Attached files
file | filename |
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EX-31.1 - T Bancshares, Inc. | v226605_ex3-1.htm |
EX-32.1 - T Bancshares, Inc. | v226605_ex32-1.htm |
EX-31.2 - T Bancshares, Inc. | v226605_ex31-2.htm |
EX-10.8 - T Bancshares, Inc. | v226605_ex10-8.htm |
EX-31.1 - T Bancshares, Inc. | v226605_ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
Commission File Number 000-51297
T BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas
|
71-0919962
|
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
16000 Dallas Parkway, Suite 125, Dallas, Texas 75248
(Address of principal executive offices)
(972) 720- 9000
(Registrant’s telephone number, including area code)
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 such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
|
¨
|
Accelerated filer
|
¨
|
||||
Non-accelerated filer
|
¨
|
Smaller reporting company
|
x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s Common Stock as of June 21, 2011, was 1,941,305 shares.
INDEX
PAGE
|
|||
PART I.
|
FINANCIAL INFORMATION
|
3
|
|
ITEM 1.
|
Financial Statements
|
3
|
|
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
22
|
|
ITEM 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
36
|
|
ITEM 4.
|
Controls and Procedures
|
36
|
|
PART II.
|
OTHER INFORMATION
|
37
|
|
ITEM 1.
|
Legal Proceedings
|
37
|
|
ITEM 6.
|
Exhibits
|
38
|
2
ITEM 1.Financial Statements
T BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(000's) except shares information
|
March 31,
2011
|
December 31,
2010
|
||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Cash and due from banks
|
$
|
1,398
|
$
|
2,142
|
||||
Interest-bearing deposits
|
3,709
|
4,695
|
||||||
Federal funds sold
|
450
|
3,352
|
||||||
Total cash and cash equivalents
|
5,557
|
10,189
|
||||||
Securities available for sale at estimated fair value
|
5,837
|
4,067
|
||||||
Securities held to maturity at amortized cost
|
607
|
641
|
||||||
Securities, restricted at cost
|
638
|
1,181
|
||||||
Loans, net of allowance for loan losses of $1,829 and $1,754, respectively
|
90,847
|
94,185
|
||||||
Bank premises and equipment, net
|
485
|
539
|
||||||
Other real estate owned
|
2,233
|
2,291
|
||||||
Other assets
|
2,036
|
2,055
|
||||||
Total assets
|
$
|
108,240
|
$
|
115,148
|
||||
LIABILITIES
|
||||||||
Demand Deposits:
|
||||||||
Noninterest-bearing
|
$
|
9,871
|
$
|
11,919
|
||||
Interest-bearing
|
27,188
|
28,975
|
||||||
Time deposits $100 and over
|
43,450
|
42,439
|
||||||
Other time deposits
|
11,856
|
12,437
|
||||||
Total deposits
|
92,365
|
95,770
|
||||||
Borrowed funds
|
3,000
|
6,000
|
||||||
Other liabilities
|
3,530
|
2,241
|
||||||
Total liabilities
|
98,895
|
104,011
|
||||||
SHAREHOLDERS’ EQUITY
|
||||||||
Common stock, $ 0.01 par value; 10,000,000 shares authorized; 1,941,305 shares issued and outstanding
|
19
|
19
|
||||||
Additional paid-in capital
|
18,590
|
18,580
|
||||||
Retained deficit
|
(9,285
|
)
|
(7,452
|
)
|
||||
Accumulated other comprehensive income(loss)
|
21
|
(10
|
)
|
|||||
Total shareholders' equity
|
9,345
|
11,137
|
||||||
Total liabilities and shareholders' equity
|
$
|
108,240
|
$
|
115,148
|
See accompanying notes to consolidated financial statements
3
T BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(000's) except earnings per share
|
Three Months Ended March 31,
|
|||||||
2011
|
2010
|
|||||||
Interest Income
|
||||||||
Loan, including fees
|
$
|
1,768
|
$
|
1,998
|
||||
Securities
|
47
|
35
|
||||||
Federal funds sold
|
1
|
-
|
||||||
Interest-bearing deposits
|
3
|
6
|
||||||
Total interest income
|
1,819
|
2,039
|
||||||
Interest Expense
|
||||||||
Deposits
|
575
|
718
|
||||||
Borrowed funds
|
4
|
5
|
||||||
Total interest expense
|
579
|
723
|
||||||
Net interest income
|
1,240
|
1,316
|
||||||
Provision for loan losses
|
19
|
1,303
|
||||||
Net interest income after provision for loan losses
|
1,221
|
13
|
||||||
Noninterest Income
|
||||||||
Trust income
|
2,134
|
1,891
|
||||||
Service fees
|
81
|
39
|
||||||
Total noninterest income
|
2,215
|
1,930
|
||||||
Noninterest Expense
|
||||||||
Salaries and employee benefits
|
652
|
750
|
||||||
Occupancy and equipment
|
258
|
276
|
||||||
Trust expenses
|
1,819
|
1,606
|
||||||
Professional fees
|
122
|
250
|
||||||
Data processing
|
69
|
59
|
||||||
Other
|
2,349
|
182
|
||||||
Total noninterest expense
|
5,269
|
3,123
|
||||||
Net Loss
|
$
|
(1,833
|
)
|
$
|
(1,180
|
)
|
||
Loss per common share:
|
||||||||
Basic
|
$
|
(0.94
|
)
|
$
|
(0.61
|
)
|
||
Diluted
|
$
|
(0.94
|
)
|
$
|
(0.61
|
)
|
||
Weighted average common shares outstanding
|
1,941,305
|
1,941,305
|
||||||
Weighted average diluted shares outstanding
|
1,941,305
|
1,941,305
|
See accompanying notes to consolidated financial statements
4
T BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
(000's)
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Deficit
|
Accumulated
Other
Comprehensive
Income
|
Total
|
|||||||||||||||
BALANCE, January 1, 2010
|
$
|
19
|
$
|
18,537
|
$
|
(6,982
|
)
|
$
|
17
|
$
|
11,591
|
|||||||||
Comprehensive loss:
|
||||||||||||||||||||
Net loss — YTD
|
(470
|
)
|
(470
|
)
|
||||||||||||||||
Change in accumulated gain on securities available for sale
|
(27
|
)
|
(27
|
)
|
||||||||||||||||
Total comprehensive loss
|
(497
|
)
|
||||||||||||||||||
Stock based compensation
|
43
|
43
|
||||||||||||||||||
BALANCE, December 31, 2010
|
$
|
19
|
$
|
18,580
|
$
|
(7,452
|
)
|
$
|
(10
|
)
|
$
|
11,137
|
||||||||
BALANCE, January 1, 2011
|
$
|
19
|
$
|
18,580
|
$
|
(7,452
|
)
|
$
|
(10
|
)
|
$
|
11,137
|
||||||||
Comprehensive loss:
|
||||||||||||||||||||
Net loss — YTD
|
(1,833
|
)
|
(1,833
|
)
|
||||||||||||||||
Change in accumulated gain on securities available for sale
|
31
|
31
|
||||||||||||||||||
Total comprehensive loss
|
(1,802
|
)
|
||||||||||||||||||
Stock based compensation
|
10
|
10
|
||||||||||||||||||
BALANCE, March 31, 2011
|
$
|
19
|
$
|
18,590
|
$
|
(9,285
|
)
|
$
|
21
|
$
|
9,345
|
See accompanying notes to consolidated financial statements
5
T BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
|
||||||||
(000's)
|
2011
|
2010
|
||||||
Cash Flows from Operating Activities
|
||||||||
Net loss
|
$
|
(1,833
|
)
|
$
|
(1,180
|
)
|
||
Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities
|
||||||||
Provision for loan losses
|
19
|
1,303
|
||||||
Depreciation and amortization
|
68
|
84
|
||||||
Net amortization of securities
|
15
|
18
|
||||||
Impairment of other real estate owned
|
58
|
-
|
||||||
Stock based compensation
|
10
|
10
|
||||||
Net change in other assets
|
19
|
(24
|
)
|
|||||
Net change in other liabilities
|
1,289
|
(80
|
)
|
|||||
Net cash provided by (used in) operating activities
|
(355
|
)
|
131
|
|||||
Cash Flows from Investing Activities
|
||||||||
Principal payments and maturities of securities held to maturity
|
34
|
48
|
||||||
Purchase of securities available for sale
|
(2,003
|
)
|
(1,000
|
)
|
||||
Principal payments, calls and maturities of securities available for sale
|
249
|
2,258
|
||||||
Purchase of securities, restricted
|
-
|
(1
|
)
|
|||||
Proceeds from sale of securities, restricted
|
543
|
-
|
||||||
Net change in loans
|
3,319
|
(493
|
)
|
|||||
Purchases of premises and equipment
|
(14
|
)
|
(14
|
)
|
||||
Net cash provided by investing activities
|
2,128
|
798
|
||||||
Cash Flows from Financing Activities
|
||||||||
Net change in demand deposits
|
(3,835
|
)
|
(1,533
|
)
|
||||
Net change in time deposits
|
430
|
(6,112
|
)
|
|||||
Proceeds from borrowed funds
|
-
|
16,000
|
||||||
Repayment of borrowed funds
|
(3,000
|
)
|
(13,000
|
)
|
||||
Net cash used in financing activities
|
(6,405
|
)
|
(4,645
|
)
|
||||
Net change in cash and cash equivalents
|
(4,632
|
)
|
(3,716
|
)
|
||||
Cash and cash equivalents at beginning of period
|
10,189
|
7,292
|
||||||
Cash and cash equivalents at end of period
|
$
|
5,557
|
$
|
3,576
|
||||
Supplemental disclosures of cash flow information
|
||||||||
Cash paid during the period for
|
||||||||
Interest
|
$
|
550
|
$
|
745
|
||||
Income taxes
|
$
|
-
|
$
|
-
|
See accompanying notes to consolidated financial statements
6
T BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
We prepared the consolidated financial statements of T Bancshares, Inc. and its subsidiaries (the “Company,” “we,” “us,” or “our,” hereafter) following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (“GAAP”) can be condensed or omitted.
We are responsible for the unaudited financial statements included in this document. The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. The accounting and reporting policies of the Company reflect banking industry practice and conform to GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts and the disclosure of contingent assets and liabilities. The allowance for loan loss is the primary estimate by management, which is established through a provision for loan loss charge to expense. It is reasonably possible that actual results could differ significantly from those estimates.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
NOTE 2. ADOPTION OF NEW ACCOUNTING POLICIES
Accounting Standards Update (ASU) No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. Upon adoption, ASU 2011-02 requires retrospective application to all restructurings occurring during 2011 along with disclosure of certain additional information. Adoption of ASU 2011-02 is not expected have a significant impact on the Company’s financial statements.
