Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 0-14289
(GREEN BANKSHARES LOGO)
GREEN BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
     
Tennessee   62-1222567
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)
     
100 North Main Street, Greeneville, Tennessee   37743-4992
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (423) 639-5111
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 (or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if you are a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES o NO þ
As of August 7, 2009, the number of shares outstanding of the issuer’s common stock was: 13,175,817.
 
 

 

 


 

PART I — FINANCIAL INFORMATION
ITEM 1.  
FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of Green Bankshares, Inc. and its wholly owned subsidiaries are as follows:
 
2
 
3
 
4
 
5
 
6
 
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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GREEN BANKSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2009 and December 31, 2008
(Amounts in thousands, except share and per share data)
                 
    (Unaudited)        
    June 30,     December 31,  
    2009     2008*  
ASSETS
               
Cash and due from banks
  $ 103,454     $ 193,095  
Federal funds sold
    4,119       5,263  
 
           
Cash and cash equivalents
    107,573       198,358  
Securities available for sale
    167,853       203,562  
Securities held to maturity (with a market value of $629 and $601)
    647       657  
Loans held for sale
    3,634       442  
Loans, net of unearned interest
    2,183,754       2,223,390  
Allowance for loan losses
    (50,157 )     (48,811 )
Other real estate owned and repossessed assets
    34,468       45,371  
Premises and equipment, net
    83,448       83,359  
FHLB and other stock, at cost
    12,734       13,030  
Cash surrender value of life insurance
    30,113       29,539  
Goodwill
          143,389  
Core deposit and other intangibles
    10,629       12,085  
Other assets
    45,138       40,300  
 
           
 
               
Total assets
  $ 2,629,834     $ 2,944,671  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Non-interest bearing deposits
  $ 165,735     $ 176,685  
Interest bearing deposits
    1,746,895       1,645,115  
Brokered deposits
    114,092       362,347  
 
           
Total deposits
    2,026,722       2,184,147  
 
               
Repurchase agreements
    25,990       35,302  
FHLB advances and notes payable
    229,154       229,349  
Subordinated debentures
    88,662       88,662  
Accrued interest payable and other liabilities
    26,114       25,980  
 
           
Total liabilities
  $ 2,396,642     $ 2,563,440  
 
           
 
               
Shareholders’ equity
               
Preferred stock: no par, 1,000,000 shares authorized, 72,278 shares outstanding
  $ 66,041     $ 65,346  
Common stock: $2 par, 20,000,000 shares authorized, 13,175,817 and 13,112,687 shares outstanding
    26,351       26,225  
Common stock warrants
    6,934       6,934  
Additional paid-in capital
    187,966       187,742  
Retained earnings (deficit)
    (53,918 )     95,647  
Accumulated other comprehensive (loss)
    (182 )     (663 )
 
           
Total shareholders’ equity
    233,192       381,231  
 
           
 
               
Total liabilities and shareholders’ equity
  $ 2,629,834     $ 2,944,671  
 
           
 
               
     
*  
Derived from the audited consolidated balance sheet, as filed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
See notes to condensed consolidated financial statements.

 

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GREEN BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three and Six Months Ended June 30, 2009 and 2008
(Amounts in thousands, except share and per share data)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2009     2008     2009     2008  
    (Unaudited)     (Unaudited)  
Interest income
                               
Interest and fees on loans
  $ 32,528     $ 39,407     $ 65,173     $ 82,156  
Taxable securities
    1,843       2,784       4,063       5,647  
Nontaxable securities
    314       324       634       657  
FHLB and other stock
    135       157       285       317  
Federal funds sold and other
    36       22       81       26  
 
                       
Total interest income
    34,856       42,694       70,236       88,803  
 
                       
 
                               
Interest expense
                               
Deposits
    11,511       13,377       24,164       29,312  
Federal funds purchased and repurchase agreements
    7       700       16       1,792  
FHLB advances and notes payable
    2,469       2,565       4,912       5,743  
Subordinated debentures
    689       1,008       1,535       2,440  
 
                       
Total interest expense
    14,676       17,650       30,627       39,287  
 
                       
 
                               
Net interest income
    20,180       25,044       39,609       49,516  
 
                               
Provision for loan losses
    24,384       11,019       25,369       11,907  
 
                       
 
                               
Net interest income (loss) after provision for loan losses
    (4,204 )     14,025       14,240       37,609  
 
                       
 
                               
Non-interest income
                               
Service charges on deposit accounts
    5,795       5,988       11,151       11,455  
Other charges and fees
    505       505       954       1,009  
Trust and investment services income
    489       548       877       834  
Mortgage banking income
    110       293       165       550  
Other income
    642       778       1,337       1,570  
 
                       
Total non-interest income
    7,541       8,112       14,484       15,418  
 
                       
 
                               
Non-interest expense
                               
Employee compensation
    8,064       8,069       15,756       16,659  
Employee benefits
    1,229       1,187       2,524       2,446  
Occupancy expense
    1,712       1,649       3,499       3,364  
Equipment expense
    895       745       1,637       1,847  
Computer hardware/software expense
    651       719       1,288       1,351  
Professional services
    446       504       975       958  
Advertising
    679       814       743       1,688  
Loss on sale of OREO and repossessed assets
    3,346       1,066       3,427       1,080  
FDIC Insurance
    2,550       366       3,250       763  
Core deposit and other intangibles amortization
    652       655       1,456       1,309  
Goodwill impairment
    143,389             143,389        
Other expenses
    5,530       4,366       9,030       8,236  
 
                       
Total non-interest expenses
    169,143       20,140       186,974       39,701  
 
                       
 
                               
Income (loss) before income taxes
    (165,806 )     1,997       (158,250 )     13,326  
 
                               
Provision for income taxes (benefit)
    (15,656 )     535       (12,880 )     4,686  
 
                       
 
                               
Net income (loss)
  $ (150,150 )   $ 1,462     $ (145,370 )   $ 8,640  
 
                               
Preferred stock dividends and accretion of discount
    1,250             2,482        
 
                       
 
                               
Net income (loss) available to common shareholders
  $ (151,400 )   $ 1,462     $ (147,852 )   $ 8,640  
 
                       
 
                               
Per share of common stock:
                               
Basic earnings (loss)
  $ (11.58 )   $ 0.11     $ (11.32 )   $ 0.67  
 
                       
Diluted earnings (loss)
    (11.58 )     0.11       (11.32 )     0.67  
 
                       
Dividends
    0.00       0.13       0.13       0.26  
 
                       
 
                               
Weighted average shares outstanding:
                               
Basic
    13,070,216       12,931,669       13,066,569       12,931,419  
 
                       
Diluted1
    13,070,216       12,958,439       13,066,569       12,939,638  
 
                       
     
1  
Diluted weighted average shares outstanding for the three and six months ended June 30, 2009 excludes 105,734 and 92,420 shares, respectively, because they are anti-dilutive.
See notes to condensed consolidated financial statements.

 

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GREEN BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Six Months Ended June 30, 2009
(Amounts in thousands, except share and per share data)
                                                                 
                            Warrants                     Accumulated        
                            For     Additional     Retained     Other     Total  
    Preferred     Common Stock     Common     Paid-in     Earnings     Comprehensive     Shareholders’  
    Stock     Shares     Amount     Stock     Capital     (Deficit)     Income(Loss)     Equity  
Balance, December 31, 2008
  $ 65,346       13,112,687     $ 26,225     $ 6,934     $ 187,742     $ 95,647     $ (663 )   $ 381,231  
 
                                                               
Preferred stock transactions:
                                                               
Accretion of preferred stock discount
    695                               (695 )            
Preferred stock dividends
                                  (1,787 )           (1,787 )
Common stock transactions:
                                                               
Issuance of restricted common shares
          63,130       126             (126 )                  
Compensation expense:
                                                               
Stock options
                            196                   196  
Restricted stock
                            154                   154  
Dividends paid ($.13 per share)
                                  (1,713 )           (1,713 )
Comprehensive (loss):
                                                               
Net (loss)
                                  (145,370 )           (145,370 )
Change in unrealized gains, net of reclassification and taxes
                                        481       481  
 
                                               
Total comprehensive (loss)
                                                            (144,889 )
 
                                                             
 
                                                               
Balance, June 30, 2009
  $ 66,041       13,175,817     $ 26,351     $ 6,934     $ 187,966     $ (53,918 )   $ (182 )   $ 233,192  
 
                                               
See notes to condensed consolidated financial statements.

 

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GREEN BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2009 and 2008
(Amounts in thousands, except share and per share data)
                 
    June 30,     June 30,  
    2009     2008  
    (Unaudited)  
Cash flows from operating activities
               
Net income (loss)
  $ (145,370 )   $ 8,640  
Adjustments to reconcile net income (loss) to net cash provided by operating activities
               
Provision for loan losses
    25,369       11,907  
Impairment of goodwill
    143,389        
Depreciation and amortization
    3,642       3,509  
Security amortization and accretion, net
    47       (548 )
Writedown of investment for impairment
    524        
FHLB stock dividends
          (303 )
Net gain on sale of mortgage loans
    (99 )     (388 )
Originations of mortgage loans held for sale
    (21,582 )     (33,715 )
Proceeds from sales of mortgage loans
    18,489       33,894  
Increase in cash surrender value of life insurance
    (574 )     (536 )
Net losses from sales of fixed assets
    35       386  
Stock-based compensation expense
    350       385  
Net loss (gain) on other real estate and repossessed assets
    3,427       (105 )
Deferred tax expense (benefit)
    305       (1,095 )
Net changes:
               
Other assets
    (5,453 )     6,482  
Accrued interest payable and other liabilities
    (228 )     (15,748 )
 
