Attached files
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EX-21 - T Bancshares, Inc. | v181258_ex21.htm |
EX-23 - T Bancshares, Inc. | v181258_ex23.htm |
EX-31.2 - T Bancshares, Inc. | v181258_ex31-2.htm |
EX-10.9 - T Bancshares, Inc. | v181258_ex10-9.htm |
EX-32.1 - T Bancshares, Inc. | v181258_ex32-1.htm |
EX-31.1 - T Bancshares, Inc. | v181258_ex31-1.htm |
EX-10.10 - T Bancshares, Inc. | v181258_ex10-10.htm |
Form
10-K
T
Bancshares, Inc. - TBNC
Filed:
April 15, 2010 (period: December 31, 2009)
Annual
report which provides a comprehensive overview of the company for the past
year
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10−K
x ANNUAL
REPORT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
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: 000-51297
T
Bancshares, Inc.
(Exact
name of registrant as specified in its charter)
Texas
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71-0919962
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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16000 Dallas Parkway, Suite 125, Dallas, Texas 75248
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(972) 720-9000
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(Address of principal executive offices) (ZIP Code)
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Registrant’s telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value
$0.01
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x
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 shorter period that the registrant as required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No o
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer
¨
|
Accelerated
filer
¨
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Non-accelerated
filer
¨
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Smaller
reporting company
x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x
The
number of common shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 1,941,305 shares of the
Company’s Common Stock ($0.01 par value per share) were outstanding as of March
31, 2010
Specified
portions of the registrant’s definitive Proxy Statement relating to the
registrant’s 2010 Annual Meeting of Shareholders, which is to be filed pursuant
to Regulation 14A within 120 days after the end of the registrant’s fiscal year
ended December 31, 2009, are incorporated by reference in Part III of this
Annual Report on Form 10-K.
PART I
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3
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Item
1. Business
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3
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Item
1A. Risk Factors
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17
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Item
2. Properties
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23
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Item
3. Legal Proceedings
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23
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Item
4. Submission of Matters to a Vote of Security Holders
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23
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PART II
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24
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Item
5. Market for Registrant’s Common Equity and Related Shareholder Matters
and Issuer Purchases of Equity Securities
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24
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Item
6. Select Financial Data
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24
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Item
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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25
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Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
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39
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Item
8. Financial Statements and Supplementary Data
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40
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Item
9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
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63
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Item
9A. Controls and Procedures
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63
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Item
9B. Other Information
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63
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PART III
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64
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Item
10. Directors, Executive Officers, and Control Persons
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64
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Item
11. Executive Compensation
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64
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Item
12. Security Ownership of Certain Beneficial Owners and
Management
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and
Related Shareholder Matters
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64
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Item
13. Certain Relationships and Related Transactions and Director
Independence
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64
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Item
14. Principal Accountant Fees and Services
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64
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PART IV
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65
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Item
15. Exhibits and Financial Statement Schedules
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65
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2
PART
I
FORWARD-LOOKING
STATEMENTS
This
annual report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of
the Securities Act of 1933, and Section 21E of the Securities Exchange Act of
1934, that involve risks and uncertainties, as well as assumptions that, if they
never materialize or prove incorrect, could cause the results of T Bancshares,
Inc. to differ materially from those expressed or implied by such
forward-looking statements. All statements other than statements of historical
fact are statements that could be deemed forward-looking statements, including
any projections of financing needs, revenue, expenses, earnings or losses from
operations, or other financial items; any statements of the plans, strategies
and objectives of management for future operations; any statements of
expectation or belief; and any statements of assumptions underlying any of the
foregoing. In addition, forward looking statements may contain the words
“believe,” “anticipate,” “expect,” “estimate,” “intend,” “plan,” “project,”
“will be,” will continue,” “will result,” “seek,” “could,” “may,” “might,” or
any variations of such words or other words with similar meanings.
The
risks, uncertainties and assumptions referred to above include risks that are
described in “Business—Risk Factors” and elsewhere in this annual report and
that are otherwise described from time to time in our Securities and Exchange
Commission reports filed after this report.
The
forward-looking statements included in this annual report represent our
estimates as of the date of this annual report. We specifically disclaim any
obligation to update these forward-looking statements in the future. These
forward-looking statements should not be relied upon as representing our
estimates or views as of any date subsequent to the date of this annual
report.
Item
1.
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Business.
|
General
T
Bancshares, Inc. (the “Company,” “we,” “us,” or “our,” hereafter) was
incorporated under the laws of the State of Texas on December 23, 2002 to serve
as the bank holding company for T Bank, N.A., a national bank (the “Bank”),
which opened on November 2, 2004. The Bank operates through a main office
located at 16000 Dallas Parkway, Dallas, Texas, and another full-service banking
office at 8100 North Dallas Parkway, Plano, Texas. We also have a loan
production office located at 850 E. State Highway 114, Suite 200, Southlake,
Texas. Other than its ownership of the Bank, the Company conducts no
material business.
The Bank
is a full-service commercial bank offering a broad range of commercial and
consumer banking services to small- to medium-sized businesses, independent
single-family residential and commercial contractors and consumers. Lending
services include consumer loans and commercial loans to small-
to medium-sized businesses and professional concerns. The Bank offers
a wide range of deposit services including demand deposits, regular savings
accounts, money market accounts, individual retirement accounts, and
certificates of deposit with fixed rates and a range of maturity options. These
services are provided through a variety of delivery systems including automated
teller machines, private banking, telephone banking and Internet
banking.
As of
December 31, 2009, the Bank had approximately $139 million in assets, $121
million in total loans and $108 million in deposits.
Market
Area
Our
primary service areas include North Dallas, Addison, Plano, Frisco, Southlake,
Grapevine and the neighboring Texas communities. We serve these markets from
three locations, one of which is a loan production office. Our main office is
located at 16000 Dallas Parkway, Dallas, Texas, and we also have a full-service
branch office at 8100 North Dallas Parkway, Plano, Texas. The branch office
enables us to more effectively serve the Plano/Frisco sector of our primary
banking market. We have a loan production office located at 850 E State Highway
114, Southlake, Texas. Our primary service area represents a diverse market with
a growing population and economy. According to data obtained from the United
States Census and ESRI Business Information Systems, between 2000 and 2007, the
population of the North Dallas/Addison area grew almost 7%, the population of
the Frisco/Plano area grew more than 32% and the population of Northeast Tarrant
County grew more that 22%. This population growth has attracted many businesses
to the area and led to growth in the local service economy, and, while they
cannot be certain, we expect this trend to continue.
3
The
market for financial services is rapidly changing and intensely competitive and
is likely to become more competitive as the number and types of market entrants
increases. The Bank competes in both lending and attracting funds with other
commercial banks, savings and loan associations, credit unions, consumer finance
companies, pension trusts, mutual funds, insurance companies, mortgage bankers
and brokers, brokerage and investment banking firms, asset-based nonbank
lenders, government agencies and certain other non-financial institutions,
including retail stores, which may offer more favorable financing alternatives
than the Bank.
Most of
the deposits held in financial institutions in our primary banking market are
attributable to branch offices of out-of-state banks. We believe that banks
headquartered outside of our primary service area often lack the consistency of
local leadership necessary to provide efficient service to individuals and
small- to medium-sized business customers. Through our local ownership and
management, we believe we are uniquely situated to efficiently provide these
customers with loan, deposit and other financial products tailored to fit their
specific needs. We believe that the Bank can compete effectively with larger and
more established banks through an active business development plan and by
offering local access, competitive products and services and more responsive
customer service.
Lending
Services
Lending
Policy
We offer
a full range of lending products, including commercial loans to small- to
medium-sized businesses and professional concerns and consumer loans to
individuals. We compete for these loans with competitors who are well
established in our primary market area and have greater resources and lending
limits. As a result, we currently have to offer more flexible pricing and terms
to attract borrowers.
The
Bank’s delegations of authority and loan policy, which are approved by the Board
of Directors, provide for various levels of officer lending authority. The Bank
has an independent review that evaluates the quality of loans on a quarterly
basis and determines if loans are originated in accordance with the guidelines
established by the board of directors. Additionally, our board of directors has
formed a Directors’ Loan Committee and appointed seven directors to provide the
following oversight:
·
|
ensure
compliance with loan policy, procedures and guidelines as well as
appropriate regulatory
requirements;
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·
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approve
secured loans above an aggregate amount of $250,000 and unsecured loans
above an aggregate amount of $100,000 to any entity and/or related
interest;
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·
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monitor
delinquent and non-accrual
loans;
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·
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monitor
overall loan quality through review of information relative to all new
loans;
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·
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monitor
our loan review systems; and
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·
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review
the adequacy of the loan loss
reserve.
|
We follow
a conservative lending policy, but one which permits prudent risks to assist
businesses and consumers in our lending market. Interest rates vary depending on
our cost of funds, the loan maturity, the degree of risk and other loan terms.
The Bank does not make any loans to any of its directors or executive officers
unless its board of directors, excluding any interested parties, first approves
the loan, and the terms of the loan are no more favorable than would be
available to any comparable non-affiliated borrower.
Lending
Limits
The
Bank’s lending activities are subject to a variety of lending limits. Differing
limits apply based on the type of loan or the nature of the borrower, including
the borrower’s relationship to the Bank. In general, however, the Bank is able
to loan any one borrower a maximum amount equal to either:
|
·
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15%
of the Bank’s capital and surplus and allowance for loan losses;
or
|
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·
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25%
of its capital and surplus and allowance for loan losses if the amount
that exceeds 15% is secured by cash or readily marketable collateral, as
determined by reliable and continuously available price quotations;
or
|
|
·
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any
amount when the loan is fully secured by a segregated deposit at the Bank
and the Bank has perfected its security interest in the
deposit.
|
These
legal limits will increase or decrease as the Bank’s capital increases or
decreases as a result of its earnings or losses, among other
reasons.
4
Credit
Risks
The
principal economic risk associated with each category of loans that the Bank
makes is the creditworthiness of the borrower. Borrower creditworthiness is
affected by general economic conditions and the strength of the relevant
business market segment. General economic factors affecting a borrower’s ability
to repay include interest, inflation and employment rates, as well as other
factors affecting a borrower’s customers, suppliers and employees. The
well-established financial institutions in our primary service area currently
make proportionately more loans to medium- to large-sized businesses than the
Bank makes. Many of the Bank’s anticipated commercial loans will likely be made
to small- to medium-sized businesses that may be less able to withstand
competitive, economic and financial pressures than larger
borrowers.
Real
Estate Loans
The Bank
makes commercial real estate loans, construction and development loans, small
business loans and residential real estate loans. These loans include commercial
loans where the Bank takes a security interest in real estate as a prudent
practice and measure and not as the principal collateral for the
loan.
|
·
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Construction and development
loans. We make construction and development loans on a pre-sold and
speculative basis. If the borrower has entered into an agreement to sell
the property prior to beginning construction, then the loan is considered
to be on a pre-sold basis. If the borrower has not entered into an
agreement to sell the property prior to beginning construction, then the
loan is considered to be on a speculative basis. Construction and
development loans are generally made with a term of six to 12 months and
interest is paid monthly. The ratio of the loan principal to the value of
the collateral as established by independent appraisal typically will not
exceed industry standards and applicable regulations. Speculative loans
are based on the borrower’s financial strength and cash flow position.
Loan proceeds will be disbursed based on the percentage of completion and
only after the project has been inspected by an experienced construction
lender or third-party inspector. Risks associated with construction loans
include, without limitation, fluctuations in the value of real estate the
financial condition of the buyer on a presold basis and of the builder on
a speculative basis and new job creation
trends.
|
|
·
|
Commercial real estate.
Commercial real estate loan terms generally are limited to ten years or
less, although payments may be structured on a longer amortization basis.
Interest rates may be fixed or adjustable, although rates typically are
not fixed for a period exceeding 60 months. The Bank generally
charges an origination fee for its services. The Bank generally requires
personal guarantees from the principal owners of the property supported by
a review by the Bank’s management of the principal owners’ personal
financial statements. The Bank also makes commercial real estate loans to
owner occupants of the real estate held as collateral. Risks associated
with commercial real estate loans include fluctuations in the value of
real estate, new job creation trends, tenant vacancy rates and the quality
of the borrower’s management. The Bank limits its risk by analyzing
borrowers’ cash flow and collateral value on an ongoing basis. In
addition, at least two of our directors are experienced in the
acquisition, development and management of commercial real estate and use
their experience to assist in the evaluation of potential commercial real
estate loans.
|
|
·
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Residential real
estate. The Bank’s residential real estate loans consist of loans
to acquire and renovate existing homes for subsequent
re-sale, residential new construction loans and, on a very limited
basis, second mortgage loans and traditional mortgage lending for
one-to-four family residences. The Bank offers primarily adjustable rate
mortgages. All loans are made in accordance with the Bank’s appraisal and
loan policy with the ratio of the loan principal to the value of
collateral as established by independent appraisal generally not exceeding
80%, unless the borrower has private mortgage insurance. We believe these
loan-to-value ratios are sufficient to compensate for fluctuations in real
estate market value and to minimize losses that could result from a
downturn in the residential real estate
market.
|
Commercial
Loans
Loans for
commercial purposes in various lines of businesses are a major component of the
Bank’s loan portfolio. The targets in the commercial loan markets are retail
establishments, professional service providers, in particular dentists, and
small-to medium-sized businesses. The terms of these loans vary by purpose and
by type of underlying collateral, if any. The commercial loans primarily are
underwritten on the basis of the borrower’s ability to service the loan from
income and their creditworthiness. The Bank will typically make equipment loans
for a term of ten years or less at fixed or variable rates, with the loan fully
amortized over the term. Loans to support working capital will typically have
terms not exceeding one year and will usually be secured by accounts receivable,
inventory or personal guarantees of the principals of the business. For loans
secured by accounts receivable or inventory, principal will typically be repaid
as the assets securing the loan are converted into cash, and for loans secured
with other types of collateral, principal will typically be repaid over the term
of the loan or due at maturity.
5
Commercial
lending generally involves greater credit risk than residential mortgage or
consumer lending, and involves risks that are different from those associated
with commercial real estate lending. Although commercial loans may be
collateralized by equipment or other business assets, the liquidation of
collateral in the event of a borrower default may represent an insufficient
source of repayment because equipment and other business assets may, among other
things, be obsolete or of limited use. Accordingly, the repayment of a
commercial loan depends primarily on the creditworthiness and projected cash
flow of the borrower (and any guarantors), while liquidation of collateral is
considered a secondary source of repayment.
Consumer
Loans
The Bank
makes a variety of loans to individuals for personal, family and household
purposes, including secured and unsecured installment and term loans, second
mortgages, home equity loans and home equity lines of credit. The amortization
of second mortgages generally does not exceed 15 years and the rates
generally are not fixed for longer than 12 months. Repayment of consumer
loans depends upon the borrower’s financial stability and is more likely to be
adversely affected by divorce, job loss, illness and personal hardships than
repayment of other loans. Because many consumer loans are secured by depreciable
assets such as boats, cars and trailers, the loan should be amortized over the
useful life of the asset. The loan officer will review the borrower’s past
credit history, past income level, debt history and, when applicable, cash flow
and determine the impact of all these factors on the ability of the borrower to
make future payments as agreed. The principal competitors for consumer loans are
the established banks and finance companies in our market.
Portfolio Composition
The
following table sets forth the composition of the Bank’s loan portfolio at
December 31, 2009. Loan balances do not include undisbursed loan proceeds,
unearned income, and allowance for loan losses.
Portfolio Percentage at
December 31, 2009
|
||||
Commercial
and industrial
|
72 | % | ||
Consumer
installment
|
1 | % | ||
Real
Estate – mortgage
|
21 | % | ||
Real
Estate – construction
|
6 | % | ||
100 | % |
Investments
The Bank
invests a portion of its assets in U.S. Treasuries, government agency mortgage
backed securities, direct obligations of quasi government agencies including
Fannie Mae, Freddie Mac, and the Federal Home Loan Bank, and federal funds sold.
No investment in any of those instruments exceeds any applicable limitation
imposed by law or regulation. The Bank’s investments are managed in relation to
loan demand and deposit growth, and are generally used to provide for the
investment of excess funds at minimal risks while providing liquidity to fund
increases in loan demand or to offset deposit fluctuations. The Bank’s
Asset-Liability Committee reviews the investment portfolio on an ongoing basis
in order to ensure that the investments conform to the Bank’s policy as set by
the Board of Directors.
Deposit
Services
Deposits
are the major source of the Bank’s funds for lending and other investment
activities. Additionally, we also generate funds from loan principal repayments
and prepayments. Scheduled loan repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. The Bank
considers the majority of its regular savings, demand, NOW, and money market
deposit accounts to be core deposits. These accounts comprised approximately 42%
of the Bank’s total deposits at December 31, 2009. The Bank’s remaining deposits
were composed of time deposits less than $100,000, which comprised 15% of total
deposits, and time deposits of $100,000 and greater, which comprised
approximately 43% of total deposits at December 31, 2009. The Bank is very
competitive in the types of accounts and interest rates we offer on deposit
accounts, in particular money market accounts and time deposits. We actively
solicit these deposits through personal solicitation by its officers and
directors, advertisements published in the local media, and through our Internet
banking strategy.
6
Trust
Services
Since
August 2006, the Bank has offered traditional fiduciary services, such as
serving as executor, trustee, agent, administrator or custodian for individuals,
nonprofit organizations, employee benefit plans and organizations. As of
December 31, 2009, the Bank had approximately $773 million in trust assets under
management.
Other
Banking Services
Other
banking services currently offered or anticipated include cashier’s checks,
travelers’ checks, direct deposit of payroll and Social Security payments,
bank-by-mail, remote check deposits, automated teller machine cards and debit
cards. The Bank offers its customers free usage of any automated teller machine
in the world.
Employees
The
success of the Bank depends, in significant part, on its ability to attract,
retain and motivate highly qualified management and other personnel, for whom
competition is intense. The Bank currently has 28 full-time equivalent
employees. The Bank believes that its relations with its employees are
good.
Employees
are covered by a comprehensive employee benefit program which provides for,
among other benefits, hospitalization and major medical insurance, disability
insurance, and life insurance. Such employee benefits are considered by
management to be generally competitive with employee benefits provided by other
similar employers in the Bank's geographic market area.
Other
Available Information
We file
or furnish with the Securities and Exchange Commission (the “SEC”) annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy statements and other reports required by Section 13(a) or 15(d) of
the Securities Exchange Act of 1934. You may read and copy any materials we file
with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at
www.sec.gov that contains our reports, proxy statements, and
other information that we file electronically with the SEC.
In
addition, our annual reports on Form 10-K and quarterly reports on Form 10-Q are
available through our Internet website, www.tbank.com, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. Our Internet website and the information contained
therein or connected thereto are not intended to be incorporated into this
Annual Report on Form 10-K.
SUPERVISION
AND REGULATION
Banking
is a complex, highly regulated industry. Consequently, our growth and earnings
performance and those of the Bank can be affected not only by management
decisions and general and local economic conditions, but also by the statutes
administered by, and the regulations and policies of, various governmental
regulatory authorities. These authorities include, but are not limited to, the
Board of Governors of the Federal Reserve System (the “Federal Reserve”), the
SEC, the Federal Deposit Insurance Corporation (the “FDIC”), the Office of the
Comptroller of the Currency (“Comptroller”), the Internal Revenue Service, and
state taxing authorities. The effect of these statutes, regulations, and
policies and any changes to any of them can be significant and cannot be
predicted.
The
primary goals of the bank regulatory scheme are to maintain a safe and sound
banking system and to facilitate the conduct of sound monetary policy. In
furtherance of these goals, Congress has created several largely autonomous
regulatory agencies and enacted numerous laws that govern banks, bank holding
companies, and the banking industry. The system of supervision and regulation
applicable to us and our banking subsidiary establishes a comprehensive
framework for their respective operations and is intended primarily for the
protection of the FDIC’s deposit insurance funds, the Bank’s depositors, and the
public, rather than the shareholders and creditors. The following is an attempt
to summarize some of the relevant laws, rules, and regulations governing banks
and bank holding companies, but does not purport to be a complete summary of all
applicable laws, rules, and regulations governing banks and bank holding
companies. The descriptions are qualified in their entirety by reference to the
specific statutes and regulations discussed.
T
Bancshares, Inc.
We are a
bank holding company registered with, and subject to regulation by, the Federal
Reserve under the Bank Holding Company Act of 1956, as amended. The Bank Holding
Company Act and other federal laws subject bank holding companies to particular
restrictions on the types of activities in which they may engage, and to a range
of supervisory requirements and activities, including regulatory enforcement
actions for violations of laws and regulations.
7
In
accordance with Federal Reserve policy, we are expected to act as a source of
financial strength to the Bank and commit resources to support the Bank. This
support may be required under circumstances when we might not be inclined to do
so absent this Federal Reserve policy. As discussed below, we could be required
to guarantee the capital plan of the Bank if it becomes undercapitalized for
purposes of banking regulations.
Certain
acquisitions
The Bank
Holding Company Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before (1) acquiring more than 5% of the voting
stock of any bank or other bank holding company, (2) acquiring all or
substantially all of the assets of any bank or bank holding company, or (3)
merging or consolidating with any other bank holding company.
Additionally,
the Bank Holding Company Act provides that the Federal Reserve may not approve
any of these transactions if it would result in or tend to create a monopoly or
substantially lessen competition or otherwise function as a restraint of trade,
unless the anti-competitive effects of the proposed transaction are clearly
outweighed by the public interest in meeting the convenience and needs of the
community to be served. The Federal Reserve is also required to consider the
financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. The Federal Reserve’s consideration of financial resources generally
focuses on capital adequacy, which is discussed below. As a result of the USA
PATRIOT Act, which is discussed below, the Federal Reserve is also required to
consider the record of a bank holding company and its subsidiary bank(s) in
combating money laundering activities in its evaluation of bank holding company
merger or acquisition transactions.
Under the
Bank Holding Company Act, any bank holding company located in Texas, if
adequately capitalized and adequately managed, may purchase a bank located
outside of Texas. Conversely, an adequately capitalized and adequately managed
bank holding company located outside of Texas may purchase a bank located inside
Texas. In each case, however, restrictions currently exist on the acquisition of
a bank that has only been in existence for a limited amount of time or will
result in specified concentrations of deposits.
Change
in bank control
Subject
to various exceptions, the Bank Holding Company Act and the Change in Bank
Control Act of 1978, together with related regulations, require Federal Reserve
approval prior to any person or company acquiring “control” of a bank holding
company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. With respect to our Company, control is rebuttably presumed to exist if
a person or company acquires 10% or more, but less than 25%, of any class of
voting securities.
Permitted
activities
Generally,
bank holding companies are prohibited under the Bank Holding Company Act from
engaging in or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in any activity other than (1) banking or
managing or controlling banks or (2) an activity that the Federal Reserve
determines to be so closely related to banking as to be a proper incident to the
business of banking.
Activities
that the Federal Reserve has found to be so closely related to banking as to be
a proper incident to the business of banking include:
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factoring
accounts receivable;
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·
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making,
acquiring, brokering, or servicing loans and usual related
activities;
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·
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leasing
personal or real property;
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·
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operating
a non-bank depository institution, such as a savings
association;
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trust
company functions;
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·
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financial
and investment advisory activities;
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·
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conducting
discount securities brokerage
activities;
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·
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underwriting
and dealing in government obligations and money market
instruments;
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·
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providing
specified management consulting and counseling
activities;
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·
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performing
selected data processing services and support
services;
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·
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acting
as agent or broker in selling credit life insurance and other types of
insurance in connection with credit transactions;
and
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·
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performing
selected insurance underwriting
activities.
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8
Despite
prior approval, the Federal Reserve has the authority to require a bank holding
company to terminate an activity or terminate control of or liquidate or divest
certain subsidiaries or affiliates when the Federal Reserve believes the
activity or the control of the subsidiary or affiliate constitutes a significant
risk to the financial safety, soundness, or stability of any of its banking
subsidiaries. A bank holding company that qualifies and elects to become a
financial holding company is permitted to engage in additional activities that
are financial in nature or incidental or complementary to financial activity.
The Bank Holding Company Act expressly lists the following activities as
financial in nature:
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·
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lending,
exchanging, transferring, investing for others, or safeguarding money or
securities;
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·
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insuring,
guaranteeing, or indemnifying against loss or harm, or providing and
issuing annuities, and acting as principal, agent, or broker for these
purposes, in any state;
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·
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providing
financial, investment, or advisory
services;
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issuing
or selling instruments representing interests in pools of assets
permissible for a bank to hold
directly;
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·
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underwriting,
dealing in, or making a market in
securities;
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·
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other
activities that the Federal Reserve may determine to be so closely related
to banking or managing or controlling banks as to be a proper incident to
managing or controlling banks;
|
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·
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foreign
activities permitted outside of the United States if the Federal Reserve
has determined them to be usual in connection with banking operations
abroad;
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·
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merchant
banking through securities or insurance affiliates;
and
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·
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insurance
company portfolio investments.
|
To
qualify to become a financial holding company, the Bank and any other depository
institution subsidiary that we may own at the time must be “well capitalized”
and “well managed” and must have a Community Reinvestment Act rating of at least
“satisfactory.” Additionally, we would need to file an election with the Federal
Reserve to become a financial holding company and must provide the Federal
Reserve with 30 days’ written notice prior to engaging in a permitted financial
activity. A bank holding company that falls out of compliance with these
requirements may be required to cease engaging in some of its activities. The
Federal Reserve serves as the primary “umbrella” regulator of financial holding
companies, with supervisory authority over each parent company and limited
authority over its subsidiaries. Expanded financial activities of financial
holding companies generally will be regulated according to the type of such
financial activity: banking activities by banking regulators, securities
activities by securities regulators, and insurance activities by insurance
regulators.