7
NOTE 3. LOANS
Loans held in portfolio consisted of the following:
(000's)
|
March 31,
2011
|
December 31,
2010
|
||||||
Commercial and industrial
|
$
|
61,939
|
$
|
64,381
|
||||
Consumer installment
|
1,007
|
1,002
|
||||||
Real estate — mortgage
|
22,126
|
22,377
|
||||||
Real estate — construction
|
7,720
|
8,309
|
||||||
Other
|
-
|
6
|
||||||
Total loans
|
92,792
|
96,075
|
||||||
Less allowance for loan losses
|
1,829
|
1,754
|
||||||
Less deferred loan fees
|
116
|
136
|
||||||
Net loans
|
$
|
90,847
|
$
|
94,185
|
The change in the allowance for loan losses is as follows:
Three Months Ended March 31,
|
||||||||
(000's)
|
2011
|
2010
|
||||||
Balance at beginning of period
|
$
|
1,754
|
$
|
1,713
|
||||
Charge-offs:
|
||||||||
Commercial and industrial
|
-
|
1,060
|
||||||
Consumer installment
|
-
|
-
|
||||||
Real estate – construction and land
|
-
|
30
|
||||||
Total charge-offs
|
-
|
1,090
|
||||||
Recoveries:
|
||||||||
Commercial and industrial
|
6
|
30
|
||||||
Consumer installment
|
-
|
-
|
||||||
Real estate – construction and land
|
50
|
-
|
||||||
Total recoveries
|
56
|
30
|
||||||
Net charge-offs
|
(56
|
)
|
(1,060
|
)
|
||||
Provision for loan losses
|
19
|
1,303
|
||||||
Balance at end of period
|
$
|
1,829
|
$
|
1,956
|
At March 31, 2011, there were $358,000 of nonaccrual loans and no loans contractually delinquent over ninety days and still accruing interest, and at December 31, 2010, there were $1.8 million of nonaccrual loans and no loans contractually delinquent over ninety days and still accruing interest.
8
The Company’s impaired loans and related allowance are summarized in the following table. Average recorded investment is reported on a year-to-date basis.
Unpaid
|
Recorded
|
Recorded
|
||||||||||||||||||||||
Contractual
|
Investment
|
Investment
|
Total
|
Average
|
||||||||||||||||||||
Principal
|
With No
|
With
|
Recorded
|
Related
|
Recorded
|
|||||||||||||||||||
(000's)
|
Balance
|
Allowance
|
Allowance
|
Investment
|
Allowance
|
Investment
|
||||||||||||||||||
March 31, 2011
|
||||||||||||||||||||||||
Commercial and industrial
|
$
|
2,642
|
$
|
1,130
|
$
|
1,492
|
$
|
2,622
|
$
|
369
|
$
|
2,635
|
||||||||||||
Consumer installment
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Real estate – mortgage
|
-
|
-
|
-
|
-
|
-
|
964
|
||||||||||||||||||
Real estate – construction and land
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Total
|
$
|
2,642
|
$
|
1,130
|
$
|
1,492
|
$
|
2,622
|
$
|
369
|
$
|
3,599
|
December 31, 2010
|
||||||||||||||||||||||||
Commercial and industrial
|
$
|
2,672
|
$
|
1,139
|
$
|
1,517
|
$
|
2,656
|
$
|
255
|
$
|
2,529
|
||||||||||||
Consumer installment
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Real estate – mortgage
|
1,534
|
1,461
|
-
|
1,461
|
-
|
1,521
|
||||||||||||||||||
Real estate – construction and land
|
-
|
-
|
-
|
-
|
-
|
774
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Total
|
$
|
4,206
|
$
|
2,600
|
$
|
1,517
|
$
|
4,117
|
$
|
255
|
$
|
4,824
|
The following summarizes the Company’s internal ratings of its loans:
Special
|
||||||||||||||||||||
(000's)
|
Pass
|
Mention
|
Substandard
|
Doubtful
|
Total
|
|||||||||||||||
March 31, 2011
|
||||||||||||||||||||
Commercial and industrial
|
$
|
58,883
|
$
|
1,227
|
$
|
1,582
|
$
|
247
|
$
|
61,939
|
||||||||||
Consumer installment
|
1,007
|
-
|
-
|
-
|
1,007
|
|||||||||||||||
Real estate - mortgage
|
17,406
|
951
|
3,769
|
-
|
22,126
|
|||||||||||||||
Real estate – construction and land
|
6,321
|
1,399
|
-
|
-
|
7,720
|
|||||||||||||||
Other
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Total
|
$
|
83,617
|
$
|
3,577
|
$
|
5,351
|
$
|
247
|
$
|
92,792
|
December 31, 2010
Commercial and industrial
|
$
|
61,273
|
$
|
1,261
|
$
|
1,847
|
$
|
-
|
$
|
64,381
|
||||||||||
Consumer installment
|
1,002
|
-
|
-
|
-
|
1,002
|
|||||||||||||||
Real estate - mortgage
|
17,706
|
958
|
3,713
|
-
|
22,377
|
|||||||||||||||
Real estate – construction and land
|
6,900
|
1,048
|
361
|
-
|
8,309
|
|||||||||||||||
Other
|
6
|
-
|
-
|
-
|
6
|
|||||||||||||||
Total
|
$
|
86,887
|
$
|
3,267
|
$
|
5,921
|
$
|
-
|
$
|
96,075
|
9
The Company’s past due loans are as follows:
Total 90
|
||||||||||||||||||||||||
30-89 Days
|
Greater Than
|
Total
|
Total
|
Total
|
Days Past Due
|
|||||||||||||||||||
(000's)
|
Past Due
|
90 Days
|
Past Due
|
Current
|
Loans
|
Still Accruing
|
||||||||||||||||||
March 31, 2011
|
||||||||||||||||||||||||
Commercial and industrial
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
61,939
|
$
|
61,939
|
$
|
-
|
||||||||||||
Consumer installment
|
-
|
-
|
-
|
1,007
|
1,007
|
-
|
||||||||||||||||||
Real estate – mortgage
|
-
|
-
|
-
|
22,126
|
22,126
|
-
|
||||||||||||||||||
Real estate – construction and land
|
-
|
-
|
-
|
7,720
|
7,720
|
-
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Total
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
92,792
|
$
|
92,792
|
$
|
-
|
December 31, 2010
|
||||||||||||||||||||||||
Commercial and industrial
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
64,381
|
$
|
64,381
|
$
|
-
|
||||||||||||
Consumer installment
|
-
|
-
|
-
|
1,002
|
1,002
|
-
|
||||||||||||||||||
Real estate – mortgage
|
-
|
1,461
|
1,461
|
20,916
|
22,377
|
-
|
||||||||||||||||||
Real estate – construction and land
|
-
|
-
|
-
|
8,309
|
8,309
|
-
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
6
|
6
|
-
|
||||||||||||||||||
Total
|
$
|
-
|
$
|
1,461
|
$
|
1,461
|
$
|
94,614
|
$
|
96,075
|
$
|
-
|
10
NOTE 4. SECURITIES
A summary of the amortized cost and fair value of securities is presented below.
March 31, 2011
|
||||||||||||||||
(000's)
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Estimated
Fair Value
|
||||||||||||
Securities Available for Sale:
|
||||||||||||||||
U.S. Government Agencies
|
$
|
5,816
|
$
|
50
|
$
|
29
|
$
|
5,837
|
||||||||
Securities Held to Maturity:
|
||||||||||||||||
U.S. Government Agencies
|
$
|
607
|
$
|
45
|
$
|
-
|
$
|
652
|
||||||||
Securities, restricted
|
||||||||||||||||
Other
|
$
|
638
|
$
|
-
|
$
|
-
|
$
|
638
|
|
December 31, 2010
|
|||||||||||||||
(000's)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
||||||||||||
Securities Available for Sale:
|
||||||||||||||||
U.S. Government Agencies
|
$
|
4,077
|
$
|
40
|
$
|
50
|
$
|
4,067
|
||||||||
Securities Held to Maturity:
|
||||||||||||||||
U.S. Government Agencies
|
$
|
641
|
$
|
41
|
$
|
-
|
$
|
682
|
||||||||
Securities, restricted
|
||||||||||||||||
Other
|
$
|
1,181
|
$
|
-
|
$
|
-
|
$
|
1,181
|
At March 31, 2011 and December 31, 2010, securities with market value of $5.8 million and $4.1 million were pledged against borrowed funds at the Federal Home Loan Bank of Dallas, and one security with market value of $652,000 and $682,000 was pledged against trust deposit balances held at our subsidiary, T Bank, N.A. (the “Bank”). The Bank held Federal Reserve Bank of Dallas stock in the amount of $420,000 at March 31, 2011 and December 31, 2010. The Bank also held Federal Home Loan Bank of Dallas stock in the amount of $218,000 and $760,600 at March 31, 2011 and December 31, 2010, respectively. Both of the Federal Reserve Bank of Dallas stock and the Federal Home Loan Bank of Dallas stock are carried at cost and are reported as “Securities, restricted” in the table above.
The amortized cost and estimated fair value of securities, excluding trading securities, at March 31, 2011 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage backed securities are shown separately since they are not due at a single maturity date.
Held to Maturity
|
Available for Sale
|
|||||||||||||||
(000's)
|
Amortized
Cost
|
Estimated
Fair Value
|
Amortized
Cost
|
Estimated
Fair Value
|
||||||||||||
Due in one year or less
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
Due after one year through five years:
|
-
|
-
|
-
|
-
|
||||||||||||
Due after five years through ten years
|
-
|
-
|
2,002
|
1,999
|
||||||||||||
Due after ten years
|
-
|
-
|
-
|
-
|
||||||||||||
Mortgage-backed securities
|
607
|
652
|
3,814
|
3,838
|
||||||||||||
Total
|
$
|
607
|
$
|
652
|
$
|
5,816
|
$
|
5,837
|
11
NOTE 5. RELATED PARTIES
Certain directors and officers of the Company have depository accounts with the Bank. None of those deposit accounts has terms more favorable than those available to any other depositor.