           
Net cash provided by operating activities
    22,271       12,765  
 
               
Cash flows from investing activities
               
Purchase of securities available for sale
    (45,873 )     (80,644 )
Proceeds from maturities of securities available for sale
    82,098       37,276  
Proceeds from maturities of securities held to maturity
    10       335  
Purchase of FHLB stock
          (417 )
Net change in loans
    19,980       (28,255 )
Proceeds from sale of other real estate
    3,110       11,498  
Improvements to other real estate
          (443 )
Proceeds from sale of fixed assets
    555       50  
Premises and equipment expenditures
    (2,865 )     (2,949 )
 
           
Net cash provided (used) by investing activities
    57,015       (63,549 )
 
               
Cash flows from financing activities
               
Net change in core deposits
    90,830       161,219  
Net change in brokered deposits
    (248,255 )     112,938  
Net change in repurchase agreements
    (9,312 )     (102,884 )
Proceeds from FHLB advances and notes payable
          20,916  
Repayments of FHLB advances and notes payable
    (195 )     (109,597 )
Preferred stock dividends paid
    (1,426 )      
Common stock dividends paid
    (1,713 )     (3,380 )
Proceeds from issuance of common stock
          14  
 
           
Net cash provided (used) by financing activities
    (170,071 )     79,226  
 
           
 
               
Net change in cash and cash equivalents
    (90,785 )     28,442  
 
               
Cash and cash equivalents, beginning of period
    198,358       65,717  
 
           
 
               
Cash and cash equivalents, end of period
  $ 107,573     $ 94,159  
 
           
 
               
Supplemental disclosures — cash and noncash
               
Interest paid
  $ 33,944     $ 42,901  
Income taxes paid
    1,675       5,250  
Loans converted to other real estate
    34,193       26,901  
Unrealized gain (loss) on available for sale securities, net of tax
    481       (1,709 )
See notes to condensed consolidated financial statements.

 

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GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 1 — PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements of Green Bankshares, Inc. (the “Company”) and its wholly owned subsidiary, GreenBank (the “Bank”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Certain amounts from prior period financial statements have been reclassified to conform to the current year’s presentation.
NOTE 2 — SECURITIES
Securities are summarized as follows:
                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
Available for Sale
                               
June 30, 2009
                               
U.S. government agencies
  $ 36,860     $ 242     $ (279 )   $ 36,823  
Obligations of states and political Subdivisions
    32,167       301       (789 )     31,679  
Mortgage-backed
    96,477       2,191       (1,143 )     97,525  
Trust preferred securities
    2,648             (822 )     1,826  
 
                       
 
                               
 
  $ 168,152     $ 2,734     $ (3,033 )   $ 167,853  
 
                       
 
                               
December 31, 2008
                               
U.S. government agencies
  $ 98,143     $ 685     $ (22 )   $ 98,806  
Obligations of states and political Subdivisions
    32,641       139       (976 )     31,804  
Mortgage-backed
    70,915       945       (1,401 )     70,459  
Trust preferred securities
    2,954             (461 )     2,493  
 
                       
 
                               
 
  $ 204,653     $ 1,769     $ (2,860 )   $ 203,562  
 
                       
 
                               
Held to Maturity
                               
June 30, 2009
                               
Obligations of states and political subdivisions
  $ 395     $ 8     $     $ 403  
Other securities
    252             (26 )     226  
 
                       
 
                               
 
  $ 647     $ 8     $ (26 )   $ 629  
 
                       
 
                               
December 31, 2008
                               
Obligations of states and political subdivisions
  $ 404     $ 7     $     $ 411  
Other securities
    253             (63 )     190  
 
                       
 
                               
 
  $ 657     $ 7     $ (63 )   $ 601  
 
                       
(Continued)

 

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GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 2 — SECURITIES (Continued)
Contractual maturities of securities at June 30, 2009 are shown below. Securities not due at a single maturity date, collateralized mortgage obligations and mortgage-backed securities are shown separately.
                         
    Available for Sale     Held to Maturity  
    Fair     Carrying     Fair  
    Value     Amount     Value  
Due in one year or less
  $     $     $  
Due after one year through five years
    2,882       647       629  
Due after five years through ten years
    32,768              
Due after ten years
    34,678              
Collateralized mortgage obligations
    81,577              
Mortgage-backed securities
    15,948              
 
                 
 
                       
Total maturities
  $ 167,853     $ 647     $ 629  
 
                 
There were no gross gains or (losses) for the three and six month periods ended June 30, 2009, respectively, compared to no gain or loss and $23 of loss for the three and six months ended June 30, 2008, respectively, from the sale of securities available for sale and held to maturity.
Securities with a carrying value of $135,741 and $181,683 at June 30, 2009 and December 31, 2008, respectively, were pledged for public deposits and securities sold under agreements to repurchase and to the Federal Reserve Bank.
Securities with unrealized losses at June 30, 2009 and December 31, 2008 not recognized in income are as follows:
                                                 
    Less than 12 months     12 months or more     Total  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Loss     Value     Loss     Value     Loss  
June 30, 2009
                                               
U. S. government agencies
  $ 11,709     $ (279 )   $     $     $ 11,709     $ (279 )
Obligations of states and political subdivisions
    10,852       (312 )     3,356       (477 )     14,208       (789 )
Other securities
    1,145       (20 )     907       (828 )     2,052       (848 )
Collateralized mortgage obligations
    3,600       (24 )     3,076       (1,060 )     6,676       (1,084 )
Mortgage-backed securities
    9,245       (54 )     631       (5 )     9,876       (59 )
 
                                   
Total temporarily impaired
  $ 36,551     $ (689 )   $ 7,970     $ (2,370 )   $ 44,521     $ (3,059 )
 
                                   
 
                                               
December 31, 2008
                                               
U. S. government agencies
  $ 977     $ (22 )   $     $     $ 977     $ (22 )
Obligations of states and political subdivisions
    18,445       (838 )     643       (139 )     19,088       (977 )
Other securities
    1,210       (14 )     1,474       (509 )     2,684       (523 )
Collateralized mortgage obligations
    8,721       (1,310 )                 8,721       (1,310 )
Mortgage-backed securities
    640       (24 )     1,446       (67 )     2,086       (91 )
 
                                   
Total temporarily impaired
  $ 29,993     $ (2,208 )   $ 3,563     $ (715 )   $ 33,556     $ (2,923 )
 
                                   
(Continued)

 

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Table of Contents

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 2 — SECURITIES (Continued)
Securities in a loss position are evaluated for other-than-temporary impairment, considering such factors as the length of time and the extent to which the market value has been below cost, the credit standing of the issuer, and the Company’s ability and intent to hold the security until its market value recovers. The Company held 55 and 61 securities with an unrealized loss position as of June 30, 2009 and December 31, 2008, respectively. Management does not believe any remaining individual unrealized loss represented other-than-temporary impairment as of June 30, 2009 or December 31, 2008. During the six months ended June 30, 2009 the Company recognized a write-down of $524, representing other-than-temporary impairment, related to equity and non-pooled trust preferred securities.
NOTE 3 — LOANS
Loans at June 30, 2009 and December 31, 2008 were as follows:
                 
    June 30,     December 31,  
    2009     2008  
 
 
Commercial real estate
  $ 1,409,007     $ 1,430,425  
Residential real estate
    400,207       397,922  
Commercial
    300,325       315,099  
Consumer
    86,491       89,733  
Other
    2,933       4,656  
Unearned income
    (15,209 )     (14,245 )
 
           
Loans, net of unearned income
  $ 2,183,754     $ 2,223,390  
 
           
 
               
Allowance for loan losses
  $ (50,157 )   $ (48,811 )
 
           
Transactions in the allowance for loan losses and certain information about nonaccrual loans and loans 90 days past due but still accruing interest for the six months ended June 30, 2009 and twelve months ended December 31, 2008 were as follows:
                 
    June 30,     December 31,  
    2009     2008  
 
 
Balance at beginning of year
  $ 48,811     $ 34,111  
Add (deduct):
               
Provision for loan losses
    25,369       52,810  
Loans charged off
    (28,367 )     (41,269 )
Recoveries of loans charged off
    4,344       3,159  
 
           
Ending balance
  $ 50,157     $ 48,811  
 
           
(Continued)

 

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Table of Contents

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 3 — LOANS (Continued)
                 
    June 30,     December 31,  
    2009     2008  
 
 
Impaired loans were as follows:
               
 
               
Loans with no allowance allocated
  $ 94,746     $ 29,602  
Loans with allowance allocated
    27,256       17,613  
Amount of allowance allocated
    5,519       2,651  
 
               
Nonperforming loans were as follows:
               
 
               
Loans past due 90 days still on accrual
  $ 820     $ 509  
Nonaccrual loans
    93,889       30,926  
 
           
Total
  $ 94,709     $ 31,435  
 
           
(Continued)

 

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Table of Contents

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 4 — EARNINGS PER SHARE OF COMMON STOCK
Basic earnings or loss per share (“EPS”) of common stock is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares and potential common shares outstanding during the period. Stock options, warrants and restricted common shares are regarded as potential common shares. Potential common shares are computed using the treasury stock method. For the three and six months ended June 30, 2009, 1,059,947 options and warrants are excluded from the effect of dilutive securities because they are anti-dilutive; 408,127 options are similarly excluded from the effect of dilutive securities for the three and six months ended June 30, 2008.
The following is a reconciliation of the numerators and denominators used in the basic and diluted earnings per share computations for the three and six months ended June 30, 2009 and 2008:
                 
    Three Months Ended June 30,  
    2009     2008  
Basic Earnings (Loss) Per Share
               
 
               
Net income (loss)
  $ (150,150 )   $ 1,462  
Less: preferred stock dividends and accretion of discount on warrants
    1,250        
 
           
Net income (loss) available to common shareholders
  $ (151,400 )   $ 1,462  
 
           
 
               
Weighted average common shares outstanding
    13,070,216       12,931,669  
 
           
 
               
Basic earnings (loss) per share
  $ (11.58 )   $ 0.11  
 
           
 
               
Diluted Earnings (Loss) Per Share
               
 
               
Net income (loss)
  $ (150,150 )   $ 1,462  
Less: preferred stock dividends and accretion of discount on warrants
    1,250        
 