Sound
banking practice
Bank
holding companies are not permitted to engage in unsound banking practices. For
example, the Federal Reserve’s Regulation Y requires a holding company to give
the Federal Reserve prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases in the preceding year, is equal to 10% or
more of the company’s consolidated net worth. The Federal Reserve may oppose the
transaction if it believes that the transaction would constitute an unsafe or
unsound practice or would violate any law or regulation. As another example, a
holding company could not impair its subsidiary bank’s soundness by causing it
to make funds available to non-banking subsidiaries or their customers if the
Federal Reserve believed it not prudent to do so.
The
Financial Institutions Reform, Recovery and Enforcement Act of 1989 expanded the
Federal Reserve’s authority to prohibit activities of bank holding companies and
their non-banking subsidiaries which represent unsafe and unsound banking
practices or which constitute violations of laws or regulations. The Financial
Institutions Reform, Recovery and Enforcement Act increased the amount of civil
money penalties which the Federal Reserve can assess for activities conducted on
a knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1,000,000 for each day
the activity continues. The Financial Institutions Reform, Recovery and
Enforcement Act also expanded the scope of individuals and entities against
which such penalties may be assessed.
Further,
the Federal Reserve issued Supervisory Letter SR 09-4 on February 24, 2009 and
revised March 27, 2009, which provides guidance on the declaration and
payment of dividends, capital redemptions, and capital repurchases by bank
holding company. Supervisory Letter SR 09-4 provides that, as a
general matter, a bank holding company should eliminate, defer, or significantly
reduce its dividends if: (1) the bank holding company’s net income
available to shareholders for the past four quarters, net of dividends
previously paid during that period, is not sufficient to fully fund the
dividends, (2) the bank holding company’s prospective rate of earnings retention
is not consistent with the bank holding company’s capital needs and overall
current and prospective financial condition, or (3) the bank holding company
will not meet, or is in danger of not meeting, its minimum regulatory capital
adequacy ratios. Failure to do so could result in a supervisory
finding that the bank holding company is operating in an unsafe and unsound
manner.
Anti-tying
restrictions
Bank
holding companies and affiliates are prohibited from tying the provision of
services, such as extensions of credit, to other services offered by a holding
company or its affiliates.
9
Dividends
Consistent
with its policy that bank holding companies should serve as a source of
financial strength for their subsidiary banks, the Federal Reserve has stated
that, as a matter of prudent banking, a bank holding company generally should
not maintain a rate of distributions to shareholders unless its available net
income has been sufficient to fully fund the distributions, and the prospective
rate of earnings retention appears consistent with the bank holding company’s
capital needs, asset quality, and overall financial condition. In addition, we
are subject to certain restrictions on the making of distributions as a result
of the requirement that the Bank maintain an adequate level of capital as
described below. As a Texas corporation, we are restricted under the Texas
Business Organizations Code from paying dividends under certain conditions.
Under Texas law, we cannot pay dividends to shareholders if the dividends exceed
our surplus or if after giving effect to the dividends, we would be
insolvent.
Sarbanes-Oxley Act of
2002
The
Sarbanes-Oxley Act of 2002 (the “SOX Act”) represents a comprehensive revision
of laws affecting corporate governance, accounting obligations and corporate
reporting. Among other requirements, the SOX Act established: (i) new
requirements for audit committees of public companies, including independence,
expertise, and responsibilities; (ii) additional responsibilities regarding
financial statements for the chief executive officers and chief financial
officers of reporting companies; (iii) new standards for auditors and regulation
of audits; (iv) increased disclosure and reporting obligations for reporting
companies regarding various matters relating to corporate governance; and
(v) new and increased civil and criminal penalties for violation of the
securities laws.
The
Bank
The Bank
is subject to the supervision, examination and reporting requirements of the
National Bank Act and the regulations of the Comptroller. The Comptroller will
regularly examine the Bank’s operations and has the authority to approve or
disapprove mergers, the establishment of branches and similar corporate actions.
The Comptroller also has the power to prevent the continuance or development of
unsafe or unsound banking practices or other violations of law. The Bank is also
subject to numerous state and federal statutes and regulations that affect its
business, activities and operations. The Bank’s deposits are insured by the FDIC
to the maximum extent provided by law.
Branching
National
banks are required by the National Bank Act to adhere to branching laws
applicable to state banks in the states in which they are located. Under current
Texas law, banks are permitted to establish branch offices throughout Texas with
prior regulatory approval. In addition, with prior regulatory approval, banks
are permitted to acquire branches of existing banks located in Texas. Finally,
banks generally may branch across state lines by merging with banks in other
states if allowed by the applicable states’ laws. Texas law, with limited
exceptions, currently permits branching across state lines through interstate
mergers. Under the Federal Deposit Insurance Act, states may “opt-in” and allow
out-of-state banks to branch into their state by establishing a new start-up
branch in the state. Texas law currently permits de novo branching into the
state of Texas on a reciprocal basis, meaning that an out-of-state bank may
establish a new start-up branch in Texas only if its home state has also elected
to permit de novo branching into that state.
10
Deposit insurance
assessments
Substantially
all of the deposits of the Bank are insured up to applicable limits by the
Deposit Insurance Fund (the “DIF”), as administered by the FDIC, and are subject
to deposit insurance assessments to maintain the DIF. The FDIC uses a
risk-based assessment system that imposes insurance premiums based upon a risk
matrix. As of April 1, 2009, each insured depository institution is
assigned to one of four risk categories that are based on both capital and
supervisory evaluations. With regard to the latter, each institution
is assigned to one of three Supervisory Groups based on the FDIC’s consideration
of supervisory evaluations provided by the institution’s primary federal
regulator. The three Supervisory Groups are: Supervisory Group A, which
consists of financially sound institutions with only a few minor
weaknesses; Supervisory Group B, which
consists of institutions that demonstrate weaknesses which, if not
corrected, could result in significant deterioration of the institution and
increased risk of loss to the Deposit Insurance Fund; and Supervisory Group C, which
consists of institutions that pose a substantial probability of loss to
the Deposit Insurance Fund unless effective corrective action is
taken.
The four
risk categories are Risk Category I, which includes all
institutions in Supervisory Group A that are well capitalized; Risk Category II,
which includes all institutions in Supervisory Group A that are adequately
capitalized, and all institutions in Supervisory Group B that are either well
capitalized or adequately capitalized; Risk Category III , which includes all
institutions in Supervisory Groups A and B that are undercapitalized, and all
institutions in Supervisory Group C that are well capitalized or adequately
capitalized; and Risk Category IV, which includes all
institutions in Supervisory Group C that are undercapitalized.
Within
Risk Category I, the initial assessment rate is generally based on certain
financial ratios that reflect leverage, asset quality, earnings, the use of
brokered deposits the institutions “CAMELS rating” (examination ratings based on
capital, assets, management, earnings, liquidity and sensitivity to market
risk). However, in the case of a large bank (generally, one with more
than $10 billion in assets), that has at least one long-term debt rating The
initial base assessment rate under the large bank method shall be derived from
three components, each given a one-third weight: a component derived
using the financial ratios method, a component derived using long-term debt
issuer ratings, and a component derived using CAMELS component
ratings. The initial base assessment rate for Risk Category I ranges
from 12 to 16 basis points (12 cents to 16 cents per year per $100.00 of
deposits), and is 22, 32 and 45 basis points for Risk Categories II, III and IV,
respectively.
The
initial assessment rate for all four risk categories is subject to downward
adjustments based on the institution’s unsecured debt and upward adjustment
based on its secured liabilities. In the case of institutions in Risk
Categories II through IV, the assessment rate is also subject to upward
adjustment based on the and brokered deposits. After reflecting such
adjustments, the current assessment rates range from 7 to 24 basis points for
Risk Category I; 17 to 43 basis points for Risk Category II; 27 to 58 basis
points for Risk Category III; and 40 to 77.5 basis points for Risk Category
IV.
The FDIC
has stated its intention, as part of a proposed plan to restore the DIF
following significant decreases in its reserves, to increase deposit insurance
assessments. On January 1, 2009, the FDIC increased its assessment
rates and has since proposed further rate increases and changes to the current
risk-based assessment framework. On May 22, 2009, the FDIC adopted a
final rule establishing a 5 basis point special assessment to be collected on
September 30, 2009. The special assessment was assessed against
assets minus Tier 1 capital, as of June 30, 2009, but was capped at 10
basis points of an institution’s domestic deposits. On November 17,
2009, the FDIC published a final rule that required insured depository
institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for all of 2010, 2011 and 2012.
The FDIC
also adopted a uniform three basis point increase in assessment rates effective
on January 1, 2011. In December 2009, the Bank paid $921,000 in prepaid
assessments including $62,000 related to the special assessment and is included
in other assets in the accompanying consolidated balance sheet as of December
31, 2009. FDIC insurance expense includes deposit insurance
assessments and Financing Company (“FICO”) assessments related to outstanding
FICO bonds. The FICO is a mixed-ownership government corporation
established by the Competitive Equality Banking Act of 1987 whose sole purpose
was to function as a financing vehicle for the now defunct Federal
Savings & Loan Insurance Corporation.
Under the
FDIC, the FDIC may terminate deposit insurance upon a finding that the
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition enacted or imposed by the FDIC or such
institution’s primary regulator. The termination of deposit insurance
for the Bank, or any future depository institution subsidiaries, could have a
materially adverse impact on us.
On
October 3, 2008, as part of the EESA, the basic limit on federal deposit
insurance coverage was increased from $100,000 to $250,000 per
depositor. The EESA, as amended by the Helping Families Save Their
Homes Act of 2009, provides that the basic deposit insurance limit will return
to $100,000 after December 31, 2013.
Expanded financial
activities
Similar
to bank holding companies, the Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 expanded the types of activities in which a bank may
engage. Generally, a bank may engage in activities that are financial in nature
through a “financial subsidiary” if the bank and each of its depository
institution affiliates are “well capitalized,” “well managed” and have at least
a “satisfactory” rating under the Community Reinvestment Act. However,
applicable law and regulation provide that the amounts of investment in these
activities generally are limited to 45% of the total assets of the Bank, and
these investments are deducted when determining compliance with capital adequacy
guidelines. Further, the transactions between the Bank and this type of
subsidiary are subject to a number of limitations.
Expanded
financial activities of national banks generally will be regulated according to
the type of such financial activity: banking activities by banking regulators,
securities activities by securities regulators and insurance activities by
insurance regulators. The Bank currently has no plans to conduct any activities
through financial subsidiaries.
Community Reinvestment
Act
The
Community Reinvestment Act requires that, in connection with examinations of
financial institutions within their respective jurisdictions, the Federal
Reserve, the FDIC, or the Comptroller, shall evaluate the record of each
financial institution in meeting the credit needs of its local community,
including low and moderate-income neighborhoods. These facts are also considered
in evaluating mergers, acquisitions, and applications to open a branch or
facility. Failure to adequately meet these criteria could impose additional
requirements and limitations on the Bank. Because our aggregate assets are
currently less than $250 million, under the Gramm-Leach-Bliley Act, we are
subject to a Community Reinvestment Act examination only once every
60 months if we receive an outstanding rating, once every 48 months if
we receive a satisfactory rating and as needed if our rating is less than
satisfactory. Additionally, we must publicly disclose the terms of various
Community Reinvestment Act-related agreements.
11
Dividends
The Bank
is required by federal law to obtain prior approval of the Comptroller for
payments of dividends if the total of all dividends declared by its board of
directors in any year will exceed its net profits earned during the current year
combined with its retained net profits of the immediately preceding two years,
less any required transfers to surplus. In addition, the Bank will be unable to
pay dividends unless and until it has positive retained earnings. As of December
31, 2009, the Bank had an accumulated deficit of approximately $4.8 million.
Accordingly, we will be unable to pay dividends until the accumulated deficit is
eliminated.
In
addition, under the Federal Deposit Insurance Corporation Improvement Act, the
Bank may not pay any dividend if the payment of the dividend would cause the
Bank to become undercapitalized or in the event the Bank is “undercapitalized.”
The Comptroller may further restrict the payment of dividends by requiring that
a financial institution maintain a higher level of capital than would otherwise
be required to be “adequately capitalized” for regulatory purposes. Moreover,
if, in the opinion of the Comptroller, the Bank is engaged in an unsound
practice (which could include the payment of dividends), the Comptroller may
require, generally after notice and hearing, that the Bank cease such practice.
The Comptroller has indicated that paying dividends that deplete a depository
institution’s capital base to an inadequate level would be an unsafe banking
practice. Moreover, the Comptroller has also issued policy statements providing
that insured depository institutions generally should pay dividends only out of
current operating earnings.
Capital
adequacy
The
Federal Reserve monitors the capital adequacy of bank holding companies, such as
the Company, and the Comptroller monitors the capital adequacy of the Bank. The
federal bank regulators use a combination of risk-based guidelines and leverage
ratios to evaluate capital adequacy and consider these capital levels when
taking action on various types of applications and when conducting supervisory
activities related to the safety and soundness of the Company and the Bank. The
risk-based guidelines apply on a consolidated basis to bank holding companies
with consolidated assets of $500 million or more and, generally, on a
bank-only basis for bank holding companies with less than $500 million in
consolidated assets. Each insured depository subsidiary of a bank holding
company with less than $500 million in consolidated assets is expected to
be “well-capitalized.”
12
The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
An
institution is considered "well capitalized" if it has a total risk-based
capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or
greater, and a leverage ratio of 5% or greater, and it is not subject to an
order, written agreement, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any capital
measure.
An
institution is considered "adequately capitalized" if it has a total risk-based
capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of at least 4%
and leverage capital ratio of 4% or greater (or a leverage ratio of 3% or
greater if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate Federal bank regulatory agency guidelines),
and the institution does not meet the definition of an undercapitalized
institution.
An
institution is considered "undercapitalized" if it has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is
less than 4%, or a leverage ratio that is less than 4% (or a leverage ratio that
is less than 3% if the institution is rated composite 1 in its most recent
report of examination, subject to appropriate Federal Banking agency
guidelines).
The
Federal Deposit Insurance Corporation Improvement Act of 1991 established a
system of prompt corrective action to resolve the problems of undercapitalized
financial institutions. Under this system, the federal banking regulators have
established five capital categories (“well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized”), and all institutions are assigned one such
category. Federal banking regulators are required to take various mandatory
supervisory actions and are authorized to take other discretionary actions with
respect to institutions in the three undercapitalized categories. The severity
of the action depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, the banking regulator must
appoint a receiver or conservator for an institution that is “critically
undercapitalized.” The federal banking agencies have specified by regulation the
relevant capital level for each category. An institution that is categorized as
“undercapitalized,” “significantly undercapitalized,” or “critically
undercapitalized” is required to submit an acceptable capital restoration plan
to its appropriate federal banking agency. A bank holding company must guarantee
that a subsidiary depository institution meets its capital restoration plan,
subject to various limitations. The controlling holding company’s obligation to
fund a capital restoration plan is limited to the lesser of 5% of an
“undercapitalized” subsidiary’s assets at the time it became “undercapitalized”
or the amount required to meet regulatory capital requirements. An
“undercapitalized” institution is also generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches or engaging
in any new line of business, except under an accepted capital restoration plan
or with FDIC approval. The regulations also establish procedures for downgrading
an institution to a lower capital category based on supervisory factors other
than capital.
Failure
to meet capital guidelines could subject a bank or bank holding company to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and other restrictions on its business. As described above,
significant additional restrictions can be imposed on FDIC-insured depository
institutions that fail to meet applicable capital requirements.
Restrictions on Transactions with
Affiliates and Loans to Insiders
The
Company and the Bank are subject to the provisions of Section 23A of the
Federal Reserve Act. Section 23A places limits on the amount
of:
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a
bank’s loans or extensions of credit to
affiliates;
|
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·
|
a
bank’s investment in affiliates;
|
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·
|
assets
a bank may purchase from affiliates, except for real and personal property
exempted by the Federal Reserve;
|
|
·
|
the
amount of loans or extensions of credit to third parties collateralized by
the securities or obligations of affiliates;
and
|
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·
|
a
bank’s guarantee, acceptance or letter of credit issued on behalf of an
affiliate.
|
The total
amount of the above transactions is limited in amount, as to any one affiliate,
to 10% of a bank’s capital and surplus and, as to all affiliates combined, to
20% of a bank’s capital and surplus. In addition to the limitation on the amount
of these transactions, each of the above transactions must also meet specified
collateral requirements. The Bank must also comply with other provisions
designed to avoid the taking of low-quality assets.
The
Company and the Bank are also subject to the provisions of Section 23B of
the Federal Reserve Act which, among other things, prohibits an institution from
engaging in the transactions with affiliates unless the transactions are on
terms substantially the same, or at least as favorable to the institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
nonaffiliated companies.
The Bank
is also subject to restrictions on extensions of credit to its executive
officers, directors, principal shareholders and their related interests. These
extensions of credit (1) must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties and (2) must not involve more
than the normal risk of repayment or present other unfavorable
features.
13
Privacy
Financial
institutions are required to disclose their policies for collecting and
protecting confidential information. Customers generally may prevent financial
institutions from sharing personal financial information with nonaffiliated
third parties except for third parties that market the institutions’ own
products and services. Additionally, financial institutions generally may not
disclose consumer account numbers to any nonaffiliated third party for use in
telemarketing, direct mail marketing or other marketing through electronic mail
to consumers.
Anti-terrorism
legislation
In the
wake of the tragic events of September 11th, on October 26, 2001,
the President signed into law the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001. Also
known as the “Patriot Act,” the law enhances the powers of the federal
government and law enforcement organizations to combat terrorism, organized
crime and money laundering. The Patriot Act significantly amends and expands the
application of the Bank Secrecy Act, including enhanced measures regarding
customer identity, new suspicious activity reporting rules and enhanced
anti-money laundering programs.
Under the
Patriot Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced
due diligence and “know your customer” standards in their dealings with foreign
financial institutions and foreign customers. For example, the enhanced due
diligence policies, procedures and controls generally require financial
institutions to take reasonable steps:
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·
|
to
conduct enhanced scrutiny of account relationships to guard against money
laundering and report any suspicious
transaction;
|
|
·
|
to
ascertain the identity of the nominal and beneficial owners of, and the
source of funds deposited into, each account as needed to guard against
money laundering and report any suspicious
transactions;
|
|
·
|
to
ascertain for any foreign bank, the shares of which are not publicly
traded, the identity of the owners of the foreign bank and the nature and
extent of the ownership interest of each such owner;
and
|
|
·
|
to
ascertain whether any foreign bank provides correspondent accounts to
other foreign banks and, if so, the identity of those foreign banks and
related due diligence information.
|
Under the
Patriot Act, financial institutions must also establish anti-money laundering
programs. The Act sets forth minimum standards for these programs, including:
(i) the development of internal policies, procedures and controls;
(ii) the designation of a compliance officer; (iii) an ongoing
employee training program; and (iv) an independent audit function to test
the programs.
In
addition, the Patriot Act requires the bank regulatory agencies to consider the
record of a bank or bank holding company in combating money laundering
activities in their evaluation of bank and bank holding company merger or
acquisition transactions. Regulations proposed by the U.S. Department of the
Treasury to effectuate certain provisions of the Patriot Act provide that all
transaction or other correspondent accounts held by a U.S. financial institution
on behalf of any foreign bank must be closed within 90 days after the final
regulations are issued, unless the foreign bank has provided the U.S. financial
institution with a means of verification that the institution is not a “shell
bank.” Proposed regulations interpreting other provisions of the Patriot Act are
continuing to be issued.
Under the
authority of the Patriot Act, the Secretary of the Treasury adopted rules on
September 26, 2002 increasing the cooperation and information sharing
between financial institutions, regulators and law enforcement authorities
regarding individuals, entities and organizations engaged in, or reasonably
suspected based on credible evidence of engaging in, terrorist acts or money
laundering activities. Under these rules, a financial institution is required
to:
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·
|
expeditiously
search its records to determine whether it maintains or has maintained
accounts, or engaged in transactions with individuals or entities, listed
in a request submitted by the Financial Crimes Enforcement Network
(“FinCEN”);
|
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·
|
notify
FinCEN if an account or transaction is
identified;
|
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·
|
designate
a contact person to receive information
requests;
|
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·
|
limit
use of information provided by FinCEN to: (1) reporting to FinCEN,
(2) determining whether to establish or maintain an account or engage
in a transaction and (3) assisting the financial institution in
complying with the Bank Secrecy Act;
and
|
|
·
|
maintain
adequate procedures to protect the security and confidentiality of FinCEN
requests.
|
14
Under the
new rules, a financial institution may also share information regarding
individuals, entities, organizations and countries for purposes of identifying
and, where appropriate, reporting activities that it suspects may involve
possible terrorist activity or money laundering. Such information-sharing is
protected under a safe harbor if the financial institution: (1) notifies
FinCEN of its intention to share information, even when sharing with an
affiliated financial institution; (2) takes reasonable steps to verify
that, prior to sharing, the financial institution or association of financial
institutions with which it intends to share information has submitted a notice
to FinCEN; (3) limits the use of shared information to identifying and
reporting on money laundering or terrorist activities, determining whether to
establish or maintain an account or engage in a transaction, or assisting it in
complying with the Bank Security Act; and (4) maintains adequate procedures
to protect the security and confidentiality of the information. Any financial
institution complying with these rules will not be deemed to have violated the
privacy requirements discussed above.
The
Secretary of the Treasury also adopted a rule on September 26, 2002
intended to prevent money laundering and terrorist financing through
correspondent accounts maintained by U.S. financial institutions on behalf of
foreign banks. Under the rule, financial institutions: (1) are prohibited
from providing correspondent accounts to foreign shell banks; (2) are
required to obtain a certification from foreign banks for which they maintain a
correspondent account stating the foreign bank is not a shell bank and that it
will not permit a foreign shell bank to have access to the U.S. account;
(3) must maintain records identifying the owner of the foreign bank for
which they may maintain a correspondent account and its agent in the Unites
States designated to accept services of legal process; (4) must terminate
correspondent accounts of foreign banks that fail to comply with or fail to
contest a lawful request of the Secretary of the Treasury or the Attorney
General of the United States, after being notified by the Secretary or Attorney
General.
Bank
Secrecy Act
In 2007,
the FDIC and the other federal financial regulatory agencies issued an
interagency policy on the application of section 8(s) of the Federal Deposit
Insurance Act. This provision generally requires each federal banking agency to
issue an order to cease and desist when a bank is in violation of the
requirement to establish and maintain a Bank Secrecy Act/anti-money laundering
(BSA/AML) compliance program, or, in the alternative, the bank fails to correct
a deficiency that has been previously cited by the federal banking agency with
respect to the bank's BSA/AML compliance program. The policy statement provides
that, in addition to the circumstances where the agencies will issue a cease and
desist order in compliance with section 8(s), they may take other actions as
appropriate for other types of BSA/AML program concerns or for violations of
other BSA requirements. The policy statement also does not address the
independent authority of the U.S. Department of the Treasury's Financial Crimes
Enforcement Network to take enforcement action for violations of the
BSA.
On July
9, 2008, the Bank announced that it entered into a Stipulation and Consent to
the Issuance of a Consent Order (the "Stipulation") and a Consent Order (the
"2008 Order") with the Comptroller. The 2008 Order contained provisions
requiring, among other things, the Bank to strengthen its internal controls,
policies, and procedures related to the BSA. This Order was terminated by an
Agreement with the Comptroller entered into on April 15, 2010. Because the
Agreement does not have any provisions related to the BSA, we believe
the Bank is in substantial compliance with the requirements of the BSA. See
“Management’s Discussion and
Analysis of Financial Condition and Results of Operation - Recent Developments - Regulatory
Action.”
Other
regulations
The
Bank’s operations are also subject to various federal and state laws
such as:
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the
federal Truth-In-Lending Act, governing disclosures of credit terms to
consumer borrowers;
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the
Home Mortgage Disclosure Act of 1975, requiring financial institutions to
provide information to enable the public and public officials to determine
whether a financial institution is fulfilling its obligation to help meet
the housing needs of the community it
serves;
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the
Equal Credit Opportunity Act, prohibiting discrimination on the basis of
race, creed or other prohibited factors in extending
credit;
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the
Fair Credit Reporting Act of 1978 and its amendment, the Fair and Accurate
Credit Transactions Act of 2003, governing the use and provision of
information to credit reporting
agencies;
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the
Fair Debt Collection Act, governing the manner in which consumer debts may
be collected by collection
agencies;
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the
rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal
laws.
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the
Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
and
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the
Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve to implement that act, which govern automatic deposits to and
withdrawals from deposit accounts and customers’ rights and liabilities
arising from the use of automated teller machines and other electronic
banking services.
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Collectively,
these regulations add to the cost of operations to ensure the Bank is operating
in a compliant fashion.
15
Proposed Legislation and Regulatory
Action
New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of the nation’s financial institutions. We cannot predict whether or in what
form any proposed regulation or statute will be adopted or the extent to which
our business may be affected by any new regulation or statute. In
June 2009, the U.S. Department of the Treasury, or Treasury, issued a
“white paper” containing several federal legislative proposals that, if enacted
into law, would make substantial changes to the present U.S. financial services
regulatory framework. In response to the U.S. Treasury Department’s proposal,
various bills were introduced by the Financial Services Committee of the U.S.