NOTE 6. BANK PREMISES AND EQUIPMENT
The original cost and related accumulated depreciation at March 31, 2011 and December 31, 2010 were as follows:
(000's)
|
March 31,
2011
|
December 31,
2010
|
||||||
Leasehold improvements
|
$
|
929
|
$
|
929
|
||||
Furniture and equipment
|
1,920
|
1,907
|
||||||
2,849
|
2,836
|
|||||||
Less: accumulated depreciation
|
2,364
|
2,297
|
||||||
Balance at end of period
|
$
|
485
|
$
|
539
|
12
NOTE 7. OTHER REAL ESTATE OWNED AND OTHER ASSETS
Other assets consisted of the following at March 31, 2011 and December 31, 2010:
(000's)
|
March 31,
2011
|
December 31,
2010
|
||||||
Prepaid assets
|
945
|
1,015
|
||||||
Accounts receivable – trust fees
|
745
|
680
|
||||||
Accrued interest receivable
|
313
|
330
|
||||||
Other
|
33
|
30
|
||||||
Total
|
$
|
2,036
|
$
|
2,055
|
Other Real Estate Owned (“OREO”) totaled $2.2 million and $2.3 million at March 31, 2011 and December 31, 2010, respectively, which are recorded at lower of cost or fair value. The OREO assets are actively being marketed, and disposal of the assets is anticipated to occur in the next 12 months. Included in other noninterest expense for the three months ended March 31, 2011 was approximately $58,000 for impairment of OREO (see Note 17).
NOTE 8. DEPOSITS
Deposits are summarized as follows:
(000's)
|
As of March 31, 2011
|
As of December 31, 2010
|
||||||||||||||
Noninterest bearing demand
|
$
|
9,871
|
11
|
%
|
$
|
11,919
|
13
|
%
|
||||||||
Interest bearing demand (NOW)
|
6,591
|
7
|
2,130
|
2
|
||||||||||||
Money market accounts
|
20,344
|
22
|
26,671
|
28
|
||||||||||||
Savings accounts
|
253
|
0
|
174
|
0
|
||||||||||||
Certificates of deposit, $100,000 and greater
|
43,450
|
47
|
12,437
|
13
|
||||||||||||
Certificates of deposit, less than $100,000
|
11,856
|
13
|
42,439
|
44
|
||||||||||||
$
|
92,365
|
100
|
%
|
$
|
95,770
|
100
|
%
|
At March 31, 2011, the scheduled maturities of certificates of deposit were as follows:
(000’s) | ||||
2011 |
$
|
35,021
|
||
2012 |
16,546
|
|||
2013 |
2,637
|
|||
2014 |
532
|
|||
2015 |
336
|
|||
2016 |
234
|
|||
Total
|
$
|
55,306
|
13
NOTE 9. BORROWED FUNDS
Borrowed funds as of March 31, 2011 and December 31, 2010, were as follows:
(000's)
|
March 31,
2011
|
December 31,
2010
|
||||||
Federal Home Loan Bank Advance
|
$
|
3,000
|
$
|
6,000
|
At March 31, 2011, borrowed funds consisted of a $3.0 million loan from the Federal Home Loan Bank of Dallas. The loan has a term of 1 year and matures on April 13, 2011. The interest rate for the loan is fixed at 0.54%. The Company has a $24.4 million credit line with the Federal Reserve Bank of Dallas, which is secured by $38.1 million in pledged commercial and industrial loans, and $19.8 million credit line with the Federal Home Loan Bank which is secured by $20.0 million in pledged real estate loans and $5.7 million in securities.
NOTE 10. OTHER LIABILITIES
The following comprised other liabilities at March 31, 2011 and December 31, 2010:
(000's)
|
March 31,
2011
|
December 31,
2010
|
||||||
Reserve for Trust Investment Funds adjustment
|
$
|
2,100
|
$
|
-
|
||||
Reserve for consumer restitution
|
108
|
963
|
||||||
Trust advisor fees payable
|
932
|
576
|
||||||
Interest payable
|
106
|
77
|
||||||
Audit fees
|
161
|
121
|
||||||
Incentive compensation
|
36
|
107
|
||||||
Legal
|
7
|
10
|
||||||
Franchise & property taxes
|
32
|
100
|
||||||
Other accruals
|
48
|
287
|
||||||
$
|
3,530
|
$
|
2,241
|
NOTE 11. INCOME TAXES
No federal income tax expense has been recorded for the quarter ended March 31, 2011, as net operating losses are being used to offset taxable income. Based upon the Company’s limited operating history, the federal income tax benefit of these losses has a valuation allowance equal to the amount of the benefit. As of December 31, 2010, the Company had net tax operating loss carry forwards of approximately $3.8 million that will ultimately expire in 2030, if not used. This amount is lower than the losses reflected in the financial statements as all organizational costs are capitalized for income tax purposes and provisions for loan losses are not recognized for tax purposes.
NOTE 12. STOCK OPTIONS
The shareholders of the Company approved the 2005 Stock Incentive Plan (the “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 has a term of 10 years. The Plan is administered by the Board of Directors. As of March 31, 2011 and December 31, 2010, options to purchase a total of 212,500 shares of common stock had been issued with a weighted average exercise price of $9.14. These options vest through May 2015. These options could potentially dilute earnings per share, but were not included in the earnings (loss) per share computations because their effect was anti-dilutive for the three months ended March 31, 2011 and 2010.
14
The Company accounts for stock options in accordance with Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (“ASC”) Topic 718. Under this method, compensation cost for all share-based payments granted are recorded 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 option plan for the three months ended March 31, 2011:
|
Number of
Shares
Underlying
Options
|
Weighted
Average
Exercise
Prices
|
||||||
Outstanding at beginning of the period
|
212,500
|
$
|
9.14
|
|||||
Granted
|
-
|
-
|
||||||
Exercised
|
-
|
-
|
||||||
Expired / forfeited
|
-
|
-
|
||||||
Outstanding at end of period
|
212,500
|
$
|
9.14
|
|||||
Exercisable at end of period
|
168,300
|
$
|
10.22
|
|||||
Available for grant at end of period
|
36,500
|
The weighted average remaining contractual life of options outstanding at March 31, 2011 was 5.5 years.
The following is a summary of the Company’s nonvested options for the three months ended March 31, 2011:
|
Shares
|
Weighted
Average
Grant Date
Fair Value
|
||||||
Nonvested at January 1, 2011
|
47,700
|
$
|
2.10
|
|||||
Granted
|
-
|
-
|
||||||
Vested
|
3,500
|
2.39
|
||||||
Forfeited
|
-
|
-
|
||||||
Nonvested at March 31, 2011
|
44,200
|
$
|
2.07
|
As of March 31, 2011, there was approximately $70,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements to be recognized over the vesting period.
NOTE 13. STOCK WARRANTS
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 $20.00 advanced up to a maximum of $100,000. A total of 96,750 warrants were issued and remain outstanding at March 31, 2011. These warrants are exercisable at a price of $10.00 per share at any time until November 2, 2014. During the three months ended March 31, 2011, no warrants were exercised.
There were no additional warrants issued during the three months ended March 31, 2011. The outstanding warrants could potentially dilute earnings per share, but were not included in the earnings (loss) per share computations because their effect was anti-dilutive for the respective three months ended March 31, 2011 and 2010.
15
NOTE 14. COMMITMENTS AND 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. At March 31, 2011, the Company had commitments to extend credit and standby letters of credit of approximately $4.0 million and $15,000, respectively. At December 31, 2010, the Company had commitments to extend credit and standby letters of credit of approximately $3.4 million and $15,000, respectively.
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 Company is involved in various regulatory inspections, inquiries, investigations and proceedings, and litigation matters that arise from time to time in the ordinary course of business. The process of resolving matters through litigation or other means is inherently uncertain, and it is possible that an unfavorable resolution of these matters, will adversely affect the Company, its results of operations, financial condition and cash flows. The Company’s regular practice is to expense legal fees as services are rendered in connection with legal matters, and to accrue for liabilities when payment is probable.
Employment Agreements
The Company entered into employment agreements with two officers of the Bank, Steve Jones and Patrick Howard, on October 3, 2007 and September 4, 2007, respectively. 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.
NOTE 15. 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.
In 2010, the Bank was 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”).To avoid the expense, delay, and uncertainty related to potential litigation with its primary regulator, the Bank negotiated a settlement with the Comptroller. Accordingly, on April 15, 2010, the Bank executed the Agreement, neither admitting nor denying the Comptroller’s findings containing the general terms outlined as follows:
·
|
deposit $5.1 million for consumer restitution charged by the merchants to eligible consumers into a segregated account at the Bank;
|
|
·
|
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;
|
|
·
|
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.
|
16
We do not know at this time the precise amounts that will ultimately be payable by us under the terms of the Agreement. In August and September, 2010, the Bank issued settlement offers and checks covering twelve of the thirteen merchants totaling approximately $3.8 million. Those checks issued in 2010 have expired. A total of approximately 52% of checks issued were cashed with the remaining 48% expiring without being cashed. The Bank issued all remaining required restitution checks totaling approximately $1.6 million on February 25, 2011.At that time, the Bank had a previously recorded reserve balance of $989 thousand, or 62% of the total restitution checks issued. As of May 17, 2011, $874 thousand of these checks have cleared. After administration expenses associated with issuing the checks, the reserve balance remaining was $54 thousand. We believe this reserve is adequate based on our prior experience and estimates to satisfy the remaining checks that may be cashed prior to their expiration on May 27, 2011.
The Bank submitted required capital, liquidity enhancement, and profit plans, as well as a written program to reduce criticized assets to the Comptroller in accordance with the requirements of the Agreement. Although the Comptroller believed the plans were reasonable and did not object to the plans and program as submitted, there is no assurance that the Bank will be able to comply with all of the remaining requirements of the Agreement, including meeting the stated capital requirements or loan to deposit ratio contained therein.
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, or failed to comply with any provision of the Agreement, 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. As of March 31, 2011, the Comptroller has made no such determination relating to any of the aforementioned aspects of the Bank’s operations.
To be categorized as well capitalized under prompt corrective action provisions, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. However, regardless of the Bank’s capital position, the requirement in the Agreement 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 March 31, 2011. The capital ratios required by the Agreement are 11.5% Total Capital to Risk Weighted Assets and 9.00% Tier 1 Capital to Average Assets. As of March 31, 2011, the Bank’s Total Capital to Risk Weighted Assets ratio and Tier 1 Capital to Average Assets ratio of 10.75% and 8.07%, respectively, were below the requirements set forth in the Agreement. Under the terms of the Agreement, the Bank has until the earlier of 90 days after the Bank receives notice from the Assistant Deputy Comptroller that the restitution process has been completed or written notice from the Comptroller that the Bank’s capital is materially deficient to achieve the capital ratios stated in the Agreement. As of March 31, 2011, the Bank has not received either communication from the Comptroller, and therefore does not consider itself in breach of this provision of the Agreement.