           
Net income (loss) available to common shareholders
  $ (151,400 )   $ 1,462  
 
           
 
               
Weighted average common shares outstanding
    13,070,216       12,931,669  
 
               
Add: Dilutive effects of assumed conversions of restricted stock and exercises of stock options and warrants1
          26,770  
 
           
 
               
Weighted average common and dilutive potential common shares outstanding
    13,070,216       12,958,439  
 
           
 
               
Diluted earnings (loss) per share1
  $ (11.58 )   $ 0.11  
 
           
     
1  
Diluted earnings (loss) per share for the three months ended June 30, 2009 is calculated by using the weighted average common shares outstanding, instead of the diluted weighted average shares outstanding because they are anti-dilutive.
(Continued)

 

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Table of Contents

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 4 — EARNINGS PER SHARE OF COMMON STOCK (Continued)
                 
    Six Months Ended June 30,  
    2009     2008  
Basic Earnings (Loss) Per Share
               
 
               
Net income (loss)
  $ (145,370 )   $ 8,640  
Less: preferred stock dividends and accretion of discount on warrants
    2,482        
 
           
Net income (loss) available to common shareholders
  $ (147,852 )   $ 8,640  
 
           
 
               
Weighted average common shares outstanding
    13,066,569       12,931,419  
 
           
 
               
Basic earnings (loss) per share
  $ (11.32 )   $ 0.67  
 
           
 
               
Diluted Earnings (Loss) Per Share
               
 
               
Net income (loss)
  $ (145,370 )   $ 8,640  
Less: preferred stock dividends and accretion of discount on warrants
    2,482        
 
           
Net income (loss) available to common shareholders
  $ (147,852 )   $ 8,640  
 
           
 
               
Weighted average common shares outstanding
    13,066,569       12,931,419  
 
               
Add: Dilutive effects of assumed conversions of restricted stock and exercises of stock options and warrants1
          8,219  
 
           
 
               
Weighted average common and dilutive potential common shares outstanding
    13,066,569       12,939,638  
 
           
 
               
Diluted earnings (loss) per share1
  $ (11.32 )   $ 0.67  
 
           
     
1  
Diluted earnings (loss) per share for the six months ended June 30, 2009 is calculated by using the weighted average common shares outstanding, instead of the diluted weighted average shares outstanding because they are anti-dilutive.
(Continued)

 

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Table of Contents

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 5 — SEGMENT INFORMATION
The Company’s operating segments include banking, mortgage banking, consumer finance, automobile lending and title insurance. The reportable segments are determined by the products and services offered, and internal reporting. Loans, investments and deposits provide the revenues in the banking operation; loans and fees provide the revenues in consumer finance and mortgage banking and insurance commissions provide revenues for the title insurance company. Consumer finance, automobile lending and title insurance do not meet the quantitative threshold on an individual basis, and are therefore shown below in “Other Segments”. Mortgage banking operations are included in “Bank”. All operations are domestic.
Segment performance is evaluated using net interest income and non-interest income. Income taxes are allocated based on income before income taxes, and indirect expenses (includes management fees) are allocated based on time spent for each segment. Transactions among segments are made at fair value. Information reported internally for performance assessment follows.
                                         
Three months ended June 30, 2009   Bank     Other Segments     Holding Company     Eliminations     Totals  
 
                                       
Net interest income (expense)
  $ 18,683     $ 2,185     $ (688 )   $     $ 20,180  
Provision for loan losses
    23,645       739                   24,384  
Noninterest income
    7,204       540       24       (227 )     7,541  
Noninterest expense
    167,643       1,232       495       (227 )     169,143  
Income tax expense (benefit)
    (15,526 )     298       (428 )           (15,656 )
 
                             
Segment profit (loss)
  $ (149,875 )   $ 456     $ (731 )   $     $ (150,150 )
 
                             
 
                                       
Segment assets at June 30, 2009
  $ 2,577,886     $ 42,282     $ 9,666     $     $ 2,629,834  
 
                             
                                         
Three months ended June 30, 2008   Bank     Other Segments     Holding Company     Eliminations     Totals  
 
                                       
Net interest income (expense)
  $ 24,078     $ 1,974     $ (1,008 )   $     $ 25,044  
Provision for loan losses
    10,502       517                   11,019  
Noninterest income
    7,730       566       30       (214 )     8,112  
Noninterest expense
    18,553       1,256       545       (214 )     20,140  
Income tax expense (benefit)
    815       301       (581 )           535  
 
                             
Segment profit (loss)
  $ 1,938     $ 466     $ (942 )   $     $ 1,462  
 
                             
 
                                       
Segment assets at June 30, 2008
  $ 2,969,897     $ 39,778     $ 8,861     $     $ 3,018,536  
 
                             
                                         
Six months ended June 30, 2009   Bank     Other Segments     Holding Company     Eliminations     Totals  
 
                                       
Net interest income (expense)
  $ 36,893     $ 4,251     $ (1,535 )   $     $ 39,609  
Provision for loan losses
    23,986       1,383                   25,369  
Noninterest income
    13,801       989       149       (455 )     14,484  
Noninterest expense
    183,885       2,471       1,073       (455 )     186,974  
Income tax expense (benefit)
    (12,510 )     545       (915 )           (12,880 )
 
                             
Segment profit (loss)
  $ (144,667 )   $ 841     $ (1,544 )   $     $ (145,370 )
 
                             
                                         
Six months ended June 30, 2008   Bank     Other Segments     Holding Company     Eliminations     Totals  
 
                                       
Net interest income (expense)
  $ 48,148     $ 3,808     $ (2,440 )   $     $ 49,516  
Provision for loan losses
    10,916       991                   11,907  
Noninterest income
    14,604       1,064       177       (427 )     15,418  
Noninterest expense
    36,559       2,549       1,020       (427 )     39,701  
Income tax expense (benefit)
    5,446       522       (1,282 )           4,686  
 
                             
Segment profit (loss)
  $ 9,831     $ 810     $ (2,001 )   $     $ 8,640  
 
                             
(Continued)

 

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Table of Contents

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 5 — SEGMENT INFORMATION (Continued)
Asset Quality Ratios
                         
As of and for the period ended June 30, 2009   Bank     Other     Total  
 
                       
Nonperforming loans as percentage of total loans, net of unearned income
    4.33 %     1.89 %     4.34 %
Nonperforming assets as a percentage of total assets
    4.88 %     2.00 %     4.91 %
Allowance for loan losses as a percentage of total loans, net of unearned income
    2.15 %     8.11 %     2.30 %
Allowance for loan losses as a percentage of nonperforming loans
    49.70 %     428.99 %     52.96 %
YTD net charge-offs to average total loans, net of unearned income
    1.04 %     2.71 %     1.08 %
                         
As of and for the period ended June 30, 2008   Bank     Other     Total  
 
                       
Nonperforming loans as percentage of total loans, net of unearned income
    1.71 %     1.51 %     1.73 %
Nonperforming assets as a percentage of total assets
    2.00 %     2.13 %     2.03 %
Allowance for loan losses as a percentage of total loans, net of unearned income
    1.37 %     8.02 %     1.51 %
Allowance for loan losses as a percentage of nonperforming loans
    80.34 %     530.82 %     87.11 %
YTD net charge-offs to average total loans, net of unearned income
    0.42 %     2.04 %     0.45 %
                         
As of and for the year ended December 31, 2008   Bank     Other     Total  
 
                       
Nonperforming loans as percentage of total loans, net of unearned income
    1.38 %     2.48 %     1.41 %
Nonperforming assets as a percentage of total assets
    2.58 %     2.57 %     2.61 %
Allowance for loan losses as a percentage of total loans, net of unearned income
    2.06 %     8.27 %     2.20 %
Allowance for loan losses as a percentage of nonperforming loans
    149.59 %     333.81 %     155.28 %
Net charge-offs to average total loans, net of unearned income
    1.53 %     6.42 %     1.63 %
                         
Net charge-offs   Bank     Other     Total  
 
 
For the six month period ended June 30, 2009
  $ 22,893     $ 1,130     $ 24,023  
For the six month period ended June 30, 2008
  $ 9,865     $ 802     $ 10,667  
For the year ended December 31, 2008
  $ 35,564     $ 2,546     $ 38,110  
(Continued)

 

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Table of Contents

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 6 — FAIR VALUE DISCLOSURES
Statement of Financial Accounting Standards (“SFAS”) No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2
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 for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices of like or similar securities, if available and these securities are classified as Level 1 or Level 2. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions and are classified as Level 3.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.
(Continued)

 

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Table of Contents

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 6 — FAIR VALUE DISCLOSURES (continued)
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan(“SFAS 114”). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2009, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. In accordance with SFAS No. 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
Other Real Estate
Other real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of 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 component of foreclosed real estate expense. Other real estate is included in Level 3 of the valuation hierarchy.
Loan Servicing Rights
Loan servicing rights are subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used in the completion of impairment testing. If the valuation model reflects a value less than the carrying value, loan servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies loan servicing rights subjected to nonrecurring fair value adjustments as Level 3.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
Below is a table that presents information about certain assets and liabilities measured at fair value:
                                         
                            Total Carrying        
                            Amount in        
                            Statement of     Assets/Liabilities  
    Fair Value Measurement Using     Financial     Measured at Fair  
Description   Level 1     Level 2     Level 3     Position     Value  
June 30, 2009
                                       
Securities available for sale
  $     $ 167,853     $     $ 167,853     $ 167,853  
 
                                       
December 31, 2008
                                       
Securities available for sale
  $     $ 203,562     $     $ 203,562     $ 203,562  
(Continued)

 

15


Table of Contents

GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 6 — FAIR VALUE DISCLOSURES (Continued)
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.
                                         
                            Total Carrying        
                            Amount in        
                            Statement of     Assets/Liabilities  
    Fair Value Measurement Using     Financial     Measured at Fair  
Description   Level 1     Level 2     Level 3     Position     Value  
June 30, 2009
                                       
Other real estate
  $     $     $ 12,511     $ 12,511     $ 12,511  
Impaired loans
                21,737       21,737       21,737  
 
                             
Total assets at fair value
  $     $     $ 34,248     $ 34,248     $ 34,248  
 
                             
 
                                       
December 31, 2008
                                       
Impaired loans
                43,364       43,364       43,364  
 
                             
Total assets at fair value
  $     $     $ 43,364     $ 43,364     $ 43,364  
 
                             
(Continued)

 

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GREEN BANKSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 6 — FAIR VALUE DISCLOSURES (Continued)
The carrying value and estimated fair value of the Company’s financial instruments are as follows at June 30, 2009 and December 31, 2008.
                                 