House of Representatives, which were ultimately consolidated into the Wall
Street Reform and Consumer Protection Act of 2009, passed by the U.S. House of
Representatives in December 2009. Among other things, this legislation
establishes a new Consumer Financial Protection Agency to regulate products like
home mortgages, car loans and credit cards.
In
November 2009, Senate Banking Chairman Christopher Dodd introduced a
financial regulatory reform bill entitled the Restoring American Financial
Stability Act of 2009 which further builds on the Treasury proposal. That
legislation, if enacted, would remove bank and bank holding company regulatory
powers from the Federal Reserve, eliminate both the Office of Thrift Supervision
and the Comptroller, and establish a single bank and bank holding company
regulator known as the Financial Institutions Regulatory Administration. The
Senate bill would also establish an independent Consumer Financial Protection
Agency, under which consumer protection responsibilities currently handled by
the bank and credit union regulators and the Federal Trade Commission would be
consolidated.
Although
it is impossible to predict which of these proposals, if any, may be adopted by
the full Congress and signed into law, these pending proposals may significantly
affect the Company and the Bank. Under the reforms contained in the Senate
proposal, the Company would become subject to supervision and regulation by the
Financial Institutions Regulatory Administration, a new federal regulatory
agency. Compliance with new regulations and being supervised by one or more new
regulatory agencies could increase our expenses and affect the conduct of our
business. In addition, the proposals could lead to heightened restrictions being
placed upon institutions and activities that increase systemic risk. Such
restrictions would likely relate to liquidity, capital, and leverage
requirements.
Any
change in the laws or regulations applicable to us, or in supervisory policies
or examination procedures of banking regulators, whether by the Comptroller, the
FDIC, the Treasury, the Federal Home Loan Bank System, the United States
Congress, or other federal or state regulators, could have a material adverse
effect on our business, financial condition, results of operations and cash
flows. In addition, bank regulatory authorities have extensive discretion in the
exercise of their supervisory and enforcement powers. They may, among other
things, impose restrictions on the operation of a banking institution, the
classification of assets by such institution and such institution’s allowance
for credit losses, require changes in other significant accounting estimates
including the determination of the fair value of assets and other-than-temporary
impairment. Additionally, bank regulatory authorities have the authority to
bring enforcement actions against banks and their holding companies for unsafe
or unsound practices in the conduct of their businesses or for violations of any
law, rule or regulation, any condition imposed in writing by the appropriate
bank regulatory agency or any written agreement with the agency. Possible
enforcement actions against us could include the issuance of a cease-and-desist
order that could be judicially enforced, the imposition of civil monetary
penalties, the issuance of directives to increase capital or enter into a
strategic transaction, whether by merger or otherwise, with a third party, the
appointment of a conservator or receiver, the termination of insurance of
deposits, the issuance of removal and prohibition orders against
institution-affiliated parties, and the enforcement of such actions through
injunctions or restraining orders.
Effect of governmental monetary
policies
The
commercial banking business is affected not only by general economic conditions
but also by the fiscal and monetary policies of the Federal Reserve Board. Some
of the instruments of fiscal and monetary policy available to the Federal
Reserve include changes in the discount rate on member bank borrowings, the
fluctuating availability of borrowings at the “discount window,” open market
operations, the imposition of and changes in reserve requirements against member
banks’ deposits and assets of foreign branches, the imposition of and changes in
reserve requirements against certain borrowings by banks and their affiliates,
and the placing of limits on interest rates that member banks may pay on time
and savings deposits. Such policies influence to a significant extent the
overall growth of bank loans, investments, and deposits and the interest rates
charged on loans or paid on time and savings deposits. We cannot predict the
nature of future fiscal and monetary policies and the effect of such policies on
the future business and our earnings.
All of the above laws and regulations
add significantly to the cost of operating the Bank and thus have a negative
impact on our profitability. It should also be noted that there has been a
tremendous expansion experienced in recent years by certain financial service
providers that are not subject to the same rules and regulations as the Company
or the Bank. These institutions, because they are not so highly regulated, have
a competitive advantage over us and may continue to draw large amounts of funds
away from traditional banking institutions, with a continuing adverse effect on
the banking industry in general.
16
Item
1A.
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Risk
Factors.
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There are
important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed in
the risk factors, described below. You should carefully consider the following
risk factors and all other information contained in this Report. The risks and
uncertainties described below may not be the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently believe are
immaterial also may impair our business. If any of the events described in the
following risk factors occur, our business, results of operations and financial
condition could be materially adversely affected. The value or market price of
our common stock could decline due to any of these identified or other risks,
and you could lose all or part of your investment.
We
have entered into a formal Agreement and Consent Order for a Civil Money Penalty
with the Comptroller.
The Bank
was recently informed by the Comptroller that the Comptroller intended to
institute an enforcement action for alleged violations of the Federal Trade
Commission Act in connection with certain merchants and a payment processor that
were Bank customers between September 1, 2006 and August 27,
2007. The Comptroller proposed that the Bank enter into a
formal agreement with the Comptroller (the “Agreement”) and a consent order for
a civil money penalty (the “Order”) payable by the Bank to resolve the
Comptroller’s allegations.
The Bank
terminated all business relationships with the merchants and the payment
processor on August 27, 2007. The Comptroller alleges that the merchants and the
payment processor defrauded consumers and is seeking restitution of such
consumers from the Bank, asserting that by accepting consumer payments for
deposit from the merchants and introducing those payments into the payment
clearing system, the Bank allegedly materially aided the merchants and the
payment processor in the alleged fraudulent activity.
Because
the cost of defending a regulatory enforcement action is likely to be
significant, would likely take a protracted timeframe, and we cannot be certain
of a favorable outcome to the Bank, we determined (and currently still believe)
that negotiating a settlement with the Comptroller is in the best interest
of the Bank. Accordingly, we have over recent months been in
discussion with the Comptroller about settling these claims. We have
over the past few weeks devoted first priority to these discussions, with the
expectation that this priority would result in a settlement with the Comptroller
prior to issuing our year-end 2009 financial statements.
On April
15, 2010, the Bank executed an Agreement and Order containing the general terms
outlined as follows:
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deposit
$5.1 million for consumer restitution charged by the merchants to
eligible consumers;
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Provide
for a civil money penalty of $100
thousand;
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require
the Bank to retain an independent claims administrator to locate and
arrange for the issuance of individual consumer checks to the identified
eligible consumers;
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terminate
the 2008 Order;
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require
the Bank to establish a capital plan which, among other provisions,
details the Bank’s plan to achieve tier 1 capital ratio of 9% and total
risk based capital ratio of 11.5%;
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require
the Bank to develop a written program designed to reduce the level of
criticized assets;
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require
the Bank to develop and implement an asset liquidity enhancement plan
designed to increase the amount of asset liquidity maintained by the Bank,
including a loan to deposit ratio of 85%;
and
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require
the Bank to develop a written profit plan to improve and sustain the
earnings of the Bank.
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Although
we do not know at this time the precise amounts that would ultimately be payable
by us under the terms of the Agreement, we expect that any such
settlement would ultimately require the Bank to, among other things, pay a
significant and material restitution payment which we have estimated to be $2.4
million. Further, there is no assurance that the Bank would be able
to comply with all of the requirements of the Agreement and the Order, including
meeting the stated capital requirements or loan to deposit ratio contained
therein. Nor is there assurance that, should the Bank pay significant
and material amounts of restitution and/or civil money penalties, the short and
long term financial condition, results of operations, liquidity, and/or
prospects of the Bank, upon which the Company is dependent, will not be
materially adversely, and irreparably, impacted. If the Bank is unable to
satisfy the terms and conditions of the Agreement and Order or the
Bank under estimates the impact or effect of such terms and conditions, it may
have a material adverse effect with respect to our financial condition, results
of operations and future prospects.
If as a
result of its review or examination of the Bank, the Comptroller should
determine that the financial condition, capital resources, asset quality,
liquidity, earnings ability, or other aspects of its operations have worsened or
that it or its management is violating or has violated the Agreement and Order
or any law or regulation, various additional remedies are available to the
Comptroller. Such remedies include the power to enjoin “unsafe or unsound”
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict our growth,
to assess civil monetary penalties, to remove officers and directors, and
ultimately to terminate our deposit insurance, which would result in the seizure
of the Bank by its regulators.
17
We
have made estimates with respect to the amount of restitution that the Bank will
ultimately be responsible to pay to consumers in connection with the Agreement
with the Comptroller.
In
determining the amount of funds that the Bank needs to reserve to make
restitution payments to consumers under the Agreement, management has made
certain assumptions regarding the number of consumers who elect to accept
restitution checks and the ability of the Bank and its claim processor to locate
consumers. Based on such assumptions, management concluded that it is
probable that the Bank will be liable for an amount that is up to $5.1
million. However, the Agreement does not limit the liability to this
amount. Further, until the restitution process is fully investigated,
formulated, and approved by the Comptroller, management has estimated that the
amount of restitution would not exceed the $5.1 million set forth in the
Agreement. In addition, certain consumers purchased products or
services from a merchant that is currently in litigation with the Federal Trade
Commission, which management believes represents approximately $1.6 million of
the $5.1 million set forth in the Agreement. In the event the Federal Trade
Commission prevails in its litigation with such merchant and the merchant is
required and pays restitution to its consumers, the Bank likely would not be
obligated to make restitution payments to such consumers.
Based on
the information available to management regarding actual historical rates that
restitution checks are ultimately negotiated by consumers, management’s estimate
is that approximately 68% of the total potential exposure will be realized.
Therefore, management believes the appropriate reserve to accrue for restitution
is 68% of $3.5 million, or $2.4 million. If management’s estimates
prove inaccurate, or the Bank is required to make restitution payments to the
consumers of the merchant mentioned above, the Bank may be required to recognize
additional payments on restitution checks. As a result, our financial
condition and results of operation may be materially adversely
affected.
The
Agreement with the Comptroller prevents us from being well
capitalized under the system of prompt corrective action established by the
Federal Deposit Insurance Corporation Improvement Act of 1991 which may inhibit
our ability to retain and attract deposits.
The
Bank’s capital ratios as of December 31, 2009 were 7.51% tier 1 leverage ratio
and 11.33% total risk based capital ratio. Although the Bank’s capital ratios
met the definition of well capitalized under
the system of prompt corrective action, the Order prevents us from being
considered well capitalized regardless of our capital ratios. Because of FDIC
restrictions which took affect on January 1, 2010 for all insured banks which
are considered not well capitalized, the Bank is restricted from offering rates
in excess of .75% over the national average rate for various deposit terms as
published weekly by the FDIC. This may adversely and materially
affect the Bank’s ability to attract and retain deposits which could have a
negative impact on the Bank’s liquidity and impair its ability to comply with
the Order.
Since
we commenced operations in 2004, we have had a short and
intermittent history of experiencing profits.
Our
profitability will depend on the Bank’s profitability and, while we were
profitable in 2006 and 2007, we experienced significant and material losses in
2008 and 2009. Therefore we can give no assurance that we will be profitable in
the future. We have incurred substantial start-up expenses associated with our
organization and our public offering and sustained losses or achieved minimal
profitability during our initial years of operations. At December 31, 2009, we
had an accumulated deficit account of approximately $7.0 million, principally
resulting from the organizational and pre-opening expenses that we incurred in
connection with the opening of the Bank, losses on loans, and accrued reserves
in connection with the Agreement and Order with the Comptroller. In addition,
due to the extensive regulatory oversight to which we are subject, we expect to
incur significant administrative costs. Our success will depend, in large part,
on our ability to attract and retain deposits and customers for our services. If
we are ultimately unsuccessful, you may lose part or all of the value of your
investment.
Our
results of operation and financial condition would be adversely affected if our
allowance for loan losses is not sufficient to absorb actual
losses.
Experience
in the banking industry indicates that a portion of our loans in all categories
of our lending business will become delinquent, and some may only be partially
repaid or may never be repaid at all. Our methodology for establishing the
adequacy of the allowance for loan losses depends on subjective application of
risk grades as indicators of borrowers’ ability to repay. Deterioration in
general economic conditions and unforeseen risks affecting customers may have an
adverse effect on borrowers’ capacity to repay timely their obligations before
risk grades could reflect those changing conditions. In times of improving
credit quality, with growth in our loan portfolio, the allowance for loan losses
may decrease as a percent of total loans. Changes in economic and market
conditions may increase the risk that the allowance would become inadequate if
borrowers experience economic and other conditions adverse to their businesses.
Maintaining the adequacy of our allowance for loan losses may require that we
make significant and unanticipated increases in our provisions for loan losses,
which would materially affect our results of operations and capital adequacy.
Recognizing that many of our loans individually represent a significant
percentage of our total allowance for loan losses, adverse collection experience
in a relatively small number of loans could require an increase in our
allowance. Federal regulators, as an integral part of their respective
supervisory functions, periodically review our allowance for loan losses. The
regulatory agencies may require us to change classifications or grades on loans,
increase the allowance for loan losses with large provisions for loan losses and
to recognize further loan charge-offs based upon their judgments, which may be
different from ours. Any increase in the allowance for loan losses required by
these regulatory agencies could have a negative effect on our results of
operations and financial condition.
Failure
to implement our business strategies may adversely affect our financial
performance.
We have developed a business plan that
details the strategies we intend to implement in our efforts to achieve
profitable operations. If we cannot implement our business strategies, we will
be hampered in our ability to develop business and serve our customers, which,
in turn, could have an adverse effect on our financial performance. Even if our
business strategies are successfully implemented, we cannot assure you that our
strategies will have the favorable impact that we anticipate. Furthermore, while
we believe that our business plan is reasonable and that our strategies will
enable us to execute our business plan, we have no control over the future
occurrence of certain events upon which our business plan and strategies are
based, particularly general and local economic conditions that may affect the
Bank’s loan-to-deposit ratio, total deposits, the rate of deposit growth, cost
of funding, the level of earning assets and interest-related revenues and
expenses.
18
We
may elect or be compelled to seek additional capital, but that capital may not
be available or it may be dilutive.
We are
required by the Agreement with the Comptroller to achieve and maintain a Tier 1
core capital ratio of 9% and a total risk-based capital ratio of 11.5% by a date
determined by the Agreement which is the earlier of 90 days after the
Comptroller determines the restitution process has been completed or the
Comptroller notifies us of such requirement. As of December 31, 2009,
we did not meet these requirements and would have needed approximately $2.3
million in additional capital, based on average assets at such date to meet the
requests. The Company currently does not have any capital available
to invest in the Bank and payment of restitution, civil money penalties as well
as further increases to cover allowance for loan losses and operating losses
which would negatively impact the Bank’s capital levels and make it more
difficult to achieve the capital levels directed by the
Comptroller. We will look to raise additional capital through
multiple avenues, including focused expense reductions, optimizing our balance
sheet for loans and deposits and increasing net interest income and ultimately
improving the overall earnings of the Company. A number of financial
institutions have recently raised considerable amounts of capital as a result of
deterioration in their results of operations and financial condition arising
from the negative impact of the mortgage loan market, non-agency mortgage-backed
security market, and deteriorating economic conditions, which may diminish our
ability to raise additional capital.
Our
ability to raise capital will depend on conditions in the capital markets, which
are outside our control, and on our financial performance. Accordingly, we
cannot be assured of our ability to raise capital when needed, on favorable
terms or at all. If we cannot raise additional capital when needed, we will be
subject to increased regulatory supervision and the imposition of restrictions
on our growth and business. These outcomes could negatively impact our ability
to operate or further expand our operations through acquisitions or the
establishment of additional branches and may result in increases in operating
expenses and reductions in revenues that could have a material adverse effect on
our financial condition and results of operations. In addition, in order to
raise additional capital, we may need to issue shares of our common stock that
would dilute the book value of our common stock and reduce our shareholders’
percentage ownership interest to the extent they do not participate in future
offerings. Also, if we are unable to raise additional capital, we may be
required to take alterative actions which may include the sale of
income-producing assets to meet our capital requirements, which could have an
adverse impact on our operations and ability to generate income.
The
success of our trust services is dependant upon market fluctuations and a
non-diversified source for its growth.
Since
August 2006, we have been offering traditional fiduciary services such as
serving as executor, trustee, agent, administrator or custodian for individuals,
non profit organizations, employee benefit plans and organizations. The Bank
received regulatory approval from the Comptroller to establish trust powers in
February 2006. As of December 31, 2009, the Bank had approximately $773 million
in trust assets under management. To date, virtually all of the growth in our
assets under management relates to a registered investment advisor who has
advised its clients of the existence of our trust services. We have not
compensated the registered investment advisor in any way for making its clients
aware of our trust services and cannot assure you that the investment advisor
will continue to notify its clients of our trust services or that those clients
will open trust accounts at the Bank. Furthermore, the level of assets under
management is significantly impacted by the market value of the assets which has
increased in 2009 after the sharp decline during 2008. In addition, we are
subject to regulatory supervision with respect to these trust services that may
restrain our growth and profitability.
Certain
of our investment advisory and wealth management contracts are subject to
termination on short notice, and termination of a significant number of
investment advisory contracts could have a material adverse impact on our
revenue.
Certain
of our investment advisory and wealth management clients can terminate their
relationships with us, reduce their aggregate assets under management, or shift
their funds to other types of accounts with different rate structures for any
number of reasons, including investment performance, changes in prevailing
interest rates, inflation, changes in investment preferences of clients, changes
in our reputation in the marketplace, change in management or control of
clients, loss of key investment management personnel and financial market
performance. We cannot be certain that our trust operations will be able to
retain all of its clients. If its clients terminate their investment advisory
and wealth management contracts, our trust operations, and consequently we,
could lose a substantial portion of our revenues and liquidity.
We
have a loan concentration related to the acquisition and financing of dental
practices.
Loan
concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that would cause them
to be similarly impacted by economic or other conditions. At December 31, 2009,
our commercial loan portfolio included $77.0 million of loans, approximately
62.6% of our total funded loans, to the dental industry, including practice
acquisition loans, dental equipment loans, and dental facility loans. We believe
that these loans are well secured to credit worthy borrowers and are diversified
geographically. However, to the extent that there is a decline in the dental
practice in general, we may incur significant losses in our loan portfolio as a
result of this concentration.
19
Our operations
are significantly affected by interest rate levels.
Our
profitability is dependent to a large extent on our net interest income, which
is the difference between interest income we earn as a result of interest paid
to us on loans and investments and interest we pay to third parties such as our
depositors and those from whom we borrow funds. Like most financial
institutions, we are affected by changes in general interest rate levels, which
are currently at record low levels, and by other economic factors beyond our
control. Prolonged periods of unusually low interest rates may have an adverse
effect on earnings by reducing the value of demand deposits, stockholders’
equity and fixed rate liabilities with rates higher than available earning
assets. Interest rate risk can result from mismatches between the dollar amount
of repricing or maturing assets and liabilities and from mismatches in the
timing and rate at which our assets and liabilities reprice. Although we have
implemented strategies which we believe reduce the potential effects of changes
in interest rates on our results of operations, these strategies will not always
be successful. In addition, any substantial and prolonged increase in market
interest rates could reduce our customers’ desire to borrow money from us or
adversely affect their ability to repay their outstanding loans by increasing
their costs since most of our loans have adjustable interest rates that reset
periodically. If our borrowers’ ability to repay is affected, our level of
non-performing assets would increase and the amount of interest earned on loans
will decrease, thereby having an adverse effect on operating results. Any of
these events could adversely affect our results of operations or financial
condition.
We
face intense competition from a variety of competitors.
We face
competition for deposits, loans, and other financial services from other
community banks, regional banks, out-of-state and in-state national banks,
savings banks, thrifts, credit unions and other financial institutions as well
as other entities which provide financial services, including consumer finance
companies, securities brokerage firms, insurance companies, mutual funds, and
other lending sources and alternative investment providers. Some of these
financial institutions and financial services organizations are not subject to
the same degree of regulation as we are. We face increased competition due to
the Gramm-Leach-Bliley Act, which allows insurance firms, securities firms, and
other non-traditional financial companies to provide traditional banking
services. The banking business in our target banking market and the surrounding
areas has become increasingly competitive over the past several years, and we
expect the level of competition to continue to increase. Many of these
competitors have been in business for many years, have established customers,
are larger, have substantially higher lending limits than we do, and are able to
offer certain services that we do not provide. In addition, many of these
entities have greater capital resources than we have, which among other things
may allow them to price their services at levels more favorable to the customer
or to provide larger credit facilities.
We
believe that the Bank will be a successful competitor in the area’s financial
services market. However, we cannot assure you that the Bank will be able to
compete successfully with other financial institutions serving our target
banking market. An inability to compete effectively could have a material
adverse effect on the Bank’s growth and profitability.
We
compete in an industry that continually experiences technological change, and we
may not be able to compete effectively with other banking institutions with
greater resources.
The
banking industry continues to undergo rapid technological changes with frequent
introduction of new technology-driven products and services. In addition to
providing better service to customers, the effective use of technology increases
efficiency and enables us to reduce costs. Our future success depends in part
upon our ability to address the needs of our customers by using technology to
provide products and services that will satisfy customer demands for convenience
as well as to create additional operating efficiencies. Many of our competitors
have substantially greater resources to invest in technological improvements.
Such technology may permit competitors to perform certain functions at a lower
cost than we can. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these to
our customers. Our inability to do so could have a material adverse effect on
our ability to compete effectively in our market and also on our business,
financial condition, and results of operations.
Our
legal lending limits may impair our ability to attract borrowers and ability to
compete with larger financial institutions.
Our per
customer lending limit is approximately $1.9 million, subject to further
reduction based on regulatory criteria. Accordingly, the size of loans which we
can offer to potential customers is less than the size which many of our
competitors with larger lending limits are able to offer. This limit has
affected and will continue to affect our ability to seek relationships with
larger businesses in our market area. We accommodate loans in excess of our
lending limit through the sale of portions of such loans to other banks.
However, we may not be successful in attracting or maintaining customers seeking
larger loans or in selling portions of such larger loans on terms that are
favorable to us.
An
economic downturn, especially one affecting our primary service area, could
diminish the quality of our loan portfolio, reduce our deposit base, and
negatively affect our financial performance.
Adverse
economic developments can impact the collectability of loans and the
sustainability of our core deposits and may negatively impact
our earnings and financial condition. In addition, the banking industry in
general is affected by economic conditions such as inflation, recession,
unemployment, and other factors beyond our control. A prolonged economic
recession or other economic dislocation could cause increases in nonperforming
assets and impair the values of real estate collateral, thereby causing
operating losses, decreasing liquidity, and eroding capital. Factors that
adversely affect the economy in our local banking market could reduce our
deposit base and the demand for our products and services, which may decrease
our earnings capability.
20
Monetary
policy and other economic factors could adversely affect the Bank’s
profitability.
Our
results of operations may be materially and adversely affected by changes in
prevailing economic conditions, including declines in real estate market values,
rapid changes in interest rates, and the monetary and fiscal policies of the
federal government. Our profitability is partly a function of the spread between
the interest rates earned on investments and loans and those paid on deposits.
As with most banking institutions, our net interest spread is affected by
general economic conditions and other factors that influence market interest
rates and our ability to respond to changes in such rates. At any given time,
our assets and liabilities may be affected differently by a given change in
interest rates. As a result, an increase or decrease in rates could have a
material adverse effect on our net income, capital and liquidity. While we take
measures to reduce interest-rate risk, these measures may not adequately
minimize exposure to interest-rate risk.
We
are subject to extensive regulatory oversight, which could constrain our growth
and profitability.
Banking
organizations such as the Company and the Bank are subject to extensive federal
and state regulation and supervision. Laws and regulations affecting financial
institutions are undergoing continuous change, and we cannot predict the
ultimate effect of these changes. We cannot assure you that any change in the
regulatory structure or the applicable statutes and regulations will not
materially and adversely affect the business, condition or operations of the
Company or the Bank or benefit competing entities that are not subject to the
same regulations and supervision.
Bank
regulators have imposed various conditions, among other things, that: (1) the
Company would not assume additional debt without prior approval by the Federal
Reserve Board; (2) the Company and the Bank will remain well-capitalized at all
times; (3) we will make appropriate filings with the regulatory agencies; and
(4) the Bank will meet all regulatory requirements as set forth. The regulatory
capital requirements imposed on the Bank could have the effect of constraining
growth.
We are
subject to extensive state and federal government supervision and regulations
that impose substantial limitations with respect to loans, purchase of
securities, payments of dividends, and many other aspects of the banking
business. Regulators include the Comptroller, the Federal Reserve, and the FDIC.
Applicable laws, regulations, interpretations, assessments and enforcement
policies have been subject to significant and sometimes retroactively applied
changes and may be subject to significant future changes.
Regulatory
agencies are funded, in part, by assessments imposed upon banks. Additional
assessments could occur in the future which could impact our financial
condition. Many of these regulations are intended to protect depositors, the
public, and the FDIC, not shareholders. Future legislation or government policy
could adversely affect the banking industry, our operations, or shareholders.
The burden imposed by federal and state regulations may place banks, in general,
and us, specifically, at a competitive disadvantage compared to less regulated
competitors. Federal economic and monetary policy may affect our ability to
attract deposits, make loans, and achieve satisfactory operating
results.
21
Current
adverse market conditions have resulted in a lack of liquidity and reduced
business activity.
