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 |
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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, 2010
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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
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37862 |
(Address of principal executive offices)
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(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 Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(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: $15,131,763.
There were 2,631,611 shares of Common Stock outstanding as of February 28, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for the 2011 Annual Meeting of
Shareholders (the 2011 Proxy Statement) are incorporated by reference into Part III of this
Report. Other than those portions of the 2011 Proxy Statement specifically incorporated by
reference herein pursuant to Part III, no other portions of the 2011 Proxy Statement shall be
deemed so incorporated.
MOUNTAIN NATIONAL BANCSHARES, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2010
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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increased levels of non-performing and repossessed assets; |
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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, and investment 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; |
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the remediation efforts related to the Companys material weakness in internal
control over financial reporting; |
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the ability to raise additional capital; |
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the prepayment of FDIC insurance premiums and higher FDIC assessment rates; |
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the effects of negative publicity; |
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the Companys recording of a further allowance related to its deferred tax asset;
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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, 2010, the assets of the Company consisted primarily of its ownership of the
capital stock of the Bank.
2
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.
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. Sevier County is adjacent to Knox County, Tennessee and the Knoxville SMSA, and
Blount County is also adjacent to Knox County and part of the Knoxville SMSA. Both Sevier County
and Blount County are adjacent to the Great Smokey Mountains National Park and have a significant
portion of their respective communities dependent upon the tourism and resort industries. Blount
County also benefits from economic growth of the Knoxville SMSA.
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 20 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.
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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.
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.
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Construction Lending. We offer single-family residential construction loans to
borrowers for construction of one-to-four family residences in our primary market area, although
volume has reduced substantially. 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.
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.
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.
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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.
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.
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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.
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 16% of
our total assets at December 31, 2010, 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 historically have used brokered deposits that are
comparable to our traditional certificates of deposit; however, management has recently sought to
reduce its reliance on this source of wholesale funding because of its volatility.
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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.
On December 14, 2010, the Company exercised its rights to defer regularly scheduled interest
payments on all of its issues of junior subordinated debentures relating to outstanding trust
preferred securities. The regular scheduled interest payments will continue to be accrued for
payment in the future and reported as an expense for financial statement purposes.
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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, 2010, there were 57 commercial
bank branches and three savings institutions branches located in Sevier County and 48 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.
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 151 employees, including 150 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. 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. These
laws and regulations are generally intended to protect depositors and borrowers, not shareholders.
In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act)
was signed into law, incorporating numerous financial institution regulatory reforms. Many of these
reforms will be implemented over the course of 2011 through regulations to be adopted by various
federal banking and securities regulations. This new law will significantly change the
current bank regulatory structure and affect the lending, deposit, investment, trading and
operating activities of financial institutions and their holding companies, including the Company
and the Bank. A broad range of new rules and regulations by various federal agencies must be
adopted and, consequently, many details and much of the impact of this act may not be known for
many months or years.
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.
10
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.
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 Dodd-Frank Act expands the affiliate transaction rules of the federal law to broaden the
definition of affiliate and to apply such rules to securities lending, repurchase agreements, and
derivative activities that the Bank may have with an affiliate, as well as to strengthen collateral
requirements and limit FRB exemptive authority. The definition of extension of credit for
transactions with executive officers, directors, and principal shareholders is also being
expanded to include credit exposure arising from a derivative transaction, a repurchase or
reverse repurchase agreement, and securities lending or borrowing transactions.
11
The BHC Act, as amended by the Dodd-Frank Act, permits acquisitions of banks by bank holding
companies, such that, if well-capitalized and well managed, Mountain National and any other bank
holding company located in Tennessee may acquire a bank located in any other state, and, if
well-capitalized and well managed, 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.
Under the Dodd-Frank Act and previously under Federal Reserve policy a bank holding company is
required 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.
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.
12
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.
As a result of a regulatory examination conducted during the first quarter of 2009, the Bank
has entered into a formal written agreement in which it made certain commitments to the OCC,
including commitments to, among other things, implement a 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 (ALLL), strengthen the Banks internal loan
review program, strengthen the Banks loan workout department, and develop a liquidity plan that
improves the Banks reliance on wholesale funding sources. The Company has taken action to comply
with these requirements and does not believe compliance with these commitments will have a
materially adverse impact on its operations.
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%. The
OCC imposed this requirement to maintain capital at higher levels than those required by applicable
federal regulations because the OCC believed that the Banks capital levels were less than
satisfactory given the level of credit risk in the Bank, specifically the high level of
nonperforming assets and provision for loan losses. As noted below under Capital, the Bank had
8.41% of Tier 1 capital to average assets and 13.23% of total capital to risk-weighted assets ratio
at December 31, 2010 and thus failed to satisfy its minimum Tier 1 capital to average assets ratio.
Failure to satisfy such requirement could result in further enforcement action by the OCC.
13
In the fourth quarter of 2010, the OCC informed the Bank that, because the OCC does not
believe that the Bank has fully satisfied the requirements of the formal written agreement, it will
be requested to replace the formal written agreement with a consent order (the Consent Order)
containing commitments for further improvements in the Banks operations. While the
requirements of the Consent Order are not currently known to the Bank, the OCC has informed
the Banks management that the Consent Order will likely contain provisions similar to those
currently contained in the existing minimum capital commitment that the Bank made to the OCC in
connection with the Banks entering into the formal written agreement, requiring the Bank to
maintain a minimum Tier 1 leverage capital ratio of 9% and a minimum total risk-based capital ratio
of 13%. If the Bank fails to comply with the requirements of the Consent Order, the OCC may impose
additional limitations, restraints, commitments or conditions 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.
The Dodd-Frank Act also creates a new Bureau of Consumer Financial Protection (the CFPB)
that will take over responsibility for the federal consumer financial protection laws. The CFPB
will be an independent bureau within the FRB and will have broad rule-making, supervisory and
examination authority to set and enforce rules in the consumer protection area over financial
institutions that have assets of $10.0 billion or more. The Dodd-Frank Act also
gives the CFPB expanded data collecting powers for fair lending purposes for both small
business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive
practices. The consumer complaint function will also be consolidated into the CFPB.
14
Several major regulatory and legislative initiatives recently adopted and revised by the
Dodd-Frank Act, will have significant future impacts on our business and financial results.
Amendments to Regulation E, which implement the Electronic Fund Transfer Act (the EFTA), involve
changes to the way banks may charge overdraft fees by limiting our ability to charge an overdraft
fee for ATM and one-time debit card transactions that overdraw a consumers account, unless the
consumer affirmatively consents to payment of overdrafts for those transactions. Additional
amendments to the EFTA include the Durbin Act, which mandates limiting debit card interchange
fees that banks may charge merchants.
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, 2010, 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 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.
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.
15
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.
Given the losses experienced by the Bank during 2009 and 2010, the Bank may not, without the
prior approval of the OCC, pay any dividends to the Company until such time that current year
profits exceed the net losses and dividends of the prior two years. Generally, federal regulatory
policy discourages payment of holding company or bank dividends if the holding company or its
subsidiaries are experiencing losses. Accordingly, until such time as it may receive dividends from
the Bank, the Company must service its interest payment on its subordinated indebtedness from its
available cash balances, if any.
On December 14, 2010, the Company exercised its rights to defer regularly scheduled interest
payments on all of its issues of junior subordinated debentures relating to outstanding trust
preferred securities. The regular scheduled interest payments will continue to be accrued for
payment in the future and reported as an expense for financial statement purposes.
Supervisory guidance from the Federal Reserve Board indicates that bank holding companies that
are experiencing financial difficulties generally should eliminate, reduce or defer dividends on
Tier 1 capital instruments including trust preferred securities, preferred stock or common stock,
if the holding company needs to conserve capital for safe and sound operation and to serve as a
source of strength to its subsidiaries. The Company has informally committed to the Federal Reserve
Board that it will not (1) declare or pay dividends on the Companys common or preferred stock, or
(2) incur any additional indebtedness without in each case, the prior written approval of the
Federal Reserve Board.
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, for certain eligible companies, 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. Following passage of the Dodd-Frank Act, trust preferred and cumulative preferred
securities will no longer be deemed Tier 1 capital for bank holding companies, but trust preferred
securities issued by bank holding companies with under $15 billion in total assets at December 31,
2009 will be grandfathered in and continue to
16
count as Tier 1 capital. Accordingly, 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).
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.
17
In December 2009, the Basel Committee on Banking Supervision (the BCBS) released a
comprehensive list of proposals for changes to capital, leverage and liquidity requirements for
banks (commonly referred to as Basel III). On December 15, 2010, the BCBS released its final
framework for strengthening international capital and liquidity regulation. When fully phased in on
January 1, 2019, Basel III requires banks to maintain the following new standards and
introduces a new capital measure Common Equity Tier 1, or CET1. Basel III increases the CET1 to
risk-weighted assets to 4.5%, and introduces a capital conservation buffer of an additional 2.5% of
common equity to risk-weighted assets, raising the target CET1 to risk-weighted assets ratio to 7%.
It requires banks to maintain a minimum ratio of Tier 1 capital to risk weighted assets of at least
6.0%, plus the capital conservation buffer effectively resulting in Tier 1 capital ratio of 8.5%.
Basel III increases the minimum total capital ratio to 8.0% plus the capital conservation buffer,
increasing the minimum total capital ratio to 10.5%. Basel III also introduces a non-risk adjusted
tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and new
liquidity standards. The Basel III capital and liquidity standards will be phased in over a
multi-year period, but the implementation of the new framework will commence January 1, 2013. On
that date, banks will be required to meet the following minimum capital ratios: 3.5% CET1 to
risk-weighted assets, 4.5% Tier 1 capital to risk-weighted assets and 8.0% total capital to
risk-weighted assets. Although the Basel III framework is not directly binding on the U.S. bank
regulatory agencies, the regulatory agencies will likely implement changes to the capital adequacy
standards applicable to the insured depository institutions and their holding companies in light of
Basel III.
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%.
As of December 31, 2010, the consolidated capital ratios of the Company and Bank were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Minimum to |
|
|
Regulatory Minimum |
|
|
|
|
|
|
|
|
|
be Adequately Capitalized |
|
|
to be Well Capitalized |
|
|
Company |
|
|
Bank |
|
Tier 1 capital ratio |
|
4.0 |
% |
|
|
6.0 |
% |
|
|
11.87 |
% |
|
|
11.97 |
% |
Total capital ratio |
|
8.0 |
% |
|
|
10.0 |
% |
|
|
13.27 |
% |
|
|
13.23 |
% |
Leverage ratio |
|
3.0-5.0 |
% |
|
|
5.0 |
% |
|
|
8.34 |
% |
|
|
8.41 |
% |
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.
18
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. Although brokered deposits are not currently
restricted, we believe that our board of directors will be asked to execute a stipulation and
consent to the issuance of a consent order by the OCC during the second or third quarter of 2011,
pursuant to which the Bank may be required to seek approval of the FDIC before it can accept, renew
or roll over brokered deposits. See Item 1A-Risk Factors and Item 7-Managements Discussion and
Analysis of Financial Condition and Results of Operations for a more detailed discussion. In
addition, the Bank generally will not be able to offer interest rates on deposits more than 75
basis points above the FDIC determined national rate.
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.
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 Federal Reserve increased the discount rate 0.25% during the first quarter of 2010. The
target federal funds rate in effect at December 31, 2008 was unchanged throughout 2009 and 2010.
19
FDIC Insurance Assessments
The Deposit Insurance Fund (DIF) of the FDIC insures deposit accounts in the Bank up to a
maximum amount per separately insured depositor. Under the Dodd-Frank Act, the maximum amount of
federal deposit insurance coverage has been permanently increased from $100,000 to $250,000 per
depositor, per institution. On November 9, 2010, the FDIC issued a final rule to implement a
provision of the Dodd-Frank Act that provides temporary unlimited deposit insurance coverage for
noninterest-bearing transaction accounts at all FDIC-insured depository institutions. Institutions
cannot opt out of this coverage, nor will the FDIC charge a separate assessment for the insurance.
On December 29, 2010, President Obama signed into law an amendment to the Federal Deposit Insurance
Act to include Interest on Lawyers Trust Accounts (IOLTA) within the definition of
noninterest-bearing transaction accounts. This amendment will provide IOLTAs with the same
temporary, unlimited insurance coverage afforded to noninterest-bearing transaction accounts under
the Dodd-Frank Act. This unlimited coverage for noninterest-bearing transaction accounts became
effective on December 31, 2010 and terminates on December 31, 2012.
The FDIC did not extend its Transaction Account Guarantee Program beyond its sunset date of
December 31, 2010, which provided a full guarantee of certain Negotiable Order of Withdrawal
accounts (NOW accounts). The FDIC insures NOW accounts up to the standard maximum deposit
insurance amount as noted above.
FDIC-insured depository institutions are required to pay deposit insurance premiums based on
the risk an institution poses to the DIF. In order to restore reserves and ensure that the DIF will
be able to adequately cover losses from future bank failures, the FDIC approved new deposit
insurance rules in November 2009. These new 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. As of December 31, 2010 the remaining balance of our prepaid
FDIC assessment was approximately $3 million. Continuing declines in the DIF may result in the FDIC
imposing additional assessments in the future, which could adversely affect the Companys capital
levels and earnings.
As required by the Dodd-Frank Act, on February 7, 2011, the FDIC finalized new rules which
would redefine the assessment base as average consolidated total assets minus average tangible
equity. The new rate schedule and other revisions to the assessment rules will become effective
April 1, 2011, to be used to calculate the June 2011 assessments which will be due in September
2011. The FDICs final rules will also eliminate risk categories and debt ratings from the
assessment calculation for large banks (over $10 billion) and will instead use scorecards that
the FDIC believes better reflect risks to the DIF. We continue to assess the impact that these
changes will have on our deposit insurance premiums in future periods.
20
In addition to DIF 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.
During the two years ended December 31, 2010 and 2009, the Bank paid approximately $65,000 and
$55,000, respectively, in FICO assessments. The Bank paid approximately $1,114,000 during 2010 for
FDIC deposit insurance premiums, including approximately $13,000 for premiums related to the
transaction account guarantee program.
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.
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.
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21
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.
The Dodd-Frank Act, certain aspects of which have been described above, will have a broad
impact on the financial services industry, imposing significant regulatory and compliance changes,
including the designation of certain financial companies as systemically significant, the
imposition of increased capital, leverage, and liquidity requirements, and numerous other
provisions designed to improve supervision and oversight of, and strengthen safety and soundness
within, the financial services sector. Additionally, the Dodd-Frank Act establishes a new framework
of authority to conduct systemic risk oversight within the financial system to be distributed among
new and existing federal regulatory agencies, including the Financial Stability Oversight Council,
the Federal Reserve, the OCC and the FDIC.
The following items provide a brief description of certain provisions of the Dodd-Frank Act
that may have an effect on us:
The Dodd-Frank Act makes permanent the general $250,000 deposit insurance limit for
insured deposits. The Dodd-Frank Act also extends until January 1, 2013, federal deposit
coverage for the full net amount held by depositors in non-interest bearing transaction
accounts. Amendments to the FDICIA also revise the assessment base against which an insured
depository institutions deposit insurance premiums paid to DIF will be calculated. Under
the amendments, the assessment base will no longer be the institutions deposit base, but
rather its average consolidated total assets less its average tangible equity. Additionally,
the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF,
increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total
insured deposits, and eliminating the requirement that the FDIC pay dividends to depository
institutions when the reserve ratio exceeds certain thresholds. We continue to assess the
impact that these changes will have on our deposit insurance premiums in future periods.
The Dodd-Frank Act generally enhances the restrictions on transactions with
affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of
the definition of covered transactions and an increase in the amount of time for which
collateral requirements regarding covered credit transactions must be satisfied. Insider
transaction limitations are expanded through the strengthening of loan restrictions to
insiders and the expansion of the types of transactions subject to the various limits,
including derivatives transactions, repurchase agreements, reverse repurchase agreements and
securities lending or borrowing transactions. Restrictions are also placed on certain asset
sales to and from an insider to an institution, including requirements that such sales be on
market terms and, in certain circumstances, approved by the institutions board of
directors.
22
The Dodd-Frank Act strengthens the existing limits on a depository institutions
credit exposure to one borrower. Federal banking law currently limits a federal thrifts
ability to extend credit to one person (or group of related persons) in an amount exceeding
certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include
credit exposure arising from derivative transactions, repurchase agreements, and securities
lending and borrowing transactions.
The Dodd-Frank Act authorizes the establishment of the CFPB, which has the power to
issue rules governing all financial institutions that offer financial services and products
to consumers. The CFPB has the authority to monitor markets for consumer financial products
to ensure that consumers are protected from abusive practices. Financial institutions will
be subject to increased compliance and enforcement costs associated with regulations
established by the CFPB.
The Dodd-Frank Act addresses many investor protection, corporate governance and
executive compensation matters that will affect most U.S. publicly traded companies,
including ours, in certain circumstances. The Dodd-Frank Act (1) grants stockholders of U.S.
publicly traded companies an advisory vote on executive compensation; (2) enhances
independence requirements for compensation committee members; (3) requires companies listed
on national securities exchanges to adopt incentive-based compensation clawback policies for
executive officers; (4) provides the SEC with authority to adopt proxy access rules that
would allow stockholders of publicly traded companies to nominate candidates for election as
a director and have those nominees included in a companys proxy materials; (5) prohibits
uninstructed broker votes on election of directors, executive compensation matters
(including say on pay advisory votes), and other significant matters, and (6) requires
disclosure on board leadership structure.
Many of the requirements of the Dodd-Frank Act will be implemented over time and most will be
subject to regulations implemented over the course of several years. Given the uncertainty
associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the
various regulatory agencies and through regulations, the full extent of the impact such
requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act
may impact the profitability of our business activities, require changes to certain of our business
practices, impose upon us more stringent capital, liquidity and leverage requirements or otherwise
adversely affect our business. These changes may also require us to invest significant management
attention and resources to evaluate and make any changes necessary to comply with new statutory and
regulatory requirements. Failure to comply with the new requirements may negatively impact our
results of operations and financial condition. While we cannot predict what effect any presently
contemplated or future changes in the laws or regulations or their interpretations would have on
us, these changes could be materially adverse to our investors.
23
We have incurred significant losses in the last two years and could continue to sustain losses if
our asset quality declines.
We incurred substantial losses in 2009 and 2010, resulting primarily from substantially higher
provisions for loan losses related to real estate related loans, reductions in net interest income
and, in 2010, the establishment of a reserve for a significant portion of our deferred tax asset. 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 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.
Our business is highly dependent upon conditions in the local real estate market and has been
adversely impacted by adverse developments in those markets.
Adverse market or economic conditions in East Tennessee have disproportionately increased 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, 2010, approximately 92.0% of our loans were secured by
real estate. Of this amount, approximately 38.9% were commercial real estate loans, 36.8% were
residential real estate loans and 24.3% were construction and development loans. We have
experienced increased payment delinquencies, foreclosures or losses caused by adverse market or
economic conditions in our markets and such conditions will continue to adversely affect the value
of our assets, our revenues, results of operations and financial condition.
We have entered into a written agreement with, and are subject to a capital requirement from, the
OCC.
On June 2, 2009, the Banks board of directors entered into a formal written agreement with
the OCC. The agreement requires the Bank to take certain actions and implement action plans with
respect to, among other things, a compliance committee, strategic and liquidity planning, loan
review and problem loan identification, loan workout management and procedures, credit and
collateral exceptions, other real estate owned, the allowance for loan and lease losses, criticized
assets, credit concentrations risk management and liquidity risk management.
In addition to the agreement, the OCC has required the Bank to meet and maintain a minimum
Tier 1 leverage ratio of 9% and a minimum total risk-based capital ratio of 13%. These ratios are
significantly higher than those required to be considered well-capitalized under OCC regulations.
At December 31, 2010, the Banks Tier 1 leverage ratio was 8.41% and its Total
risk-based capital ratio was 13.23%. Because of its non-compliance with the Tier 1 leverage ratio,
the Bank could become subject to additional enforcement action by the OCC.
24
We anticipate that we will become subject to a cease and desist order with the OCC during the
second or third quarter of 2011.
We believe that our board of directors will be asked to execute a stipulation and consent to
the issuance of a cease and desist order by the OCC, during the second or third quarter of 2011.
Although we do not yet know what terms the consent order will include we have been informed by the
OCC that the minimum capital maintenance requirements that we have informally committed to the OCC
that we will maintain (a minimum Tier 1 to average assets ratio of 9% and a minimum total
risk-based ratio of 13%) will be included in the consent order. Even if the Banks capital levels
exceed these higher levels, upon the issuance of the consent order, the Bank will be deemed to not
be well capitalized under the applicable federal regulations for so long as the consent order is
in place. As a result, the Bank will be required to seek approval of the FDIC before it can accept,
renew or roll over brokered deposits or pay interest on deposits above certain federally
established rates. The Banks regulators have considerable discretion in whether to grant required
approvals, and we may not be able to obtain approvals if requested. We expect that the consent
order will also include other operational and supervisory provisions requiring the Bank to take
certain actions.
Additionally, if the Bank fails to comply with the requirements of the consent order, it may
be subject to further regulatory action. The OCC also has broad authority to take additional
actions against the Bank, including assessing civil fines and penalties, issuing additional consent
or cease and desist orders, removing officers and directors, requiring us to sell or merge the
Bank.
Our inability to accept, renew or roll over brokered deposits without the prior approval of the
FDIC could adversely affect our liquidity.
