Attached files
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EXCEL - IDEA: XBRL DOCUMENT - T Bancshares, Inc. | Financial_Report.xls |
EX-31.1 - EX-31.1 - T Bancshares, Inc. | ex31-1.htm |
EX-32 - EX-32 - T Bancshares, Inc. | ex32.htm |
EX-31.2 - EX-31.2 - T Bancshares, Inc. | ex31-2.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 September 30, 2014
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.)
|
16200 Dallas Parkway, Suite 190, 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 x 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 October 31, 2014 was 4,028,932 shares.
T BANCSHARES, INC.
TABLE OF CONTENTS
PAGE
|
||||
PART I.
|
FINANCIAL INFORMATION
|
3
|
||
Item 1.
|
3
|
|||
Item 2.
|
25
|
|||
Item 3.
|
41
|
|||
Item 4.
|
41
|
|||
PART II.
|
OTHER INFORMATION
|
42
|
||
Item 1.
|
42
|
|||
Item 2.
|
42
|
|||
Item 3.
|
42
|
|||
Item 4.
|
42
|
|||
Item 5.
|
42
|
|||
Item 6.
|
|
42
|
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
T BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(000's except share data)
|
September 30,
2014
|
December 31,
2013
|
||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Cash and due from banks
|
$
|
1,387
|
$
|
1,077
|
||||
Interest-bearing deposits
|
7,799
|
4,312
|
||||||
Federal funds sold
|
420
|
55
|
||||||
Total cash and cash equivalents
|
9,606
|
5,444
|
||||||
Securities available for sale at estimated fair value
|
8,830
|
9,271
|
||||||
Securities, restricted at cost
|
1,039
|
1,230
|
||||||
Loans held for sale
|
7,653
|
2,120
|
||||||
Loans, net of allowance for loan losses of $1,686 and $2,318, respectively
|
124,842
|
112,281
|
||||||
Bank premises and equipment, net
|
4,606
|
2,452
|
||||||
Other real estate owned
|
-
|
749
|
||||||
Deferred tax assets, net
|
1,117
|
1,301
|
||||||
Receivable for loans sold
|
1,726
|
7,465
|
||||||
Other assets
|
2,836
|
2,231
|
||||||
Total assets
|
$
|
162,255
|
$
|
144,544
|
||||
LIABILITIES
|
||||||||
Demand deposits:
|
||||||||
Non-interest-bearing
|
$
|
20,532
|
$
|
16,302
|
||||
Interest-bearing
|
45,480
|
34,047
|
||||||
Time deposits $100 and over
|
61,440
|
51,457
|
||||||
Other time deposits
|
4,296
|
3,997
|
||||||
Total deposits
|
131,748
|
105,803
|
||||||
Borrowed funds
|
5,000
|
16,000
|
||||||
Other liabilities
|
2,891
|
2,308
|
||||||
Total liabilities
|
139,639
|
124,111
|
||||||
SHAREHOLDERS’ EQUITY
|
||||||||
Common stock, $0.01 par value; 10,000,000 shares authorized; 4,029,932 and 4,021,932 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
|
40
|
40
|
||||||
Additional paid-in capital
|
22,656
|
22,631
|
||||||
Retained deficit
|
(2
|
)
|
(1,933
|
)
|
||||
Accumulated other comprehensive loss
|
(78
|
)
|
(305
|
)
|
||||
Total shareholders' equity
|
22,616
|
20,433
|
||||||
Total liabilities and shareholders' equity
|
$
|
162,255
|
$
|
144,544
|
See accompanying notes to consolidated financial statements
T BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(000's except per share data)
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2014
|
2013
|
2014
|
2013
|
|||||||||||||
Interest Income
|
||||||||||||||||
Loan, including fees
|
$
|
1,965
|
$
|
1,630
|
$
|
5,598
|
$
|
4,747
|
||||||||
Securities
|
64
|
63
|
197
|
193
|
||||||||||||
Federal funds sold
|
-
|
-
|
1
|
1
|
||||||||||||
Interest-bearing deposits
|
4
|
4
|
11
|
11
|
||||||||||||
Total interest income
|
2,033
|
1,697
|
5,807
|
4,952
|
||||||||||||
Interest Expense
|
||||||||||||||||
Deposits
|
200
|
130
|
545
|
369
|
||||||||||||
Borrowed funds
|
3
|
4
|
8
|
12
|
||||||||||||
Total interest expense
|
203
|
134
|
553
|
381
|
||||||||||||
Net interest income
|
1,830
|
1,563
|
5,254
|
4,571
|
||||||||||||
Provision for loan losses
|
-
|
284
|
492
|
284
|
||||||||||||
Net interest income after provision for loan losses
|
1,830
|
1,279
|
4,762
|
4,287
|
||||||||||||
Non-interest Income
|
||||||||||||||||
Trust income
|
2,902
|
2,721
|
8,549
|
7,928
|
||||||||||||
Gain on sale of loans
|
949
|
450
|
1,386
|
1,509
|
||||||||||||
Service fees and other income
|
97
|
21
|
241
|
55
|
||||||||||||
Rental income
|
81
|
66
|
239
|
125
|
||||||||||||
Gain on sale of securities
|
-
|
-
|
-
|
31
|
||||||||||||
Total non-interest income
|
4,029
|
3,258
|
10,415
|
9,648
|
||||||||||||
Non-interest Expense
|
||||||||||||||||
Salaries and employee benefits
|
981
|
932
|
3,051
|
2,755
|
||||||||||||
Occupancy and equipment
|
344
|
285
|
928
|
735
|
||||||||||||
Trust expenses
|
2,290
|
2,178
|
6,741
|
6,208
|
||||||||||||
Professional fees
|
57
|
101
|
283
|
349
|
||||||||||||
Data processing
|
199
|
206
|
593
|
591
|
||||||||||||
Other
|
213
|
154
|
594
|
566
|
||||||||||||
Total non-interest expense
|
4,084
|
3,856
|
12,190
|
11,204
|
||||||||||||
Income before Income Taxes
|
1,775
|
681
|
2,987
|
2,731
|
||||||||||||
Income tax expense
|
612
|
-
|
1,056
|
-
|
||||||||||||
Net Income
|
$
|
1,163
|
$
|
681
|
$
|
1,931
|
$
|
2,731
|
||||||||
Earnings per common share:
|
||||||||||||||||
Basic
|
0.29
|
0.17
|
0.48
|
0.68
|
||||||||||||
Diluted
|
0.29
|
0.17
|
0.48
|
0.68
|
||||||||||||
Weighted average common shares outstanding
|
4,029,932
|
4,021,932
|
4,029,932
|
4,021,932
|
||||||||||||
