
Tennessee, our regional headquarters in Maryville, TN, and through ten additional branches in
Sevier County and 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 segment 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 stable during the past couple of years, particularly with respect to
overnight rentals and hospitality services, and management does not anticipate any significant
changes in that trend in the future.
32
Critical Accounting Policies
Our accounting and reporting policies are in accordance with accounting principles generally
accepted in the United States of America and conform to general practices accepted within the
banking industry. Our significant accounting policies are described in the notes to our
consolidated financial statements. Certain accounting policies require management to make
significant estimates and assumptions that have a material impact on the carrying value of certain
assets and liabilities, and we consider these to be critical accounting policies. The estimates and
assumptions used are based on historical experience and other factors that management believes to
be reasonable under the circumstances. Actual results could differ significantly from these
estimates and assumptions, which could have a material impact on the carrying value of assets and
liabilities at the balance sheet dates and on our results of operations for the reporting periods.
We believe the following are the critical accounting policies that require the most
significant estimates and assumptions and that are particularly susceptible to a significant change
in the preparation of our financial statements.
Valuation of Investment Securities
Management conducts regular reviews to assess whether the values of our investments are
impaired and whether any such impairment is other than temporary. The determination of whether
other-than-temporary impairment has occurred involves significant assumptions, estimates and
judgments by management. Changing economic conditions global, regional or related to industries
of specific issuers could adversely affect these values.
On May 1, 2009, Silverton Bank, the bank subsidiary of Silverton Financial Services, Inc.
(Silverton), was placed into receivership by the OCC after Silverton Banks capital deteriorated
significantly in the first quarter of 2009, and on June 5, 2009 Silverton filed a petition for
bankruptcy. The Company does not anticipate that it will recover any of the Banks investment in
either the common securities or trust preferred securities issued by Silverton or its affiliated
trust. As a result, the Company recorded an impairment charge of $347,368, which represents the
Companys full investment in the securities, during the first quarter of 2009.
We recorded no additional other-than-temporary impairment of our investment securities during
2008 and 2009.
Allowance and Provision for Loan Losses
The allowance and provision for loan losses are based on managements assessments of amounts
that it deems to be adequate to absorb probable incurred losses inherent in our existing
loan portfolio. The allowance for loan losses is established through a provision for losses based
on managements evaluation of current economic conditions, volume and composition of the loan
portfolio, the fair market value or the estimated net realizable value of underlying collateral,
historical charge-off experience, the level of nonperforming and past due loans, and other
indicators derived from reviewing the loan portfolio. The evaluation includes a review of all loans
on which full collection may not be reasonably assumed. Should the factors that are considered in
determining the allowance for loan losses change over time, or should managements estimates prove
incorrect, a different amount may be reported for the allowance and the associated provision for
loan losses. For example, if economic conditions in our market area undergo an unexpected and
adverse change, we may need to increase our allowance for loan losses by taking a charge against
earnings in the form of an additional provision for loan losses.
33
Valuation of Other Real Estate Owned
Real estate properties acquired through or in lieu of loan foreclosure are initially recorded
at the fair value less estimated selling cost at the date of foreclosure. The fair value of other
real estate is generally based on current appraisals, comparable sales, and other estimates of
value obtained principally from independent sources. Any write-downs based on the assets fair
value at the date of acquisition are charged to the allowance for loan losses. Valuations are
periodically performed by management, and any subsequent write-downs are recorded as a charge to
operations, if necessary, to reduce the carrying value of a property to fair value less cost to
sell. Other real estate owned also includes excess Bank property not utilized when subdividing land
acquired for the construction of Bank branches. Costs of significant property improvements are
capitalized. Costs relating to holding property are expensed.
Results of Operations for the Years Ended December 31, 2009 and 2008
General Discussion of Our Results
Our principal source of revenue is net interest income at the Bank. Net interest income is the
difference between:
|
|
|
income received on interest-earning assets, such as loans and investment
securities; and |
|
|
|
payments we make on our interest-bearing sources of funds, such as deposits
and borrowings. |
The level of net interest income is determined primarily by the average balances, or volume,
of interest-earning assets and interest-bearing liabilities and the various rate spreads between
the interest-earning assets and the Companys funding sources. Changes in our net interest income
from period to period result from, among other things:
|
|
|
increases or decreases in the volumes of interest-earning assets and
interest-bearing liabilities; |
|
|
|
increases or decreases in the average rates earned and paid on those assets
and liabilities; |
|
|
|
our ability to manage our interest-earning asset portfolio, which includes
loans; |
|
|
|
|
the availability and costs of particular sources of funds, such as
non-interest bearing deposits; and |
|
|
|
our ability to match liabilities to fund assets of similar maturities at a
profitable spread of rates earned on assets over rates paid on liabilities. |
34
In 2009 and 2008, our other principal sources of revenue were service charges on deposit
accounts and credit/debit card related income.
Net Income (Loss)
The following is a summary of our results of operations (dollars in thousands except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
Dollar Change |
|
|
Percent Change |
|
|
|
2009 |
|
|
2008 |
|
|
2009 to 2008 |
|
|
2009 to 2008 |
|
Interest income |
|
$ |
31,369 |
|
|
$ |
35,193 |
|
|
$ |
(3,824 |
) |
|
|
-10.87 |
% |
Interest expense |
|
|
13,358 |
|
|
|
16,934 |
|
|
|
(3,576 |
) |
|
|
-21.12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
18,011 |
|
|
|
18,259 |
|
|
|
(248 |
) |
|
|
-1.36 |
% |
Provision for loan losses |
|
|
11,673 |
|
|
|
2,275 |
|
|
|
9,398 |
|
|
|
413.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
6,338 |
|
|
|
15,984 |
|
|
|
(9,646 |
) |
|
|
-60.35 |
% |
Noninterest income |
|
|
4,863 |
|
|
|
4,325 |
|
|
|
538 |
|
|
|
12.44 |
% |
Noninterest expense |
|
|
19,217 |
|
|
|
16,202 |
|
|
|
3,015 |
|
|
|
18.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before
income taxes |
|
|
(8,016 |
) |
|
|
4,107 |
|
|
|
(12,123 |
) |
|
|
-295.18 |
% |
Income tax expense (benefit) |
|
|
(3,788 |
) |
|
|
827 |
|
|
|
(4,615 |
) |
|
|
-558.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before |
|
$ |
(4,228 |
) |
|
$ |
3,280 |
|
|
$ |
(7,508 |
) |
|
|
-228.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
36,232 |
|
|
$ |
39,518 |
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
40,460 |
|
|
|
36,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
(1.61 |
) |
|
|
1.24 |
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per
share |
|
|
(1.61 |
) |
|
|
1.24 |
|
|
|
|
|
|
|
|
|
The net loss for 2009 was primarily attributable to the increase in the provision for
loan losses as well as continued compression in the Companys net interest margin. The increase in
the provision for loan losses reflects the higher levels of net loans charged-off and increased
probable losses as a result of the slowdown in economic conditions, primarily with respect to the
real estate construction and development segment of our portfolio. Total average loans, our largest
interest earning-asset, decreased approximately $1,602,000 during 2009. More significantly, the
average balance of nonaccrual loans increased approximately $18,944,000
during the year from approximately $11,711,000 at December 31, 2008 to approximately
$40,549,000 at December 31, 2009. The interest associated with these loans that was excluded and
reversed from income throughout 2009 was a significant factor contributing to the decrease in
interest income, the 114 basis point reduction of the yield earned on loans as well as the
continued compression of our net interest margin. Nonaccrual loans and interest income are
discussed in more detail under Allowance for Loan Losses and Net Interest Income. Additionally,
the net loss during 2009 was negatively impacted by the increase in noninterest expense which was
primarily related to the increase in FDIC insurance assessment expense and expenses associated with
maintaining OREO, both of which are described in more detail under Noninterest Expenses.
35
Basic and diluted loss per share was ($1.61) and ($1.61), respectively, for 2009, compared to
earnings per share $1.24 and $1.24, respectively, for 2008 reflecting the decrease in net income
from 2008 to 2009. The average number of shares outstanding was unchanged during 2009.
The Banks net interest margin, the difference between the yields on earning assets, including
loan fees, and the rate paid on funds to support those assets, declined 40 basis points from 3.47%
at December 31, 2008, to 3.07% at December 31, 2009. Management anticipated greater stability of
the net interest margin during 2009 in comparison to 2008, however; the volume of nonaccrual loans
caused a more prolonged compression that was greater than expected. See the section titled Net
Interest Income, below for a more detailed discussion.
The following chart illustrates our net income (loss) for the periods indicated.
The changes below were impacted by changes in rate as well as changes in volume:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
First Quarter |
|
$ |
(673,634 |
) |
|
$ |
790,580 |
|
Second Quarter |
|
|
(789,050 |
) |
|
|
929,137 |
|
Third Quarter |
|
|
1,028,162 |
|
|
|
868,204 |
|
Fourth Quarter |
|
|
(3,793,873 |
) |
|
|
692,287 |
|
|
|
|
|
|
|
|
Annual Total |
|
$ |
(4,228,395 |
) |
|
$ |
3,280,208 |
|
|
|
|
|
|
|
|
The following discussion and analysis describes, in greater detail, the specific changes in
each income statement component.
Net Interest Income
Average Balances, Interest Income, and Interest Expense
The following table contains condensed average balance sheets for the years indicated. In
addition, the amount of our interest income and interest expense for each category of
interest-earning assets and interest-bearing liabilities and the related average interest rates,
net interest spread and net yield on average interest earning assets are included.
36
Average Balance Sheet and Analysis of Net Interest Income
for the Years Ended December 31, 2009 and 2008
(in thousands, except rates)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance |
|
|
Income/Expense |
|
|
Yield/Rate |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)(2) |
|
$ |
415,522 |
|
|
$ |
417,124 |
|
|
$ |
25,072 |
|
|
$ |
29,921 |
|
|
|
6.03 |
% |
|
|
7.17 |
% |
Investment Securities: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
151,729 |
|
|
|
101,210 |
|
|
|
5,994 |
|
|
|
4,926 |
|
|
|
3.95 |
% |
|
|
4.87 |
% |
Held to maturity |
|
|
2,156 |
|
|
|
2,073 |
|
|
|
87 |
|
|
|
96 |
|
|
|
4.04 |
% |
|
|
4.63 |
% |
Equity securities |
|
|
3,895 |
|
|
|
3,799 |
|
|
|
191 |
|
|
|
201 |
|
|
|
4.90 |
% |
|
|
5.29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
157,780 |
|
|
|
107,082 |
|
|
|
6,272 |
|
|
|
5,223 |
|
|
|
3.98 |
% |
|
|
4.88 |
% |
Federal funds sold and other |
|
|
13,295 |
|
|
|
2,147 |
|
|
|
25 |
|
|
|
49 |
|
|
|
0.19 |
% |
|
|
2.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets |
|
|
586,597 |
|
|
|
526,353 |
|
|
|
31,369 |
|
|
|
35,193 |
|
|
|
5.35 |
% |
|
|
6.69 |
% |
Nonearning assets |
|
|
72,816 |
|
|
|
56,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
659,413 |
|
|
$ |
582,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
demand deposits |
|
|
150,384 |
|
|
|
142,020 |
|
|
|
1,856 |
|
|
|
3,067 |
|
|
|
1.23 |
% |
|
|
2.16 |
% |
Savings deposits |
|
|
17,340 |
|
|
|
13,815 |
|
|
|
241 |
|
|
|
269 |
|
|
|
1.39 |
% |
|
|
1.95 |
% |
Time deposits |
|
|
304,715 |
|
|
|
224,055 |
|
|
|
8,151 |
|
|
|
9,579 |
|
|
|
2.67 |
% |
|
|
4.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
472,439 |
|
|
|
379,890 |
|
|
|
10,248 |
|
|
|
12,915 |
|
|
|
2.17 |
% |
|
|
3.40 |
% |
Securities sold under agreements
to repurchase |
|
|
4,284 |
|
|
|
5,093 |
|
|
|
91 |
|
|
|
129 |
|
|
|
2.12 |
% |
|
|
2.53 |
% |
Federal Home Loan Bank advances
and other borrowings |
|
|
68,442 |
|
|
|
83,024 |
|
|
|
2,627 |
|
|
|
3,127 |
|
|
|
3.84 |
% |
|
|
3.77 |
% |
Subordinated debt |
|
|
13,403 |
|
|
|
13,403 |
|
|
|
392 |
|
|
|
763 |
|
|
|
2.92 |
% |
|
|
5.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
558,568 |
|
|
|
481,410 |
|
|
|
13,358 |
|
|
|
16,934 |
|
|
|
2.39 |
% |
|
|
3.52 |
% |
Noninterest-bearing deposits |
|
|
45,761 |
|
|
|
48,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and interest-bearings liabilities |
|
|
604,329 |
|
|
|
529,741 |
|
|
|
13,358 |
|
|
|
16,934 |
|
|
|
2.21 |
% |
|
|
3.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,143 |
|
|
|
2,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
51,941 |
|
|
|
50,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
659,413 |
|
|
$ |
582,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
18,011 |
|
|
$ |
18,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.96 |
% |
|
|
3.17 |
% |
Net interest margin (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.07 |
% |
|
|
3.47 |
% |
|
|
|
(1) |
|
Interest income from loans includes total fee income of approximately $1,134,000 and
$1,786,000 for the years ended December 31, 2009 and 2008, respectively. |
|
(2) |
|
For the purpose of these computations, non-accrual loans are included in average loans. |
|
(3) |
|
Tax-exempt income from investment securities is not presented on a tax-equivalent basis. |
|
(4) |
|
Yields realized on interest-earning assets less the rates paid on interest-bearing liabilities. |
|
(5) |
|
Net interest margin is the result of net interest income divided by average interest-earning assets for the period. |
37
During the fourth quarter of 2008, the Federal Reserve, in response to increasing
economic instability, further reduced the targeted federal funds rate such that the targeted rate
was less than 0.25% throughout 2009 compared to an average rate of 2.09% throughout 2008. This
reduction resulted in the continued compression of our net interest margin as we experienced
reduced yields on a significant portion of our earning asset base due to variable rate loans. Rate
and volume variances during 2009 caused a decrease in interest income and interest expense as well
as net interest income which decreased approximately $248,000 in 2009 compared to 2008. The
Companys net interest margin decreased by 40 basis points in 2009 compared to 2008. Yields on our
loan portfolio decreased by 114 basis points in 2009 compared to 2008, reflecting the approximately
$19 million increase in average nonaccrual loans during the year as well as the continuing
depressed rate environment. Although we made significant investments in our available-for-sale
investment securities portfolio in 2009, yields decreased by 90 basis points in 2009 compared to
2008. Offsetting the decrease in yields earned on our average earning assets was a corresponding
decrease in our funding costs. Rates paid on our interest-bearing deposits decreased by 123 basis
points in 2009 compared to 2008, reflecting the continued effects of a decreasing interest rate
environment during 2009. Also contributing to our lower funding costs was a 277 basis point
decrease in rates paid on subordinated debt in 2009.
Average balances of our earning assets increased by approximately $60 million in 2009 compared
to 2008, primarily due to growth in average deposits which increased approximately $93 million in
2009. Due to limited lending opportunities, our liquidity was used to pay off federal funds
purchased and the remaining funds were invested in relatively lower yielding debt securities and
federal funds sold.
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, averaged 3.07% during 2009 versus 3.47%
in 2008, a decrease of 40 basis points. The decrease in our net interest margin reflects a decrease
in the average spread in 2009 between the rates we earned on our interest-earning assets, which had
a decrease in overall yield of 134 basis points to 5.35% at December 31, 2009, as compared to 6.69%
at December 31, 2008, and the rates we paid on interest-bearing liabilities, which had a slightly
less substantial decrease of 113 basis points in the overall rate to 2.39% at December 31, 2009,
versus 3.52% at December 31, 2008. Our interest-earning assets, including approximately
$181,000,000 in loans tied to prime that reprice immediately, reprice more quickly than our
interest-bearing liabilities, particularly time deposits and borrowings with a fixed rate and term.
Therefore, during the continuous, declining interest rate environment
experienced over the last two years, our net interest margin has been compressed as our
interest-sensitive assets and liabilities reprice at their expected speeds. Additionally, the
approximately $19 million increase in nonaccrual loans and approximately $3 million decrease in
noninterest-bearing demand deposits during 2009 negatively impacted our net interest margin. The
negative effect of these items will continue as long as and to the extent that the balance of
nonaccrual loans is increased and the balance of noninterest-bearing demand deposits is reduced.
When market interest rates begin to increase, our net interest margin will likely remain compressed
until interest rates exceed the established rate floors.
38
The interest income we earn on loans is the largest component of net interest income and the
Banks net interest margin. The average balance of our loan portfolio decreased approximately $1.6
million during 2009 and, as mentioned above, the yield we earned on these loans decreased as well.
Both of these factors contributed to the approximately $4.8 million reduction in loan related
interest income. While management separately deals with the nonperforming loans that accounted for
a considerable portion of the decline in yield and income during 2009, measures to offset the
impact of the depressed rate environment, including certain terms and conditions applicable to
performing loans such as repricing frequency, rate floors and fixed interest rates, have been used
by the Bank in an attempt to limit exposure to low interest rates.
Interest income on investment securities increased approximately $1 million from 2008 to 2009
due to the approximately $51 million increase in volume of securities owned. During 2009, the yield
on securities decreased 90 basis points; however, the increase in volume was enough to offset the
reduction in yield.
The decrease in interest expense during 2009 as compared to 2008 was primarily due to the
general decrease in interest rates paid on deposits, primarily demand deposit accounts and time
deposits (including brokered deposits), as well as subordinated debt. The increases in the average
balance of time deposits of approximately $81 million and interest-bearing demand deposits of
approximately $8 million were not large enough to counteract the effects of the lower rates paid.
As a result of the approximately $10 million decrease in the average balance of federal funds
purchased in 2009, the average rate paid on combined FHLB advances and other borrowings during 2009
was higher than the average rate paid during 2008. The rates paid to borrow federal funds are based
on current market rates and are significantly lower than the average rates paid on our FHLB
borrowings which are generally fixed rates obtained at various times under different market
conditions. FHLB advances are typically subject to prepayment penalties that severely limit any
interest rate advantages gained from early payment if current market rates are lower than rates
applicable to outstanding advances. In spite of the 2009 rate increase, interest expense on
borrowed funds decreased approximately $500,000, reflecting the approximately $15 million decrease
in average borrowed funds. Interest expense on subordinated debt decreased during 2009 due
exclusively to the 277 basis point decrease in the average rate paid on this debt which is priced
at a spread above 3-month LIBOR.
Even as our cost of interest-bearing deposits has declined due to the actions of the Federal
Open Markets Committee (FOMC), the local competition for deposits, in some instances, has and
could continue to cause interest rates paid on deposits to remain above market levels during 2010.
Rate and Volume Analysis
The following table sets 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 years 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.
39
ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Compared to 2008 |
|
|
|
Increase (decrease) |
|
|
|
due to change in |
|
|
|
Rate |
|
|
Volume |
|
|
Total |
|
Income from interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
(4,734 |
) |
|
$ |
(115 |
) |
|
$ |
(4,849 |
) |
Interest on securities |
|
|
(1,425 |
) |
|
|
2,474 |
|
|
|
1,049 |
|
Interest on Federal funds sold and other |
|
|
(278 |
) |
|
|
254 |
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
(6,437 |
) |
|
|
2,613 |
|
|
|
(3,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense from interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on interest-bearing deposits |
|
|
(1,493 |
) |
|
|
254 |
|
|
|
(1,239 |
) |
Interest on time deposits |
|
|
(4,891 |
) |
|
|
3,463 |
|
|
|
(1,428 |
) |
Interest on other borrowings |
|
|
(300 |
) |
|
|
(609 |
) |
|
|
(909 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(6,684 |
) |
|
|
3,108 |
|
|
|
(3,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
247 |
|
|
$ |
(495 |
) |
|
$ |
(248 |
) |
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 nonperforming
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.