As of December 31, 2010, we had approximately $27 million in brokered certificates of deposit
which represented approximately 6.01% of our total deposits. Because we anticipate that the consent
order will establish specific capital amounts to be maintained by the Bank, the Bank may not be
considered better than adequately capitalized under capital adequacy regulations, even if the
Bank exceeds the levels of capital set forth in the consent order and the normal requirements for
well capitalized status. As long as it is considered an adequately capitalized institution, the
Bank may not accept, renew or roll over brokered deposits without prior approval of the FDIC. As of
December 31, 2010, brokered deposits maturing in the next 24 months totaled approximately $18.8
million. Funding sources for the maturing brokered deposits include, among other sources: our cash
account at the Federal Reserve Bank of Atlanta; growth, if any, of core deposits from current and
new retail and commercial customers; scheduled repayments on existing loans; and the possible
pledge or sale of investment securities. Because the Bank will not be considered well capitalized
following issuance of the consent order, it will also not be permitted to offer to pay interest on
deposits at rates that are more than 75 basis points above the national rate unless the FDIC
determines we are in a high rate area. These interest rate limitations may limit the ability of
the Bank to increase or maintain core deposits from current and new deposit customers. The
limitations on our ability to accept, renew or roll over brokered
deposits, or pay more than 75 basis points above the national rate could adversely affect
our liquidity.
25
We may need to raise additional capital that may not be available to us.
As a result of our continuing losses, we may need to raise additional capital in the future if
we continue to incur additional losses or due to regulatory mandates. The ability to raise
additional capital, if needed, will depend in part on conditions in the capital markets at that
time, which are outside our control, and on our financial performance. Accordingly, additional
capital may not be raised, if and when needed, on terms acceptable to us, or at all. If we cannot
raise additional capital when needed, our ability to maintain our capital ratios could be
materially impaired, and we could face additional regulatory challenges.
If our allowance for loan losses is not sufficient to cover actual loan losses, our losses will
continue.
If loan customers with significant loan balances fail to repay their loans according to the
terms of these loans, our losses will continue. 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, loss experience of various loan categories,
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 a particular borrower of ours or our entire 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.
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.
26
Our loan portfolio includes a meaningful amount of real estate construction and development loans,
which have a greater credit risk than residential mortgage loans.
The percentage of real estate construction and development loans in the Companys portfolio was
approximately 22.3% of total loans at December 31, 2010, and these loans make up approximately
45.0% of our non-performing loans at December 31, 2010. This type of lending is generally
considered to have relatively high credit risks because the principal is concentrated in a limited
number of loans with repayment dependent on the successful completion and operation of the related
real estate project. Consequently, the credit quality of many of these loans has deteriorated as a
result of the current adverse conditions in the real estate market. Throughout 2009 and 2010, 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 losses and expenses from the management and disposition of non-performing
assets, increases in provision for loan losses, and increases in operating expenses as a result of
the allocation of management time and resources to the collection and work out of loans, 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, particularly the tourism industry, 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. Economic conditions in our area weakened during 2008 and 2009 and
remained weak throughout 2010, 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 2011 or thereafter, and continued weak economic
conditions could cause us to continue to further reduce our asset size, affect the ability of our
customers to repay their loans and generally affect our financial condition and results of
operations.
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 twelve primary concentrations of
credit by industry, of which seven are directly related to the tourism industry. At December 31,
2010, approximately $192 million in loans, representing
approximately 51.2% 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, borrowers in this industry are unable to perform their obligations under
their existing loan agreements, owe could incur additional losses.
27
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.
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.
A significant portion of 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 would 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 at least throughout 2011. 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 have had, and may continue to 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.
If the value of real estate in our markets were to decline further or if appraisals do not
accurately reflect real estate values, a significant portion of our loan portfolio could become
under-collateralized, which could have a material adverse effect on us.
In addition to considering the financial strength and cash flow characteristics of borrowers,
we often secure loans with real estate collateral. At December 31, 2010, approximately 92% of our
loans had real estate as a primary or secondary component of collateral. The real estate collateral
in each case provides an alternate source of repayment in the event of default by the borrower but
may deteriorate in value during the time the credit is extended. If the value of real estate in our
markets were to decline further, a significant portion of our loan portfolio could become
under-collateralized. As a result, if we are required to liquidate the collateral securing a loan
to satisfy the debt during a period of reduced real estate values, our earnings and capital could
be adversely affected.
28
Also, in considering whether to make a loan secured by real property, we generally require an
appraisal of the property. However, an appraisal is only an estimate of the value of the property
at the time the appraisal is made, and, as real estate values in our market area have experienced
changes in value in relatively short periods of time, this estimate might not accurately describe
the net value of the real property collateral after the loan has been closed. If the appraisal does
not reflect the amount that may be obtained upon any sale or foreclosure of the property, we may
not realize an amount equal to the indebtedness secured by the property. The valuation of the
property may negatively impact the continuing value of such loan and could adversely affect our
operating results and financial condition.
Negative publicity about financial institutions, generally, or about us or the Bank, specifically,
could damage the Banks reputation and adversely impact its liquidity, business operations or
financial results.
Reputation risk, or the risk to our business from negative publicity, is inherent in our
business. Negative publicity can result from the actual or alleged conduct of financial
institutions, generally, or us or the Bank, specifically, in any number of activities, including
leasing and lending practices, corporate governance, and actions taken by government regulators in
response to those activities. Negative publicity can adversely affect our ability to keep and
attract customers and can expose us to litigation and regulatory action, any of which could
negatively affect our liquidity, business operations or financial results.
The costs and effects of litigation, investigations or similar matters, or adverse facts and
developments related thereto, could materially affect our business, operating results and financial
condition.
We may be involved from time to time in a variety of litigation, investigations or similar
matters arising out of our business. Our insurance may not cover all claims that may be asserted
against it and indemnification rights to which we are entitled may not be honored, and any claims
asserted against us, regardless of merit or eventual outcome, may harm our reputation. Should the
ultimate judgments or settlements in any litigation or investigation significantly exceed our
insurance coverage, they could have a material adverse effect on our business, financial condition
and results of operations. In addition, premiums for insurance covering the financial and banking
sectors are rising. We may not be able to obtain appropriate types or levels of insurance in the
future, nor may we be able to obtain adequate replacement policies with acceptable terms or at
historic rates, if at all.
We may be required to pay significantly higher FDIC premiums or remit special assessments that
could adversely affect our earnings.
A downgrade in our regulatory condition, along with our current level of brokered deposits,
could cause our assessment to materially increase. In addition, market developments have
significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured
deposits. As a result, the entire industry may be required to pay significantly higher premiums or
additional special assessments that could adversely affect our earnings. It is possible that the
FDIC may impose additional special assessments in the future as part of its restoration plan.
29
We reported a material weakness in our internal control over financial reporting, and if we are
unable to improve our internal controls, our financial results may not be accurately reported.
Managements assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2010 identified a material weakness in its internal control over financial
reporting, as described in Item 9A-Controls and Procedures. This material weakness, or
difficulties encountered in implementing new or improved controls or remediation, could prevent us
from accurately reporting our financial results, result in material misstatements in our financial
statements or cause us to fail to meet our reporting obligations. Failure to comply with Section
404 of the Sarbanes-Oxley Act of 2002 could negatively affect our business, the price of our common
stock and market confidence in our reported financial information.
Negative developments in the U.S. and local economy and in local real estate markets have adversely
impacted our operations and results and may continue to adversely impact our results in the future.
Economic conditions in the markets in which we operate deteriorated significantly between
early 2008 and 2010. As a result, we incurred losses in 2009 and 2010, resulting primarily from
provisions for loan losses related to declining collateral values in our construction and
development loan portfolio. Although economic conditions showed signs of stabilization in our
markets in the second half of 2010 with the exception of real estate values, we believe that we
will continue to experience a challenging and volatile economic environment in 2011. Accordingly,
we expect that our results of operations will continue to be negatively impacted in 2011. 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 us in particular, will
improve, materially or at all, in which case we could continue to experience losses, write-downs of
assets, capital and liquidity constraints or other business challenges.
Environmental liability associated with commercial lending could result in losses.
In the course of business, we may acquire, through foreclosure, properties securing loans it
has originated or purchased which are in default. Particularly in commercial real estate lending,
there is a risk that hazardous substances could be discovered on these properties. In this event,
we, or the Bank, might be required to remove these substances from the affected properties at our
sole cost and expense. The cost of this removal could substantially exceed the value of affected
properties. We may not have adequate remedies against the prior owner or other responsible parties
and could find it difficult or impossible to sell the affected properties. These events could have
a material adverse effect on our business, results of operations and financial condition.
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, 2010, there were 57
commercial bank branches and three savings institutions branches located in Sevier County and 49
commercial bank branches and one savings institution branch located in Blount County.
30
Liquidity needs could adversely affect our results of operations and financial condition.
We rely on dividends from the Bank, which are currently limited as a result of the Banks
losses in 2009 and 2010, 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 have relied
to a significant degree on national time deposits and brokered deposits, which may be more volatile
than local time deposits. We have committed to the OCC to reduce our dependence on such sources and
have sought to improve our asset and liability liquidity. However, actions to improve liquidity may
adversely affect our profitability. 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. The
availability of these sources may be restricted because of the Banks financial performance. 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 Federal Deposit Insurance
Corporation Improvement Act of 1991. While we believe that these sources are currently adequate,
there can be no assurance they will be sufficient to meet future liquidity demands. We may be
required to continue to reduce our asset size, slow or discontinue capital expenditures or other
investments or liquidate assets should such sources not be adequate.
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 (usually deposits and borrowings),
meaning that either our interest-bearing liabilities will be more sensitive to changes in market
interest rates than our interest-earning assets (usually loans and investment securities), 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.
31
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.
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. 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.
Consumer protection initiatives related to the foreclosure process could affect our remedies as a
creditor.
Consumer protection initiatives proposed related to the foreclosure process, including
voluntary and/or mandatory programs intended to permit or require lenders to consider loan
modifications or other alternatives to foreclosure, could increase our credit losses or increase
our expense in pursuing our remedies as a creditor.
32
National or state legislation or regulation may increase our expenses and reduce earnings.
Federal bank regulators are increasing regulatory scrutiny, and additional restrictions
(including those originating from the Dodd-Frank Act) on financial institutions have been proposed
or adopted 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.
Implementation of the various provisions of the Dodd-Frank Act may increase our operating costs or
otherwise have a material affect on our business, financial condition or results of operations.
On July 21, 2010, President Obama signed the Dodd-Frank Act. This landmark legislation
includes, among other things, (i) the creation of a Financial Services Oversight Counsel to
identify emerging systemic risks and improve interagency cooperation; (ii) the elimination of the
Office of Thrift Supervision and the transfer of oversight of federally chartered thrift
institutions and their holding companies to the Office of the Comptroller of the Currency and the
Federal Reserve; (iii) the creation of a Consumer Financial Protection Agency authorized to
promulgate and enforce consumer protection regulations relating to financial products that would
affect banks and non-bank finance companies; (iv) the establishment of new capital and prudential
standards for banks and bank holding companies; (v) the termination of investments by the U.S.
Treasury under TARP; (vi) enhanced regulation of financial markets, including the derivatives,
securitization and mortgage origination markets; (vii) the elimination of certain proprietary
trading and private equity investment activities by banks; (viii) the elimination of barriers to de
novo interstate branching by banks; (ix) a permanent increase of the previously implemented
temporary increase of FDIC deposit insurance to $250,000; (x) the authorization of interest-bearing
transaction accounts; and (xi) changes in how the FDIC deposit insurance assessments will be
calculated and an increase in the minimum designated reserve ratio for the Deposit Insurance Fund.
Certain provisions of the legislation are not immediately effective or are subject to required
studies and implementing regulations. Further, community banks with less than $10 billion in assets
(like us) are exempt from certain provisions of the legislation. We cannot predict how this
significant new legislation may be interpreted and enforced or how implementing regulations and
supervisory policies may affect us. There can be no assurance that these or future
reforms will not significantly increase our compliance or operating costs or otherwise have a
significant impact on our business, financial condition and results of operations.
33
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
current economic conditions), our net interest margin continues to be negatively affected. Because
of these competitive pressures, we have been unable to lower the rate that we pay on
interest-bearing liabilities to the same extent and as quickly as the yields we charge on
interest-earning assets. Additionally, the amount of non-accrual loans and other real estate owned
has been and may continue to be elevated. As a result, our net interest margin, and consequently
our profitability, has been and may continue to be negatively impacted.
We have a significant deferred tax asset and cannot give any assurance that it will be fully
realized.
During 2010, the Company reached a three-year pre-tax cumulative loss position. Under GAAP, a
cumulative loss position is considered significant negative evidence which makes it very difficult
for the Company to rely on future earnings as a reliable source of future taxable income to realize
deferred tax assets. We had net deferred tax assets of approximately $1.4 million as of December
31, 2010. We established a valuation allowance against our net deferred tax assets as of December
31, 2010 totaling approximately $7.4 million because we believe that it is not more likely than not
that all of these assets will be realized. In determining the amount of the valuation allowance, we
considered the reversal of deferred tax liabilities and the ability to carryback losses to prior
years. This process required significant judgment by management about matters that are by nature
uncertain. We may need to increase our valuation allowance because of changes in the amounts of
deferred tax assets and liabilities, which could have a material adverse effect on our results of
operations and financial condition.
Holders of the Companys junior subordinated debentures have rights that are senior to those of the
Companys common shareholders.
At December 31, 2010, we had outstanding trust preferred securities from special purpose
trusts and accompanying junior subordinated debentures totaling $13 million. Payments of the
principal and interest on the trust preferred securities of these trusts are conditionally
guaranteed by us. Further, the accompanying junior subordinated debentures we issued to the trusts
are senior to our shares of common stock and preferred stock. As a result, we must make payments on
the junior subordinated debentures before any dividends can be paid on our common stock and, in the
event of our bankruptcy, dissolution or liquidation, the holders of the junior subordinated
debentures must be satisfied before any distributions can be made on our common stock. We have the
right to defer distributions on our junior subordinated debentures (and the related trust preferred
securities) for up to five years, during which time no dividends may be paid on our common stock.
Because of the losses the Bank incurred in 2009 and 2010, it is not permitted to pay dividends to
us without the consent of the OCC. As a result, we must use cash
on hand to pay our obligations on the subordinated debentures related to our trust preferred
securities.
34
On December 14, 2010, the Company exercised its rights to defer regularly scheduled interest
payments on all of its issues of junior subordinated debentures relating to outstanding trust
preferred securities. The regular scheduled interest payments will continue to be accrued for
payment in the future and reported as an expense for financial statement purposes.
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.
Our 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 our
common stock is inherently risky for the reasons described in this Risk Factors section and
elsewhere in this report and is subject to the equity market forces like other common stocks. As a
result, if you acquire our 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.
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 2015 and includes
one five-year renewal option 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.
35
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 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.
|
|
|
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.
|
|
|
ITEM 4. |
|
REMOVED AND RESERVED |
36
PART II
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
Market Price Range |
|
|
|
Per Share |
|
Year/Period |
|
High |
|
|
Low |
|
2010: |
|
$ |
8.10 |
|
|
$ |
4.00 |
|
First Quarter |
|
|
8.10 |
|
|
|
5.75 |
|
Second Quarter |
|
|
6.75 |
|
|
|
5.10 |
|
Third Quarter |
|
|
5.75 |
|
|
|
5.00 |
|
Fourth Quarter |
|
|
5.00 |
|
|
|
4.00 |
|
|
|
|
|
|
|
|
|
|
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 |
|
These quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
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 and 2010, the Banks ability to pay dividends to the Company beginning
on January 1, 2010 was 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.
Issuer Purchases of Equity Securities
The Company made no repurchases of its Common Stock during the fourth quarter of 2010.
37
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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, 2010, and our financial condition at December
31, 2009 and 2010. We have provided comparisons of financial data as of and for the fiscal years
ended December 31, 2009 and 2010, 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.
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.
38
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
2009 and 2010.
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, because economic conditions in our market area have undergone an
unexpected and adverse change in the last two years, we have had to increase our allowance for loan
losses by taking a charge against earnings in the form of additional provisions for loan losses.
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.
39
Deferred Tax Asset Valuation
A valuation allowance is recognized for a deferred tax asset if, based on the weight of
available evidence, it is more-likely-than-not that some portion or the entire deferred tax asset
will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become
deductible. In making such judgments, significant weight is given to evidence that can be
objectively verified. As a result of its increased credit losses, the Company entered into a
three-year cumulative pre-tax loss position during 2010. A cumulative loss position is considered
significant negative evidence in assessing the realizability of a deferred tax asset which is
difficult to overcome. The Companys estimate of the realization of its deferred tax assets was
based on the scheduled reversal of deferred tax liabilities and taxable income available in prior
carry back years. We did not consider future taxable income in determining the realizability of our
deferred tax assets, and as such, recorded a valuation allowance to reduce our net deferred tax
asset to approximately $1.4 million. When the Companys profitability returns and continues to a
point that is considered sustainable, some or all of the valuation allowance may be reversed. The
timing of the reversal of the valuation allowance is dependent on an assessment of future events
and will be based on the circumstances that exist as of that future date.
Results of Operations for the Years Ended December 31, 2010 and 2009
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. |
In 2010 and 2009, our other principal sources of revenue were service charges on deposit
accounts and credit/debit card related income.
40
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 |
|
|
|
2010 |
|
|
2009 |
|
|
2010 to 2009 |
|
|
2010 to 2009 |
|
Interest income |
|
$ |
23,456 |
|
|
$ |
31,369 |
|
|
$ |
(7,913 |
) |
|
|
-25.23 |
% |
Interest expense |
|
|
10,702 |
|
|
|
13,358 |
|
|
|
(2,656 |
) |
|
|
-19.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
12,754 |
|
|
|
18,011 |
|
|
|
(5,257 |
) |
|
|
-29.19 |
% |
Provision for loan losses |
|
|
7,727 |
|
|
|
11,673 |
|
|
|
(3,946 |
) |
|
|
-33.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
5,027 |
|
|
|
6,338 |
|
|
|
(1,311 |
) |
|
|
-20.68 |
% |
Noninterest income |
|
|
5,750 |
|
|
|
4,863 |
|
|
|
887 |
|
|
|
18.24 |
% |
Noninterest expense |
|
|
17,490 |
|
|
|
19,217 |
|
|
|
(1,727 |
) |
|
|
-8.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before
income taxes |
|
|
(6,713 |
) |
|
|
(8,016 |
) |
|
|
1,303 |
|
|
|
-16.25 |
% |
Income tax expense (benefit) |
|
|
3,738 |
|
|
|
(3,788 |
) |
|
|
7,526 |
|
|
|
-198.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(10,451 |
) |
|
$ |
(4,228 |
) |
|
$ |
(6,223 |
) |
|
|
147.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
29,206 |
|
|
$ |
36,232 |
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
39,657 |
|
|
|
40,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share |
|
|
(3.97 |
) |
|
|
(1.61 |
) |
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share |
|
|
(3.97 |
) |
|
|
(1.61 |
) |
|
|
|
|
|
|
|
|
The net loss for 2010 was primarily attributable to the provision for loan losses, the
continued compression in the Companys net interest margin and the disallowance of the deferred tax
asset. The provision for loan losses reflects the continued elevated 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 and
is discussed in more detail under Provision for Loan Losses. Total average loans, our largest
interest earning-asset, decreased approximately $17,928,000 during 2010. More significantly, the
average balance of nonaccrual loans increased approximately $38,311,000 during the year from
approximately $21,444,000 at December 31, 2009 to approximately
$59,755,000 at December 31, 2010. The interest associated with these loans that was excluded
and reversed from income throughout 2010 was a significant factor contributing to the decrease in
interest income, the 83 basis point reduction of the yield earned on loans and 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. During 2010, we established a
valuation allowance against our deferred tax assets in order to adjust the net carrying amount to
what we believe is currently realizable. The deferred tax valuation allowance and related tax
expense is described in more detail under Income Taxes. The net loss during 2010 was lessened by
the decrease in noninterest expense which was primarily related to the decrease in salaries and
employee benefits from personnel cutbacks, as described in more detail under Noninterest
Expenses.
41
Basic and diluted loss per share was ($3.97) and ($3.97), respectively, for 2010, compared to
($1.61) and ($1.61), respectively, for 2009 reflecting the increased net loss from 2009 to 2010.
The average number of shares outstanding was unchanged during 2010.
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 73 basis points from 3.07%
at December 31, 2009, to 2.34% at December 31, 2010. The increasing volume of nonaccrual loans has
caused a more prolonged and significant compression in the Banks margin 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:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
First Quarter |
|
$ |
329,113 |
|
|
$ |
(673,634 |
) |
Second Quarter |
|
|
142,286 |
|
|
|
(789,050 |
) |
Third Quarter |
|
|
350,893 |
|
|
|
1,028,162 |
|
Fourth Quarter |
|
|
(11,273,470 |
) |
|
|
(3,793,873 |
) |
|
|
|
|
|
|
|
Annual Total |
|
$ |
(10,451,178 |
) |
|
$ |
(4,228,395 |
) |
|
|
|
|
|
|
|
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.