Weighted average diluted shares outstanding
|
4,037,593
|
4,032,096
|
4,032,678
|
4,031,210
|
See accompanying notes to consolidated financial statements
T BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
(000's)
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Net Income
|
$
|
1,163
|
$
|
681
|
$
|
1,931
|
$
|
2,731
|
||||||||
Other comprehensive income (loss):
|
||||||||||||||||
Securities available for sale:
|
||||||||||||||||
Change in net unrealized gain (loss) on investment securities available-for-sale
|
(5
|
)
|
(126
|
)
|
227
|
(509
|
)
|
|||||||||
Gain on sale distributed to third party issuer
|
-
|
-
|
-
|
(93
|
)
|
|||||||||||
Gain on sale included in net income
|
-
|
-
|
-
|
(31
|
)
|
|||||||||||
Reclassification adjustment for gain on sale
|
-
|
-
|
-
|
(124
|
)
|
|||||||||||
Total securities available for sale
|
(5
|
)
|
(126
|
)
|
227
|
(633
|
)
|
|||||||||
Comprehensive income
|
$
|
1,158
|
$
|
555
|
$
|
2,158
|
$
|
2,098
|
See accompanying notes to consolidated financial statements
T BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(000's)
|
Common
Stock
|
Additional
Paid-in
Capital
|
Retained
Deficit
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
|
|||||||||||||||
BALANCE, January 1, 2013
|
$
|
40
|
$
|
22,622
|
$
|
(6,022
|
)
|
$
|
387
|
$
|
17,027
|
|||||||||
Net income - YTD
|
- | - |
2,731
|
- |
2,731
|
|||||||||||||||
Other comprehensive income
|
- | - | - |
(633
|
)
|
(633
|
)
|
|||||||||||||
Stock based compensation
|
- |
7
|
- | - |
7
|
|||||||||||||||
BALANCE, September 30, 2013
|
$
|
40
|
$
|
22,629
|
$
|
(3,291
|
)
|
$
|
(246
|
)
|
$
|
19,132
|
||||||||
BALANCE, January 1, 2014
|
$
|
40
|
$
|
22,631
|
$
|
(1,933
|
)
|
$
|
(305
|
)
|
$
|
20,433
|
||||||||
Net income - YTD
|
- | - |
1,931
|
- |
1,931
|
|||||||||||||||
Other comprehensive income
|
- | - | - |
227
|
227
|
|||||||||||||||
Exercise of stock options
|
- |
8
|
- | - |
8
|
|||||||||||||||
Stock based compensation
|
- |
17
|
- | - |
17
|
|||||||||||||||
BALANCE, September 30, 2014
|
$
|
40
|
$
|
22,656
|
$
|
(2
|
)
|
$
|
(78
|
)
|
$
|
22,616
|
See accompanying notes to consolidated financial statements
T BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
|
||||||||
(000's)
|
2014
|
2013
|
||||||
Cash Flows from Operating Activities
|
||||||||
Net income
|
$
|
1,931
|
$
|
2,731
|
||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
||||||||
Provision for loan losses
|
492
|
284
|
||||||
Depreciation and amortization
|
153
|
129
|
||||||
Accretion of discount on loans
|
(8
|
)
|
(88
|
)
|
||||
Securities premium amortization, net
|
28
|
37
|
||||||
Net gain on sale of other real estate owned
|
(12
|
)
|
-
|
|||||
Net gain on sale of securities
|
-
|
(31
|
)
|
|||||
Origination of loans held for sale
|
(19,730
|
)
|
(19,454
|
)
|
||||
Proceeds from payments and sales of loans held for sale
|
15,205
|
16,184
|
||||||
Net gain on sale of loans
|
(1,386
|
)
|
(1,509
|
)
|
||||
Stock based compensation
|
17
|
7
|
||||||
Receivable for sold loans
|
5,739
|
-
|
||||||
Deferred income taxes
|
184
|
-
|
||||||
Net change in:
|
||||||||
Servicing assets, net
|
43
|
11
|
||||||
Other assets
|
(270
|
)
|
60
|
|||||
Other liabilities
|
623
|
261
|
||||||
Net cash provided by (used in) operating activities
|
3,009
|
(1,378
|
)
|
|||||
Cash Flows from Investing Activities
|
||||||||
Purchase of securities available for sale
|
-
|
(3,587
|
)
|
|||||
Principal payments, calls and maturities of securities available for sale
|
600
|
1,759
|
||||||
Proceeds from sale of securities available for sale
|
-
|
1,351
|
||||||
Payment to third party for gain-sharing arrangement
|
-
|
(93
|
)
|
|||||
Purchase of securities, restricted
|
(350
|
)
|
(289
|
)
|
||||
Proceeds from sale of securities, restricted
|
541
|
154
|
||||||
Net change in loans
|
(13,045
|
)
|
(12,295
|
)
|
||||
Proceeds from sale of other real estate owned
|
761
|
-
|
||||||
Purchases of premises and equipment
|
(2,307
|
)
|
(2,158
|
)
|
||||
Net cash used in investing activities
|
(13,800
|
)
|
(15,158
|
)
|
||||
Cash Flows from Financing Activities
|
||||||||
Net change in demand deposits
|
15,663
|
2,857
|
||||||
Net change in time deposits
|
10,282
|
10,405
|
||||||
Proceeds from stock options exercised
|
8
|
-
|
||||||
Proceeds from borrowed funds
|
204,000
|
194,700
|
||||||
Repayment of borrowed funds
|
(215,000
|
)
|
(193,000
|
)
|
||||
Net cash provided by financing
|
14,953
|
14,962
|
||||||
Net change in cash and cash equivalents
|
4,162
|
(1,574
|
)
|
|||||
Cash and cash equivalents at beginning of period
|
5,444
|
6,828
|
||||||
Cash and cash equivalents at end of period
|
$
|
9,606
|
$
|
5,254
|
||||
Supplemental disclosures of cash flow information
|
||||||||
Cash paid during the period for
|
||||||||
Interest
|
$
|
546
|
$
|
381
|
||||
Income taxes
|
$
|
625
|
$
|
-
|
See accompanying notes to consolidated financial statements
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 management believes 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 charged to expense. It is reasonably possible that actual results could differ significantly from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.