Dramatic
declines in the housing market, with falling home prices and increasing
foreclosures and unemployment have resulted in significant write-downs of asset
values by financial institutions. These write-downs have caused many
financial institutions to seek additional capital, to merge with larger and
stronger institutions and, in some cases, to fail. To the extent a
weak institution in our market merges with or is acquired by a stronger
institution, the competition within the market may
increase. Reflecting concern about the stability of the financial
markets generally and the strength of counterparties, many lenders and
institutional investors have reduced, and in some cases, ceased to provide
funding to borrowers including other financial institutions. The
willingness of other banks to lend to the Bank may be further reduced by the
fact the Bank is new and has no established banking
relationships. Loans from other banks will be essential for the Bank
to maintain liquidity and grow its loan portfolio. The Bank
anticipates having sufficient liquidity to fund its immediate growth and
operations following its initial capitalization; however, a prolonged lack of
available credit with resulting reduced business activity could materially
adversely affect our business, financial condition and results of
operations.
RISKS
RELATED TO OUR COMMON STOCK
Our
common stock is thinly traded and, therefore, you may have difficulty selling
shares.
The
Company’s common stock is traded on the Over-the-Counter Bulletin Board
(“OTCBB”); however, we are unable to provide assurance that an active market
will exist in the future or that shares can be liquidated without delay. The
average daily trading volume in our stock was 426 in 2009.
We
do not anticipate paying dividends for the foreseeable future.
We do not
anticipate dividends will be paid on our common stock for the foreseeable
future. The Company is largely dependent upon dividends paid by the Bank to
provide funds to pay cash dividends if and when the board of directors may
declare such dividends. No assurance can be given that future earnings will be
sufficient to satisfy regulatory requirements and permit the legal payment of
dividends to shareholders at any time in the future. Even if we could legally
declare dividends, the amount and timing of such dividends would be at the
discretion of our board of directors. The board may in its sole discretion
decide not to declare dividends.
The
market price of our common stock may be volatile.
The
market price of our common stock is subject to fluctuations as a result of a
variety of factors, including the following:
|
·
|
quarterly
variations in our operating results or those of other banking
institutions;
|
|
·
|
changes
in national and regional economic conditions, financial markets or the
banking industry; and
|
|
·
|
other
developments affecting us or other financial
institutions.
|
The
trading volume of our common stock is limited, which may increase the volatility
of the market price for our stock. In addition, the stock market has experienced
significant price and volume fluctuations in recent years. This volatility has
had a significant effect on the market prices of securities issued by many
companies for reasons not necessarily related to the operating performance of
these companies.
22
Item
2.
|
Properties.
|
Our main
office is located at 16000 Dallas Parkway, Dallas, Texas 75248. We occupy 4,357
square feet of the main lobby-accessed ground floor of a multi-story office
building at that address. The lease for our main office began on January 1, 2004
and is for a term of 125 months. We subsequently leased an additional
3,493 square feet on the second floor of the same building to house our trust
and operations areas. The lease began on June 1, 2006, and is for a term of 64
months. The leases also call for the Bank to pay for a pro rata share of
operating, tax and electric costs above a certain base amount. We also operate a
branch office located at 8100 North Dallas Parkway, Plano, Texas, which is
approximately 10 miles north of the main office. The branch office occupies
1,750 square feet in a two story, commercial building in a developed commercial
center. The lease for our branch office began on December 1, 2003 and is for a
term of 120 months. The lease rate increased on month 60. The lease also calls
for the Bank to pay for a pro rata share of operating and tax costs above a
certain base amount. We also
operate a loan production office located at 850 E Highway 114, Southlake, Texas,
which is approximately 15 miles northwest of the main office. The loan
production office occupies 2,245 square feet on the second floor of a two story,
commercial building in a developed commercial center. The lease for our office
began on February 1, 2007 and is for a term of 120 months. The lease rate is
scheduled to increase on February 1, 2012. The lease also calls for the Bank to
pay for a pro rata share of operating and tax costs above a certain base amount.
Management believes that the principal terms of the leases are consistent with
prevailing market terms and conditions and that these facilities are in good
condition and adequate to meet our current needs.
Item
3.
|
Legal
Proceedings.
|
The Bank
is involved, from time to time, as plaintiff or defendant in various legal
actions arising in the normal course of its business. Based on the information
presently available, management believes that the ultimate outcome in such
proceedings, in the aggregate, will not have a material adverse effect on the
business’s financial condition or results of operations of the Company on a
consolidated basis. On April 15, 2010, the Bank settled a threatened
enforcement action by the Comptroller. See “Management’s Discussion and Analysis
of Financial Condition and Results of Operation - Recent Developments - Regulatory
Action.”
Item
4.
|
[Removed
and Reserved]
|
23
PART
II
Item
5.
|
Market
for Registrant’s Common Equity and Related Shareholder Matters and Issuer
Purchases of Equity Securities.
|
Market
Information
Our
common stock has been quoted on the OTCBB under the symbol “TBNC.OB” since June
2007 and “FMPX.OB” from November 2004 to June 2007. The table below gives the
high and low bid information for the last two fiscal years. The bid information
in the table was obtained from the OTCBB and reflects inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions. There may have been other transactions in our common stock of
which we are not aware.
High
|
Low
|
|||||||
2009
|
||||||||
Fourth
Quarter
|
$
|
5.38
|
$
|
4.55
|
||||
Third
Quarter
|
$
|
5.80
|
$
|
3.75
|
||||
Second
Quarter
|
$
|
6.00
|
$
|
3.00
|
||||
First
Quarter
|
$
|
7.25
|
$
|
3.50
|
||||
2008
|
||||||||
Fourth
Quarter
|
$
|
7.50
|
$
|
4.50
|
||||
Third
Quarter
|
$
|
9.50
|
$
|
5.07
|
||||
Second
Quarter
|
$
|
9.50
|
$
|
7.70
|
||||
First
Quarter
|
$
|
10.25
|
$
|
7.05
|
On March
31, 2010 we had 360 holders of record of our common stock.
Dividends
It is the
policy of our board of directors to reinvest earnings for such period of time as
is necessary to ensure our successful operations. There are no current plans to
initiate payment of cash dividends, and future dividends will depend on our
earnings, capital and regulatory requirements, financial condition, and other
factors considered relevant by our board of directors. In addition, we are
subject to regulatory restrictions on our payment of dividends. For more
information regarding the Company’s ability to pay dividends, please refer to
the “ Supervision and
Regulation ” section under Item 1.
Securities
Authorized for Issuance Under Equity Compensation Plans
Equity
Compensation Plan Information
Plan Category
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants, and rights
(a)
|
Weighted average
exercise price of
outstanding options,
warrants, and rights
(b)
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in (a))
|
|||||||||
Equity
compensation plans approved by security holders
|
260,000 | $ | 10.03 | 53,500 |
Item
6.
|
Select
Financial Data.
|
Because
the registrant is a small business issuer, disclosure under this item is not
required.
24
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.
|
This
management’s discussion and analysis of financial condition and results of
operations contains forward-looking statements that involve risks and
uncertainties. Please see “Item 1—Business—Forward-Looking Statements” for a
discussion of the uncertainties, risks and assumptions associated with these
statements. You should read the following discussion in conjunction with our
audited consolidated financial statements and the notes to our audited
consolidated financial statements included elsewhere in this report. Our actual
results may differ materially from those discussed in the forward-looking
statements as a result of various factors, including but not limited to those
listed under “Item 1A—Risk Factors” and included in other portions of this
report.
General
We are a
bank holding company headquartered in Dallas, Texas, offering a broad array of
banking services through our wholly owned banking subsidiary, T Bank, N.A. Our
principal markets include North Dallas, Addison, Plano, Frisco, Southlake,
Grapevine and the neighboring Texas communities. We currently operate through a
main office located at 16000 Dallas Parkway, Dallas, Texas, and another office
at 8100 North Dallas Parkway, Plano, Texas and a loan production office at 850 E
State Highway 114, Southlake, Texas.
We were
incorporated under the laws of the State of Texas on December 23, 2002 to
organize and serve as the holding company for the Bank The Bank opened for
business on November 2, 2004.
Business
Strategy
The Bank
operates as a full-service community bank emphasizing prompt, personalized
customer service to further our strategy of attracting deposits from the general
public and using such deposits and other sources of funds to originate
commercial business loans, commercial real estate loans, and a variety of
consumer loans. We believe our philosophy, encompassing the service aspects of
community banking, distinguish the Bank from its larger and non-locally owned
competitors and allows us to capitalize on an opportunity as a locally-owned and
locally-managed community bank to acquire significant market share.
The
Bank’s goal is to sustain profitability, maintain controlled growth by focusing
on increasing our loan and deposit market share by developing and offering new
financial products, services and delivery channels; closely managing yields on
earning assets and rates on interest-bearing liabilities; focusing on
noninterest income opportunities, controlling noninterest expenses and
maintaining strong asset quality.
2009
Executive Overview
Financial
Highlights
The
following were significant factors related to 2009 results as compared to
2008.
Total
assets were slightly higher at December 31, 2009 as compared to December 31,
2008 at $139.4 million and $136.3 million, respectively. Asset categories with
notable changes in 2009 compared to 2008 were:
|
·
|
Cash
and equivalents at December 31, 2009 decreased by $1.2 million as compared
to December 31, 2008; however, the Bank moved most of its Federal funds
sold balances from private financial institutions into its interest
bearing account at the Federal Reserve Bank of
Dallas.
|
|
·
|
Securities
available for sale were $4.0 million at December 31, 2009. The Bank had no
securities available for sale at December 31, 2008. The increase was due
to management’s decision to develop longer term balance sheet liquidity at
higher yields than Federal funds sold. All of the securities are pledged
to the Federal Home Loan Bank of Dallas as collateral for current and
future borrowings.
|
|
·
|
Net
loans declined by $2.0 million from December 31, 2008. Management
maintained the loan portfolio at approximately level balances throughout
the year to ensure the Bank was in compliance with the capital ratio
requirements of the Consent Order dated July 9, 2008, discussed at “Business-Supervision and
Regulation - Bank Secrecy
Act.”
|
|
·
|
A
significant increase in other assets is the result of increased other real
estate owned to $1.6 million at December 31, 2009, compared to zero at the
end of 2008. Further, in November 2009, the FDIC issued a rule requiring
all institutions, with limited exceptions, to prepay their estimated
insurance assessments for the fourth quarter 2009 and for all of 2010,
2011 and 2012 in order to improve the FDIC’s liquidity. In December 2009,
the Bank paid $921,000 in prepaid assessments and is included in other
assets.
|
Total
liabilities were up $5.4 million at December 31, 2009 compared to December 31,
2008. While deposits were down $3.0 million, borrowings were up by $5.5 million
due principally to a 7 day advance of $10.0 million from the Federal Home Loan
Bank of Dallas which was paid in full on January 7, 2010.
Net
interest income was up at year end 2009 by $241,000 compared to 2008. A decrease
in trust income of $2.9 million was largely offset by a comparable decrease in
trust expenses, resulting in a net decrease of $174,000 in net trust income for
2009 compared to 2008. This decrease is primarily due to the financial equities
markets averaging lower in 2009 compared to the prior year, and both trust
income and expenses correlate closely to the market value of assets in custody
which are largely invested in the markets.
The
Company recorded a provision for loan losses of approximately $1.4 million for
the year ended December 31, 2009, an increase of $953,000, from the $417,000
provision for loan losses in 2008. The continuing recession contributed to
declining credit quality during 2009 resulting in the inability of borrowers to
service their debt. Net loan charge offs for 2009 were $1.3 million. Also, the
allowance for loan loss to total loans percentage increased from 1.31% at
December 31, 2008 to 1.39% at December 31, 2009, as well. Ratios of
nonperforming assets as a percentage of total assets increased from 3.36% at
December 31, 2008 to 3.88% at December 31, 2009.
Net loss
for 2009 was $3.8 million compared to net loss of $428,000 in 2008. The net loss
for 2009 was primarily the result of $1.3 million in net loan charge-offs, a
charge of $2.4 million to establish a reserve for consumer restitution in
connection with the Agreement with the Comptroller, a reserve of $185,000
representing the estimated cost to administer the Restitution, and a charge of
$100,000 for the civil money penalty e imposed by the Comptroller in connection
with the Order (see Item 1A “Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operation - Recent Developments - Regulatory
Action.”).
25
Recent
Developments
Regulatory
Action
The Bank
was recently informed by the Comptroller that the Comptroller intended to
institute an enforcement action for alleged violations of the Federal Trade
Commission Act in connection with certain merchants and a payment processor that
were Bank customers between September 1, 2006 and August 27,
2007. The Comptroller proposed that the Bank enter into a
formal agreement with the Comptroller (the “Agreement”) and a consent order for
a civil money penalty (the “Order”) payable by the Bank to resolve the
Comptroller’s allegations.
The Bank
terminated all business relationships with the merchants and the payment
processor on August 27, 2007. The Comptroller alleges that the merchants and the
payment processor defrauded consumers and is seeking restitution of such
consumers from the Bank, asserting that by accepting consumer payments for
deposit from the merchants and introducing those payments into the payment
clearing system, the Bank materially aided the merchants and the payment
processor in the alleged fraudulent activity.
Because
the cost of defending a regulatory enforcement action is likely to be
significant, would likely take a protracted timeframe, and we cannot be certain
of a favorable outcome to the Bank, we determined (and currently still believe)
that negotiating a settlement with the Comptroller is in the best interest
of the Bank. Accordingly, we have over recent months been in
discussion with the Comptroller about settling these claims. We have
over the past few weeks devoted first priority to these discussions, with the
expectation that this priority would result in a settlement with the Comptroller
prior to issuing our year-end 2009 financial statements. On April 15, 2010, the
Bank executed an Agreement and Order containing the general terms outlined as
follows:
|
·
|
deposit
$5.1 million for consumer restitution charged by the merchants to
eligible consumers;
|
|
·
|
Provide
for a civil money penalty of
$100,000;
|
|
·
|
require
the Bank to retain an independent claims administrator to locate and
arrange for the issuance of individual consumer checks to the identified
eligible consumers;
|
|
·
|
terminate
the Consent Order dated July 9, 2008, between the Bank and the
Comptroller, which contained provisions requiring the Bank to establish a
satisfactory program to ensure compliance with the Bank Secrecy Act and
established minimum capital ratios;
|
|
·
|
require
the Bank to establish a capital plan which, among other provisions,
details the Bank’s plan to achieve tier 1 capital ratio of 9% and total
risk based capital ratio of 11.5%;
|
|
·
|
require
the Bank to develop a written program designed to reduce the level of
criticized assets;
|
|
·
|
require
the Bank to develop and implement an asset liquidity enhancement plan
designed to increase the amount of asset liquidity maintained by the Bank,
including a loan to deposit ratio of 85%;
and
|
|
·
|
require
the Bank to develop a written profit plan to improve and sustain the
earnings of the Bank.
|
Although
we do not know at this time the precise amounts that would ultimately be payable
by us under the terms of the Agreement, we expect that any such settlement would
ultimately require the Bank to, among other things, pay a significant and
material restitution payment which we have estimated to be $2.4
million. Further, there is no assurance that the Bank would be able
to comply with all of the requirements of the Agreement and Order, including
meeting the stated capital requirements contained therein. Nor is
there assurance that, should the Bank pay significant and material amounts of
restitution and/or civil money penalties, the short and long term financial
condition, results of operations, liquidity, and/or prospects of the Bank, upon
which the Company is dependent, will not be materially adversely, and
irreparably, impacted.
In
determining the amount of funds that the Bank needs to reserve to make
restitution payments to consumers under the Agreement, management has made
certain assumptions regarding the number of consumers who elect to accept
restitution checks and the ability of the Bank and its claim processor to locate
consumers. Based on such assumptions, management concluded that it is
possible that the Bank will be liable for an amount that is up to $5.1 million,
while the Agreement does not limit the liability to this
amount. However, until the restitution process is fully investigated,
formulated, and approved by the Comptroller, the Company has estimated that the
amount of restitution would not exceed the $5.1 million set forth in the
Agreement. In addition, certain consumers purchased products or
services from a merchant that is currently in litigation with the Federal Trade
Commission (“FTC”), which management believes represents approximately $1.6
million of the $5.1 million set forth in the Agreement. We do not
have enough information to estimate the probability of outcome of the FTC
litigation with the merchant. Additionally, we cannot estimate the amount, if
any, of restitution that the merchant or FTC may pay the consumers of this
merchant which, if paid, would reduce the Bank’s possible liability to $3.5
million. Because our Agreement with the Comptroller stipulates that the
Bank will not be responsible for the $1.6 million if the FTC or the merchant
ultimately pay the consumers, we have not included this amount in our estimate
of the appropriate reserve.
Based on
the information available to management regarding actual historical rates that
restitution checks are ultimately negotiated by consumers, management’s estimate
is that approximately 68% of the total potential exposure will be realized.
Therefore, management believes the appropriate reserve to accrue for restitution
is 68% of $3.5 million, or $2.4 million. We have estimated and
accrued an expense of $185,000 representing the estimated cost to administer the
restitution based on information from our claims administrator, and
accrued an expense of $100,000 for the civil money penalty to be imposed by the
Comptroller in connection with the Order. This expected reserve and accrued
expenses we believe represents a reasonable estimate under FASB ASC Topic 450 of
liability based on the facts and circumstances as we understand them
today. However, we can not assure you that this estimate of the
required reserve will not change due to the risk factors described in Item 1A.
If management’s estimates prove inaccurate, the Bank may be required to
recognize additional payments on restitution checks. As a result, our
financial condition and results of operation may be materially adversely
affected.
26
Loan
Losses
During
the first quarter of 2010, we expect losses of approximately $1.16 million
primarily related to one large loan and two smaller loans. The events
and factors leading to the expected losses on these loans occurred during the
first quarter of 2010. We have written the loans down to an amount that Bank
believes it can collect. This has resulted in a preliminary estimated addition
to the provision for loan losses of $1.3 million. This
would increase our allowance for loan losses from 1.39% of
total loans as of December 31, 2009 to 1.59% of total loans as of March 31,
2010.
Critical
Accounting Policies
The
Company’s financial condition and results of operations are sensitive to
accounting measurements and estimates of matters that are inherently uncertain.
When applying accounting policies in areas that are subjective in nature, the
Company must use its best judgment to arrive at that carrying value of certain
assets. The following accounting policies are identified by management as being
critical to the results of operations:
Allowance
for Credit Losses
The
allowance for loan losses is a valuation allowance for probable incurred credit
losses, increased by the provision for loan losses and decreased by charge-offs
less recoveries. Management estimates the allowance balance required by
considering the collectability of loans based on historical experience and the
borrowers ability to repay, the nature and volume of the portfolio, information
about specific borrower situations and the estimated value of any underlying
collateral, economic conditions and other factors. The allowance consists of
general and specific reserves. The specific component relates to loans that are
individually evaluated and determined to be impaired. This evaluation is often
based on significant estimates and assumptions due to the level of subjectivity
and judgment necessary to account for highly uncertain matters of the
susceptibility of such matters to change. The general component relates to the
entire group of loans that are evaluated in the aggregate based primarily on
industry historical loss experience adjusted for current economic factors. To
the extent actual loan losses differ materially from management’s estimate of
these subjective factors, loan growth/run-off accelerates, or the mix of loan
types changes, the level of the provision for loan loss, and related allowance
can, and will, fluctuate. As of December 31, 2009, the allowance for loan loss
was $1.7 million which represents approximately 1.39% of total
loans.
Securities
available for sale
Securities
available for sale are evaluated periodically to determine whether a decline in
their value is other than temporary. The term "other than temporary" is not
intended to indicate a permanent decline in value. Rather, it means that the
prospects for near term recovery of value are not necessarily favorable, or that
there is a lack of evidence to support fair values equal to, or greater than,
the carrying value of the security.
The
initial indication of OTTI for both debt and equity securities is a decline in
the market value below the amount recorded for an investment, and the severity
and duration of the decline. In determining whether an impairment is other than
temporary, we consider the length of time and the extent to which the market
value has been below cost, recent events specific to the issuer, including
investment downgrades by rating agencies and economic conditions of its
industry, our intent to sell the investment, and if it is more likely than not
that we will be required to sell the security before recovery of its amortized
cost basis. For marketable equity securities, we also consider the issuer's
financial condition, capital strength, and near−term prospects. For debt
securities and for perpetual preferred securities that are treated as debt
securities for the purpose of OTTI analysis, we also consider the cause of the
price decline (general level of interest rates and industry− and issuer−specific
factors), the issuer's financial condition, near−term prospects and current
ability to make future payments in a timely manner, the issuer's ability to
service debt, and any change in agencies' ratings at evaluation date from
acquisition date and any likely imminent action. Once a decline in value is
determined to be other than temporary, the security is segmented into credit−
and noncredit−related components. Any impairment adjustment due to identified
credit−related components is recorded as an adjustment to current period
earnings, while noncredit−related fair value adjustments are recorded through
other comprehensive income. In situations where we intend to sell or it is more
likely than not that we will be required to sell the security, the entire OTTI
loss must be recognized in earnings.
Income
Taxes
Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
difference between carrying amounts and tax basis of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized. Positions taken by
the Company in preparing the consolidated federal tax return are subject to the
review of the Internal Revenue Service or to reinterpretation based on
management’s ongoing assessment of facts and evolving case law, and as such
positions taken by management could result in a material adjustment to the
financial statements.
Periodically
and in the ordinary course of business, we are involved in inquiries and reviews
by tax authorities that normally require management to provide supplemental
information to support certain tax positions we take in our tax returns.
Uncertain tax positions are initially recognized in the financial statements
when it is more likely than not the position will be sustained upon examination
by the tax authorities. Such tax positions are initially and subsequently
measured as the largest amount of tax benefit that is greater than 50% likely of
being realized upon ultimate settlement with the tax authority assuming full
knowledge of the position and all relevant facts. Management believes it has
taken appropriate positions on its tax returns, although the ultimate outcome of
any tax review cannot be predicted with certainty. Still, no assurance can be
given that the final outcome of these matters will not be different than what is
reflected in the current and historical financial statements.
27
Loan
income recognition
Interest
income on loans is accrued at the contractual rate based on the principal
outstanding. Loan origination fees and certain direct loan origination costs are
deferred and amortized as a yield adjustment over the contractual loan terms.
Accrual of interest is discontinued when its receipt is in doubt, which
typically occurs when a loan becomes impaired. Any interest accrued to income in
the year when interest accruals are discontinued is generally reversed.
Management may elect to continue the accrual of interest when a loan is in the
process of collection and the estimated fair value of the collateral is
sufficient to satisfy the principal balance and accrued interest. Loans are
returned to accrual status once the doubt concerning collectibility has been
removed and the borrower has demonstrated the ability to pay and remain current.
Payments on nonaccrual loans are generally applied to principal.
Real
estate acquired through foreclosure
We record
foreclosed real estate assets at the lower of cost or estimated fair value on
the acquisition date and at the lower of such initial amount or estimated fair
value less estimated selling costs thereafter. Estimated fair value is based
upon many subjective factors, including location and condition of the property
and current economic conditions, among other things. Because the calculation of
fair value relies on estimates and judgments relating to inherently uncertain
events, results may differ from our estimates.
Write−downs
at time of transfer are made through the allowance for loan losses. Write−downs
subsequent to transfer are included in our noninterest expenses, along with
operating income, net of related expenses of such properties and gains or losses
realized upon disposition.
Stock
Based Compensation
We
adopted FASB ASC Topic 718 using the modified-prospective-transition method.
Accordingly, no compensation expense was recognized in our financial statements
for years ended prior to January 1, 2006. For the years ended December 31, 2009
and 2008, we recorded expense of $103,000 and $96,000, respectively, for option
grants.
We
calculated the compensation expense of the options using the Modified
Black-Scholes-Merton option pricing model to determine the fair value of the
options granted. In calculating the fair value of the options, management makes
assumptions regarding the risk-free rate of return, the expected volatility of
our common stock and the expected life of the options.
Recent
Accounting Pronouncements
Please
refer to Note 1 of the accompanying Consolidated Financial Statements for
information related to the adoption of new accounting standards and the effect
of newly issued but not yet effective accounting standards.
Financial
Condition
Total
assets were slightly higher at December 31, 2009 as compared to December 31,
2008 at $139.4 million and $136.3 million, respectively. Asset categories with
notable changes in 2009 compared to 2008 were:
|
·
|
Cash
and equivalents at December 31, 2009 decreased by $1.2 million as compared
to December 31, 2008; however, the Bank moved most of its Federal funds
sold balances from private financial institutions into its interest
bearing account at the Federal Reserve Bank of
Dallas.
|
|
·
|
Securities
available for sale were $4.0 million at December 31, 2009. The Bank had no
securities available for sale at December 31, 2008. The increase was due
to management’s decision to develop longer term balance sheet liquidity at
higher yields than Federal funds sold. All of the securities are pledged
to the Federal Home Loan Bank of Dallas as collateral for current and
future borrowings.
|
|
·
|
Net
loans declined by $2.0 million from December 31, 2008. Management
maintained the loan portfolio at approximately level balances throughout
the year to ensure the Bank was in compliance with the capital ratio
requirements of the 2008 Order, discussed at “Business-Supervision and
Regulation - Bank Secrecy
Act.”
|
|
·
|
A
significant increase in other assets is the result of increased other real
estate owned to $1.6 million at December 31, 2009, compared to zero at the
end of 2008. Further, in November 2009, the FDIC issued a rule requiring
all institutions, with limited exceptions, to prepay their estimated
insurance assessments for the fourth quarter 2009 and for all of 2010,
2011 and 2012 in order to improve the FDIC’s liquidity. In December 2009,
the Bank paid $921,000 in prepaid assessments and is included in other
assets.
|
Total
liabilities were up $5.4 million at December 31, 2009 compared to December 31,
2008. While deposits were down $3.0 million, borrowings were up by $5.5 million
due principally to a 7 day advance of $10.0 million from the Federal Home Loan
Bank of Dallas which was paid in full on January 7, 2010.