42
Average Balance Sheet and Analysis of Net Interest Income
for the Years Ended December 31, 2010 and 2009
(in thousands, except rates)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance |
|
|
Income/Expense |
|
|
Yield/Rate |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)(2) |
|
$ |
397,594 |
|
|
$ |
415,522 |
|
|
$ |
20,674 |
|
|
$ |
25,072 |
|
|
|
5.20 |
% |
|
|
6.03 |
% |
Investment Securities: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
111,784 |
|
|
|
151,729 |
|
|
|
2,456 |
|
|
|
5,994 |
|
|
|
2.20 |
% |
|
|
3.95 |
% |
Held to maturity |
|
|
1,362 |
|
|
|
2,156 |
|
|
|
61 |
|
|
|
87 |
|
|
|
4.48 |
% |
|
|
4.04 |
% |
Equity securities |
|
|
3,837 |
|
|
|
3,895 |
|
|
|
189 |
|
|
|
191 |
|
|
|
4.93 |
% |
|
|
4.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
116,983 |
|
|
|
157,780 |
|
|
|
2,706 |
|
|
|
6,272 |
|
|
|
2.31 |
% |
|
|
3.98 |
% |
Federal funds sold and other |
|
|
29,310 |
|
|
|
13,295 |
|
|
|
76 |
|
|
|
25 |
|
|
|
0.26 |
% |
|
|
0.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning
assets |
|
|
543,887 |
|
|
|
586,597 |
|
|
|
23,456 |
|
|
|
31,369 |
|
|
|
4.31 |
% |
|
|
5.35 |
% |
Nonearning assets |
|
|
74,544 |
|
|
|
72,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
618,431 |
|
|
$ |
659,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
demand deposits |
|
|
119,547 |
|
|
|
150,384 |
|
|
|
1,309 |
|
|
|
1,856 |
|
|
|
1.09 |
% |
|
|
1.23 |
% |
Savings deposits |
|
|
22,790 |
|
|
|
17,340 |
|
|
|
245 |
|
|
|
241 |
|
|
|
1.08 |
% |
|
|
1.39 |
% |
Time deposits |
|
|
302,494 |
|
|
|
304,715 |
|
|
|
6,283 |
|
|
|
8,151 |
|
|
|
2.08 |
% |
|
|
2.67 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
444,831 |
|
|
|
472,439 |
|
|
|
7,837 |
|
|
|
10,248 |
|
|
|
1.76 |
% |
|
|
2.17 |
% |
Securities sold under agreements
to repurchase |
|
|
1,535 |
|
|
|
4,284 |
|
|
|
24 |
|
|
|
91 |
|
|
|
1.56 |
% |
|
|
2.12 |
% |
Federal Home Loan Bank advances
and other borrowings |
|
|
61,657 |
|
|
|
68,442 |
|
|
|
2,497 |
|
|
|
2,627 |
|
|
|
4.05 |
% |
|
|
3.84 |
% |
Subordinated debt |
|
|
13,403 |
|
|
|
13,403 |
|
|
|
344 |
|
|
|
392 |
|
|
|
2.57 |
% |
|
|
2.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
521,426 |
|
|
|
558,568 |
|
|
|
10,702 |
|
|
|
13,358 |
|
|
|
2.05 |
% |
|
|
2.39 |
% |
Noninterest-bearing deposits |
|
|
46,237 |
|
|
|
45,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and interest-bearings liabilities |
|
|
567,663 |
|
|
|
604,329 |
|
|
|
10,702 |
|
|
|
13,358 |
|
|
|
1.89 |
% |
|
|
2.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
2,890 |
|
|
|
3,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
47,878 |
|
|
|
51,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
618,431 |
|
|
$ |
659,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
|
|
|
$ |
12,754 |
|
|
$ |
18,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.26 |
% |
|
|
2.96 |
% |
Net interest margin (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.34 |
% |
|
|
3.07 |
% |
|
|
|
(1) |
|
Interest income from loans includes total fee income of approximately $889,000 and
$1,134,000 for the
years ended December 31, 2010 and 2009, 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. |
43
The large volume of nonaccrual loans as well as a securities portfolio that, at certain times
during 2010, contained comparatively low-rate investments resulted in the continued compression of
our net interest margin as we experienced reduced yields on a significant portion of our earning
asset base. Rate and volume variances during 2010 caused a decrease in interest income and interest
expense as well as net interest income which decreased approximately $5,257,000 in 2010 compared to
2009. The Companys net interest margin decreased by 73 basis points in 2010 compared to 2009.
Yields on our loan portfolio decreased by 83 basis points in 2010 compared to 2009, reflecting the
approximately $38 million increase in average nonaccrual loans during the year as well as the
continuing very low rate environment. As discussed in more detail under Securities, we shifted a
significant portion of our investment portfolio to shorter-term securities in preparation for their
liquidation. This shift caused the yield on our investment securities portfolio to decrease 167
basis points during 2010 when compared to 2009. Partially 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 41 basis points in 2010 compared to 2009, reflecting the
continued effects of a decreasing interest rate environment. The average rate paid on time
deposits, in particular, takes longer to adjust to current market rates due to the varied and
sometimes extended repricing speed of these deposits. Also contributing to our lower funding costs
was a 35 basis point decrease in rates paid on subordinated debt in 2010.
Average balances of our earning assets decreased by approximately $43 million in 2010 compared
to 2009, primarily due to a reduction in average securities and average loans which decreased
approximately $41 million and $18 million, respectively, in 2010. The liquidity created by the
reduction in securities and loans was used to fund the withdrawal of certain municipal deposits
during the year as discussed in more detail under Deposits. The remaining funds were used to
pre-pay an FHLB advance and invested in 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 2.34% during 2010 versus 3.07%
in 2009, a decrease of 73 basis points. The decrease in our net interest margin reflects a decrease
in the average spread in 2010 between the rates we earned on our interest-earning assets, which had
a decrease in overall yield of 104 basis points to 4.31% at December 31, 2010, as compared to 5.35%
at December 31, 2009, and the rates we paid on interest-bearing liabilities, which had a less
substantial decrease of 34 basis points in the overall rate to 2.05% at December 31, 2010, versus
2.39% at December 31, 2009. Our interest-earning assets, including approximately $163,000,000 in
loans tied to prime that reprice more quickly than our interest-bearing liabilities, particularly
time deposits and borrowings with a fixed rate and term. Therefore, during the declining and low
interest rate environments 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 $38 million increase
in average nonaccrual loans and reduction in the average rate earned on our investment securities
portfolio negatively impacted our net interest margin. The negative effect of nonaccrual loans will
continue as long as and to the extent that the balance of nonaccrual loans is elevated. The yield
earned on investment securities will likely not fully recover for some time as new investments
obtained during the current economic environment typically do not carry the same yield as those
that we sold during 2010. When market interest rates begin to increase, our net interest margin
will likely remain compressed until interest rates exceed the established rate floors.
44
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 $17.9
million during 2010 and, as mentioned above, the yield we earned on these loans decreased as well.
Both of these factors contributed to the approximately $4.4 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 2010, measures to offset the
impact of the ongoing 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 reduce the impact of low interest rates.
Interest income on investment securities decreased approximately $3.6 million from 2009 to
2010 due to the 167 basis point decrease in the yield earned on these securities as well as the
approximately $40.8 million decrease in volume of securities owned.
The decrease in interest expense during 2010 as compared to 2009 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 decreases in the average
balance of time deposits of approximately $2 million and interest-bearing demand deposits of
approximately $31 million also contributed to the decrease in interest expense from 2009 to 2010.
As a result of the approximately $3.6 million decrease in average federal funds purchased during
2010, the average rate paid on combined FHLB advances and other borrowings during 2010 was higher
than the average rate paid during 2009. 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 2010 average rate increase, interest expense on borrowed
funds decreased approximately $130,000, reflecting the approximately $6.8 million decrease in
average borrowed funds. In addition to the decrease in average federal funds purchased, we prepaid
a $7.5 million FHLB advance during the third quarter of 2010 which is discussed in more detail
under Noninterest Expense as well as Note 7. FHLB Advances. Interest expense on subordinated
debt decreased during 2010 due exclusively to the 35 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) in recent years, 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.
45
ANALYSIS OF CHANGES IN NET INTEREST INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Compared to 2009 |
|
|
|
Increase (decrease) |
|
|
|
due to change in |
|
|
|
Rate |
|
|
Volume |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
(3,313 |
) |
|
$ |
(1,085 |
) |
|
$ |
(4,398 |
) |
Interest on securities |
|
|
(1,948 |
) |
|
|
(1,618 |
) |
|
|
(3,566 |
) |
Interest on Federal funds sold and other |
|
|
21 |
|
|
|
30 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
(5,240 |
) |
|
|
(2,673 |
) |
|
|
(7,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense from interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on interest-bearing deposits |
|
|
(227 |
) |
|
|
(316 |
) |
|
|
(543 |
) |
Interest on time deposits |
|
|
(1,808 |
) |
|
|
(60 |
) |
|
|
(1,868 |
) |
Interest on other borrowings |
|
|
100 |
|
|
|
(345 |
) |
|
|
(245 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
(1,935 |
) |
|
|
(721 |
) |
|
|
(2,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
(3,305 |
) |
|
$ |
(1,952 |
) |
|
$ |
(5,257 |
) |
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 $33 million
during 2010, the continuing increased level of provision for loan loss expense during 2010, as well
as 2009, 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. Continuing reductions in property values and the reduced volume of sales of developed
and undeveloped land has led to an increase of impaired loans determined to be collateral
dependent. As the collateral value for these land loans has declined significantly during 2010 and
into 2011, related charge-offs and provision expense have been incurred. Management has continued
its ongoing 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 and higher allowance levels.
46
Noninterest Income
The following table presents the major components of noninterest income for 2010 and 2009
(dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
Dollar Change |
|
|
Percent Change |
|
|
|
2010 |
|
|
2009 |
|
|
2010 to 2009 |
|
|
2010 to 2009 |
|
Service charges on deposit
accounts |
|
$ |
1,642 |
|
|
$ |
2,327 |
|
|
$ |
(685 |
) |
|
|
-29.44 |
% |
Other fees and commissions |
|
|
1,473 |
|
|
|
1,262 |
|
|
|
211 |
|
|
|
16.72 |
% |
Gain on sale of mortgage loans |
|
|
191 |
|
|
|
147 |
|
|
|
44 |
|
|
|
29.93 |
% |
Gain on sale of securities, net |
|
|
1,511 |
|
|
|
2,558 |
|
|
|
(1,047 |
) |
|
|
-40.93 |
% |
Loss on impairment of securities |
|
|
|
|
|
|
(347 |
) |
|
|
347 |
|
|
|
-100.00 |
% |
Gain (loss) on other real
estate, net |
|
|
34 |
|
|
|
(1,479 |
) |
|
|
1,513 |
|
|
|
-102.30 |
% |
Other noninterest income |
|
|
899 |
|
|
|
395 |
|
|
|
504 |
|
|
|
127.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
5,750 |
|
|
$ |
4,863 |
|
|
$ |
887 |
|
|
|
18.24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal components of noninterest income during both 2009 and 2010 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 and 2010, we sold approximately $90 million and $104 million,
respectively, 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, during 2010 we realized a $1.5 million net gain and during 2009 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. We recorded a small net gain on OREO in 2010.
The reduction in service charges on deposit accounts was primarily the result of a decrease in
overdraft fees. During January 2009, we implemented an authorized overdraft program that led to
increased overdraft fee income when compared to prior years. However, during 2010 these fees
decreased as compared to 2009 due, in part, to regulatory changes that became effective during 2010
which are discussed in the following paragraph, as well as general consumer behavior. The increase
in other fees and commissions from 2009 to 2010 was the result of increases in credit/debit card
fees. The increase in other noninterest income was attributable to increases in the following
areas: approximately $208,000 increase in OREO income related to rental of certain of our OREO
properties, approximately $158,000 increase in income generated by our investment in the
Appalachian Fund for Growth partnership and approximately $130,000 increase in income generated by
the increased cash surrender value of BOLI.
47
In November 2009, the Federal Reserve Board issued a final rule that, effective July 1, 2010,
prohibited 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. This rule had a negative impact on insufficient funds income
during 2010.
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.
Noninterest Expenses
The following table presents the major components of noninterest expense for 2010 and 2009
(dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
Dollar Change |
|
|
Percent Change |
|
|
|
2010 |
|
|
2009 |
|
|
2010 to 2009 |
|
|
2010 to 2009 |
|
Salaries and employee benefits |
|
$ |
8,322 |
|
|
$ |
9,670 |
|
|
$ |
(1,348 |
) |
|
|
-13.94 |
% |
Occupancy expenses |
|
|
1,759 |
|
|
|
1,699 |
|
|
|
60 |
|
|
|
3.53 |
% |
FDIC assessment expense |
|
|
1,161 |
|
|
|
1,537 |
|
|
|
(376 |
) |
|
|
-24.46 |
% |
Other operating expenses |
|
|
6,248 |
|
|
|
6,311 |
|
|
|
(63 |
) |
|
|
-1.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
17,490 |
|
|
$ |
19,217 |
|
|
$ |
(1,727 |
) |
|
|
-8.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The largest component of our noninterest expense continues to be the cost of salaries and
employee benefits, which decreased by approximately $1,348,000 during 2010, and was the most
significant factor contributing to the overall decrease in noninterest expense. Other operating
expenses decreased slightly as a whole, however; this decrease was negatively affected by an
approximately $350,000 FHLB pre-payment penalty incurred during the third quarter of 2010 as well
as the approximately $118,000 increase in OREO expense related to maintenance and upkeep of our
foreclosed properties. These increases were offset by the effects of several cost cutting
initiatives enacted during the first quarter of 2010 in an effort to improve its profitability
during 2010. These measures included, but were not limited to, areas such as employee related
expenses, business travel and other discretionary spending, equipment and supply expenses and
marketing expenses. In total, these initiatives reduced the Companys expenses by approximately
$1.5 million during 2010. The decrease in noninterest expense was also attributable to the decrease
in FDIC assessment expense during 2010 related to the overall decrease in deposits.
48
Income Taxes
Our provision for income taxes and effective tax rates for 2010 and 2009 were as follows:
Provision for Income Taxes and Effective Tax Rates
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Provision |
|
|
Effective |
|
|
|
Expense/(Benefit) |
|
|
Tax Rates |
|
2010 |
|
$ |
3,738 |
|
|
|
-55.68 |
% |
2009 |
|
$ |
(3,788 |
) |
|
|
47.26 |
% |
The effective income tax rate for the year ended December 31, 2010 was approximately (55.68%),
compared to an income tax benefit rate of 47.26% for the year ended December 31, 2009. Our income
tax expense rate for 2010 was principally impacted by the recognition of a valuation allowance
during 2010 as more fully discussed in Note 6. Income Taxes. Establishing a valuation allowance
required us to record a significant tax expense which, when applied to a pretax loss, caused a
negative effective tax rate. Additionally, tax exempt income has the effect of increasing a taxable
loss, therefore increasing effective tax rates as a percentage of pretax income. This is the
opposite effect on tax rates when a company has pretax income.
During 2009 and 2010, 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 improved our effective tax rate in both years. 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 2009 and 2010. 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.
49
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, 2010 and 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ change |
|
|
% change |
|
Cash and equivalents |
|
$ |
32,576 |
|
|
$ |
14,105 |
|
|
$ |
18,471 |
|
|
|
130.95 |
% |
Loans |
|
|
374,355 |
|
|
|
407,704 |
|
|
|
(33,349 |
) |
|
|
-8.18 |
% |
Allowance for loan losses |
|
|
10,942 |
|
|
|
11,353 |
|
|
|
(411 |
) |
|
|
-3.62 |
% |
Investment securities |
|
|
87,635 |
|
|
|
146,534 |
|
|
|
(58,899 |
) |
|
|
-40.19 |
% |
Premises and equipment |
|
|
32,601 |
|
|
|
33,709 |
|
|
|
(1,108 |
) |
|
|
-3.29 |
% |
Other real estate owned |
|
|
13,141 |
|
|
|
14,575 |
|
|
|
(1,434 |
) |
|
|
-9.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
557,207 |
|
|
|
639,739 |
|
|
|
(82,532 |
) |
|
|
-12.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
47,639 |
|
|
|
47,601 |
|
|
|
38 |
|
|
|
0.08 |
% |
Interest-bearing demand and savings deposits |
|
|
130,779 |
|
|
|
173,769 |
|
|
|
(42,990 |
) |
|
|
-24.74 |
% |
Time deposits |
|
|
271,173 |
|
|
|
289,244 |
|
|
|
(18,071 |
) |
|
|
-6.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
449,591 |
|
|
|
510,614 |
|
|
|
(61,023 |
) |
|
|
-11.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank advances |
|
|
55,200 |
|
|
|
62,900 |
|
|
|
(7,700 |
) |
|
|
-12.24 |
% |
Subordinated debentures |
|
|
13,403 |
|
|
|
13,403 |
|
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
521,532 |
|
|
|
592,370 |
|
|
|
(70,838 |
) |
|
|
-11.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
(loss) |
|
|
(1,065 |
) |
|
|
283 |
|
|
|
(1,348 |
) |
|
|
-476.33 |
% |
Total shareholders equity |
|
$ |
35,674 |
|
|
$ |
47,369 |
|
|
$ |
(11,695 |
) |
|
|
-24.69 |
% |
Loans
At December 31, 2009 and 2010, loans comprised 74.2% and 77.4% of our total earning assets,
respectively. While both loans and securities decreased during 2010, the increase in loans as a
percent of total earning assets was caused by the relatively more significant decrease in our
investment securities portfolio as discussed under Securities. Total earning assets as a percent
of total assets, were 86.8% at December 31, 2010, compared to 86.3% at December 31, 2009. This
slight increase in total earning assets relative to total assets in 2010 was attributable to
decreases in nonearning assets including deferred tax assets, OREO and prepaid expenses associated
with the Banks FDIC assessment. The increase in total earning assets as a percent of total assets
was offset by decreases in loans and securities.
50
Loan Portfolio. Our loan portfolio consisted of the following loan categories and
amounts as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Commercial, financial, agricultural |
|
$ |
24,944 |
|
|
$ |
30,387 |
|
|
$ |
37,632 |
|
|
$ |
35,929 |
|
|
$ |
26,062 |
|
Real estate construction,
development |
|
|
83,543 |
|
|
|
99,771 |
|
|
|
142,370 |
|
|
|
150,844 |
|
|
|
137,989 |
|
Real estate mortgage |
|
|
260,738 |
|
|
|
270,622 |
|
|
|
231,999 |
|
|
|
201,011 |
|
|
|
173,085 |
|
Consumer and other |
|
|
5,130 |
|
|
|
6,924 |
|
|
|
8,428 |
|
|
|
9,890 |
|
|
|
7,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses |
|
|
10,942 |
|
|
|
11,353 |
|
|
|
5,292 |
|
|
|
3,974 |
|
|
|
3,524 |
|
Loans, net |
|
$ |
363,413 |
|
|
$ |
396,351 |
|
|
$ |
415,137 |
|
|
$ |
393,700 |
|
|
$ |
341,184 |
|
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 and 2010 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, 2010 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 |
|
$ |
10,825 |
|
|
$ |
8,117 |
|
|
$ |
3,170 |
|
|
$ |
2,832 |
|
Real estate construction,
development |
|
|
57,116 |
|
|
|
22,620 |
|
|
|
2,170 |
|
|
|
1,637 |
|
Real estate mortgage |
|
|
139,028 |
|
|
|
77,980 |
|
|
|
21,524 |
|
|
|
22,206 |
|
Consumer and other |
|
|
3,102 |
|
|
|
1,490 |
|
|
|
422 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
210,071 |
|
|
$ |
110,207 |
|
|
$ |
27,286 |
|
|
$ |
26,791 |
|
Of our loans maturing more than one year after December 31, 2010, approximately $80,696,000
had fixed rates of interest and approximately $83,588,000 had variable rates of interest. At
December 31, 2010, loans to sub-dividers/developers were 17.7% of total loans and loans to
franchise hotels & motels were 11.2% of total loans. No other concentrations of credit exceeded ten
percent of our total loans.
51
Past Due Loans and Non-Performing Assets
The following table presents performing loans that were past due at least 30 days but less
than 90 days as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Balance |
|
|
% of total loans |
|
|
Balance |
|
|
% of total loans |
|
|
|
($ in thousands) |
|
|
Construction, land
development
and other land loans |
|
$ |
265 |
|
|
|
0.07 |
% |
|
$ |
656 |
|
|
|
0.16 |
% |
Commercial real estate |
|
|
541 |
|
|
|
0.14 |
% |
|
|
126 |
|
|
|
0.03 |
% |
Consumer real estate |
|
|
1,130 |
|
|
|
0.30 |
% |
|
|
1,125 |
|
|
|
0.28 |
% |
Commercial loans |
|
|
|
|
|
|
0.00 |
% |
|
|
138 |
|
|
|
0.03 |
% |
Consumer loans |
|
|
68 |
|
|
|
0.02 |
% |
|
|
81 |
|
|
|
0.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,004 |
|
|
|
0.54 |
% |
|
$ |
2,126 |
|
|
|
0.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to managements ongoing efforts to identify and enter into workout arrangements with
borrowers experiencing financial difficulty, delinquent loans at December 31, 2010
remained stable and were slightly lower than delinquent loans at December 31, 2009. 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.
52
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, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land
development
and other land loans |
|
$ |
|
|
|
|
0.00 |
% |
|
$ |
27,929 |
|
|
|
7.46 |
% |
|
$ |
2,595 |
|
|
$ |
30,524 |
|
Commercial real estate |
|
|
413 |
|
|
|
0.11 |
% |
|
|
6,362 |
|
|
|
1.70 |
% |
|
|
2,107 |
|
|
|
8,882 |
|
Consumer real estate |
|
|
|
|
|
|
0.00 |
% |
|
|
18,647 |
|
|
|
4.98 |
% |
|
|
8,439 |
|
|
|
27,086 |
|
Commercial loans |
|
|
|
|
|
|
0.00 |
% |
|
|
67 |
|
|
|
0.02 |
% |
|
|
|
|
|
|
67 |
|
Consumer loans |
|
|
19 |
|
|
|
0.01 |
% |
|
|
|
|
|
|
0.00 |
% |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
432 |
|
|
|
0.12 |
% |
|
$ |
53,005 |
|
|
|
14.16 |
% |
|
$ |
13,141 |
|
|
$ |
66,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing
loans to total loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.27 |
% |
|
|
|
|
|
|
|
|
Total non-performing
assets to total
loans plus other
real estate owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
Delinquent and nonaccrual loans at both December 31, 2010 and December 31, 2009 consisted
primarily of construction and land development loans and commercial and consumer real estate loans.
Approximately $27,929,000 of the nonaccrual loans, or 52.7% of the approximate $53,005,000 total at
December 31, 2010, are construction and land development loans while commercial real estate and
consumer real estate make up approximately $6,362,000 and $18,647,000, or 12.1% and 35.2%,
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 2010, following the same pattern that
began during the second half of 2008 and continued throughout 2009. The reduced sales have
negatively impacted past due, nonaccrual and charged-off loans. Price declines during 2009 and 2010
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 and continuing during 2010. 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.
53
The following table sets forth the reduction in interest income we experienced in 2009 and
2010 as a result of non-performance of certain loans during the year:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
Interest income that would have been recorded on
nonaccrual loans under original terms |
|
$ |
3,164 |
|
|
$ |
1,359 |
|
|
|
|
|
|
|
|
|
|
Interest income that was recorded on nonaccrual
loans |
|
|
603 |
|
|
|
45 |
|
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 management based on a monthly review.