As discussed in more detail under Discussion of Financial Condition Allowance for Loan
Losses, management determined it was necessary to increase the allowance for loan loss account
through the provision for loan losses. Although total loans decreased approximately $13 million
during 2009, the increase in the provision for loan losses during 2009 as compared to 2008 was due
to increased charge-offs and delinquencies, related primarily to deterioration in the real estate
segment of the Companys loan portfolio, particularly construction and land development, as well as
increased probable losses as the result of the slowdown in economic conditions. Management has
continued its thorough review of the loan portfolio with particular emphasis on construction and
land development loans and we believe we have identified and adequately provided for losses present
in the loan portfolio; however, 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.
40
Noninterest Income
The following table presents the major components of noninterest income for 2009 and 2008
(dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
Dollar Change |
|
|
Percent Change |
|
|
|
2009 |
|
|
2008 |
|
|
2009 to 2008 |
|
|
2009 to 2008 |
|
Service charges on deposit
accounts |
|
$ |
2,327 |
|
|
$ |
1,424 |
|
|
$ |
903 |
|
|
|
63.41 |
% |
Other fees and commissions |
|
|
1,262 |
|
|
|
1,222 |
|
|
|
40 |
|
|
|
3.27 |
% |
Gain on sale of mortgage loans |
|
|
147 |
|
|
|
163 |
|
|
|
(16 |
) |
|
|
-9.82 |
% |
Gain on sale of securities, net |
|
|
2,558 |
|
|
|
179 |
|
|
|
2,379 |
|
|
|
1,329.05 |
% |
Loss on impairment of securities |
|
|
(347 |
) |
|
|
|
|
|
|
(347 |
) |
|
|
100.00 |
% |
Gain (loss) on other real
estate, net |
|
|
(1,479 |
) |
|
|
759 |
|
|
|
(2,238 |
) |
|
|
-294.86 |
% |
Other noninterest income |
|
|
395 |
|
|
|
578 |
|
|
|
(183 |
) |
|
|
-31.66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
4,863 |
|
|
$ |
4,325 |
|
|
$ |
538 |
|
|
|
12.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal components of noninterest income during both 2008 and 2009 were service
charges on deposits, fees associated with credit/debit cards included in other fees and
commissions, and income resulting from the increase in the cash surrender value of bank owned life
insurance (BOLI). Additionally, during 2009, we sold approximately $90 million of our
available-for-sale investment securities in order to reposition our bond portfolio for asset
liability management purposes. As a result of the sale of these securities, we realized a $2.6
million net gain, excluding the securities impairment loss described below. Also during 2009, we
recorded an approximately $1.5 million net loss on OREO, which includes valuation adjustments as
well as gains and losses on disposal. During 2008, we sold two pieces of excess Bank property
resulting in a total gain on sale of approximately $882,000. The net gain on OREO during 2008 was
approximately $759,000. The increase in service charges on deposit accounts was primarily the
result of an authorized overdraft program implemented during January 2009. The addition of this
program increased the number of customers using overdraft protection products.
In November 2009, the Federal Reserve Board issued a final rule that, effective July 1, 2010,
prohibits financial institutions from charging customers fees for paying overdrafts on automated
teller machine and debit card transactions, unless a consumer consents, or opts in, to the
overdraft service for those types of transactions. Consumers must be provided a notice that
explains the financial institutions overdraft services, including the fees associated with the
service, and the consumers choices. Because our customers must provide advance consent to the
overdraft service for automated teller machine and one-time debit card transactions, we cannot be
certain what impact this rule will have on the amount of insufficient funds charges reported in
future periods.
In the first quarter of 2009, the Company experienced losses of $347,368 related to impairment
of common stock held by the Bank and issued by Silverton and trust preferred securities held by the
Bank and issued by a trust affiliated with Silverton which are guaranteed by Silverton. On May 1,
2009, Silvertons bank subsidiary, Silverton Bank, was placed into receivership by the OCC after
Silverton Banks capital deteriorated significantly in the first quarter of 2009. On June 5, 2009,
Silverton filed a petition for bankruptcy. The Company does not anticipate that it will recover any
of the Banks investment in either the common securities or trust preferred securities issued by
Silverton or its affiliated trust. As a result, the Company recorded an impairment charge of
$347,368 during the first quarter of 2009, which represents the Companys full investment in the
securities.
41
Noninterest Expenses
The following table presents the major components of noninterest expense for 2009 and 2008
(dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
Dollar Change |
|
|
Percent Change |
|
|
|
2009 |
|
|
2008 |
|
|
2009 to 2008 |
|
|
2009 to 2008 |
|
Salaries and employee
benefits |
|
$ |
9,670 |
|
|
$ |
9,232 |
|
|
$ |
438 |
|
|
|
4.74 |
% |
Occupancy expenses |
|
|
1,699 |
|
|
|
1,324 |
|
|
|
375 |
|
|
|
28.32 |
% |
FDIC assessment expense |
|
|
1,537 |
|
|
|
354 |
|
|
|
1,183 |
|
|
|
334.18 |
% |
Other operating expenses |
|
|
6,311 |
|
|
|
5,293 |
|
|
|
1,018 |
|
|
|
19.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
19,217 |
|
|
$ |
16,203 |
|
|
$ |
3,014 |
|
|
|
18.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The largest component of our non-interest expense continues to be the cost of salaries
and employee benefits, which increased by approximately $438,000 during 2009. However, the most
significant increase in noninterest expenses during 2009 was related to an increase in FDIC
assessment expense of approximately $1.2 million and the increase in other operating expenses
including an increase in maintenance costs related to foreclosed real estate of approximately
$493,000, an increase in professional fees of approximately $263,000 and an increase in furniture,
fixture and equipment related expenses of approximately $112,000.
Due to new BIF funding rules adopted by the FDIC as well as the increasing number of bank
failures, FDIC insurance costs were significantly higher for all insured depository institutions
during 2009. The Banks 2009 FDIC assessment expense increased approximately $1,184,000 when
compared to 2008. This increase includes approximately $306,000 related to a one-time assessment
paid during the third quarter of 2009. In November 2009, the FDIC issued a rule that required all
insured depository institutions, with limited exceptions, to prepay their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC
also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011.
In December 2009, we paid approximately $4.4 million in prepaid risk-based assessments, which
included $292,000 related to the fourth quarter of 2009 that would have otherwise been payable in
the first quarter of 2010. This amount is included in deposit insurance expense for 2009. The
remaining $4.1 million in pre-paid deposit insurance is included in other assets in the
accompanying consolidated balance sheet as of December 31, 2009. Unless the FDIC imposes
additional, unforeseen assessments during 2010, we expect that our expenses related to FDIC
insurance will be slightly lower in 2010 than they were in 2009.
Foreclosed real estate expense increased approximately $493,000 from approximately $20,000 in
2008, to approximately $513,000 in 2009. The increase is due to the increase in OREO from
approximately $9.4 million at December 31, 2008 to approximately $14.5 million at December 31,
2009. Additionally, the Bank operated one property, a hotel, which previously secured a loan for
approximately $6.3 million for nine months during 2009. The property was sold in the third quarter
of 2009; however, operation of the property contributed to the increase in foreclosed real estate
expense during 2009. We may continue to experience increases in the expenses to hold, market and
dispose of OREO, particularly if the amount of OREO continues to increase.
42
The increase in professional fees for 2009 when compared to 2008 was primarily the result of
fees paid to the firm administering our authorized overdraft program. The program was implemented
in January 2009; therefore, these fees are not reflected in 2008 results of operations. The
increase in professional fees also includes a general increase in audit and tax fees during 2009.
During the first quarter of 2009, the Bank completed the expansion of our Operations Center as
well as the construction of our Blount County regional headquarters. During the second quarter of
2009, we completed construction of our Newport Highway branch. The increase in salaries and
employee benefits during 2009 was primarily related to the addition of staff dedicated to managing
troubled assets as described in more detail under Past Due Loans and Non-Performing Assets as
well as staff related to branch expansion and the general increase in insurance and benefit costs
for employees. The increase in occupancy expense and furniture, fixture and equipment expense,
included in other operating expenses, during 2009 were also primarily the result of the Banks
physical growth.
Income Taxes
Our provision for income taxes and effective tax rates for 2009 and 2008 were as follows:
Provision for Income Taxes and Effective Tax Rates
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Provision |
|
|
Effective Tax Rates |
|
2009 |
|
$ |
(3,788 |
) |
|
|
47.26 |
% |
2008 |
|
|
827 |
|
|
|
20.14 |
% |
The increase in the effective rate for 2009 when compared to 2008 was primarily due
to the Banks net operating loss. 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 2008 and 2009, 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 generated a federal tax credit in the amount of approximately $200,000 per year
during 2008 and 2009. 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.
43
Discussion of Financial Condition
General Discussion of Our Financial Condition
The following is a summary comparison of selected major components of our financial condition
for the periods ended December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ change |
|
|
% change |
|
Cash and equivalents |
|
$ |
14,105 |
|
|
$ |
14,590 |
|
|
$ |
(485 |
) |
|
|
-3.32 |
% |
Loans |
|
|
407,704 |
|
|
|
420,429 |
|
|
|
(12,725 |
) |
|
|
-3.03 |
% |
Allowance for loan losses |
|
|
11,353 |
|
|
|
5,292 |
|
|
|
6,061 |
|
|
|
114.53 |
% |
Investment securities |
|
|
146,534 |
|
|
|
126,695 |
|
|
|
19,839 |
|
|
|
15.66 |
% |
Premises and equipment |
|
|
33,709 |
|
|
|
31,484 |
|
|
|
2,225 |
|
|
|
7.07 |
% |
Other real estate owned |
|
|
14,575 |
|
|
|
9,444 |
|
|
|
5,131 |
|
|
|
54.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
636,784 |
|
|
|
621,373 |
|
|
|
15,411 |
|
|
|
2.48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
47,601 |
|
|
|
44,652 |
|
|
|
2,949 |
|
|
|
6.60 |
% |
Interest-bearing demand and savings deposits |
|
|
173,769 |
|
|
|
163,565 |
|
|
|
10,204 |
|
|
|
6.24 |
% |
Time deposits |
|
|
289,244 |
|
|
|
246,449 |
|
|
|
42,795 |
|
|
|
17.36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
510,614 |
|
|
|
454,666 |
|
|
|
55,948 |
|
|
|
12.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
|
|
|
|
22,580 |
|
|
|
(22,580 |
) |
|
|
-100.00 |
% |
Federal Home Loan Bank advances |
|
|
62,900 |
|
|
|
72,900 |
|
|
|
(10,000 |
) |
|
|
-13.72 |
% |
Subordinated debentures |
|
|
13,403 |
|
|
|
13,403 |
|
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
589,415 |
|
|
|
570,379 |
|
|
|
19,036 |
|
|
|
3.34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
(loss) |
|
|
283 |
|
|
|
(148 |
) |
|
|
431 |
|
|
|
291.22 |
% |
Total shareholders equity |
|
$ |
47,369 |
|
|
$ |
50,994 |
|
|
$ |
(3,625 |
) |
|
|
-7.11 |
% |
Loans
At December 31, 2008 and 2009, loans comprised 76.1% and 74.2% of our total earning assets,
respectively. This decrease was caused by the decrease in loans as well as the more significant,
relative increase in our investment securities portfolio which was driven primarily by limited
lending opportunities, increased pledging requirements related to borrowed funds and increased
collateralization percentages applicable to our pledging requirements, primarily those related to
public funds. Total earning assets as a percent of total assets, were 86.3% at December 31, 2009,
compared to 88.9% at December 31, 2008. This decrease in total earning assets relative to total
assets in 2009 was attributable to the increase in OREO and premises and equipment related to the
construction of new branches and the expansion of our operations center. The increase in securities
as a percentage of our total earning assets negatively impacted our net interest margin in 2009 as
the yield earned on these securities was lower than the yield earned on loans.
44
Loan Portfolio. Our loan portfolio consisted of the following loan categories and
amounts as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Commercial, financial, agricultural |
|
$ |
30,387 |
|
|
$ |
37,632 |
|
|
$ |
35,929 |
|
|
$ |
26,062 |
|
|
$ |
15,375 |
|
Real estate construction,
development |
|
|
99,771 |
|
|
|
142,370 |
|
|
|
150,844 |
|
|
|
137,989 |
|
|
|
80,719 |
|
Real estate mortgage |
|
|
270,622 |
|
|
|
231,999 |
|
|
|
201,011 |
|
|
|
173,085 |
|
|
|
144,898 |
|
Consumer and other |
|
|
6,924 |
|
|
|
8,428 |
|
|
|
9,890 |
|
|
|
7,572 |
|
|
|
7,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses |
|
|
11,353 |
|
|
|
5,292 |
|
|
|
3,974 |
|
|
|
3,524 |
|
|
|
2,634 |
|
Loans, net |
|
$ |
396,351 |
|
|
$ |
415,137 |
|
|
$ |
393,700 |
|
|
$ |
341,184 |
|
|
$ |
246,230 |
|
Commercial and consumer loans tend to be more risky than loans that are secured by real
estate; however, the Bank seeks to control this risk with adherence to quality underwriting
standards. Still, as reflected in our 2009 results of operations and described in more detail under
Allowance for Loan Losses, real estate construction and development loans do involve risk and if
the underlying collateral, which in the case of acquisition and development loans may involve large
parcels of real property, is not equal to the value of the loan, we may suffer losses if the
borrower defaults on its obligation to us.
Maturities and Sensitivities of Loan Portfolio to Changes in Interest Rates. Total
loans as of December 31, 2009 are classified in the following table according to maturity or
scheduled repricing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year |
|
|
Over one year |
|
|
Over three years |
|
|
Over five |
|
|
|
or less |
|
|
through three years |
|
|
through five years |
|
|
years |
|
|
|
(in thousands) |
|
Commercial, financial, agricultural |
|
$ |
11,409 |
|
|
$ |
7,883 |
|
|
$ |
6,212 |
|
|
$ |
4,105 |
|
Real estate construction,
development |
|
|
62,063 |
|
|
|
27,805 |
|
|
|
9,748 |
|
|
|
2,735 |
|
Real estate mortgage |
|
|
125,849 |
|
|
|
97,166 |
|
|
|
28,198 |
|
|
|
17,897 |
|
Consumer and other |
|
|
3,852 |
|
|
|
1,829 |
|
|
|
721 |
|
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
203,173 |
|
|
$ |
134,683 |
|
|
$ |
44,879 |
|
|
$ |
24,969 |
|
Of our loans maturing more than one year after December 31, 2009, approximately
$97,520,000 had fixed rates of interest and approximately $107,011,000 had variable rates of
interest. At December 31, 2009, loans to sub-dividers/developers were 16.3% of total loans and
loans to franchise hotels & motels were 10.1% of total loans. No other concentrations of credit
exceeded ten percent of our total loans.
45
Past Due Loans and Non-Performing Assets
The following table presents performing loans that were past due at least 30 days but less
than 90 days as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Balance |
|
|
% of total loans |
|
|
Balance |
|
|
% of total loans |
|
|
|
($ in thousands) |
|
Construction, land
development
and other land loans |
|
$ |
656 |
|
|
|
0.16 |
% |
|
$ |
11,081 |
|
|
|
2.64 |
% |
Commercial real estate |
|
|
126 |
|
|
|
0.03 |
% |
|
|
1,170 |
|
|
|
0.28 |
% |
Consumer real estate |
|
|
1,125 |
|
|
|
0.28 |
% |
|
|
2,312 |
|
|
|
0.55 |
% |
Commercial loans |
|
|
138 |
|
|
|
0.03 |
% |
|
|
201 |
|
|
|
0.05 |
% |
Consumer loans |
|
|
81 |
|
|
|
0.02 |
% |
|
|
88 |
|
|
|
0.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,126 |
|
|
|
0.52 |
% |
|
$ |
14,852 |
|
|
|
3.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to managements efforts to identify and enter into workout arrangements with
borrowers experiencing financial difficulty, delinquent loans at December 31, 2009 were
significantly lower than delinquent loans at December 31, 2008. Developers that do not have
adequate cash flow or cash reserves to sustain the required interest payments on their loans during
this period of economic stress have been unable to continue their developments. As a result, the
Bank has classified a significant portion of these loans as non-performing assets.
46
The Banks non-performing assets consist of loans past due 90 days or more and still accruing,
nonaccrual loans and OREO. Loans that have been restructured and remain on
accruing status are not included in non-performing assets. The following table presents the Banks
non-performing assets for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due 90 days |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real |
|
|
Total |
|
|
|
or more and |
|
|
% of total |
|
|
Nonaccrual |
|
|
% of total |
|
|
estate |
|
|
non-performing |
|
|
|
still accruing |
|
|
loans |
|
|
loans |
|
|
loans |
|
|
owned |
|
|
assets |
|
|
|
($ in thousands) |
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development and other land loans |
|
$ |
43 |
|
|
|
0.01 |
% |
|
$ |
21,596 |
|
|
|
5.30 |
% |
|
$ |
5,834 |
|
|
$ |
27,473 |
|
Commercial real estate |
|
|
|
|
|
|
0.00 |
% |
|
|
11,003 |
|
|
|
2.70 |
% |
|
|
1,093 |
|
|
|
12,096 |
|
Consumer real estate |
|
|
|
|
|
|
0.00 |
% |
|
|
7,864 |
|
|
|
1.93 |
% |
|
|
7,648 |
|
|
|
15,512 |
|
Commercial loans |
|
|
|
|
|
|
0.00 |
% |
|
|
75 |
|
|
|
0.02 |
% |
|
|
|
|
|
|
75 |
|
Consumer loans |
|
|
25 |
|
|
|
0.01 |
% |
|
|
10 |
|
|
|
0.00 |
% |
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68 |
|
|
|
0.02 |
% |
|
$ |
40,548 |
|
|
|
9.95 |
% |
|
$ |
14,575 |
|
|
$ |
55,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing
loans to total loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.96 |
% |
|
|
|
|
|
|
|
|
Total non-performing
assets to total loans
plus other real
estate owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land
development
and other land loans |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
9,185 |
|
|
|
2.18 |
% |
|
$ |
2,859 |
|
|
$ |
12,044 |
|
Commercial real estate |
|
|
|
|
|
|
0.00 |
% |
|
|
136 |
|
|
|
0.03 |
% |
|
|
6,475 |
|
|
|
6,611 |
|
Consumer real estate |
|
|
122 |
|
|
|
0.03 |
% |
|
|
2,390 |
|
|
|
0.57 |
% |
|
|
110 |
|
|
|
2,622 |
|
Commercial loans |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
Consumer loans |
|
|
6 |
|
|
|
0.00 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
128 |
|
|
|
0.03 |
% |
|
$ |
11,711 |
|
|
|
2.79 |
% |
|
$ |
9,444 |
|
|
$ |
21,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing
loans to total loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.82 |
% |
|
|
|
|
|
|
|
|
Total non-performing
assets to total loans
plus other
real estate owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.95 |
% |
|
|
|
|
|
|
|
|
Delinquent and nonaccrual loans at both December 31, 2009 and December 31, 2008 consisted
primarily of construction and land development loans and commercial and consumer real estate loans.
Approximately $21,596,000 of the nonaccrual loans, or 53.3% of the approximate $40,548,000 total at
December 31, 2009, are construction and land development loans while commercial real estate and
consumer real estate make up approximately $11,003,000 and $7,864,000, or 27.1% and 19.4%,
respectively, of nonaccrual loans at that date.
Notwithstanding the general favorable trends in tourism in Sevier County, residential and
commercial real estate sales continued to be weak during 2009, following the same pattern that
existed during the second half of 2008. The reduced sales have negatively impacted past due,
nonaccrual and charged-off loans. Price declines during 2009 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 during 2009. 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.