    June 30,     December 31,  
    2009     2008  
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
Financial assets:
                               
Cash and cash equivalents
  $ 107,573     $ 107,573     $ 198,358     $ 198,358  
Securities available for sale
    167,853       167,853       203,562       203,562  
Securities held to maturity
    647       629       657       601  
Loans held for sale
    3,634       3,649       442       445  
Loans, net
    2,133,597       2,088,545       2,174,579       2,135,732  
FHLB, Bankers Bank and other stock
    12,734       12,734       13,030       13,030  
Cash surrender value of life insurance
    30,113       30,113       29,539       29,539  
Accrued interest receivable
    9,075       9,075       10,808       10,808  
 
                               
Financial liabilities:
                               
Deposit accounts
  $ 2,026,722     $ 2,035,351     $ 2,184,147     $ 2,195,459  
Federal funds purchased and repurchase agreements
    25,990       25,990       35,302       35,302  
FHLB Advances and notes payable
    229,154       236,048       229,349       232,731  
Subordinated debentures
    88,662       70,976       88,662       74,570  
Accrued interest payable
    3,511       3,511       6,828       6,828  
The following methods and assumptions were used to estimate the fair values for financial instruments that are not disclosed under SFAS No. 157. The carrying amount is considered to estimate fair value for cash and short-term instruments, demand deposits, liabilities for repurchase agreements, variable rate loans or deposits that reprice frequently and fully, and accrued interest receivable and payable. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, the fair value is estimated by discounted cash flow analysis using current market rates for the estimated life and credit risk. Liabilities for FHLB advances and notes payable are estimated using rates of debt with similar terms and remaining maturities. The fair value of off-balance sheet items is based on the current fees or costs that would be charged to enter into or terminate such arrangements, which is not material. The fair value of commitments to sell loans is based on the difference between the interest rates at which the loans have been committed to sell and the quoted secondary market price for similar loans, which is not material.
NOTE 7 — SUBSEQUENT EVENTS
Management evaluated subsequent events through August 7, 2009, the date the financial statements were available to be issued. Material events or transactions occurring after June 30, 2009 but prior to August 7, 2009 that provided additional evidence about conditions that existed at June 30, 2009 have been recognized in the financial statements for the period ended June 30, 2009. Events or transactions that provided evidence about conditions that did not exist at June 30, 2009 but arose before the financial statements were available to be issued have not been recognized in the financial statements for the period ended June 30, 2009.
(Continued)

 

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ITEM 2.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the Company’s consolidated results of operations and financial condition. This discussion should be read in conjunction with the (i) condensed consolidated financial statements and notes thereto in this Form 10-Q and (ii) the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 10-K”). Except for specific historical information, many of the matters discussed in this Form 10-Q may express or imply projections of revenues or expenditures, plans and objectives for future operations, growth or initiatives, expected future economic performance, or the expected outcome or impact of pending or threatened litigation. These and similar statements regarding events or results which the Company expects will or may occur in the future, are forward-looking statements that involve risks, uncertainties and other factors which may cause actual results and performance of the Company to differ materially from those expressed or implied by those statements. All forward-looking information is provided pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these risks, uncertainties and other factors. Forward-looking statements, which are based on assumptions and estimates and describe our future plans, strategies and expectations, are generally identifiable by the use of forward-looking terminology and words such as “trends,” “assumptions,” “target,” “guidance,” “outlook,” “opportunity,” “future,” “plans,” “goals,” “objectives,” “expectations,” “near-term,” “long-term,” “projection,” “may,” “will,” “would,” “could,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “potential,” “regular,” or “continue” (or the negative or other derivatives of each of these terms) or similar terminology and expressions.
Although the Company believes that the assumptions underlying any forward-looking statements are reasonable, any of the assumptions could be inaccurate, and therefore, actual results may differ materially from those projected in or implied by the forward-looking statements. Factors and risks that may result in actual results differing from this forward-looking information include, but are not limited to, those contained in the 2008 10-K in Part I, Item 1A thereof, which is incorporated herein by this reference and (1) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (2) continuation of the historically low short-term interest rate environment; (3) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (4) increased competition with other financial institutions in the markets that the Bank serves; (5) greater than anticipated deterioration or lack of sustained growth in the national or local economies; (6) rapid fluctuations or unanticipated changes in interest rates; (7) the impact of governmental restrictions on entities participating in the Capital Purchase Program of the United States Department of the Treasury; (8) changes in state and federal legislation, regulations or policies applicable to banks or other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy and (9) the loss of key personnel, as well as other factors discussed throughout this document, including, without limitation the factors described under “Critical Accounting Policies and Estimates” on page 21 of this Quarterly Report on Form 10-Q, or from time to time, in the Company’s filings with the SEC, press releases and other communications.
Readers are cautioned not to place undue reliance on forward-looking statements made in this document, since the statements speak only as of the document’s date. All forward-looking statements included in this Quarterly Report on Form 10-Q are expressly qualified in their entirety by the cautionary statements in this section and to the more detailed risk factors included in the Company’s 2008 10-K. The Company has no obligation and does not intend to publicly update or revise any forward-looking statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q, to reflect events or circumstances occurring after the date of this document or to reflect the occurrence of unanticipated events. Readers are advised, however, to consult any further disclosures the Company may make on related subjects in its documents filed with or furnished to the SEC or in its other public disclosures.
Green Bankshares, Inc. (the “Company”) is the bank holding company for GreenBank (the “Bank”), a Tennessee-chartered commercial bank that conducts the principal business of the Company. The Company is the third largest bank holding company headquartered in Tennessee based on asset size at June 30, 2009 and at that date was also the second largest NASDAQ-Listed bank holding company headquartered in Tennessee. The Bank currently maintains a main office in Greeneville, Tennessee and 64 full-service bank branches primarily in East and Middle Tennessee. In addition to its commercial banking operations, the Bank conducts separate businesses through its three wholly-owned subsidiaries: Superior Financial Services, Inc. (“Superior Financial”), a consumer finance company; GCB Acceptance Corporation (“GCB Acceptance”), an automobile lending company; and Fairway Title Co., a title company formed in 1998. The Bank also operates a wealth management office in Sumner County, Tennessee, and a mortgage banking operation in Knox County, Tennessee. All dollar amounts reported or discussed in Part I, Item 2 of this Quarterly Report on Form 10-Q are shown in thousands, except share and per share amounts.

 

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On December 23, 2008, we entered into a Securities Purchase Agreement — Standard Terms with the U.S. Department of Treasury ( the “Treasury”), pursuant to which we agreed to issue and sell, and the Treasury agreed to purchase, (i) 72,278 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share, and (ii) a ten year warrant to purchase up to 635,504 shares of our common stock, $2.00 par value, at an initial exercise price of $17.06 per share. The warrant was immediately exercisable upon its issuance and will expire on December 23, 2018.
Growth and Business Strategy
The Company expects that over the short term, given the current economic environment, there will be little to no growth until this recessionary environment stabilizes and the economy begins to improve.
The Company’s long-term strategic plan outlines geographic expansion within a 300-mile radius of its headquarters in Greene County, Tennessee. This could result in the Company expanding westward and eastward up to and including Nashville, Tennessee and Roanoke, Virginia, respectively, east/southeast up to and including the Piedmont area of North Carolina and western North Carolina, southward to northern Georgia and northward into eastern and central Kentucky. In particular, the Company believes the markets in and around Knoxville, Nashville and Chattanooga, Tennessee are highly desirable areas with respect to expansion and growth plans.
The Bank had historically operated under a single bank charter while conducting business under 18 bank brands with a distinct community-based brand in almost every market. On March 31, 2007 the Bank announced that it had changed all brand names to GreenBank throughout all the communities it serves to better enhance recognition and customer convenience. The Bank continues to offer local decision making through the presence of its regional executives in each of its markets, while maintaining a cost effective organizational structure in its back office and support areas.
The Bank focuses its lending efforts predominately on individuals and small to medium-sized businesses while it generates deposits primarily from individuals in its local communities. To aid in deposit generation efforts, the Bank offers its customers extended hours of operation during the week as well as Saturday and Sunday banking. The Bank also offers free online banking along with its High Performance Checking Program which since its inception has generated a significant number of core transaction accounts.
In addition to the Company’s business model, which is summarized in the paragraphs above and the Company’s Annual Report on Form 10-K, the Company is continuously investigating and analyzing other lines and areas of business. Conversely, the Company frequently evaluates and analyzes the profitability, risk factors and viability of its various business lines and segments and, depending upon the results of these evaluations and analyses, may conclude to exit certain segments and/or business lines. Further, in conjunction with these ongoing evaluations and analyses, the Company may decide to sell, merge or close certain branch facilities.