Management also reviews any loans 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.
Management 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 decreased approximately $1,435,000 during 2010. 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 $4,640,000, or 36%, of the OREO balance at
December 31, 2010 (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 condo units.
Potential problem loans, which are not included in nonperforming loans, amounted to
approximately $58.9 million, or 15.72% of total loans outstanding at December 31, 2010, compared to
approximately $27.2 million, or 6.66% of total loans outstanding at December 31, 2009. 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.
54
During 2009, the Bank formed a Special Assets department. This department was significantly
expanded during 2010 and it is 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 risk officer, the
CFO presents a quarterly analysis of the adequacy of the allowance for loan losses for review by
our board of directors.
During 2010, management sought to enhance its assessment of the allowance for loan losses by
incorporating the results of a comprehensive historic loss rates migration analysis. The study
provided more precise historical loss trends and percentages attributable to specific loan grades
and types than were previously available. Consideration was given to recent charge off experience
which management believes is a more reliable basis due to current economic conditions. The study
did not have a material effect on the outcome of the allowance calculation; rather this data was
used to narrow and refine managements calculation and supported managements previous estimation
of the adequacy of the allowance for loan loss balance.
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. During the regular safety and soundness examination conducted
by the Banks regulatory agency during the first quarter of 2011, significant increases were
incurred due to required provisions to the allowance based on loans determined to be collateral
dependent by the OCC. These changes have been recognized and incorporated into the results of
operations as of December 31, 2010.
55
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, 2010, approximately $192 million in loans, or 51% 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 $200 million in loans, or
49% of total loans, at December 31, 2009. The most significant decreases in this category were
display advertising, full service restaurants and overnight rentals by owner which decreased
approximately $5 million, $3 million and $1 million, respectively.
While it is the Banks policy to charge off in the current period loans for which a loss is
considered confirmed, there are additional risks of losses which cannot be quantified precisely or
attributed to particular loans or classes of loans. Because the risk of loss includes unpredictable
factors, such as the state of the economy and conditions affecting individual borrowers,
managements judgments regarding the appropriate size of the allowance for loan losses is
necessarily approximate and imprecise, and involves numerous estimates and judgments that may
result in an allowance that is insufficient to absorb all incurred loan losses.
Management is not aware of any loans classified for regulatory purposes as loss, doubtful,
substandard, or special mention that have not been identified and sufficiently provided for in the
allowance for loan losses which (1) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results, liquidity, or
capital resources, or (2) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms.
Individually impaired loans are loans that the Bank does not expect to collect all amounts due
according to the contractual terms of the loan agreement and include any loans that meet the
definition of a 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. Management determines the proper course of action
relating to these loans and receives monthly updates as to the status of the loans.
56
The following table presents impaired loans as of December 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Impaired |
|
|
% of total |
|
|
Impaired |
|
|
% of total |
|
|
|
Loans |
|
|
loans |
|
|
Loans |
|
|
loans |
|
|
|
($ in thousands) |
|
|
|
|
|
Construction, land development
and other land loans |
|
$ |
41,517 |
|
|
|
11.09 |
% |
|
$ |
27,213 |
|
|
|
6.67 |
% |
Commercial real estate |
|
|
21,529 |
|
|
|
5.75 |
% |
|
|
13,224 |
|
|
|
3.24 |
% |
Consumer real estate |
|
|
29,182 |
|
|
|
7.80 |
% |
|
|
22,616 |
|
|
|
5.55 |
% |
Other loans |
|
|
128 |
|
|
|
0.03 |
% |
|
|
94 |
|
|
|
0.02 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
92,356 |
|
|
|
24.67 |
% |
|
$ |
63,147 |
|
|
|
15.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in impaired loans during 2010 was primarily related to the continued
weakening of the residential and commercial real estate market in the Banks market areas. Within
this segment of the portfolio, the Bank has traditionally made loans to, among other borrowers,
home builders and developers of land. These borrowers have continued to experience stress during
the current real estate recession due to a combination of declining demand for residential real
estate, excessive volume of properties available and the resulting price and collateral value
declines. In addition, housing starts in the Banks market areas continue to be at historically low
levels. An extended recessionary period in real estate will likely cause the Banks real estate
mortgage loans, which include construction and land development loans, to continue to underperform
and may result in increased levels of impaired loans and non-performing assets, which may
negatively impact the Companys results of operations.
Thirty-six impaired loans with a total balance of approximately $28,804,000 were
considered to be collateral dependent at December 31, 2010, and of this amount approximately
$22,804,000 are trouble debt restructurings discussed in more detail below. Collateral dependent
loans are recorded at the lower of cost or the appraised value net of estimated selling costs. It
is generally determined these loans will be repaid by the liquidation of the collateral securing
the loans. Management obtains independent appraisals of the collateral securing collateral
dependent loans at least annually from independent licensed real estate appraisers and the carrying
amount of the loans that exceed the appraised value net of estimated selling costs is taken as a
charge against the allowance for loan losses and may result in additional charges to the provision
expense. At the date of this filing, seven of the thirty-six collateral dependent loans were
pending receipt of a current reviewed appraisal (an appraisal within the past twelve months). It is
anticipated these appraisals, when received, will result in additional charge off to be recorded
during the first quarter of 2011 totaling approximately $1,400,000. Management believes the
anticipated losses on these loans have been adequately provided as of December 31, 2010 and there
is a specific reserve relating to these loans equal to the estimated loss to be recorded. All loans
considered collateral dependent are nonaccrual loans and included in the nonperforming loan
balances. Management has recorded partial charge offs on these collateral dependent loans totaling
$5,545,331 as of December 31, 2010.
57
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, 2010 and 2009, there were $36.0 million and $21.8 million,
respectively, of accruing restructured loans that remain in a performing status.
TDRs at December 31, 2010 totaled approximately $82,443,000 which is 89.3% of total impaired
loans. The TDRs related primarily to construction and development loans totaling approximately
$36,661,000, or 39.7% of impaired loans, 1-4 family residential loans totaling approximately
$25,630,000, or 27.8% of impaired loans and commercial real estate loans totaling approximately
$20,023,000, or 21.7% 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, 2010 was approximately $10,942,000, a net
decrease of approximately $411,000 for the year. The allowance for loan losses as a percentage of
total loans, non-accrual loans and non-performing assets at December 31, 2010 was 2.92%, 20.64% and
20.48%, respectively, compared to 2.78%, 28.00% and 27.95%, respectively, at December 31, 2009. Net
charge-offs during 2010 increased from approximately $5,612,000 in 2009 to approximately $8,138,000
in 2010, representing a net charge-off ratio of 2.05% in 2010 compared to 1.35% in 2009. 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, 2010, that will result in additional charge-offs have been identified and adequate provision
has been made in the allowance for loan loss balance. No assurance can be given, however, that
adverse economic circumstances, declines in real estate values or other events or changes in
borrowers financial conditions, particularly borrowers in the real estate construction and
development business, will not result in increased losses in the Banks loan portfolio or in the
need for increases in the allowance for loan losses through additional provision expense in future
periods.
58
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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(dollars in thousands) |
|
Average balance of loans outstanding |
|
$ |
397,594 |
|
|
$ |
415,522 |
|
|
$ |
417,124 |
|
|
$ |
373,237 |
|
|
$ |
292,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of allowance for loan losses at beginning of year |
|
|
11,353 |
|
|
|
5,292 |
|
|
|
3,974 |
|
|
|
3,524 |
|
|
|
2,634 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, agricultural |
|
|
225 |
|
|
|
328 |
|
|
|
198 |
|
|
|
43 |
|
|
|
|
|
Real estate construction, development |
|
|
5,439 |
|
|
|
3,054 |
|
|
|
686 |
|
|
|
158 |
|
|
|
1 |
|
Real estate mortgage |
|
|
2,652 |
|
|
|
2,220 |
|
|
|
41 |
|
|
|
250 |
|
|
|
25 |
|
Consumer and other |
|
|
278 |
|
|
|
289 |
|
|
|
98 |
|
|
|
110 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, agricultural |
|
|
13 |
|
|
|
1 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
Real estate construction, development |
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Real estate mortgage |
|
|
4 |
|
|
|
251 |
|
|
|
11 |
|
|
|
15 |
|
|
|
18 |
|
Consumer and other |
|
|
49 |
|
|
|
27 |
|
|
|
12 |
|
|
|
14 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
8,138 |
|
|
|
5,612 |
|
|
|
957 |
|
|
|
532 |
|
|
|
25 |
|
Additions to allowance charges to operations |
|
|
7,727 |
|
|
|
11,673 |
|
|
|
2,275 |
|
|
|
982 |
|
|
|
915 |
|
Balance of allowance for loan losses at end of year |
|
|
10,942 |
|
|
|
11,353 |
|
|
|
5,292 |
|
|
|
3,974 |
|
|
|
3,524 |
|
Ratio of net loan charge-offs during the year to average
loans outstanding during the year |
|
|
2.05 |
% |
|
|
1.35 |
% |
|
|
0.23 |
% |
|
|
0.14 |
% |
|
|
0.01 |
% |
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, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
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 |
|
$ |
396 |
|
|
|
6.65 |
% |
|
$ |
557 |
|
|
|
7.45 |
% |
|
$ |
1,289 |
|
|
|
8.95 |
% |
|
$ |
968 |
|
|
|
9.03 |
% |
|
$ |
418 |
|
|
|
7.56 |
% |
Real estate construction,
development |
|
|
3,614 |
|
|
|
22.31 |
% |
|
|
5,844 |
|
|
|
24.47 |
% |
|
|
2,131 |
|
|
|
33.86 |
% |
|
|
1,600 |
|
|
|
37.93 |
% |
|
|
1,331 |
|
|
|
40.03 |
% |
Real estate mortgage |
|
|
6,713 |
|
|
|
69.67 |
% |
|
|
4,798 |
|
|
|
66.38 |
% |
|
|
1,599 |
|
|
|
55.18 |
% |
|
|
1,201 |
|
|
|
50.55 |
% |
|
|
1,669 |
|
|
|
50.21 |
% |
Consumer, other |
|
|
219 |
|
|
|
1.37 |
% |
|
|
154 |
|
|
|
1.70 |
% |
|
|
273 |
|
|
|
2.01 |
% |
|
|
205 |
|
|
|
2.49 |
% |
|
|
106 |
|
|
|
2.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,942 |
|
|
|
100.00 |
% |
|
$ |
11,353 |
|
|
|
100.00 |
% |
|
$ |
5,292 |
|
|
|
100.00 |
% |
|
$ |
3,974 |
|
|
|
100.00 |
% |
|
$ |
3,524 |
|
|
|
100.00 |
% |
Securities
Our investment securities portfolio consists primarily of mortgage-backed securities and
municipal securities. The investment securities portfolio is the second largest component of our
earning assets and represented 18.11% of total earning assets and 15.73% of total assets at
year-end 2010. 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 2010 was
2.31% versus 3.98% for 2009, a decrease of 167 basis points. Net unrealized gains (losses) on
securities available for sale, included in accumulated other comprehensive income (loss), decreased
from a net unrealized gain of $283,014 for the year ended December 31, 2009 to a net unrealized
loss of ($1,064,678) at December 31, 2010.
59
The approximately $59 million decrease in investment securities during 2010 was primarily
liquidated through U.S. Treasury securities that matured during the second and third quarters of
2010 and is primarily attributable to decreased pledging requirements related to the reduction in
municipal deposits discussed in more detail below and under Deposits. Municipal deposits, which
are secured by a portion of the Banks investment securities and are currently required to be
over-collateralized by such securities, decreased approximately $60 million, or 60%, during 2010
from approximately $100 million at December 31, 2009 to approximately $40 million at December 31,
2010. Pledging requirements for municipal deposits have decreased approximately $67 million from
approximately $115 million to approximately $48 million at December 31, 2009 and December 31, 2010,
respectively. As an integral component of our asset/liability management strategy, we manage our
investment securities portfolio to maintain liquidity, balance interest rate risk and augment
interest income. In addition to securing public deposits, we also use our investment securities
portfolio to meet pledging requirements for borrowings.
During the third quarter of 2009, in an effort to improve the Banks long-term liquidity
position, management developed a strategy that would reduce the size of the Banks assets between
$50 million and $100 million. A central element of this strategy involved not bidding to retain
certain public deposits as the contracts came up for renewal. These deposits are collateralized
with securities representing up to 126% of the value of the deposits. In preparation to liquidate
the securities pledged to secure the public funds as the funds were drawn out of the Bank,
management sold substantial portions of its mortgage-backed and municipal securities and
re-invested the proceeds from sales and maturities of mortgage-backed and municipal securities in
short-term U.S. Treasury and government agency securities. In most cases, the securities were sold
at a gain. When comparing the December 31, 2010 and 2009 portfolio balances, the significant
changes that occurred in our portfolio during 2010 are not immediately evident, however; the
distribution of the portfolio changed considerably throughout 2010 as funds were transferred among
categories as described above. These changes caused a decrease in the yield on investment
securities during 2010 as the rates earned on short-term U.S. Treasury and government agency
securities are significantly lower than the rates earned on mortgage-backed and municipal
securities. At December 31, 2010, the Banks portfolio was back to a more historically
characteristic composition. However, the yield earned on investment securities will likely not
fully recover for some time as new investments obtained during the current interest rate
environment typically do not carry the same yield as those that we sold during 2010.
Additionally, at December 31, 2010, we had approximately $31 million in mortgage-backed and
municipal securities pledged as collateral for certain federal funds lines of credit and FHLB
borrowings. The average yields on these investments generally exceeded the cost of the
interest-bearing deposits that funded them during 2010. 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 2010. Included in our investment securities portfolio as of December 31,
2010, was approximately $5,519,000 in tax-exempt municipal securities.
60
The carrying amounts of securities at the dates indicated are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and government agencies
and corporations |
|
$ |
250 |
|
|
$ |
10,149 |
|
|
$ |
5,751 |
|
Corporate securities |
|
|
|
|
|
|
|
|
|
|
175 |
|
Mortgage-backed securities residential |
|
|
81,145 |
|
|
|
114,057 |
|
|
|
98,045 |
|
Obligations of states and political subdivisions |
|
|
4,922 |
|
|
|
20,124 |
|
|
|
20,607 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
86,317 |
|
|
|
144,330 |
|
|
|
124,578 |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions |
|
|
1,318 |
|
|
|
2,204 |
|
|
|
2,117 |
|
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 |
|
$ |
250 |
|
|
|
0.14 |
% |
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
250 |
|
|
|
0.14 |
% |
Mortgage-backed securities
residential |
|
|
|
|
|
|
|
|
|
|
74,096 |
|
|
|
3.74 |
% |
|
|
5,785 |
|
|
|
4.09 |
% |
|
|
1,264 |
|
|
|
3.77 |
% |
|
|
81,145 |
|
|
|
3.76 |
% |
Obligations of states and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
264 |
|
|
|
2.33 |
% |
|
|
1,189 |
|
|
|
5.68 |
% |
|
|
3,469 |
|
|
|
4.47 |
% |
|
|
4,922 |
|
|
|
4.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale |
|
|
250 |
|
|
|
0.14 |
% |
|
|
74,360 |
|
|
|
3.73 |
% |
|
|
6,974 |
|
|
|
4.36 |
% |
|
|
4,733 |
|
|
|
4.29 |
% |
|
|
86,317 |
|
|
|
3.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722 |
|
|
|
4.65 |
% |
|
|
596 |
|
|
|
4.72 |
% |
|
|
1,318 |
|
|
|
4.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722 |
|
|
|
4.65 |
% |
|
|
596 |
|
|
|
4.72 |
% |
|
|
1,318 |
|
|
|
4.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
250 |
|
|
|
0.14 |
% |
|
|
74,360 |
|
|
|
3.73 |
% |
|
|
7,696 |
|
|
|
4.39 |
% |
|
|
5,329 |
|
|
|
4.33 |
% |
|
|
87,635 |
|
|
|
3.82 |
% |
We did not hold any securities from a single issuer that exceeded 10% of total
shareholders equity as of December 31, 2010, except for mortgage-backed securities issued by
government sponsored entities that had a carrying value of approximately $81,145,000 and
$114,057,000 at December 31, 2010 and 2009, respectively.
61
Deposits
Total deposits decreased during 2010 and the balances were distributed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ change |
|
|
% change |
|
Noninterest-bearing demand deposits |
|
$ |
47,638 |
|
|
$ |
47,601 |
|
|
$ |
37 |
|
|
|
0.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing deposits |
|
|
47,638 |
|
|
|
47,601 |
|
|
|
37 |
|
|
|
0.08 |
% |
NOW accounts |
|
|
57,345 |
|
|
|
112,440 |
|
|
|
(55,095 |
) |
|
|
-49.00 |
% |
Money market accounts |
|
|
49,701 |
|
|
|
40,809 |
|
|
|
8,892 |
|
|
|
21.79 |
% |
Savings |
|
|
23,734 |
|
|
|
20,520 |
|
|
|
3,214 |
|
|
|
15.66 |
% |
Brokered deposits |
|
|
27,019 |
|
|
|
69,871 |
|
|
|
(42,852 |
) |
|
|
-61.33 |
% |
Time deposits |
|
|
244,154 |
|
|
|
219,373 |
|
|
|
24,781 |
|
|
|
11.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
401,953 |
|
|
|
463,013 |
|
|
|
(61,060 |
) |
|
|
-13.19 |
% |
Total deposits |
|
$ |
449,591 |
|
|
$ |
510,614 |
|
|
$ |
(61,023 |
) |
|
|
-11.95 |
% |
The balance in NOW accounts primarily consists of public funds deposits. As discussed
under Investment Securities, management anticipated the significant reduction in NOW accounts
during 2010 that was the result of withdrawal of the deposits of a local municipal entity upon
contract renewal. Public funds are generally obtained through a bidding process under varying
terms.
The increase in money market accounts is related to the seasonality of the tourism industry in
the Banks market area. The Banks customers typically experience their strongest cash inflows
during the third and fourth quarter of each year.
The increase in savings deposits is the result of the continued success of our competitive
rate savings product.
The increase in certificates of deposit was the result of an increase in customer
deposits 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.
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 decreased
approximately $43 million during 2010, and represented approximately 6.01% and 13.68% of total
deposits at December 31, 2010 and 2009, respectively. The Bank significantly reduced its reliance
on brokered deposits during 2010 and management intends to seek to further reduce the level of
brokered deposits during 2011. The average cost of our brokered deposits at December 31, 2010 was
1.70%. During 2010, the average cost of these deposits was 1.81%. We have not and do not intend to
replace any maturing brokered deposits during 2011.
Because we anticipate that we will be required to enter into an OCC Consent Order that will
establish specific capital amounts to be maintained by the Bank, the Bank cannot be considered
better than adequately capitalized under capital adequacy regulations, even if the Bank exceeds
the levels of capital set forth in the Consent Order and the normal requirements for well
capitalized status. As long as it is considered an adequately capitalized institution, the Bank
may not accept, renew or roll over brokered deposits without prior approval of the FDIC. As of
December 31, 2010, brokered deposits maturing in the next 24 months totaled approximately $18.8
million. Funding sources for the maturing brokered deposits include, among other sources: our cash
account at the Federal Reserve Bank of Atlanta; growth, if any, of core deposits from current and
new retail and commercial customers; scheduled repayments on existing loans; and the possible
pledge or sale of investment securities.
62
Because the Bank will not be considered well capitalized following issuance of the Consent
Order, it will also not be permitted to pay interest on deposits at rates that are more than 75
basis points above the national rate as determined by the FDIC. These interest rate limitations may
limit the ability of the Bank to increase or maintain core deposits from current and new deposit
customers.
The average balances of deposit accounts by category and the average rates paid thereon are
presented below for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
|
Amount |
|
|
Rate |
|
|
|
(dollars in thousands) |
|
Noninterest-bearing demand deposits |
|
$ |
46,237 |
|
|
|
0 |
% |
|
$ |
45,761 |
|
|
|
0 |
% |
|
$ |
48,331 |
|
|
|
0 |
% |
Interest-bearing demand deposits |
|
|
119,547 |
|
|
|
1.09 |
% |
|
|
150,384 |
|
|
|
1.23 |
% |
|
|
142,020 |
|
|
|
2.16 |
% |
Savings deposits |
|
|
22,790 |
|
|
|
1.08 |
% |
|
|
17,340 |
|
|
|
1.39 |
% |
|
|
13,815 |
|
|
|
1.95 |
% |
Time deposits |
|
|
302,494 |
|
|
|
2.08 |
% |
|
|
304,715 |
|
|
|
2.67 |
% |
|
|
224,055 |
|
|
|
4.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
491,068 |
|
|
|
|
|
|
$ |
518,200 |
|
|
|
|
|
|
$ |
428,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balances in time certificates of deposit issued in amounts of $100,000 or more as of
December 31, 2010, are shown below by time remaining until maturity:
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
Three months or less |
|
$ |
73,289 |
|
Over three months through six months |
|
|
30,097 |
|
Over six months through 12 months |
|
|
80,470 |
|
Over 12 months |
|
|
87,317 |
|
|
|
|
|
Total |
|
$ |
271,173 |
|
The average balance of interest-bearing demand and savings deposits decreased approximately
$25,387,000 during 2010. The average rate paid on these interest-bearing demand and savings
deposits in 2010 was 1.09%, down from 1.25% in 2009.
Our total average cost of interest-bearing deposits (including demand, savings and certificate
of deposit accounts) for 2010 was 1.76%, down from 2.17% in the prior year.
63
Shareholders Equity
The decrease in shareholders equity was primarily the result of the 2010 net loss of
approximately $10,451,000. Accumulated other comprehensive income (loss) represents the net
unrealized gain (losses) on securities available-for-sale. The decrease in accumulated
comprehensive income from a net gain of $283,014 at December 31, 2009 to a net loss of $1,064,678
at December 31, 2010 also contributed to the decrease in shareholders equity during 2010.
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.
64
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.
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.
65
The following table summarizes our interest-sensitive assets and liabilities as of December
31, 2010. 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.