47
The following table sets forth the reduction in interest income we experienced in 2008 and
2009 as a result of non-performance of certain loans during the year:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Interest income that would have been recorded on
nonaccrual loans under original terms |
|
$ |
1,359 |
|
|
$ |
748 |
|
|
|
|
|
|
|
|
|
|
Interest income that was recorded on nonaccrual
loans |
|
|
45 |
|
|
|
2 |
|
The purpose of placing a loan on nonaccrual is to prevent the Bank from overstating its
income. The decision to place a loan on nonaccrual is made by the Executive Committee based on a
monthly review. The Executive Committee also reviews any loans recommended by management to be
placed on nonaccrual that are: (1) being maintained on a cash basis because of deterioration in the
financial position of the borrower; or (2) for which payment in full of interest or principal is
not expected.
Generally, the Bank does not accrue interest on any loan when principal or interest are in
default for 90 days or more unless the loan is well secured and in the process of collection.
Consumer loans and residential real estate loans secured by 1-4 family dwellings are ordinarily not
subject to those guidelines.
The Board of Directors may restore a non-accruing loan to an accruing status when principal
and interest is no longer due and unpaid, or it otherwise becomes both well secured and in the
process of collection. All loans on non-accrual are reported on the Banks watch loan list.
The Banks OREO increased approximately $5,131,000 during 2009. One property, an operating
nightly condo rental operation located in Pigeon Forge, Tennessee, which previously secured a loan
for approximately $5,116,000, represents approximately $4,860,000, or 33%, of the OREO balance at
December 31, 2009 (included in consumer real estate in the table above). The condos are currently
under management contract with an experienced nightly rental management company as we seek to
market the sale of the properties.
Potential problem loans, which are not included in nonperforming loans, amounted to
approximately $27.2 million, or 6.66% of total loans outstanding at December 31, 2009, compared to
approximately $2.9 million, or 0.68% of total loans outstanding at December 31, 2008. Potential
problem loans represent those loans with a well-defined weakness and where information about
possible credit problems of borrowers has caused management to have serious
doubts about the borrowers ability to comply with present repayment terms. This definition is
believed to be substantially consistent with the standards established by the OCC, the Banks
primary regulator, for loans classified as substandard or worse, excluding the impact of
nonperforming loans. The large increase in potential problem loans was caused primarily by the
downgrade of additional residential construction and development loans, commercial and industrial
loans, and commercial real estate loans due to the continuing deterioration in the economy. Loans
past due 30 days or longer have been excluded from potential problem loans.
48
During 2009, the Bank formed a Special Assets department dedicated to oversight of
non-performing assets. The Special Assets department focuses on relationships that represent
current and potential performance problems related to the Banks loan portfolio. The department
also handles administration of the Banks OREO properties including incorporating new information
and data as it becomes available and applying that information to the recorded value of assets.
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.
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 loan review
officer, the CFO presents a quarterly analysis of the adequacy of the allowance for loan losses for
review by our board of directors.
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 December 31, 2009, approximately $200 million in loans, or 49% of 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 $180 million in loans, or
43% of
total loans, at December 31, 2008. The most significant increase in this category was for hotel &
motel franchise operators which increased approximately $16 million to approximately $41 million.
Additionally, loans to overnight rental agencies increased approximately $9 million to
approximately $38 million.
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.
49
Management is not aware of any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been identified 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 troubled debt restructuring (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 and management determines the proper course of action
relating to these loans and receives monthly updates as to the status of the loans.
The following table presents impaired loans as of December 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Impaired |
|
|
% of total |
|
|
Impaired |
|
|
% of total |
|
|
|
Loans |
|
|
loans |
|
|
Loans |
|
|
loans |
|
|
|
($ in thousands) |
|
Construction, land development
and other land loans |
|
$ |
27,213 |
|
|
|
6.67 |
% |
|
$ |
1,907 |
|
|
|
0.45 |
% |
Commercial real estate |
|
|
13,224 |
|
|
|
3.24 |
% |
|
|
616 |
|
|
|
0.15 |
% |
Consumer real estate |
|
|
22,616 |
|
|
|
5.55 |
% |
|
|
824 |
|
|
|
0.20 |
% |
Other loans |
|
|
94 |
|
|
|
0.02 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
63,147 |
|
|
|
15.49 |
% |
|
$ |
3,347 |
|
|
|
0.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
The increase in impaired loans during 2009 was primarily related to the weakened
residential and commercial real estate market in the Banks market areas. Within this segment of
the portfolio, the Bank makes loans to, among other borrowers, home builders and developers of
land. These borrowers have continued to experience stress during the current recession due to a
combination of declining demand for residential real estate and the resulting price and collateral
value declines. In addition, housing starts in the Banks market areas continue to slow. An
extended recessionary period 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.
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 December 31, 2009, there were $21.8 million of accruing restructured loans
that remain in a performing status. There were no accruing restructured loans at December 31, 2008.
TDRs at December 31, 2009 totaled approximately $37,332,000 which is 59.1% of total impaired
loans. The TDRs related primarily to 1-4 family residential loans totaling approximately
$15,093,000, or 23.9% of impaired loans, construction and development loans totaling approximately
$11,450,000, or 18.1% of impaired loans and commercial real estate loans totaling approximately
$10,789,000, or 17.1% of impaired loans. The 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, and include an
interest rate reduction during this term.
Our allowance for loan losses at December 31, 2009 was approximately $11,353,000, a net
increase of approximately $6,061,000 for the year. The allowance for loan losses as a percentage of
total loans, non-accrual loans and non-performing assets at December 31, 2009 was 2.78%, 28.00% and
27.95%, respectively, compared to 1.26%, 45.19% and 24.86%, respectively, at December 31, 2008. Net
charge-offs during 2009 increased from approximately $957,000 in 2008 to approximately $5,612,000
in 2009, representing a net charge-off ratio of 1.35% in 2009 compared to 0.23% in 2008. 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 December
31, 2009, 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 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.
51
The following table summarizes our loan loss experience and related adjustments to the
allowance for loan losses as of the dates and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(dollars in thousands) |
|
Average balance of loans outstanding |
|
$ |
415,522 |
|
|
$ |
417,124 |
|
|
$ |
373,237 |
|
|
$ |
292,950 |
|
|
$ |
227,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance for loan losses at beginning of
year |
|
|
5,292 |
|
|
|
3,974 |
|
|
|
3,524 |
|
|
|
2,634 |
|
|
|
2,281 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, agricultural |
|
|
328 |
|
|
|
198 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
Real estate construction, development |
|
|
3,054 |
|
|
|
686 |
|
|
|
158 |
|
|
|
1 |
|
|
|
24 |
|
Real estate mortgage |
|
|
2,220 |
|
|
|
41 |
|
|
|
250 |
|
|
|
25 |
|
|
|
40 |
|
Consumer and other |
|
|
289 |
|
|
|
98 |
|
|
|
110 |
|
|
|
23 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, agricultural |
|
|
1 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction, development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Real estate mortgage |
|
|
251 |
|
|
|
11 |
|
|
|
15 |
|
|
|
18 |
|
|
|
10 |
|
Consumer and other |
|
|
27 |
|
|
|
12 |
|
|
|
14 |
|
|
|
5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
5,612 |
|
|
|
957 |
|
|
|
532 |
|
|
|
25 |
|
|
|
93 |
|
Additions to allowance charges to operations |
|
|
11,673 |
|
|
|
2,275 |
|
|
|
982 |
|
|
|
915 |
|
|
|
446 |
|
Balance of allowance for loan losses at end of year |
|
|
11,353 |
|
|
|
5,292 |
|
|
|
3,974 |
|
|
|
3,524 |
|
|
|
2,634 |
|
Ratio of net loan charge-offs during the year to average
loans outstanding during the year |
|
|
1.35 |
% |
|
|
0.23 |
% |
|
|
0.14 |
% |
|
|
0.01 |
% |
|
|
0.04 |
% |
The following table presents our allocation of the allowance for loan losses to the
categories of loans in our loan portfolio as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
Loan |
|
|
|
|
|
|
|
Category as |
|
|
|
|
|
|
Category as |
|
|
|
|
|
|
Category as |
|
|
|
|
|
|
Category as |
|
|
|
|
|
|
Category as |
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
% of Total |
|
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
Amount |
|
|
Loans |
|
|
|
(dollars in thousands) |
|
Commercial |
|
$ |
557 |
|
|
|
7.45 |
% |
|
$ |
1,289 |
|
|
|
8.95 |
% |
|
$ |
968 |
|
|
|
9.03 |
% |
|
$ |
418 |
|
|
|
7.56 |
% |
|
$ |
225 |
|
|
|
3.16 |
% |
Real estate
construction,
development |
|
|
5,844 |
|
|
|
24.47 |
% |
|
|
2,131 |
|
|
|
33.86 |
% |
|
|
1,600 |
|
|
|
37.93 |
% |
|
|
1,331 |
|
|
|
40.03 |
% |
|
|
837 |
|
|
|
32.43 |
% |
Real estate mortgage |
|
|
4,798 |
|
|
|
66.38 |
% |
|
|
1,599 |
|
|
|
55.18 |
% |
|
|
1,201 |
|
|
|
50.55 |
% |
|
|
1,669 |
|
|
|
50.21 |
% |
|
|
1,502 |
|
|
|
58.23 |
% |
Consumer, other |
|
|
154 |
|
|
|
1.70 |
% |
|
|
273 |
|
|
|
2.01 |
% |
|
|
205 |
|
|
|
2.49 |
% |
|
|
106 |
|
|
|
2.20 |
% |
|
|
70 |
|
|
|
6.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,353 |
|
|
|
100.00 |
% |
|
$ |
5,292 |
|
|
|
100.00 |
% |
|
$ |
3,974 |
|
|
|
100.00 |
% |
|
$ |
3,524 |
|
|
|
100.00 |
% |
|
$ |
2,634 |
|
|
|
100.00 |
% |
Securities
Our investment securities portfolio consists of mortgage-backed securities, municipal
securities and securities of U.S. government agencies. The investment securities portfolio is the
second largest component of our earning assets and represented 26.67% of total earning assets and
23.01% of total assets at year-end 2009. 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. We also use our investment securities portfolio to meet
pledging requirements for deposits and borrowings. The average yield on our investment securities
portfolio during 2009 was 3.98% versus 4.88% for 2008, a decrease of 90 basis points. Net
unrealized gains (losses) on securities available for sale, included in accumulated other
comprehensive income (loss), increased from a net unrealized loss of ($147,587) for the year ended
December 31, 2008 to a net unrealized gain of $283,014 at December 31, 2009.
52
The growth in our investment securities portfolio during 2009 was seen primarily in
mortgage-backed securities and U.S. Treasury and government agency securities, which increased 16%
and 76%, respectively, and was attributable to limited lending opportunities, increased pledging
requirements related to borrowed funds and increased collateralization percentages applicable to
our pledging requirements, primarily those related to public funds. The required collateralization
percent in effect for public funds pledging was 90% at December 31, 2008. At December 31, 2009, the
required percentage was 115%. Additionally, during 2009, we purchased and pledged approximately
$6.5 million in mortgage-backed securities as collateral for certain FHLB borrowings. The average
yields on these investments generally exceeded the cost of the interest-bearing deposits that
funded them during 2009. However, the cost of these deposits and the lower yield associated with
these securities, when compared to loans, negatively impacted our net interest margin during 2009.
Included in our investment securities portfolio as of December 31, 2009, was approximately
$22,328,000 in tax-exempt municipal securities.
The carrying amounts of securities at the dates indicated are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
and corporations |
|
$ |
10,149 |
|
|
$ |
5,751 |
|
|
$ |
9,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
|
|
|
|
175 |
|
|
|
175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
114,057 |
|
|
|
98,045 |
|
|
|
57,975 |
|
|
Obligations of states and political subdivisions |
|
|
20,124 |
|
|
|
20,607 |
|
|
|
13,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
144,330 |
|
|
|
124,578 |
|
|
|
81,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions |
|
|
2,204 |
|
|
|
2,117 |
|
|
|
2,021 |
|
53
The following table contains the contractual maturity distribution, carrying value, and
weighted-average yield to maturity of our investment securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average Tax |
|
|
After 1 |
|
|
Average Tax |
|
|
After 5 |
|
|
Average Tax |
|
|
|
|
|
|
Average Tax |
|
|
|
|
|
|
Average Tax |
|
|
|
1 year |
|
|
Equivalent |
|
|
Year - 5 |
|
|
Equivalent |
|
|
Years - 10 |
|
|
Equivalent |
|
|
Over 10 |
|
|
Equivalent |
|
|
|
|
|
|
Equivalent |
|
|
|
or less |
|
|
Yield |
|
|
Years |
|
|
Yield |
|
|
Years |
|
|
Yield |
|
|
Years |
|
|
Yield |
|
|
Total |
|
|
Yield |
|
|
|
(dollars in thousands) |
|
Securities available for
sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and
government agencies |
|
$ |
6,249 |
|
|
|
0.11 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
3,900 |
|
|
|
4.78 |
% |
|
$ |
10,149 |
|
|
|
1.91 |
% |
Mortgage-backed securities |
|
|
171 |
|
|
|
5.13 |
% |
|
|
89,329 |
|
|
|
4.42 |
% |
|
|
9,356 |
|
|
|
4.69 |
% |
|
|
15,201 |
|
|
|
4.73 |
% |
|
|
114,057 |
|
|
|
4.48 |
% |
Obligations of states and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,027 |
|
|
|
3.95 |
% |
|
|
14,097 |
|
|
|
4.85 |
% |
|
|
20,124 |
|
|
|
4.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
|
6,420 |
|
|
|
0.25 |
% |
|
|
89,329 |
|
|
|
4.42 |
% |
|
|
15,383 |
|
|
|
4.40 |
% |
|
|
33,198 |
|
|
|
4.79 |
% |
|
|
144,330 |
|
|
|
4.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to
maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690 |
|
|
|
4.65 |
% |
|
|
1,514 |
|
|
|
4.38 |
% |
|
|
2,204 |
|
|
|
4.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690 |
|
|
|
4.65 |
% |
|
|
1,514 |
|
|
|
4.38 |
% |
|
|
2,204 |
|
|
|
4.47 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
6,420 |
|
|
|
0.25 |
% |
|
|
89,329 |
|
|
|
4.42 |
% |
|
|
16,073 |
|
|
|
4.41 |
% |
|
|
34,712 |
|
|
|
4.77 |
% |
|
|
146,534 |
|
|
|
4.32 |
% |
We did not hold any securities from a single issuer that exceeded 10% of total
shareholders equity as of December 31, 2009, except for mortgage-backed securities issued by
government sponsored entities that had a carrying value of approximately $114,057,000 and
$98,045,000 at December 31, 2009 and 2008, respectively.
Deposits
Asset growth during 2009 was funded primarily by the increase in deposits for the periods
ended December 31, 2009 and 2008.
The balance in total deposits was distributed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
$ change |
|
|
% change |
|
Noninterest-bearing demand
deposits |
|
$ |
47,601 |
|
|
$ |
44,652 |
|
|
$ |
2,949 |
|
|
|
6.60 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing
deposits |
|
|
47,601 |
|
|
|
44,652 |
|
|
|
2,949 |
|
|
|
6.60 |
% |
NOW accounts |
|
|
112,440 |
|
|
|
110,420 |
|
|
|
2,020 |
|
|
|
1.83 |
% |
Money market accounts |
|
|
40,809 |
|
|
|
37,167 |
|
|
|
3,642 |
|
|
|
9.80 |
% |
Savings |
|
|
20,520 |
|
|
|
15,978 |
|
|
|
4,542 |
|
|
|
28.43 |
% |
Brokered deposits |
|
|
69,871 |
|
|
|
62,478 |
|
|
|
7,393 |
|
|
|
11.83 |
% |
Time deposits |
|
|
219,373 |
|
|
|
183,971 |
|
|
|
35,402 |
|
|
|
19.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
463,013 |
|
|
|
410,014 |
|
|
|
52,999 |
|
|
|
12.93 |
% |
|
Total deposits |
|
$ |
510,614 |
|
|
$ |
454,666 |
|
|
$ |
55,948 |
|
|
|
12.31 |
% |
Brokered deposits are certificates of deposit acquired from approved brokers on terms that are
substantially similar to deposits acquired in the local market. Brokered deposits increased
approximately $7,000,000 during 2009, and represented approximately 13.68% and 13.74% of total
deposits at December 31, 2009 and 2008, respectively. The Bank will continue to carefully utilize
these brokered deposits going forward to supplement other sources of liquidity due to the relative
ease at which these deposits can be acquired and replaced upon maturity, so long as the Bank is not
subject to a formal enforcement action requiring it to maintain capital at levels higher than those
required to be well-capitalized under the prompt corrective action provisions of the FDICIA, and
their comparability to local market rates. The average cost of our brokered deposits at December
31, 2009 was 1.92%. During 2009, the average cost of these deposits was 2.44%. During the first
sixty days of 2010, maturing brokered deposits were replaced at an average rate of 1.12%, a 132
basis point decrease from the 2009 average, with maturities ranging from 12 to 42 months.
54
The average balances of deposit accounts by category and the average rates paid thereon are
presented below for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
|
|
(dollars in thousands) |
|
Noninterest-bearing demand
deposits |
|
$ |
45,761 |
|
|
|
0 |
% |
|
$ |
48,331 |
|
|
|
0 |
% |
|
$ |
53,336 |
|
|
|
0 |
% |
Interest-bearing demand deposits |
|
|
150,384 |
|
|
|
1.23 |
% |
|
|
142,020 |
|
|
|
2.16 |
% |
|
|
127,704 |
|
|
|
3.88 |
% |
Savings deposits |
|
|
17,340 |
|
|
|
1.39 |
% |
|
|
13,815 |
|
|
|
1.95 |
% |
|
|
8,673 |
|
|
|
1.05 |
% |
Time deposits |
|
|
304,715 |
|
|
|
2.67 |
% |
|
|
224,055 |
|
|
|
4.28 |
% |
|
|
196,654 |
|
|
|
5.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
518,200 |
|
|
|
|
|
|
$ |
428,221 |
|
|
|
|
|
|
$ |
386,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balances in time certificates of deposit issued in amounts of $100,000 or more as of
December 31, 2009, are shown below by time remaining until maturity:
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
Three months or less |
|
$ |
50,418 |
|
Over three months through six months |
|
|
31,459 |
|
Over six months through 12 months |
|
|
57,412 |
|
Over 12 months |
|
|
28,957 |
|
|
|
|
|
Total |
|
$ |
168,246 |
|
The average balance of interest-bearing demand and savings deposits increased approximately
$11,889,000 during 2009. The average rate paid on these interest-bearing demand and savings
deposits in 2009 was 1.25%, down from 2.14% in 2008.
The increase in certificates of deposit was the result of an increase in customer deposits,
deposits received from a correspondent bank and acceptance of deposits through a national listing
service. We offer certificate of deposit accounts on a wide range of terms in order to achieve
sustained growth in a market area where there is strong competition for new deposits. Our total
average cost of interest-bearing deposits (including demand, savings and certificate of deposit
accounts) for 2009 was 2.17%, down from 3.40% in the prior year.
55
Shareholders Equity
The decrease in shareholders equity was primarily the result of the 2009 net loss of
approximately $4,228,000. Accumulated other comprehensive income (loss) represents the net
unrealized gain (losses) on securities available-for-sale. The decrease in shareholders equity
during 2009 was partially offset by the approximately $431,000 increase in accumulated
comprehensive income from a net loss of $147,587 at December 31, 2008 to a net gain of $283,014 at
December 31, 2009.
Interest Rate Sensitivity Management
Interest rate risk is the risk to earnings or market value of equity from the potential
movement in interest rates. The primary purpose of managing interest rate risk is to reduce the
effects of interest rate volatility and achieve reasonable stability of earnings from changes in
interest rates and preserve the value of our equity. Changes in interest rates affect, among other
things, our net interest income, volume of loan production and the fair value of financial
instruments and our loan portfolio. A key component of our interest rate risk management policy is
the maintenance of an appropriate mix of assets and liabilities.