28
Net
interest income was up at year end 2009 by $241,000 compared to 2008. A decrease
in trust income of $2.9 million was largely offset by a comparable decrease in
trust expenses, resulting in a net decrease of $174,000 in net trust income for
2009 compared to 2008. This decrease is primarily due to the financial equities
markets averaging lower in 2009 compared to the prior year, and both trust
income and expenses correlate closely to the market value of assets in custody
which are largely invested in the markets.
The
Company recorded a provision for loan losses of approximately $1.4 million for
the year ended December 31, 2009, an increase of $953,000, from the $417,000
provision for loan losses in 2008. The continuing recession contributed to
declining credit quality during 2009 resulting in the inability of borrowers to
service their debt. Net loan charge offs for 2009 were $1.3 million. Also, the
allowance for loan loss to total loans percentage increased from 1.31% at
December 31, 2008 to 1.39% at December 31, 2009, as well. Ratios of
nonperforming assets as a percentage of total assets increased from 3.36% at
December 31, 2008 to 3.88% at December 31, 2009.
Net loss
for 2009 was $3.8 million compared to net loss of $428,000 in 2008. The net loss
for 2009 was primarily the result of $1.3 million in net loan charge-offs, a
charge of $2.4 million to establish a reserve for consumer restitution in
connection with the Agreement with the Comptroller, a reserve of $185,000
representing the estimated cost to administer the restitution, and a charge of
$100,000 for the civil money penalty imposed by the Comptroller in connection
with the Order (see Item 1A “Risk Factors”).
Investment
Securities
Securities
are categorized as either “held to maturity”, “available for sale”, or
“trading.” Securities held to maturity represent those securities which the Bank
has the positive intent and ability to hold to maturity. The primary purpose of
the Bank’s investment portfolio is to provide a source of earnings for liquidity
management purposes, to provide collateral to pledge against public deposits,
and to control interest rate risk. In managing the portfolio, the Bank seeks to
attain the objectives of safety of principal, liquidity, diversification, and
maximized return on investment.
29
At
December 31, 2009, securities available for sale consisted of mortgage-backed
securities guaranteed by U.S. government agencies. Securities held to maturity
consisted of a GNMA mortgage backed security having an amortized cost of
$801,000 and a fair value of $830,000. Restricted securities consisted of
Federal Reserve Bank Stock, having an amortized cost and fair value of $420,000,
Federal Home Loan Bank stock, having an amortized cost and fair value of
$861,000. The weighted average yield for the securities was 2.37% at December
31, 2009.
At
December 31, 2008, securities held to maturity consisted of a GNMA mortgage
backed security having an amortized cost of $981,000 and a fair value of
$1,012,000. Restricted securities consisted of Federal Reserve Bank Stock,
having an amortized cost and fair value of $420,000, Federal Home Loan Bank
stock, having an amortized cost and fair value of $302,000. The weighted average
yield for the securities was 3.28% at December 31, 2008.
The
following presents the amortized cost and fair values of the securities
portfolio at December 31, 2009 and 2008:
As
of December 31,
|
||||||||||||||||
2009
|
2008
|
|||||||||||||||
(000's)
|
Amortized
Cost
|
Estimated
Fair Value
|
Amortized
Cost
|
Estimated
Fair Value
|
||||||||||||
Securities
Available for Sale:
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 3,988 | $ | 4,005 | $ | - | $ | - | ||||||||
Securities
Held to Maturity:
|
||||||||||||||||
U.S.
Government Agencies
|
801 | 830 | 981 | 1,012 | ||||||||||||
Securities,
restricted:
|
||||||||||||||||
Other
|
1,281 | 1,281 | 722 | 722 | ||||||||||||
Total
|
$ | 6,070 | $ | 6,116 | $ | 1,703 | $ | 1,734 |
Loan
Portfolio Composition
Commercial
loans comprise the largest group of loans in our portfolio amounting to $88.9
million, or 72.1% of the total loan portfolio, at December 31, 2009, which is up
from $81.3 million, or 65.0%, at December 31, 2008. Commercial real estate loans
comprise the second largest group of loans in the portfolio. At
December 31, 2009, commercial real estate loans totaled $32.5 million, or 26.4%
of the total loan portfolio, compared to $40.0 million, or 32.0%, at year end in
prior year. The following table sets forth the composition of our loan
portfolio:
As
of December 31,
|
||||||||||||||||
(000's)
|
2009
|
2008
|
||||||||||||||
Commercial
and industrial
|
$
|
88,920
|
72.1
|
%
|
$
|
81,342
|
65.0
|
%
|
||||||||
Consumer
installment
|
1,852
|
1.5
|
%
|
3,799
|
3.0
|
%
|
||||||||||
Real
estate — mortgage
|
25,464
|
20.7
|
%
|
20,543
|
16.4
|
%
|
||||||||||
Real
estate — construction
|
7,045
|
5.7
|
%
|
19,481
|
15.6
|
%
|
||||||||||
Other
|
2
|
0.0
|
%
|
12
|
0.0
|
%
|
||||||||||
$
|
123,283
|
100.0
|
%
|
$
|
125,177
|
100.0
|
%
|
|||||||||
Less
allowance for loan losses
|
1,713
|
1,638
|
||||||||||||||
Less
deferred loan fees
|
151
|
146
|
||||||||||||||
$
|
121,419
|
$
|
123,393
|
Loan
concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that would cause them
to be similarly impacted by economic or other conditions. At December 31, 2009,
our commercial loan portfolio included $77.0 million of loans, approximately
62.6% of our total funded loans, to the dental industry, as compared to $73.6
million, or 58.8%, at December 31, 2008. We believe that these loans are to
credit worthy borrowers and are diversified geographically. As new loans are
generated to replace loans which have paid off or reduced balances as a result
of payments, the percentage of the total loan portfolio creating the foregoing
concentration may remain constant thereby continuing the risk associated with
industry concentration.
30
As of
December 31, 2009, 23.5% of the loan portfolio consisting of commercial,
consumer and real estate loans, or $29.0 million, matures or re-prices within
one year or less. The following table presents the contractual maturity ranges
for commercial, consumer and real estate loans outstanding at December 31, 2009
and 2008, and also presents for each maturity range the portion of loans that
have fixed interest rates or variable interest rates over the life of the loan
in accordance with changes in the interest rate environment as represented by
the base rate:
As of December 31, 2009
|
||||||||||||||||||||||||
Over 1 Year through 5 Years
|
Over 5 Years
|
|||||||||||||||||||||||
(000's)
|
One Year or
Less
|
Fixed Rate
|
Floating or
Adjustable
Rate
|
Fixed Rate
|
Floating or
Adjustable
Rate
|
Total
|
||||||||||||||||||
Commercial
and industrial
|
$
|
19,132
|
$
|
5,950
|
$
|
1,798
|
$
|
30,948
|
$
|
31,092
|
$
|
88,920
|
||||||||||||
Consumer
installment
|
669
|
1,183
|
-
|
-
|
-
|
1,852
|
||||||||||||||||||
Real
estate — mortgage
|
4,741
|
7,447
|
1,810
|
1,368
|
10,098
|
25,464
|
||||||||||||||||||
Real
estate — construction
|
4,474
|
2,082
|
361
|
128
|
-
|
7,045
|
||||||||||||||||||
Other
|
2
|
-
|
-
|
-
|
-
|
2
|
||||||||||||||||||
Total
|
$
|
29,018
|
$
|
16,662
|
$
|
3,969
|
$
|
32,444
|
$
|
41,190
|
$
|
123,283
|
As of December 31, 2008
|
||||||||||||||||||||||||
Over 1 Year through 5 Years
|
Over 5 Years
|
|||||||||||||||||||||||
(000's)
|
One Year or
Less
|
Fixed Rate
|
Floating or
Adjustable
Rate
|
Fixed Rate
|
Floating or
Adjustable
Rate
|
Total
|
||||||||||||||||||
Commercial
and industrial
|
$
|
12,618
|
$
|
8,089
|
$
|
515
|
$
|
45,101
|
$
|
15,019
|
$
|
81,342
|
||||||||||||
Consumer
installment
|
1,117
|
793
|
-
|
1,889
|
-
|
3,799
|
||||||||||||||||||
Real
estate — mortgage
|
3,480
|
6,897
|
782
|
4,827
|
4,557
|
20,543
|
||||||||||||||||||
Real
estate — construction
|
15,832
|
280
|
1,179
|
1,440
|
750
|
19,481
|
||||||||||||||||||
Other
|
12
|
-
|
-
|
-
|
-
|
12
|
||||||||||||||||||
Total
|
$
|
33,059
|
$
|
16,059
|
$
|
2,476
|
$
|
53,257
|
$
|
20,326
|
$
|
125,177
|
Scheduled
contractual principal repayments of loans do not reflect the actual life of such
assets. The average life of loans is less than their average contractual terms
due to prepayments.
Nonperforming
Assets
Our
primary business is making commercial, real estate, and consumer loans. That
activity entails potential loan losses, the magnitude of which depends on a
variety of economic factors affecting borrowers which are beyond our control.
While the Company has instituted underwriting guidelines and credit review
procedures to protect it from avoidable credit losses, some losses will
inevitably occur. Non-performing assets include non-accrual loans, accruing
loans 90 or more days past due and other repossessed assets. Non-performing
assets at December 31, 2009 increased $823,000 from December 31, 2008.
Nonperforming loans decreased $823,000 to $3.8 million at December 31, 2009, as
compared to $4.6 million at December 31, 2008. Other real estate
owned at December 31, 2009 was $1.6 million. The Company had no other
real estate owned at December 31, 2008. The Company had no loans past
due 90 days and still accruing interest at December 31, 2009 compared to $1.3
million at December 31, 2008.
Loans are
placed on nonaccrual status when management has concerns relating to the ability
to collect the loan principal and interest and generally when such loans are 90
days or more past due. A loan is considered impaired when it is probable that
not all principal and interest amounts will be collected according to the loan
contract. The following table sets forth certain information regarding
nonaccrual loans and 90 days or more past due loans by type, including ratio of
such loans to total assets as of the dates indicated:
31
As of December 31,
|
||||||||||||||||
(000's)
|
2009
|
2008
|
||||||||||||||
Allocated:
|
Amount
|
Loan
Category to
Total Assets
|
Amount
|
Loan
Category to
Total Assets
|
||||||||||||
Commercial
and industrial
|
$
|
2,155
|
1.55
|
%
|
$
|
137
|
0.10
|
%
|
||||||||
Real
estate — mortgage
|
-
|
-
|
%
|
1,666
|
1.22
|
%
|
||||||||||
Real
estate — construction
|
1,633
|
1.17
|
%
|
2,778
|
2.04
|
%
|
||||||||||
Consumer
and other
|
-
|
-
|
%
|
-
|
-
|
%
|
||||||||||
Total
nonperforming loans
|
3,788
|
2.72
|
%
|
4,581
|
3.36
|
|||||||||||
Other
real estate owned
|
1,616
|
1.16
|
%
|
-
|
-
|
%
|
||||||||||
Total
non-performing assets
|
$
|
5,404
|
3.88
|
%
|
$
|
4,581
|
3.36
|
%
|
Credit
Risk Management
Credit
risk is the risk of loss arising from the inability of a borrower to meet its
obligations. We manage credit risk by evaluating the risk profile of the
borrower, repayment sources, the nature of the underlying collateral, and other
support given current events, conditions, and expectations. We attempt to manage
the risk characteristics of our loan portfolio through various control
processes, such as credit evaluation of borrowers, establishment of lending
limits, and application of lending procedures, including the holding of adequate
collateral and the maintenance of compensating balances. However, we seek to
rely primarily on the cash flow of our borrowers as the principal source of
repayment. Although credit policies and evaluation processes are designed to
minimize our risk, management recognizes that loan losses will occur and the
amount of these losses will fluctuate depending on the risk characteristics of
our loan portfolio, as well as general and regional economic
conditions.
We
provide for loan losses through the establishment of an allowance for loan
losses by provisions charged against earnings. Our allowance represents an
estimated reserve for existing losses in the loan portfolio. We deploy a
systematic methodology for determining our allowance that includes a quarterly
review process, risk rating, and adjustment to our allowance. We classify our
portfolios as either consumer or commercial and monitor credit risk separately
as discussed below. We evaluate the adequacy of our allowance continually based
on a review of all significant loans, with a particular emphasis on nonaccruing,
past due, and other loans that we believe require special
attention.
The
allowance consists of two elements: (1) specific reserves and valuation
allowances for individual credits; (2) general reserves for types or portfolios
of loans based on historical loan loss experience, judgmentally adjusted for
current conditions and credit risk concentrations. All outstanding loans are
considered in evaluating the adequacy of the allowance.
Allowance
for Loan Losses
The
allowance for loan losses is a valuation allowance for credit losses in the loan
portfolio. Management has adopted a methodology to properly analyze and
determine an adequate loan loss allowance. The analysis is based on sound,
reliable and well documented information and is designed to support an allowance
that is adequate to absorb all estimated incurred losses in the Company’s loan
portfolio.
In
estimating the specific and general exposure to loss on impaired loans, the
Company has considered a number of factors, including the borrower’s character,
overall financial condition, resources and payment record, the prospects for
support from any financially responsible guarantors, and the realizable value of
any collateral.
The
Company also considers other internal and external factors when determining the
allowance for loan losses, which include, but are not limited to, changes in
national and local economic conditions, loan portfolio concentrations, and
trends in the loan portfolio.
Senior
management and the Directors Loan Committee review this calculation and the
underlying assumptions on a routine basis not less frequently than
quarterly.
The
allowance for loan losses amounted to $1.7 million at December 31, 2009 and $1.6
million at December 31, 2008. During the year ended December 31, 2009, the Bank
had charge-offs of $1.3 million compared to $451,000 for the year ended December
31, 2008. The Bank did not experience any charge-offs prior to
2008. The total reserve percentage increased to 1.39% at year-end
2009 from 1.31% of loans at December 31, 2008 as a result of the effects of
economic conditions on borrowers and values of assets pledged as collateral.
Based on an analysis performed by management at December 31, 2009, the allowance
for loan losses is considered to be adequate to cover estimated loan losses in
the portfolio as of that date. However, management’s judgment is based upon a
number of assumptions about future events, which are believed to be reasonable,
but which may or may not prove valid. Thus, there can be no assurance that
charge-offs in future periods will not exceed the allowance for loan losses or
that significant additional increases in the allowance for loan losses will not
be required.
32
The
following table sets forth the specific allocation of the allowance for years
ended December 31, 2009 and 2008 and the percentage of allocated possible loan
losses in each category to total gross loans:
As of December 31,
|
||||||||||||||||
(000's)
|
2009
|
2008
|
||||||||||||||
Allocated:
|
Amount
|
Loan
Category to
Gross Loans
|
Amount
|
Loan
Category to
Gross Loans
|
||||||||||||
Commercial
and industrial
|
$
|
1,285
|
75.0
|
%
|
$
|
1,064
|
65.0
|
%
|
||||||||
Consumer
installment
|
23
|
1.3
|
%
|
49
|
3.0
|
%
|
||||||||||
Real
estate — mortgage
|
318
|
18.6
|
%
|
269
|
16.4
|
%
|
||||||||||
Real
estate — construction
|
87
|
5.1
|
%
|
256
|
15.6
|
%
|
||||||||||
Total
allowance for loan losses
|
$
|
1,713
|
100.00
|
%
|
$
|
1,638
|
100.00
|
%
|
Note: An allocation for a loan
classification is only for internal analysis of the adequacy of the allowance
and is not an indication of expected or anticipated losses.
Sources
of Funds
General
Deposits,
loan and investment security repayments and prepayments, proceeds from the sale
of securities, and cash flows generated from operations are the primary sources
of our funds for lending, investing, and other general purposes. Loan repayments
are generally a relatively stable source of funds, while deposit inflows and
outflows tend to fluctuate with prevailing interests rates, markets and economic
conditions, and competition.
Deposits
Deposits
are attracted principally from our primary geographic market area with the
exception of time deposits, which, due to the Bank’s attractive rates, are
attracted from across the nation. The Bank offers a broad selection of deposit
products, including demand deposit accounts, NOW accounts, money market
accounts, regular savings accounts, term certificates of deposit and retirement
savings plans (such as IRAs). Deposit account terms vary, with the primary
differences being the minimum balance required, the time period the funds must
remain on deposit, and the associated interest rates. Management sets the
deposit interest rates weekly based on a review of deposit flows for the
previous week, and a survey of rates among competitors and other financial
institutions. The Bank relies primarily on customer service and long-standing
relationships with customers to attract and retain deposits; however, market
interest rates and rates offered by competing financial institutions
significantly affect the Bank’s ability to attract and retain deposits. The Bank
can not be considered well capitalized, regardless of its capital ratios.
Because of FDIC restrictions which took affect on January 1, 2010 for all
insured banks which are not well capitalized, the Bank is restricted from
offering rates in excess of .75% over the national average rate for various
deposit terms as published weekly by the FDIC. This further affects
the Bank’s ability to attract and retain deposits. (See Item A “Risk Factors” for additional
discussion regarding our ability to attract and retain
deposits).
33
The
following table sets forth our average deposit account balances, the percentage
of each type of deposit to total deposits, and average cost of funds for each
category of deposits:
As of December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Average
Balance
|
Percent of
Deposits
|
Average
Yield
|
Average
Balance
|
Average
Yield
|
||||||||||||||||||||
Noninterest
bearing deposits
|
$
|
9,931
|
8.4
|
%
|
0.00
|
%
|
$
|
13,649
|
10.0
|
%
|
0.00
|
%
|
||||||||||||
NOW
accounts
|
1,876
|
1.6
|
%
|
0.74
|
%
|
1,792
|
1.3
|
%
|
1.04
|
%
|
||||||||||||||
Money
market accounts
|
48,249
|
40.8
|
%
|
1.40
|
%
|
46,722
|
34.4
|
%
|
2.62
|
%
|
||||||||||||||
Savings
accounts
|
197
|
0.2
|
%
|
1.07
|
%
|
162
|
0.1
|
%
|
1.46
|
%
|
||||||||||||||
Certificates
of deposit less than $100,000
|
18,607
|
15.7
|
%
|
4.34
|
%
|
27,646
|
20.4
|
%
|
4.98
|
%
|
||||||||||||||
Certificates
of deposit $100,000 or more
|
39,298
|
33.3
|
%
|
4.57
|
%
|
45,908
|
33.8
|
%
|
5.03
|
%
|
||||||||||||||
Total
average deposits
|
$
|
118,158
|
100.00
|
%
|
3.04
|
%
|
$
|
135,879
|
100.00
|
%
|
4.03
|
%
|
The
following table presents maturity of our time deposits of $100,000 or more at
December 31, 2009 and 2008:
As of December 31,
|
||||||||
(000's)
|
2009
|
2008
|
||||||
Three
months or less
|
$
|
8,869
|
$
|
3,345
|
||||
Over
three months through 12 months
|
10,315
|
7,557
|
||||||
Over
one year through three years
|
25,724
|
21,031
|
||||||
Over
three years
|
1,126
|
5,307
|
||||||
Total
|
$
|
46,034
|
$
|
37,240
|
Liquidity
Our
liquidity is its ability to maintain a steady flow of funds to support its
ongoing operating, investing and financing activities. Our Board establishes
policies and analyzes and manages liquidity to ensure that adequate funds are
available to meet normal operating requirements in addition to unexpected
customer demands for funds, such as high levels of deposit withdrawals or loan
demand, in a timely and cost-effective manner. The most important factor in the
preservation of liquidity is maintaining public confidence that facilitates the
retention and growth of a large, stable supply of core deposits and funds.
Ultimately, public confidence is generated through profitable operations, sound
credit quality and a strong capital position. Liquidity management is viewed
from a long-term and a short-term perspective as well as from an asset and
liability perspective. We monitor liquidity through a regular review of loan and
deposit maturities and forecasts, incorporating this information into a detailed
projected cash flow model.
The
Bank’s primary sources of funds will be retail and commercial deposits, loan
repayments, maturity of investment securities, other short-term borrowings, and
other funds provided by operations. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and loan prepayments are
more influenced by interest rates, general economic conditions, and competition.
The Bank will maintain investments in liquid assets based upon management’s
assessment of (1) the need for funds, (2) expected deposit flows, (3) yields
available on short-term liquid assets, and (4) objectives of the asset/liability
management program.
The Bank
had cash and cash equivalents of $7.3 million, or 5.2% of total assets at
December 31, 2009. In addition to the on balance sheet liquidity available, the
Bank has lines of credit with the Federal Home Loan Bank (“FHLB”) and the
Federal Reserve Bank (“FRB”), which provides the Bank with a source of
off-balance sheet liquidity. As of December 31, 2009, the Bank’s established
credit line with the FHLB was $18.3 million, or 13.1% of assets, of which $16.0
million was utilized or outstanding. However, a 7 day advance of $10
million from the FHLB was paid in full on January 7, 2010. The established
credit line with the FRB was $22.7 million, or 16.3% of assets, of which none
was utilized at December 31, 2009. The Bank’s trust operations serve
in a fiduciary capacity for approximately $773 million in total market value of
assets. Some of these custody assets are invested in cash. This cash is
maintained either in a third party money market mutual fund (invested
predominately in U.S. Treasury securities and other high grade investments) or
in a Bank money market account. Only cash which is fully insured by the FDIC is
maintained at the Bank. This cash can be moved readily between the Bank and the
third party money market mutual fund. As of December 31, 2009, there
was $39.1 million of cash at the third party money market mutual fund available
to transfer to the Bank which would be fully FDIC insured for the trust
customers of the Bank.
34
Net
Interest Income
The
following table presents the changes in net interest income and identifies the
changes due to differences in the average volume of earning assets and
interest–bearing liabilities and the changes due to changes in the average
interest rate on those assets and liabilities. The changes in net
interest income due to changes in both average volume and average interest rate
have been allocated to the average volume change or the average interest rate
change in proportion to the absolute amounts of the change in each.
2009 vs 2008
|
2008 vs 2007
|
|||||||||||||||||||||||
(000's)
|
Increase
(Decrease) Due to
Change
in
|
Increase
(Decrease) Due
to
Change in
|
||||||||||||||||||||||
Rate
|
Volume
|
Total
|
Rate
|
Volume
|
Total
|
|||||||||||||||||||
Federal
Funds Sold
|
$
|
(197
|
)
|
$
|
26
|
$
|
(171
|
)
|
$
|
(589
|
)
|
$
|
(205
|
)
|
$
|
(794
|
)
|
|||||||
Securities
|
(29
|
)
|
115
|
86
|
(23
|
)
|
7
|
(16
|
)
|
|||||||||||||||
Loans,
net of reserve
|
(593
|
)
|
(670)
|
(1,263
|
)
|
(1,532
|
)
|
1,868
|
336
|
|||||||||||||||
Total
earning assets
|
(819
|
)
|
(529)
|
(1,348
|
)
|
(2,144
|
)
|
1,670
|
(474
|
)
|
||||||||||||||
NOW
|
(6
|
)
|
1
|
(5
|
)
|
(2
|
)
|
2
|
-
|
|||||||||||||||
Money
Market
|
(573
|
)
|
21
|
(552
|
)
|
(1,021
|
)
|
(409
|
)
|
(1,430
|
)
|
|||||||||||||
Savings
|
(1
|
)
|
-
|
(1
|
)
|
0
|
(2
|
)
|
(2
|
)
|
||||||||||||||
Certificates
of deposit $100,000 or less
|
(171
|
)
|
(391
|
)
|
(562
|
)
|
(127
|
)
|
659
|
532
|
||||||||||||||
Certificates
of deposit $100,000 or more
|
(213
|
)
|
(302
|
)
|
(515
|
)
|
(200
|
)
|
1,092
|
892
|
||||||||||||||
Other
Borrowings
|
(2
|
)
|
48
|
46
|
-
|
3
|
3
|
|||||||||||||||||
Total
Interest-bearing liabilities
|
(966
|
)
|
(623
|
)
|
(1,589
|
)
|
(1,350
|
)
|
1,345
|
(5
|
)
|
|||||||||||||
Changes
in net interest income
|
$
|
147
|
$
|
94
|
$
|
241
|
$
|
(794
|
)
|
$
|
325
|
$
|
(469
|
)
|
Net
interest income for 2009 increased $241,000, or 4.9%, compared to
2008. The increase primarily resulted from a decrease in the average
interest yield for interest-bearing liabilities and was partly offset by the
average yield of earning assets. The average yield on
interest-bearing liabilities decreased to 2.64% for 2009, compared to 4.02% for
2008.
Net
interest income for 2008 decreased $469,000, or 8.7%, compared to
2007. The decrease primarily resulted from a decrease in the average
interest yield for earning assets and was partly offset by the average volume of
earning assets. The average yield on earning assets decreased to
6.75% for 2008, compared to 7.97% for 2007. The average volume of
interest earning assets for 2008 increased $16.2 million, or 12.6%, compared to
2007.
35
Capital
Resources and Regulatory Capital Requirements
Shareholders’
equity decreased $2.2 million during 2009 to $11.6 million at December 31, 2009
from $$13.8 million at December 31, 2008. The decrease was primarily due to a
net loss for 2009 of $3.8 million. The net loss for 2009 was primarily the
result of $1.3 million in net loan charge-offs, a charge of $2.4 million to
establish a reserve for consumer restitution in connection with the Agreement
with the Comptroller, a reserve of $185,000 representing the estimated cost to
administer the restitution, and a charge of $100,000 for the civil money penalty
imposed by the Comptroller in connection with the Order (see Item 1A “Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operation - Recent Developments - Regulatory
Action.”).