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, 2013.
NOTE 2. ADOPTION OF NEW ACCOUNTING POLICIES
Accounting Standards Update (ASU) No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (Topic 210).” ASU 2013-01 clarifies the scope of ASU No. 2011-11 which applies to derivatives, including bifurcated embedded derivatives, repurchase agreements, reverse repurchase agreements, and securities borrowing and securities lending transactions. ASU 2013-01 became effective for annual and interim periods on January 1, 2013, and did not have a significant impact on the Company’s financial statements.
Accounting Standards Update (ASU) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (Topic 220).” ASU 2013-02 requires the presentation of certain amounts reclassified out of accumulated other comprehensive income to net income, by component, either on the face of the financial statements or in the notes. Other reclassifications out of accumulated other comprehensive income will require cross reference to existing disclosures. ASU 2013-02 became effective for annual and interim periods beginning after December 15, 2012, and did not have a significant impact on the Company’s financial statements. This ASU is the result of certain provisions deferred within ASU No. 2011-12.
Accounting Standards Update (ASU) No. 2013-11, “Income Taxes (Topic 740) – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU 2013-11 requires unrecognized tax benefits to be presented as a decrease in net operating loss, similar tax loss or tax credit forward if certain criteria are met. ASU 2013-11 became effective for fiscal years and interim periods beginning after December 15, 2013, and did not have a significant impact on the Company’s financial position or results of operations.
Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for the Company on January 1, 2017 and is not expected to have a significant impact on the Company's financial statements.
Accounting Standards Update (ASU) No. 2014-11, “Transfers and Servicing (Topic 860).” ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 is effective for the Company on January 1, 2015 and is not expected to have a significant impact on the Company's financial statements.
NOTE 3. SECURITIES
A summary of the amortized cost and fair value of securities is presented below.
September 30, 2014
|
||||||||||||||||
(000's)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
||||||||||||
Securities available for sale:
|
||||||||||||||||
U.S. government agencies
|
$
|
5,604
|
$
|
60
|
$
|
153
|
$
|
5,511
|
||||||||
Mortgage-backed securities
|
3,345
|
13
|
39
|
3,319
|
||||||||||||
Total securities available for sale
|
$
|
8,949
|
$
|
73
|
$
|
192
|
$
|
8,830
|
||||||||
Securities, restricted:
|
||||||||||||||||
Other
|
$
|
1,039
|
$
|
-
|
$
|
-
|
$
|
1,039
|
December 31, 2013
|
||||||||||||||||
(000's)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
||||||||||||
Securities available for sale:
|
||||||||||||||||
U.S. government agencies
|
$
|
5,865
|
$
|
29
|
$
|
242
|
$
|
5,652
|
||||||||
Mortgage-backed securities
|
3,711
|
14
|
106
|
3,619
|
||||||||||||
Total securities available for sale
|
$
|
9,576
|
$
|
43
|
$
|
348
|
$
|
9,271
|
||||||||
Securities, restricted:
|
||||||||||||||||
Other
|
$
|
1,230
|
$
|
-
|
$
|
-
|
$
|
1,230
|
All mortgage-backed securities included in the above table were issued by U.S. government agencies, or by U.S. government-sponsored agencies. Securities, restricted consist of Federal Reserve Bank of Dallas stock and Federal Home Loan Bank of Dallas stock which are carried at cost.
At September 30, 2014 and December 31, 2013, securities with market value of $6.8 million and $7.1 million, respectively, were pledged against borrowed funds at the Federal Home Loan Bank of Dallas and securities with market values of $1.2 million and $1.3 million, respectively, were pledged against trust deposit balances held at the Company’s insured depository subsidiary, T Bank, N.A. (the “Bank”). One security was pledged against borrowed funds at the Federal Reserve Bank of Dallas at September 30, 2014 and December 31, 2013 with a market value of $875,000 and $878,000, respectively. The Bank held Federal Reserve Bank of Dallas stock in the amount of $570,000 and $528,000 at September 30, 2014 and December 31, 2013, respectively. The Bank also held Federal Home Loan Bank of Dallas stock in the amount of $469,000 and $702,000 at September 30, 2014 and December 31, 2013, respectively.
The amortized cost and estimated fair value of securities at September 30, 2014 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.