Our earnings are affected not only by general economic conditions, but also by the monetary
and fiscal policies of the U.S. and its agencies, particularly the Federal Reserve. The monetary
policies of the Federal Reserve can influence the overall growth of loans, investment securities,
and deposits and the level of interest rates earned on assets and paid for liabilities. The nature
and impact of future changes in monetary policies are generally not predictable.
It is our objective to manage assets and liabilities to control the impact of interest rate
fluctuations on earnings and to provide a satisfactory, consistent level of profitability within
the framework of established cash, loan, investment, borrowing, and capital policies. Certain
officers within the Bank are charged with the responsibility for monitoring policies and procedures
that are designed to ensure acceptable composition of the asset/liability mix.
The Banks asset/liability mix is monitored on a regular basis and a report reflecting the
interest rate sensitive assets and interest rate sensitive liabilities is prepared and presented to
our Board of Directors and managements asset/liability committee on a quarterly basis. The key
objective of our asset/liability management policy is to monitor and adjust the mix of interest
rate sensitive assets and liabilities so as to minimize the impact of substantial movements in
interest rates on earnings by matching rates and maturities of our interest-earning assets to those
of our interest-bearing liabilities. An asset or liability is considered to be interest
rate-sensitive if it will reprice or mature within the time period analyzed, usually one year or
less.
We use interest rate sensitivity gap analysis to achieve the appropriate mix of interest
rate-sensitive assets and liabilities. The interest rate-sensitivity gap is the difference between
the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within
a given time period. A gap is considered positive when the amount of interest rate-sensitive assets
exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the
amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely affect net
interest income, while a positive gap would tend to result in an increase in net interest income.
Conversely, during a period of falling interest rates, a negative gap would tend to result in an
increase in net interest income, while a positive gap would tend to adversely affect net interest
income. If our assets and liabilities were equally flexible and moved concurrently, the impact of
any increase or decrease in interest rates on net interest income would be minimal.
56
A simple interest rate gap analysis by itself may not be an accurate indicator of how net
interest income will be affected by changes in interest rates. Accordingly, we also evaluate how
the repayment of particular assets and liabilities is impacted by changes in interest rates. Income
associated with interest-earning assets and costs associated with interest-bearing liabilities may
not be affected uniformly by changes in interest rates. In addition, unpredictable variables such
as the magnitude and duration of changes in interest rates may have a significant impact on net
interest income. For example, although certain assets and liabilities may have similar maturities
or periods of repricing, they may react in different degrees to changes in market interest rates.
Interest rates on certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types of assets and liabilities may lag behind
changes in general market rates. In addition, certain assets, such as adjustable rate mortgage
loans, have features (generally referred to as interest rate caps), that limit changes in
interest rates. Prepayment and early withdrawal levels also could deviate significantly from those
assumed in calculating the interest rate gap.
The following table summarizes our interest-sensitive assets and liabilities as of December
31, 2009. Adjustable rate loans are included in the period in which their interest rates are
scheduled to adjust. Fixed rate loans are included in the periods in which they are anticipated to
be repaid based on scheduled maturities and anticipated prepayments. Investment securities are
included in the period in which they are scheduled to mature while mortgage backed
securities are included according to expected repayment. Certificates of deposit are presented
according to contractual maturity dates.
57
Analysis of Interest Sensitivity
As of December 31, 2009
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 - 3 |
|
|
3 - 12 |
|
|
1 - 3 |
|
|
Over three |
|
|
|
|
|
|
months |
|
|
months |
|
|
years |
|
|
years |
|
|
Total |
|
Federal funds sold |
|
$ |
2,354 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,354 |
|
Securities |
|
|
6,060 |
|
|
|
24,248 |
|
|
|
24,169 |
|
|
|
92,057 |
|
|
|
146,534 |
|
Loans (1) |
|
|
212,776 |
|
|
|
60,885 |
|
|
|
94,702 |
|
|
|
39,341 |
|
|
|
407,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
221,190 |
|
|
|
85,133 |
|
|
|
118,871 |
|
|
|
131,398 |
|
|
|
556,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
153,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,249 |
|
Savings |
|
|
20,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,520 |
|
Time deposits |
|
|
75,888 |
|
|
|
161,097 |
|
|
|
50,847 |
|
|
|
1,412 |
|
|
|
289,244 |
|
Other borrowings |
|
|
1,776 |
|
|
|
200 |
|
|
|
12,700 |
|
|
|
50,000 |
|
|
|
64,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
251,433 |
|
|
|
161,297 |
|
|
|
63,547 |
|
|
|
51,412 |
|
|
|
527,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap |
|
$ |
(30,243 |
) |
|
$ |
(76,164 |
) |
|
$ |
55,324 |
|
|
$ |
79,986 |
|
|
$ |
28,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap |
|
$ |
(30,243 |
) |
|
$ |
(106,407 |
) |
|
$ |
(51,083 |
) |
|
$ |
28,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap ratio |
|
|
-13.67 |
% |
|
|
-89.46 |
% |
|
|
46.54 |
% |
|
|
60.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity
gap ratio |
|
|
-13.67 |
% |
|
|
-34.74 |
% |
|
|
-12.01 |
% |
|
|
5.19 |
% |
|
|
|
|
|
|
|
(1) |
|
Includes nonaccrual loans |
During the fourth quarter of 2008, the Federal Reserve, in response to increasing economic
instability, further reduced the targeted federal funds rate such that the targeted rate was less
than 0.25% throughout 2009 compared to an average rate of 2.09% throughout 2008.
At December 31, 2009, the Banks cumulative one-year interest rate sensitivity gap ratio was
(13.67%), which would tend to indicate that our interest-earning assets will re-price during this
period at a rate slower than our interest-bearing liabilities. In an extended declining interest
rate environment, this would be expected as the majority of our interest-earning assets reprice
more quickly than our interest-bearing liabilities and would have more closely followed the
magnitude and direction of the changing interest rates. Our interest-earning assets are likely much
closer to their current interest rate environment yield levels than a significant portion of our
interest-bearing liabilities, particularly time deposits and other longer term borrowings, which
should continue to reprice downward as outstanding liabilities originated during periods of higher
interest rates mature and get replaced at lower rates. Additionally, the effects of certain
categories of interest-bearing liabilities, primarily interest-bearing demand deposits and
overnight federal funds purchased, tend to be overstated in our gap analysis and we believe that
the spread between our interest-earning assets and interest-bearing liabilities will not be
affected as much by the repricing period for these deposits as they will by the current interest
rate environment. These particular shorter term liabilities, like our interest-earning assets, are
probably at or much closer to their current rate environment yield levels than other longer-term
liabilities mentioned above.
58
Return on Assets and Equity
The following table summarizes our return on average assets and return on average equity as
well as our dividend payout ratio for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Return on average assets |
|
|
-0.64 |
% |
|
|
0.56 |
% |
|
|
0.77 |
% |
Return on average equity |
|
|
-8.14 |
% |
|
|
6.48 |
% |
|
|
9.81 |
% |
Average equity as a percentage of average assets |
|
|
7.88 |
% |
|
|
8.68 |
% |
|
|
7.83 |
% |
Cash dividend payout ratio |
|
|
0.00 |
% |
|
|
30.65 |
% |
|
|
0.00 |
% |
Capital Adequacy and Liquidity
Our funding sources primarily include customer-based core deposits and customer repurchase
accounts. The Bank, being situated in a market that relies on tourism as its principal industry,
can be subject to periods of reduced deposit funding because tourism in Sevier County is seasonably
slow in the winter months. The Bank manages seasonal deposit outflows through its secured Federal
Funds lines of credit at several correspondent banks. Those lines totaled $23 million as of
December 31, 2009, 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 of Cincinnati as well as a line of credit
totaling approximately $15 million from the Federal Reserve Discount Window that the Bank uses to
meet short-term liquidity demands.
Capital adequacy is important to the continued financial safety and soundness and growth of
the Bank and the Company. Our banking regulators have adopted risk-based capital and leverage
guidelines to measure the capital adequacy of national banks and bank holding companies. Based on
these guidelines, management believes the Bank and the Company are well capitalized.
Regulatory Capital Requirements
The Bank and Company are subject to minimum capital standards as set forth by federal bank
regulatory agencies.
Capital for regulatory purposes differs from equity as determined under generally accepted
accounting principles. Generally, Tier 1 regulatory capital will equal capital as
determined under generally accepted accounting principles together with eligible trust preferred
securities and less any unrealized gains or losses on securities available for sale, while Tier 2
capital includes the allowance for loan losses up to certain limitations. Total risk based capital
is the sum of Tier 1 and Tier 2 capital.
59
Total capital at the Bank also has an important effect on the amount of FDIC insurance
premiums paid. Institutions not considered well capitalized are subject to higher rates for FDIC
insurance.
The Bank is subject to the supervision, examination and reporting requirements of the National
Bank Act and the regulations of the OCC. In the first quarter of 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%. Had these new minimum requirements been effective as
of December 31, 2009, the Bank would have been in compliance.
The table below set forth the Companys capital ratios as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Tier 1 Risk-Based Capital |
|
|
12.89 |
% |
|
|
13.34 |
% |
Regulatory minimum |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital |
|
|
14.16 |
% |
|
|
14.44 |
% |
Regulatory minimum |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
Tier 1 Leverage |
|
|
9.23 |
% |
|
|
10.51 |
% |
Regulatory minimum |
|
|
4.00 |
% |
|
|
4.00 |
% |
The table below sets forth the Banks capital ratios as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Tier 1 Risk-Based Capital |
|
|
12.75 |
% |
|
|
13.19 |
% |
Regulatory minimum |
|
|
4.00 |
% |
|
|
4.00 |
% |
Well-capitalized |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital |
|
|
14.02 |
% |
|
|
14.29 |
% |
Regulatory minimum |
|
|
8.00 |
% |
|
|
8.00 |
% |
Well-capitalized |
|
|
10.00 |
% |
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
Tier 1 Leverage |
|
|
9.14 |
% |
|
|
10.41 |
% |
Regulatory minimum |
|
|
4.00 |
% |
|
|
4.00 |
% |
Well-capitalized |
|
|
5.00 |
% |
|
|
5.00 |
% |
60
In November 2003, the Company formed a wholly owned Delaware statutory trust subsidiary,
MNB Capital Trust I. This subsidiary issued approximately $5.5 million in trust preferred
securities, guaranteed by the Company on a junior subordinated basis. In June 2006, the Company
formed a wholly owned Delaware statutory trust subsidiary, MNB Capital Trust II. This subsidiary
issued approximately $7.5 million in trust preferred securities, guaranteed by the Company on a
junior subordinated basis. The Company obtained the proceeds from the trusts sale of trust
preferred securities by issuing junior subordinated debentures to the trusts. Under the Financial
Accounting Standards Boards revised Interpretation No. 46 (FIN 46R), the trust subsidiaries must
be deconsolidated with the Company for accounting purposes. As a result of this accounting
pronouncement, the Federal Reserve adopted changes to its capital rules with respect to the
regulatory capital treatment afforded to trust preferred securities. The Federal Reserves current
rules permit qualified trust preferred securities and other restricted capital elements to be
included as Tier 1 capital up to 25% of core capital, net of goodwill and intangibles. The Company
believes that its trust preferred securities qualify under these revised regulatory capital rules
and expects that it will continue to treat the eligible portion of its $13,000,000 of trust
preferred securities as Tier 1 capital.
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.
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. For additional information relating to
our interest rate sensitivity management, refer to the discussion above under the heading Interest
Rate Sensitivity Management. 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 Banks 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.
61
The following is a summary of the Banks commitments outstanding at December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
(dollars in thousands) |
|
Commitments to extend credit |
|
$ |
50,702 |
|
|
$ |
82,097 |
|
Standby letters of credit |
|
|
5,801 |
|
|
|
9,885 |
|
|
|
|
|
|
|
|
Totals |
|
$ |
56,503 |
|
|
$ |
91,982 |
|
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 decreased approximately
$22,485,000 during 2009, reflecting current economic conditions in our market.
Effects of Inflation
Our consolidated financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the measurement of
financial position and operational results in terms of historic dollars, without considering
changes in the relative purchasing power of money over time due to inflation.
Inflation generally increases the costs of funds and operating overhead, and to the extent
loans and other assets bear variable rates, the yields on such assets. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant effect on the performance of
a financial institution than the effects of general levels of inflation. In addition, inflation
affects financial institutions cost of goods and services purchased, the cost of salaries and
benefits, occupancy expense, and similar items. Inflation and related increases in interest rates
generally decrease the market value of investments and loans held and may adversely affect
liquidity, earnings, and stockholders equity. Mortgage originations and refinancings tend to slow
as interest rates increase, and likely will reduce the Banks volume of such activities and the
income from the sale of residential mortgage loans in the secondary market.
Significant Accounting Changes
The information appearing under Note 18. Recent Accounting Pronouncements in the 2009 notes
to the financial statements is incorporated herein by reference.
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements of the Company, including notes thereto, and the reports
of the Companys independent registered public accounting firm are included in this Annual Report
on Form 10-K beginning at page F-1 and are incorporated herein by reference.
62
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
ITEM 9A(T). |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures 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, as of the end of the period covered by this
report, the Companys disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2009 there were no 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.
Managements Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting. Internal control is designed to provide reasonable assurance to
the Companys management and board of directors regarding the preparation of reliable published
financial statements. Internal control over financial reporting includes self-monitoring
mechanisms, and actions are taken to correct deficiencies as they are identified.
Because of inherent limitations in any system of internal control, no matter how well
designed, misstatements due to error or fraud may occur and not be detected, including the
possibility of the circumvention or overriding of controls. Accordingly, even effective internal
control over financial reporting can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, internal control effectiveness
may vary over time.
Management assessed the Companys internal control over financial reporting as of December 31,
2009. This assessment was based on criteria for effective internal control over financial reporting
described in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, the Chief Executive Officer and
Chief Financial Officer concluded that the Company maintained effective internal control over
financial reporting as of December 31, 2009 based on the specified criteria.
63
This annual report does not include an attestation report of the Companys independent
registered public accounting firm regarding internal control over financial reporting. Managements
report was not subject to attestation by the Companys independent registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company
to provide only managements report in this annual report.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
None.
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information appearing under the headings Proposal #1 Election of Directors, Additional
Information Concerning the Companys Board of Directors and Committees and Section 16(a)
Beneficial Ownership Reporting Compliance in the Proxy Statement (the 2010 Proxy Statement)
relating to the annual meeting of shareholders of the Company, scheduled to be held on May 18,
2010, is incorporated herein by reference.
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information appearing under the heading Compensation of Named Executive Officers and
Directors in the 2010 Proxy Statement is incorporated herein by reference.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The information appearing under the heading Outstanding Voting Securities of the Company and
Principal Holders Thereof in the 2010 Proxy Statement is incorporated herein by reference.
The information appearing under Note 14. Stock Options and Warrants in the 2009 notes to the
financial statements is incorporated herein by reference.
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information appearing under the headings Certain Relationships and Transactions and
Proposal #1 Election of Directors in the 2010 Proxy Statement is incorporated herein by
reference.
64
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information appearing under the caption Proposal #3 Ratification of the Appointment of
Independent Registered Public Accounting Firm in the 2010 Proxy Statement is incorporated herein
by reference.
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial statements. See Item 8.
(a)(2) Financial statement schedules. Inapplicable.
(a)(3) The following exhibits are filed as a part of or incorporated by reference in this
report:
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
2.1 |
|
|
Plan of Reorganization dated March 28, 2003, by and between
the Company and Mountain National Bank (included as Exhibit
2.1 to the Report on Form 8-K12G3 of the Company, dated July
12, 2003 (File No. 000-49912), previously filed with the
Commission and incorporated herein by reference). |
|
|
|
|
|
|
2.2 |
|
|
Amendment to Plan of Reorganization dated July 1, 2003
(included as Exhibit 2.2 to the Report on Form 8-K12G3 of the
Company, dated July 12, 2003 (File No. 000-49912), previously
filed with the Commission and incorporated herein by
reference). |
|
|
|
|
|
|
3.1 |
|
|
Charter of Incorporation of the Company, as amended (Restated
for SEC filing purposes only). |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Bylaws of the Company, as amended
(included as Exhibit 3.1 to the Report on Form 8-K of the
Company, dated March 31, 2010 (File No. 000-49912), previously
filed with the Commission and incorporated herein by
reference). |
|
|
|
|
|
|
10.1 |
|
|
Stock Option Plan of the Company, as amended (included as
Exhibit 10.1 to the Report on Form 8-K of the Company, dated
May 19, 2006 (File No. 000-49912), previously filed with the
Commission and incorporated herein by reference)* |
|
|
|
|
|
|
10.2 |
|
|
Stock Option Agreement of Dwight B. Grizzell (assumed by
Company) (included as Exhibit 10.3 to the Companys Form
10-KSB for the year ended December 31, 2002 and incorporated
herein by reference)* |
|
|
|
|
|
10.3
|
|
Summary Description of Director and Named Executive Officer
Compensation Arrangements* |
65
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
10.4 |
|
|
Form of Warrant Agreement (included as Exhibit 10.5 to the
Companys Form SB-2/A filed with the Commission on August 23,
2005) |
|
|
|
|
|
|
10.5 |
|
|
Employment Agreement dated as of May 15, 2009 by and among
Mountain National Bank, Mountain National Bancshares, Inc. and
Grace McKinzie (included as Exhibit 10.1 to the Report on Form
8-K of the Company, dated March 31, 2010 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)* |
|
|
|
|
|
|
10.6 |
|
|
Employment Agreement dated as of May 28, 2009 by and among
Mountain National Bank, Mountain National Bancshares, Inc. and
Michael Brown (included as Exhibit 10.2 to the Report on Form
8-K of the Company, dated March 31, 2010 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)* |
|
|
|
|
|
|
10.7 |
|
|
Employment Agreement dated as of May 18, 2009 by and among
Mountain National Bank, Mountain National Bancshares, Inc. and
Richard Hubbs (included as Exhibit 10.3 to the Report on Form
8-K of the Company, dated March 31, 2010 (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference)* |
|
|
|
|
|
|
10.8 |
|
|
Amended and Restated Salary Continuation Agreement, dated
January 19, 2007, by and between Mountain National Bank and
Dwight Grizzell. (included as Exhibit 10.8 to the Companys
Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference)* |
|
|
|
|
|
|
10.9 |
|
|
Amendment, dated November 19, 2007, to Amended and Restated
Salary Continuation Agreement, by and between Mountain
National Bank and Dwight Grizzell. (included as Exhibit 10.9
to the Companys Form 10-K for the year ended December 31,
2007 and incorporated herein by reference)* |
|
|
|
|
|
|
10.10 |
|
|
Amended and Restated Salary Continuation Agreement, dated
January 19, 2007, by and between Mountain National Bank and
Michael Brown. (included as Exhibit 10.10 to the Companys
Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference)* |
|
|
|
|
|
|
10.11 |
|
|
Amendment, dated November 19, 2007, to Amended and Restated
Salary Continuation Agreement, by and between Mountain
National Bank and Michael Brown. (included as Exhibit 10.11 to
the Companys Form 10-K for the year ended December 31, 2007
and incorporated herein by reference)* |
|
|
|
|
|
|
10.12 |
|
|
Amended and Restated Salary Continuation Agreement, dated
January 19, 2007, by and between Mountain National Bank and
Grace McKinzie. (included as Exhibit 10.12 to the Companys
Form 10-K for the year ended December 31, 2007 and
incorporated herein by reference)* |
|
|
|
|
|
|
10.13 |
|
|
Amendment, dated November 19, 2007, to Amended and Restated
Salary Continuation Agreement, by and between Mountain
National Bank and Grace McKinzie. (included as Exhibit 10.13
to the Companys Form 10-K for the year ended December 31,
2007 and incorporated herein by reference)* |
66
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
10.14 |
|
|
Agreement, dated June 2, 2009, by and between Mountain
National Bank and the Office of the Comptroller of the
Currency. (included as Exhibit 10.1 to the Report on Form 8-K
of the Company, dated June 5, 2009, (File No. 000-49912),
previously filed with the Commission and incorporated herein
by reference) |
|
|
|
|
|
|
21 |
|
|
Subsidiaries of the Company |
|
|
|
|
|
|
23 |
|
|
Consent of Independent Registered Public Accounting Firm |
|
|
|
|
|
|
31.1 |
|
|
Certificate of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Certificate of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
Certificate of CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.2 |
|
|
Certificate of CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Denotes management contract or compensatory plan or arrangement. |
The Company is a party to certain agreements entered into in connection with the offering by
MNB Capital Trust I of an aggregate of $5,500,000 in trust preferred securities and the offering by
MNB Capital Trust II of an aggregate of $7,500,000 in trust preferred securities, as more fully
described in this Annual Report on Form 10-K. In accordance with Item 601(b)(4)(iii) of Regulation
S-K, and because the total amount of the trust preferred securities is not in excess of 10% of the
Companys total assets, the Company has not filed the various documents and agreements associated
with the trust preferred securities herewith. The Company has, however, agreed to furnish copies of
the various documents and agreements associated with the trust preferred securities to the
Commission upon request.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
|
|
|
|
(Registrant) |
|
|
|
|
|
By:
|
|
/s/ Dwight B. Grizzell
Dwight B. Grizzell
|
|
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
Date: March 31, 2010 |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
/s/ Dwight B. Grizzell
Dwight B. Grizzell, President,
|
|
Date: March 31, 2010 |
Chief Executive Officer and Director |
|
|
|
|
|
/s/ Richard A. Hubbs
Richard A. Hubbs, Senior Vice President and
|
|
Date: March 31, 2010 |
Chief Financial Officer (Principal Financial |
|
|
and Accounting Officer) |
|
|
|
|
|
/s/ James E. Bookstaff
James E. Bookstaff, Director
|
|
Date: March 31, 2010 |
|
|
|
/s/ Gary A. Helton
Gary A. Helton, Director
|
|
Date: March 31, 2010 |
|
|
|
/s/ Charlie R. Johnson
Charlie R. Johnson, Director
|
|
Date: March 31, 2010 |
|
|
|
/s/ Sam L. Large
Sam L. Large, Director
|
|
Date: March 31, 2010 |
|
|
|
/s/ Jeffrey J. Monson
Jeffrey J. Monson, Director
|
|
Date: March 31, 2010 |
|
|
|
/s/ Linda N. Ogle
Linda N. Ogle, Director
|
|
Date: March 31, 2010 |
|
|
|
/s/ Michael C. Ownby
Michael C. Ownby, Director
|
|
Date: March 31, 2010 |
|
|
|
/s/ John M. Parker
John M. Parker, Director
|
|
Date: March 31, 2010 |
|
|
|
/s/ Ruth Reams
Ruth Reams, Director
|
|
Date: March 31, 2010 |
68
Mountain National Bancshares, Inc. and Subsidiaries
Consolidated Financial Report
December 31, 2009
CONTENTS
|
|
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|
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|
|
Page |
|
|
|
|
|
|
|
|
|
F-1 |
|
|
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 F-46 |
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Mountain National Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Mountain National Bancshares, Inc.