Analysis of Interest Sensitivity
As of December 31, 2010
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 - 3 |
|
|
3 - 12 |
|
|
1 - 3 |
|
|
Over three |
|
|
|
|
|
|
months |
|
|
months |
|
|
years |
|
|
years |
|
|
Total |
|
Federal funds sold |
|
$ |
2,536 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,536 |
|
Securities |
|
|
3,031 |
|
|
|
9,426 |
|
|
|
24,000 |
|
|
|
51,178 |
|
|
|
87,635 |
|
Loans (1) |
|
|
181,404 |
|
|
|
78,123 |
|
|
|
82,277 |
|
|
|
32,551 |
|
|
|
374,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
186,971 |
|
|
|
87,549 |
|
|
|
106,277 |
|
|
|
83,729 |
|
|
|
464,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
107,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,046 |
|
Savings |
|
|
23,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,734 |
|
Time deposits |
|
|
72,495 |
|
|
|
110,187 |
|
|
|
77,820 |
|
|
|
10,671 |
|
|
|
271,173 |
|
Other borrowings |
|
|
|
|
|
|
|
|
|
|
5,200 |
|
|
|
50,000 |
|
|
|
55,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
203,275 |
|
|
|
110,187 |
|
|
|
83,020 |
|
|
|
60,671 |
|
|
|
457,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap |
|
$ |
(16,304 |
) |
|
$ |
(22,638 |
) |
|
$ |
23,257 |
|
|
$ |
23,058 |
|
|
$ |
7,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap |
|
$ |
(16,304 |
) |
|
$ |
(38,942 |
) |
|
$ |
(15,685 |
) |
|
$ |
7,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity gap ratio |
|
|
-8.72 |
% |
|
|
-25.86 |
% |
|
|
21.88 |
% |
|
|
27.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest rate sensitivity gap ratio |
|
|
-8.72 |
% |
|
|
-14.19 |
% |
|
|
-4.12 |
% |
|
|
1.59 |
% |
|
|
|
|
|
|
|
(1) |
|
Includes nonaccrual loans |
At December 31, 2010, the Banks cumulative one-year interest rate sensitivity gap ratio was
(14.19%), 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. 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.
Currently, due to the extended period of low interest rates, our short term interest-sensitive
assets and liabilities are likely close to their floors. Certain longer term interest-sensitive
assets and liabilities, particularly fixed rate loans, time deposits and long-term borrowings, have
more potential for repricing adjustments as they mature and are replaced at current rate levels.
Additionally, when interest rates increase, our cumulative interest rate sensitivity gap indicates
that a larger volume of our interest-bearing liabilities will reprice more quickly than our
interest-earning assets. This could cause further compression of our net interest margin until the
volume of interest-sensitive assets earning higher rates of interest gets closer to the volume of
interest-sensitive liabilities already bearing higher rates of interest.
66
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, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
At December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Return on average assets |
|
|
-1.69 |
% |
|
|
-0.64 |
% |
|
|
0.56 |
% |
Return on average equity |
|
|
-21.83 |
% |
|
|
-8.14 |
% |
|
|
6.48 |
% |
Average equity as a percentage of average assets |
|
|
7.74 |
% |
|
|
7.88 |
% |
|
|
8.68 |
% |
Cash dividend payout ratio |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
30.65 |
% |
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 various correspondent banks. Available lines totaled $33 million with $10
million secured and accessible as of December 31, 2010, 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 $24 million at December 31, 2010 from
the Federal Reserve Discount Window that the Bank uses to meet short-term liquidity demands, none
of which was borrowed as of that date. The borrowing capacity can be increased based on the amount
of collateral pledged.
Capital adequacy is important to the 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 met the current regulatory
definitions for well capitalized at December 31, 2010. However, as noted below, the Bank
anticipates that it will be required to enter into a Consent Order which will contain higher
capital standards which will result in it being deemed to be adequately capitalized for
regulatory purposes, including being subject to broker deposit restrictions.
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.
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.
67
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 individual minimum capital requirement (IMCR) to maintain a minimum Tier 1 capital to
average assets ratio of 9% and a minimum total capital to risk-weighted assets ratio of 13%. As of
December 31, 2010, the Tier 1 capital to average assets ratio for the Bank was below the agreed
upon 9% minimum. As a result, it is subject to further enforcement action.
The table below sets forth the Banks capital ratios as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Tier 1 Leverage |
|
|
8.41 |
% |
|
|
9.14 |
% |
Adequately capitalized regulatory minimum |
|
|
4.00 |
% |
|
|
4.00 |
% |
Well-capitalized regulatory minimum |
|
|
5.00 |
% |
|
|
5.00 |
% |
Required by IMCR |
|
|
9.00 |
% |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital |
|
|
11.97 |
% |
|
|
12.75 |
% |
Adequately capitalized regulatory minimum |
|
|
4.00 |
% |
|
|
4.00 |
% |
Well-capitalized regulatory minimum |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital |
|
|
13.23 |
% |
|
|
14.02 |
% |
Adequately capitalized regulatory minimum |
|
|
8.00 |
% |
|
|
8.00 |
% |
Well-capitalized regulatory minimum |
|
|
10.00 |
% |
|
|
10.00 |
% |
Required by IMCR |
|
|
13.00 |
% |
|
|
N/A |
|
The table below sets forth the Companys capital ratios as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Tier 1 Leverage |
|
|
8.34 |
% |
|
|
9.23 |
% |
Regulatory minimum |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
Tier 1 Risk-Based Capital |
|
|
11.87 |
% |
|
|
12.89 |
% |
Regulatory minimum |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital |
|
|
13.27 |
% |
|
|
14.16 |
% |
Regulatory minimum |
|
|
8.00 |
% |
|
|
8.00 |
% |
68
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.
Additionally, following passage of the Dodd-Frank Act, trust preferred and cumulative preferred
securities will no longer be deemed Tier 1 capital for bank holding companies, but trust preferred
securities issued by bank holding companies with under $15 billion in total assets at December 31,
2009 will be grandfathered in and continue to count as Tier 1 capital. The Company believes that
its trust preferred securities qualify under both of these revised regulatory capital rules and
accordingly, expects that it will continue to treat its $13 million of trust preferred securities
as Tier 1 capital subject to the limits listed above.
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.
69
The following is a summary of the Banks commitments outstanding at December 31, 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(dollars in thousands) |
|
Commitments to extend credit |
|
$ |
41,155 |
|
|
$ |
50,702 |
|
Standby letters of credit |
|
|
5,288 |
|
|
|
5,801 |
|
|
|
|
|
|
|
|
Totals |
|
$ |
46,443 |
|
|
$ |
56,503 |
|
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 $6,369,000
during 2010, 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 2010 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.
70
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
ITEM 9A. |
|
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 certain deficiencies identified in internal
controls and procedures created a material weakness and resulted in the Companys disclosure
controls and procedures not being effective to ensure that information required to be disclosed in
the Companys reports under the Exchange Act was recorded, summarized and reported within the time
periods specified in the Commissions rules and forms as of the end of the period covered by this
report. Based on this determination of the existence of a material weakness, which began during the
fourth quarter of 2010 and continued into the first quarter of 2011, management identified certain
areas requiring internal control and procedure improvements.
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.
71
Management assessed the Companys internal control over financial reporting as of December 31,
2010. 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, as of December 31, 2010, the Companys system of internal
control over financial reporting was not effective as it relates to certain internal controls over
the special assets function. See Changes in Internal Control over Financial Reporting for further
information.
This annual report does not include an attestation report of the Companys independent
registered public accounting firm regarding internal control over financial reporting because that
requirement under Section 404 of the Sarbanes Oxley Act of 2002 was permanently removed for
non-accelerated filers pursuant to the provisions of Section 989(G) set forth in the Dodd-Frank
Act.
Changes in Internal Control over Financial Reporting
During Managements assessment of the Companys internal control over financial reporting at
December 31, 2010, the following deficiencies were noted: 1) Loans determined to be collateral
dependent were not properly identified in a timely manner which created a material internal control
deficiency. Procedures have been put in place by the Banks Special Assets Department to ensure
loans that are dependent upon the sale of the underlying collateral for repayment are properly
identified and documented when the determination is made the loan is collateral dependent and this
information is incorporated in the allowance for loan loss calculation. 2) Appraisals and appraisal
reviews from an independent third-party appraiser or collateral valuations performed internally for
loans determined to be collateral dependent were not ordered, received or reviewed prior to the
reporting date which could result in overstatement of loans and income and understatement of the
provision for loan losses, charge off and the allowance for loan losses. The Special Assets
Department has created procedures and updated the Appraisal Policy to address this deficiency. The
remediation plan for these internal control deficiencies is noted below. Other than the items noted
above, during the fourth quarter of 2010 there were no other changes in the Companys internal
control over financial reporting that have materially affected, or that are reasonably likely to
materially affect, the Companys internal control over financial reporting.
During and subsequent to the fourth quarter of 2010, management took the following
remediation actions regarding the above referenced internal control deficiencies:
|
1) |
|
During the first quarter of 2011, the OCC, during their regular safety and soundness
exam, determined several loans were not properly identified by the Bank as collateral
dependent as of December 31, 2010. Collateral dependent loans require a charge off of the
loan balance if the recorded investment in the loan exceeds the underlying collateral value
net of cost to sell. To make the determination the proper recorded investment has been
recorded, the current appraised value of the collateral must be obtained. The Special
Assets Department, formed during 2009, is in charge of complying with these requirements.
During the first quarter of 2011, procedures were put in place in the Special Assets
Department to comply with these requirements and the results of their efforts have been
incorporated into the financial statements as of December 31, 2010. |
72
|
2) |
|
As noted in item 1, collateral dependent loans require the Bank to obtain a current
appraisal or collateral valuation performed internally to allow for the determination as to
whether there is sufficient collateral securing the loan. In addition to the requirement of
obtaining the appraisal, the appraisal must be reviewed by an independent third-party
appraiser charged with determining the appraisal has been properly performed. After the
review, the Bank determines if the appraisal is acceptable, then provides the documentation
to the Accounting Department to incorporate the results into the calculation of the
allowance for loan losses. Failure to comply with any of these steps could result in the
overstatement of both assets and income. The Special Assets Department, as noted in item 1,
is in charge of complying with these requirements and during the first quarter of 2011,
procedures were put in place to comply with these requirements and the results of their
efforts have been incorporated into the financial statements as of December 31, 2010. |
|
3) |
|
During the first quarter of 2011, Management ensured proper controls are in place when
evidence of impairment of a loan exists or prior to the annual appraisal date, the Special
Assets Department will order appraisals or collateral valuations in a timely manner to
allow for proper review and implementation of the results into the allowance for loan loss
calculation. Proper controls have also been developed and incorporated into the process to
assure a potential impairment is recorded when appraisal or valuation and review process is
not complete as of a reporting date. |
|
4) |
|
The Bank has revised its policy and procedures to require independent third-party
appraisals or collateral valuations performed internally for all loans considered to be
impaired, classified or worse. The Special Assets Department, as noted in item 1, is in
charge of complying with these requirements and during the first quarter of 2011,
procedures were put in place to comply with these requirements and the results of their
efforts have been incorporated into the financial statements as of December 31, 2010. |
The identified material weakness in our internal controls over financial reporting will not be
considered remediated until the new controls are fully implemented, in operation for a sufficient
period of time, tested, and concluded by management to be operating effectively.
|
|
|
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 2011 Proxy Statement)
relating to the annual meeting of shareholders of the Company is incorporated herein by reference.
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information appearing under the heading Compensation of Named Executive Officers and
Directors in the 2011 Proxy Statement is incorporated herein by reference.
73
|
|
|
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 2011 Proxy Statement is incorporated herein by reference.
The information appearing under Note 14. Stock Options and Warrants in the 2010 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 2011 Proxy Statement is incorporated herein by
reference.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information appearing under the caption Proposal #2 Ratification of the Appointment of
Independent Registered Public Accounting Firm in the 2011 Proxy Statement is incorporated herein
by reference.
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS, 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) (included as Exhibit 3.1 to the
Companys Registration Statement on Form S-1 (File No.
333-168281), previously filed with the Commission and
incorporated by reference herein). |
74
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
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* |
|
|
|
|
|
|
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)* |
75
|
|
|
|
|
Exhibit No. |
|
Description of Exhibit |
|
|
|
|
|
|
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)* |
|
|
|
|
|
|
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. |
76
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.
77
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: April 13, 2011 |
|
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: April 13, 2011 |
Chief Executive Officer and Director |
|
|
|
|
|
/s/ Richard A. Hubbs
Richard A. Hubbs, Senior Vice President and
|
|
Date: April 13, 2011 |
Chief Financial Officer (Principal Financial |
|
|
and Accounting Officer) |
|
|
|
|
|
/s/ Gary A. Helton
Gary A. Helton, Director
|
|
Date: April 13, 2011 |
|
|
|
/s/ Charlie R. Johnson
Charlie R. Johnson, Director
|
|
Date: April 13, 2011 |
|
|
|
/s/ Sam L. Large
Sam L. Large, Director
|
|
Date: April 13, 2011 |
|
|
|
/s/ Jeffrey J. Monson
Jeffrey J. Monson, Director
|
|
Date: April 13, 2011 |
|
|
|
/s/ Linda N. Ogle
Linda N. Ogle, Director
|
|
Date: April 13, 2011 |
|
|
|
/s/ Michael C. Ownby
Michael C. Ownby, Director
|
|
Date: April 13, 2011 |
|
|
|
/s/ John M. Parker
John M. Parker, Director
|
|
Date: April 13, 2011 |
|
|
|
/s/ Ruth Reams
Ruth Reams, Director
|
|
Date: April 13, 2011 |
78
Mountain National Bancshares, Inc. and Subsidiaries
Consolidated Financial Report
December 31, 2010
CONTENTS
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
|
F-1 |
|
|
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
|
|
|
|
F-4 |
|
|
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
|
|
|
|
F-6 F-57 |
|
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, 2010 and 2009, 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, 2010 and 2009, and the
results of its operations and its cash flows for the years then ended, in conformity with U.S.
generally accepted accounting principles.
As
discussed in Note 15 of the consolidated financial statements, the Corporations bank subsidiary is not in compliance with an existing
commitment it made to maintain revised minimum regulatory capital levels in connection with a
formal regulatory agreement which has imposed limitations on certain operations. Failure to comply
with the regulatory agreement and the commitment may result in additional regulatory enforcement
actions.
/s/ Crowe Horwath LLP
Brentwood, Tennessee
April 13, 2011
F-1
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
30,039,647 |
|
|
$ |
11,750,723 |
|
Federal funds sold |
|
|
2,536,173 |
|
|
|
2,353,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
32,575,820 |
|
|
|
14,104,636 |
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
86,316,591 |
|
|
|
144,330,068 |
|
Securities held to maturity, fair value $1,303,080 at December 31, 2010 and
$2,208,236 at December 31, 2009 |
|
|
1,317,951 |
|
|
|
2,204,303 |
|
Restricted investments, at cost |
|
|
3,843,150 |
|
|
|
3,816,050 |
|
Loans, net of allowance for loan losses of $10,942,414 at December 31, 2010 and
$11,353,438 at December 31, 2009 |
|
|
363,413,050 |
|
|
|
396,351,008 |
|
Investment in partnership |
|
|
4,303,600 |
|
|
|
4,198,675 |
|
Premises and equipment |
|
|
32,600,673 |
|
|
|
33,709,282 |
|
Accrued interest receivable |
|
|
1,495,869 |
|
|
|
3,045,290 |
|
Cash surrender value of company owned life insurance |
|
|
11,774,605 |
|
|
|
11,366,270 |
|
Other real estate owned |
|
|
13,140,698 |
|
|
|
14,575,368 |
|
Other assets |
|
|
6,424,504 |
|
|
|
12,038,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
557,206,511 |
|
|
$ |
639,739,030 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
$ |
47,638,792 |
|
|
$ |
47,600,944 |
|
NOW accounts |
|
|
57,344,798 |
|
|
|
112,440,413 |
|
Money market accounts |
|
|
49,701,122 |
|
|
|
40,808,892 |
|
Savings accounts |
|
|
23,733,795 |
|
|
|
20,519,998 |
|
Time deposits |
|
|
271,172,901 |
|
|
|
289,243,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
449,591,408 |
|
|
|
510,614,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase |
|
|
432,016 |
|
|
|
1,776,402 |
|
Accrued interest payable |
|
|
719,133 |
|
|
|
605,936 |
|
Subordinated debentures |
|
|
13,403,000 |
|
|
|
13,403,000 |
|
Federal Home Loan Bank advances |
|
|
55,200,000 |
|
|
|
62,900,000 |
|
Other liabilities |
|
|
2,186,784 |
|
|
|
3,070,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
521,532,341 |
|
|
|
592,369,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, no par value; 1,000,000 shares authorized;
0 shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $1.00 par value; 10,000,000 shares authorized; 2,631,611
issued and outstanding |
|
|
2,631,611 |
|
|
|
2,631,611 |
|
Additional paid-in capital |
|
|
42,229,713 |
|
|
|
42,125,828 |
|
Retained earnings (deficit) |
|
|
(8,122,476 |
) |
|
|
2,328,702 |
|
Accumulated other comprehensive income (loss) |
|
|
(1,064,678 |
) |
|
|
283,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
35,674,170 |
|
|
|
47,369,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
557,206,511 |
|
|
$ |
639,739,030 |
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
F-2
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
Loans |
|
$ |
20,674,310 |
|
|
$ |
25,072,166 |
|
Taxable securities |
|
|
2,454,381 |
|
|
|
5,219,060 |
|
Tax-exempt securities |
|
|
250,898 |
|
|
|
1,053,433 |
|
Federal funds sold and deposits in other banks |
|
|
76,371 |
|
|
|
24,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
23,455,960 |
|
|
|
31,369,369 |
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
Deposits |
|
|
7,837,187 |
|
|
|
10,247,527 |
|
Federal funds purchased |
|
|
3,063 |
|
|
|
36,020 |
|
Repurchase agreements |
|
|
24,250 |
|
|
|
91,022 |
|
Federal Reserve and Federal Home Loan Bank advances |
|
|
2,493,511 |
|
|
|
2,592,048 |
|
Subordinated debentures |
|
|
343,850 |
|
|
|
392,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
10,701,861 |
|
|
|
13,358,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
12,754,099 |
|
|
|
18,010,736 |
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
7,727,200 |
|
|
|
11,672,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
5,026,899 |
|
|
|
6,337,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
1,642,058 |
|
|
|
2,326,614 |
|
Other fees and commissions |
|
|
1,473,616 |
|
|
|
1,262,244 |
|
Gain on sale of mortgage loans |
|
|
191,163 |
|
|
|
146,913 |
|
Investment gains and losses, net |
|
|
1,511,005 |
|
|
|
2,558,612 |
|
Other than temporary loss |
|
|
|
|
|
|
|
|
Total impairment loss |
|
|
|
|
|
|
(405,846 |
) |
Loss recognized in other comprehensive income (loss) |
|
|
|
|
|
|
(58,478 |
) |
|
|
|
|
|
|
|
Net impairment recognized in earnings (loss) |
|
|
|
|
|
|
(347,368 |
) |
Other real estate gains and losses, net |
|
|
34,591 |
|
|
|
(1,478,877 |
) |
Other noninterest income |
|
|
897,972 |
|
|
|
395,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
5,750,405 |
|
|
|
4,863,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
8,322,173 |
|
|
|
9,670,008 |
|
Occupancy expenses |
|
|
1,759,196 |
|
|
|
1,698,987 |
|
FDIC assessment expense |
|
|
1,161,330 |
|
|
|
1,537,439 |
|
Other operating expenses |
|
|
6,247,956 |
|
|
|
6,311,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
17,490,655 |
|
|
|
19,217,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense (benefit) |
|
|
(6,713,351 |
) |
|
|
(8,016,422 |
) |
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
3,737,827 |
|
|
|
(3,788,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,451,178 |
) |
|
$ |
(4,228,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER SHARE |
|
|
|
|
|
|
|
|
Basic |
|
$ |
(3.97 |
) |
|
$ |
(1.61 |
) |
Diluted |
|
$ |
(3.97 |
) |
|
$ |
(1.61 |
) |
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, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Retained |
|
|
Other |
|
|
Total |
|
|
|
Comprehensive |
|
|
Common |
|
|
Paid-in |
|
|
Earnings |
|
|
Comprehensive |
|
|
Shareholders |
|
|
|
Income (Loss) |
|
|
Stock |
|
|
Capital |
|
|
(Deficit) |
|
|
Income/(Loss) |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, January 1, 2009 |
|
|
|
|
|
$ |
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 (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,228,395 |
) |
|
|
|
|
|
|
|
|
|
|
(4,228,395 |
) |
|
|
|
|
|
|
(4,228,395 |
) |
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on
securities available-for-sale for which
a portion of an other-than-temporary-
impairment has been recognized in
earnings, net of reclassification |
|
|
58,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,478 |
|
|
|
58,478 |
|
Change in unrealized gains (losses) on
securities available-for-sale, net of
reclassification |
|
|
372,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
372,123 |
|
|
|
372,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
(3,797,794 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2009 |
|
|
|
|
|
|
2,631,611 |
|
|
|
42,125,828 |
|
|
|
2,328,702 |
|
|
|
283,014 |
|
|
|
47,369,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
103,885 |
|
|
|
|
|
|
|
|
|
|
|
103,885 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(10,451,178 |
) |
|
|
|
|
|
|
|
|
|
|
(10,451,178 |
) |
|
|
|
|
|
|
(10,451,178 |
) |
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on
securities available-for-sale, net of
reclassification |
|
|
(1,347,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,347,692 |
) |
|
|
(1,347,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
(11,798,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2010 |
|
|
|
|
|
$ |
2,631,611 |
|
|
$ |
42,229,713 |
|
|
$ |
(8,122,476 |
) |
|
$ |
(1,064,678 |
) |
|
$ |
35,674,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
F-4
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,451,178 |
) |
|
$ |
(4,228,395 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,653,848 |
|
|
|
1,430,157 |
|
Net realized gains on securities available for sale |
|
|
(1,499,481 |
) |
|
|
(2,558,612 |
) |
Net realized gains on securities held to maturity |
|
|
(11,524 |
) |
|
|
|
|
Securities impairment loss recognized in earnings |
|
|
|
|
|
|
347,368 |
|
Net amortization on available for sale securities |
|
|
818,917 |
|
|
|
790,954 |
|
Increase in held to maturity due to accretion |
|
|
(61,220 |
) |
|
|
(87,259 |
) |
Provision for loan losses |
|
|
7,727,200 |
|
|
|
11,672,802 |
|
Net (gain) loss on other real estate |
|
|
(34,591 |
) |
|
|
1,478,877 |
|
Deferred income taxes, net of change in valuation allowance |
|
|
(3,737,827 |
) |
|
|
(3,877,978 |
) |
Gross mortgage loans originated for sale |
|
|
(15,340,608 |
) |
|
|
(20,078,046 |
) |
Gross proceeds from sale of mortgage loans |
|
|
15,315,271 |
|
|
|
20,413,759 |
|
Gain on sale of mortgage loans |
|
|
(191,163 |
) |
|
|
(146,913 |
) |
Increase in cash surrender value of life insurance |
|
|
(408,335 |
) |
|
|
(287,562 |
) |
Investment in partnership |
|
|
(104,925 |
) |
|
|
(80,713 |
) |
Share-based compensation |
|
|
103,885 |
|
|
|
102,500 |
|
Tax benefit from exercise of options |
|
|
|
|
|
|
(70,696 |
) |
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
1,549,421 |
|
|
|
(307,471 |
) |
Accrued interest payable |
|
|
113,197 |
|
|
|
(416,985 |
) |
Other assets and liabilities |
|
|
7,952,384 |
|
|
|
(6,620,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
3,393,271 |
|
|
|
(2,524,466 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Activity in available-for-sale securities: |
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
103,501,336 |
|
|
|
89,957,394 |
|
Proceeds from maturities, prepayments and calls |
|
|
339,012,432 |
|
|
|
142,591,220 |
|
Purchases |
|
|
(384,212,916 |
) |
|
|
(250,277,064 |
) |
Activity in held-to-maturity securities: |
|
|
|
|
|
|
|
|
Proceeds from sales |
|
|
520,000 |
|
|
|
|
|
Purchases of restricted investments |
|
|
(27,100 |
) |
|
|
(125,900 |
) |
Loan originations and principal collections, net |
|
|
24,475,863 |
|
|
|
1,436,719 |
|
Purchase of premises and equipment |
|
|
(325,339 |
) |
|
|
(3,655,206 |
) |
Proceeds from sale of other real estate |
|
|
2,200,756 |
|
|
|
1,228,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
85,145,032 |
|
|
|
(18,844,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
|
(61,022,733 |
) |
|
|
55,948,195 |
|
Proceeds from Federal Reserve/Federal Home Loan Bank advances |
|
|
43,000,000 |
|
|
|
31,000,000 |
|
Matured Federal Reserve/Federal Home Loan Bank advances |
|
|
(50,700,000 |
) |
|
|
(41,000,000 |
) |
Net decrease in federal funds purchased |
|
|
|
|
|
|
(22,580,000 |
) |
Net decrease in securities sold under
agreements to repurchase |
|
|
(1,344,386 |
) |
|
|
(2,555,463 |
) |
Tax benefit from exercise of options |
|
|
|
|
|
|
70,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(70,067,119 |
) |
|
|
20,883,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
18,471,184 |
|
|
|
(485,039 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
14,104,636 |
|
|
|
14,589,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
32,575,820 |
|
|
$ |
14,104,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
10,588,664 |
|
|
$ |
13,775,618 |
|
Income taxes |
|
|
165,000 |
|
|
|
520,000 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Transfers from loans to other real estate owned |
|
|
3,245,233 |
|
|
|
13,359,756 |
|
Loans advanced for sales of other real estate |
|
|
2,293,838 |
|
|
|
7,871,855 |
|
See accompanying Notes to Consolidated Financial Statements
F-5
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 1 Summary of Significant Accounting Policies
The accounting and reporting policies of Mountain National Bancshares, Inc. and its
subsidiaries (the Company) conform to U.S. generally accepted accounting principles 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 Counties, 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.