 

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Overview
The Company’s results of operations for the three and six month periods ended June 30, 2009, before dividend and related costs associated with the issuance of Preferred Stock to the U.S. Treasury, were negatively impacted by a non-cash pre-tax goodwill impairment charge of $143.4 million resulting in a net loss of $150.2 million and $145.4 million respectively. The net loss applicable to common shareholders totaled $151.4 million for the second quarter of 2009 and $147.9 million for the six months ended June 30, 2009. The non-cash goodwill impairment charge had no impact on the Company’s regulatory capital ratios or its tangible common equity to tangible assets ratio (Tangible common equity is total stockholders’ equity minus preferred stock and intangible assets. Tangible assets are total assets minus intangible assets.) At year-end the Company obtained an independent evaluation of goodwill based upon a discounted present value analysis of cash flows. The results obtained at that time, compared with the market price of the stock at year-end, indicated that there was no goodwill impairment. During the latter part of the first quarter of 2009, the Company’s stock price began to decline and by the end of the quarter the stock price was trading relatively close to tangible book value. In the Company’s 2009 first quarter Form 10-Q, the Company indicated that it would monitor this situation closely and if this condition were deemed to be other than a temporary aberration in the market, it would re-evaluate goodwill for impairment. During the second quarter of 2009, the Company’s stock price declined from a high of $9.73 per share to a low of $4.14 per share, closing on June 30, 2009 at $4.48 per share. From the end of June 2009 we consistently observed the price of the Company’s stock trading in the mid $3.00 per share range. During this period of time there were no positive, or negative, reports issued on or by the Company which would have influenced the stock price performance witnessed. However, short sale activity in the Company’s stock continued to escalate and totaled 2,510,519 shares by June 30, 2009 or 19.1% of outstanding shares. During the latter part of the second quarter, the Company performed an interim impairment valuation analysis on its intangible assets and placed more emphasis on the trading value of the Company’s stock due to the steep market price decline and the duration of time its stock was trading below both book value and tangible book value. As previously mentioned in our annual report on Form 10-K, our annual evaluation performed at year-end 2008 placed more emphasis on a discounted cash flow model. As a result of the continued and prolonged decline in the second quarter of the Company’s stock price, compared with the tangible common book value of $11.88 per share at June 30, 2009, the non-cash goodwill impairment charge was deemed appropriate. The table below is provided to better facilitate an understanding of the earnings fundamentals of the Company and is incorporated in the discussion that follows:
GREEN BANKSHARES, INC.
Reconciliation of Non-GAAP Measures

(Dollars in thousands)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,     June 30,     June 30,  
    2009     2008     2009     2008  
Total non-interest expense
  $ 169,143     $ 20,140     $ 186,974     $ 39,701  
Goodwill impairment charge
    (143,389 )           (143,389 )      
 
                       
Operating expenses
  $ 25,754     $ 20,140     $ 43,585     $ 39,701  
 
                       
 
                               
Net income (loss) available to common shareholders
  $ (151,400 )   $ 1,462     $ (147,852 )   $ 8,640  
Goodwill impairment charge, net of tax
    137,414             137,414        
 
                       
Net operating income (loss)
  $ (13,986 )   $ 1,462     $ (10,438 )   $ 8,640  
 
                       
 
                               
Per Diluted Share:
                               
Net income (loss) available to common shareholders
  $ (11.58 )   $ 0.11     $ (11.32 )   $ 0.67  
Goodwill impairment charge, net of tax
    10.51             10.52        
 
                       
Net operating income (loss)
  $ (1.07 )   $ 0.11     $ (0.80 )   $ 0.67  
 
                       
The Company believes that the exclusion of goodwill impairment in expressing net operating income (loss), operating expenses and earnings (loss) per share data provides a more meaningful base for period to period comparisons which will assist the reader in analyzing the operating results of the Company and predicting operating performance. The Company utilizes these non-GAAP financial measures to compare the operating performance with comparable periods in prior years and with internally prepared projections.
For the second quarter of 2009, the net loss available to common shareholders, including the goodwill impairment charge, was $151,400 compared with net income of $1,462 in the same period a year ago. The net operating loss (as defined above), excluding the goodwill impairment charge, was $13,986 for the second quarter of 2009 versus net income of $1,462 for the second quarter of 2008.
Both the second quarter 2009 net operating loss of $13,986 and the year-to-date net operating loss of $10,438 were primarily the result of a higher loan loss provision driven by an increase in net loan charge-offs and an increase in non-performing assets, coupled with increased losses on other real estate plus the special deposit insurance assessment levied against all banks during the current quarter by the FDIC. The net operating loss continued to reflect the deepening recessionary environment during the second quarter and its impact on the Company’s customer base. At June 30, 2009 the Company’s non-performing assets totaled $129,177 compared with $121,272 at the end of the first quarter of 2009 and $61,212 at June 30, 2008. Net loan charge-offs during the current quarter were $23,281 compared with $9,595 for the second quarter of 2008. At the end of the current quarter, the Company’s loan loss reserve coverage to total loans was 2.30% compared with 1.51% at the end of the same period a year ago.

 

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The Company reported a net operating loss of $13,986 for the second quarter of 2009 compared with net operating income of $1,462 for the same period a year ago. The decline from 2008 was primarily the result of a lower level of net interest income, a higher loan loss provision and increased operating expenses.
On a year-to-date basis, the Company reported a net operating loss of $10,438 through the second quarter of 2009 compared with net operating income of $8,640 in the same period last year. The principal reasons for the year-to-date decline in net operating income from 2008 paralleled the decline in quarterly earnings.
At June 30, 2009, the Company had total consolidated assets of $2,629,834, total consolidated deposits of $2,026,722, total consolidated loans, net of unearned income, of $2,183,754 and total consolidated shareholders’ equity of $233,192.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.
Management continually evaluates the Company’s accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, information from regulators and third party professionals and various assumptions that are believed to be reasonable under the existing facts and circumstances. Actual results could differ from those estimates made by management.
The Company believes its critical accounting policies and estimates include the valuation of the allowance for loan losses and the fair value of financial instruments and other accounts. Based on management’s calculation, an allowance of $50,157, or 2.30% of total loans, net of unearned income, was an adequate estimate of losses inherent in the loan portfolio as of June 30, 2009. This estimate resulted in a provision for loan losses in the income statement of $24,384 and $25,369, respectively, for the three and six months ended June 30, 2009. If the economic conditions, loan mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could be materially affected.
The consolidated financial statements include certain accounting disclosures that require management to make estimates about fair values. Independent third party valuations are used for securities available for sale and securities held to maturity as well as acquisition purchase accounting adjustments. Estimates of fair value are used in the accounting for loans held for sale, goodwill and other intangible assets. Estimates of fair values are used in disclosures regarding stock compensation, commitments, and the fair values of financial instruments. Fair values are estimated using relevant market information and other assumptions such as interest rates, credit risk, prepayments and other factors. The fair values of financial instruments are subject to change as influenced by market conditions.
Goodwill and intangible assets that have indefinite useful lives are generally evaluated for impairment annually, in December of each year. Goodwill and intangible assets may be more regularly monitored for impairment as part of the Company’s review of its assets if events and circumstances occur between annual tests that would suggest that the fair value of a reporting unit might have declined below its carrying value. As discussed above, goodwill was evaluated for impairment due to the prolonged decline of the Company’s stock price relative to its tangible net book value during the second quarter of 2009 and a goodwill impairment charge was taken.

 

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Changes in Results of Operations
Net Income (Loss). Net income (loss) available to common shareholders for the three months ended June 30, 2009 was ($151,400), as compared to $1,462 for the same period in 2008. This decrease of $152,862 resulted primarily from a $137,400, net of tax, charge for goodwill impairment. Second quarter 2009 net interest income totaled $20,180 compared with $25,044 during the year ago period and declined as a result of a narrowing in the net interest margin from 3.92% in the second quarter of last year to 3.43% in the current quarter plus the net interest income impact of carrying a higher level of non-interest earning assets. Non-interest income declined by $571 from the second quarter of last year and totaled $7,541 for the current quarter. The decline was principally reflected in lower deposit service charges, reflecting a slower economic environment despite the continued success in adding 4,418 net new checking account customers during the quarter, and mortgage banking income. Total non-interest expenses amounted to $169,143 during the quarter and included a one-time, non-cash goodwill impairment charge of $143,389. Operating expenses (total non-interest expenses minus the goodwill impairment charge) totaled $25,754 for the second quarter compared with $20,140 during the same period last year. The principal expense items driving this increase, over the same period a year ago, were higher real estate foreclosure losses of $2,280; an increase in FDIC deposit insurance costs of $2,184; the impairment loss taken on three investment portfolio securities of $524 and higher loan collection costs of $563.
Net Interest Income. The largest source of earnings for the Company is net interest income, which is the difference between interest income on earning assets and interest expense on deposits and other interest-bearing liabilities. The primary factors which affect net interest income are changes in volume and rates on interest-earning assets and interest-bearing liabilities, which are affected in part by management’s responses to changes in interest rates through asset/liability management. During the three months ended June 30, 2009, net interest income was $20,180, as compared to $25,044 for the same period in 2008, representing a decrease of 19%. This decrease of $4,864 in net interest income resulted primarily from the contraction of the net interest margin plus the income impact of carrying a higher level of non-performing assets.
The Company’s average balance for interest-earning assets decreased 8% from $2,591,822 for the three months ended June 30, 2008 to $2,382,377 for the three months ended June 30, 2009. The primary reason for the decline in interest-earning assets was the movement of loans to non-performing assets as the recession continued to escalate.
The Company’s average balance for interest-bearing liabilities decreased 7% from $2,401,297 for the three months ended June 30, 2008 to $2,232,953 for the three months ended June 30, 2009 as the Company reduced its reliance on short-term borrowings and brokered deposits while focusing on building core deposit levels throughout its branch network.

 

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The Company’s yield on loans (the largest component of interest-earning assets) decreased by 75 basis points from the second quarter of 2008 to the second quarter of 2009. Approximately one-half of the Company’s loan portfolio is set at variable rates and was impacted by the result of the FOMC’s action to lower market interest rates by 400 basis points during this period of time as detailed below.
                         