Available for Sale
|
||||||||
(000's)
|
Amortized
Cost
|
Estimated
Fair Value
|
||||||
Due after five years through ten years
|
4,781
|
4,636
|
||||||
Due after ten years
|
823
|
875
|
||||||
Mortgage-backed securities
|
3,345
|
3,319
|
||||||
Total
|
$
|
8,949
|
$
|
8,830
|
The table below indicates the length of time individual investment securities and mortgage-backed securities have been in a continuous loss position at September 30, 2014:
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||
(000’s)
|
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
Fair Value
|
Unrealized
Losses
|
||||||||||||||||||
U.S. government agencies
|
$
|
-
|
$
|
-
|
$
|
2,838
|
$
|
153
|
$
|
2,838
|
$
|
153
|
||||||||||||
Mortgage-backed securities
|
-
|
-
|
1,715
|
39
|
1,715
|
39
|
||||||||||||||||||
Total
|
$
|
-
|
$
|
-
|
$
|
4,553
|
$
|
192
|
$
|
4,553
|
$
|
192
|
NOTE 4. LOANS
Major classifications of loans held for investment are as follows:
(000's)
|
September 30,
2014
|
December 31,
2013
|
||||||
Commercial and industrial
|
$
|
73,910
|
$
|
76,445
|
||||
Consumer installment
|
1,603
|
1,826
|
||||||
Real estate - mortgage
|
26,155
|
18,310
|
||||||
Real estate - construction and land
|
5,385
|
5,756
|
||||||
SBA:
|
||||||||
SBA 7(a) unguaranteed portion
|
13,348
|
7,031
|
||||||
SBA 504
|
5,463
|
5,174
|
||||||
USDA
|
1,909
|
1,007
|
||||||
Other
|
-
|
10
|
||||||
Gross Loans
|
127,773
|
115,559
|
||||||
Less:
|
||||||||
Allowance for loan losses
|
1,686
|
2,318
|
||||||
Deferred loan costs
|
(120
|
)
|
(69
|
)
|
||||
Discount on loans
|
1,365
|
1,029
|
||||||
Net loans
|
$
|
124,842
|
$
|
112,281
|
The Company periodically sells the guaranteed portion of selected Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) loans into the secondary market, on a servicing-retained basis. The Company retains the unguaranteed portion of these loans. In calculating gain on the sale of these loans, the Company performs an allocation based on the relative fair values of the sold portion and retained portion of the loan. The Company’s assumptions are validated by reference to external market information.
During the three and nine months ended September 30, 2014, the Company originated $9.6 million and $19.3 million, respectively, of SBA loans. The guaranteed portions of the loans are recorded as loans held for sale. The Company had $7.7 million and $2.1 million of SBA loans held for sale as of September 30, 2014 and December 31, 2013, respectively. During the third quarter of 2014, the Company sold $9.6 million of SBA loans, recognizing a gain on sale of loans of $949,000, and recorded a servicing asset at fair value of $258,000. There was one loan sold that did not settle until October 2014 and the Company recorded a receivable of $1.7 million, which consists of $1.5 million for the principal balance of the loan and $193,000 for the premium amount.
Loan Origination/Risk Management.
The Company maintains written loan origination policy, procedures, and processes which address credit quality at several levels including individual loan level, loan type, and loan portfolio levels.
Commercial and industrial loans, which are predominantly loans to dentists, are underwritten based on historical and projected income of the business and individual borrowers and guarantors. The Company utilizes a comprehensive global debt service coverage analysis to determine debt service coverage ratios. This analysis compares global cash flow of the borrowers and guarantors on an individual credit to existing and proposed debt after consideration of personal and business related other expenses. Collateral is generally a lien on all available assets of the business borrower including intangible assets. Creditworthiness of individual borrowers and guarantors is established through the use of credit reports and credit scores.
Consumer loans are evaluated on the basis of credit worthiness as established through the use of credit reports and credit scores. Additional credit quality indicators include borrower debt to income ratios based on verifiable income sources.
Real estate mortgage loans are evaluated based on collateral value as well as global debt service coverage ratios based on historical and projected income from all related sources including the collateral property, the borrower, and all guarantors where applicable.
Small Business Administration Lending - The Company originates SBA loans which are sometimes sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The two primary SBA loan programs that the Company offers are the basic 7(a) Loan Guaranty (“7(a)”) program and the Certified Development Company (“CDC”), a Section 504 (“504”) program.
The 7(a) program serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. Loan proceeds under this program can be used for most business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements and debt refinancing. Loan maturity is generally up to 10 years for working capital and up to 25 years for fixed assets. The 7(a) loan is approved and funded by a qualified lender, guaranteed by the SBA and subject to applicable regulations. In general, the SBA guarantees up to 85% of the loan amount depending on loan size. The Company is required by the SBA to retain a contractual minimum of 5% on all SBA 7(a) program loans. The SBA 7(a) program loans are generally variable interest rate loans. Gains recognized by the Company on the sales of the guaranteed portion of these loans and the ongoing servicing income received are significant revenue sources for the Company. The servicing spread is 1% on the majority of SBA 7(a) program loans.
The 504 program is an economic development-financing program providing long-term, low down payment loans to expanding businesses. Typically, a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior lien covering up to 40% of the total cost, and a contribution of at least 10% equity from the borrower. Debenture limits are $5.0 million for regular 504 loans and $5.5 million for those 504 loans that meet a public policy goal.
The SBA has designated the Bank as a “Preferred Lender.” As a Preferred Lender, the Bank has been delegated loan approval, closing and most servicing and liquidation authority responsibility from the SBA.
The Company also offers Business & Industry (“B&I”) program loans through the USDA. These loans are similar to the SBA product, except they are guaranteed by the USDA. The guaranteed amount is generally 80% on loan amounts up to $5.0 million. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the SBA 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market. These loans can be utilized for rural commercial real estate and equipment. The loans can be up to 30 years or 360 months and the rates can be fixed or variable.
Construction and land development loans are evaluated based on the borrower’s and guarantor’s creditworthiness, past experience in the industry, track record and experience with the type of project being considered, and other factors. Collateral value is determined generally by independent appraisal utilizing multiple approaches to determine value based on property type.
For all loan types, including loans acquired through purchase participations, the Company establishes guidelines for its underwriting criteria including collateral coverage ratios, global debt service coverage ratios, and maximum amortization or loan maturity terms.
At the portfolio level, the Company monitors concentrations of loans based on several criteria including loan type, collateral type, industry, geography, and other factors. The Company also performs periodic market research and economic analysis at a local geographic and national level. Based on this research, the Company may from time to time change the minimum or benchmark underwriting criteria applied to the above loan types.
The activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2014 and 2013 is presented below. Management has evaluated the adequacy of the allowance for loan losses by estimating the losses in various categories of the loan portfolio.