and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in shareholders equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009 and 2008, and the
results of its operations and its cash flows for the years then ended, in conformity with U.S.
generally accepted accounting principles.
/s/ Crowe Horwath LLP
Brentwood, Tennessee
March 31, 2010
F-1
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
11,750,723 |
|
|
$ |
14,013,675 |
|
Federal funds sold |
|
|
2,353,913 |
|
|
|
576,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
14,104,636 |
|
|
|
14,589,675 |
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
144,330,068 |
|
|
|
124,578,359 |
|
Securities held to maturity, fair value $2,208,236 at December 31, 2009 and $1,813,410
at December 31, 2008 |
|
|
2,204,303 |
|
|
|
2,117,044 |
|
Restricted investments, at cost |
|
|
3,816,050 |
|
|
|
3,862,518 |
|
Loans, net of allowance for loan losses of $11,353,438 at December 31, 2009 and
$5,292,028 at December 31, 2008 |
|
|
396,351,008 |
|
|
|
415,137,230 |
|
Investment in partnership |
|
|
4,198,675 |
|
|
|
4,117,962 |
|
Premises and equipment |
|
|
33,709,282 |
|
|
|
31,484,233 |
|
Accrued interest receivable |
|
|
3,045,290 |
|
|
|
2,737,819 |
|
Cash surrender value of life insurance |
|
|
11,366,270 |
|
|
|
11,078,708 |
|
Other real estate owned |
|
|
14,575,368 |
|
|
|
9,444,150 |
|
Other assets |
|
|
9,083,366 |
|
|
|
2,225,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
636,784,316 |
|
|
$ |
621,373,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
$ |
47,600,944 |
|
|
$ |
44,652,008 |
|
NOW accounts |
|
|
112,440,413 |
|
|
|
110,420,061 |
|
Money market accounts |
|
|
40,808,892 |
|
|
|
37,166,820 |
|
Savings accounts |
|
|
20,519,998 |
|
|
|
15,977,609 |
|
Time deposits |
|
|
289,243,894 |
|
|
|
246,449,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
510,614,141 |
|
|
|
454,665,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
|
|
|
|
22,580,000 |
|
Securities sold under agreements to repurchase |
|
|
1,776,402 |
|
|
|
4,331,865 |
|
Accrued interest payable |
|
|
605,936 |
|
|
|
1,022,921 |
|
Subordinated debentures |
|
|
13,403,000 |
|
|
|
13,403,000 |
|
Federal Home Loan Bank advances |
|
|
62,900,000 |
|
|
|
72,900,000 |
|
Other liabilities |
|
|
115,682 |
|
|
|
1,475,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
589,415,161 |
|
|
|
570,379,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
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 |
|
|
42,125,828 |
|
|
|
41,952,632 |
|
Retained earnings |
|
|
2,328,702 |
|
|
|
6,557,097 |
|
Accumulated other comprehensive income (loss) |
|
|
283,014 |
|
|
|
(147,587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
47,369,155 |
|
|
|
50,993,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
636,784,316 |
|
|
$ |
621,373,199 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
F-2
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
Loans |
|
$ |
25,072,166 |
|
|
$ |
29,920,558 |
|
Taxable securities |
|
|
5,219,060 |
|
|
|
4,434,395 |
|
Tax-exempt securities |
|
|
1,053,433 |
|
|
|
788,792 |
|
Federal funds sold and deposits in other banks |
|
|
24,710 |
|
|
|
49,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
31,369,369 |
|
|
|
35,192,991 |
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
Deposits |
|
|
10,247,527 |
|
|
|
12,914,535 |
|
Federal funds purchased |
|
|
36,020 |
|
|
|
314,216 |
|
Repurchase agreements |
|
|
91,022 |
|
|
|
129,080 |
|
Federal Home Loan Bank advances |
|
|
2,592,048 |
|
|
|
2,813,163 |
|
Subordinated debentures |
|
|
392,016 |
|
|
|
763,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
13,358,633 |
|
|
|
16,934,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
18,010,736 |
|
|
|
18,258,801 |
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
11,672,802 |
|
|
|
2,275,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
6,337,934 |
|
|
|
15,983,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
2,326,614 |
|
|
|
1,424,062 |
|
Other fees and commissions |
|
|
1,262,244 |
|
|
|
1,222,454 |
|
Gain on sale of mortgage loans |
|
|
146,913 |
|
|
|
162,740 |
|
Investment gains and losses, net |
|
|
2,558,612 |
|
|
|
179,274 |
|
Other than temporary loss |
|
|
|
|
|
|
|
|
Total impairment loss |
|
|
(405,846 |
) |
|
|
|
|
Loss recognized in other comprehensive income (loss) |
|
|
(58,478 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net impairment recognized in earnings |
|
|
(347,368 |
) |
|
|
|
|
Other real estate gains and losses, net |
|
|
(1,478,877 |
) |
|
|
758,976 |
|
Other noninterest income |
|
|
395,248 |
|
|
|
577,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
4,863,386 |
|
|
|
4,325,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
9,670,008 |
|
|
|
9,232,079 |
|
Occupancy expenses |
|
|
1,698,987 |
|
|
|
1,323,860 |
|
FDIC assessment expense |
|
|
1,537,439 |
|
|
|
353,606 |
|
Other operating expenses |
|
|
6,311,308 |
|
|
|
5,292,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
19,217,742 |
|
|
|
16,202,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(8,016,422 |
) |
|
|
4,106,995 |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
(3,788,027 |
) |
|
|
826,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,228,395 |
) |
|
$ |
3,280,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER SHARE |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.61 |
) |
|
$ |
1.24 |
|
Diluted |
|
$ |
(1.61 |
) |
|
$ |
1.24 |
|
See accompanying Notes to Consolidated Financial Statements
F-3
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Comprehensive |
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Shareholders |
|
|
|
Income (Loss) |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income/(Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, January 1, 2008 |
|
|
|
|
|
$ |
2,499,629 |
|
|
$ |
39,426,881 |
|
|
$ |
7,300,933 |
|
|
$ |
(278,990 |
) |
|
|
48,948,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options, 72,914 shares |
|
|
|
|
|
|
72,914 |
|
|
|
504,716 |
|
|
|
|
|
|
|
|
|
|
|
577,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share repurchase program, 65,650 shares |
|
|
|
|
|
|
(65,650 |
) |
|
|
(1,136,372 |
) |
|
|
|
|
|
|
|
|
|
|
(1,202,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% stock dividend |
|
|
|
|
|
|
124,718 |
|
|
|
2,868,514 |
|
|
|
(3,011,034 |
) |
|
|
|
|
|
|
(17,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend ($0.38 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,013,010 |
) |
|
|
|
|
|
|
(1,013,010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
86,000 |
|
|
|
|
|
|
|
|
|
|
|
86,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of options |
|
|
|
|
|
|
|
|
|
|
202,893 |
|
|
|
|
|
|
|
|
|
|
|
202,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,280,208 |
|
|
|
|
|
|
|
|
|
|
|
3,280,208 |
|
|
|
|
|
|
|
3,280,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding loss on
securities available for
sale, net of
reclassification adjustment |
|
|
131,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,403 |
|
|
|
131,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
3,411,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2008 |
|
|
|
|
|
|
2,631,611 |
|
|
|
41,952,632 |
|
|
|
6,557,097 |
|
|
|
(147,587 |
) |
|
|
50,993,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
102,500 |
|
|
|
|
|
|
|
|
|
|
|
102,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of options |
|
|
|
|
|
|
|
|
|
|
70,696 |
|
|
|
|
|
|
|
|
|
|
|
70,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(4,228,395 |
) |
|
|
|
|
|
|
|
|
|
|
(4,228,395 |
) |
|
|
|
|
|
|
(4,228,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gain on
securities available for
sale, net of
reclassification adjustment |
|
|
430,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,601 |
|
|
|
430,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(3,797,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2009 |
|
|
|
|
|
$ |
2,631,611 |
|
|
$ |
42,125,828 |
|
|
$ |
2,328,702 |
|
|
$ |
283,014 |
|
|
$ |
47,369,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
F-4
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,228,395 |
) |
|
$ |
3,280,208 |
|
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,430,157 |
|
|
|
1,248,204 |
|
Net realized gains on securities available for sale |
|
|
(2,558,612 |
) |
|
|
(179,274 |
) |
Securities impairment loss recognized in earnings |
|
|
347,368 |
|
|
|
|
|
Net amortization on available for sale securities |
|
|
790,954 |
|
|
|
124,466 |
|
Increase in held to maturity due to accretion |
|
|
(87,259 |
) |
|
|
(95,717 |
) |
Provision for loan losses |
|
|
11,672,802 |
|
|
|
2,275,000 |
|
Net loss on other real estate |
|
|
1,478,877 |
|
|
|
62,120 |
|
Gain on sale of land |
|
|
|
|
|
|
(821,096 |
) |
Deferred income taxes |
|
|
(3,877,978 |
) |
|
|
(611,624 |
) |
Gross mortgage loans originated for sale |
|
|
(20,078,046 |
) |
|
|
(19,015,218 |
) |
Gross proceeds from sale of mortgage loans |
|
|
20,413,759 |
|
|
|
19,381,754 |
|
Gain on sale of mortgage loans |
|
|
(146,913 |
) |
|
|
(162,740 |
) |
Increase in cash surrender value of life insurance |
|
|
(287,562 |
) |
|
|
(428,915 |
) |
Investment in partnership |
|
|
(80,713 |
) |
|
|
(22,877 |
) |
Share-based compensation |
|
|
102,500 |
|
|
|
86,000 |
|
Tax benefit from exercise of options |
|
|
(70,696 |
) |
|
|
(202,893 |
) |
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
(307,471 |
) |
|
|
(36,417 |
) |
Accrued interest payable |
|
|
(416,985 |
) |
|
|
(217,196 |
) |
Other assets and liabilities |
|
|
(6,620,253 |
) |
|
|
929,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by operating
activities |
|
|
(2,524,466 |
) |
|
|
5,593,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Activity in available-for-sale securities: |
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
89,957,394 |
|
|
|
16,149,538 |
|
Proceeds from maturities, prepayments and calls |
|
|
142,591,220 |
|
|
|
28,055,036 |
|
Purchases |
|
|
(250,277,064 |
) |
|
|
(87,456,210 |
) |
Purchases of other investments |
|
|
(125,900 |
) |
|
|
(205,900 |
) |
Loan originations and principal collections, net |
|
|
(5,558,028 |
) |
|
|
(32,618,031 |
) |
Purchase of premises and equipment |
|
|
(3,655,206 |
) |
|
|
(7,802,054 |
) |
Proceeds from sale of land |
|
|
|
|
|
|
1,317,955 |
|
Purchase of life insurance |
|
|
|
|
|
|
(2,000,000 |
) |
Proceeds from sale of other real estate |
|
|
8,223,583 |
|
|
|
673,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(18,844,001 |
) |
|
|
(83,885,947 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
55,948,195 |
|
|
|
50,291,735 |
|
Proceeds from Federal Reserve/Federal Home Loan Bank advances |
|
|
31,000,000 |
|
|
|
27,000,000 |
|
Matured Federal Reserve/Federal Home Loan Bank advances |
|
|
(41,000,000 |
) |
|
|
(19,456,418 |
) |
Net increase (decrease) in federal funds purchased |
|
|
(22,580,000 |
) |
|
|
21,280,000 |
|
Net decrease in securities sold under
agreements to repurchase |
|
|
(2,555,463 |
) |
|
|
(1,109,650 |
) |
Proceeds from issuance of common stock, including options |
|
|
|
|
|
|
577,630 |
|
Tax benefit from exercise of options |
|
|
70,696 |
|
|
|
202,893 |
|
Purchase of common stock |
|
|
|
|
|
|
(1,202,022 |
) |
Cash dividends |
|
|
|
|
|
|
(1,030,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
20,883,428 |
|
|
|
76,553,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(485,039 |
) |
|
|
(1,738,905 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
14,589,675 |
|
|
|
16,328,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
14,104,636 |
|
|
$ |
14,589,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
13,775,618 |
|
|
$ |
17,151,386 |
|
Income taxes |
|
|
520,000 |
|
|
|
1,165,000 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Transfers from loans to other real estate owned |
|
|
13,359,756 |
|
|
|
8,701,852 |
|
See accompanying Notes to Consolidated Financial Statements
F-5
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 1 Summary of Significant Accounting Policies
|
|
The accounting and reporting policies of Mountain National Bancshares, Inc. and its
subsidiaries (the Company) conform to generally accepted accounting principles in the
United States of America and practices within the banking industry. The policies that
materially affect financial position and results of operations are summarized as follows: |
|
|
Nature of operations and geographic concentration: |
|
|
The Company is a bank-holding company which owns all of the outstanding common stock of
Mountain National Bank (the Bank). The Bank provides a variety of financial services
through its branch offices located in Sevier and Blount County, Tennessee. The Banks
primary deposit products are demand deposits, savings accounts, and certificates of deposit.
Its primary lending products are commercial loans, real estate loans, and installment
loans. |
|
|
Principles of consolidation: |
|
|
The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. The Companys principal subsidiary is Mountain National Bank. All
material inter-company accounts and transactions have been eliminated in consolidation. |
|
|
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates and such differences could be material to the financial statements. |
|
|
The determination of the adequacy of the allowance for loan losses is based on estimates
that are particularly susceptible to significant changes in the economic environment and
market conditions. In connection with the determination of the estimated losses on loans,
management obtains independent appraisals for significant collateral. |
|
|
The Banks loans are generally secured by specific items of collateral including real
property, consumer assets, and business assets. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors ability to honor their contracts is
dependent on local economic conditions. |
F-6
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 1 Summary of Significant Accounting Policies (continued)
|
|
Due to the predominance of the tourism industry in Sevier County, a significant portion of
our commercial loan portfolio is concentrated within that industry. The predominance of the
tourism industry also makes our business more seasonal in nature than may be the case with
banks and financial institutions in other market areas. |
|
|
While management uses available information to recognize losses on loans, further reductions
in the carrying amounts of loans may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their examination
process, periodically review the estimated losses on loans. Such agencies may advise the
Bank to recognize additional losses based on their judgments about information available to
them at the time of their examination. Because of these factors, it is reasonably possible
that the estimated losses on loans may change materially in the near term. However, the
amount of the change that is reasonably possible cannot be estimated. |
|
|
Statements of cash flows: |
|
|
The Company considers all cash and amounts due from depository institutions with maturities
under 90 days and Federal Funds sold to be cash equivalents for purposes of the statements
of cash flows. Net cash flows are reported for customer loan and deposit transactions,
interest bearing deposits in other financial institutions, federal funds purchased and
repurchase agreements. |
|
|
Debt securities are classified as held to maturity when the Bank has the positive intent and
ability to hold the securities to maturity. Securities held to maturity are carried at
amortized cost. |
|
|
Debt securities not classified as held to maturity are classified as available for sale.
Securities available for sale are carried at fair value with unrealized gains and losses,
net of taxes, reported in other comprehensive income (loss). Realized gains (losses) on
securities available for sale are included in other income (expense) and, when applicable,
are reported as a reclassification adjustment, net of tax, in other comprehensive income
(loss). Realized gains and losses on sales of securities are recorded in non-interest income
on the trade date and are determined on the specific-identification method. |
|
|
The amortization of premiums and accretion of discounts are recognized in interest income
using methods approximating the level-yield method over the period to maturity, without
anticipating prepayments, except for mortgage backed securities where prepayments are
anticipated. |
F-7
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 1 Summary of Significant Accounting Policies (continued)
|
|
Restricted equity securities include common stock of the Federal Home Loan Bank of
Cincinnati and Federal Reserve Bank stock. These securities are carried at cost. |
|
|
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. |
|
|
Securities sold under agreements to repurchase: |
|
|
The Bank enters into sales of securities under agreements to repurchase identical securities
the next day. |
|
|
Loans are stated at unpaid principal balances, less the allowance for loan losses. Interest
income is accrued on the unpaid principal balance. |
|
|
The accrual of interest on real estate and commercial loans is discontinued at the time the
loan is 90 days delinquent unless the credit is well-secured and in process of collection.