FOMC Meeting   Beginning     Increase/     Ending  
Date   Rate     Decrease     Rate  
January 22, 2008
    4.25 %     (0.75 %)     3.50 %
January 30, 2008
    3.50 %     (0.50 %)     3.00 %
March 18, 2008
    3.00 %     (0.75 %)     2.25 %
April 30, 2008
    2.25 %     (0.25 %)     2.00 %
June 25, 2008
    2.00 %     0.00 %     2.00 %
August 6, 2008
    2.00 %     0.00 %     2.00 %
September 16, 2008
    2.00 %     0.00 %     2.00 %
September 29, 2008
    2.00 %     0.00 %     2.00 %
October 7, 2008
    2.00 %     (0.50 %)     1.50 %
October 29, 2008
    1.50 %     (0.50 %)     1.00 %
December 16, 2008
    1.00 %     (0.75%) – (1.00 %)     0.00% – 0.25 %
January 28, 2009
    0.00% – 0.25 %     0.00 %     0.00% – 0.25 %
March 17, 2009
    0.00% – 0.25 %     0.00 %     0.00% – 0.25 %
April 30, 2009
    0.00% – 0.25 %     0.00 %     0.00% – 0.25 %
June 25, 2009
    0.00% – 0.25 %     0.00 %     0.00% – 0.25 %
The Company’s cost of interest-bearing liabilities decreased by 32 basis points from the second quarter ended June 30, 2008 to the second quarter ended June 30, 2009. The velocity of change on fixed maturity interest-bearing liabilities is slower than the immediate change on variable rate assets. The re-pricing characteristics of this portion of interest-bearing liabilities which comprise 66% of total interest-bearing liabilities will lag behind market interest rate changes especially in a rapidly changing interest rate environment.

 

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The following table sets forth certain information relating to the Company’s consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. These yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented.
                                                 
    Three Months Ended  
    June 30,  
    2009     2008  
    Average             Average     Average             Average  
    Balance     Interest     Rate     Balance     Interest     Rate  
Interest-earning assets:
                                               
Loans(1) (2)
  $ 2,127,104     $ 32,538       6.14 %   $ 2,340,923     $ 39,421       6.77 %
Investment securities (2)
    195,390       2,461       5.05 %     246,541       3,439       5.61 %
Other short-term investments
    59,883       36       0.24 %     4,358       22       2.03 %
 
                                   
Total interest-earning assets
  $ 2,382,377     $ 35,035       5.90 %   $ 2,591,822     $ 42,882       6.65 %
 
                                   
Non-interest earning assets
    420,404                       352,299                  
 
                                           
Total assets
  $ 2,802,781                     $ 2,944,121                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
Deposits:
                                               
Interest checking, savings and money market
  $ 731,422     $ 2,542       1.39 %   $ 675,467     $ 2,255       1.34 %
Time deposits
    1,155,533       8,969       3.11 %     1,233,075       11,122       3.63 %
 
                                   
Total interest-bearing deposits
  $ 1,886,955     $ 11,511       2.45 %   $ 1,908,542     $ 13,377       2.82 %
 
                                   
Securities sold under repurchase agreements and short-term borrowings
    28,171       7       0.10 %     157,317       700       1.79 %
Notes payable
    229,165       2,469       4.32 %     246,776       2,565       4.18 %
Subordinated debentures
    88,662       689       3.12 %     88,662       1,008       4.57 %
 
                                   
Total interest-bearing liabilities
  $ 2,232,953     $ 14,676       2.64 %   $ 2,401,297     $ 17,650       2.96 %
 
                                   
Non-interest bearing liabilities:
                                               
Demand deposits
    162,458                       186,136                  
Other liabilities
    21,597                       23,311                  
 
                                           
Total non-interest bearing liabilities
    184,055                       209,447                  
 
                                           
Total liabilities
    2,417,008                       2,610,744                  
 
                                           
Shareholders’ equity
    385,773                       333,377                  
 
                                           
Total liabilities and shareholders’ equity
  $ 2,802,781                     $ 2,944,121                  
 
                                           
 
                                               
Net interest income
          $ 20,359                     $ 25,232          
 
                                           
 
                                               
Interest rate spread
                    3.26 %                     3.70 %
 
                                           
 
                                               
Net yield on interest-earning assets
                    3.43 %                     3.92 %
 
                                           
     
1  
Average loan balances excluded nonaccrual loans for the periods presented.
 
2  
Fully Taxable Equivalent (“FTE”) at the rate of 35%. The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 35% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

 

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    Six Months Ended  
    June 30,  
    2009     2008  
    Average             Average     Average             Average  
    Balance     Interest     Rate     Balance     Interest     Rate  
Interest-earning assets:
                                               
Loans(1) (2)
  $ 2,151,190     $ 65,193       6.11 %   $ 2,332,642     $ 82,187       7.09 %
Investment securities (2)
    206,015       5,323       5.21 %     246,202       6,975       5.70 %
Other short-term investments
    65,141       81       0.25 %     2,408       25       2.09 %
 
                                   
Total interest-earning assets
  $ 2,422,346     $ 70,597       5.88 %   $ 2,581,252     $ 89,187       6.95 %
 
                                   
Non-interest earning assets
    402,244                       355,007                  
 
                                           
Total assets
  $ 2,824,590                     $ 2,936,259                  
 
                                           
 
                                               
Interest-bearing liabilities:
                                               
Deposits:
                                               
Interest checking, savings and money market
  $ 677,863     $ 4,394       1.31 %   $ 686,444     $ 5,580       1.63 %
Time deposits
    1,225,516       19,770       3.25 %     1,185,132       23,732       4.03 %
 
                                   
Total interest-bearing deposits
  $ 1,903,379     $ 24,164       2.45 %   $ 1,871,576     $ 29,312       3.15 %
 
                                   
Securities sold under repurchase agreements and short-term borrowings
    30,609       16       0.11 %     155,188       1,792       2.32 %
Notes payable
    229,223       4,912       4.32 %     278,822       5,743       4.14 %
Subordinated debentures
    88,662       1,535       3.49 %     88,662       2,440       5.53 %
 
                                   
Total interest-bearing liabilities
  $ 2,251,873     $ 30,627       2.74 %   $ 2,394,248     $ 39,287       3.30 %
 
                                   
Non-interest bearing liabilities:
                                               
Demand deposits
    165,268                       186,295                  
Other liabilities
    22,098                       24,639                  
 
                                           
Total non-interest bearing liabilities
    187,366                       210,934                  
 
                                           
Total liabilities
    2,439,239                       2,605,182                  
 
                                           
Shareholders’ equity
    385,351                       331,077                  
 
                                           
Total liabilities and shareholders’ equity
  $ 2,824,590                     $ 2,936,259                  
 
                                           
 
                                               
Net interest income
          $ 39,970                     $ 49,900          
 
                                           
 
                                               
Interest rate spread
                    3.13 %                     3.65 %
 
                                           
 
                                               
Net yield on interest-earning assets
                    3.33 %                     3.89 %
 
                                           

 

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Provision for Loan Losses. During the three and six months ended June 30, 2009, loan charge-offs were $24,631 and $28,367, respectively and recoveries of charged-off loans were $1,351 and $4,344. The Company’s provision for loan losses increased by $13,365 to $24,384 for the three months ended June 30, 2009, as compared to $11,019 for the same period in 2008. Compared with the first quarter of 2009, the provision for loan losses increased by $23,399 as the Company continued to experience higher loan defaults during the second quarter with net loan charge-offs increasing from $742 in the first quarter to $23,281 during the second quarter as the economy continued to decline. The Company’s allowance for loan losses increased by $1,346 to $50,157 at June 30, 2009 from $48,811 at December 31, 2008 and the reserve to outstanding loans ratio increased 10 basis points to 2.30% from 2.20% at December 31, 2008 and also increased 79 basis points from the ratio of 1.51% at June 30, 2008. Credit quality ratios have declined since September 30, 2007, principally as a result of the prolonged deterioration of the residential real estate construction and development market beginning in the fourth quarter of 2007 in the Company’s urban markets, primarily Nashville and Knoxville. Management continually evaluates the Company’s credit policies and procedures for effective risk and control management. The ratio of allowance for loan losses to nonperforming loans was 52.96%, 155.28% and 87.11% at June 30, 2009, December 31, 2008 and June 30, 2008, respectively, and the ratio of nonperforming assets to total assets was 4.91%, 2.61% and 2.03% at June 30, 2009, December 31, 2008 and June 30, 2008, respectively. The ratio of nonperforming loans to total loans, net of unearned interest, was 4.34%, 1.41% and 1.73% at June 30, 2009, December 31, 2008 and June 30, 2008, respectively. Within the Bank, the Company’s largest subsidiary, the ratio of nonperforming assets to total assets was 4.88%, 2.58% and 2.00% at June 30, 2009, December 31, 2008 and June 30, 2008, respectively.
The Company’s year-to-date (“YTD”) net charge-offs as a percentage of average loans increased from 0.45% (annualized 0.90%) for the three months ended June 30, 2008 to 1.08% (annualized 2.16%) for the three months ended June 30, 2009. Net charge-offs as a percentage of average loans were 1.63% for the year ended December 31, 2008.
Management believes that credit quality indicators will be driven by the current economic environment and the resiliency of residential real estate markets. Management continually evaluates the existing portfolio in light of loan concentrations, current general economic conditions and economic trends. Management believes these evaluations strongly suggest an economic slowdown in the Company’s markets has and will continue to occur throughout 2009. Based on its evaluation of the allowance for loan loss calculation and review of the loan portfolio, management believes the allowance for loan losses is adequate at June 30, 2009. However, the provision for loan losses could further increase for the entire year of 2009 if the general economic conditions continue to weaken or the residential real estate markets in Nashville or Knoxville or the financial conditions of borrowers deteriorate beyond management’s current expectations.
Non-interest Income. Fee income, unrelated to interest-earning assets, consisting primarily of service charges, commissions and fees, is an important component to the Company’s total revenue stream.
Total non-interest income for the three and six months ended June 30, 2009 was $7,541 and $14,484 as compared to $8,112 and $15,418 for the same period in 2008. Service charges, commissions and fees remain the largest component of total non-interest income and decreased slightly from $5,988 and $11,455 for the three and six months ended June 30, 2008 to $5,795 and $11,151, respectively, for the same periods in 2009. Although the Company continues to see solid growth in net new checking account customers due to its High Performance Checking Program, as evidenced by the 8,710 net new accounts opened during the first six months of 2009, the service charges and NSF fees associated with this product have declined modestly due to the current economic environment. The Company believes that as the economy begins to recover, non-interest income will continue to improve given the expansion of its customer base. Mortgage banking income decreased by $183 and $385, respectively, to $110 and $165 for the three and six months ended June 30, 2009 from $293 and $550 for the same periods in 2008. In addition other non-interest income decreased by $136 and $233, respectively, to $642 and $1,337 for the three and six months ended June 30, 2009 from $778 and $1,570 for the same periods in 2008.
Non-interest Expense. Control of non-interest expense is a critical aspect in enhancing income. Non-interest expense includes personnel, occupancy, and other expenses such as goodwill impairment charges, write-downs on OREO, data processing, printing and supplies, legal and professional fees, postage, Federal Deposit Insurance Corporation (“FDIC”) assessment, etc. Total non-interest expense was $169,143 and $186,974 for the three and six months ended June 30, 2009 compared to $20,140 and $39,701 for the same periods in 2008. The $149,003 increase in total non-interest expense for the three months ended June 30, 2009 compared to the same period of 2008 primarily reflects a one-time charge for goodwill impairment of $143,389, increased FDIC assessments of $2,184 which includes a one-time special assessment levied against all banks in proportion to their asset size, an increase of $2,280 in loss on OREO cost, increased collection costs of $563 associated with OREO and a write-down of $524 taken in connection with three investments held in the securities portfolio.