(000’s) | Commercial and Industrial | Consumer Installment | Real Estate Mortgage | Real Estate Construction and Land | SBA | USDA | Unallocated | Total | ||||||||||||||||||||||||
Three months ended:
|
||||||||||||||||||||||||||||||||
September 30, 2014
|
||||||||||||||||||||||||||||||||
Beginning Balance
|
$
|
1,098
|
$
|
25
|
$
|
270
|
$
|
97
|
$
|
232
|
$
|
20
|
$
|
-
|
$
|
1,742
|
||||||||||||||||
Provision for loan losses
|
(118
|
)
|
12
|
|
57
|
(31
|
)
|
62
|
|
18
|
|
-
|
-
|
|
||||||||||||||||||
Charge-offs
|
(65
|
)
|
(16
|
)
|
-
|
-
|
-
|
-
|
-
|
(81
|
)
|
|||||||||||||||||||||
Recoveries
|
23
|
-
|
-
|
2
|
-
|
-
|
-
|
25
|
||||||||||||||||||||||||
Net recoveries
|
(42
|
)
|
(16
|
)
|
-
|
2
|
-
|
-
|
-
|
(56
|
)
|
|||||||||||||||||||||
Ending balance
|
$
|
938
|
$
|
21
|
$
|
327
|
$
|
68
|
$
|
294
|
$
|
38
|
$
|
-
|
$
|
1,686
|
||||||||||||||||
September 30, 2013
|
||||||||||||||||||||||||||||||||
Beginning Balance
|
$
|
960
|
$
|
17
|
$
|
200
|
$
|
69
|
$
|
65
|
$
|
17
|
$
|
13
|
$
|
1,341
|
||||||||||||||||
Provision for loan losses
|
239
|
8
|
|
2
|
7
|
38
|
|
3
|
|
(13
|
)
|
284
|
|
|||||||||||||||||||
Charge-offs
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Recoveries
|
-
|
-
|
-
|
2
|
-
|
-
|
-
|
2
|
||||||||||||||||||||||||
Net recoveries
|
-
|
-
|
-
|
2
|
-
|
-
|
-
|
2
|
||||||||||||||||||||||||
Ending balance
|
$
|
1,199
|
$
|
25
|
$
|
202
|
$
|
78
|
$
|
103
|
$
|
20
|
$
|
-
|
$
|
1,627
|
(000’s) | Commercial and Industrial | Consumer Installment | Real Estate Mortgage | Real Estate Construction and Land | SBA | USDA | Unallocated | Total | ||||||||||||||||||||||||
Nine months ended:
|
||||||||||||||||||||||||||||||||
September 30, 2014
|
||||||||||||||||||||||||||||||||
Beginning Balance
|
$
|
1,805
|
$
|
24
|
$
|
229
|
$
|
74
|
$
|
166
|
$
|
20
|
$
|
-
|
$
|
2,318
|
||||||||||||||||
Provision for loan losses
|
245
|
13
|
|
98
|
(10
|
)
|
128
|
|
18
|
|
-
|
492
|
|
|||||||||||||||||||
Charge-offs
|
(1,138
|
)
|
(16
|
)
|
-
|
-
|
-
|
-
|
-
|
(1,154
|
)
|
|||||||||||||||||||||
Recoveries
|
26
|
-
|
-
|
4
|
-
|
-
|
-
|
30
|
||||||||||||||||||||||||
Net recoveries
|
(1,112
|
)
|
(16
|
)
|
-
|
4
|
-
|
-
|
-
|
(1,124
|
)
|
|||||||||||||||||||||
Ending balance
|
$
|
938
|
$
|
21
|
$
|
327
|
$
|
68
|
$
|
294
|
$
|
38
|
$
|
-
|
$
|
1,686
|
||||||||||||||||
September 30, 2013
|
||||||||||||||||||||||||||||||||
Beginning Balance
|
$
|
1,007
|
$
|
12
|
$
|
259
|
$
|
60
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,338
|
||||||||||||||||
Provision for loan losses
|
192
|
13
|
|
(57
|
)
|
13
|
|
103
|
|
20
|
|
-
|
284
|
|
||||||||||||||||||
Charge-offs
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||
Recoveries
|
-
|
-
|
-
|
5
|
-
|
-
|
-
|
5
|
||||||||||||||||||||||||
Net recoveries
|
-
|
-
|
-
|
5
|
-
|
-
|
-
|
5
|
||||||||||||||||||||||||
Ending balance
|
$
|
1,199
|
$
|
25
|
$
|
202
|
$
|
78
|
$
|
103
|
$
|
20
|
$
|
-
|
$
|
1,627
|
The Company’s allowance for loan losses as of September 30, 2014 and December, 31, 2013 by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:
(000’s) | Commercial and Industrial | Consumer Installment | Real Estate Mortgage | Real Estate Construction and Land | SBA | USDA | Unallocated | Total | ||||||||||||||||||||||||
September 30, 2014
|
||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment
|
$
|
81
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
81
|
||||||||||||||||
Loans collectively evaluated for impairment
|
857
|
21
|
327
|
68
|
294
|
38
|
-
|
1,605
|
||||||||||||||||||||||||
Ending balance
|
$
|
938
|
$
|
21
|
$
|
327
|
$
|
68
|
$
|
294
|
$
|
38
|
$
|
-
|
$
|
1,686
|
||||||||||||||||
December 31, 2013
|
||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment
|
$
|
927
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
927
|
||||||||||||||||
Loans collectively evaluated for impairment
|
878
|
24
|
229
|
74
|
166
|
20
|
-
|
1,391
|
||||||||||||||||||||||||
Ending balance
|
$
|
1,805
|
$
|
24
|
$
|
229
|
$
|
74
|
$
|
166
|
$
|
20
|
$
|
-
|
$
|
2,318
|
The Company’s recorded investment in loans as of September 30, 2014 and December 31, 2013 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:
(000’s) | Commercial and Industrial |
Consumer Installment
|
Real Estate Mortgage | Real Estate Construction and Land | SBA | USDA | Unallocated | Total | ||||||||||||||||||||||||
September 30, 2014
|
||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment
|
$
|
1,859
|
$
|
-
|
$
|
157
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,016
|
||||||||||||||||
Loans collectively evaluated for impairment
|
72,051
|
1,603
|
25,998
|
5,385
|
18,811
|
1,909
|
-
|
125,757
|
||||||||||||||||||||||||
Total loans
|
$
|
73,910
|
$
|
1,603
|
$
|
26,155
|
$
|
5,385
|
$
|
18,811
|
$
|
1,909
|
$
|
-
|
$
|
127,773
|
||||||||||||||||
December 31, 2013
|
||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment
|
$
|
3,682
|
$
|
-
|
$
|
427
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
4,109
|
||||||||||||||||
Loans collectively evaluated for impairment
|
72,763
|
1,826
|
17,883
|
5,756
|
12,205
|
1,007
|
10
|
111,450
|
||||||||||||||||||||||||
Ending balance
|
$
|
76,445
|
$
|
1,826
|
$
|
18,310
|
$
|
5,756
|
$
|
12,205
|
$
|
1,007
|
$
|
10
|
$
|
115,559
|
At September 30, 2014 and December 31, 2013, there were $632,000 and $750,000, respectively, of commercial and industrial nonaccrual loans, and there were no loans contractually delinquent over ninety days and still accruing interest.