On
December 31, 2008, the Company completed its rights offering for 237,504 shares
of common stock at a price of $7.50 per share for a total of $1.8
million. The proceeds from the offering were held in receivership at
year end and deposited with the Company on January 7, 2009, partially offsetting
the impact of the net losses.
The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken could have a direct material effect on the Bank's
and, accordingly, the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank’s assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative
measures established by regulations to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as
defined).
To be
categorized as well-capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table.
(000's)
|
Actual
|
For Capital
Adequacy Purposes
|
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
|
|||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
As
of December 31, 2009
|
||||||||||||||||||||||||
Total
Capital (to Risk Weighted Assets)
|
$
|
12,640
|
11.33
|
%
|
$
|
8,925
|
>
|
8.00
|
%
|
$
|
11,156
|
>
|
10.00
|
%
|
||||||||||
Tier
1 Capital (to Risk Weighted Assets)
|
11,242
|
10.08
|
%
|
4,462
|
>
|
4.00
|
%
|
6,694
|
>
|
6.00
|
%
|
|||||||||||||
Tier
1 Capital (to Average Assets)
|
11,242
|
7.51
|
%
|
5,988
|
>
|
4.00
|
%
|
7,485
|
>
|
5.00
|
%
|
|||||||||||||
As
of December 31, 2008
|
||||||||||||||||||||||||
Total
Capital (to Risk Weighted Assets)
|
$
|
14,400
|
12.05
|
%
|
$
|
9,558
|
>
|
8.00
|
%
|
$
|
11,947
|
>
|
10.00
|
%
|
||||||||||
Tier
1 Capital (to Risk Weighted Assets)
|
12,905
|
10.80
|
%
|
4,779
|
>
|
4.00
|
%
|
7,168
|
>
|
6.00
|
%
|
|||||||||||||
Tier
1 Capital (to Average Assets)
|
12,905
|
9.21
|
%
|
5,603
|
>
|
4.00
|
%
|
7,004
|
>
|
5.00
|
%
|
On July
9, 2008, the Bank announced that it entered into the Stipulation and
the 2008 Order with the Comptroller. The 2008 Order was replaced with the
Order dated April 15, 2010 (see “Management’s Discussion and Analysis
of Financial Condition and Results of Operation - Recent Developments - Regulatory
Action.”) in which the Bank has agreed to maintain specific capital
ratios, among other provisions.. Regardless of the Bank’s capital position, the
requirement in the Order to meet and maintain a specific capital level means
that the Bank may not be deemed to be well capitalized under regulatory
requirements, irrespective of the Bank’s actual capital ratios. Furthermore, the
capital ratios required by the Order are 11.5% total capital to risk weighted
assets and 9.00% tier 1 capital to average assets. As of December 31, 2009, the
Bank was not in compliance with this requirement with capital ratios
of 11.33% and 7.51%, respectively. In order to comply with
those capital ratios, the Bank would have needed an additional $2.3 million of
capital based on our average assets for the quarter ending December
31, 2009.
36
Off-Balance
Sheet Arrangements and Contractual Obligations
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the accompanying balance sheets. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The amount of credit extended is based on management’s credit evaluation of the
customer and, if deemed necessary, may require collateral.
Standby
letters of credit are conditional commitments issued by the Company to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers. At December 31, 2009, the Company had commitments to extend
credit and standby letters of credit of approximately $6.8 million and $15,000,
respectively.
The
following is a summary of the Company’s contractual obligations, including
certain on-balance-sheet obligations, at December 31, 2009:
As of December 31, 2009
|
||||||||||||||||
(000's)
|
Less than
One Year
|
One to
Three Years
|
Over Three to
Five Years
|
Over Five
Years
|
||||||||||||
Unused
lines of credit
|
$
|
6,085
|
$
|
-
|
$
|
-
|
$
|
764
|
||||||||
Standby
letters of credit
|
15
|
-
|
-
|
-
|
||||||||||||
Operating
Leases
|
292
|
488
|
328
|
145
|
||||||||||||
Certificates
of Deposit
|
27,915
|
32,765
|
1,860
|
-
|
||||||||||||
Total
|
$
|
34,307
|
$
|
33,253
|
$
|
2,188
|
$
|
909
|
Results
of Operations
Our
operating results depend primarily on our net interest income. Net interest
income is the difference between interest income, principally from loan, lease
and investment securities portfolios, and interest expense, principally on
customer deposits and borrowings. Changes in net interest income result from
changes in volume and spread and are reflected in the net interest margin.
Volume refers to the average dollar level of interest-earning assets and
interest-bearing liabilities. Spread refers to the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Margin refers to net interest income divided by
average interest-earning assets, and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities.
Net
interest income was $5.2 million and $4.9 million for the years ended December
31, 2009 and December 31, 2008, respectively. Net interest margin was 3.4% and
3.3% for the years ended December 31, 2009 and 2008, respectively. The increase
in net interest income and net interest margin is primarily the result of a
decrease in deposit interest rates and increase in borrowed funds with low
interest rates.
Total
interest income was $8.5 million and $9.8 million for the years ended December
31, 2009 and 2008, respectively. The decrease in interest income was primarily a
result of a decrease in interest rates and transfer of approximately $9.7
million in loans to lower yielding securities and fed funds sold. Total average
loans and average yield for the year ended December 31, 2009 was $121.0 million
and 6.7% compared with $130.7 million and 7.3% for the year ended December 31,
2008.
Total
interest expense was $3.3 million and $4.9 million for the year ended December
31, 2009 and 2008, respectively. The decrease in interest expense was a result
of a decrease in deposit interest rates and increased volume in low yielding
borrowed funds. The average interest rate for interest-bearing liabilities was
2.6% for the year ended December 31, 2009, compared to 4.0% for the same period
in 2008.
37
The
following table sets forth our average balances of assets, liabilities and
shareholders’ equity, in addition to the major components of net interest income
and our net interest margin for the years ended December 31, 2009 and
2008.
Twelve Months Ended December
31,
|
||||||||||||||||||||||||
(000'S)
|
2009
|
2008
|
||||||||||||||||||||||
Average
Balance
|
Interest
|
Average
Yield
|
Average
Balance
|
Interest
|
Average
Yield
|
|||||||||||||||||||
Interest-earning
assets
|
||||||||||||||||||||||||
Loans,
net of reserve
|
$ | 120,991 | $ | 8,239 | 6.72 | % | $ | 130,713 | $ | 9,502 | 7.27 | % | ||||||||||||
Federal
funds sold
|
17,930 | 114 | 0.63 | % | 13,405 | 285 | 2.12 | % | ||||||||||||||||
Securities
and other
|
8,322 | 145 | 1.71 | % | 1,680 | 59 | 3.51 | % | ||||||||||||||||
Total
earning assets
|
147,243 | 8,498 | 5.69 | % | 145,798 | 9,846 | 6.75 | % | ||||||||||||||||
Cash
and other assets
|
4,385 | 4,476 | ||||||||||||||||||||||
Total
assets
|
$ | 151,628 | $ | 150,274 | ||||||||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
NOW
accounts
|
$ | 1,875 | $ | 14 | 0.74 | % | $ | 1,792 | $ | 19 | 1.06 | % | ||||||||||||
Money
market accounts
|
48,249 | 673 | 1.40 | % | 46,722 | 1,225 | 2.62 | % | ||||||||||||||||
Savings
accounts
|
197 | 2 | 1.07 | % | 162 | 2 | 1.23 | % | ||||||||||||||||
Certificates
of deposit less than $100,000
|
18,608 | 807 | 4.34 | % | 27,646 | 1,378 | 4.98 | % | ||||||||||||||||
Certificates
of deposit $100,000 or greater
|
39,299 | 1,795 | 4.57 | % | 45,908 | 2,302 | 5.01 | % | ||||||||||||||||
Total
interest bearing deposits
|
108,228 | 3,291 | 3.04 | % | 122,230 | 4,926 | 4.03 | % | ||||||||||||||||
Borrowed
funds
|
18,379 | 49 | 0.27 | % | 268 | 3 | 1.11 | % | ||||||||||||||||
Total
interest bearing liabilities
|
126,607 | 3,340 | 2.64 | % | 122,498 | 4,929 | 4.02 | % | ||||||||||||||||
Noninterest
bearing deposits
|
9,931 | 13,649 | ||||||||||||||||||||||
Other
liabilities
|
637 | 1,035 | ||||||||||||||||||||||
Stockholders
equity
|
14,453 | 13,092 | ||||||||||||||||||||||
Total
liabilities and stockholders' equity
|
$ | 151,628 | $ | 150,274 | ||||||||||||||||||||
Net
interest income
|
5,158 | 4,917 | ||||||||||||||||||||||
Net
interest spread
|
3.05 | % | 2.73 | % | ||||||||||||||||||||
Net
interest margin
|
3.45 | % | 3.33 | % |
Provision
for Loan Losses
The Bank
establishes provision for loan losses, which are charged to operations, at a
level required to reflect probable incurred credit losses in the loan portfolio.
For additional information concerning this determination, see the section of
this discussion and analysis captioned “Allowance for
Loan and Lease Losses.”
The
provision for loan losses for the years ended December 31, 2009 and 2008 were
$1.4 million and $417,000, respectively.
38
Noninterest
Income
The
components of non-interest income for the years ended December 31, 2009 and 2008
were as follows:
Year
ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Service
charges and fees
|
$
|
116
|
$
|
203
|
||||
Trust
services
|
6,846
|
9,718
|
||||||
$
|
6,962
|
$
|
9,921
|
Non-interest
income for the year-ended December 31, 2009 decreased $3.0 million or 29.8%, as
compared to 2008. The decrease is due primarily to trust income attributable to
the general decline in the market values of assets in trust accounts on which
the fees are based.
Noninterest
Expenses
For the
fiscal year ended December 31, 2009, the Company’s expenses totaled $14.6
million, compared to $14.8 million for 2008.
Salaries
and employee benefits remained unchanged at $3.1 million for the year ended
December 31, 2009 and 2008. We had 28 full-time equivalent employees
as of December 31, 2009, and 31 employees as of December 31, 2008.
Occupancy
and equipment expenses totaled $1.3 million for the year ended December 31,
2009, as compared to $1.2 million for 2008. Expense in both periods is
attributable primarily to lease expense and depreciation and amortization of
leasehold improvements and furniture, fixtures and equipment.
Expenses
related to trust consulting services were $5.8 million for the year ended
December 31, 2009, compared to $8.5 million for 2008. Advisory fees are based on
total assets held in custody and are paid to a fund advisor to manage the assets
in the trust. Similar to trust income, the decrease in trust expense is directly
attributable to the general decline in the market values in trust
accounts.
Professional
fees were $640,000 for the year ended December 31, 2009, compared to $597,000
for 2008.
Data
processing fees were $268,000 for the year ended December 31, 2009, compared to
$521,000 for 2008. The $253,000 decrease from prior year is due primarily to
lower processing volumes.
Deposit
insurance costs increased due to an increase in our rates assessed by the FDIC,
including total special assessments of approximately $62,000 in 2009. Our
regular FDIC rates have increased due to our capital adequacy levels and
financial condition.
Other
expenses were $3.5 million for the year ended December 31, 2009, compared to
$959,000 for 2008. The $2.5 million increase from prior year is due
to the reserve for consumer restitution in connection with the Agreement with
the Comptroller and related accrued expenses (see “Management’s Discussion and Analysis
of Financial Condition and Results of Operation - Recent Developments - Regulatory
Action.”).
Income
Taxes
No
federal tax expense has been recorded for the fiscal years ended December 31,
2009 and 2008 based upon prior net operating losses and the Company’s
carry-forward of those losses. The Company has fully reserved the federal tax
benefit of these losses. Cumulative net operating loss available to carry
forward for tax purposes amounted to approximately $1.8 million as of December
31, 2009. This is lower than the losses per the financial statements as all
organizational costs are capitalized for income tax purposes.
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market
Risk.
|
Because
the registrant is a small business issuer, disclosure under this item is not
required.
39
Item
8.
|
Financial
Statements and Supplementary Data
|
INDEX
TO FINANCIAL STATEMENTS
Page
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
41
|
FINANCIAL
STATEMENTS
|
|
Consolidated
Balance Sheets
|
42
|
Consolidated
Statements of Operations
|
43
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
44
|
Consolidated
Statements of Cash Flows
|
45
|
Notes
to Consolidated Financial Statements
|
46
|
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Shareholders
We have
audited the accompanying consolidated balance sheets of T Bancshares, Inc. (the
Company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders’ equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of T Bancshares,
Inc. as of December 31, 2009 and 2008, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
/s/
WEAVER AND TIDWELL, L.L.P.
Fort
Worth, Texas
April 15,
2010
41
T
BANCSHARES, INC.
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2009 and 2008
(000's)
|
2009
|
2008
|
||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 1,216 | $ | 1,002 | ||||
Interest-bearing
deposits
|
5,526 | 240 | ||||||
Federal
funds sold
|
550 | 7,215 | ||||||
Total
cash and cash equivalents
|
7,292 | 8,457 | ||||||
Securities
available for sale at estimated fair value
|
4,005 | - | ||||||
Securities
held to maturity at amortized cost
|
801 | 981 | ||||||
Securities,
restricted at cost
|
1,281 | 722 | ||||||
Loans,
net of allowance for loan losses of $1,713 and $1,638,
respectively
|
121,419 | 123,393 | ||||||
Bank
premises and equipment, net
|
793 | 1,169 | ||||||
Other
real estate owned
|
1,616 | - | ||||||
Other
assets
|
2,204 | 1,528 | ||||||
Total
assets
|
$ | 139,411 | $ | 136,250 | ||||
LIABILITIES
|
||||||||
Demand
Deposits:
|
||||||||
Noninterest-bearing
|
$ | 9,428 | $ | 10,077 | ||||
Interest-bearing
|
36,157 | 42,407 | ||||||
Time
deposits $100,000 and over
|
46,034 | 37,240 | ||||||
Other
time deposits
|
16,506 | 21,372 | ||||||
Total
deposits
|
108,125 | 111,096 | ||||||
Borrowed
funds
|
16,000 | 10,500 | ||||||
Other
liabilities
|
3,695 | 860 | ||||||
Total
liabilities
|
127,820 | 122,456 | ||||||
SHAREHOLDERS’
EQUITY
|
||||||||
Common
Stock, $ .01 par value; 10,000,000 shares authorized; 1,941,305 shares
issued and outstanding
|
19 | 17 | ||||||
Additional
paid-in capital
|
18,537 | 16,915 | ||||||
Retained
deficit
|
(6,982 | ) | (3,138 | ) | ||||
Accumulated
other comprehensive income
|
17 | - | ||||||
Total
shareholders' equity
|
11,591 | 13,794 | ||||||
Total
liabilities and shareholders' equity
|
$ | 139,411 | $ | 136,250 |
See
accompanying notes to consolidated financial statements
42
T
BANCSHARES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
YEARS
ENDED DECEMBER 31, 2009 and 2008
(000's), except per share amounts
|
2009
|
2008
|
||||||
Interest
Income
|
||||||||
Loan,
including fees
|
$ | 8,239 | $ | 9,502 | ||||
Securities
|
139 | 59 | ||||||
Federal
funds sold
|
114 | 285 | ||||||
Interest-bearing
deposits
|
6 | - | ||||||
Total
interest income
|
8,498 | 9,846 | ||||||
Interest
Expense
|
||||||||
Deposits
|
3,291 | 4,926 | ||||||
Borrowed
funds
|
49 | 3 | ||||||
Total
interest expense
|
3,340 | 4,929 | ||||||
Net
interest income
|
5,158 | 4,917 | ||||||
Provision
for loan losses
|
1,370 | 417 | ||||||
Net
interest income after provision for loan losses
|
3,788 | 4,500 | ||||||
Noninterest
Income
|
||||||||
Trust
income
|
6,846 | 9,718 | ||||||
Service
fees
|
116 | 203 | ||||||
Total
noninterest income
|
6,962 | 9,921 | ||||||
Noninterest
Expense
|
||||||||
Salaries
and employee benefits
|
3,077 | 3,068 | ||||||
Occupancy
and equipment
|
1,285 | 1,197 | ||||||
Trust
expenses
|
5,809 | 8,507 | ||||||
Professional
fees
|
640 | 597 | ||||||
Data
processing
|
268 | 521 | ||||||
Other
|
3,515 | 959 | ||||||
Total
noninterest expense
|
14,594 | 14,849 | ||||||
Net
Loss
|
$ | (3,844 | ) | $ | (428 | ) | ||
Loss
per common share:
|
||||||||
Basic
|
(1.99 | ) | (0.25 | ) | ||||
Diluted
|
(1.99 | ) | (0.25 | ) | ||||
Weighted
average common shares outstanding
|
1,936,099 | 1,703,801 | ||||||
Weighted
average diluted shares outstanding
|
1,936,099 | 1,703,801 |
See
accompanying notes to consolidated financial statements
43
T
BANCSHARES, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS
ENDED DECEMBER 31, 2009 and 2008
(000's)
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Deficit
|
Accumulated
Other
Comprehensive
Income
|
Total
|
|||||||||||||||
BALANCE,
December 31, 2007
|
$ | 17 | $ | 16,819 | $ | (2,710 | ) | $ | - | $ | 14,126 | |||||||||
Comprehensive
loss:
|
||||||||||||||||||||
Net
loss — YTD
|
(428 | ) | (428 | ) | ||||||||||||||||
Total
comprehensive loss
|
(428 | ) | ||||||||||||||||||
Stock
based compensation
|
96 | 96 | ||||||||||||||||||
BALANCE,
December 31, 2008
|
$ | 17 | $ | 16,915 | $ | (3,138 | ) | $ | - | $ | 13,794 | |||||||||
Comprehensive
loss:
|
||||||||||||||||||||
Net
loss — YTD
|
(3,844 | ) | (3,844 | ) | ||||||||||||||||
Change
in accumulated gain on securities available for sale
|
17 | 17 | ||||||||||||||||||
Total
comprehensive loss
|
(3,827 | ) | ||||||||||||||||||
Net
proceeds from rights offering
|
2 | 1,519 | 1,521 | |||||||||||||||||
Stock
based compensation
|
103 | 103 | ||||||||||||||||||
BALANCE,
December 31, 2009
|
$ | 19 | $ | 18,537 | $ | (6,982 | ) | $ | 17 | $ | 11,591 |
See
accompanying notes to consolidated financial statements
44
T
BANCSHARES, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
YEARS
ENDED DECEMBER 31, 2009 and 2008
(000's)
|
2009
|
2008
|
||||||
Cash
Flows from Operating Activities
|
||||||||
Net
loss
|
$
|
(3,844
|
)
|
$
|
(428
|
)
|
||
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||
Provision
for loan losses
|
1,370
|
417
|
||||||
Depreciation
and amortization
|
458
|
466
|
||||||
Securities
premium amortization (discount accretion), net
|
57
|
(15
|
)
|
|||||
Gain
on sale of real estate
|
(1
|
)
|
-
|
|||||
Stock
based compensation
|
103
|
96
|
||||||
Change
in operating assets and liabilities:
|
||||||||
Other
assets
|
(676
|
)
|
(347
|
)
|
||||
Other
liabilities
|
2,835
|
381
|
||||||
Net
cash provided by operating activities
|
302
|
570
|
||||||
Cash
Flows from Investing Activities
|
||||||||
Purchase
of securities held to maturity
|
-
|
(3,003
|
)
|
|||||
Proceeds
from principal payments and maturities of securities held to
maturity
|
180
|
3,000
|
||||||
Purchase
of securities available for sale
|
(56,685
|
)
|
(50,000
|
)
|
||||
Proceeds
from principal payments, calls and maturities of securities available for
sale
|
2,640
|
29
|
||||||
Proceeds
from sale of securities available for sale
|
50,000
|
50,000
|
||||||
Purchase
of securities, restricted
|
(984
|
)
|
(223
|
)
|
||||
Proceeds
from sale of securities, restricted
|
425
|
-
|
||||||
Net
change in loans
|
(1,388
|
)
|
(3,886
|
)
|
||||
Proceeds
from sale of other real estate
|
377
|
-
|
||||||
Purchases
of premises and equipment
|
(82
|
)
|
(34
|
)
|
||||
Net
cash used in investing activities
|
(5,517
|
)
|
(4,117
|
)
|
||||
Cash
Flows from Financing Activities
|
||||||||
Net
change in demand deposits
|
(6,899
|
)
|
(13,707
|
)
|
||||
Net
change in time deposits
|
3,928
|
(8,107
|
)
|
|||||
Proceeds
from borrowed funds
|
236,517
|
10,500
|
||||||
Repayment
of borrowed funds
|
(231,017
|
)
|
(242
|
)
|
||||
Net
proceeds from rights offering
|
1,521
|
-
|
||||||
Net
cash (used in) provided by financing activities
|
4,050
|
(11,556
|
)
|
|||||
Net
change in cash and cash equivalents
|
(1,165
|
)
|
(15,103
|
)
|
||||
Cash
and cash equivalents at beginning of period
|
8,457
|
23,560
|
||||||
|
||||||||
Cash
and cash equivalents at end of period
|
$
|
7,292
|
$
|
8,457
|
||||
Supplemental
disclosures of cash flow information
|
||||||||
Cash
paid during the period for
|
|
|||||||
Interest
|
$
|
3,316
|
$
|
4,958
|
||||
Income
taxes
|
$
|
-
|
$
|
-
|
||||
Non-cash
transactions:
|
||||||||
Transfers
from loans to other real estate owned
|
$
|
1,992
|
$
|
-
|
See
accompanying notes to consolidated financial statements
45
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
and Nature of Operations
T
Bancshares, Inc. (the “Company”) is a bank holding company headquartered in
Dallas, Texas. The consolidated financial statements include the accounts of T
Bancshares, Inc. and its wholly owned subsidiary, T Bank, N.A. (the “Bank”). The
Company’s financial condition and operating results principally reflect those of
the Bank. All intercompany transactions and balances are eliminated in
consolidation.
The Bank
provides a full range of banking services to individuals and corporate customers
with two banking facilities serving North Dallas, Addison, Plano, Frisco and
surrounding area communities. Additionally, the Bank maintains a loan production
office in Southlake. The Bank’s primary business segment is community banking
and consists of attracting deposits from the general public and using such
deposits and other sources of funds to originate commercial business loans,
commercial real estate loans, and a variety of consumer loans. At December 31,
2009, the Bank’s loan portfolio consisted of approximately $77.0 million, or
62.6% of the loan portfolio, in loans to dentists and dental practices.
Substantially all loans are secured by specific collateral, including business
assets, consumer assets, and commercial real estate.
The Bank
also offers traditional fiduciary services primarily to clients of Cain Watters
& Associates P.C. The Bank, Cain Watters & Associates P.C., and III:I
Financial Management Research, L.P. have entered into an advisory services
agreement related to the trust operations.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expense during the reporting period, as well as the
disclosures provided. Changes in assumptions or in market conditions could
significantly affect the estimates. The determination of the allowance for loan
losses, the fair value of stock options, the fair values of financial
instruments and other real estate owned, and the status of contingencies are
particularly susceptible to significant change in recorded amounts.
Cash
and Cash Equivalents
The
Company maintains its cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and does not believe it is exposed to significant credit risk on cash
and cash equivalents.
For
purposes of the consolidated statements of cash flows, cash and cash equivalents
include cash on hand, deposits with other financial institutions, and federal
funds sold. Net cash flows are reported for customer loan and deposit
transactions.
Trust
Assets
Property
held for customers in a fiduciary capacity, other than trust cash on deposit at
the Bank, is not included in the accompanying consolidated financial statements
since such items are not assets of the Company.
Securities
Debt
securities are classified as held to maturity and carried at amortized cost when
management has the positive intent and ability to hold them until maturity.
Securities to be held for indefinite periods of time are classified as available
for sale and carried at fair value, with the unrealized holding gains and losses
reported as a component of other comprehensive income, net of tax. Securities
held for resale in anticipation of short-term market movements are classified as
trading and are carried at fair value, with changes in unrealized holding gains
and losses included in income. Management determines the appropriate
classification of securities at the time of purchase. Securities with limited
marketability, such as stock in the Federal Reserve Bank and the Federal Home
Loan Bank, are carried at cost.
Interest
income includes amortization of purchase premiums and accretion of purchase
discounts. Premiums and discounts on securities are amortized on the level-yield
method without anticipating prepayments. Gains and losses are recorded on the
trade date and determined using the specific identification method. 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. In estimating other-than-temporary impairment losses,
management considers, among other things, (i) the length of time and the extent
to which the fair value has been less than cost, (ii) the financial condition
and near-term prospects of the issuer, and (iii) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.
46
The Bank
has investments in stock of the Federal Reserve System and the Federal Home Loan
Bank as is required for participation in the services offered. These investments
are classified as restricted and are recorded at cost.
Loans
Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are reported at the principal balance outstanding, net
of unearned interest, deferred loan fees, and allowance for loan losses.
Interest income is accrued on the unpaid principal balance. Loan origination
fees are deferred and recognized in interest income using the level-yield method
without anticipating prepayments.
Interest
income on commercial business and commercial real estate loans is discontinued
when the loan becomes 90 days delinquent unless the credit is well secured and
in process of collection. Unsecured consumer loans are generally charged off
when the loan becomes 90 days past due. Consumer loans secured by collateral
other than real estate are charged off after a review of all factors affecting
the ability to collect on the loan, including the borrower’s history, overall
financial condition, resources, guarantor support, and the realizable value of
any collateral. However, any consumer loan past 180 days is charged off. Past
due status is based on the contractual terms of the loan. In all cases, loans
are placed on nonaccrual or charged off at an earlier date if collection of
principal or interest is considered doubtful.