17
(000's)
|
Actual
|
For Capital
Adequacy Purposes
|
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
|
|||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
As of March 31, 2011
|
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets)
|
$
|
12,390
|
10.75
|
%
|
$
|
7,655
|
>
|
8.00
|
%
|
$
|
9,569
|
>
|
10.00
|
%
|
||||||||||
Tier 1 Capital (to Risk Weighted Assets)
|
11,186
|
9.50
|
%
|
3,827
|
>
|
4.00
|
%
|
5,741
|
>
|
6.00
|
%
|
|||||||||||||
Tier 1 Capital (to Average Assets)
|
11,186
|
8.07
|
%
|
4,504
|
>
|
4.00
|
%
|
5,631
|
>
|
5.00
|
%
|
|||||||||||||
As of December 31, 2010
|
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets)
|
$
|
12,156
|
12.20
|
%
|
$
|
7,973
|
>
|
8.00
|
%
|
$
|
9,966
|
>
|
10.00
|
%
|
||||||||||
Tier 1 Capital (to Risk Weighted Assets)
|
10,904
|
10.94
|
%
|
3,986
|
>
|
4.00
|
%
|
5,979
|
>
|
6.00
|
%
|
|||||||||||||
Tier 1 Capital (to Average Assets)
|
10,904
|
9.41
|
%
|
4,635
|
>
|
4.00
|
%
|
5,793
|
>
|
5.00
|
%
|
18
NOTE 16. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
T BANCSHARES, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
(000's)
|
March 31,
2011
|
December 31,
2010
|
||||||
ASSETS
|
||||||||
Cash and due from banks
|
$
|
239
|
$
|
256
|
||||
Investment in subsidiary
|
9,107
|
10,894
|
||||||
Total Assets
|
$
|
9,346
|
$
|
11,150
|
||||
LIABILITIES AND CAPITAL
|
||||||||
Other Liabilities
|
$
|
1
|
$
|
13
|
||||
Capital
|
9,345
|
11,137
|
||||||
Total Liabilities and Capital
|
$
|
9,346
|
$
|
11,150
|
T BANCSHARES, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
|
||||||||
(000's)
|
2011
|
2010
|
||||||
Equity in loss from subsidiary
|
$
|
(1,818
|
)
|
$
|
(1,160
|
)
|
||
Noninterest expense:
|
||||||||
Professional and administrative
|
5
|
10
|
||||||
Stock based compensation
|
10
|
10
|
||||||
Total noninterest expenses
|
15
|
20
|
||||||
Net loss
|
$
|
(1,833
|
)
|
$
|
(1,180
|
)
|
19
T BANCSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Three Months Ended March 31,
|
|||||||
(000's)
|
2011
|
2010
|
||||||
Cash Flows from Operating Activities
|
||||||||
Net loss
|
$
|
(1,833
|
)
|
$
|
(1,180
|
)
|
||
Adjustments to reconcile net income(loss) to net cash used by operating activities:
|
||||||||
Equity in loss of Bank
|
1,818
|
1,160
|
||||||
Stock based compensation
|
10
|
10
|
||||||
Net change in other assets
|
-
|
-
|
||||||
Net change in other liabilities
|
(12
|
)
|
(35
|
)
|
||||
Net cash used by operating activities
|
(17
|
)
|
(45
|
)
|
||||
Cash Flows from Investing Activities
|
-
|
-
|
||||||
Cash Flows from Financing Activities
|
-
|
-
|
||||||
Net change in cash and cash equivalents
|
(17
|
)
|
(45
|
)
|
||||
Cash and cash equivalents at beginning of period
|
256
|
367
|
||||||
Cash and cash equivalents at end of period
|
$
|
239
|
$
|
322
|
||||
Supplemental disclosures of cash flow information
|
||||||||
Cash paid during the period for
|
||||||||
Interest
|
$
|
-
|
$
|
-
|
||||
Income taxes
|
$
|
-
|
$
|
-
|
NOTE 17. Fair Value Measurements
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.
|
·
|
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.
|
20
·
|
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 March 31, 2011 and December 31, 2010, 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
|
||||||||||||
As of March 31, 2011
|
||||||||||||||||
Securities available for sale:
|
||||||||||||||||
U.S. government agencies
|
$
|
—
|
$
|
5,837
|
$
|
—
|
$
|
5,837
|
||||||||
Other Assets:
|
||||||||||||||||
OREO
|
—
|
2,233
|
—
|
2,233
|
||||||||||||
As of December 31, 2010
|
||||||||||||||||
Securities available for sale:
|
||||||||||||||||
U.S. government agencies and corporations
|
$
|
—
|
$
|
4,067
|
$
|
—
|
$
|
4,067
|
||||||||
Other Assets:
|
||||||||||||||||
OREO
|
—
|
2,291
|
—
|
2,291
|
Non-financial assets measured at fair value on a non-recurring basis include OREO. Certain OREO assets, upon initial recognition, were re-measured 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 and impairment, is estimated using Level 2 inputs based on observable market data. Impairment included in other noninterest expense for the three months ended March 31, 2011 was approximately $58,000.
Carrying amount and estimated fair values of financial instruments were as follows:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
Carrying
Amount
|
Estimated
Fair Value
|
Carrying
Amount
|
Estimated
Fair Value
|
|||||||||||||
Financial assets
|
||||||||||||||||
Cash and cash equivalents
|
$
|
5,557
|
$
|
5,557
|
$
|
10,189
|
$
|
10,189
|
||||||||
Securities available for sale
|
5,837
|
5,837
|
4,067
|
4,067
|
||||||||||||
Loans, net
|
90,847
|
92,206
|
94,185
|
94,305
|
||||||||||||
Accrued interest receivable
|
313
|
313
|
330
|
330
|
||||||||||||
Financial liabilities
|
||||||||||||||||
Deposits
|
92,365
|
94,227
|
95,770
|
97,717
|
||||||||||||
Accrued interest payable
|
106
|
106
|
77
|
77
|
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.
21
NOTE 18. Subsequent Events
The Bank has recently become aware that the accounting software system utilized by the Bank, in its fiduciary capacity in the administration of its collective investment funds, erroneously reported duplications of portions of actual dividend income received, resulting in a partial over-accrual and overstatement of dividend income to some of the collective investment funds and an overstatement of the unit values to some of the collective investment funds. An independent accounting consulting firm was engaged to research and quantify the extent that such reporting variance and over-accrual may have impacted the value of each collective investment fund. The research resulted in adjustments to the unit values of twelve of the collective investment funds administered by the Bank. These adjustments to the unit values affect each of the current participants in the funds proportionally according to the number of units held. The independent accounting consulting firm reviewed the history of each individual participant account from the date the account was opened to present to determine the impact of these adjustments at the participant account level, based on the actual activity within the participant account. As a result of this review, we have estimated an expense and accrued a $2.1 million reserve representing the net value of the aggregate units to be credited to participant accounts based on the May 31, 2011 unit value for each affected collective investment fund. The amount required to credit or debit individual participant accounts will be based on the June 30, 2011 valuation of the collective investment funds.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis represents our consolidated financial condition as of March 31, 2011 and December 31, 2010, and our consolidated results of operations for three months ended March 31, 2011 and 2010. The discussion should be read in conjunction with our financial statements and the notes related thereto, which appear elsewhere in this Quarterly Report on Form 10-Q.
Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including our expectations, intentions, beliefs, or strategies regarding the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results may differ materially from those in such forward-looking statements due to fluctuations in interest rates, inflation, government regulations, economic conditions, customer disintermediation and competitive product and pricing pressures in the geographic and business areas in which we conduct operations, including our plans, objectives, expectations and intentions and other factors discussed under the section entitled “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2010, including the following:
·
|
we have limited operating history upon which to base an estimate of our future financial performance;
|
·
|
if we are unable to implement our business plan and 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;
|
·
|
we are subject to significant government regulation and legislation that increases the cost of doing business and inhibits our ability to compete including the potential impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III;
|
·
|
if we fail to retain our key employees, growth and profitability could be adversely affected;
|
·
|
if we fail to retain our trust customers our non-interest income could be adversely affected;
|
·
|
we face substantial competition in our primary market area;
|
·
|
the Bank’s methodology with respect to reconciling the variance and over-accrual may be challenged by our trust customers, which could in turn adversely affect our financial performance;
|
·
|
if we fail to sustain attractive investment returns to our Trust customers, our growth and profitability in our Trust services could be adversely affected;
|
·
|
we have a significant dental industry loan concentration in which economic or regulatory changes could adversely affect the ability of those customers to fulfill their loan obligations;
|
·
|
if we fail to adequately address formal administrative actions with the Comptroller, including, without limitation, the Agreement, this may have an adverse impact on the Company’s operating results or financial condition;
|
22
·
|
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 Bank’s current legally mandated lending limits are lower than those of our competitors, which may impair our ability to attract borrowers;
|
·
|
changes in governmental economic and monetary policies, the Internal Revenue Code and banking and credit regulations, as well as other factors, will affect the demand for loans and the ability of the Bank to attract deposits;
|
·
|
changes in the general level of interest rates and other economic factors can affect the Bank’s interest income by affecting the spread between interest-earning assets and interest-bearing liabilities;
|
·
|
we have no current intentions of paying cash dividends;
|
·
|
we may not be able to raise additional capital on terms favorable to us; and
|
·
|
our directors and executive officers beneficially own a significant portion of our outstanding common stock.
|
These factors and the risk factors referred to in our Annual Report on Form 10-K for the year ended December 31, 2010 could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement reflects only information known to us as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise.
Executive Overview
Introduction
The Company is a bank holding company headquartered in Dallas, Texas, offering a broad array of banking services through the Bank. Our principal markets include North Dallas, Addison, Plano, Frisco, Southlake and the neighboring Texas communities. As of March 31, 2011, we had, on a consolidated basis, total assets of $108.2 million, net loans of $90.8 million, total deposits of $92.4 million, and shareholders’ equity of $9.3 million. We currently operate through a main office located at 16000 Dallas Parkway, Dallas, Texas, and a branch office at 8100 North Dallas Parkway, Plano, 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. In 2004, we completed an initial public offering of our common stock, issuing 1,680,000 shares at a price of $10.00 per share. The net proceeds that we received from the offering, after deducting offering expenses, were approximately $16.4 million. The Bank opened for business on November 2, 2004.
The following discussion focuses on our financial condition at March 31, 2011 and December 31, 2010, and our results of operations for the three months ended March 31, 2011 and 2010.
Recent Developments
The Bank has recently become aware that the accounting software system utilized by the Bank, in its fiduciary capacity in the administration of its collective investment funds, erroneously reported duplications of portions of actual dividend income received, resulting in a partial over-accrual and overstatement of dividend income to some of the collective investment funds and an overstatement of the unit values to some of the collective investment funds. An independent accounting consulting firm was engaged to research and quantify the extent that such reporting variance and over-accrual may have impacted the value of each collective investment fund. That research resulted in required adjustments to the unit values of twelve of the collective investment funds administered by the Bank. These adjustments to the unit values affect each of the current participants in the funds proportionally according to the number of units held. The independent accounting consulting firm reviewed the history of each individual participant account from the date the account was opened to present to determine the impact of these adjustments at the participant account level, based on the actual activity within the participant account. As a result of this review, we have estimated and expensed a $2.1 million reserve representing the value of the aggregate units to be credited to participant accounts based on the May 31, 2011 unit value for each affected collective investment fund. The actual amount required to credit or debit the individual participant accounts will be based on the actual June 30, 2011 valuation of the collective investment funds. Immediately following this valuation date, participant accounts will be corrected (See “Part I. ITEM 4. Controls and Procedures”).