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The Company’s impaired loans and related allowance are summarized in the following table:
Unpaid
|
Recorded
|
Recorded
|
||||||||||||||||||||||||||
Contractual
|
Investment
|
Investment
|
Total
|
Average
|
Interest | |||||||||||||||||||||||
Principal
|
With No
|
With
|
Recorded
|
Related
|
Recorded
|
Income
|
||||||||||||||||||||||
(000's)
|
Balance
|
Allowance
|
Allowance
|
Investment
|
Allowance
|
Investment
|
Recognized
|
|||||||||||||||||||||
September 30, 2014
|
Nine Months Ended | |||||||||||||||||||||||||||
Commercial and industrial
|
$
|
1,947
|
$
|
869
|
$
|
990
|
$
|
1,859
|
$
|
81
|
$
|
2,547
|
$
|
111
|
||||||||||||||
Real estate – mortgage
|
157
|
157
|
-
|
157
|
-
|
306
|
11
|
|||||||||||||||||||||
Total
|
$
|
2,104
|
$
|
1,026
|
$
|
990
|
$
|
2,016
|
$
|
81
|
$
|
2,853
|
$
|
122
|
December 31, 2013
|
Year Ended
|
|||||||||||||||||||||||||||
Commercial and industrial
|
$
|
3,719
|
$
|
1,526
|
$
|
2,156
|
$
|
3,682
|
$
|
927
|
$
|
2,856
|
$
|
241
|
||||||||||||||
Real estate – mortgage
|
427
|
427
|
-
|
427
|
-
|
441
|
22
|
|||||||||||||||||||||
Total
|
$
|
4,146
|
$
|
1,953
|
$
|
2,156
|
$
|
4,109
|
$
|
927
|
$
|
3,297
|
$
|
263
|
Interest income is recognized on impaired loans unless collections of the remaining recorded investment are placed on nonaccrual, at which time we record payments received as reductions of principal. Interest that would have been recognized for the nine months ended September 30, 2014 and 2013 on non-accrual loans if performed in accordance with their original contract terms was not significant.
Restructured loans are considered “troubled debt restructurings” if due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modification of loan terms may include interest rate reductions below market interest rates, principal forgiveness, restructuring amortization schedules, reductions in collateral and other actions intended to minimize potential losses. There were no troubled debt restructurings during the nine months ended September 30, 2014.
There were no loans modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default during the three or nine months ended September 30, 2014. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.
As of September 30, 2014 and December 31, 2013, the Company had no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.
As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including internal credit risk based on past experiences as well as external statistics and factors. Loans are graded in one of six categories: (i) pass, (ii) pass-watch, (iii) special mention, (iv) substandard, (v) doubtful, or (vi) loss. Loans graded as loss are charged-off.
The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits quarterly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit. The Company’s methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
Credits rated pass are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.
Credits rated pass-watch loans have been determined to require enhanced monitoring for potential weaknesses which require further investigation. They have no significant delinquency in the past twelve months. This rating causes the loan to be actively monitored with greater frequency than pass loans and allows appropriate downgrade transition if verifiable adverse events are confirmed. This category may also include loans that have improved in credit quality from special mention but are not yet considered pass loans.
Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.
Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss.
Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future.