Use of estimates:
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
allowance for loan losses, other real estate owned, deferred tax assets and fair values of
financial instruments are particularly subject to change.
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, 2010 and 2009
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.
Investment Securities:
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, 2010 and 2009
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. For securities in an unrealized loss position, management considers the extent
and duration of the unrealized loss, and the financial condition and near-term prospects of
the issuer. Management also assesses whether it intends to sell, or it is more likely than
not that it will be required to sell, a security in an unrealized loss position before
recovery of its amortized cost basis. If either of the criteria regarding intent or
requirement to sell is met, the entire difference between amortized cost and fair value is
recognized as impairment through earnings. For debt securities that do not meet the
aforementioned criteria, the amount of impairment is split into two components as follows:
1) OTTI related to credit loss, which must be recognized in the statement of operations and
2) OTTI related to other factors, which is recognized in other comprehensive income (loss).
The credit loss is defined as the difference between the present value of the cash flows
expected to be collected and the amortized cost basis. For equity securities, the entire
amount of impairment is recognized through earnings.
Securities sold under agreements to repurchase:
The Bank enters into sales of securities under agreements to repurchase identical securities
the next day.
Loans:
Loans are stated at unpaid principal balances, less the allowance for loan losses. The
recorded investment in loans presented throughout the Notes to the Consolidated Financial
Statements is defined as the outstanding principal balance of loans. Interest income is
accrued on the unpaid principal balance.
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.
F-8
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 1 Summary of Significant Accounting Policies (continued)
Loans held for sale:
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 $216,500 and $0 at December 31, 2010 and 2009, respectively, and are included with
loans on the balance sheet.
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. Allocations of the allowance
may be made for specific loans, but the entire allowance is available for any loan that, in
managements judgment, should be charged off. 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.
During 2010, management sought to enhance its assessment of the allowance for loan losses by
incorporating the results of a comprehensive historic loss rates migration analysis. The
study provided more precise historical loss trends and percentages attributable to specific
loan grades and types than were previously available. Consideration was given to recent
charge off experience which management believes is a more reliable basis due to current
economic conditions. The study did not have a material effect on the outcome of the
allowance calculation; rather this data was used to narrow and refine managements
calculation and supported managements previous estimation of the adequacy of the allowance
for loan loss balance.
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.
F-9
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 1 Summary of Significant Accounting Policies (continued)
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.
Loans over $100,000 that are graded special mention or worse according to the Companys
internal credit risk rating system, which is described in more detail under Note 3. Loans
and Allowance for Loan Losses, are individually evaluated for impairment. If a loan is
impaired, a portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loans existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Large groups of
smaller balance homogeneous loans are collectively evaluated for impairment, and
accordingly, they are not separately identified for impairment disclosures. Troubled debt
restructurings are separately identified for impairment disclosures and are measured at the
present value of estimated future cash flows using the loans effective rate at inception.
If a troubled debt restructuring is considered to be a collateral dependent loan, the loan
is reported, net, at the fair value of the collateral. For troubled debt restructurings that
subsequently default, the Company determines the amount of reserve in accordance with the
accounting policy for the allowance for loan losses.
The general component of the allowance covers non-impaired loans and is based on historical
loss experience adjusted for current factors. The historical loss experience is determined
by portfolio segment and is based on the actual loss history experienced by the Company over
the most recent three years for loans secured by real estate and five years for all other
loans. This actual loss experience is supplemented with other economic and qualitative
factors based on the risks present for each portfolio segment. These economic and
qualitative factors include consideration of the following: levels of and trends in
delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends
in volume and terms of loans; effects of any changes in risk selection and underwriting
standards; other changes in lending policies, procedures, and practices; experience,
ability, and depth of lending management and other relevant staff; changes in loan review;
national and local economic trends and conditions; changes in value of underlying
collateral; industry conditions; and effects of changes in credit concentrations.
F-10
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 1 Summary of Significant Accounting Policies (continued)
Portfolio segments are defined as the level at which an entity develops and documents a
systematic methodology to determine its allowance. As part of managements quarterly
assessment of the allowance, management divides the loan portfolio into six segments:
construction and land development, commercial real estate, commercial, residential real
estate, consumer and credit cards. Each segment, described in more detail below, is then
analyzed such that an allocation of the allowance is estimated for each loan segment. Both
quantitative and qualitative factors are used by management at the portfolio segment level
in determining the adequacy of the allowance for the Company. During 2010, we incorporated
the results of a historical loan loss migration analysis into our determination of the
allowance for loan losses. We believe the increased emphasis on our historical loss
experience metrics provides a better estimate of losses inherent in our portfolio. This
refinement of our methodology did not result in a material change in our allowance.
Construction and land development loans include loans to finance the process of
improving land preparatory to erecting new structures or the on-site construction of
industrial, commercial or residential buildings. Construction and land development
loans also include loans secured by vacant land, except land known to be used or
usable for agricultural purposes. Construction loans generally are made for
relatively short terms. They generally are more vulnerable to changes in economic
conditions. Further, the nature of these loans is such that they are more difficult
to evaluate and monitor. The risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the propertys value upon
completion of the project and the estimated cost (including interest) of the
project. Periodic site inspections are made on construction loans.
Commercial real estate loans include loans secured by non-residential real estate,
including farmland and improvements thereon. Often these loans are made to single
borrowers or groups of related borrowers, and the repayment of these loans largely
depends on the results of operations and management of these properties. Adverse
economic conditions may affect the repayment ability of these loans.
Commercial loans include loans for commercial or industrial purposes to business
enterprises that are not secured by real estate. Commercial loans are typically made
on the basis of the borrowers ability to repay from the cash flow of the borrowers
business. Commercial loans are generally secured by accounts receivable, inventory
and equipment. The collateral securing loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the success of the
business. The Company seeks to minimize these risks through its underwriting
standards.
F-11
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 1 Summary of Significant Accounting Policies (continued)
Residential real estate loans include loans secured by residential real estate,
including single-family and multi-family dwellings. Mortgage title insurance and
hazard insurance are normally required. Adverse economic conditions in the Companys
market area may reduce borrowers ability to repay these loans and may reduce the
collateral securing these loans.
Consumer loans include loans to individuals for household, family and other personal
expenditures that are not secured by real estate. Consumer loans are generally
secured by vehicles and other household goods. The collateral securing consumer
loans may depreciate over time. The Company seeks to minimize these risks through
its underwriting standards.
Credit Card loans include revolving lines of credit issued for commercial and
consumer purposes. These lines are generally unsecured. Several factors including
adverse economic conditions and unfavorable circumstances relative to individual
customers may affect repayment of these loans.
Classes of loans and leases are a disaggregation of a Companys portfolio segments. Classes
are defined as a group of loans and leases which share similar initial measurement
attributes, risk characteristics, and methods for monitoring and assessing credit risk.
Management has determined that the Company has eight classes of loans and leases
(construction and land development, commercial mortgage, commercial and industrial,
residential mortgage, home equity and junior liens, multi-family, other consumer and credit
cards). The other consumer class of loans is comprised of both revolving credit and
installment loans.
The assessment also includes an unallocated component. We believe that the unallocated
amount is warranted for inherent factors that cannot be practically assigned to individual
loan categories, such as the imprecision in the overall loss allocation measurement process,
the volatility of the local economies in the markets we serve and imprecision in our credit
risk ratings process.
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.
F-12
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 1 Summary of Significant Accounting Policies (continued)
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.
Premises and equipment:
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.
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,
establishing a new cost basis. 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 (ORE) 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.
Income taxes:
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
valuation allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
F-13
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 1 Summary of Significant Accounting Policies (continued)
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.
Advertising costs:
The Company expenses all advertising costs as incurred. Advertising expense was $122,670 and
$276,129 for the years ended December 31, 2010 and 2009, 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.
Long-term assets:
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.
Retirement plans:
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.
F-14
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 1 Summary of Significant Accounting Policies (continued)
Earnings (losses) per common share:
Basic earnings (losses) per common share is net income (loss) 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 (loss) and dividends per share are restated for all stock splits
and dividends through the date of issue of the financial statements.
Comprehensive income (loss):
Comprehensive income (loss) consists of net income (loss) and other comprehensive income
(loss). Other comprehensive income (loss) includes unrealized gains and losses on securities
available for sale, which is also recognized as a separate component of equity.
Loss contingencies:
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.
Restrictions on cash:
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.
Equity:
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.
Dividend restriction:
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.)
F-15
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 1 Summary of Significant Accounting Policies (continued)
Fair value of financial instruments:
Fair values of financial instruments are estimated using relevant market information and
other assumptions, as more fully disclosed in Note 13 Fair Value. Fair value estimates
involve uncertainties and matters of significant judgment regarding interest rates, credit
risk, prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could significantly affect
these estimates.
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, 2010, the Company has a stock-based compensation plan, which
is described more fully in Note 14 Stock Options.
Segment reporting:
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.
Reclassifications:
Some items in the prior year financial statements were reclassified to conform to the
current presentation. Reclassifications had no effect on prior year net income or
shareholders equity.
F-16
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
securities |
|
$ |
249,879 |
|
|
$ |
|
|
|
$ |
(13 |
) |
|
$ |
249,866 |
|
Obligations of states and
political subdivisions |
|
|
5,201,492 |
|
|
|
17,407 |
|
|
|
(296,786 |
) |
|
|
4,922,113 |
|
Mortgage-backed
securities residential |
|
|
81,754,184 |
|
|
|
134,557 |
|
|
|
(744,129 |
) |
|
|
81,144,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87,205,555 |
|
|
$ |
151,964 |
|
|
$ |
(1,040,928 |
) |
|
$ |
86,316,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
$ |
1,317,951 |
|
|
$ |
|
|
|
$ |
(14,871 |
) |
|
$ |
1,303,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-17
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 2 Securities (continued)
The proceeds from sales of securities and the associated gains and losses are listed below:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Proceeds |
|
$ |
103,501,336 |
|
|
$ |
89,957,394 |
|
Gross gains |
|
|
1,570,376 |
|
|
|
2,562,423 |
|
Gross losses |
|
|
(59,371 |
) |
|
|
(3,811 |
) |
During the first quarter of 2010, the Bank sold one security classified as held-to-maturity.
The remaining held-to-maturity security in the Banks portfolio was reclassified as
available for sale. The approximately $1.3 million residual balance in held-to-maturity
securities at December 31, 2010 represents securities held in the portfolio of MNB
Investments, Inc., a consolidated subsidiary of the Bank. MNB Investments, Inc. does not
intend and it is not more likely than not that it would be required to sell these securities
prior to maturity.
The amortized cost and fair value of securities at December 31, 2010, by contractual
maturity, are shown below. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale |
|
|
Securities Held to Maturity |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Within one year |
|
$ |
249,879 |
|
|
$ |
249,866 |
|
|
$ |
|
|
|
$ |
|
|
One to five years |
|
|
268,535 |
|
|
|
263,624 |
|
|
|
|
|
|
|
|
|
Five to ten years |
|
|
1,184,661 |
|
|
|
1,189,545 |
|
|
|
722,012 |
|
|
|
710,900 |
|
Beyond ten years |
|
|
3,748,296 |
|
|
|
3,468,944 |
|
|
|
595,939 |
|
|
|
592,180 |
|
Mortgage-backed
securities residential |
|
|
81,754,184 |
|
|
|
81,144,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87,205,555 |
|
|
$ |
86,316,591 |
|
|
$ |
1,317,951 |
|
|
$ |
1,303,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, securities with a carrying value of approximately $78,019,000
and $131,039,000, respectively, were pledged to secure public deposits and for other
purposes required or permitted by law. At December 31, 2010 and 2009, the carrying amount of
securities pledged to secure repurchase agreements was approximately $1,064,000 and
$2,293,000, respectively.
The Company did not hold any securities from a single issuer that exceeded 10% of total
shareholders equity as of December 31, 2010, 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 $81,145,000 and $114,057,000
at December 31, 2010 and 2009, respectively.
F-18
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 2 Securities (continued)
The following table summarizes the investment securities with unrealized losses at December
31, 2010 and 2009 aggregated by major security type and length of time in a continuous
unrealized loss position:
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securties |
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
Value |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. Government
securities |
|
$ |
249,866 |
|
|
$ |
(13 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
249,866 |
|
|
$ |
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and
political subdivisions |
|
|
3,632,820 |
|
|
|
(112,755 |
) |
|
|
1,571,970 |
|
|
|
(198,902 |
) |
|
|
5,204,790 |
|
|
|
(311,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities residential |
|
|
57,369,268 |
|
|
|
(744,129 |
) |
|
|
|
|
|
|
|
|
|
|
57,369,268 |
|
|
|
(744,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired |
|
$ |
61,251,954 |
|
|
$ |
(856,897 |
) |
|
$ |
1,571,970 |
|
|
$ |
(198,902 |
) |
|
$ |
62,823,924 |
|
|
$ |
(1,055,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securties |
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the Companys security portfolio consisted of 76 securities,
56 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-19
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 2 Securities (continued)
Mortgage-Backed Securities
At December 31, 2010, 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, 2010.
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, 2010.
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.
F-20
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 2 Securities (continued)
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 (loss), net of applicable taxes.
The previous amortized cost basis less the OTTI recognized in earnings becomes the
new amortized cost basis of the investment.
Other Securities
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.
F-21
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 3 Loans and Allowance for Loan Losses
At December 31, 2010 and 2009, the Banks loans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Mortgage loans on real estate: |
|
|
|
|
|
|
|
|
Residential 1-4 family |
|
$ |
86,402,948 |
|
|
$ |
88,491,997 |
|
Residential multifamily |
|
|
6,146,427 |
|
|
|
7,259,301 |
|
Commercial |
|
|
133,917,383 |
|
|
|
138,374,082 |
|
Construction |
|
|
83,543,331 |
|
|
|
99,771,212 |
|
Second mortgages |
|
|
8,879,885 |
|
|
|
7,127,228 |
|
Equity lines of credit |
|
|
25,391,414 |
|
|
|
29,370,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344,281,388 |
|
|
|
370,394,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
24,944,178 |
|
|
|
30,386,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer installment loans: |
|
|
|
|
|
|
|
|
Personal |
|
|
2,854,531 |
|
|
|
4,512,571 |
|
Credit cards |
|
|
2,275,367 |
|
|
|
2,411,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,129,898 |
|
|
|
6,923,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
374,355,464 |
|
|
|
407,704,446 |
|
Less: Allowance for loan losses |
|
|
(10,942,414 |
) |
|
|
(11,353,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
363,413,050 |
|
|
$ |
396,351,008 |
|
|
|
|
|
|
|
|
F-22
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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,
2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
11,353,438 |
|
|
$ |
5,292,028 |
|
Provision for loan losses |
|
|
7,727,200 |
|
|
|
11,672,802 |
|
Loans charged-off |
|
|
(8,593,679 |
) |
|
|
(5,890,874 |
) |
Recoveries of loans previously charged-off |
|
|
455,455 |
|
|
|
279,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
10,942,414 |
|
|
$ |
11,353,438 |
|
|
|
|
|
|
|
|
The Bank had a concentration of credit at December 31, 2010 in real estate loans, which
totaled approximately $344,281,000. Real estate loans accounted for 92% 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 $13,448,000 and $17,933,000 at December 31, 2010 and 2009, respectively. For
the year ended December 31, 2010, the activity in these loans included new borrowings of
approximately $1,352,000 and repayments of approximately $5,837,000. None of these loans to
executive officers, principal shareholders and directors and their affiliates, were impaired
at December 31, 2010 or 2009.