23
Results of Operations
Net Interest Income and Net Interest Margin
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 borrowed funds. Net interest income is our principal source of earnings. 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.
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.
Three Months Ended March 31, 2011 Compared to
Three Months Ended March 31, 2010
|
||||||||||||||||
Increase (Decrease) Due to
Change in
|
||||||||||||||||
(000’s)
|
Yield/
Rate
|
Average
Volume
|
Number of
Days
|
Total
|
||||||||||||
Federal Funds Sold
|
$ | - | $ | 1 | $ | - | $ | 1 | ||||||||
Securities and other
|
17 | (8 | ) | - | 9 | |||||||||||
Loans, net of reserve (1)
|
344 | (574 | ) | - | (230 | ) | ||||||||||
Total earning assets
|
361 | (581 | ) | - | (220 | ) | ||||||||||
NOW
|
- | - | - | - | ||||||||||||
Money Market
|
(9 | ) | (40 | ) | (49 | ) | ||||||||||
Certificates of deposit $100,000 or less
|
(18 | ) | (30 | ) | - | (48 | ) | |||||||||
Certificates of deposit $100,000 or more
|
(33 | ) | (13 | ) | - | (46 | ) | |||||||||
Borrowed Funds
|
4 | (5 | ) | - | (1 | ) | ||||||||||
Total interest-bearing liabilities
|
(56 | ) | (88 | ) | - | (144 | ) | |||||||||
Changes in net interest income
|
$ | 417 | $ | (493 | ) | $ | - | $ | (76 | ) |
(1) Average loans include non-accrual.
Net interest income for the three months ended March 31, 2011 decreased $76,000, or 5.8%, compared to the same period in the prior year. The decrease was due primarily to a decline in average earning asset volume, which was partially offset by an increase in average interest yield for interest-earning assets.
Total interest income for the three months ended March 31, 2011 decreased $220,000, or 10.8%, compared to the same period in 2010. For the three month period ended March 31, 2011, the average interest yield for interest-earning assets increased to 6.8%, or 14.6%, compared to 5.9% for the same period in 2010. Average earning asset volume decreased $30.4 million, or 22.1%, to $106.9 million for the three months ended March 31, 2011, compared to $137.3 million for the same period in the prior year. The entire decrease was due to reduction in loan volume.
Total interest expense for the three months ended March 31, 2011 decreased $144,000, or 19.8%, compared to the same period in 2010. For the three month-period ended March 31, 2011, the average interest yield for interest-bearing liabilities increased slightly to 2.7%, or 6.8%, compared to 2.5% for the same period in 2010. Average interest bearing deposit volume fell $24.7 million, or 22.6%, to $84.4 million for the three months ended March 31, 2011, compared to $109.1 million for the same period in 2010. The decrease was primarily attributable to the reduction of money market deposits. Average borrowed funds decreased $4.7 million, or 54.8%, to $3.9 million for the three months ended March 31, 2011, compared to $8.6 million for the same period in the prior year.
24
Key Performance Indicators at March 31, 2011
The following were key indicators of our performance and results of operations through the first quarter of 2011:
·
|
total assets was $108.2 million at the end of the first quarter of 2011, representing a decrease of $6.9 million, or 6.0%, from $115.1 million at the end of 2010;
|
·
|
total loans, net of allowance for loan losses, decreased to $90.8 million at the end of the first quarter of 2011, representing a decrease of $3.4 million, or 3.5%, from $94.2 million at the end of 2010;
|
·
|
total deposits decreased to $92.4 million at the end of the first quarter of 2011, representing a decrease of $3.4 million, or 3.6%, from $95.8 million at the end of 2010;
|
·
|
net loss was $1.8 million for the three months ended March 31, 2011, compared to net loss of $1.2 million for the same period in the prior year. The Bank recorded a reserve of $2.1 million to correct the value of participants’ investments in certain collective investment funds administered by the Bank’s trust department (See “Part I. ITEM 4.Controls and Procedures”).
|
·
|
total revenue was $4.0 million for the three months ended March 31, 2011, unchanged from the same period in the prior year.
|
·
|
Tier 1 capital to average assets and total capital ratios were 8.07% and 10.75% compared to 9.41% and 12.20% at December 31, 2010.
|
25
The following tables set 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 three months ended March 31, 2011 and 2010.
FINANCIAL SUMMARY
Consolidated Daily Average Balances, Average Yields and Rates
Three Months Ended March 31,
|
||||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||
(000's) except earnings per share
|
Average
Balance
|
Income/
Expense
|
Average
Yield
|
Average
Balance
|
Income/
Expense
|
Average
Yield
|
||||||||||||||||||
Interest-earning assets
|
||||||||||||||||||||||||
Loans, net of reserve(1)
|
$
|
92,952
|
$
|
1,768
|
7.6
|
%
|
$
|
123,107
|
$
|
1,998
|
6.5
|
%
|
||||||||||||
Federal funds sold
|
2,281
|
1
|
0.2
|
%
|
634
|
-
|
0.2
|
%
|
||||||||||||||||
Securities and other
|
11,682
|
50
|
1.7
|
%
|
13,589
|
41
|
1.2
|
%
|
||||||||||||||||
Total earning assets
|
106,915
|
1,819
|
6.8
|
%
|
137,330
|
2,039
|
5.9
|
%
|
||||||||||||||||
Cash and other assets
|
5,686
|
5,760
|
||||||||||||||||||||||
Total assets
|
$
|
112,601
|
$
|
143,090
|
||||||||||||||||||||
Interest-bearing liabilities
|
||||||||||||||||||||||||
NOW accounts
|
$
|
2,523
|
4
|
0.6
|
%
|
$
|
2,069
|
4
|
0.7
|
%
|
||||||||||||||
Money market accounts
|
26,791
|
52
|
0.8
|
%
|
47,052
|
100
|
0.9
|
%
|
||||||||||||||||
Savings accounts
|
188
|
-
|
0.8
|
%
|
194
|
1
|
0.9
|
%
|
||||||||||||||||
Certificates of deposit less than $100,000
|
11,851
|
103
|
3.5
|
%
|
15,341
|
151
|
4.0
|
%
|
||||||||||||||||
Certificates of deposit $100,000 or greater
|
43,065
|
416
|
3.9
|
%
|
44,456
|
462
|
4.2
|
%
|
||||||||||||||||
Total interest bearing deposits
|
84,418
|
575
|
2.8
|
%
|
109,112
|
718
|
2.7
|
%
|
||||||||||||||||
Borrowed funds
|
3,900
|
4
|
0.5
|
%
|
8,622
|
5
|
0.2
|
%
|
||||||||||||||||
Total interest bearing liabilities
|
88,318
|
579
|
2.7
|
%
|
117,734
|
723
|
2.5
|
%
|
||||||||||||||||
Noninterest bearing deposits
|
11,717
|
10,765
|
||||||||||||||||||||||
Other liabilities
|
1,529
|
3,162
|
||||||||||||||||||||||
Stockholders’ equity
|
11,037
|
11,429
|
||||||||||||||||||||||
Total liabilities and stockholders' equity
|
$
|
112,601
|
$
|
143,090
|
||||||||||||||||||||
Net interest income
|
1,240
|
1,316
|
||||||||||||||||||||||
Net interest spread
|
4.1
|
%
|
3.4
|
%
|
||||||||||||||||||||
Net interest margin
|
4.7
|
%
|
3.8
|
%
|
||||||||||||||||||||
Provision for loan loss
|
19
|
1,303
|
||||||||||||||||||||||
Non-interest income
|
2,215
|
1,930
|
||||||||||||||||||||||
Non-interest expense
|
5,269
|
3,123
|
||||||||||||||||||||||
Loss before income taxes
|
(1,833
|
)
|
(1,180
|
)
|
||||||||||||||||||||
Income taxes expense (benefit)
|
-
|
-
|
||||||||||||||||||||||
Net loss
|
$
|
(1,833
|
)
|
$
|
(1,180
|
)
|
||||||||||||||||||
Loss per share
|
(0.94
|
)
|
(0.61
|
)
|
||||||||||||||||||||
Return on average equity
|
(66.43
|
)%
|
(41.30
|
)%
|
||||||||||||||||||||
Return on average assets
|
(6.51
|
)%
|
(3.30
|
)%
|
||||||||||||||||||||
Equity to assets ratio
|
9.80
|
%
|
7.99
|
%
|
(1)
|
Includes nonaccrual loans
|
26
Provision for Loan Losses
We determined a provision for loan losses that we consider sufficient to maintain an allowance to absorb probable losses inherent in our portfolio as of the balance sheet date. For additional information concerning this determination, see the section of this discussion and analysis captioned “Allowance for Loan Losses.”
The provision for loan losses totaled $19,000 for the three months ended March 31, 2011, compared to $1.3 million for the three months ended March 31, 2010. The provision amounts are directly related to loan volumes and losses. We had no charge-offs and recoveries of $56,000 during the three months ended March 31, 2011, compared to charge-offs of $1.1 million and recoveries of $30,000 for the same period in the prior year.
Non-interest Income
Non-interest income was primarily attributable to fee income generated by the Company for trust services and service charges on depository accounts.
Total non-interest income increased $285,000, or 14.8%, to $2.2 million for the three months ended March 31, 2011, compared to $1.9 million for the same period in the prior year. The increase is primarily attributable to an increase in trust income.
Trust income is earned on the value of managed and non-managed assets held in custody. For the three months ended March 31, 2011, trust income totaled $2.1 million, compared to $1.9 million for the same period in the prior year. The increase in trust income is directly attributable to the general rise in the market values of assets in trust accounts on which the fees are based.
Service fees were $81,000 for the three months ended March 31, 2011, compared to $39,000 for the same period in the prior year. The increase was due to $56,000 recovery from the Federal Trade Commission for the consumer restitution explained in Note 15, offset by reduction of other real estate owned income due to sale of rental properties in the fourth quarter of 2010.
Non-interest Expense
Total non-interest expense increased $2.1 million, or 68.7%, to $5.3 million for the three months ended March 31, 2011, compared to $3.1 million for the same period in the prior year. Changes in the components of non-interest expense for the three months ending March 31, 2011 and 2010 are discussed below.