Installment loans and other personal loans are typically charged off no later than 90 days
past due. Past due status is based on the contractual terms of the loan. In all cases, loans
are placed on nonaccrual or charged off at an earlier date if collection of principal or
interest is considered doubtful. |
|
|
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. |
|
|
Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of aggregate cost or fair value, as determined by outstanding commitments from
investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged
to earnings. Mortgage servicing rights are sold with the related loan. Loans held
for sale totaled $0 and $188,800 at December 31, 2009 and 2008, respectively, and are
included with loans on the balance sheet. |
F-8
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 1 Summary of Significant Accounting Policies (continued)
|
|
Allowance for loan losses: |
|
|
The allowance for loan losses is maintained at a level which, in managements judgment, is
adequate to absorb probable incurred credit losses inherent in the loan portfolio. The
amount of the allowance is based on managements evaluation of the collectability of the
loan portfolio, including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, economic conditions, and other risks
inherent in the portfolio. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of uncertainties associated with
local economic conditions, collateral values, and future cash flows on impaired loans, it is
reasonably possible that a material change could occur in the allowance for loan losses in
the near term. However, the amount of the change that is reasonably possible cannot be
estimated. The allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses. |
|
|
The allowance consists of specific and general components. The specific component relates to
loans that are individually classified as impaired or loans otherwise classified as
substandard or doubtful. The general component covers non-classified loans and is based on
historical loss experience adjusted for current factors. |
|
|
A loan is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Loans, for which the terms have been modified, and for which
the borrower is experiencing financial difficulties, are considered troubled debt
restructurings and classified as impaired. Factors considered by management in determining
impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the borrowers prior
payment record and the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan by loan basis for commercial and construction loans
over $100,000 by either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans obtainable
market price or the fair value of the collateral if the loan is collateral dependent.
Troubled debt restructurings are measured at the present value of estimated future cash
flows using the loans effective rate at inception. Large groups of smaller balance,
homogeneous loans are collectively evaluated for impairment. |
F-9
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 1 Summary of Significant Accounting Policies (continued)
|
|
Reserve for unfunded commitments: |
|
|
The reserve for unfunded commitments represents the estimate for probable credit losses
inherent in these commitments to extend credit. Unfunded commitments to extend credit
include standby letters of credit and commitments to fund available lines of credit. The
process used to determine the reserve for unfunded commitments is consistent with the
process for determining the allowance for loan losses and the reserve, if any, is included
in other liabilities. |
|
|
Investment in Partnership: |
|
|
The Bank is a partner in Appalachian Fund for Growth II, LLC with three other Tennessee
banking institutions. This partnership involves a new markets tax credit which is
generated from a tax credit allocation from the Community Development Financial Institutions
Fund (CDFI). The purposes of the partnership are (a) to have the primary mission of
providing investment capital, solely in the form of loans, to low-income communities in
accordance with the New Markets Tax Credit Program and (b) to make loans that are qualified
low-income community investment loans. This partnership is accounted for using the equity
method of accounting. |
|
|
Land is carried at cost. Other premises and equipment are carried at cost net of accumulated
depreciation. Depreciation is computed using the straight-line and the declining balance
methods based on the estimated useful lives of the assets. Useful lives range from three to
forty years for premises and improvements, and from three to ten years for furniture and
equipment. Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in current
operations. |
|
|
Real estate properties acquired through or in lieu of loan foreclosure are initially
recorded at the fair value less estimated selling cost at the date of foreclosure. Any
write-downs based on the assets fair value at the date of acquisition are charged to the
allowance for loan losses. Valuations are periodically performed by management, and any
subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the
carrying
value of a property to fair value less cost to sell. Other real estate owned also includes
excess Bank property not utilized when subdividing land acquired for the construction of
Bank branches. Costs of significant property improvements are capitalized. Costs relating to
holding property are expensed. |
F-10
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 1 Summary of Significant Accounting Policies (continued)
|
|
The Company files consolidated federal and state income tax returns with the Bank and its
subsidiaries. Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred income taxes
related primarily to differences between the basis of the allowance for loan losses and
accumulated depreciation. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or deductible when
the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are
reflected using enacted income tax rates. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes. |
|
|
A tax position is recognized as a benefit only if it is more likely than not that the tax
position would be sustained in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the more likely than
not test, no tax benefit is recorded. |
|
|
The Company expenses all advertising costs as incurred. Advertising expense was $276,129 and
$332,989 for the years ended December 31, 2009 and 2008, respectively. |
|
|
Company owned life insurance: |
|
|
The Company has purchased life insurance policies on certain key executives. Company owned
life insurance is recorded at the amount that can be realized under the insurance contract
at the balance sheet date, which is the cash surrender value adjusted for other charges or
other amounts due that are probable at settlement. |
|
|
Premises and equipment and other long-term assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted cash flows.
If impaired, the assets are recorded at fair value. |
|
|
Loan commitments and related financial instruments: |
|
|
Financial instruments include off-balance sheet credit instruments, such as commitments to
make loans and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are
funded. |
F-11
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 1 Summary of Significant Accounting Policies (continued)
|
|
Employee 401(k) and profit sharing plan expense is the amount of matching contributions made
by the Company pursuant to the Companys 401(k) benefit plan. Deferred compensation and
supplemental retirement plan expense allocates the benefits over years of service. |
|
|
Earnings per common share: |
|
|
Basic earnings per common share is net income divided by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share includes the
dilutive effect of additional potential common shares issuable under stock options and stock
warrants. Any shares having an antidilutive effect are excluded from the calculation.
Earnings and dividends per share are restated for all stock splits and dividends through the
date of issue of the financial statements. |
|
|
Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities available for sale,
which is also recognized as a separate component of equity. |
|
|
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. |
|
|
Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory
reserve and clearing requirements. Beginning October 1, 2008, the Federal Reserve was
authorized to pay interest on these balances based on a spread to the average target federal
funds rate. These balances did not earn interest prior to that date. |
|
|
Stock dividends in excess of 20% of the Companys outstanding shares are reported by
transferring the par value of the stock issued from retained earnings to common stock. Stock
dividends for 20% or less of the Companys outstanding shares are reported by transferring
the fair value, as of the ex-dividend date, of the stock issued from retained
earnings to common stock and additional paid-in capital. Fractional share amounts are paid
in cash with a reduction in retained earnings. |
F-12
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 1 Summary of Significant Accounting Policies (continued)
|
|
Banking regulations require maintaining certain capital levels and may limit the dividends
paid by the bank to the holding company or by the holding company to shareholders. Banking
regulations also limit the ability of banks that are incurring losses to pay dividends
without prior regulatory approval. (See Note 15 Regulatory Matters for more specific
disclosure.) |
|
|
Stock-based compensation: |
|
|
Compensation cost is recognized for stock options and restricted stock awards issued to
employees, based on the fair value of these awards at the date of grant. A Black-Scholes
model is utilized to estimate the fair value of stock options, while the market price of the
Companys common stock at the date of grant is used for restricted stock awards.
Compensation cost is recognized over the required service period, generally defined as the
vesting period. At December 31, 2009, the Company has a stock-based compensation plan, which
is described more fully in Note 14 Stock Options. |
|
|
While the chief decision-makers monitor the revenue streams of the various products and
services, operations are managed and financial performance is evaluated on a Company-wide
basis. In the Companys operations, each branch is viewed by management as being a
separately identifiable business or segment from the perspective of monitoring performance
and allocation of financial resources. Although the branches operate independently and are
managed and monitored separately, each is substantially similar in terms of business focus,
type of customers, products and services. Accordingly, the Companys consolidated financial
statements reflect the presentation of segment information on an aggregated basis in one
reportable segment. |
F-13
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 2 Securities
|
|
Securities have been classified in the balance sheet according to managements intent as
securities held to maturity or securities available for sale. The amortized cost and
approximate fair value of securities at December 31, 2009 and 2008 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
securities |
|
$ |
3,250,638 |
|
|
$ |
|
|
|
$ |
(87 |
) |
|
$ |
3,250,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
agencies |
|
|
6,997,816 |
|
|
|
89 |
|
|
|
(99,536 |
) |
|
|
6,898,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
|
19,977,724 |
|
|
|
257,496 |
|
|
|
(111,291 |
) |
|
|
20,123,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities residential |
|
|
113,645,162 |
|
|
|
1,065,493 |
|
|
|
(653,436 |
) |
|
|
114,057,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
143,871,340 |
|
|
$ |
1,323,078 |
|
|
$ |
(864,350 |
) |
|
$ |
144,330,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
$ |
2,204,303 |
|
|
$ |
63,980 |
|
|
$ |
(60,047 |
) |
|
$ |
2,208,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 2 Securities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
securities |
|
$ |
254,253 |
|
|
$ |
2,545 |
|
|
$ |
|
|
|
$ |
256,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
agencies |
|
|
5,453,229 |
|
|
|
42,086 |
|
|
|
|
|
|
|
5,495,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
|
22,224,441 |
|
|
|
21,075 |
|
|
|
(1,638,780 |
) |
|
|
20,606,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
175,000 |
|
|
|
|
|
|
|
(60,147 |
) |
|
|
114,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities residential |
|
|
96,720,773 |
|
|
|
1,435,106 |
|
|
|
(51,222 |
) |
|
|
98,104,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
124,827,696 |
|
|
$ |
1,500,812 |
|
|
$ |
(1,750,149 |
) |
|
$ |
124,578,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
$ |
2,117,044 |
|
|
$ |
|
|
|
$ |
(303,634 |
) |
|
$ |
1,813,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The proceeds from sales of securities and the associated gains and losses are listed
below: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Proceeds |
|
$ |
89,957,394 |
|
|
$ |
16,149,538 |
|
Gross gains |
|
|
2,562,423 |
|
|
|
179,382 |
|
Gross losses |
|
|
(3,811 |
) |
|
|
(108 |
) |
|
|
The amortized cost and fair value of securities at December 31, 2009, by contractual
maturity, are shown below. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately. |
F-15
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 2 Securities (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale |
|
|
Securities Held to Maturity |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Within one year |
|
$ |
6,248,454 |
|
|
$ |
6,248,450 |
|
|
$ |
|
|
|
$ |
|
|
One to five years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five to ten years |
|
|
5,948,218 |
|
|
|
6,026,887 |
|
|
|
689,563 |
|
|
|
707,730 |
|
Beyond ten years |
|
|
18,029,506 |
|
|
|
17,997,512 |
|
|
|
1,514,740 |
|
|
|
1,500,506 |
|
Mortgage-backed
securities
residential |
|
|
113,645,162 |
|
|
|
114,057,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
143,871,340 |
|
|
$ |
144,330,068 |
|
|
$ |
2,204,303 |
|
|
$ |
2,208,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, securities with a carrying value of approximately
$131,039,000 and $106,808,000, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law. At December 31, 2009 and 2008, the carrying
amount of securities pledged to secure repurchase agreements was approximately $2,293,000
and $6,095,000, respectively. |
|
|
The Company did not hold any securities from a single issuer that exceeded 10% of total
shareholders equity as of December 31, 2009, other than securities of the U.S. Government
and its agencies and mortgage-backed securities issued by government sponsored entities that
had a carrying value of approximately $114,057,000 and $98,105,000 at December 31, 2009 and
2008, respectively. |
F-16
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 2 Securities (continued)
|
|
The following table summarizes the investment securities with unrealized losses at December
31, 2009 and 2008 aggregated by major security type and length of time in a continuous
unrealized loss position: |
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securities |
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
U. S. Government
securities |
|
$ |
252,373 |
|
|
$ |
(87 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
252,373 |
|
|
$ |
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
agencies |
|
|
4,899,769 |
|
|
|
(99,536 |
) |
|
|
|
|
|
|
|
|
|
|
4,899,769 |
|
|
|
(99,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
|
4,797,788 |
|
|
|
(171,338 |
) |
|
|
|
|
|
|
|
|
|
|
4,797,788 |
|
|
|
(171,338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities residential |
|
|
46,712,247 |
|
|
|
(653,436 |
) |
|
|
|
|
|
|
|
|
|
|
46,712,247 |
|
|
|
(653,436 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
$ |
56,662,177 |
|
|
$ |
(924,397 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
56,662,177 |
|
|
$ |
(924,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securities |
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Obligations of states and
political subdivisions |
|
$ |
18,671,408 |
|
|
$ |
(1,787,779 |
) |
|
$ |
985,140 |
|
|
$ |
(154,636 |
) |
|
$ |
19,656,548 |
|
|
$ |
(1,942,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
114,853 |
|
|
|
(60,147 |
) |
|
|
|
|
|
|
|
|
|
|
114,853 |
|
|
|
(60,147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities residential |
|
|
6,008,515 |
|
|
|
(37,907 |
) |
|
|
3,781,650 |
|
|
|
(13,314 |
) |
|
|
9,790,165 |
|
|
|
(51,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
$ |
24,794,776 |
|
|
$ |
(1,885,833 |
) |
|
$ |
4,766,790 |
|
|
$ |
(167,950 |
) |
|
$ |
29,561,566 |
|
|
$ |
(2,053,783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Companys security portfolio consisted of 153 securities,
42 of which were in an unrealized loss position. The majority of unrealized losses are
related to the Companys obligations of states and political subdivisions and
mortgage-backed securities, as discussed below. |
F-17
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 2 Securities (continued)
|
|
Mortgage-Backed Securities |
|
|
At December 31, 2009, 100% of the mortgage-backed securities held by the Company were issued
by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac and
Ginnie Mae, institutions which the government has affirmed its commitment to support.
Because the decline in fair value is attributable to changes in interest rates and
illiquidity, and not credit quality, and because the Company does not have the intent to
sell these mortgage-backed 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 December 31, 2009. |
|
|
Obligations of States and Political Subdivisions |
|
|
Unrealized losses on obligations of states and political subdivisions have not been
recognized in 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 December
31, 2009. |
|
|
Other-Than-Temporary-Impairment |
|
|
Management evaluates securities for 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 debt 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, net of applicable
taxes. The previous amortized cost basis less the OTTI recognized in earnings
becomes the new amortized cost basis of the investment. |
F-18
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 2 Securities (continued)
|
|
On May 1, 2009, Silverton Bank, the bank subsidiary of Silverton Financial Services, Inc.
(Silverton), was placed into receivership by the Office of the Comptroller of the Currency
after Silverton Banks capital deteriorated significantly in the first quarter of 2009, and
on June 5, 2009 Silverton filed a petition for bankruptcy. The Company does not anticipate
that it will recover any of the Banks investment in either the common securities or trust
preferred securities issued by Silverton or its affiliated trust. As a result, the Company
recorded an impairment charge of $347,368, which represents the Companys full investment in
the securities, during the first quarter of 2009. |
Note 3 Loans and Allowance for Loan Losses
|
|
At December 31, 2009 and 2008, the Banks loans consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Mortgage loans on real estate: |
|
|
|
|
|
|
|
|
Residential 1-4 family |
|
$ |
88,491,997 |
|
|
$ |
75,921,024 |
|
Residential multifamily |
|
|
7,259,301 |
|
|
|
6,587,643 |
|
Commercial |
|
|
138,374,082 |
|
|
|
113,734,280 |
|
Construction |
|
|
99,771,212 |
|
|
|
142,369,956 |
|
Second mortgages |
|
|
7,127,228 |
|
|
|
6,058,854 |
|
Equity lines of credit |
|
|
29,370,304 |
|
|
|
29,697,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,394,124 |
|
|
|
374,369,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
30,386,527 |
|
|
|
37,631,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer installment loans: |
|
|
|
|
|
|
|
|
Personal |
|
|
4,512,571 |
|
|
|
6,233,261 |
|
Credit cards |
|
|
2,411,224 |
|
|
|
2,194,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,923,795 |
|
|
|
8,428,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
407,704,446 |
|
|
|
420,429,258 |
|
Less: Allowance for loan losses |
|
|
(11,353,438 |
) |
|
|
(5,292,028 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
396,351,008 |
|
|
$ |
415,137,230 |
|
|
|
|
|
|
|
|
F-19
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 3 Loans and Allowance for Loan Losses (continued)
|
|
A summary of transactions in the allowance for loan losses for the years ended December 31,
2009 and 2008 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Balance, beginning of year |
|
$ |
5,292,028 |
|
|
$ |
3,974,354 |
|
Provision for loan losses |
|
|
11,672,802 |
|
|
|
2,275,000 |
|
Loans charged-off |
|
|
(5,890,874 |
) |
|
|
(1,023,366 |
) |
Recoveries of loans previously charged-off |
|
|
279,482 |
|
|
|
66,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
11,353,438 |
|
|
$ |
5,292,028 |
|
|
|
|
|
|
|
|
|
|
The Bank had a concentration of credit at December 31, 2009 in real estate loans, which
totaled approximately $370,394,000. Real estate loans accounted for 91% of total loans and
were primarily commercial loans secured by commercial properties and residential mortgage
loans. Additionally, a large portion of the Banks real estate loans were for construction,
land acquisition and development. Substantially all real estate loans are secured by
properties located in Tennessee. |
|
|
Loans to executive officers, principal shareholders and directors and their affiliates were
approximately $17,933,000 and $18,613,000 at December 31, 2009 and 2008, respectively. For
the year ended December 31, 2009, the activity in these loans included new borrowings of
approximately $1,018,000 and repayments of approximately
$1,698,000. None of these loans to executive officers, principal shareholders and directors
and their affiliates, were impaired at December 31, 2009 or 2008. |
|
|
Individually impaired loans were as follows: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Year-end loans with allocated allowance
for loan losses |
|
$ |
37,952,662 |
|
|
$ |
2,807,562 |
|
Year-end loans with no allocated allowance
for loan losses |
|
|
25,194,329 |
|
|
|
539,263 |
|
|
|
|
|
|
|
|
Total impaired loans |
|
|
63,146,991 |
|
|
|
3,346,825 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses on impaired loans |
|
|
5,367,678 |
|
|
|
561,250 |
|
|
|
|
|
|
|
|
|
|
Average of individually impaired loans
during the year |
|
|
54,479,634 |
|
|
|
4,600,602 |
|
|
|
|
|
|
|
|
|
|
Amount of partial charge-offs related to
impaired loans above |
|
|
2,218,029 |
|
|
|
|
|
F-20
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 3 Loans and Allowance for Loan Losses (continued)
|
|
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
restructuring, the loans are included in the nonperforming loan balances noted below. Not
included in nonperforming loans are loans that have been restructured that were performing
as of the restructure date. The Company has allocated $3,733,765 of specific reserves to
customers whose loan terms have been modified in troubled debt restructurings as of December
31, 2009. The Company has $37,332,034 outstanding to customers whose loans are classified as
a troubled debt restructuring. The Company has committed to lend additional amounts totaling
$900,367 related to loans classified as troubled debt restructurings. At December 31, 2009,
there were $21,797,811 of accruing restructured loans that remain in a performing status.
There were no accruing restructured loans at December 31, 2008. |
|
|
At December 31, 2009 and 2008, the Bank had certain impaired loans on nonaccruing interest
status. The principal balance of these nonaccrual loans amounted to approximately
$39,587,000 and $1,964,000 at December 31, 2009 and 2008, respectively. In most cases, at
the date such loans were placed on nonaccrual status, the Bank reversed all previously
accrued interest income against the current year earnings.
