Risk Management Manual of Examination Policies - FDIC

Examination Conclusions and Comments (Continued) 99999
LIQUIDITY - 2
The bank’s liquidity position is adequate. Asset growth has been minimal since the last FDIC examination and
the loan portfolio is shrinking. Management has increased the bank’s investment in mortgage-backed securities
with the portfolio maintaining slight appreciation. Non-core funding has increased slightly but management is
using these funds appropriately. Off-balance sheet commitments are minimal. While the bank’s liquidity
position and actual practices are generally satisfactory, no written funds management policy is in place.
President Lincoln stated that a written funds management policy would be developed and implemented by
March 31, 2005.
SENSITIVITY TO MARKET RISK - 2
The bank’s sensitivity to market risk relates primarily to interest rate risk, which is minimal. The balance sheet
contains a low volume of potentially volatile assets, and funding sources reasonably match the bank's asset
repricing structure. The bank does not engage in off-balance sheet derivative activity.
Although the bank has suffered from a lackluster net interest margin and overall poor earnings performance, the
net interest margin has remained relatively stable when the substantial volume of nonperforming loans is removed
from the calculation of Average Earning Assets. Management regularly monitors the bank's interest rate
sensitivity position and presents detailed quarterly gap reports to the Board. The loan portfolio is composed
primarily of adjustable-rate commercial loans and fixed-rate mortgage loans. Over the past two years, depositors
have moved funds out of maturing time deposits and into money market demand accounts. Management actively
manages rates on these deposits, as the local market is extremely competitive.
MEETING WITH THE DIRECTORATE
A Board of Directors’ meeting was held on September 18, 2004. All directors were present with the exception of
Director Henry P. Herrington. Will Smith, a partner with the bank’s external auditing firm, was also present.
Assistant Regional Director Cynthia Jones represented the State Department of Banking. Field Supervisor Ira B.
Sharp, Assistant Examiner Monica D. Powers, and the undersigned examiner represented the FDIC. All matters
listed above were discussed with the Board. Most of the discussion concerned the increase in severity of adverse
classifications, the need to improve the ALLL methodology, and management’s efforts to improve loan
administration procedures. The Directorate’s and management’s commitments for corrective action are noted
above. The Board strongly asserted that because of the improvement in the bank’s overall condition, the
Memorandum of Understanding should be removed.
DIRECTORATE RESPONSIBILITY
Each member of the Board of Directors is responsible for thoroughly reviewing this Report of Examination. Each
Director must sign the Signatures of Directors page, which affirms that he or she has reviewed the Report in its
entirety.
Examiner (Signature) Reviewing Official (Signature) and Title
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