The following summarizes the Company’s internal ratings of its loans:
(000's)
|
Pass
|
Pass-
Watch
|
Special
Mention
|
Substandard
|
Doubtful
|
Total
|
||||||||||||||||||
September 30, 2014
|
||||||||||||||||||||||||
Commercial and industrial
|
$ | 69,521 | $ | 2,233 | $ | 1,227 | $ | 929 | $ | - | $ | 73,910 | ||||||||||||
Consumer installment
|
1,603 | - | - | - | - | 1,603 | ||||||||||||||||||
Real estate – mortgage
|
24,567 | 860 | 571 | 157 | - | 26,155 | ||||||||||||||||||
Real estate – construction and land
|
4,470 | 151 | 764 | - | - | 5,385 | ||||||||||||||||||
SBA
|
18,811 | - | - | - | - | 18,811 | ||||||||||||||||||
USDA
|
1,909 | - | - | - | - | 1,909 | ||||||||||||||||||
Other
|
- | - | - | - | - | - | ||||||||||||||||||
Total
|
$ | 120,881 | $ | 3,244 | $ | 2,562 | $ | 1,086 | $ | - | $ | 127,773 | ||||||||||||
December 31, 2013
|
||||||||||||||||||||||||
Commercial and industrial
|
$ | 71,930 | $ | 582 | $ | 1,208 | $ | 2,725 | $ | - | $ | 76,445 | ||||||||||||
Consumer installment
|
1,826 | - | - | - | - | 1,826 | ||||||||||||||||||
Real estate - mortgage
|
14,851 | 882 | 1,565 | 1,012 | - | 18,310 | ||||||||||||||||||
Real estate - construction and land
|
3,662 | 1,301 | 793 | - | - | 5,756 | ||||||||||||||||||
SBA
|
12,205 | - | - | - | - | 12,205 | ||||||||||||||||||
USDA
|
1,007 | - | - | - | - | 1,007 | ||||||||||||||||||
Other
|
10 | - | - | - | - | 10 | ||||||||||||||||||
Total
|
$ | 105,491 | $ | 2,765 | $ | 3,566 | $ | 3,737 | $ | - | $ | 115,559 |
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. 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
|
||||||||||||||||||
September 30, 2014
|
||||||||||||||||||||||||
Commercial and industrial
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
73,910
|
$
|
73,910
|
$
|
-
|
||||||||||||
Consumer installment
|
-
|
-
|
-
|
1,603
|
1,603
|
-
|
||||||||||||||||||
Real estate – mortgage
|
-
|
-
|
-
|
26,155
|
26,155
|
-
|
||||||||||||||||||
Real estate – construction and land
|
-
|
-
|
-
|
5,385
|
5,385
|
-
|
||||||||||||||||||
SBA
|
-
|
-
|
-
|
18,811
|
18,811
|
-
|
||||||||||||||||||
USDA
|
-
|
-
|
-
|
1,909
|
1,909
|
-
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Total
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
127,773
|
$
|
127,773
|
$
|
-
|
||||||||||||
December 31, 2013
|
||||||||||||||||||||||||
Commercial and industrial
|
$
|
766
|
$
|
-
|
$
|
766
|
$
|
75,679
|
$
|
76,445
|
$
|
-
|
||||||||||||
Consumer installment
|
499
|
-
|
499
|
1,327
|
1,826
|
-
|
||||||||||||||||||
Real estate – mortgage
|
-
|
-
|
-
|
18,310
|
18,310
|
-
|
||||||||||||||||||
Real estate – construction and land
|
-
|
-
|
-
|
5,756
|
5,756
|
-
|
||||||||||||||||||
SBA
|
-
|
-
|
-
|
12,205
|
12,205
|
-
|
||||||||||||||||||
USDA
|
-
|
-
|
-
|
1,007
|
1,007
|
-
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
10
|
10
|
-
|
||||||||||||||||||
Total
|
$
|
1,265
|
$
|
-
|
$
|
1,265
|
$
|
114,294
|
$
|
115,559
|
$
|
-
|
NOTE 5. RELATED PARTIES
Certain directors and officers of the Company have depository accounts with the Bank. None of those deposit accounts have terms more favorable than those available to any other depositor. No directors or officers have loans with the Company or the Bank.
NOTE 6. BANK PREMISES AND EQUIPMENT
The original cost and related accumulated depreciation at September 30, 2014 and December 31, 2013 were as follows:
(000's)
|
September 30,
2014
|
December 31,
2013
|
||||||
Land
|
$
|
676
|
$
|
661
|
||||
Building
|
1,279
|
1,279
|
||||||
Building improvements
|
2,415
|
-
|
||||||
Leasehold improvements
|
915
|
929
|
||||||
Construction in progress
|
2
|
242
|
||||||
Furniture and equipment
|
2,300
|
2,189
|
||||||
7,587
|
5,300
|
|||||||
Less: accumulated depreciation
|
2,981
|
2,848
|
||||||
Balance at end of period
|
$
|
4,606
|
$
|
2,452
|
NOTE 7. OTHER REAL ESTATE OWNED AND OTHER ASSETS
The Company had no Other Real Estate Owned (“OREO”) as of September 30, 2014. In July 2014, the Company sold a medical office complex building and recorded a gain on the sale in the amount of $12,000. At December 31, 2013, this office complex was the only property the Company held in OREO and had a recorded balance of $749,000.
Other assets consisted of the following at September 30, 2014 and December 31, 2013:
(000's)
|
September 30,
2014
|
December 31,
2013
|
||||||
Prepaid assets
|
$
|
374
|
$
|
267
|
||||
Accounts receivable – trust fees
|
1,019
|
975
|
||||||
Accrued interest receivable
|
446
|
404
|
||||||
Loan servicing rights
|
900
|
565
|
||||||
Other
|
97
|
20
|
||||||
Total
|
$
|
2,836
|
$
|
2,231
|
For the three and nine months ended September 30, 2014, the Company sold $9.6 million and $19.3 million, respectively, of SBA 7(a) program loans, and recorded a loan servicing asset of $258,000 and $378,000, respectively. The Company has elected to use the amortizing method for the treatment of servicing assets. Amortization expense for the three and nine months ended September 30, 2014 was $17,000 and $43,000, respectively. In the event future prepayments exceed management’s estimates and future expected cash flows are inadequate to cover the servicing asset, impairment is recognized.