Had nonaccruing loans been on accruing status, interest income would have been higher by
approximately $1,358,000 and $97,000 for the years ended December 31, 2009 and 2008,
respectively. |
|
|
Nonperforming loans were as follows: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Loans past due over 90 days still on accrual |
|
$ |
67,634 |
|
|
$ |
128,620 |
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
|
40,548,546 |
|
|
|
11,711,449 |
|
|
|
Nonperforming loans include both smaller balance homogeneous loans that are collectively
evaluated for impairment and individually classified as impaired loans. |
F-21
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 4 Bank Premises and Equipment
|
|
A summary of Bank premises and equipment at December 31, 2009 and 2008, is as follows: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Land |
|
$ |
9,694,709 |
|
|
$ |
9,047,710 |
|
Buildings and improvements |
|
|
22,753,470 |
|
|
|
21,154,187 |
|
Furniture, fixtures and equipment |
|
|
8,934,486 |
|
|
|
7,585,050 |
|
|
|
|
|
|
|
|
|
|
|
41,382,665 |
|
|
|
37,786,947 |
|
Accumulated depreciation |
|
|
(7,673,383 |
) |
|
|
(6,302,714 |
) |
|
|
|
|
|
|
|
|
|
$ |
33,709,282 |
|
|
$ |
31,484,233 |
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2009 and 2008 amounted to $1,430,157
and $1,248,204, respectively. |
|
|
At December 31, 2008, construction in process totaled $5,328,854 and is included in the
buildings and improvements line item above. The balance consisted primarily of costs
associated with the construction of our Blount County Regional Headquarters and Operations
Center expansion in Sevier County. |
Note 5 Deposits
|
|
The aggregate amount of time deposits in denominations of $100,000 or more at December 31,
2009 and 2008, was approximately $168,252,000 and $172,302,000, respectively, including
brokered deposits of approximately $69,955,000 and $57,151,000, respectively, for each time
period. |
|
|
At December 31, 2009, the scheduled maturities of time deposits for each of the five years
subsequent to December 31, 2009 were as follows: |
|
|
|
|
|
2010 |
|
$ |
239,610,335 |
|
2011 |
|
|
39,191,317 |
|
2012 |
|
|
9,029,586 |
|
2013 |
|
|
745,407 |
|
2014 |
|
|
667,249 |
|
|
|
|
|
Total |
|
$ |
289,243,894 |
|
|
|
|
|
|
|
Deposits of employees, officers and directors totaled approximately $8,482,000 at December
31, 2009 and $7,923,000 at December 31, 2008. |
F-22
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 6 Income Taxes (Benefits)
|
|
Income tax expense (benefit) in the statements of income for the years ended December 31,
2009 and 2008 consists of the following: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Current tax expense |
|
$ |
89,951 |
|
|
$ |
1,438,411 |
|
Deferred tax expense (benefit) |
|
|
(3,877,978 |
) |
|
|
(611,624 |
) |
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
(3,788,027 |
) |
|
$ |
826,787 |
|
|
|
|
|
|
|
|
|
|
Income tax expense differs from amounts computed by applying the Federal income tax
statutory rate of 34% in 2009 and 2008 to income before income taxes. A reconciliation of
the differences for the years ended December 31, 2009 and 2008 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Expected tax at statutory rates |
|
$ |
(2,726,000 |
) |
|
$ |
1,396,000 |
|
Increase (decrease) resulting from tax effect of: |
|
|
|
|
|
|
|
|
State income taxes, net of federal tax |
|
|
(544,004 |
) |
|
|
(90,328 |
) |
Increase in cash surrender value of life insurance |
|
|
(94,601 |
) |
|
|
(145,831 |
) |
Tax exempt interest |
|
|
(347,420 |
) |
|
|
(258,597 |
) |
General business credits, net of basis reduction |
|
|
(132,000 |
) |
|
|
(132,000 |
) |
Other |
|
|
55,998 |
|
|
|
57,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
(3,788,027 |
) |
|
$ |
826,787 |
|
|
|
|
|
|
|
|
F-23
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 6 Income Taxes (Benefits) (continued)
|
|
Significant components of the Companys deferred tax assets and liabilities at December 31,
2009 and 2008 were as follows: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
4,214,292 |
|
|
$ |
1,779,980 |
|
Deferred compensation |
|
|
419,399 |
|
|
|
303,785 |
|
Unrealized loss on securities available for sale |
|
|
|
|
|
|
101,750 |
|
Net operating loss |
|
|
371,065 |
|
|
|
199,477 |
|
Nonaccrual loans |
|
|
472,359 |
|
|
|
87,223 |
|
Tax credits |
|
|
150,816 |
|
|
|
|
|
Other real estate owned |
|
|
488,685 |
|
|
|
|
|
Other |
|
|
315,770 |
|
|
|
177,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
6,432,386 |
|
|
|
2,650,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Accelerated depreciation |
|
|
(604,553 |
) |
|
|
(619,000 |
) |
Unrealized gain on securities available for sale |
|
|
(175,714 |
) |
|
|
|
|
Income from subsidiary |
|
|
(49,823 |
) |
|
|
(46,973 |
) |
Investment in partnership |
|
|
(72,000 |
) |
|
|
(204,000 |
) |
Other |
|
|
(358,491 |
) |
|
|
(208,745 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(1,260,581 |
) |
|
|
(1,078,718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets |
|
$ |
5,171,805 |
|
|
$ |
1,571,291 |
|
|
|
|
|
|
|
|
F-24
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 6 Income Taxes (Benefits) (continued)
|
|
We had net deferred tax assets of approximately $5 million as of December 31, 2009. We
did not establish a valuation allowance against our net deferred tax assets as of
December 31, 2009 because we believe that it is more likely than not that all of these
assets will be realized. In evaluating the need for a valuation allowance, we considered the
reversal of deferred tax liabilities, the ability to carryback losses to prior years, tax
planning strategies and estimated future taxable income based on management prepared
forecasts. This process required significant judgment by management about matters that are
by nature uncertain. If future events differ significantly from our current forecasts, we
may need to establish a valuation allowance, which could have a material adverse effect on
our results of operations and financial condition. |
|
|
The Bank has a Tennessee net operating loss carryforward, approximately $1,590,000 of which
will expire in 2021, $1,630,000 of which will expire in 2022, $1,681,000 of which will
expire in 2023 and $3,748,000 of which will expire in 2024 if not offset by future taxable
income. |
|
|
The Bank has a minimum tax credit of $151,000 that can be carried forward indefinitely. |
|
|
The Company currently has no unrecognized tax benefits that, if recognized, would favorably
affect the effective income tax rate in future periods. The Company does not expect any
unrecognized tax benefits to significantly increase or decrease in the next twelve months.
It is the Companys policy to recognize any interest accrued related to unrecognized tax
benefits in interest expense, with any penalties recognized as operating expenses. |
|
|
The Company and its subsidiaries are subject to U.S. federal income tax as well as income
tax of the state of Tennessee. The Company is no longer subject to examination by taxing
authorities for tax years before 2006. |
F-25
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 7 Federal Home Loan Bank Advances
|
|
The Bank has an agreement with the Federal Home Loan Bank of Cincinnati (FHLB) that
provides short-term and long-term funding to the Bank in an amount up to $100,000,000. The
Banks portfolio of one to four single-family mortgages, commercial real estate, home equity
lines of credit and multi-family mortgages have been pledged as collateral for any advances
under a blanket lien arrangement requiring a collateral-to-loan ratio of 180%, 400%, 400%
and 250%, respectively. At year end, advances from the FHLB were as follows: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Short-term advance requiring monthly interest payments
at 0.54% variable, principal due in February 2009 |
|
$ |
|
|
|
$ |
10,000,000 |
|
|
|
|
|
|
|
|
|
|
Long-term advance requiring monthly interest payments
at 4.47% fixed, principal due in December 2012 |
|
|
200,000 |
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
Long-term advance requiring monthly interest payments
at 4.32% fixed, principal due in June 2010 |
|
|
200,000 |
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
Long-term callable advance requiring monthly interest payments
at 4.39% fixed, principal due in November 2011 |
|
|
7,500,000 |
|
|
|
7,500,000 |
|
|
|
|
|
|
|
|
|
|
Long-term callable advance requiring monthly interest payments
at 4.25% fixed, principal due in January 2017 |
|
|
10,000,000 |
|
|
|
10,000,000 |
|
|
|
|
|
|
|
|
|
|
Long-term callable advance requiring monthly interest payments
at 4.15% fixed, principal due in April 2017 |
|
|
10,000,000 |
|
|
|
10,000,000 |
|
|
|
|
|
|
|
|
|
|
Long-term callable advance requiring monthly interest payments
at 4.27% fixed, principal due in May 2017 |
|
|
10,000,000 |
|
|
|
10,000,000 |
|
|
|
|
|
|
|
|
|
|
Long-term callable advance requiring monthly interest payments
at 4.68% fixed, principal due in June 2017 |
|
|
10,000,000 |
|
|
|
10,000,000 |
|
|
|
|
|
|
|
|
|
|
Long-term callable advance requiring monthly interest payments
at 3.36% fixed, principal due in December 2012 |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
Long-term callable advance requiring monthly interest payments
at 3.46% fixed, principal due in December 2014 |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
Long-term callable advance requiring monthly interest payments
at 3.13% fixed, principal due in January 2015 |
|
|
5,000,000 |
|
|
|
5,000,000 |
|
|
|
|
|
|
|
|
|
|
|
$ |
62,900,000 |
|
|
$ |
72,900,000 |
|
|
|
|
|
|
|
|
|
|
Each advance is payable at its maturity date, with prepayment penalties that vary
according to the type of advance. Maturities of the notes payable for each of the years
subsequent to December 31, 2009 are as follows: |
|
|
|
|
|
2010 |
|
$ |
200,000 |
|
2011 |
|
|
7,500,000 |
|
2012 |
|
|
5,200,000 |
|
2014 |
|
|
5,000,000 |
|
2015 |
|
|
5,000,000 |
|
2017 |
|
|
40,000,000 |
|
|
|
|
|
Total |
|
$ |
62,900,000 |
|
|
|
|
|
F-26
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 8 Subordinated Debentures
|
|
On November 7, 2003, we established MNB Capital Trust I and on June 9, 2006, we
established MNB Capital Trust II (Trust I and Trust II or collectively, the Trusts).
Both are wholly-owned statutory business trusts. The Company is the sole sponsor of the
Trusts and acquired each Trusts common securities for $171,000 and $232,000, respectively.
The Trusts were created for the exclusive purpose of issuing 30-year capital trust preferred
securities (Trust Preferred Securities) in the aggregate amount of $5,500,000 for Trust I
and $7,500,000 for Trust II and using the proceeds to acquire junior subordinated debentures
(Subordinated Debentures) issued by the Company. The sole assets of the Trusts are the
Subordinated Debentures. The Companys aggregate $403,000 investment in the Trusts is
included in other assets in the accompanying consolidated balance sheets and the $13,403,000
obligation of the Company is reflected as subordinated debt. |
|
|
The Trust I Preferred Securities bear a floating interest rate based on a spread over
3-month LIBOR and was 3.337% at December 31, 2009 which is set each quarter and mature on
December 31, 2033. The Trust II Preferred Securities bear a floating interest rate based on
a spread over 3-month LIBOR and was 1.884% at December 31, 2009 which is set each quarter
and mature on July 7, 2036. Distributions are payable quarterly. The Trust Preferred
Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures
at their stated maturity date or their earlier redemption in an amount equal to their
liquidation amount plus accumulated and unpaid distributions to the date of redemption. The
Company guarantees the payment of distributions and payments for redemption or liquidation
of the Trust Preferred Securities to the extent of funds held by the Trusts. The Companys
obligations under the Subordinated Debentures together with the guarantee and other back-up
obligations, in the aggregate, constitute a full and unconditional guarantee by the Company
of the obligations of the Trusts under the Trust Preferred Securities. |
|
|
The Subordinated Debentures are unsecured, bear interest at a rate equal to the rates paid
by the Trusts on the Trust Preferred Securities and mature on the same dates as those noted
above for the Trust Preferred Securities. Interest is payable quarterly. The Company may
defer the payment of interest at any time for a period not exceeding 20 consecutive quarters
provided that deferral period does not extend past the stated maturity. During any such
deferral period, distributions on
the Trust Preferred Securities will also be deferred and the Companys ability to pay
dividends on its common shares will be restricted. |
|
|
Subject to approval by the Federal Reserve Bank of Atlanta, if then required, the Trust
Preferred Securities may be redeemed prior to maturity at the Companys option on or after
December 31, 2008, for Trust I and on or after July 7, 2011, for Trust II. The Trust
Preferred Securities may also be redeemed at any time in whole (but not in part) in the
event of unfavorable changes in laws or regulations that result in (1) the Trusts becoming
subject to federal income tax on income received on the Subordinated Debentures, (2)
interest payable by the Company on the Subordinated Debentures becoming non-deductible for
federal tax purposes, (3) the requirement for the Trusts to register under the Investment
Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred
Securities as Tier 1 capital under the Federal Reserve capital adequacy guidelines. |
F-27
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 8 Subordinated Debentures (continued)
|
|
The Companys investments in Trust I and Trust II are included in other assets. These
investments are accounted for under the equity method and consist of 100% of the common
stock of Trust I and Trust II. |
Note 9 Securities Sold Under Agreements to Repurchase
|
|
Securities sold under agreements to repurchase are variable rate financing arrangements with
no fixed maturity. Upon cancellation of the agreement, the securities underlying the
agreements are returned to the Company. Information concerning securities sold under
agreements to repurchase is summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Weighted average borrowing rate at year-end |
|
|
1.52 |
% |
|
|
2.20 |
% |
|
|
|
|
|
|
|
|
|
Weighted average borrowing rate during the year |
|
|
2.12 |
% |
|
|
2.53 |
% |
|
|
|
|
|
|
|
|
|
Average daily balance during the year |
|
$ |
4,283,833 |
|
|
$ |
5,093,472 |
|
|
|
|
|
|
|
|
|
|
Maximum month-end balance during the year |
|
|
7,872,502 |
|
|
|
7,413,995 |
|
|
|
|
|
|
|
|
|
|
Balance at year-end |
|
|
1,776,402 |
|
|
|
4,331,865 |
|
Note 10 Employee Benefit Plans
|
|
The Bank sponsors a 401(k) employee benefit plan covering substantially all employees who
have completed at least six months of service and met minimum age requirements. The Banks
contribution to the plan is discretionary and was $111,373 for 2009 and $120,422 for 2008. |
|
|
The Company also has salary continuation agreements in place with certain key officers. Such
agreements are structured with differing benefits based on the participants overall position
and responsibility. These agreements provide the participants with a supplemental income
upon retirement at age 65, additional incentive to remain with the Company in order to
receive these deferred retirement benefits and a compensation package that is competitive in
the market. These agreements vest over a ten year period, require a minimum number of years
of service and contain change of control provisions. All benefits would cease in the event
of termination for cause, and if the participants employment were to end due to disability,
voluntary termination or termination without cause, the participant would be entitled to
receive certain reduced benefits based on vesting and other conditions. |
|
|
The estimated cost of this obligation is being accrued over the service period for each
officer. The Company recognized expense of $301,943 and $262,594 during 2009 and 2008,
respectively, related to these agreements. The total amount accrued at December 31, 2009 and
2008 was $1,095,323 and $793,380, respectively. |
F-28
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 11 Leases
|
|
The Bank is leasing the land on which its Gatlinburg branch is located under a
non-cancelable lease agreement that expires in 2013. This lease agreement contains renewal
options for twelve additional five-year terms. |
|
|
The Bank is also leasing the land on which its Justice Center branch is located under a
non-cancelable lease agreement that expires in 2013. This lease agreement contains renewal
options for six additional five-year terms. The Bank completed construction of its Justice
Center branch on this property during the second quarter of 2008. |
|
|
In addition, the Bank is leasing the building in which its Gatlinburg walk-up facility is
located and the property on which it has placed certain automated teller machines. These
leases expire at various dates through 2010 and contain various renewal options. Total
rental expense under all operating leases was $182,330 in 2009 and $184, 204 in 2008. |
|
|
The following is a schedule by years of future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms in excess of one
year as of December 31, 2009: |
|
|
|
|
|
2010 |
|
$ |
148,549 |
|
2011 |
|
|
101,745 |
|
2012 |
|
|
103,369 |
|
2013 |
|
|
78,270 |
|
2014 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
431,933 |
|
|
|
|
|
F-29
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 12 Financial Instruments with Off-Balance Sheet Risk
|
|
In the normal course of business, the Bank has outstanding commitments and contingent
liabilities, such as commitments to extend credit and standby letters of credit, which are
not included in the accompanying financial statements. The Banks exposure to credit loss in
the event of nonperformance by the other party to the financial instruments for commitments
to extend credit and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Bank uses the same credit policies in making such
commitments as it does for instruments that are included in the balance sheet. At December
31, 2009, commitments under standby letters of credit and undisbursed loan commitments,
substantially all of which are carried at variable rates, were as follows: |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
(dollars in thousands) |
|
Commitments to extend credit |
|
$ |
50,702 |
|
|
$ |
82,097 |
|
Standby letters of credit |
|
|
5,801 |
|
|
|
9,885 |
|
|
|
|
|
|
|
|
Totals |
|
$ |
56,503 |
|
|
$ |
91,982 |
|
|
|
|
|
|
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank evaluates each
customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on managements credit
evaluation. Collateral held varies but may include accounts receivable, inventory, property
and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Standby letters of credit generally have fixed
expiration dates or other termination clauses and may require payment of a fee. The credit
risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Banks policy for obtaining collateral, and the
nature of such collateral, is essentially the same as that involved in making commitments to
extend credit.
The Bank was not required to perform on any financial guarantees and did not incur any
losses on its commitments during 2009 or 2008.
Note 13 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.
F-30
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 13 Fair Value (continued)
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 companys 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 and Level 3 inputs. For these securities,
the Company obtains fair value measurements from an independent service provider. Level 2
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 prepayments speeds, credit information and the securities terms and
conditions, among other things. Level 3 fair value measurements consider discounted cash
flows or other market indicators. Discounted cash flows are calculated using spread to swap
and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread
and optionality.
Impaired Loans Impaired loans are measured based on the present value of expected
payments using the loans original effective interest rate as the discount rate, the loans
observable market price, or the fair value of the collateral if the loan is collateral
dependent. 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. Impaired loans are classified
within Level 3 of the hierarchy.
Other Real Estate The fair value of other real estate 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 allowance for loan losses. Gains or losses on sale and any
subsequent adjustments to the value are recorded as a gain or loss on other real estate.
Other real estate is classified within Level 3 of the hierarchy.
F-31
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 13 Fair Value (continued)
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 December 31, 2009 and December 31, 2008, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2009 Using: |
|
|
|
|
|
|
|
Significant Other |
|
|
|
|
|
|
|
Observable Inputs |
|
|
|
Carrying Value |
|
|
(Level 2) |
|
Assets: |
|
|
|
|
|
|
|
|
Available for sale securities: |
|
|
|
|
|
|
|
|
U. S. Government securities |
|
$ |
3,250,551 |
|
|
$ |
3,250,551 |
|
U. S. Government sponsored
entities and agencies |
|
|
6,898,369 |
|
|
|
6,898,369 |
|
Obligations of states and
political subdivisions |
|
|
20,123,929 |
|
|
|
20,123,929 |
|
Mortgage-backed securities-residential |
|
|
114,057,219 |
|
|
|
114,057,219 |
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
144,330,068 |
|
|
$ |
144,330,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2008 Using: |
|
|
|
|
|
|
|
Significant Other |
|
|
|
|
|
|
|
Observable Inputs |
|
|
|
Carrying Value |
|
|
(Level 2) |
|
Assets: |
|
|
|
|
|
|
|
|
Available for sale securities: |
|
|
|
|
|
|
|
|
U. S. Government securities |
|
$ |
256,798 |
|
|
$ |
256,798 |
|
U. S. Government sponsored
entities and agencies |
|
|
5,495,315 |
|
|
|
5,495,315 |
|
Obligations of states and
political subdivisions |
|
|
20,606,736 |
|
|
|
20,606,736 |
|
Corporate securities |
|
|
114,853 |
|
|
|
114,853 |
|
Mortgage-backed securities-residential |
|
|
98,104,657 |
|
|
|
98,104,657 |
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
124,578,359 |
|
|
$ |
124,578,359 |
|
|
|
|
|
|
|
|
F-32
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 13 Fair Value (continued)
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 December 31, 2009 and December 31, 2008, segregated by the level
of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2009 Using: |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
Unobservable Inputs |
|
|
|
Carrying Value |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
Impaired Loans |
|
$ |
39,848,461 |
|
|
$ |
39,848,461 |
|
Other real estate |
|
|
12,019,079 |
|
|
|
12,019,079 |
|
|
|
|
|
|
|
|
Total Assets Measured at Fair |
|
|
|
|
|
|
|
|
Value on a Non-Recurring Basis |
|
$ |
51,867,540 |
|
|
$ |
51,867,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2008 Using: |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
Unobservable Inputs |
|
|
|
Carrying Value |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
Impaired Loans |
|
$ |
2,246,312 |
|
|
$ |
2,246,312 |
|
At December 31, 2009, impaired loans, which are measured for impairment using the
present value of expected future cash flows or the fair value of collateral for collateral
dependent loans, had a carrying amount of $45,216,139, with a valuation allowance of
$5,367,678 resulting in an additional provision for loan losses of $7,485,707 for the year
ended December 31, 2009. At December 31, 2008, impaired loans had a carrying amount of
$2,807,562, with a valuation allowance of $561,250 resulting in an additional provision for
loan losses of $561,250 for the year ended December 31, 2008.