 

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Personnel costs are the primary element of the Company’s non-interest expenses. For the three and six months ended June 30, 2009, employee compensation and benefits represented $9,293, or 36%, and $18,280, or 42% of total non-interest expense, excluding the one-time charge for goodwill impairment of $143,389. This was an increase of $37, or 0.4%, and a decrease of $825, or 4%, respectively, from the $9,256 and $19,105 for the three and six months ended June 30, 2008. Including Bank branches and non-bank office locations the Company had 75 locations at June 30, 2009 and December 31, 2008, as compared to 76 at June 30, 2008, and the number of full-time equivalent employees declined from 795 at June 30, 2008 to 730 at June 30, 2009.
The increases in FDIC assessments were due to increases in the fee assessment rates during 2009 and a special assessment applied to all insured institutions as of June 30, 2009. With regard to the increase in fee assessment rates, the FDIC finalized a rule in December 2008 that raised the then current assessment rates uniformly by 7 basis points for the first quarter of 2009 assessment. The new rule resulted in annualized assessment rates for Risk Category 1 institutions, like the Company, ranging from 12 to 14 basis points. In February 2009, the FDIC issued final rules to amend the deposit insurance fund restoration plan, change the risk-based assessment system and set assessment rates for Risk Category 1 institutions beginning in the second quarter of 2009. The new initial base assessment rates for Risk Category 1 institutions range from 12 to 16 basis points, on an annualized basis, and from 7 to 24 basis points after the effect of potential base-rate adjustments, in each case depending upon various factors. The increase in deposit insurance expense during the six months ended June 30, 2009 compared to the same period a year ago was also partly related to the Company’s utilization of available credits to offset assessments during the first six months of 2008. The increases were also partly related to the additional 10 basis point assessment paid on covered transaction accounts exceeding $250 thousand under the Temporary Liquidity Guaranty Program.
In May 2009, the FDIC issued a final rule which levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. The special assessment is part of the FDIC’s efforts to rebuild the Deposit Insurance Fund (“DIF”). Deposit insurance expense during the three and six months ended June 30, 2009 included a $1.2 million accrual related to the special assessment. The final rule also allows the FDIC to impose additional special assessments of 5 basis points for the third and fourth quarters of 2009, if the FDIC estimates that the DIF reserve ratio will fall to a level that would adversely affect public confidence in federal deposit insurance or to a level that would be close to or below zero. Any additional special assessment would also be capped at 10 basis points of domestic deposits. The Company cannot provide any assurance as to the ultimate amount or timing of any such special assessments, should such special assessments occur, as such special assessments depend upon a variety of factors which are beyond the Company’s control.
Income Taxes. The effective income tax rate for the three and six months ended June 30, 2009 was 9.44% and 8.14%, respectively, compared to 26.79% and 35.16% for the same period in 2008. The effective tax rates for the three and six month periods ending June 30, 2009 were lower than the statutory tax rates primarily due to the goodwill impairment charge recognized during the second quarter. The effective tax rates for both periods reflect the tax treatment of the $143,389 goodwill impairment charge, of which $126,317 was non-deductible for tax purposes.
Changes in Financial Condition
Total assets at June 30, 2009 were $2,629,834, a decrease of $314,837, or 11%, from December 31, 2008. The decrease in assets was primarily reflective of the $143,389 write-off of goodwill and decreases of $90,785 in cash and cash equivalents, $39,636 in loans, net of unearned income, $35,709 in securities available-for-sale and a $10,903 reduction in other real estate owned and repossessed assets. The Company expects that its total assets will decline slightly over the remainder of 2009.
Non-performing assets (“NPA’s”), which include non-accrual loans, loans past due 90 days or more and still accruing interest and other real estate owned and repossessed assets (“OREO”), totaled $129,177 at June 30, 2009 compared with $76,806 at December 31, 2008. During the six month period the Company experienced an increase in net NPA’s of $52,371 as the economy continued to weaken and it continued its aggressive approach to identify and recognize NPA’s.
Non-performing loans include non-accrual loans and loans 90 or more days past due. All loans that are 90 days past due are considered non-accrual unless they are adequately secured and there is reasonable assurance of full collection of principal and interest. Non-accrual loans that are 120 days past due without assurance of repayment are charged off against the allowance for loan losses. Nonaccrual loans and loans past due 90 days totaled $94,709 at June 30, 2009 an increase of $63,274 from December 31, 2008.

 

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OREO totaled $34,468 at June 30, 2009 compared with $45,371 at December 31, 2008. During the first quarter of 2009, $36,368 of OREO balances were returned to non-accrual loan status due to the aforementioned bankruptcy filings and the extended period of time now required to achieve possession of the property and at the end of the second quarter of 2009 most of these properties have now been foreclosed and reside in OREO balances. Additionally, the Company received proceeds on the disposition of OREO totaling $3,110 and it incurred a net loss on the disposition of OREO property of $3,427 during the first six months of 2009.
At June 30, 2009, the ratio of the Company’s allowance for loan losses to non-performing loans (which include non-accrual loans) was 52.96% compared to 87.11% at June 30, 2008.
The Company maintains an investment portfolio to provide liquidity and earnings. Investments at June 30, 2009 with an amortized cost of $168,799 had a market value of $168,482. At year-end 2008, investments with an amortized cost of $205,310 had a market value of $204,163.
Liquidity and Capital Resources
Liquidity. Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company’s liquid assets include cash and due from banks, federal funds sold, investment securities and loans held for sale. Including securities pledged to collateralize municipal deposits, these assets represented 12% and 16% of the total liquidity base at June 30, 2009 and December 31, 2008, respectively. The liquidity base is generally defined to include deposits, repurchase agreements, notes payable and subordinated debentures. The Company maintains borrowing availability with the Federal Home Loan Bank of Cincinnati (“FHLB”), which was fully utilized at June 30, 2009. The Company also maintains federal funds lines of credit totaling $116,000 at six correspondent banks, of which $116,000 was available at June 30, 2009. The Company believes it has sufficient liquidity to satisfy its current operating needs.
For the six months ended June 30, 2009, operating activities of the Company provided $22,271 of cash flows. This was primarily comprised of net income (loss) of ($145,370), positively adjusted for (i) goodwill impairment of $143,389, (ii) 25,369 in provision for loan losses, (iii) $3,642 of depreciation and amortization and (iv) $3,427 net loss on other real estate and repossessed assets. This was offset in part by an increase of $5,453 in other assets.
Maturities of $82,098 in investment securities available for sale was the primary component of the $57,015 in net cash provided from investing activities for the six months ended June 30, 2009. During the first six months of 2009, as the U.S. Treasury implemented its program of repurchasing $1.3 trillion of previously issued Government Agency Securities, certain securities held by the Company were called, at par, resulting in no gain or loss to the Company. In addition proceeds from the net change in loans provided $19,980 in cash flows. These were offset by (i) $45,873 in proceeds from the purchase of investment securities available for sale, and (ii) $2,865 in premises and equipment expenditures.
The net decrease in total deposits of $157,424 was the primary source of cash flows used in financing activities of $170,070. The net decrease in total deposits reflects a decrease in brokered deposits of $248,255 and an increase in core customer deposits of $90,831, as the Company, as well as other banks, experienced an inflow of deposit balances due to the economic environment. In addition, the net change in repurchase agreements of $9,312, dividends paid on preferred stock of $1,426 and dividends paid on common stock of $1,713 further increased the total net cash used in financing activities.