All
interest accrued but not received for loans placed on nonaccrual are reversed
against interest income. Interest received on such loans is accounted for on a
cash-basis or cost-recovery method, until qualifying for return to accrual
basis. Loans are returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably
assured.
Allowance
for Loan Losses
The
allowance for loan losses is a valuation allowance for probable incurred credit
losses, increased by the provision for loan losses and decreased by charge-offs
less recoveries. Management estimates the allowance balance required by
considering the collectability of loans based on historical experience and the
borrowers ability to repay, the nature and volume of the portfolio, information
about specific borrower situations and the estimated value of any underlying
collateral, economic conditions and other factors.
The
allowance consists of general and specific reserves. The specific component
relates to loans that are individually evaluated and determined to be impaired.
This evaluation is often based on significant estimates and assumptions due to
the level of subjectivity and judgment necessary to account for highly uncertain
matters of the susceptibility of such matters to change. The general component
relates to the entire group of loans that are evaluated in the aggregate based
primarily on industry historical loss experience adjusted for current economic
factors. To the extent actual loan losses differ materially from management’s
estimate of these subjective factors, loan growth/run-off accelerates, or the
mix of loan types changes, the level of the provision for loan loss, and related
allowance can, and will, fluctuate.
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due.
Bank
Premises and Equipment
Bank
premises and equipment are stated at cost less accumulated depreciation.
Buildings and related components are depreciated using the straight-line method
with useful lives ranging from 5 to 40 years. Furniture, fixtures and equipment
are depreciated using the straight-line method with useful lives ranging from 3
to 10 years. Leasehold improvements are depreciated over the lease term or
estimated life, whichever is shorter. Repair and maintenance costs are expensed
as incurred.
Stock
Based Compensation
Effective
January 1, 2006, the Company adopted FASB ASC Topic 718 using the
modified-prospective-transition method. Under this method, prior periods are not
restated. Also, under this transition method, stock compensation cost recognized
beginning January 1, 2006 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant-date estimated fair value, and (b) compensation cost for all
share-based payments granted on or subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of FASB ASC
Topic 718.
47
As a
result of applying FASB ASC Topic 718, the Company recorded $103,000 and $96,000
in compensation expense for the years ended December 31, 2009 and December 31,
2008, respectively, in connection with the Stock Incentive Plan. This amount is
not reduced by related deferred tax assets since all deferred tax assets are
impaired as of December 31, 2009 (see Note 10). As of December 31, 2009 there
was $149,000 of total unrecognized compensation cost related to non-vested
equity-based compensation awards expected to vest.
Income
Taxes
The
Company accounts for income taxes utilizing the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The
Company has provided a 100% valuation allowance for its net deferred tax asset
due to the Company’s net operating loss carry-forward of approximately $1.8
million as of December 31, 2009.
The
Company accounts for uncertainties in income taxes in accordance with current
accounting guidance which prescribes a recognition threshold and a measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Benefits from
tax positions should be recognized in the financial statements only when it is
more likely than not that the tax position will be sustained upon examination by
the appropriate taxing authority that would have full knowledge of all relevant
information. A tax position that meets the more-likely-than-not recognition
threshold is measured at the largest amount of cumulative benefit that is
greater than fifty percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent financial
reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not recognition threshold
should be derecognized in the first subsequent financial reporting period in
which that threshold is no longer met. No uncertain tax positions have been
recognized.
The
Company files income tax returns in the U.S. federal jurisdiction and the Texas
state jurisdiction. The Company is no longer subject to U.S. federal income tax
examinations by tax authorities for years before 2006.
Earnings
Per Share
Basic
earnings per share are computed by dividing net income applicable to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share are computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents. Common
stock equivalents consist of stock options and warrants and are computed using
the treasury stock method.
The
Company reported a net loss for the year ended December 31, 2009. The dilutive
effect of 195,500 outstanding options and 96,750 outstanding warrants for the
year ended December 31, 2009, is not considered in the per share calculations
for these periods as the impact would have been anti-dilutive.
Comprehensive
Income
Comprehensive
income consists of net income and other comprehensive income. Other
comprehensive income includes net unrealized gains and losses on available for
sale securities, which are recognized as a separate component of
equity. Accumulated comprehensive income (loss), net for the year
ended December 31, 2009 and 2008 is reported in the accompanying
consolidated statements of changes in stockholders’ equity.
Loss
Contingencies
Loss
contingencies, including claims and legal actions arising in the ordinary course
of business, are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated.
Fair
Value of Financial Instruments
Fair
values of financial instruments are estimated using relevant market information
and other assumptions, as more fully disclosed in a separate note. Fair value
estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions or in
market conditions could significantly affect the estimates.
Operating
Segments
While the
chief decision makers monitor the revenue streams of the various products and
services, operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the financial service operations are
considered by management to be aggregated into one reportable operating
segment.
48
Recent
Accounting Pronouncements
Accounting Standards
Codification. The Financial Accounting Standards Board’s (FASB)
Accounting Standards Codification (ASC) became effective on July 1, 2009.
At that date, the ASC became FASB’s officially recognized source of
authoritative U.S. generally accepted accounting principles (GAAP) applicable to
all public and non-public non-governmental entities, superseding existing FASB,
American Institute of Certified Public Accountants (AICPA), Emerging Issues Task
Force (EITF) and related literature. Rules and interpretive releases of the SEC
under the authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the away companies refer to
U.S. GAAP in financial statements and accounting policies. Citing particular
content in the ASC involves specifying the unique numeric path to the content
through the Topic, Subtopic, Section and Paragraph structure.
FASB ASC Topic 820, “Fair Value
Measurements and Disclosures.” New authoritative accounting guidance
under ASC Topic 820,”Fair Value Measurements and Disclosures,” affirms that the
objective of fair value when the market for an asset is not active is the price
that would be received to sell the asset in an orderly transaction, and
clarifies and includes additional factors for determining whether there has been
a significant decrease in market activity for an asset when the market for that
asset is not active. ASC Topic 820 requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the evidence. The
new accounting guidance amended prior guidance to expand certain disclosure
requirements. The Company adopted the new authoritative accounting guidance
under ASC Topic 820 during the first quarter of 2009. Adoption of the new
guidance did not significantly impact the Company’s financial statements, except
that expanded disclosure has been made as reflected in Note 15.
Further
new authoritative accounting guidance (Accounting Standards Update
No. 2009-5) under ASC Topic 820 provides guidance for measuring the
fair value of a liability in circumstances in which a quoted price in an active
market for the identical liability is not available. In such instances, a
reporting entity is required to measure fair value utilizing a valuation
technique that uses (i) the quoted price of the identical liability when
traded as an asset, (ii) quoted prices for similar liabilities or similar
liabilities when traded as assets, or (iii) another valuation technique
that is consistent with the existing principles of ASC Topic 820, such as
an income approach or market approach. The new authoritative accounting guidance
also clarifies that when estimating the fair value of a liability, a reporting
entity is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. The forgoing new authoritative accounting guidance under ASC
Topic 820 became effective for the Company’s financial statements for
periods ending after October 1, 2009 and did not have a significant impact
on the Company’s financial statements.
FASB ASC Topic 825 “Financial
Instruments.” New authoritative accounting guidance under ASC Topic
825,”Financial Instruments,” requires an entity to provide disclosures about the
fair value of financial instruments in interim financial information and amends
prior guidance to require those disclosures in summarized financial information
at interim reporting periods. The new interim disclosures required under Topic
825 are included in Note 15 - Fair Value Measurements.
FASB ASC Topic 855, “Subsequent
Events.” New authoritative accounting guidance under ASC Topic 855,
“Subsequent Events,” establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. Subsequently, ASU
2010-09 “Amendments to Certain Recognition and Disclosure Requirements” was
issued. This guidance, as amended, defines (i) the period after the
balance sheet date during which a reporting entity’s management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, (ii) the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and (iii) the disclosures an entity should
make about events or transactions that occurred after the balance sheet date.
The new authoritative accounting guidance under ASC Topic 855 became effective
for the Corporation’s financial statements for periods ending after
June 15, 2009. ASU 2010-09 was adopted upon issuance. Adoption
did not have a significant impact on the Corporation’s financial
statements.
49
NOTE 2. SECURITIES
Year-end
securities held to maturity and available for sale consisted of the
following:
December 31, 2009
|
||||||||||||||||
(000's)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
||||||||||||
Securities Available for
Sale:
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 3,988 | $ | 20 | $ | 3 | $ | 4,005 | ||||||||
Securities
Held to Maturity:
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 801 | $ | 29 | $ | - | $ | 830 | ||||||||
Securities,
restricted
|
||||||||||||||||
Other
|
$ | 1,281 | $ | - | $ | - | $ | 1,281 |
|
December 31, 2008
|
|||||||||||||||
(000's)
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Estimated
Fair Value
|
||||||||||||
Securities
Held to Maturity:
|
||||||||||||||||
U.S.
Government Agencies
|
$ | 981 | $ | 31 | $ | - | $ | 1,012 | ||||||||
Securities,
restricted:
|
||||||||||||||||
Other
|
$ | 722 | $ | - | $ | - | $ | 722 |
Securities,
restricted consists of Federal Reserve Bank stock and Federal Home Loan Bank
stock and are carried at cost.
Securities
with a carrying value of $601,000 and $981,000 at December 31, 2009 and 2008
were pledged to the Company’s trust department. Securities with a
carrying value of $4.2 million at December 31, 2009 were pledged to secure
borrowings at the Federal Home Loan Bank in Dallas. No securities
were pledged to secure borrowings at December 31, 2008.
The
amortized cost and estimated fair value of securities, excluding trading
securities, at December 31, 2009 are presented below by contractual
maturity. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations.
Management
has the ability and intent to hold the securities classified as held to maturity
in the table above until they mature, at which time the Company will receive
full value for the securities. Furthermore, as of December 31, 2009,
management does not have the intent to sell any of the securities classified as
available for sale in the table above and believes that it is more likely than
not that the Company will not have to sell any such securities before a recovery
of cost. Management does not believe any of the securities are impaired due to
reasons of credit quality.
Held to Maturity
|
Available for Sale
|
|||||||||||||||
(000's)
|
Amortized
Cost
|
Estimated
Fair Value
|
Amortized
Cost
|
Estimated
Fair Value
|
||||||||||||
Due
in one year or less
|
$ | $ | $ | 1,002 | $ | 1,003 | ||||||||||
Due
after one year through five years:
|
1,000 | 1,003 | ||||||||||||||
Due
after five years through ten years
|
- | - | - | - | ||||||||||||
Due
after ten years
|
||||||||||||||||
Mortgage-backed
securities
|
801 | 830 | 1,986 | 1,999 | ||||||||||||
Total
|
$ | 801 | $ | 830 | $ | 3,988 | $ | 4,005 |
NOTE 3. LOANS
Major
classifications of loans are as follows:
(000's)
|
December 31,
2009
|
December 31,
2008
|
||||||
Commercial
and industrial
|
$ | 88,920 | $ | 81,342 | ||||
Consumer
installment
|
1,852 | 3,799 | ||||||
Real
estate — mortgage
|
25,464 | 20,543 | ||||||
Real
estate — construction
|
7,045 | 19,481 | ||||||
Other
|
2 | 12 | ||||||
123,283 | 125,177 | |||||||
Less
allowance for loan losses
|
1,713 | 1,638 | ||||||
Less
deferred loan fees
|
151 | 146 | ||||||
Net
loans
|
$ | 121,419 | $ | 123,393 |
50
The
change in the allowance for loan losses is as follows:
(000's)
|
December 31,
2009
|
December 31,
2008
|
||||||
Balance
at beginning of period
|
$ | 1,638 | $ | 1,600 | ||||
Provision
charged to operations
|
1,369 | 417 | ||||||
Loans
charged off
|
1,303 | 451 | ||||||
Recoveries
of loans previously charged off
|
9 | 72 | ||||||
Balance
at end of period
|
$ | 1,713 | $ | 1,638 |
December 31,
|
December 31,
|
|||||||
(000's)
|
2009
|
2008
|
||||||
Impaired
loans were as follows:
|
||||||||
Year
end loans with allowance allocated
|
$ | 1,426 | $ | 409 | ||||
Year
end loans with no allowance allocated
|
3,637 | - | ||||||
Impaired
loans
|
5,063 | 409 | ||||||
Amount
of allowance allocated
|
180 | 53 | ||||||
Average
of impaired loans during the year
|
4,392 | 268 | ||||||
Interest
income recognized during impairment
|
121 | - | ||||||
Loans
past due 90 days still on accrual
|
- | 1,328 | ||||||
Non-accrual
loans
|
3,788 | 3,253 | ||||||
Total
non-performing loans
|
$ | 3,788 | $ | 4,581 |
NOTE 4. BANK PREMISES AND
EQUIPMENT
Year-end
premises and equipment were as follows:
(000's)
|
December 31,
2009
|
December 31,
2008
|
||||||
Leasehold
improvements
|
$ | 929 | $ | 929 | ||||
Furniture
and equipment
|
1,876 | 1,794 | ||||||
2,805 | 2,723 | |||||||
Less:
accumulated depreciation
|
2,012 | 1,554 | ||||||
Balance
at end of period
|
$ | 793 | $ | 1,169 |
Depreciation
expense, including amortization of leasehold improvements, was $458,000 and
$466,000 for the years ended December 31, 2009 and 2008,
respectively.
51
NOTE 5. OTHER ASSETS
Other
assets, including accrued interest receivable, as of December 31, 2009 and 2008,
were as follows:
(000's)
|
December 31,
2009
|
December 31,
2008
|
||||||
Prepaid
assets
|
1,136 | 267 | ||||||
Accounts
receivable – trust fees
|
640 | 509 | ||||||
Accrued
interest receivable
|
397 | 472 | ||||||
Capitalized
rights offering costs
|
- | 242 | ||||||
Other
|
31 | 38 | ||||||
Total
|
$ | 2,204 | $ | 1,528 |
NOTE 6. DEPOSITS
Deposits
at December 31, 2009 and 2008 are summarized as follows:
(000's)
|
December 31, 2009
|
December 31, 2008
|
||||||||||||||
Noninterest
bearing demand
|
$ | 9,428 | 9 | % | $ | 10,077 | 9 | % | ||||||||
Interest
bearing demand (NOW)
|
1,960 | 2 | % | 1,899 | 2 | % | ||||||||||
Money
market accounts
|
34,006 | 31 | % | 40,333 | 36 | % | ||||||||||
Savings
accounts
|
191 | 0 | % | 175 | 0 | % | ||||||||||
Certificates
of deposit, less than $100,000
|
16,506 | 15 | % | 21,372 | 19 | % | ||||||||||
Certificates
of deposit, greater than $100,000
|
46,034 | 43 | % | 37,240 | 34 | % | ||||||||||
Total
|
$ | 108,125 | 100 | % | $ | 111,096 | 100 | % |
At
December 31, 2009, the scheduled maturities of certificates of deposit were as
follows:
2010
|
27,915
|
|||
2011
|
22,960
|
|||
2012
|
9,805
|
|||
2013
|
1,549
|
|||
2014
|
311
|
|||
Total
|
$
|
62,540
|
NOTE
7. BORROWED FUNDS
Borrowed
funds as of December 31, 2009 and December 31, 2008, were as
follows:
(000's)
|
December 31,
2009
|
December 31,
2008
|
||||||
Federal
Home Loan Bank
|
$ | 16,000 | $ | - | ||||
Federal
Reserve Bank
|
- | 10,500 | ||||||
$ | 16,000 | $ | 10,500 |
At
December 31, 2009, borrowed funds consisted of a $3.0 million advance and a
$13.0 million advance from the Federal Home Loan Bank. The loans have a term of
1 year and 7 days and mature on October 28, 2010 and January 7, 2010,
respectively. The interest rates for the loans are fixed at 0.47% and 0.10%. The
Company has a $22.7 million credit line with the Federal Reserve Bank, secured
by $39.6 million in pledged commercial and industrial loans, and an $18.3
million credit line with the Federal Home Loan Bank, secured by $14.1 million in
pledged real estate loans and $4.2 million in pledged
securities.
52
NOTE
8. OTHER LIABILITIES
Other
liabilities as of December 31, 2009 and December 31, 2008, were as
follows:
(000's)
|
December 31,
2009
|
December 31,
2008
|
||||||
Reserve
for OCC Settlement
|
$ | 2,685 | $ | - | ||||
Trust
Advisor Fees Payable
|
522 | 453 | ||||||
Interest
Payable
|
101 | 125 | ||||||
Incentive
Compensation
|
51 | 67 | ||||||
Audit
Fees
|
38 | 97 | ||||||
Franchise
& Property Taxes
|
37 | 37 | ||||||
Legal
|
28 | - | ||||||
Other
Accruals
|
233 | 81 | ||||||
$ | 3,695 | $ | 860 |
NOTE 9. BENEFIT PLANS
The
Company funds certain costs for medical benefits in amounts determined at the
discretion of management. In 2007, the Company implemented a 401K plan, which
provides for contributions by employees. As of December 31, 2009, the Company
had no plans to match employee contributions.
53
NOTE 10. INCOME TAXES
The
provision (benefit) for income taxes consists of the following:
(000s)
|
2009
|
2008
|
||||||
Income
tax expense (benefit) was as follows:
|
||||||||
Current
federal taxable income
|
$
|
-
|
$
|
-
|
||||
NOL
utilized
|
-
|
-
|
||||||
Total
current taxes due
|
-
|
-
|
||||||
Deferred
federal tax provision (benefit)
|
1,296
|
24
|
||||||
Valuation
allowance
|
(1,296
|
)
|
(24
|
)
|
||||
$
|
-
|
$
|
-
|
The
effective tax rate differs from the U. S. statutory tax rate due to the
following for 2009 and 2008:
U.S.
statutory rate
|
34.0
|
%
|
||
Valuation
Allowance
|
-34.0
|
%
|
||
Effective
tax rate
|
0.0
|
%
|
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities as of December 31 are as
follows:
(000s)
|
2009
|
2008
|
||||||
Deferred
tax assets:
|
||||||||
Organizational
costs
|
$
|
-
|
$
|
66
|
||||
Stock-based
compensation
|
114
|
80
|
||||||
Allowance
for loan losses
|
583
|
557
|
||||||
FAS91
fees
|
51
|
50
|
||||||
Accrued
liabilities
|
913
|
-
|
||||||
Net
operating loss carryforward
|
599
|
258
|
||||||
Total
deferred tax asset
|
2,260
|
1,011
|
||||||
Deferred
tax liabilities:
|
||||||||
Depreciation
and amortization
|
(70
|
)
|
(117
|
)
|
||||
2,190
|
894
|
|||||||
Less
valuation allowance for net deferred tax asset
|
(2,190
|
)
|
(894
|
)
|
||||
$
|
-
|
$
|
-
|
Management
has provided a 100% valuation allowance for its net deferred tax asset. For year
ended December 31, 2009, the Company had a taxable loss of $1.0 million, which
increased the net tax operating loss carry-forward to $1.8
million. The net operating loss carry-forward will fully expire in
2029 if not used. For year ended December 31, 2008, the Company produced taxable
loss of $453,000.
Projections
for continued levels of profitability will be reviewed quarterly and any
necessary adjustments to the deferred tax assets will be recognized in the
provision or benefit for income taxes. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. At December 31, 2009, management believes it is more likely than not
that the Company will not realize the benefits of those deductible
differences.
54
NOTE 11. STOCK OPTIONS AND
WARRANTS
The
shareholders of the Company approved the 2005 Stock Incentive Plan (“Plan”) at
the annual shareholder meeting held on June 2, 2005. The plan authorizes the
granting of options to purchase up to 260,000 shares of common stock of the
company to employees of the Company and its subsidiaries. The Plan is designed
to provide the Company with the flexibility to grant incentive stock options and
non-qualified stock options to its executive and other officers. The purpose of
the Plan is to provide increased incentive for key employees to render services
and to exert maximum effort for the success of the Company.
The Plan
is administered by the Board of Directors and has a term of 10 years. Any award
that expires or is forfeited is returned to the Plan. Stock options
are granted under the Plan with an exercise price equal to or greater than the
stock fair market value at the date of grant. All stock options granted have
ten-year lives with vesting terms of five years.
The fair
value of each option award is estimated on the date of grant using a closed form
option valuation (Black-Scholes) model. Expected volatilities are based on
historical volatility of the Company’s stock. The risk-free rate for the period
within the contractual life of the stock option is based upon the five year
Treasury rate at the date of grant.
As of
December 31, 2009 and December 31, 2008, options to purchase a total of 195,500
and 205,500 had been issued with an average exercise price of $10.03 and $9.87,
respectively. These options vest through September 2013.
Effective
January 1, 2006, the Company adopted FASB ASC Topic 718 using the
modified-prospective-transition method. Under this method, prior periods are not
restated. Also, under this transition method, stock compensation cost recognized
beginning January 1, 2006 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant-date estimated fair value, and (b) compensation cost for all
share-based payments granted on or subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of FASB ASC
Topic 718.
The
following is a summary of activity in the Company’s Stock Incentive Plan for
2009 and 2008:
2009
|
2008
|
|||||||||||||||
Number of
Shares
Underlying
Options
|
Weighted
Average
Exercise
Prices
|
Number of
Shares
Underlying
Options
|
Weighted
Average
Exercise
Prices
|
|||||||||||||
Outstanding
at beginning of the year
|
205,500 | $ | 9.87 | 196,000 | $ | 10.44 | ||||||||||
Granted
|
- | - | 32,000 | 6.53 | ||||||||||||
Exercised
|
- | - | - | - | ||||||||||||
Expired
/ forfeited
|
10,000 | 6.75 | 22,500 | 10.06 | ||||||||||||
Outstanding
at end of period
|
195,500 | $ | 10.03 | 205,500 | $ | 9.87 | ||||||||||
Exercisable
at end of period
|
155,900 | $ | 10.13 | 116,800 | $ | 10.16 | ||||||||||
Available
for grant at end of period
|
53,500 | 43,500 |
55
2009
|
2008
|
|||||||||||||||
Shares
|
Weighted
Average
Grant Date
Fair Value
|
Shares
|
Weighted
Average
Grant Date
Fair Value
|
|||||||||||||
Nonvested
at January 1
|
88,700 | $ | 2.78 | 101,900 | $ | 2.93 | ||||||||||
Granted
|
- | - | 32,000 | 1.96 | ||||||||||||
Vested
|
39,100 | 2.37 | 34,700 | 2.58 | ||||||||||||
Forfeited
|
10,000 | 2.01 | 10,500 | 2.54 | ||||||||||||
Nonvested
at December 31
|
39,600 | $ | 3.24 | 88,700 | $ | 2.78 |
There
were no options granted during 2009. The weighted average grant date fair value
per option granted during 2008 was $1.96. The Company has 53,500 options
available for grant at December 31, 2009. As of December 31, 2009 approximately
$149,000 of total unrecognized compensation cost related to non-vested share
based compensation arrangements to be recognized over the average vesting period
of 2.9 years.
The fair
value of options granted was determined using the following weighted-average
assumptions as of grant date:
2009
|
2008
|
|||||||
Risk-free
interest rate
|
n/a | 2 | % | |||||
Dividend
yield
|
n/a | 0 | % | |||||
Expected
stock price volatility
|
n/a | 25 | % | |||||
Expected
term
|
n/a |
6.5
years
|
All
options carry exercise prices ranging from $6.00 to $13.00. At December 31,
2009, there were 155,900 exercisable options with no intrinsic value as the
exercise price exceeded the stock price.
The
Company’s organizers advanced funds for organizational and other preopening
expenses. As consideration for the advances the organizers received warrants to
purchase one share of common stock for every $20 advanced up to a limit of
$100,000. A total of 96,750 warrants were issued and remain outstanding at
December 31, 2009. These warrants are exercisable at a price of $10.00 per share
at any time until November 2, 2014.
NOTE 12. LOAN COMMITMENTS AND OTHER
CONTINGENCIES
The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the accompanying balance sheets. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.
56
At
December 31, 2009, the Company had commitments to extend credit and standby
letters of credit of approximately $6.8 million and $15,000, respectively. At
December 31, 2008, the Company had commitments to extend credit and standby
letters of credit of approximately $6.5 million and $12,000,
respectively.
The
Company has three lease agreements, which expire on or before 2014. In addition
to the leases for office space, the Company also leases various pieces of office
equipment under short-term agreements. The following table summarizes loan
commitments and minimum rental commitments for office space leases as of
December 31, 2009:
As of December 31, 2009
|
||||||||||||||||
(000's)
|
Less than
One Year
|
One to
Three Years
|
Over Three to
Five Years
|
Over Five
Years
|
||||||||||||
Unused lines of
credit
|
$ | 6,085 | $ | - | $ | - | $ | 764 | ||||||||
Standby
letters of credit
|
15 | - | - | - | ||||||||||||
Operating
Leases
|
292 | 488 | 328 | 145 | ||||||||||||
Total
|
$ | 6,392 | $ | 488 | $ | 328 | $ | 909 |
Lease
expense for the years ended December 31, 2009 and 2008 was $286,000 and
$285,000, respectively.
Employment
Agreements
The
Company has entered into employment agreements with two officers of the Bank,
Steve Jones and Patrick Howard. The agreements are for an initial one-year term
and are automatically renewable for an additional one-year term unless either
party elects not to renew.
