ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS - continued
Liquidity and Capital Resources
Maintenance of adequate liquidity requires that sufficient resources be available at all times to meet cash flow requirements of the Company. Liquidity in a banking institution is required primarily to
provide for deposit withdrawals and the credit needs of customers and to take advantage of investment opportunities as they arise. A bank may achieve desired liquidity from both assets and liabilities. Cash and deposits held in other financial
institutions, Federal funds sold, other short term investments in interest-earning time deposits in other financial institutions and securities available-for-sale, maturing loans and investments, payments of principal and interest on loans and
investments, and potential loan sales are sources of asset liquidity. Deposit growth and access to credit lines established with correspondent banks, the Federal Home Loan Bank and market sources of funds are sources of liability liquidity. The
Company reviews its liquidity position on a regular basis based upon its current position and expected trends of loans and deposits. The policy of the Board of Directors is to maintain sufficient capital at not less than the
well-capitalized thresholds established by banking regulators. Management believes that the Company maintains adequate sources of liquidity to meet its liquidity needs.
The Companys liquid assets, defined as cash and due from financial institutions, interest earning time deposits in other financial institutions and the market value of unpledged securities
available-for-sale, totaled $128.2 million at June 30, 2013 and constituted 26.4% of total assets at that date, compared to $97.4 million, or 19.8%, of total assets at December 31, 2012.
The Company also maintains lines of credit with the Federal Home Loan Bank. The total of these lines of credit were $76.5 million at June 30, 2013,
of which $50.0 million in Federal Home Loan Bank advances were outstanding. The Company has additional securities and certain approved real estate loans available to pledge as collateral in order to increase our lines of credit with the Federal Home
Loan Bank. At June 30, 2013, we had $108.8 million in unpledged securities available for sale. The Company actively utilizes its borrowing capacity with the Federal Home Loan Bank to manage liquidity and to provide a funding alternative to time
deposits, if the Federal Home Loan Banks rates and terms are more favorable. The advances from the Federal Home Loan Bank can have maturities from overnight to multiple years. At June 30, 2013, $23,000 of these advances were due within
one year, and $50.0 million had maturities greater than a year.
The Company may also utilize the Federal Reserve discount window as a source
of short-term funding. At June 30, 2013, the Company had no outstanding overnight borrowings with the Federal Reserve Bank discount window. The Companys borrowing capacity at the Federal Reserve Bank discount window is based on the
collateral value of pledged securities. During the second quarter of 2010, the Federal Reserve announced the discount window would return to its original intent of being a lender of last resort. The collateral value of securities pledged
to the Federal Reserve discount window at June 30, 2013 totaled $5.7 million.
During the third quarter of 2012, the Company was
extended an accommodation from First Tennessee Bank National Association to borrow federal funds up to the amount of $15.0 million. This federal funds accommodation is not and shall not be a confirmed line or loan, and First Tennessee Bank National
Association may cancel such accommodation at any time, in whole or in part, without cause or notice, in its sole discretion. At June 30, 2013, the Company had no outstanding borrowings from First Tennessee Bank National Association.
Also during 2012, the Company signed a Federal Funds Line Agreement with Zions First National Bank to borrow federal funds up to the amount of $9.0
million. The credit limit amount is at the discretion of Zions First National Bank and may be modified at any time. At June 30, 2013, the Company had no outstanding borrowings from Zions First National Bank.
Federal regulations establish guidelines for calculating risk-adjusted capital ratios and minimum ratio requirements. Under these
regulations, banks are required to maintain a total risk-based capital ratio of 8.0% of risk-weighted assets and a Tier 1 risk-based capital ratio (primarily total shareholders equity less intangible assets) of at least 4.0% of risk-weighted
assets. The Bank had total and Tier 1 risk-based capital ratios of 21.3% and 20.1%, respectively, at June 30, 2013, and was well-capitalized under the regulatory guidelines.
In addition, regulators have adopted a minimum leverage ratio standard for Tier 1 capital to average assets. The minimum ratio for top-rated institutions may be as low as 3%. However, regulatory agencies
have stated that most institutions should maintain ratios at least 1 to 2 percentage points above the 3% minimum. As of June 30, 2013, the Banks leverage ratio was 14.0%. Capital levels for the Bank remain above the established regulatory
capital requirements.
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