The December 31, 2009 carrying amount of other real estate includes a net valuation
adjustment of approximately $938,000. Valuation adjustments are charged to earnings as a
gain or loss on other real estate. The fair value of other real estate is based upon
appraisals performed by qualified, licensed appraisers.
F-33
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 13 Fair Value (continued)
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 and Federal Reserve Bank stock. It
is not practicable to determine the fair value due to restrictions placed on the
transferability of the stock.
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.
F-34
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 13 Fair Value (continued)
Federal funds purchased 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.
F-35
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 13 Fair Value (continued)
The carrying amounts and estimated fair values of the Companys financial instruments at
December 31, 2009 and December 31, 2008, not previously presented, are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
14,105 |
|
|
$ |
14,105 |
|
|
$ |
14,590 |
|
|
$ |
14,590 |
|
Investment securities held to maturity |
|
|
2,204 |
|
|
|
2,208 |
|
|
|
2,117 |
|
|
|
1,813 |
|
Restricted investments |
|
|
3,816 |
|
|
|
N/A |
|
|
|
3,863 |
|
|
|
N/A |
|
Loans, net |
|
|
396,351 |
|
|
|
396,254 |
|
|
|
415,137 |
|
|
|
417,969 |
|
Accrued interest receivable |
|
|
3,045 |
|
|
|
3,045 |
|
|
|
2,738 |
|
|
|
2,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
$ |
47,601 |
|
|
$ |
47,601 |
|
|
$ |
44,652 |
|
|
$ |
44,652 |
|
NOW accounts |
|
|
112,440 |
|
|
|
112,440 |
|
|
|
110,420 |
|
|
|
110,420 |
|
Savings and money market accounts |
|
|
61,329 |
|
|
|
61,329 |
|
|
|
53,144 |
|
|
|
53,144 |
|
Time deposits |
|
|
289,244 |
|
|
|
290,534 |
|
|
|
246,449 |
|
|
|
248,356 |
|
Subordinated debentures |
|
|
13,403 |
|
|
|
6,922 |
|
|
|
13,403 |
|
|
|
10,582 |
|
Federal funds purchased and securities
sold under agreements to repurchase |
|
|
1,776 |
|
|
|
1,776 |
|
|
|
26,912 |
|
|
|
26,912 |
|
Federal Reserve/Federal Home Loan
Bank advances |
|
|
62,900 |
|
|
|
67,989 |
|
|
|
72,900 |
|
|
|
80,517 |
|
Accrued interest payable |
|
|
606 |
|
|
|
606 |
|
|
|
1,023 |
|
|
|
1,023 |
|
F-36
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 14 Stock Options
The Company has a stock option plan that is administered by the Board of Directors and
provides for both incentive stock options and nonqualified stock options. The exercise price
of each option shall not be less than 100 percent of the fair market value of the common
stock on the date of grant. All options have been granted at the fair market value of the
shares at the date of grant. The maximum term for each option is ten years. The maximum
number of shares that can be issued under the plan is 724,239. The following table provides
certain information about the Companys equity compensation plan as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
Number of |
|
|
|
|
|
|
securities remaining |
|
|
|
securities to be |
|
|
|
|
|
|
available for |
|
|
|
issued upon |
|
|
|
|
|
|
future issuance under |
|
|
|
exercise of |
|
|
Weighted average |
|
|
equity compensation |
|
|
|
outstanding |
|
|
exercise price of |
|
|
plans (excluding |
|
|
|
options, warrants |
|
|
options, warrants |
|
|
securities reflected |
|
|
|
and rights |
|
|
and rights |
|
|
in column (a)) |
|
Plan Category |
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
Equity compensation plans approved
by security holders |
|
|
125,086 |
|
|
$ |
21.44 |
|
|
|
378,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
The Company has granted incentive stock options to certain key officers and employees.
The Company has also granted nonqualified stock options to non-employee organizers of the
Bank. The stock option agreements state that upon termination of employment, employees have
90 days to exercise any stock options vested as of the termination date.
The Company issues new shares to satisfy option exercises from the authorized shares
allocated to the employee stock option plan.
A summary of activity in the Companys stock option plan for the year ended December 31,
2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted Average |
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
of Options |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
Intrinsic Value |
|
Options outstanding, December 31, 2008 |
|
|
121,717 |
|
|
$ |
21.64 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
9,000 |
|
|
|
13.75 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(5,631 |
) |
|
|
13.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2009 |
|
|
125,086 |
|
|
$ |
21.44 |
|
|
|
6.38 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested and expected to vest |
|
|
125,086 |
|
|
$ |
21.44 |
|
|
|
6.38 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009 |
|
|
58,037 |
|
|
$ |
18.31 |
|
|
|
5.18 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 14 Stock Options (continued)
Information related to the stock option plan during each year follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Intrinsic value of options exercised |
|
$ |
|
|
|
$ |
764,852 |
|
Cash received from option exercises |
|
|
|
|
|
|
577,630 |
|
Tax benefit realized from option exercises |
|
|
70,696 |
|
|
|
202,893 |
|
Weighted average fair value of options granted |
|
|
5.82 |
|
|
|
6.60 |
|
As of December 31, 2009, there was $352,718 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the stock option
plan. The cost is expected to be recognized over a weighted-average period of 2.44 years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model using the assumptions noted in the following table.
Expected volatilities are based on historical exercise patterns, employee terminations and
historical stock prices. The expected life of options granted represents the period of time
that options granted are expected to be outstanding. The U.S. Treasury 10 year constant
maturity rate in effect at the date of grant is used to derive the risk-free interest rate
for the contractual period of the options.
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected life |
|
9.5 years |
|
|
9.5 years |
|
Expected volatility |
|
|
18 |
% |
|
|
18 |
% |
Risk-free interest rate |
|
|
2.96 |
% |
|
|
3.60 |
% |
Note 15 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.
F-38
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 15 Regulatory Matters (continued)
Quantitative measures established by regulation to ensure capital adequacy require the Bank
and Company to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and
of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2009, that the Bank and Company met all capital adequacy requirements to which
it is subject.
As of December 31, 2009, the most recent notification from the Office of the Comptroller of
the Currency (OCC) categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. There are no conditions or events since that notification that
management believes have changed the Banks prompt corrective action category for bank
capital.
The actual capital amounts and ratios are presented in the table. Dollar amounts are
presented in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital |
|
|
Minimum to be |
|
|
|
Actual |
|
|
Requirement |
|
|
Well-Capitalized |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
65,993 |
|
|
|
14.16 |
% |
|
$ |
37,290 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
65,287 |
|
|
|
14.02 |
% |
|
|
37,260 |
|
|
|
8.00 |
% |
|
|
46,574 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
60,098 |
|
|
|
12.89 |
% |
|
|
18,645 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
59,397 |
|
|
|
12.75 |
% |
|
|
18,630 |
|
|
|
4.00 |
% |
|
|
27,945 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
60,098 |
|
|
|
9.23 |
% |
|
|
26,049 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
59,397 |
|
|
|
9.14 |
% |
|
|
26,007 |
|
|
|
4.00 |
% |
|
|
32,509 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
69,433 |
|
|
|
14.44 |
% |
|
$ |
38,471 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
68,725 |
|
|
|
14.29 |
% |
|
|
38,462 |
|
|
|
8.00 |
% |
|
|
48,078 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
64,142 |
|
|
|
13.34 |
% |
|
|
19,236 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
63,433 |
|
|
|
13.19 |
% |
|
|
19,231 |
|
|
|
4.00 |
% |
|
|
28,847 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
64,142 |
|
|
|
10.51 |
% |
|
|
24,403 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
63,433 |
|
|
|
10.41 |
% |
|
|
24,375 |
|
|
|
4.00 |
% |
|
|
30,469 |
|
|
|
5.00 |
% |
F-39
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 15 Regulatory Matters (continued)
As a result of a regulatory examination during the 2009 first quarter, the Bank made certain
commitments to its primary federal regulator during the second quarter of 2009, including
commitments to, among other things, implement a written 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 Allowance for Loan and Lease Losses, 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. The
Company has already taken many of these actions and does not believe compliance with these
commitments will have a materially adverse impact on its operations; however, failure to
comply with these commitments may result in the Banks primary federal regulator imposing
additional limitations, restraints, conditions or commitments on the Bank.
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%. Had the agreement been effective as of December 31, 2009, the Bank would have been in
compliance with these new minimum requirements. As noted above, the Bank had 9.14% of Tier 1
capital to average assets and 14.02% of total capital to risk-weighted assets ratio at
December 31, 2009.
Dividend restrictions:
The Companys principal source of funds for dividend payments is dividends received from the
Bank. The Bank is subject to limitations on the payment of dividends to the Company under
federal banking laws and the regulations of the OCC. The Company is also subject to limits
on payment of dividends to its shareholders by the rules, regulations and policies of
federal banking authorities. Under these regulations, the amount of dividends that may be
paid in any calendar year is limited to the current years net profits, combined with the
retained net profits of the preceding two years, subject to the capital requirements
described above.
As of December 31, 2009, the Bank could, without prior approval, declare dividends of
approximately $3,727,000. Pursuant to federal banking regulations and due to losses incurred
in 2009, beginning in 2010, the Bank and the Company had no net retained profits from the
previous two years available for dividend payments. The Bank and the Company may not,
subsequent to January 1, 2010, without prior consent, pay any dividends until such time that
current year profits exceed the net losses and dividends of the prior two years.
F-40
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 16 Other Comprehensive Income
Other comprehensive income (loss) consists of unrealized holding gains and losses on
securities available for sale. A summary of other comprehensive income (loss) and the
related tax effects for the years ended December 31, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Before-Tax |
|
|
(Expense) |
|
|
Net-of-Tax |
|
|
|
Amount |
|
|
Benefit |
|
|
Amount |
|
Year ended December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains/(losses)
arising during the period |
|
$ |
2,919,308 |
|
|
$ |
(1,117,736 |
) |
|
$ |
1,801,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustment for
gains realized in net income |
|
|
(2,211,243 |
) |
|
|
840,272 |
|
|
|
(1,370,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
708,065 |
|
|
$ |
(277,464 |
) |
|
$ |
430,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains/(losses)
arising during the period |
|
$ |
377,344 |
|
|
$ |
(134,791 |
) |
|
$ |
242,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustment for
gains realized in net income |
|
|
(179,274 |
) |
|
|
68,124 |
|
|
|
(111,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
198,070 |
|
|
$ |
(66,667 |
) |
|
$ |
131,403 |
|
|
|
|
|
|
|
|
|
|
|
Note 17 Earnings Per Common Share
Basic earnings per share represents income available to common stockholders divided by the
weighted-average number of common shares outstanding during the period. Diluted earnings per
share reflects additional common shares that would have been outstanding if dilutive
potential common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would result from
the assumed issuance.
Potential common shares that may be issued by the Company relate to outstanding stock
options, determined using the treasury stock method.
F-41
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 17 Earnings Per Common Share (continued)
Earnings per common share have been computed based on the following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(4,228,395 |
) |
|
$ |
3,280,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding |
|
|
2,631,611 |
|
|
|
2,634,750 |
|
Dilutive effect of stock options |
|
|
|
|
|
|
7,195 |
|
|
|
|
|
|
|
|
Average number of common shares outstanding used
to calculate diluted earnings per common share |
|
|
2,631,611 |
|
|
|
2,641,945 |
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008, there were options for the purchase of 125,086 and
93,131 shares, respectively, outstanding that were antidilutive.
Potential common shares that would have the effect of decreasing diluted loss per share are
considered to be antidilutive and therefore not included in calculating diluted loss per
share. During the year ended December 31, 2009, due to the net loss, there were 19,315
shares excluded from this calculation although the exercise price for such shares
underlying options was less than the fair value of the Companys common stock.
Note 18 Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162. This statement modifies the Generally Accepted Accounting Principles
(GAAP) hierarchy by establishing only two levels of GAAP, authoritative and
nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards
Codification (ASC), also known collectively as the Codification, is considered the
single source of authoritative U.S. accounting and
reporting standards, except for additional authoritative rules and interpretive releases
issued by the SEC. Nonauthoritative guidance and literature would include, among other
things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue
Papers and Technical Practice Aids and accounting textbooks. The Codification was developed
to organize GAAP pronouncements by topic so that users can more easily access authoritative
accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of
which is identified by a numerical designation. FASB ASC 105-10 Generally Accepted
Accounting Principles became applicable beginning in third quarter of 2009. All accounting
references have been updated, and therefore SFAS references have been replaced with ASC
references except for SFAS references that have not been integrated into the codification.
F-42
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 18 Recent Accounting Pronouncements (continued)
ASC Topic 820 Fair Value Measurements and Disclosures (ASC 820) defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. The provisions of ASC 820
became effective for periods beginning after November 15, 2007. The Company adopted these
provisions on January 1, 2008 for financial assets and financial liabilities and on January
1, 2009 for non-financial assets and non-financial liabilities (see Note 13Fair Value).
Additional new authoritative accounting guidance under ASC 820 affirms that the objective of
fair value when the market for an asset is not active is the price that would be received to
sell the asset in an orderly transaction, and clarifies and includes additional factors for
determining whether there has been a significant decrease in market activity for an asset
when the market for that asset is not active. ASC 820 requires an entity to base its
conclusion about whether a transaction was not orderly on the weight of the evidence. The
new accounting guidance amended prior guidance to expand certain disclosure requirements.
The Company adopted the new authoritative accounting guidance under ASC 820 as of April 1,
2009. Adoption of the new guidance did not significantly impact the financial statements.
Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under
ASC 820 provides guidance for measuring the fair value of a liability in circumstances in
which a quoted price in an active market for the identical liability is not available. In
such instances, a reporting entity is required to measure fair value utilizing a valuation
technique that uses (i) the quoted price of the identical liability when traded as an asset,
(ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or
(iii) another valuation technique that is consistent with the existing principles of ASC
820, such as an income approach or market approach. The new authoritative accounting
guidance also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the liability. The
forgoing new authoritative accounting guidance under ASC 820 became effective for periods
ending after October 1, 2009 and did not have a significant impact on the Companys
financial statements.
ASC Topic 320 InvestmentsDebt and Equity (ASC 320) (i) changes existing guidance for
determining whether an impairment is other than temporary to debt securities and (ii)
replaces the existing requirement that the entitys management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that management
assert: (a) it does not have the intent to sell the security; and (b) it is more likely than
not it will not have to sell the security before recovery of its cost basis. Under ASC 320,
declines in the fair value of held-to-maturity and available-for-sale debt securities below
their cost that are deemed to be other than temporary are reflected in earnings as realized
losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive
income. The Company adopted the provisions of the new authoritative accounting guidance
under ASC 320 during the second quarter of 2009. There was no impact from the adoption of
this new guidance.
F-43
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 18 Recent Accounting Pronouncements (continued)
In June 2009, the FASB issued new guidance impacting ASC Topic 860 Transfers and Servicing
(ASC 860), which provides for the removal of the qualifying special purpose entity
(QSPE) concept from GAAP, resulting in the evaluation of all former QSPEs for
consolidation on and after January 1, 2010. It also modifies the criteria for achieving sale
accounting for transfers of financial assets and defines the term participating interest to
establish specific conditions for reporting a transfer of a portion of a financial asset as
a sale, and provides that a transferor should recognize and initially measure at fair value
all assets obtained (including a transferors beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. This guidance also
requires enhanced disclosures which are generally consistent with, and supersede, the
disclosures previously required, and is effective prospectively for new transfers of
financial assets occurring in fiscal years beginning after November 15, 2009, and in interim
periods within those fiscal years. The disclosure requirements should be applied to
transfers that occurred both before and after its effective date, with comparative
disclosures required only for periods subsequent to initial adoption for those disclosures
not previously required under ASC 860-10-65-2. This statement is not expected to have a
significant impact on the Companys financial condition or results of operations.
Also in June 2009, the FASB issued amended guidance on accounting for variable interest
entities (VIEs). This guidance replaces the quantitative-based risks and rewards
calculation for determining which enterprise might have a controlling financial interest in
a VIE. The new, more qualitative evaluation focuses on who has the power to direct the
significant economic activities of the VIE and also has the obligation to absorb losses or
rights to receive benefits from the VIE. It also requires an ongoing reassessment of whether
an enterprise is the primary beneficiary of a VIE and calls for certain expanded disclosures
about an enterprises involvement with variable interest entities. The new guidance is
effective for periods beginning after November 15, 2009. Management does not expect the new
guidance to have a material effect, if any, on the Companys financial position or results
of operations.
Note 19 Dividends
During January 2008, the Board of Directors approved a 5% stock dividend for stockholders of
record as of February 15, 2008. In lieu of fractional shares, certain stockholders received
cash payments totaling $17,802. This stock dividend resulted in the issuance of 124,718
additional shares of common stock. All per share data included in the accompanying financial
statements reflects this stock dividend.
F-44
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 19 Dividends (continued)
During November 2008, the Board of Directors approved a special cash dividend of $0.38 per
issued and outstanding share of Common Stock for stockholders of record as of November 26,
2008. The dividend totaling approximately $1,013,000 was paid December 15, 2008.
Note 20 Condensed Parent Information
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash |
|
$ |
114,454 |
|
|
$ |
463,884 |
|
Investment in subsidiary |
|
|
59,679,774 |
|
|
|
63,285,236 |
|
Other assets |
|
|
1,015,161 |
|
|
|
774,465 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
60,809,389 |
|
|
$ |
64,523,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Subordinated debentures |
|
$ |
13,403,000 |
|
|
$ |
13,403,000 |
|
Accrued interest payable |
|
|
37,234 |
|
|
|
126,832 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
13,440,234 |
|
|
|
13,529,832 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
47,369,155 |
|
|
|
50,993,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
60,809,389 |
|
|
$ |
64,523,585 |
|
|
|
|
|
|
|
|
STATEMENTS OF INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
Dividends from subsidiaries |
|
$ |
|
|
|
$ |
500,000 |
|
Interest expense |
|
|
392,016 |
|
|
|
763,196 |
|
Other expense |
|
|
44,114 |
|
|
|
145,184 |
|
|
|
|
|
|
|
|
Loss before equity in undistributed earnings (loss) of subsidiary |
|
|
(436,130 |
) |
|
|
(408,380 |
) |
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings (loss) of subsidiary |
|
|
(3,959,259 |
) |
|
|
3,340,769 |
|
Income tax benefit |
|
|
166,994 |
|
|
|
347,819 |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,228,395 |
) |
|
$ |
3,280,208 |
|
|
|
|
|
|
|
|
F-45
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009 and 2008
Note 20 Condensed Parent Information (continued)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,228,395 |
) |
|
$ |
3,280,208 |
|
Adjustments to reconcile net income to net cash
provided by operating activities |
|
|
|
|
|
|
|
|
Equity in undistributed (income) loss of subsidiary |
|
|
3,959,259 |
|
|
|
(3,340,769 |
) |
Other |
|
|
(80,294 |
) |
|
|
(4,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(349,430 |
) |
|
|
(64,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Dividends |
|
|
|
|
|
|
(1,030,812 |
) |
Proceeds from issuance of common stock |
|
|
|
|
|
|
577,630 |
|
Purchase of common stock |
|
|
|
|
|
|
(1,202,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
|
|
|
|
(1,655,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(349,430 |
) |
|
|
(1,719,976 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of year |
|
|
463,884 |
|
|
|
2,183,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year |
|
$ |
114,454 |
|
|
$ |
463,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
481,613 |
|
|
$ |
768,630 |
|
Income taxes |
|
|
(154,676 |
) |
|
|
(295,042 |
) |
F-46