 

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Capital Resources. The Company’s capital position is reflected in its shareholders’ equity, subject to certain adjustments for regulatory purposes. Shareholders’ equity, or capital, is a measure of the Company’s net worth, soundness and viability. The Company continues to exhibit a strong capital position. Further, the capital base of the Company allows it to take advantage of business opportunities while maintaining the level of resources deemed appropriate by management of the Company to address business risks inherent in the Company’s daily operations. During the second quarter of 2009, the Company suspended common stock dividends, in an abundance of caution, in order to preserve capital in these uncertain economic times.
Shareholders’ equity on June 30, 2009 was $233,192, a decrease of $148,039, or 39%, from $381,231 on December 31, 2008. The decrease in shareholders’ equity primarily reflects net income (loss) available to common shareholders for the six months ended June 30, 2009 of ($147,852) (($11.32) per share) and the common stock dividend payments during the six months ended June 30, 2009 totaling $1,713 ($0.13 per share). These decreases were offset by the cumulative change of $481 in unrealized gains, net of reclassification and taxes, on available for sale securities.
The Company’s primary source of liquidity is dividends paid by the Bank. Applicable Tennessee statutes and regulations impose restrictions on the amount of dividends that may be declared by the Bank. Further, any dividend payments are subject to the continuing ability of the Bank to maintain its compliance with minimum federal regulatory capital requirements and the Company’s self-imposed restrictions to retain its characterization under federal regulations as a “well-capitalized” institution.
Risk-based capital regulations adopted by the Board of Governors of the Federal Reserve Board (“FRB”) and the FDIC require bank holding companies and banks, respectively, to achieve and maintain specified ratios of capital to risk-weighted assets. The risk-based capital rules are designed to measure Tier 1 Capital and Total Capital in relation to the credit risk of both on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk-weighting after conversion to balance sheet equivalent amounts. All bank holding companies and banks must maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of which must be in the form of core, or Tier 1, capital (consisting of common equity, retained earnings, and a limited amount of qualifying perpetual preferred stock and trust preferred securities, net of goodwill and other intangible assets and accumulated other comprehensive income). These guidelines also specify that bank holding companies that are experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels. At June 30, 2009, the Bank and the Company each satisfied their respective minimum regulatory capital requirements, and the Bank was “well-capitalized” within the meaning of federal regulatory requirements. The table below sets forth the capital position of the Bank and the Company at June 30, 2009.
                                 
    Required     Required              
    Minimum     to be              
    Ratio     Well Capitalized     Bank     Company  
Tier 1 risk-based capital
    4.00 %     6.00 %     13.45 %     13.72 %
Total risk-based capital
    8.00 %     10.00 %     14.72 %     14.98 %
Leverage Ratio
    4.00 %     5.00 %     10.85 %     11.07 %

 

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Off-Balance Sheet Arrangements
At June 30, 2009, the Company had outstanding unused lines of credit and standby letters of credit totaling $313,067 and unfunded loan commitments outstanding of $18,194. Because these commitments generally have fixed expiration dates and most will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company has the ability to liquidate Federal funds sold or securities available-for-sale or, on a short-term basis, to borrow any then available amounts from the FHLB and/or purchase Federal funds from other financial institutions. At June 30, 2009, the Company had accommodations with upstream correspondent banks for unsecured Federal funds lines of $116,000. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month. The following table presents additional information about the Company’s off-balance sheet commitments as of June 30, 2009, which by their terms have contractual maturity dates subsequent to June 30, 2009:
                                         
    Less than 1                     More than 5        
    Year     1-3 Years     3-5 Years     Year     Total  
Commitments to make loans — fixed
  $ 3,804     $     $     $     $ 3,804  
Commitments to make loans — variable
    14,390                         14,390  
Unused lines of credit
    157,790       24,655       8,829       82,283       273,557  
 
                                       
Letters of credit
    24,529       734       7,353       6,894       39,510  
 
                             
Total
  $ 200,513     $ 25,389     $ 16,182     $ 89,177     $ 331,261  
 
                             
Disclosure of Contractual Obligations
In the ordinary course of operations, the Company enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises and equipment. The following table summarizes the Company’s significant fixed and determinable contractual obligations as of June 30, 2009:
                                         
    Less than 1                     More than 5        
    Year     1-3 Years     3-5 Years     Years     Total  
Certificates of deposits
  $ 905,204     $ 140,191     $ 10,876     $ 3,563     $ 1,059,834  
FHLB advances and notes payable
    54,937       37,863       65,932       70,422       229,154  
Subordinated debentures
                      88,662       88,662  
Operating lease obligations
    1,232       2,010       1,431       1,270       5,943  
Deferred compensation
    1,712                   2,210       3,922  
Purchase obligations
    1,508                         1,508  
 
                             
Total
  $ 964,593     $ 180,064     $ 78,239     $ 166,127     $ 1,389,023  
 
                             
Additionally, the Company routinely enters into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for early termination of the contract. Management is not aware of any additional commitments or contingent liabilities which may have a material adverse impact on the liquidity or capital resources of the Company.
Effect of New Accounting Standards
Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”), Statement of Financial Accounting Standards (“SFAS”) No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” was issued April 9, 2009. FSP SFAS 157-4 affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. FSP SFAS 157-4 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. FSP SFAS 157-4 also amended SFAS 157, “Fair Value Measurements,” to expand certain disclosure requirements. FSP SFAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP SFAS 157-4 became effective for the Company on June 15, 2009 and did not have a significant impact on the Company’s financial statements.
FSP SFAS 115-2 and SFAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” were issued April 9, 2009. FSP SFAS 115-2 and SFAS 124-2 (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under FSP SFAS 115-2 and SFAS 124-2, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. FSP SFAS 115-2 and SFAS 124-2 are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. FSP SFAS 115-2 and SFAS 124-2 became effective for the Company on June 15, 2009 and did not have a significant impact on the Company’s financial statements.

 

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FSP SFAS 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments” were issued April 9, 2009. FSP SFAS 107-1 and APB 28-1 amends SFAS 107, “Disclosures about Fair Value of Financial Instruments,” to require an entity to provide disclosures about fair value of financial instruments in interim financial information and amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. Under FSP SFAS 107-1 and APB 28-1, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by SFAS 107. The new interim disclosures required by FSP SFAS 107-1 and APB 28-1 are included in the Company’s interim financial statements for the second quarter, June 30, 2009.
On May 28, 2009, the FASB issued SFAS No. 165, “Subsequent Events”. Under SFAS 165, companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued, or available to be issued in the case of non-public entities. SFAS 165 requires entities to recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. SFAS 165 also requires entities to disclose the date through which subsequent events have been evaluated. SFAS 165 was effective for interim and annual reporting periods ending after June 15, 2009. The Company reviewed events for inclusion in the financial statements through August 7, 2009, the date that the accompanying financial statements were issued. The Company adopted the provisions of SFAS 165 for the quarter ended June 30, 2009, as required, and adoption did not have a material impact on the financial statements taken as a whole.
On June 29, 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162”. SFAS 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles. SFAS 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities. On the effective date, all non-SEC accounting and reporting standards will be superseded. The Company will adopt SFAS 168 for the quarterly period ended September 30, 2009, as required, and adoption is not expected to have a material impact on the financial statements taken as a whole.
ITEM 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Part II, Item 7A of the 2008 10-K is incorporated in this item of this Quarterly Report by this reference. There have been no material changes in the quantitative and qualitative market risks of the Company since December 31, 2008.
ITEM 4.  
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this report. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2009, the Company’s disclosure controls and procedures were effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e).
Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION
Item 1.  
Legal Proceedings
The Company and its subsidiaries are subject to claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on the Company’s results of operations.
Item 1A.  
Risk Factors
There have been no material changes to our risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
The Company made no unregistered sales of its equity securities or repurchases of its common stock during the quarter ended June 30, 2009.
Item 3.  
Defaults Upon Senior Securities
None
Item 4.  
Submission of Matters to a Vote of Security Holders
  (a)  
The annual meeting of shareholders (the “Annual Meeting”) of the Company was held on April 24, 2009. In addition to the election of directors, the proposals described in section “(c)” below were considered by shareholders at the Annual Meeting.
  (b)  
Proxies for the Annual Meeting were solicited in accordance with Regulation 14 of the Exchange Act; there was no solicitation in opposition to management’s nominees and all of management’s nominees were elected. Each director is elected to serve for a 3-year term and until his or her successor is elected and qualified. Accordingly, in section “(c)” below, the Company has reported the voting results only with respect to those directors who were voted on at the Annual Meeting.
  (c)  
The following sets forth the results of voting on each matter at the Annual Meeting:
Proposal 1 — Election of directors
                 
    Votes     Votes  
    For     Withheld  
Martha M. Bachman
    10,005,900       376,822  
W.T. Daniels
    9,987,692       395,029  
Charles H. Whitfield, Jr.
    9,924,572       458,150  
Proposal 2 — Shareholder proposal regarding majority election of directors
                         
Votes   Votes           Broker  
For   Against     Abstentions     Non-Votes  
3,490,805
    4,805,986       241,965       1,884,630  
Proposal 3 — Shareholder proposal regarding annual election of directors
                         
Votes   Votes           Broker  
For   Against     Abstentions     Non-Votes  
3,577,166
    4,726,470       235,122       1,884,628  

 

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Proposal 4 — Ratification of the use of the performance measures in the Company’s 2004 Long-Term Incentive Plan
                         
Votes   Votes             Broker  
For   Against     Abstentions     Non-Votes  
9,522,661
    596,787       263,272       40,665  
Proposal 5 — Approval of the Company’s executive compensation program and procedures in accordance with recently enacted “say on pay” regulations of the American Recovery and Reinvestment Act of 2009
                         
Votes   Votes             Broker  
For   Against     Abstentions     Non-Votes  
9,537,961
    524,970       319,787       40,668  
Proposal 6 — Ratification of the appointment of Dixon Hughes PLLC as the Company’s independent registered public accounting firm for 2009
                         
Votes   Votes             Broker  
For   Against     Abstentions     Non-Votes  
10,048,843
    117,982       214,899       41,662  
Item 5.  
Other Information
None
Item 6.  
Exhibits
See Exhibit Index immediately following the signature page hereto.

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Green Bankshares, Inc.
Registrant
 
 
Date: August 7, 2009  By:  /s/ James E. Adams    
    James E. Adams   
    Executive Vice President, Chief Financial Officer and Secretary   

 

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EXHIBIT INDEX
         
Exhibit No.   Description
       
 
  31.1    
Chief Executive Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a)
       
 
  31.2    
Chief Financial Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a)
       
 
  32.1    
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
  32.2    
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002