Salaries and employee benefits decreased $98,000, or 13.1%, to $652,000 for the three months ended March 31, 2011, compared to $750,000 for the same period in the prior year. The decrease was related to reduction of full-time equivalent employees.
Occupancy and equipment expenses are primarily lease expenses and depreciation and amortization of leasehold improvements and furniture, fixtures and equipment. For the three months ended March 31, 2011, occupancy and equipment expense decreased $18,000, or 6.5%, to $258,000, compared to $276,000 for the same period in the prior year. The decrease was due primarily to a reduction in the depreciation of furniture, fixtures and equipment.
Trust expenses are advisory fees paid to a fund advisor to advise the Bank on the common investment funds held in the trust department and are based on the value of the assets held in custody. For the three months ended March 31, 2011, trust expenses increased $213,000, or 13.3%, to $1.8 million as compared to $1.6 million for the same period in the prior year. Similar to trust income, the increase in trust expense is directly attributable to the general rise in the market values of assets in trust accounts.
Professional fees decreased $128,000, or 51.2%, to $122,000 for the three months ended March 31, 2011, compared to $250,000 for the same period in the prior year. The decrease was primarily due to the recording of $148,000 in legal fees related to negotiating the agreement with the Comptroller in the quarter ended March 31, 2010.
Data processing fees increased $10,000, or 16.9%, to $69,000 for the three months ended March 31, 2011, compared to $59,000 for the same period in the prior year. The increase is due to increased processing cost from our core system servicing vendor.
Other expenses increased $2.1 million, or 1109.7%, to $2.2 million for the three months ended March 31, 2011, compared to $182,000 for the same period in the prior year. The increase was due to a reserve of $2.1 million recorded in the current period to correct the value participants’ investments in certain collective investment funds administered by the Bank’s trust department (See “Part I. ITEM 4.Controls and Procedures”).
27
Income Taxes
No federal income tax expense was recorded for the three months ended March 31, 2011, due to available operating losses to offset taxable income. Based upon the Company’s limited operating history, the federal tax benefit of these losses has a valuation allowance equal to the benefit. Cumulative net operating loss available to carry forward for tax purposes is approximately $3.8 million as of December 31, 2010.
Financial Condition
Our total assets as of March 31, 2011 were $108.2 million, compared to $115.1 million as of December 31, 2010. Deposits were $92.4 million as of March 31, 2011, compared to $95.8 million as of December 31, 2010. Borrowed funds as of March 31, 2011 were $3.0 million, compared to $6.0 million as of December 31, 2010.
As of March 31, 2011, our shareholders’ equity was $9.3 million, compared to $11.1 million as of December 31, 2010.
Short-Term Investments and Interest-bearing Deposits in Other Financial Institutions
At March 31, 2011, we had $3.7 million in interest-bearing deposits and $450,000 in federal funds sold. At December 31, 2010, we had $4.7 million in interest-bearing deposits and $3.4 million in federal funds sold. Interest-bearing deposits and federal funds sold allow us to meet liquidity requirements and provide temporary interest-bearing holdings until the funds can be otherwise deployed or invested.
Investment Securities
Our investment portfolio primarily serves as a source of interest income and, secondarily, as a source of liquidity and a management tool for our interest rate sensitivity. We manage our investment portfolio according to a written investment policy established by our Board of Directors and implemented by our Investment/Asset-Liability Committee.
At March 31, 2011, our securities included Federal Reserve Bank of Dallas stock and Federal Home Loan Bank of Dallas stock at cost of $420,000 and $218,000, respectively, with an estimated fair value that approximated cost. We also had government agency securities with amortized cost of $6.4 million and fair value of $6.5 million. Weighted average yield of the securities portfolio at March 31, 2011 was 3.0%. Securities with market value of $5.8 million were pledged against borrowed funds at the Federal Home Loan Bank of Dallas, and one security with market value of $652,000 was pledged against trust deposit balances held at the Bank.
At December 31, 2010, our securities consisted of Federal Reserve Bank of Dallas stock and Federal Home Loan Bank of Dallas stock at cost and fair value of $420,000 and $760,600, respectively. We also had government agency securities with amortized cost and fair value of $4.7 million. Weighted average yield of the securities portfolio at December 31, 2010 was 2.7%.
28
Loan Portfolio
Our primary source of income is interest on loans. The following table presents the composition of our loan portfolio by category as of the dates indicated:
As of
|
As of
|
|||||||
(000's)
|
March 31, 2011
|
December 31, 2010
|
||||||
Commercial and industrial
|
$
|
61,939
|
$
|
64,381
|
||||
Consumer installment
|
1,007
|
1,002
|
||||||
Real estate — mortgage
|
22,126
|
22,377
|
||||||
Real estate — construction
|
7,720
|
8,309
|
||||||
Other
|
-
|
6
|
||||||
Total loans
|
92,792
|
96,075
|
||||||
Less allowance for loan losses
|
1,829
|
1,754
|
||||||
Less deferred loan fees
|
116
|
136
|
||||||
Total net loans
|
$
|
90,847
|
$
|
94,185
|
As of March 31, 2011 and December 31, 2010, our total net loans were $90.8 million and $94.2 million, respectively. Total loans, net of reserves and deferred fees, as a percentage of total assets were 83.9% as of March 31, 2011, and 81.8% as of December 31, 2010. The $3.3 million decrease is the combined result of softening overall loan demand in our local market as well as our strategy to reduce the risk in the loan portfolio by reducing overall exposure to commercial real estate loans to dental professionals.
Our commercial loan portfolio is composed of lines of credit for working capital and term loans to finance equipment and other business assets. Our lines of credit typically are limited to a percentage of the value of the assets securing the line. Lines of credit and term loans typically are reviewed annually and are supported by accounts receivable, inventory, equipment and other assets of our clients businesses. At March 31, 2011 and December 31, 2010, commercial loans totaled $61.9 million and $64.4 million, representing approximately 66.7% and 67.0% of our total funded loans, respectively.
Our consumer loan portfolio consists of personal lines of credit and loans to acquire personal assets such as automobiles and boats. Our lines of credit generally have terms of one year and our term loans generally have terms of three to five years. Our lines of credit typically have floating rates. At March 31, 2011 and December 31, 2010, consumer loans totaled $1.0 million, approximately 1.1% and 1.0% of our total funded loans, respectively.
Our real estate loan portfolio is composed of construction loans and short-term mortgage loans. Construction loans consist primarily of single-family residential properties, typically have terms of less than one year and have floating rates and commitment fees. Our construction loans are typically to builders who have an established record of successful project completion and loan repayment. Short-term mortgage loans are typically secured by commercial properties occupied by the borrower and typically have terms of three to ten years with both fixed and floating rates. At March 31, 2011 and December 31, 2010, real estate loans totaled $29.8 million and $30.7 million, approximately 32.2% and 31.9% of our total loans, respectively.
Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At March 31, 2011, our commercial loan portfolio included $63.9 million of loans, approximately 68.8% of our total funded loans, to dental professionals. These loans were to fund practice acquisitions, practice enhancements, equipment purchases, real estate and personal borrowing needs. We believe that these loans are to credit worthy borrowers and are diversified geographically. As new loans are generated the percentage of the total loan portfolio consisting of the foregoing concentration may remain constant or increase thereby continuing the risk associated with industry concentration.
Management may renew loans at maturity when requested by a customer whose financial strength appears to support such a renewal or when such a renewal appears to be in our best interest. We require payment of accrued interest in such instances and may adjust the rate of interest, require a principal reduction, or modify other terms of the loan at the time of renewal.
29
The following table shows the maturity/reset date distribution and type of loan within our loan portfolio as of March 31, 2011:
As of March 31, 2011 | ||||||||||||||||||||||||
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 (1)
|
$
|
6,045
|
$
|
6,252
|
$
|
27,709
|
$
|
21,159
|
$
|
774
|
$
|
61,939
|
||||||||||||
Consumer installment
|
624
|
383
|
-
|
-
|
-
|
1,007
|
||||||||||||||||||
Real estate — mortgage
|
5,059
|
7,514
|
4,967
|
1,393
|
3,193
|
22,126
|
||||||||||||||||||
Real estate — construction(1)
|
2,586
|
1,919
|
361
|
-
|
2,854
|
7,720
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Total
|
$
|
14,314
|
$
|
16,068
|
$
|
33,037
|
$
|
22,552
|
$
|
6,821
|
$
|
92,792
|
(1)
|
Includes nonaccrual and other loans at March 31, 2011.
|
Nonperforming Loans and Assets
Nonperforming assets consist of loans on nonaccrual status, loans 90 days or more past due and still accruing interest, loans that have been restructured resulting in a reduction or deferral of interest or principal, other real estate owned (“OREO”), and other repossessed assets. The impact of foreclosures and distressed sales is impacting the value of real estate and the overall economy broadly. This economic downturn has affected our real estate portfolio. As of March 31, 2011, we had no loans 90 days or more past due and still accruing interest, $358,000 in loans on nonaccrual status and $2.2 million in OREO. At December 31, 2010, we had no loans 90 days or more past due and still accruing interest, $1.8 million in loans on nonaccrual status and $2.3 million in OREO. Total nonperforming assets as of March 31, 2011 was $2.6 million, a decrease of 37.1% compared to $4.1 million as of December 31, 2010. The decrease was primarily attributable to one nonaccrual loan which was changed to accrual status.
A potential problem loan is defined as a loan where information about possible credit problems of the borrower is known, causing management to have doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the inclusion of such loan in one of the nonperforming asset categories. We maintain an internally classified loan list that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as “special mention” are those that contain a weakness that, if left unattended, could develop into a problem affecting the ultimate collectability of the loan. Loans classified as “substandard” are those loans with clear and defined weaknesses such as highly leveraged positions, unfavorable financial ratios, uncertain repayment resources or poor financial condition, which may jeopardize recoverability of the loan. Loans classified as “doubtful” are those loans that have characteristics similar to substandard loans, but also have an increased risk that loss may occur or at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans may include some loans that are past due at least 90 days, are on nonaccrual status, or have been restructured. Loans classified as “loss” are those loans that are in the process of being charged-off. At March 31, 2011 the Company had $3.6 million in special mention loans, $5.4 million in substandard loans and $247,000 in doubtful loans, compared to $3.3 million in special mention loans, $5.9 million in substandard loans and no loans classified as doubtful loans at December 31, 2010.