The
agreement for Mr. Howard provides for compensation and benefits including the
issuance of options to acquire up to 25,000 shares of the Company’s common stock
at $13.00 per share, exercisable within ten years from the date of grant. At
December 31, 2009, these options were issued and outstanding under the stock
option plan disclosed in Note 11.
NOTE 13. RELATED PARTIES
The
Company purchased corporate insurance through an insurance agency in which one
of its principals is also a director and organizer of the Company. Premiums paid
totaled $91,000 and $73,000 for the years ended December 31, 2009 and 2008,
respectfully.
The
Company purchased employee benefit insurance through an insurance agency in
which one of its principals is also a director and organizer of the Company.
During the years ended December 31, 2009 and 2008 those premiums totaled
$212,000 and $214,000 respectively.
Certain
Directors and Officers of the Bank have depository accounts with the Bank. None
of those deposit accounts have terms more favorable than those available to any
other depositor.
NOTE 14. REGULATORY
MATTERS
The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken could have a direct material effect on the Bank's
and, accordingly, the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank’s assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative
measures established by regulations to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined). To
be categorized as well-capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table.
57
On July
9, 2008, the Bank announced that it entered into a Stipulation and Consent to
the Issuance of a Consent Order (the "Stipulation") and a Consent Order (the
"Order") with the Comptroller (the "OCC"). The Stipulation and the Order were
based on the Comptroller's findings during its examination as of September 30,
2007. As part of the Order, the Bank has agreed to strengthen its Bank Secrecy
Act ("BSA") internal controls, revise and implement changes to its internal BSA
audit program, maintain specific capital ratios and correct any violations of
law. Therefore, regardless of the Bank’s capital position, the requirement in
the Order to meet and maintain a specific capital level means that the Bank may
not be deemed to be well capitalized under regulatory requirements as of
December 31, 2009. The capital ratios required by the Order are 11.5% Total
Capital to Risk Weighted Assets and 9.00% Tier 1 Capital to Average Assets. As
of December 31, 2009, the Bank was in compliance with both ratios.
To be
categorized as well-capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table.
(000's)
|
Actual
|
For Capital
Adequacy Purposes
|
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
|
|||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
As
of December 31, 2009
|
||||||||||||||||||||||||
Total
Capital (to Risk Weighted Assets)
|
$ | 12,640 | 11.33 | % | $ | 8,925 | > | 8.00 | % | $ | 11,156 | > | 10.00 | % | ||||||||||
Tier
1 Capital (to Risk Weighted Assets)
|
11,242 | 10.08 | % | 4,462 | > | 4.00 | % | 6,694 | > | 6.00 | % | |||||||||||||
Tier
1 Capital (to Average Assets)
|
11,242 | 7.51 | % | 5,988 | > | 4.00 | % | 7,485 | > | 5.00 | % | |||||||||||||
As
of December 31, 2008
|
||||||||||||||||||||||||
Total
Capital (to Risk Weighted Assets)
|
$ | 14,400 | 12.05 | % | $ | 9,558 | > | 8.00 | % | $ | 11,947 | > | 10.00 | % | ||||||||||
Tier
1 Capital (to Risk Weighted Assets)
|
12,905 | 10.80 | % | 4,779 | > | 4.00 | % | 7,168 | > | 6.00 | % | |||||||||||||
Tier
1 Capital (to Average Assets)
|
12,905 | 9.21 | % | 5,603 | > | 4.00 | % | 7,004 | > | 5.00 | % |
NOTE 15. FAIR VALUE OF FINANCIAL
INSTRUMENTS
The fair
value of an asset or liability is the price that would be received to sell that
asset or paid to transfer that liability in an orderly transaction occurring in
the principal market (or most advantageous market in the absence of a principal
market) for such asset or liability. In estimating fair value, the Company
utilizes valuation techniques that are consistent with the market approach, the
income approach and/or the cost approach. Such valuation techniques are
consistently applied. Inputs to valuation techniques include the assumptions
that market participants would use in pricing an asset or liability. FASB ASC
Topic 820 establishes a fair value hierarchy for valuation inputs that gives the
highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The fair value
hierarchy is as follows:
·
|
Level 1 Inputs -
Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date.
|
58
·
|
Level 2 Inputs -
Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly.
These might include quoted prices for similar assets or liabilities in
active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, inputs other than quoted
prices that are observable for the asset or liability (such as interest
rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that
are derived principally from or corroborated by market data by correlation
or other means.
|
|
·
|
Level 3 Inputs -
Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entity’s own assumptions about the assumptions
that market participants would use in pricing the assets or
liabilities.
|
In
general, fair value is based upon quoted market prices, where available. If such
quoted market prices are not available, fair value is based upon internally
developed models that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. The Company’s valuation methodologies
may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. While management believes
the Company’s valuation methodologies are appropriate and consistent with other
market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date. Furthermore, the
reported fair value amounts have not been comprehensively revalued since the
presentation dates, and therefore, estimates of fair value after the balance
sheet date may differ significantly from the amounts presented
herein.
The
following table summarizes financial and nonfinancial assets measured at
fair value as of December 31, 2009, segregated by the level of the valuation
inputs within the fair value hierarchy utilized to measure fair
value:
(000's)
|
Level 1
Inputs
|
Level 2
Inputs
|
Level 3
Inputs
|
Total
Fair Value
|
||||||||||||
Securities
available for sale:
|
||||||||||||||||
U.S.
government agencies and corporations
|
$ | — | $ | 4,005 | $ | — | $ | 4,005 | ||||||||
Other
Assets:
|
||||||||||||||||
OREO
|
— | 1,616 | — | 1,616 |
Non-financial
assets measured at fair value on a non-recurring basis include OREO. Certain
OREO assets, upon initial recognition, were remeasured and reported at fair
value through a charge-off to the allowance for possible loan losses based upon
the fair value of the OREO asset. The fair value of an OREO asset, upon
initial recognition, is estimated using Level 2 inputs based on observable
market data. In connection with the measurement and initial
recognition of the OREO assets, the Company recognized charge-offs of the
allowance for loan losses totaling $1.4 million, which has been recorded on the
consolidated statement of income through the provision for loan
losses.
Carrying
amount and estimated fair values of financial instruments were as follows at
year end:
2009
|
2008
|
|||||||||||||||
Carrying
Amount
|
Estimated
Fair Value
|
Carrying
Amount
|
Estimated
Fair Value
|
|||||||||||||
Financial
assets
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 7,292 | $ | 7,292 | $ | 8,457 | $ | 8,457 | ||||||||
Securities
available for sale
|
4,005 | 4,005 | - | - | ||||||||||||
Loans,
net
|
121,419 | 120,702 | 123,393 | 122,694 | ||||||||||||
Accrued
interest receivable
|
397 | 397 | 472 | 472 | ||||||||||||
Financial
liabilities
|
||||||||||||||||
Deposits
|
108,125 | 108,685 | 111,096 | 111,424 | ||||||||||||
Accrued
interest payable
|
101 | 101 | 125 | 125 |
The
methods and assumptions used to estimate fair value are described as
follows:
Carrying
amount is the estimated fair value for cash and cash equivalents, restricted
securities, accrued interest receivable and payable, and demand and savings
deposits and variable rate loans or deposits that re-price frequently and fully.
For fixed rate loans or deposits and for variable rate loans or deposits with
infrequent re-pricing, fair value is based on discounted cash flows using
current market rates applied to the estimated life and credit risk. The
estimated fair value of other financial instruments and off-balance-sheet loan
commitments approximate cost and are not considered significant to this
presentation.
59
NOTE 16. PARENT COMPANY CONDENSED FINANCIAL
STATEMENTS
T
BANCSHARES, INC.
CONDENSED
BALANCE SHEET
(000's)
|
December 31,
2009
|
December 31,
2008
|
||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 367 | $ | 333 | ||||
Due
from subsidiary
|
- | 333 | ||||||
Other
assets
|
- | 242 | ||||||
Investment
in subsidiary
|
11,259 | 12,905 | ||||||
Total
assets
|
$ | 11,626 | $ | 13,813 | ||||
LIABILITIES
AND CAPITAL
|
||||||||
Accounts
payable
|
35 | 19 | ||||||
Capital
|
11,591 | 13,794 | ||||||
Total
liabilities and capital
|
$ | 11,626 | $ | 13,813 |
T
BANCSHARES, INC.
CONDENSED
STATEMENT OF INCOME
YEARS
ENDED DECEMBER 31,
(000's)
|
2009
|
2008
|
||||||
Equity
in (loss) income from subsidiary
|
$ | (3,663 | ) | $ | (189 | ) | ||
Noninterest
expense:
|
||||||||
Professional
and administrative
|
78 | 143 | ||||||
Stock
options
|
103 | 96 | ||||||
Total
noninterest expenses
|
181 | 239 | ||||||
Net
(loss) income
|
$ | (3,844 | ) | $ | (428 | ) |
60
NOTE 17. PARENT COMPANY CONDENSED FINANCIAL
STATEMENTS cont’d
T
BANCSHARES, INC.
CONDENSED
STATEMENT OF CASH FLOWS
YEARS
ENDED DECEMBER 31,
(000's)
|
2009
|
2008
|
||||||
Cash
Flows from Operating Activities
|
||||||||
Net
Income
|
$ | (3,844 | ) | $ | (428 | ) | ||
Adjustments
to reconcile net income to net cash used by operating
activities:
|
||||||||
Equity
in loss (earnings) of Bank
|
3,663 | 189 | ||||||
Stock
based compensation
|
103 | 96 | ||||||
Net
change in other assets
|
333 | (44 | ) | |||||
Net
change in other liabilities
|
16 | 19 | ||||||
Net
cash used by operating activities
|
271 | (168 | ) | |||||
Cash
Flows from Investing Activities
|
||||||||
Proceeds
from sale of premises and equipment
|
- | - | ||||||
Net
cash provided by investing activities
|
- | - | ||||||
Cash
Flows from Financing Activities
|
||||||||
Proceeds
from rights offering
|
1,763 | - | ||||||
Contribution
to bank
|
(2,000 | ) | - | |||||
Payment
of capitalized rights offering costs
|
- | (242 | ) | |||||
Net
cash provided by financing activities
|
(237 | ) | (242 | ) | ||||
Net
change in cash and cash equivalents
|
34 | (410 | ) | |||||
Cash
and cash equivalents at beginning of period
|
333 | 743 | ||||||
Cash
and cash equivalents at end of period
|
$ | 367 | $ | 333 | ||||
Supplemental
disclosures of cash flow information
|
||||||||
Cash
paid during the period for
|
||||||||
Interest
|
$ | - | $ | - | ||||
Income
taxes
|
$ | - | $ | - |
NOTE 18. SUBSEQUENT EVENTS
In
preparing the financial statements, the Company has evaluated, for potential
disclosure, events or transactions subsequent to the end of the most recent
annual period through the issuance date of these financial
statements.
Regulatory
Action
The Bank
was recently informed by the Comptroller that the Comptroller intended to
institute an enforcement action for alleged violations of the Federal Trade
Commission Act in connection with certain merchants and a payment processor that
were Bank customers between September 1, 2006 and August 27,
2007. The Comptroller proposed that the Bank enter into a
formal agreement with the Comptroller (the “Agreement”) and a consent order for
a civil money penalty (the “Order”) payable by the Bank to resolve the
Comptroller’s allegations.
The Bank
terminated all business relationships with the merchants and the payment
processor on August 27, 2007. The Comptroller alleges that the merchants and the
payment processor defrauded consumers and is seeking restitution of such
consumers from the Bank, asserting that by accepting consumer payments for
deposit from the merchants and introducing those payments into the payment
clearing system, the Bank materially aided the merchants and the payment
processor in the alleged fraudulent activity.
Because
the cost of defending a regulatory enforcement action is likely to be
significant, would likely take a protracted timeframe, and we cannot be certain
of a favorable outcome to the Bank, we determined (and currently still believe)
that negotiating a settlement with the Comptroller is in the best interest
of the Bank. Accordingly, we have over recent months been in
discussion with the Comptroller about settling these claims. We have
over the past few weeks devoted first priority to these discussions, with the
expectation that this priority would result in a settlement with the Comptroller
prior to issuing our year-end 2009 financial statements.
61
On April
15, 2010, the Bank executed an Agreement and Order containing the general terms
outlined as follows:
|
·
|
deposit
$5.1 million for consumer restitution charged by the merchants to
eligible consumers;
|
|
·
|
Provide
for a civil money penalty of
$100,000;
|
|
·
|
require
the Bank to retain an independent claims administrator to locate and
arrange for the issuance of individual consumer checks to the identified
eligible consumers;
|
|
·
|
terminate
the Consent Order dated July 9, 2008, between the Bank and the
Comptroller, which contained provisions requiring the Bank to establish a
satisfactory program to ensure compliance with the Bank Secrecy Act and
established minimum capital ratios;
|
|
·
|
require
the Bank to establish a capital plan which, among other provisions,
details the Bank’s plan to achieve tier 1 capital ratio of 9% and total
risk based capital ratio of 11.5%;
|
|
·
|
require
the Bank to develop a written program designed to reduce the level of
criticized assets;
|
|
·
|
require
the Bank to develop and implement an asset liquidity enhancement plan
designed to increase the amount of asset liquidity maintained by the Bank,
including a loan to deposit ratio of 85%;
and
|
|
·
|
require
the Bank to develop a written profit plan to improve and sustain the
earnings of the Bank.
|
Although
we do not know at this time the precise amounts that would ultimately be payable
by us under the terms of the Agreement, we expect that any such settlement would
ultimately require the Bank to, among other things, pay a significant and
material restitution payment which we have estimated to be $2.4
million. Further, there is no assurance that the Bank would be able
to comply with all of the requirements of the Agreement and Order, including
meeting the stated capital requirements contained therein. Nor is
there assurance that, should the Bank pay significant and material amounts of
restitution and/or civil money penalties, the short and long term financial
condition, results of operations, liquidity, and/or prospects of the Bank, upon
which the Company is dependent, will not be materially adversely, and
irreparably, impacted.
In
determining the amount of funds that the Bank needs to reserve to make
restitution payments to consumers under the Agreement, management has made
certain assumptions regarding the number of consumers who elect to accept
restitution checks and the ability of the Bank and its claim processor to locate
consumers. Based on such assumptions, management concluded that it is
possible that the Bank will be liable for an amount that is up to $5.1 million,
while the Agreement does not limit the liability to this
amount. However, until the restitution process is fully investigated,
formulated, and approved by the Comptroller, the Company has estimated that the
amount of restitution would not exceed the $5.1 million set forth in the
Agreement. In addition, certain consumers purchased products or
services from a merchant that is currently in litigation with the Federal Trade
Commission (“FTC”), which management believes represents approximately $1.6
million of the $5.1 million set forth in the Agreement. We do not
have enough information to estimate the probability of outcome of the FTC
litigation with the merchant. Additionally, we cannot estimate the amount, if
any, of restitution that the merchant or FTC may pay the consumers of this
merchant which, if paid, would reduce the Bank’s possible liability to $3.5
million. Because our Agreement with the Comptroller stipulates that the
Bank will not be responsible for the $1.6 million if the FTC or the merchant
ultimately pay the consumers, we have not included this amount in our estimate
of the appropriate reserve.
Based on
the information available to management regarding actual historical rates that
restitution checks are ultimately negotiated by consumers, management’s estimate
is that approximately 68% of the total potential exposure will be realized.
Therefore, management believes the appropriate reserve to accrue for restitution
is 68% of $3.5 million, or $2.4 million. We have estimated and
accrued an expense of $185,000 representing the estimated cost to administer the
restitution based on information from our claims administrator, and
accrued an expense of $100,000 for the civil money penalty to be imposed by the
Comptroller in connection with the Order. This expected reserve and accrued
expenses we believe represents a reasonable estimate under FASB ASC Topic 450 of
liability based on the facts and circumstances as we understand them
today. However, we can not assure you that this estimate of the
required reserve will not change due to the risk factors described in Item 1A.
If management’s estimates prove inaccurate, the Bank may be required to
recognize additional payments on restitution checks. As a result, our
financial condition and results of operation may be materially adversely
affected.
As a
result of the impact on the financial statements and capital of the Bank of the
settlement with the OCC, we will look to raise additional capital through
multiple avenues, including focused expense reductions, optimizing our balance
sheet for loans and deposits and increasing net interest income and ultimately
improving the overall earnings of the Company. A number of financial
institutions have recently raised considerable amounts of capital as a result of
deterioration in their results of operations and financial condition arising
from the negative impact of the mortgage loan market, non-agency mortgage-backed
security market, and deteriorating economic conditions, which may diminish our
ability to raise additional capital.
We will
conduct a comprehensive review of the operational expenses of the Bank to
identify targeted opportunities where expenses can be reduced without adversely
impacting operational effectiveness, which may result in improvements to net
operating income. We will review assets and liabilities for strategic
enhancements to the balance sheet structure, focusing on enhancing net interest
income. We will evaluate opportunities to retain existing earning assets against
available asset acquisition strategies to determine if, within acceptable risk
tolerance levels, higher yielding assets can replace lower yielding assets
without effecting balance sheet growth. We will continue to pursue our
aggressive strategy in place to address non-performing and classified loans to
reduce the levels of those assets or, alternatively to return the loans to
performing status.
Loan
Losses
During
the first quarter of 2010, we expect losses of approximately $1.16 million
primarily related to one large loan and two smaller loans. The events
and factors leading to the expected losses on these loans occurred during the
first quarter of 2010. We have written the loans down to an amount that Bank
believes it can collect. This has resulted in a preliminary estimated addition
to the provision for loan losses of $1.3 million. This
would increase our allowance for loan losses from 1.39% of
total loans as of December 31, 2009 to 1.59% of total loans as of March 31,
2010.
62
Item
9.
|
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None.
Item
9A.
|
Controls
and Procedures.
|
As of the
end of the period covered by this Annual Report on Form 10-K, our principal
executive officer and principal financial officer have evaluated the
effectiveness of our “disclosure controls and procedures” (“Disclosure
Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as this Annual
Report, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Disclosure Controls are also designed with the objective of ensuring that
such information is accumulated and communicated to our management, including
the chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Our
management, including the principal executive officer and acting co-principal
financial officers, does not expect that our Disclosure Controls will prevent
all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.
Based
upon their controls evaluation, our chief executive officer and acting
co-principal financial officers have concluded that our Disclosure Controls are
effective at a reasonable assurance level.
Management’s
Report on Internal Control over Financial Reporting
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a - 15(f) of the
Securities and Exchange Act of 1934. The Company’s internal control over
financial reporting system is designed to provide reasonable assurance to
management and the Board of Directors regarding the reliability of the Company’s
financial reporting and the preparation of published financial statements in
accordance with generally accepted accounting principles.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to the financial
statement preparation’s and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Company’s management assessed the effectiveness of the Company’s internal
controls over financial reporting as of December 31, 2009, utilizing the
framework established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, management believes that as of December 31, 2009, the
Company’s internal controls over financial reporting are effective.
Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and (3) unauthorized acquisitions, use, or disposition of the
Company’s assets that could have a material affect on the Company’s financial
statements are prevented or timely detected.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal controls over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
Item
9B.
|
Other
Information.
|
None.
63
PART
III
Item
10.
|
Directors,
Executive Officers, and Corporate
Governance
|
Information
concerning the Company’s directors and executive officers will appear in the
Company’s Proxy Statement for the 2010 Annual Meeting of Shareholders, to be
filed pursuant to Regulation 14A on or before April 30, 2010, under
the caption “Election of Directors” and “Executive Officers.” Such information
is incorporated herein by reference.
Information
concerning compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, will appear in the Company’s Proxy Statement for the 2010
Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A on
or before April 30, 2010, under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance.” Such information is incorporated herein by
reference.
We have
adopted a Code of Conduct and Ethics, which is applicable to all directors,
officers and employees of the Company and the Bank. The Code of Conduct and
Ethics will appear in the Company’s Proxy Statement for the 2010 Annual Meeting
of Stockholders, to be filed pursuant to Regulation 14A on or before
April 30, 2010, under the caption “Code of Ethics.” Such information is
incorporated herein by reference.
Section
16A Beneficial Ownership Reporting Compliance
Item
11.
|
Executive
Compensation.
|
Information
in response to this item will appear in the Company’s Proxy Statement for the
2010 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A
on or before April 30, 2010, under the captions “Executive Compensation,”
“Director Compensation,” and “Compensation Committee.” Such information is
incorporated herein by reference.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.
|
Information
concerning security ownership of certain beneficial owners and management will
appear in the Company’s Proxy Statement for the 2010 Annual Meeting of
Shareholders, to be filed pursuant to Regulation 14A on or before
April 30, 2010, under the caption “Security Ownership of Certain Beneficial
Owners and Management.” Such information is incorporated herein by
reference.
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence.
|
Information
concerning certain relationships and related transactions will appear in the
Company’s Proxy Statement for the 2010 Annual Meeting of Shareholders, to be
filed pursuant to Regulation 14A on or before April 30, 2010, under
the caption “Certain Relationships and Related Transactions.” Such information
is incorporated herein by reference.
Item
14.
|
Principal
Accountant Fees and Services.
|
Information
concerning principal accounting fees and services will appear in the Company’s
Proxy Statement for the 2010 Annual Meeting of Shareholders, to be filed
pursuant to Regulation 14A on or before April 30, 2010, under the
caption “Independent Public Accountants.” Such information is incorporated
herein by reference.
64
PART
IV
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
Exhibit
No.
|
Description
of Exhibit
|
|
3.1
|
Articles of Incorporation
(1)
|
|
3.2
|
Bylaws of Registrant
(1)
|
|
10.1
|
T Bancshares, Inc. (f/k/a First
Metroplex Capital, Inc.) 2005 Incentive Plan
(2)(3)
|
|
10.2
|
Form of Incentive Stock Option
Agreement (2)(3)
|
|
10.3
|
Form of Non-Qualified Stock
Option Agreement (2)(3)
|
|
10.4
|
T Bancshares, Inc. (f/k/a First
Metroplex Capital, Inc.) Organizers' Warrant Agreement dated November 2,
2004 (1)
|
|
10.5
|
T Bancshares, Inc. (f/k/a First
Metroplex Capital, Inc.) Shareholders' Warrant Agreement dated November 2,
2004 (1)
|
|
10.6
|
Extension of term of initial
Shareholder Warrants (1)
|
|
10.7
|
Form of Employment Agreement by
and between T Bancshares, Inc. and Patrick Howard
(1)(3)
|
|
10.8
|
Form of Employment Agreement by
and between T Bancshares, Inc. and Steve Jones
(1)(3)
|
|
10.9
|
Agreement
between T Bank, N.A. and the Office of the Comptroller of the Currency,
dated April 15, 2010*
|
|
10.10
|
Consent
Order for Civil Money Penalty of T Bank, N.A., dated April 15,
2010*
|
|
21
|
Subsidiaries
of T Bancshares, Inc.
(2) *
|
|
23
|
Consent
of Weaver and Tidwell L.L.P.*
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer*
|
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer*
|
|
32
|
Certification
Pursuant to Rule 14d-14(b) of the Securities Exchange
Act*
|
(1)
|
Incorporated
by reference from the Registration Statement on Form SB-2 filed by the
Registrant with the SEC on December 15, 2003 and as amended on June 11,
2007 (file no. 333-111153).
|
|
(2)
|
Incorporated
by reference from the Registration Statement on Form S-8 filed by the
Registrant with the SEC on September 20, 2005 (file no.
333-128456).
|
|
(3)
|
Indicates
a compensatory plan or contract.
|
|
*
|
Filed
Herewith
|
65
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
T
BANCSHARES, INC.
|
|||
Dated:
|
April
15, 2010
|
By:
|
/s/
Patrick G. Adams
|
Patrick
G. Adams
|
|||
Chief
Executive Officer
(Principal
Executive Officer)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE
|
TITLE
|
DATE
|
||
/s/
Patrick G. Adams
|
Director
and Principal Executive
|
April
15, 2010
|
||
Patrick
G. Adams
|
Officer
|
|||
/s/
Stanley E. Allred
|
Director
|
April
15, 2010
|
||
Stanley
E. Allred
|
||||
/s/
Dan Basso
|
Director
|
April
15, 2010
|
||
Dan
Basso
|
||||
/s/
Frankie Basso
|
Director
|
April
15, 2010
|
||
Frankie
Basso
|
||||
/s/
David Carstens
|
Director
|
April
15, 2010
|
||
David
Carstens
|
||||
/s/
Ron Denheyer
|
Director
|
April
15, 2010
|
||
Ron
Denheyer
|
||||
/s/
Patrick Howard
|
Director
|
April
15, 2010
|
||
Patrick
Howard
|
||||
/s/
Eric Langford
|
Director
|
April
15, 2010
|
||
Eric
Langford
|
||||
/s/
Steven M. Lugar
|
Director
|
April
15, 2010
|
||
Steven
M. Lugar, CFP
|
66
SIGNATURE
|
TITLE
|
DATE
|
||
/s/
Charles M. Mapes, III
|
Director
|
April
15, 2010
|
||
Charles
M. Mapes, III
|
||||
/s/
Thomas McDougal
|
Director
|
April
15, 2010
|
||
Thomas
McDougal, DDS
|
||||
/s/
Anthony Pusateri
|
Director
|
April
15, 2010
|
||
Anthony
Pusateri
|
||||
/s/
Gordon R. Youngblood
|
Director
|
April
15, 2010
|
||
Gordon
R. Youngblood
|
||||
/s/
Cyvia Noble
|
Director
|
April
15, 2010
|
||
Cyvia
Noble
|
||||
/s/
Steven Jones
|
Director
|
April
15, 2010
|
||
Steven
Jones
|
||||
67