F-23
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 3 Loans and Allowance for Loan Losses (continued)
The following table presents the balance in the allowance for loan losses and the recorded
investment in loans by portfolio segment and based on impairment method as of December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and |
|
|
Residential |
|
|
Commercial |
|
|
|
|
|
|
Consumer / |
|
|
Credit |
|
|
|
|
|
|
|
|
|
Development |
|
|
Real Estate |
|
|
Real Estate |
|
|
Commercial |
|
|
Other |
|
|
Cards |
|
|
Unallocated |
|
|
Total |
|
Allowance for loan losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance
attributable to loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for
impairment |
|
$ |
1,647,319 |
|
|
$ |
2,444,296 |
|
|
$ |
617,123 |
|
|
$ |
623 |
|
|
$ |
480 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,709,841 |
|
Collectively evaluated for
impairment |
|
|
1,444,541 |
|
|
|
1,653,029 |
|
|
|
1,444,301 |
|
|
|
395,080 |
|
|
|
97,188 |
|
|
|
121,268 |
|
|
|
1,077,166 |
|
|
|
6,232,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance
balance |
|
$ |
3,091,860 |
|
|
$ |
4,097,325 |
|
|
$ |
2,061,424 |
|
|
$ |
395,703 |
|
|
$ |
97,668 |
|
|
$ |
121,268 |
|
|
$ |
1,077,166 |
|
|
$ |
10,942,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated
for impairment |
|
$ |
41,517,256 |
|
|
$ |
29,181,876 |
|
|
$ |
21,528,757 |
|
|
$ |
113,250 |
|
|
$ |
15,189 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
92,356,328 |
|
Loans collectively evaluated
for impairment |
|
|
42,026,075 |
|
|
|
97,638,798 |
|
|
|
112,388,626 |
|
|
|
24,830,928 |
|
|
|
2,839,342 |
|
|
|
2,275,367 |
|
|
|
|
|
|
|
281,999,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loan balance |
|
$ |
83,543,331 |
|
|
$ |
126,820,674 |
|
|
$ |
133,917,383 |
|
|
$ |
24,944,178 |
|
|
$ |
2,854,531 |
|
|
$ |
2,275,367 |
|
|
$ |
|
|
|
$ |
374,355,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually impaired loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Year-end loans with allocated allowance
for loan losses |
|
$ |
69,501,838 |
|
|
$ |
37,952,662 |
|
Year-end loans with no allocated allowance
for loan losses |
|
|
22,854,490 |
|
|
|
25,194,329 |
|
|
|
|
|
|
|
|
Total impaired loans |
|
|
92,356,328 |
|
|
|
63,146,991 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses on impaired loans |
|
|
4,709,841 |
|
|
|
5,367,678 |
|
|
|
|
|
|
|
|
|
|
Average of individually impaired loans
during the year |
|
$ |
83,699,963 |
|
|
|
54,479,634 |
|
|
|
|
|
|
|
|
|
|
Amount of partial charge-offs related to
impaired loans above |
|
|
5,051,238 |
|
|
|
2,218,029 |
|
F-24
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 3 Loans and Allowance for Loan Losses (continued)
The following table presents loans individually evaluated for impairment by class of loans
as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
|
|
|
|
Allowance for |
|
|
|
Principal |
|
|
Recorded |
|
|
Loan Losses |
|
|
|
Balance |
|
|
Investment |
|
|
Allocated |
|
With no related allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development |
|
$ |
18,005,132 |
|
|
$ |
13,216,014 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
5,559,433 |
|
|
|
4,834,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
4,357,820 |
|
|
|
4,336,359 |
|
|
|
|
|
Home equity and junior
liens |
|
|
467,700 |
|
|
|
467,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential real estate |
|
|
4,825,520 |
|
|
|
4,804,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with no related allowance recorded |
|
$ |
28,390,085 |
|
|
$ |
22,854,490 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded: |
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development |
|
$ |
28,504,574 |
|
|
$ |
28,301,242 |
|
|
$ |
1,647,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
16,742,796 |
|
|
|
16,694,340 |
|
|
|
617,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
113,250 |
|
|
|
113,250 |
|
|
|
623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
22,349,306 |
|
|
|
22,297,635 |
|
|
|
2,334,970 |
|
Home equity and junior
liens |
|
|
388,063 |
|
|
|
388,063 |
|
|
|
17,283 |
|
Multi-family |
|
|
1,692,119 |
|
|
|
1,692,119 |
|
|
|
92,043 |
|
|
|
|
|
|
|
|
|
|
|
Total residential real estate |
|
|
24,429,488 |
|
|
|
24,377,817 |
|
|
|
2,444,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
15,189 |
|
|
|
15,189 |
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total with an allowance recorded |
|
$ |
69,805,297 |
|
|
$ |
69,501,838 |
|
|
$ |
4,709,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
98,195,382 |
|
|
$ |
92,356,328 |
|
|
$ |
4,709,841 |
|
|
|
|
|
|
|
|
|
|
|
F-25
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 3 Loans and Allowance for Loan Losses (continued)
At December 31, 2010 and 2009, the Bank had certain impaired loans on nonaccruing interest
status. The principal balance of these nonaccrual loans amounted to approximately
$53,005,000 and $39,587,000 at December 31, 2010 and 2009, 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 $3,164,000 and
$1,358,000 for the years ended December 31, 2010 and 2009, respectively.
Nonperforming loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Loans past due over 90 days still on accrual |
|
$ |
432,438 |
|
|
$ |
67,634 |
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
|
53,005,380 |
|
|
|
40,548,546 |
|
Nonperforming loans include both smaller balance homogeneous loans that are collectively
evaluated for impairment and individually classified as impaired loans.
The following table presents the recorded investment in nonperforming loans by class of
loans as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Past Due |
|
|
|
|
|
|
|
Over 90 Days |
|
|
|
Nonaccrual |
|
|
Still Accruing |
|
Construction and development |
|
$ |
27,929,095 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
6,362,017 |
|
|
|
413,283 |
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
67,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
17,446,374 |
|
|
|
|
|
Home equity and junior
liens |
|
|
1,200,660 |
|
|
|
84 |
|
|
|
|
|
|
|
|
Total residential real estate |
|
|
18,647,034 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
|
|
|
|
19,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
53,005,380 |
|
|
$ |
432,438 |
|
|
|
|
|
|
|
|
F-26
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 3 Loans and Allowance for Loan Losses (continued)
The following table presents the aging of the recorded investment in past due loans,
including the payment status of loans on non-accrual which have been incorporated into the
table, as of December 31, 2010 by class of loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 |
|
|
60-89 |
|
|
Greater Than |
|
|
|
|
|
|
|
|
|
|
|
|
|
Days |
|
|
Days |
|
|
90 Days |
|
|
Total |
|
|
|
|
|
|
Total |
|
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Past Due |
|
|
Current |
|
|
Loans |
|
Construction and development |
|
$ |
264,762 |
|
|
$ |
49,071 |
|
|
$ |
394,151 |
|
|
$ |
707,984 |
|
|
$ |
82,835,347 |
|
|
$ |
83,543,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
214,642 |
|
|
|
326,019 |
|
|
|
2,573,021 |
|
|
|
3,113,682 |
|
|
|
130,803,701 |
|
|
|
133,917,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,944,178 |
|
|
|
24,944,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
947,887 |
|
|
|
2,579,749 |
|
|
|
|
|
|
|
3,527,636 |
|
|
|
82,875,312 |
|
|
|
86,402,948 |
|
Home equity and junior
liens |
|
|
|
|
|
|
408,909 |
|
|
|
61,800 |
|
|
|
470,709 |
|
|
|
33,800,590 |
|
|
|
34,271,299 |
|
Multi-family |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,146,427 |
|
|
|
6,146,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential real estate |
|
|
947,887 |
|
|
|
2,988,658 |
|
|
|
61,800 |
|
|
|
3,998,345 |
|
|
|
122,822,329 |
|
|
|
126,820,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
13,685 |
|
|
|
10,601 |
|
|
|
|
|
|
|
24,286 |
|
|
|
2,830,245 |
|
|
|
2,854,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
42,996 |
|
|
|
1,082 |
|
|
|
19,071 |
|
|
|
63,149 |
|
|
|
2,212,218 |
|
|
|
2,275,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,483,972 |
|
|
$ |
3,375,431 |
|
|
$ |
3,048,043 |
|
|
$ |
7,907,446 |
|
|
$ |
366,448,018 |
|
|
$ |
374,355,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings:
Impaired loans also include loans that the Bank may elect to formally restructure due to the
weakening credit status of a borrower such that the restructuring may facilitate a repayment
plan that minimizes the potential losses, if any, that the Bank may have to otherwise incur.
These loans are classified as impaired loans and, if on nonaccruing status as of the date of
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 $3,699,700 of specific reserves to
customers whose loan terms have been modified in troubled debt restructurings as of December
31, 2010. The Company has $82,442,903 outstanding to customers whose loans are classified as
a troubled debt restructuring. The Company has committed to lend additional amounts totaling
$1,241,287 related to loans classified as troubled debt restructurings. At December 31, 2010
and 2009, there were $35,751,985 and $21,797,811, respectively, of accruing restructured
loans that remain in a performing status.
F-27
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 3 Loans and Allowance for Loan Losses (continued)
Credit Quality Indicators:
The Company uses several credit quality indicators, which are updated at least annually, to
manage credit risk in an ongoing manner. The Company categorizes loans into risk categories
based on relevant information about the ability of borrowers to service their debt such as:
current financial information, historical payment experience, credit documentation, public
information and current economic trends, among other factors. The Company uses an internal
credit risk rating system that categorizes loans into pass, special mention or classified
categories. Credit risk ratings are applied to all loans individually with the exception of
credit cards.
The following are the definitions of the Companys risk ratings:
|
|
|
Pass:
|
|
Loans that are not adversely rated, are contractually current
as to principal and interest and are otherwise in compliance with the
contractual terms of the loan or lease agreement. Management believes that
there is a low likelihood of loss related to those loans that are considered
pass. |
|
|
|
Special Mention:
|
|
Loans classified as special mention have a potential weakness that
deserves managements close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan
or of the institutions credit position at some future date. |
|
|
|
Substandard/
Accruing:
|
|
Loans classified as substandard are inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Loans so classified have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized by the distinct
possibility that the institution will sustain some loss if the deficiencies are
not corrected. |
|
|
|
Substandard/
Nonaccrual:
|
|
A loan classified as nonaccrual has all the deficiencies of a loan
graded substandard but collection of the full amount of principal and interest
owed is uncertain or unlikely and collateral support, if any, may be weak. |
|
|
|
Doubtful:
|
|
Loans classified as doubtful have all the weaknesses inherent in those
classified as substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing
estimations, facts, conditions and values, highly questionable and improbable.
Doubtful loans include only the portion of each specific loan deemed
uncollectible and the classification can change as certain current information
and facts are ascertained. |
F-28
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 3 Loans and Allowance for Loan Losses (continued)
The following tables presents by class and by risk category, the recorded investment in the
Companys loans as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not |
|
|
|
|
|
|
Special |
|
|
Substandard |
|
|
Substandard |
|
|
|
|
|
|
Rated |
|
|
Pass |
|
|
Mention |
|
|
Accruing |
|
|
Nonaccrual |
|
|
Doubtful |
|
Construction and development |
|
$ |
|
|
|
$ |
36,085,885 |
|
|
$ |
283,817 |
|
|
$ |
19,244,534 |
|
|
$ |
26,977,265 |
|
|
$ |
951,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
|
|
|
|
|
99,648,357 |
|
|
|
1,044,251 |
|
|
|
26,862,758 |
|
|
|
6,362,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
|
|
|
|
24,274,283 |
|
|
|
207,244 |
|
|
|
395,417 |
|
|
|
67,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage |
|
|
|
|
|
|
54,331,450 |
|
|
|
2,905,416 |
|
|
|
11,719,708 |
|
|
|
17,446,374 |
|
|
|
|
|
Home equity and junior liens |
|
|
|
|
|
|
30,841,092 |
|
|
|
668,456 |
|
|
|
1,561,091 |
|
|
|
1,200,660 |
|
|
|
|
|
Multi-family |
|
|
|
|
|
|
4,454,308 |
|
|
|
|
|
|
|
1,692,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential real estate |
|
|
|
|
|
|
89,626,850 |
|
|
|
3,573,872 |
|
|
|
14,972,918 |
|
|
|
18,647,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
2,755,139 |
|
|
|
40,627 |
|
|
|
58,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit cards |
|
|
2,275,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,275,367 |
|
|
$ |
252,390,514 |
|
|
$ |
5,149,811 |
|
|
$ |
61,534,392 |
|
|
$ |
52,053,550 |
|
|
$ |
951,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 4 Bank Premises and Equipment
A summary of Bank premises and equipment at December 31, 2010 and 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
9,694,709 |
|
|
$ |
9,694,709 |
|
Buildings and improvements |
|
|
22,865,665 |
|
|
|
22,753,470 |
|
Furniture, fixtures and equipment |
|
|
9,056,630 |
|
|
|
8,934,486 |
|
|
|
|
|
|
|
|
|
|
|
41,617,004 |
|
|
|
41,382,665 |
|
Accumulated depreciation |
|
|
(9,016,331 |
) |
|
|
(7,673,383 |
) |
|
|
|
|
|
|
|
|
|
$ |
32,600,673 |
|
|
$ |
33,709,282 |
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2010 and 2009 amounted to $1,433,948
and $1,430,157, respectively.
Note 5 Deposits
The aggregate amount of time deposits in denominations of $100,000 or more at December 31,
2010 and 2009, was approximately $121,566,000 and $168,252,000, respectively, including
brokered deposits of approximately $27,019,000 and $69,955,000, respectively, for each time
period.
At December 31, 2010, the scheduled maturities of time deposits for each of the five years
subsequent to December 31, 2010 were as follows:
|
|
|
|
|
2011 |
|
$ |
183,855,611 |
|
2012 |
|
|
58,105,369 |
|
2013 |
|
|
18,647,603 |
|
2014 |
|
|
1,404,456 |
|
2015 |
|
|
9,159,862 |
|
|
|
|
|
Total |
|
$ |
271,172,901 |
|
|
|
|
|
Deposits of employees, officers and directors totaled approximately $6,200,000 at December
31, 2010 and $8,482,000 at December 31, 2009.
F-30
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 6 Income Taxes (Benefits)
Income tax expense (benefit) in the statements of income for the years ended December 31,
2010 and 2009 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Current tax expense |
|
$ |
|
|
|
$ |
89,951 |
|
Deferred tax expense (benefit) |
|
|
(3,737,827 |
) |
|
|
(3,877,978 |
) |
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
(3,737,827 |
) |
|
$ |
(3,788,027 |
) |
|
|
|
|
|
|
|
Income tax expense (benefit) differs from amounts computed by applying the Federal income
tax statutory rate of 34% in 2010 and 2009 to income before income taxes. A reconciliation
of the differences for the years ended December 31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Expected tax at statutory rates |
|
$ |
(2,283,000 |
) |
|
$ |
(2,726,000 |
) |
Increase (decrease) resulting from tax effect of: |
|
|
|
|
|
|
|
|
State income taxes, net of federal tax |
|
|
(377,063 |
) |
|
|
(544,004 |
) |
Increase in cash surrender value of life insurance |
|
|
(138,834 |
) |
|
|
(94,601 |
) |
Tax exempt interest |
|
|
(64,204 |
) |
|
|
(347,420 |
) |
General business credits, net of basis reduction |
|
|
(158,400 |
) |
|
|
(132,000 |
) |
Other |
|
|
(97,785 |
) |
|
|
|
|
Valuation allowance change |
|
|
6,857,113 |
|
|
|
55,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
3,737,827 |
|
|
$ |
(3,788,027 |
) |
|
|
|
|
|
|
|
F-31
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 6 Income Taxes (Benefits) (continued)
Significant components of the Companys deferred tax assets and liabilities at December 31,
2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
4,107,907 |
|
|
$ |
4,214,292 |
|
Deferred compensation |
|
|
562,754 |
|
|
|
419,399 |
|
Unrealized loss on securities available for sale |
|
|
339,693 |
|
|
|
|
|
Net operating loss |
|
|
2,637,959 |
|
|
|
371,065 |
|
Nonaccrual loans |
|
|
1,110,990 |
|
|
|
472,359 |
|
Tax credits |
|
|
610,516 |
|
|
|
150,816 |
|
Other real estate owned |
|
|
417,928 |
|
|
|
488,685 |
|
Other |
|
|
336,903 |
|
|
|
315,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
10,124,650 |
|
|
|
6,432,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Accelerated depreciation |
|
|
(552,177 |
) |
|
|
(604,553 |
) |
Unrealized gain on securities available for sale |
|
|
|
|
|
|
(175,714 |
) |
Income from subsidiary |
|
|
|
|
|
|
(49,823 |
) |
Investment in partnership |
|
|
(367,200 |
) |
|
|
(72,000 |
) |
Other |
|
|
(400,324 |
) |
|
|
(358,491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(1,319,701 |
) |
|
|
(1,260,581 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(7,372,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets |
|
$ |
1,432,429 |
|
|
$ |
5,171,805 |
|
|
|
|
|
|
|
|
A valuation allowance is recognized for a deferred tax asset if, based on the weight of
available evidence, it is more-likely-than-not that some portion of the entire deferred tax
or asset will not be realized. In making such judgments, significant weight is given to
evidence that can be objectively verified. As a result of increased credit losses, the
Company entered into a three-year cumulative pre-tax loss position in 2010. A cumulative
loss position is considered significant negative evidence in assessing the reliability
deferred tax asset which is difficult to overcome. The Companys estimate of the realization
of its deferred tax assets was based on future reversals of existing taxable temporary
differences and taxable income in prior carry back years. The Company did not consider
future taxable income in determining the reliability of its deferred assets. During 2010, we
recorded a valuation allowance of $7,372,520. The timing of the reversal of the valuation
allowance is dependent on our assessment of future events and will be based on the
circumstances that exist as of that future date.
F-32
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 6 Income Taxes (Benefits) (continued)
During 2010 and per ASC 740-20-45, the Company had income tax expense related to changes in
the unrealized gains and losses on investment securities available for sale
totaling approximately $515,000. This expense was recorded through accumulated other
comprehensive income and increased our deferred tax valuation allowance.
The Bank has a federal net operating loss carryforward of approximately $1,578,000 which
will expire in 2030. The Bank has a Tennessee net operating loss carryforward of which
approximately $1,590,000 will expire in 2021, $1,630,000 which will expire in 2022,
$1,563,000 which will expire in 2023, $3,748,000 which will expire in 2024 and $5,818,000
which will expire in 2025 if not offset by future taxable income.
The Bank has a minimum tax credit of $130,000 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 2007.
F-33
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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, multi-family mortgages and junior mortgages have been pledged as collateral
for any advances under a blanket lien arrangement requiring a collateral-to-loan ratio of
145%, 210%, 200%, 230% and 195%, respectively. At year end, advances from the FHLB were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Long-term advance requiring monthly interest payments
at 4.32% fixed, principal due in June 2010 |
|
$ |
|
|
|
$ |
200,000 |
|
|
|
|
|
|
|
|
|
|
Long-term callable advance requiring monthly interest payments
at 4.39% fixed, principal due in November 2011 |
|
|
|
|
|
|
7,500,000 |
|
|
|
|
|
|
|
|
|
|
Long-term advance requiring monthly interest payments
at 4.47% fixed, principal due in June 2012 |
|
|
200,000 |
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,200,000 |
|
|
$ |
62,900,000 |
|
|
|
|
|
|
|
|
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, 2010 are as follows:
|
|
|
|
|
2012 |
|
|
5,200,000 |
|
2014 |
|
|
5,000,000 |
|
2015 |
|
|
5,000,000 |
|
2017 |
|
|
40,000,000 |
|
|
|
|
|
Total |
|
$ |
55,200,000 |
|
|
|
|
|
F-34
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 7 Federal Home Loan Bank Advances (continued)
During the third quarter of 2010, the Bank elected to pre-pay a $7,500,000 FHLB advance that
was scheduled to mature in November 2011. The pre-payment resulted in a penalty of
approximately $350,000 which essentially accelerated payment of the interest that would have
been due on the advance through its maturity. Management chose to pay off the advance early
due to increasing collateralization requirements associated with the Banks outstanding FHLB
debt and difficulty finding pledgeable collateral with a yield sufficient to cover or exceed
the cost of the debt. Additionally, management chose to pay off the advance in order to
reduce a non-core funding source. The pre-payment penalty is included in other non-interest
expense in the Companys 2010 statement of operations.
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). 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. Both are wholly-owned
statutory business trusts, however; the Company is not considered the primary beneficiary of
Trust I or Trust II (variable interest entities), therefore the Trusts are not consolidated
in the Companys financial statements. 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 3.340% at December 31, 2010 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 1.889% at December 31, 2010 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.
F-35
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 8 Subordinated Debentures (continued)
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
without default 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.
On December 14, 2010, the Company exercised its rights to defer regularly scheduled interest
payments of $84,680 on all of its issues of junior subordinated debentures relating to
outstanding trust preferred securities. The regular scheduled interest payments will
continue to be accrued for payment in the future and reported as an expense for financial
statement purposes.
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.
Following passage of the Dodd Frank Wall Street Reform and Consumer Protection Act (the
Reform Act), bank holding companies like the Company must be subject to capital
requirements that are at least as severe as those imposed on banks under current federal
regulations. Trust preferred and cumulative preferred securities will no longer be deemed
Tier 1 capital for bank holding companies following passage of the Reform Act, but trust
preferred securities issued by bank holding companies with under $15 billion in total assets
at December 31, 2009 will be grandfathered in and continue to count as Tier 1 capital.
Accordingly, the Companys trust preferred securities will continue to count as Tier 1
capital.
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.
F-36
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Weighted average borrowing rate at year-end |
|
|
2.08 |
% |
|
|
1.52 |
% |
Weighted average borrowing rate during the year |
|
|
1.58 |
% |
|
|
2.12 |
% |
Average daily balance during the year |
|
$ |
1,535,058 |
|
|
$ |
4,283,833 |
|
Maximum month-end balance during the year |
|
|
3,198,689 |
|
|
|
7,872,502 |
|
Balance at year-end |
|
|
432,016 |
|
|
|
1,776,402 |
|
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 $15,181 for 2010 and $111,373 for 2009.
During the first quarter of 2010, the Bank elected to suspend its 401(k) matching
contributions indefinitely.
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 $374,393 and $301,943 during 2010 and 2009,
respectively, related to these agreements. The total amount accrued at December 31, 2010 and
2009 was $1,469,716 and $1,095,323, respectively.
F-37
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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.
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 2015 and contain various renewal options. Total
rental expense under all operating leases was $189,180 in 2010 and $182,330 in 2009.
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, 2010:
|
|
|
|
|
2011 |
|
$ |
178,277 |
|
2012 |
|
|
160,501 |
|
2013 |
|
|
135,402 |
|
2014 |
|
|
57,132 |
|
2015 |
|
|
33,327 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
564,639 |
|
|
|
|
|
F-38
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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, 2010, commitments under standby letters of credit and undisbursed loan commitments,
substantially all of which are carried at variable rates, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
(dollars in thousands) |
|
Commitments to extend credit |
|
$ |
41,155 |
|
|
$ |
50,702 |
|
Standby letters of credit |
|
|
5,288 |
|
|
|
5,801 |
|
|
|
|
|
|
|
|
Totals |
|
$ |
46,443 |
|
|
$ |
56,503 |
|
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 2010 or 2009.
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.
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.
F-39
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 13 Fair Value (continued)
The Company used the following methods and significant assumptions to estimate the fair
value of each type of financial instrument:
Investment Securities Available for Sale Securities classified as available for
sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company
obtains fair value measurements from an independent service provider. The fair value
measurements consider observable data that may include dealer quotes, market spreads, cash
flows, the U. S. Treasury yield curve, live trading levels, trade execution data, market
consensus prepayments speeds, credit information and the securities terms and conditions,
among other things.
Impaired Loans The fair value of impaired loans with specific allocations of the
allowance for loan losses may be based on recent real estate appraisals. These appraisals
may utilize a single valuation approach or a combination of approaches including comparable
sales and the income approach. Adjustments are routinely made in the appraisal process by
the appraisers to adjust for differences between the comparable sales and income data
available. Such adjustments are usually significant and typically result in a Level 3
classification of the inputs for determining fair value. If the recorded investment in an
impaired loan exceeds the measure of fair value, a valuation allowance may be established as
a component of the allowance for loan losses or the expense is recognized as a charge-off.