30
The following table sets forth certain information regarding nonaccrual loans by type, other real estate owned, restructured loans accruing and loans past due 90 days and accruing as of the dates indicated:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
(000's, except percentages):
|
Amount
|
Loan
Category to
Total Assets
|
Amount
|
Loan
Category to
Total Assets
|
||||||||||||
Commercial and industrial
|
$
|
358
|
0.33
|
%
|
$
|
367
|
0.32
|
%
|
||||||||
Real estate — mortgage
|
-
|
-
|
1,462
|
1.27
|
||||||||||||
Real estate — construction
|
-
|
-
|
-
|
-
|
||||||||||||
Consumer and other
|
-
|
-
|
-
|
-
|
||||||||||||
Total nonaccrual loans
|
358
|
0.33
|
1,829
|
1.59
|
||||||||||||
Other real estate owned
|
2,233
|
2.01
|
2,291
|
1.99
|
%
|
|||||||||||
Total non-performing assets
|
$
|
2,591
|
2.39
|
%
|
$
|
4,120
|
3.58
|
%
|
||||||||
Restructured loans accruing
|
$
|
2,368
|
2.8
|
%
|
$
|
2,395
|
2.08
|
%
|
||||||||
Loans past due 90 days and accruing
|
$
|
-
|
-
|
%
|
$
|
-
|
-
|
%
|
We record interest payments received on impaired loans as interest income unless collections of the remaining recorded investment are placed on nonaccrual, at which time we record payments received as reductions of principal. We recognized interest income on impaired loans of approximately $215,000 during the year ended December 31, 2010. If interest on impaired loans had been recognized on a full accrual basis during the year ended December 31, 2010, income would have increased by approximately $81,000. Interest income recognized and interest income not recognized on impaired loans during the quarters ended March 31, 2011 and 2010 was not significant.
Allowance for Loan Losses
Implicit in our lending activities is the fact that we will experience loan losses and that the risk of loss will vary with the type of loan being made and the creditworthiness of the borrower over the term of the loan. To reflect the currently perceived risk of loss associated with our loan portfolio, additions are made to our allowance for loan losses in the form of direct charges against income and our allowance is available to absorb possible loan losses. The factors that influence the allowance amount include, among others, the remaining collateral and/or financial condition of the borrowers, historical loan loss, changes in the size and composition of the loan portfolio, and general economic conditions.
The amount of the allowance equals the cumulative total of the provisions made from time to time, reduced by loan charge-offs and increased by recoveries of loans previously charged-off. Our allowance for loan losses was $1.8 million at March 31, 2011 and December 31, 2010, or 2.0% and 1.8%, respectively, of total funded loans.
Credit and loan decisions are made by management and the Board of Directors in conformity with loan policies established by the Board. Our practice is to charge-off any loan or portion of a loan when the loan is determined by management to be fully or partially uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or other reasons. We had no charge-offs and recoveries of $56,000 during the three months ended March 31, 2011. During the three months ended March 31, 2010, we had charge-offs of $1.4 million and recoveries of $30,000.
31
The following table sets forth the specific allocation of the allowance for the periods indicated and the percentage of allocated possible loan losses in each category to total gross loans. 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. Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. The current downturn in the economy or higher unemployment could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in income. Additionally, as an integral part of their examination process, bank regulatory agencies periodically review our allowance for loan losses. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination.
(000's)
|
As of
March 31, 2011
|
As of
December 31, 2010
|
||||||||||||||
Allocated:
|
Amount
|
Loan
Category to
Gross Loans
|
Amount
|
Loan
Category to
Gross Loans
|
||||||||||||
Commercial and industrial
|
$
|
1,221
|
66.8
|
%
|
$
|
1,175
|
67.1
|
%
|
||||||||
Consumer installment
|
20
|
1.1
|
18
|
1.0
|
||||||||||||
Real estate — mortgage
|
436
|
23.8
|
409
|
23.3
|
||||||||||||
Real estate — construction
|
152
|
8.3
|
152
|
8.6
|
||||||||||||
Total allowance for loan losses
|
$
|
1,829
|
100.0
|
%
|
$
|
1,754
|
100.0
|
%
|
Nonearning Assets
Premises, leasehold improvements and equipment, net of accumulated depreciation and amortization, totaled $485,000 at March 31, 2011 and $539,000 at December 31, 2010.
Deposits
Deposits are our primary source of funding. Total deposits at March 31, 2011 and December 31, 2010 were $92.4 million and $95.8 million, respectively, representing a decrease of $3.4 million, or 3.5%.
The following table shows the average deposit balances and average cost of funds for each category of deposits, for the periods ended March 31, 2011 and 2010:
For the three months ended
|
||||||||||||||||||||||||
(000's)
|
March 31, 2011
|
March 31, 2010
|
||||||||||||||||||||||
Average
Balance
|
Percent of
Deposits
|
Average
Rate
|
Average
Balance
|
Percent of
Deposits
|
Average
Rate
|
|||||||||||||||||||
Noninterest bearing deposits
|
$
|
11,717
|
12.2
|
%
|
0.0
|
%
|
$
|
10,765
|
9.0
|
%
|
0.0
|
%
|
||||||||||||
NOW accounts
|
2,523
|
2.6
|
0.6
|
2,069
|
1.7
|
0.7
|
||||||||||||||||||
Money market accounts
|
26,791
|
27.9
|
0.8
|
47,052
|
39.2
|
0.9
|
||||||||||||||||||
Savings accounts
|
188
|
0.2
|
0.8
|
194
|
.2
|
0.9
|
||||||||||||||||||
Certificates of deposit, less than $100,000
|
11,851
|
12.3
|
3.5
|
15,341
|
12.8
|
4.0
|
||||||||||||||||||
Certificates of deposit, $100,000 or greater
|
43,065
|
44.8
|
3.9
|
44,456
|
37.1
|
4.2
|
||||||||||||||||||
Total deposits
|
$
|
96,135
|
100.00
|
%
|
2.4
|
%
|
$
|
119,877
|
100.00
|
%
|
2.4
|
%
|
32
The following table sets forth the amount and maturities of the certificates of deposit of $100,000 or more as of the dates indicated:
(000's)
|
March 31,
2011
|
December 31,
2010
|
||||||
Three months or less
|
$
|
9,400
|
$
|
1,467
|
||||
Over three months through six months
|
12,373
|
9,184
|
||||||
Over six months through twelve months
|
10,280
|
18,420
|
||||||
Over twelve months
|
11,397
|
13,368
|
||||||
Total
|
$
|
43,450
|
$
|
42,439
|
Off-Balance Sheet Arrangements
Neither the Company nor the Bank has any material off-balance sheet arrangements other than the Bank’s commitments to extend credit at March 31, 2011. See Note 14 to the financial statements included in this report. Additional liquidity is also provided through the Bank’s lines of credit with each of the Federal Home Loan Bank of Dallas and the Federal Reserve Bank of Dallas, which provide us with sources of off-balance sheet liquidity. As of March 31, 2011, our established credit line with the Federal Home Loan Bank of Dallas was $19.8 million, or 18.3% of assets, of which $3.0 million was utilized. As of March 31, 2011, our established credit line with the Federal Reserve Bank of Dallas was $24.4 million, or 22.5% of assets, none of which was utilized. Additionally, we serve as trustee or custodian for $49.1 million in cash deposits held at BlackRock, Inc. in a money market fund, of which approximately $36.0 million could be held at the Bank in deposit accounts fully insured by the FDIC.
33
Capital Resources and Capital Adequacy Requirements
The risk-based capital regulations established and administered by the banking regulatory agencies discussed previously are applicable to the Bank. Risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Under the regulations, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk weighted assets and off-balance sheet items. Under the prompt corrective action regulations, to be adequately capitalized a bank must maintain minimum ratios of total capital to risk-weighted assets of 8.00%, Tier 1 capital to risk-weighted assets of 4.00%, and Tier 1 capital to total assets of 4.00%. Failure to meet these 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 financial statements. A well capitalized institution must maintain a minimum ratio of total capital to risk-weighted assets of at least 10.00%, a minimum ratio of Tier 1 capital to risk weighted assets of at least 6.00%, and a minimum ratio of Tier 1 capital to total assets of at least 5.00% and must not be subject to any written order, agreement, or directive requiring it to meet or maintain a specific capital level. On April 15, 2010, the Bank entered into the Agreement with the Comptroller requiring, among other provisions, that the Bank ultimately achieve and maintain certain capital ratios (See Item 1, Note 15, Regulatory Matters). The capital ratios required by the Agreement are 11.5% Total Capital to Risk Weighted Assets and 9.00% Tier 1 Capital to Average Assets. Therefore, regardless of the Bank’s capital position, the requirement in the Agreement 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 March 31, 2011. As of March 31, 2011, the Bank’s Total Capital to Risk Weighted Assets ratio and Tier 1 Capital to Average Assets ratio of 10.75% and 8.07%, respectively, were below the requirements set forth in the Agreement. Under the terms of the Agreement, the Bank has until the earlier of 90 days after the Bank receives notice from the Comptroller that the restitution process has been completed or written notice from the Comptroller that the Bank’s capital is materially deficient to achieve the capital ratios stated in the Agreement. As of March 31, 2011, the Bank has not received either communication from the Comptroller, and therefore does not consider itself in breach of this provision of the Agreement.
(000's)
|
Actual
|
For Capital Adequacy Purposes
|
To Be Well Capitalized Under
Prompt Corrective Action
Provisions
|
|||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
As of March 31, 2011
|
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets)
|
$
|
12,390
|
10.75
|
%
|
$
|
7,655
|
>
|
8.00
|
%
|
$
|
9,569
|
>
|
10.00
|
%
|
||||||||||
Tier 1 Capital (to Risk Weighted Assets)
|
11,186
|
9.50
|
%
|
3,827
|
>
|
4.00
|
%
|
5,741
|
>
|
6.00
|
%
|
|||||||||||||
Tier 1 Capital (to Average Assets)
|
11,186
|
8.07
|
%
|
4,504
|
>
|
4.00
|
%
|
5,631
|
>
|
5.00
|
%
|
|||||||||||||
As of December 31, 2010
|
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets)
|
$
|
12,156
|
12.20
|
%
|
$
|
7,973
|
>
|
8.00
|
%
|
$
|
9,966
|
>
|
10.00
|
%
|
||||||||||
Tier 1 Capital (to Risk Weighted Assets)
|
10,904
|
10.94
|
%
|
3,986
|
>
|
4.00
|
%
|
5,979
|
>
|
6.00
|
%
|
|||||||||||||
Tier 1 Capital (to Average Assets)
|
10,904
|
9.41
|
%
|
4,635
|
>
|
4.00
|
%
|
5,793
|
>
|
5.00
|
%
|
34
Liquidity Management
At March 31, 2011, the Company (excluding the Bank) had approximately $239,000 in cash proceeds, which includes $108,000 of initial shareholder warrant and option exercises. These funds can be used for Company operations, investment and for later infusion into the Bank and other corporate activities. The primary source of liquidity for the Company will be dividends paid by the Bank. The Bank is currently restricted from paying dividends without regulatory approval, which will not be granted until the Bank’s accumulated deficit has been eliminated and the Bank is no longer subject to the Agreement with the Comptroller.