As a result of partial charge-offs, certain impaired loans are carried at fair value with no
allocation. Certain impaired loans are not measured at fair value, which generally includes
troubled debt restructurings that are measured for impairment based upon the present value
of expected cash flows discounted at the loans original effective interest rate, and are
excluded from the assets measured on a nonrecurring basis.
Other Real Estate The fair value of ORE is generally based on current appraisals,
comparable sales, and other estimates of value obtained principally from independent
sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the
loan balance over the fair value of the real estate held as collateral is treated as a
charge against the allowance for loan losses. Gains or losses on sale and any subsequent
adjustments to the value are recorded as a gain or loss on ORE. ORE is classified within
Level 3 of the hierarchy.
F-40
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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, 2010 and December 31, 2009, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2010 Using: |
|
|
|
|
|
|
|
Significant Other |
|
|
|
|
|
|
|
Observable Inputs |
|
|
|
Carrying Value |
|
|
(Level 2) |
|
Assets: |
|
|
|
|
|
|
|
|
Available for sale securities: |
|
|
|
|
|
|
|
|
U. S. Government securities |
|
$ |
249,866 |
|
|
$ |
249,866 |
|
Obligations of states and
political subdivisions |
|
|
4,922,113 |
|
|
|
4,922,113 |
|
Mortgage-backed securities
-residential |
|
|
81,144,612 |
|
|
|
81,144,612 |
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
86,316,591 |
|
|
$ |
86,316,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
There were no significant transfers between Level 1 and Level 2 during 2010. |
F-41
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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, 2010 and December 31, 2009, segregated by the level
of the valuation inputs within the fair value hierarchy utilized to measure fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2010 Using: |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
Unobservable Inputs |
|
|
|
Carrying Value |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
Impaired loans: |
|
|
|
|
|
|
|
|
Construction and development |
|
$ |
8,826,040 |
|
|
$ |
8,826,040 |
|
Commercial real estate |
|
|
3,378,152 |
|
|
|
3,378,152 |
|
Residential real estate |
|
|
4,045,756 |
|
|
|
4,045,756 |
|
|
|
|
|
|
|
|
Total impaired loans |
|
|
16,249,948 |
|
|
|
16,249,948 |
|
|
|
|
|
|
|
|
|
|
Other real estate: |
|
|
|
|
|
|
|
|
Construction and development |
|
|
2,229,161 |
|
|
|
2,229,161 |
|
Commercial real estate |
|
|
1,404,833 |
|
|
|
1,404,833 |
|
Residential real estate |
|
|
7,518,670 |
|
|
|
7,518,670 |
|
|
|
|
|
|
|
|
Total other real estate |
|
|
11,152,664 |
|
|
|
11,152,664 |
|
|
|
|
|
|
|
|
Total Assets Measured at Fair
Value on a Non-Recurring Basis |
|
$ |
27,402,612 |
|
|
$ |
27,402,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
|
|
|
|
|
December 31, 2009 Using: |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
Unobservable Inputs |
|
|
|
Carrying Value |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
Impaired Loans |
|
$ |
8,512,991 |
|
|
$ |
8,512,991 |
|
Other real estate |
|
|
12,019,079 |
|
|
|
12,019,079 |
|
|
|
|
|
|
|
|
Total Assets Measured at Fair
Value on a Non-Recurring Basis |
|
$ |
20,532,070 |
|
|
$ |
20,532,070 |
|
|
|
|
|
|
|
|
F-42
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 13 Fair Value (continued)
|
|
At December 31, 2010, impaired loans measured at fair value, which are evaluated for
impairment using the fair value of collateral, had a carrying amount of $17,718,189, with a
valuation allowance of $1,468,241 resulting in an additional provision for loan losses of
$4,514,585 for the year ended December 31, 2010. At December 31, 2009, impaired loans
measured at fair value had a carrying amount of $8,512,991, with no valuation allowance.
During 2009, $2,218,028 of outstanding principal was charged off on these loans resulting in
an additional provision for loan losses of $2,218,028 for the year ended December 31, 2009.
Impaired loans carried at fair value include loans that have been written down to fair value
through the partial charge-off of principal balance. Accordingly, these loans do not have a
specific valuation allowance as their balances represent fair value. |
|
|
The December 31, 2010 carrying amount of ORE includes net valuation adjustments of
approximately $1,211,000. The December 31, 2009 carrying amount of ORE includes net
valuation adjustments of approximately $938,000. Valuation adjustments include both charge
offs and holding gains and losses. The fair value of ORE is based upon appraisals performed
by qualified, licensed appraisers. |
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. |
F-43
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 13 Fair Value (continued)
|
|
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 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. |
|
|
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. |
|
|
The fair value of deposits with no stated maturity, such as demand deposits, money market
accounts, and savings deposits, is equal to the amount payable on demand. The fair value of
time deposits is based on the discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of similar remaining maturities. |
|
|
Federal funds purchased and securities sold under agreements to repurchase: |
|
|
The estimated value of these liabilities, which are extremely short term, approximates their
carrying value. |
|
|
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. |
F-44
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 13 Fair Value (continued)
|
|
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-45
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 13 Fair Value (continued)
|
|
The carrying amounts and estimated fair values of the Companys financial instruments at
December 31, 2010 and December 31, 2009, not previously presented, are as follows (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
32,576 |
|
|
$ |
32,576 |
|
|
$ |
14,105 |
|
|
$ |
14,105 |
|
Investment securities held to maturity |
|
|
1,318 |
|
|
|
1,303 |
|
|
|
2,204 |
|
|
|
2,208 |
|
Restricted investments |
|
|
3,843 |
|
|
|
N/A |
|
|
|
3,816 |
|
|
|
N/A |
|
Loans, net |
|
|
363,413 |
|
|
|
358,587 |
|
|
|
396,351 |
|
|
|
396,254 |
|
Accrued interest receivable |
|
|
1,496 |
|
|
|
1,496 |
|
|
|
3,045 |
|
|
|
3,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
$ |
47,639 |
|
|
$ |
47,639 |
|
|
$ |
47,601 |
|
|
$ |
47,601 |
|
NOW accounts |
|
|
57,345 |
|
|
|
57,345 |
|
|
|
112,440 |
|
|
|
112,440 |
|
Savings and money market accounts |
|
|
73,435 |
|
|
|
73,435 |
|
|
|
61,329 |
|
|
|
61,329 |
|
Time deposits |
|
|
271,173 |
|
|
|
272,304 |
|
|
|
289,244 |
|
|
|
290,534 |
|
Subordinated debentures |
|
|
13,403 |
|
|
|
7,276 |
|
|
|
13,403 |
|
|
|
6,922 |
|
Federal funds purchased and securities
sold under agreements to repurchase |
|
|
432 |
|
|
|
432 |
|
|
|
1,776 |
|
|
|
1,776 |
|
Federal Reserve/Federal Home Loan
Bank advances |
|
|
55,200 |
|
|
|
61,136 |
|
|
|
62,900 |
|
|
|
67,989 |
|
Accrued interest payable |
|
|
719 |
|
|
|
719 |
|
|
|
606 |
|
|
|
606 |
|
F-46
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
122,133 |
|
|
$ |
21.50 |
|
|
|
381,264 |
|
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,
2010 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Contractual Term |
|
|
Aggregate |
|
|
|
of Options |
|
|
Exercise Price |
|
|
(in years) |
|
|
Intrinsic Value |
|
Options outstanding, December 31, 2009 |
|
|
125,086 |
|
|
$ |
21.44 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(2,953 |
) |
|
|
18.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2010 |
|
|
122,133 |
|
|
$ |
21.50 |
|
|
|
5.42 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested and expected to vest |
|
|
122,133 |
|
|
$ |
21.50 |
|
|
|
5.42 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010 |
|
|
66,867 |
|
|
$ |
19.06 |
|
|
|
4.52 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-47
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 14 Stock Options (continued)
|
|
Information related to the stock option plan during each year follows: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Intrinsic value of options exercised |
|
$ |
|
|
|
$ |
|
|
Cash received from option exercises |
|
|
|
|
|
|
|
|
Tax benefit realized from option exercises |
|
|
|
|
|
|
70,696 |
|
Weighted average fair value of options granted |
|
|
|
|
|
|
5.82 |
|
|
|
As of December 31, 2010, there was $248,036 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 2.04 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 for
years in which options were granted. 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 |
|
Dividend yield |
|
|
0.00 |
% |
Expected life |
|
9.5 years |
|
Expected volatility |
|
|
18 |
% |
Risk-free interest rate |
|
|
2.96 |
% |
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-48
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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). In addition, the Companys
and the Banks regulators may impose additional capital requirements on financial
institutions and their bank subsidiaries, like the Company and the Bank, beyond those
provided for statutorily, which standards may be in addition to, and require higher levels
of capital, than the general capital adequacy guidelines. As discussed below, the Bank has
agreed to maintain certain of its capital ratios above statutory levels. As of December 31,
2010 and discussed below, the Bank failed to meet all capital adequacy requirements to which
it is subject. |
|
|
As of December 31, 2010, 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. However, as noted below, the Bank anticipates that it will be
required to enter into a Consent Order which will contain higher capital standards which
will result in it being deemed to be adequately capitalized for regulatory purposes. |
F-49
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 15 Regulatory Matters (continued)
|
|
The actual capital amounts and ratios are presented in the table. Dollar amounts are
presented in thousands. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adequately Capitalized |
|
|
Well-Capitalized |
|
|
Required by |
|
|
|
Actual |
|
|
Regulatory Minimum |
|
|
Regulatory Minimum |
|
|
IMCR |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
As of December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
54,973 |
|
|
|
13.27 |
% |
|
$ |
33,147 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
54,764 |
|
|
|
13.23 |
% |
|
|
33,110 |
|
|
|
8.00 |
% |
|
|
41,388 |
|
|
|
10.00 |
% |
|
|
53,804 |
|
|
|
13.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
49,174 |
|
|
|
11.87 |
% |
|
|
16,574 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
49,526 |
|
|
|
11.97 |
% |
|
|
16,555 |
|
|
|
4.00 |
% |
|
|
24,833 |
|
|
|
6.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
49,174 |
|
|
|
8.34 |
% |
|
|
23,585 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
49,526 |
|
|
|
8.41 |
% |
|
|
23,549 |
|
|
|
4.00 |
% |
|
|
29,436 |
|
|
|
5.00 |
% |
|
|
52,984 |
|
|
|
9.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
65,993 |
|
|
|
14.16 |
% |
|
$ |
37,290 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
65,287 |
|
|
|
14.02 |
% |
|
|
37,260 |
|
|
|
8.00 |
% |
|
|
46,574 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
60,098 |
|
|
|
12.89 |
% |
|
|
18,645 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
59,397 |
|
|
|
12.75 |
% |
|
|
18,630 |
|
|
|
4.00 |
% |
|
|
27,945 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
60,098 |
|
|
|
9.23 |
% |
|
|
26,049 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Mountain National Bank |
|
|
59,397 |
|
|
|
9.14 |
% |
|
|
26,007 |
|
|
|
4.00 |
% |
|
|
32,509 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
As a result of a regulatory examination conducted during the first quarter of 2009, the
Bank has entered into a formal written agreement in which it made certain commitments to the
OCC, including commitments to, among other things, implement a 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 ALLL, strengthen the Banks internal
loan review program, strengthen the Banks loan workout department, and develop a liquidity
plan that improves the Banks reliance on wholesale funding sources. The Company has taken
action to comply with these requirements and does not believe compliance with these
commitments will have a materially adverse impact on its operations. |
F-50
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 15 Regulatory Matters (continued)
|
|
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%. The OCC imposed this requirement to maintain capital at higher levels than those
required by applicable federal regulations because the OCC believed that the Banks capital
levels were less than satisfactory given the level of credit risk in the Bank, specifically
the high level of nonperforming assets and provision for loan losses. As noted above, the
Bank had 8.41% of Tier 1 capital to average assets and 13.25% of total capital to
risk-weighted assets ratio at December 31, 2010 and thus failed to satisfy its minimum Tier
1 capital to average assets ratio. Failure to satisfy such requirement could result in
further enforcement action by the OCC. |
|
|
In the fourth quarter of 2010, the OCC informed the Bank that, because the OCC does not
believe that the Bank has fully satisfied the requirements of the formal written agreement,
it will be requested to replace the formal written agreement with a consent order (the
Consent Order) containing commitments for further improvements in the Banks operations.
While the requirements of the Consent Order are not currently known to the Bank, the OCC has
informed the Banks management that the Consent Order will likely contain provisions similar
to those currently contained in the existing minimum capital commitment that the Bank made
to the OCC in connection with the Banks entering into the formal written agreement,
requiring the Bank to maintain a minimum Tier 1 leverage capital ratio of 9% and a minimum
total risk-based capital ratio of 13%. If the Bank fails to comply with the requirements of
the Consent Order, the OCC may impose additional limitations, restraints, commitments or
conditions on the Bank. Once the Consent Order is effective, the Bank will be deemed to be
adequately capitalized even if the Banks capital ratios exceed those minimum amounts
necessary to be considered well capitalized under federal banking regulations as well as
the minimum ratios set forth in the Consent Order. |
|
|
Since the Bank agreed to the capital requirement, certain actions have been taken, and are
ongoing, that are designed to ensure the required capital levels are maintained. The
reduction of total assets of the Bank can have a significant impact on the Tier 1 capital
ratio. Since December 31, 2009 the Bank has reduced total assets approximately $83,000,000
from approximately $640,000,000 to approximately $557,000,000 at December 31, 2010. This
reduction in assets was accomplished by reducing wholesale funding including brokered
deposits and Federal Home Loan Bank advances as well as the reduction of public funds
deposits. Additionally, loans outstanding and the bond investment portfolio were reduced
subsequent to the capital requirement. Expense reduction measures were put in place during
the second quarter of 2010 which included a significant reduction of salaries and benefits.
As a result of and the continuation of these efforts, management expects the Banks Tier 1
capital ratio will meet the minimum requirement as of March 31, 2011. |
F-51
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 15 Regulatory Matters (continued)
|
|
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, 2010, pursuant to federal banking regulations and due to losses incurred
during 2009 and 2010, the Company and Bank may not, without the prior approval of their
respective banking authorities, pay any dividends until such time that current year profits
exceed the net losses and dividends of the prior two years. Generally, federal regulatory
policy discourages payment of holding company or bank dividends if the holding company or
its subsidiaries are experiencing losses. |
|
|
Supervisory guidance from the Federal Reserve Board indicates that bank holding companies
that are experiencing financial difficulties generally should eliminate, reduce or defer
dividends on Tier 1 capital instruments including trust preferred securities, preferred
stock or common stock, if the holding company needs to conserve capital for safe and sound
operation and to serve as a source of strength to its subsidiaries. The Company has
informally committed to the Federal Reserve Board that it will not (1) declare or pay
dividends on the Companys common or preferred stock, or (2) incur any additional
indebtedness without in each case, the prior written approval of the Federal Reserve Board. |
F-52
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 16 Other Comprehensive Income (Loss)
|
|
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, 2010 and 2009 is as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Before-Tax |
|
|
(Expense) |
|
|
Net-of-Tax |
|
|
|
Amount |
|
|
Benefit |
|
|
Amount |
|
Year ended December 31, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains/(losses)
arising during the period |
|
$ |
163,313 |
|
|
$ |
(574,182 |
) |
|
$ |
(410,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reclassification adjustment for
gains realized in net income (loss) |
|
|
(1,511,005 |
) |
|
|
574,182 |
|
|
|
(936,823 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1,347,692 |
) |
|
$ |
|
|
|
$ |
(1,347,692 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) |
|
|
(2,211,243 |
) |
|
|
840,272 |
|
|
|
(1,370,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
708,065 |
|
|
$ |
(277,464 |
) |
|
$ |
430,601 |
|
|
|
|
|
|
|
|
|
|
|
Note 17 Earnings (Loss) Per Common Share
|
|
Basic earnings (loss) per share represents income (loss) available to common stockholders
divided by the weighted-average number of common shares outstanding during the period.
Diluted earnings (loss) 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 (loss) 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-53
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 17 Earnings (Loss) Per Common Share (continued)
|
|
Earnings (loss) per common share have been computed based on the following: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
(10,451,178 |
) |
|
$ |
(4,228,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding |
|
|
2,631,611 |
|
|
|
2,631,611 |
|
Dilutive effect of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares outstanding used
to calculate diluted earnings (loss) per common share |
|
|
2,631,611 |
|
|
|
2,631,611 |
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, there were options for the purchase of 122,133 and 125,086
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. For the year
ended December 31, 2010, the exercise price of all outstanding options was greater than the
fair value of the Companys stock. |
Note 18 Recent Accounting Pronouncements
|
|
FASB ASC 810 Consolidation (ASC 810) was amended to change how a company determines when
an entity that is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a company is required to
consolidate an entity is based on, among other things, an entitys purpose and design and a
companys ability to direct the activities of the entity that most significantly impact the
entitys economic performance. The new authoritative accounting guidance requires additional
disclosures about the reporting entitys involvement with variable-interest entities and any
significant changes in risk exposure due to that involvement as well as its affect on the
entitys financial statements. The new authoritative accounting guidance under ASC 810 was
effective January 1, 2010 and did not have a significant impact on our financial statements. |
|
|
FASB ASC 860 Transfers and Servicing (ASC 860) was amended to enhance reporting about
transfers of financial assets, including securitizations, and where companies have
continuing exposure to the risks related to transferred financial assets. The new
authoritative accounting guidance eliminates the concept of a qualifying special-purpose
entity and changes the requirements for derecognizing financial assets. The new
authoritative accounting guidance also requires additional disclosures about all continuing
involvements with transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative accounting guidance under
ASC 860 was effective January 1, 2010 and did not have a significant impact on our financial
statements. |
F-54
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 18 Recent Accounting Pronouncements (continued)
|
|
FASB ASC 310 Receivables, Sub-Topic 310-30 Loans and Debt Securities Acquired with
Deteriorated Credit Quality (Subtopic 310-30) was amended to clarify that modifications of
loans that are accounted for within a pool under Subtopic 310-30 do not result in the
removal of those loans from the pool even if the modification would otherwise be considered
a troubled debt restructuring. The amendments do not affect the accounting for loans under
the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for
individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring
accounting provisions within ASC 310 Subtopic 310-40 Troubled Debt Restructurings by
Creditors. The new authoritative accounting guidance under Subtopic 310-30 was effective in
the third quarter of 2010. This amendment did not have a significant impact on our financial
statements. |
|
|
FASB ASC 310 Receivables (ASC 310) was amended to enhance disclosures about credit quality
of financing receivables and the allowance for credit losses. The amendments require an
entity to disclose credit quality information, such as internal risk gradings, more detailed
nonaccrual and past due information, and modifications of its financing receivables. The
disclosures under ASC 310, as amended, were effective for interim and annual reporting
periods ending on or after December 15, 2010. We do not expect this amendment to have a
significant impact on our financial results, but it will significantly expand the
disclosures that we are required to provide, some of which are included in this annual
filing, as required, with additional disclosures included in future filings. |
|
|
FASB ASU No. 2010-06 Improving Disclosures About Fair Value Measurements (ASU 2010-06)
amended guidance for fair value measurements and disclosures to clarify and provide
additional disclosure requirements related to recurring and non-recurring fair value
measurements. The update requires new disclosures for transfers in and out of Levels 1 and
2, and requires a reconciliation to be provided for the activity in Level 3 fair value
measurements. A reporting entity should disclose separately the amounts of significant
transfers in and out of Levels 1 and 2 and provide an explanation for the transfers. This
guidance was effective for interim periods beginning after December 15, 2009, and did not
have a material effect on the Companys results of operations or financial position. |
|
|
In the reconciliation for fair value measurements using observable inputs (Level 3) a
reporting entity should present separately information about purchases, sales, issuances,
and settlements on a gross basis rather than a net basis. Disclosures relating to purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurement will become effective beginning after December 15, 2010, and for interim periods
within those fiscal years. The adoption of this standard is not expected to have a material
effect on the Companys results of operations or financial position. |
F-55
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 19 Condensed Parent Information
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash |
|
$ |
52,648 |
|
|
$ |
114,454 |
|
Investment in subsidiary |
|
|
48,461,350 |
|
|
|
59,679,774 |
|
Other assets |
|
|
655,999 |
|
|
|
1,015,161 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
49,169,997 |
|
|
$ |
60,809,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Subordinated debentures |
|
$ |
13,403,000 |
|
|
$ |
13,403,000 |
|
Accrued interest payable |
|
|
92,827 |
|
|
|
37,234 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
13,495,827 |
|
|
|
13,440,234 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
35,674,170 |
|
|
|
47,369,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
49,169,997 |
|
|
$ |
60,809,389 |
|
|
|
|
|
|
|
|
STATEMENTS OF INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
Interest expense |
|
$ |
343,850 |
|
|
$ |
392,016 |
|
Other expense |
|
|
40,295 |
|
|
|
44,114 |
|
|
|
|
|
|
|
|
Loss before equity in undistributed earnings (loss) of subsidiary |
|
|
(384,145 |
) |
|
|
(436,130 |
) |
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings (loss) of subsidiary |
|
|
(9,974,617 |
) |
|
|
(3,959,259 |
) |
Income tax expense (benefit) |
|
|
92,416 |
|
|
|
(166,994 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,451,178 |
) |
|
$ |
(4,228,395 |
) |
|
|
|
|
|
|
|
F-56
MOUNTAIN NATIONAL BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Note 19 Condensed Parent Information (continued)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,451,178 |
) |
|
$ |
(4,228,395 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by operating activities |
|
|
|
|
|
|
|
|
Equity in undistributed (income) loss of subsidiary |
|
|
9,974,617 |
|
|
|
3,959,259 |
|
Other |
|
|
414,755 |
|
|
|
(80,294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(61,806 |
) |
|
|
(349,430 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(61,806 |
) |
|
|
(349,430 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of year |
|
|
114,454 |
|
|
|
463,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year |
|
$ |
52,648 |
|
|
$ |
114,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
288,258 |
|
|
$ |
481,613 |
|
Income taxes |
|
|
(266,746 |
) |
|
|
(154,676 |
) |
F-57