The Bank’s liquidity is monitored by its management, the Investment/Asset-Liability Committee and the Board of Directors who review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments.
The Bank’s primary sources of funds will be retail, custodial, 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.
At March 31, 2011, we had outstanding loan origination commitments and unused commercial and retail lines of credit of $4.0 million and $15,000 in standby letters of credit. Certificates of deposit that are scheduled to mature within one year totaled $40.3 million at March 31, 2011.
The Bank’s significant contractual obligations and other potential funding needs at March 31, 2011 consist of:
|
As of March 31, 2011
|
|||||||||||||||
(000's)
|
Less than
One
Year
|
One to Three
Years
|
Over Three to
Five Years
|
Over Five
Years
|
||||||||||||
Operating leases
|
$ | 252 | $ | 421 | $ | 157 | $ | 58 | ||||||||
|
||||||||||||||||
Certificates of deposit
|
$ | 40,312 | $ | 14,201 | $ | 793 | $ | - |
The Bank had cash and cash equivalents of $5.6 million, or 5.1% of total assets, at March 31, 2011. Liquidity is also provided through the Bank’s lines of credit with the Federal Home Loan Bank of Dallas and the Federal Reserve Bank of Dallas, which provide the Bank with a source of off-balance sheet liquidity. As of March 31, 2011, the Bank’s established credit line with the Federal Home Loan Bank of Dallas was $19.8, million or 18.3% of assets, of which $3.0 million was utilized. The established credit line with the Federal Reserve Bank of Dallas was $24.4 million, or 22.5% of assets, none of which was utilized at March 31, 2011.
As loan demand increases, greater pressure will be exerted on the Bank’s liquidity. As of March 31, 2011, the loan to deposit ratio was 98%. Although this deposit ratio is high, it is not reflective of the Bank’s liquidity position. With the low rates available from the Federal Home Loan Bank and the Federal Reserve Bank ranging from 0.05% to 0.75%, the Bank, at quarter end, transfers money market deposits available to the Bank through the Bank’s trust department to third party trust investment funds and replaces them with borrowed funds from the Federal Home Loan Bank and Federal Reserve Bank of Dallas. This reduces the expense of FDIC insurance to the Bank. Trust money market deposits available to the Bank as of March 31, 2011, are approximately $36 million. With additional advances available from the Federal Home Loan Bank and Federal Reserve Bank of Dallas and the money market deposits available through the Bank’s trust department, the Bank has off-balance sheet liquidity available of 70% of total assets as of March 31, 2011. We believe that the Bank has adequate liquidity to meet anticipated future funding needs.
The Bank is subject to various regulatory capital requirements administered by federal banking agencies, which could affect its ability to pay dividends to the Company. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on our financial statements. The minimum ratios required for the Bank to be considered “well capitalized” for regulatory purposes, and therefore eligible to consider the payment of dividends to the Company, will be 10% total capital to risk weighted assets, 6% Tier 1 capital to risk weighted assets and 5% Tier 1 capital to average assets. As noted in the Capital Resources and Capital Adequacy Requirements section of this discussion, regardless of the Bank’s capital position, the requirement in the Agreement to meet and maintain a specific capital level means that the Bank may not be deemed to be well capitalized under regulatory requirements.
35
ITEM 4. Controls and Procedures
As of March 31, 2011, our principal executive officer and our principal financial officer have evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” (“Disclosure Controls”) pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed or submitted under the Exchange Act, such as this Quarterly 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 principal financial officer, 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.
Management, in consultation with our Audit Committee, has concluded that errors with respect to our accounting software system for the collective investment funds, as described more fully below, constituted a material weakness in the Company’s internal controls over financial reporting as of the date of this Quarterly Report. As a result of the material weakness, our principal executive officer and principal financial officer have concluded that our Disclosure Controls were not effective, as of March 31, 2011, to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.
The financial statements for the period covered by this Quarterly Report were prepared with particular attention to the material weakness. Accordingly, management believes that the consolidated financial statements included in this Quarterly Report fairly present, in all material respects, our financial condition, results of operations and cash flows as of and for the periods presented.
Accounting of Collective Investment Funds
The Bank has recently become aware that the accounting software system utilized by the Bank, in its fiduciary capacity in the administration of its collective investment funds, erroneously reported duplications of portions of actual dividend income received, resulting in a partial over-accrual and overstatement of dividend income to some of the collective investment funds and an overstatement of the unit values to some of the collective investment funds. An independent accounting consulting firm was engaged to research and quantify the extent that such reporting variance and over-accrual may have impacted the value of each collective investment fund. That research resulted in required adjustments to the unit values of twelve of the collective investment funds administered by the Bank. The Bank has resolved the issue prospectively such that the resultant unit values of the collective investment funds represent the accurate value of the assets within each such collective investment fund plus the corrected amount of accrued dividend income as of the April 30, 2011 and subsequent valuation dates. These adjustments to the unit values affect each of the current participants in the funds proportionally according to the number of units held. At no time was there any discrepancy in the amount or value of the actual assets contained in each collective investment fund, which are primarily marketable securities held in custody with third-party custodians.
However, the over-accruals in each of the collective funds occurred over the life of such funds. Therefore, the independent accounting consulting firm further reviewed the history of each individual participant account from the date the account was opened to present to determine the impact of these adjustments at the participant account level, based on the actual activity within the participant account. The independent accounting consulting firm recalculated the unit value of each affected collective investment fund based on all unit sales and purchases by all participants, which allowed them to create historical unit values for each collective investment fund based on actual activity in such collective investment fund as of each valuation date. Following this same procedure, the independent accounting consultants then analyzed the activity in each participant account. Typical activity would include monthly contributions, distributions, account rebalancing, and model changes. In most cases, this activity resulted in a purchase or sale of units in one or more of the collective investment funds. For each purchase made in each collective investment fund, on an actual historical basis, the corrected number of units which should have been acquired has been calculated. For each sale, on an actual historical basis, the corrected amount of proceeds from the sale of units has been calculated. This created two potential separate adjustments to a participant account.
36
The first adjustment, based on all of the purchase activity in the participant account, resulted in an adjustment to the number of units of each collective investment fund which the participant account should have acquired over the term of the participant account’s investment in the affected collective investment funds.
The second adjustment, based on the sales activity in the participant account, resulted in an adjustment to the proceeds the participant account should have received as a result of the sale of units at the corrected unit value of the collective investment fund sold over the term of the participant account’s investment in the affected collective investment funds.
Approximately 80% of affected participant accounts will receive a net credit which we aggregated to arrive at our estimate of $2.1 million. The value of the aggregate units to be credited to participant accounts has been calculated based on the May 31, 2011 unit value for each affected collective investment fund. This amount, was offset by the aggregate overpayment to all of the affected participant accounts. The Bank’s estimate of $2.1 million is based on the May 31, 2011 valuation of the collective investment funds. The actual amount required to credit or debit the individual participant accounts will be based on the actual June 30, 2011 valuation of the collective investment funds.
Material Weakness
Management, in consultation with our Audit Committee, has determined that the foregoing errors constituted a material weakness in our internal controls over financial reporting as of the date of this Quarterly Report.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Remediation of Material Weakness
Management believes that the historical over-accrual of dividend income and resulting overstatement of unit values in the Bank’s collective investment funds constituted a material weakness in the internal controls of the Bank which failed to promptly detect and correct the accounting software system issue. Upon learning of the material weakness, management began to take steps to remediate the material weakness surrounding the accounting and valuation of the units of the collective investment funds. The Bank implemented additional operational and internal controls to prevent the over-accrual of dividend income into the collective investment funds in the future, including monthly reconciliations of all data related to the accounting of the collective investment funds and corrections to the accounting software program responsible for the collective investment funds. These reconciliations will be reviewed by management monthly to ensure timely completion and that reconciling items are appropriately addressed. The Company believes that such weakness has been remediated. Management will continue to evaluate whether additional changes need to be implemented to the Disclosure Controls based on the review of the third-party advisor.
ITEM 1. Legal Proceedings
In the ordinary course of our operations, we are a party to various legal proceedings. 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 our financial condition or results of operations.
37
Item 6. Exhibits and Financial Statement Schedules.
Exhibit
No.
|
Description of Exhibit
|
|
3.1
|
Articles of Incorporation*
|
|
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 (4)
|
|
10.5
|
T Bancshares, Inc. (f/k/a First Metroplex Capital, Inc.) Shareholders' Warrant Agreement dated November 2, 2004 (4)
|
|
10.6
|
Extension of term of initial Shareholder Warrants (4)
|
|
10.7
|
Form of Employment Agreement by and between T Bancshares, Inc. and Patrick Howard (3)(5)
|
|
10.8
|
Form of Employment Agreement by and between T Bancshares, Inc. and Steve Jones (3)(6)*
|
|
10.9
|
Form of Executive Employment Agreement Modification by and between T Bancshares, Inc. and Steve Jones (3)(7)*
|
|
10.9
|
Agreement between T Bank, N.A. and the Office of the Comptroller of the Currency, dated April 15, 2010 (8)
|
|
10.10
|
Consent Order for Civil Money Penalty of T Bank, N.A., dated April 15, 2010 (7)
|
|
31.1
|
Rule 13a-14(a) Certification of Principal Executive Officer*
|
|
31.2
|
Rule 13a-14(a) Certification of Principal Financial Officer*
|
|
32
|
Section 1350 Certification*
|
(1)
|
Incorporated by reference from Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant with the SEC on April 30, 2008.
|
|
(2)
|
Incorporated by reference from the Registration Statement on Form S-8 filed by the Registrant with the SEC on September 20, 2005.
|
|
(3)
|
Indicates a compensatory plan or contract.
|
|
(4)
|
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.
|
|
(5)
|
Incorporated by reference from the Current Report on Form 8-K filed by the Registrant with the SEC on September 5, 2007.
|
|
(6)
|
Incorporated by reference from the Annual Report on Form 10-KSB filed by the Registrant with the SEC on March 31, 2005.
|
|
(7)
|
Incorporated by reference from the Quarterly Report on Form 10-QSB filed by the Registrant with the SEC on November 14, 2007.
|
|
(8)
|
Incorporated by reference from the Annual Report on Form 10-K filed by the Registrant with the SEC on April 15, 2010.
|
|
*
|
Filed Herewith
|
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
T BANCSHARES, INC.
|
||
|
|
|
Date: June 21, 2011
|
By:
|
/s/ Patrick Howard
|
|
|
|
Patrick Howard
President and Chief Executive Officer/Principal Executive Officer
|
||
|
|
|
|
By:
|
/s/ Ken Bramlage
|
Ken Bramlage
Senior Vice President and Chief Financial Officer/Principal Financial Officer
|
39