NOTE 8. DEPOSITS
Deposits are summarized as follows:
(000's)
|
As of September 30, 2014
|
As of December 31, 2013
|
||||||||||||||
Non-interest-bearing demand
|
$
|
20,532
|
16
|
%
|
$
|
16,302
|
15
|
%
|
||||||||
Interest-bearing demand (NOW)
|
5,473
|
4
|
3,108
|
3
|
||||||||||||
Money market accounts
|
36,797
|
28
|
29,759
|
28
|
||||||||||||
Savings accounts
|
3,210
|
2
|
1,180
|
1
|
||||||||||||
Certificates of deposit, $100,000 and greater
|
61,440
|
47
|
51,457
|
49
|
||||||||||||
Certificates of deposit, less than $100,000
|
4,296
|
3
|
3,997
|
4
|
||||||||||||
Total
|
$
|
131,748
|
100
|
%
|
$
|
105,803
|
100
|
%
|
At September 30, 2014, the scheduled maturities of certificates of deposit were as follows:
(000’s)
|
||||
2014
|
$
|
10,110
|
||
2015
|
33,980
|
|||
2016
|
15,366
|
|||
2017
|
4,391
|
|||
2018
|
533
|
|||
2019
|
1,356
|
|||
Total
|
$
|
65,736
|
NOTE 9. BORROWED FUNDS
The Company had borrowed funds from the Federal Home Loan Bank of Dallas of $5.0 million and $16.0 million as of September 30, 2014 and December 31, 2013, respectively. The Company has a blanket lien credit line with the Federal Home Loan Bank of Dallas with borrowing capacity of $22.8 million secured by commercial loans and securities with collateral values of $16.2 million and $6.6 million, respectively. The Company had one outstanding advance for $5.0 million at September 30, 2014, with a fixed interest rate of 0.05% and maturity date of October 1, 2014. At maturity, we determine our borrowing needs and renew accordingly at varying terms ranging from one to thirty days. The Company had one outstanding advance for $16.0 million at December 31, 2013, with a fixed interest rate of 0.05% and maturity date of January 2, 2014.
The Company also has a credit line with the Federal Reserve Bank of Dallas with borrowing capacity of $15.3 million, secured by commercial loans and securities with collateral value of $14.3 million and $1.0 million, respectively. There were no outstanding borrowings at September 30, 2014 or December 31, 2013.
NOTE 10. OTHER LIABILITIES
The following comprised other liabilities at September 30, 2014 and December 31, 2013:
(000's)
|
September 30,
2014
|
December 31,
2013
|
||||||
Trust advisor fees payable
|
$
|
1,427
|
$
|
1,293
|
||||
Federal income taxes payable
|
536
|
-
|
||||||
Audit fees
|
37
|
41
|
||||||
Incentive compensation
|
327
|
333
|
||||||
Data processing
|
95
|
100
|
||||||
Franchise & property taxes
|
54
|
94
|
||||||
Interest payable
|
24
|
17
|
||||||
Legal
|
7
|
7
|
||||||
Other
|
384
|
423
|
||||||
$
|
2,891
|
$
|
2,308
|
NOTE 11. INCOME TAXES
Income tax expense for the three and nine months ended September 30, 2014 was $612,000 and $1.1 million, respectively. No federal income tax expense was recorded for the three and nine months ended September 30, 2013 as net operating losses offset taxable income. The Company’s effective income tax rate was 34.0% for the three and nine months ended September 30, 2014. Projections for continued levels of profitability will be reviewed quarterly and any necessary adjustments to the deferred tax assets will be recognized in the provision or benefit for income taxes.
Net deferred tax assets totaled $1.1 million at September 30, 2014 and $1.3 million at December 31, 2013. No valuation allowance was recorded against deferred tax assets at September 30, 2014, as management believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by the Company’s earnings in prior years.
NOTE 12. EMPLOYEE BENEFITS
The Company has a retirement savings 401(k) plan covering substantially all employees. Employees may contribute up to 6% of their compensation with the Company matching 100% of the employee’s contribution on the first 1% of the employee’s compensation and 50% of the employee’s contribution on the next 5% of the employee’s compensation. Employer contributions charged to expense for the three months ending September 30, 2014 and 2013 totaled $26,000 and $20,000, respectively. Employer contributions charged to expense for the nine months ending September 30, 2014 and 2013 totaled $74,000 and $62,000, respectively.
NOTE 13. 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 executives and other officers. The purpose of the Plan is to provide increased incentive for key employees to render services and to exert maximum effort for the success of the Company.
The Plan is administered by the Board of Directors and has a term of 10 years. As of September 30, 2014, options to purchase a total of 233,000 shares of common stock were issued and outstanding with a weighted average exercise price of $8.86. These options vest through March 2019. As of December 31, 2013, options to purchase a total of 210,000 shares of common stock were issued and outstanding with a weighted average exercise price of $9.12. Outstanding stock options of 19,000 were considered in the diluted earnings per share computations for the three and nine months ended September 30, 2014. The remaining 214,000 outstanding options at September 30, 2014 were not considered in the per share computation because their effect was anti-dilutive. Outstanding stock options of 27,000 were considered in the diluted earnings per share computations for the three and nine months ended September 30, 2013. The remaining 183,000 outstanding options at September 30, 2013 were not considered in the per share computation because their effect was anti-dilutive.
The Company recorded $8,000 and $2,000 in compensation expense for the three months ended September 30, 2014 and 2013, respectively, and $17,000 and $7,000 in compensation expense for the nine months ended September 30, 2014 and 2013, respectively, in connection with the Plan.
The Company accounts for stock options in accordance with FASB 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 Plan for the nine months ended September 30, 2014:
|
Number of
Shares
Underlying
Options
|
Weighted
Average
Exercise
Prices
|
||||||
Outstanding at beginning of the period
|
210,000
|
$
|
9.12
|
|||||
Granted
|
31,000
|
5.04
|
||||||
Exercised
|
8,000
|
1.01
|
||||||
Expired / forfeited
|
-
|
-
|
||||||
Outstanding at end of period
|
233,000
|
$
|
8.86
|
|||||
Exercisable at end of period
|
196,600
|
$
|
9.65
|
|||||
Available for grant at end of period
|
8,000
|
The weighted average remaining contractual life of options outstanding at September 30, 2014 was 2.9 years.
Aggregate intrinsic value of the outstanding stock options and exercisable stock options at September 30, 2014, was $123,000 and $56,000, respectively. Aggregate intrinsic value of the outstanding stock options and exercisable stock options at December 31, 2013 was $74,000 and $44,000, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $6.40 and $4.52 at September 30, 2014 and December 31, 2013, respectively, and the exercise price, multiplied by the number of options outstanding. There were 8,000 stock options exercised during the three and nine months ended September 30, 2014, and none were exercised for the year ended December 31, 2013.
NOTE 14. 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 advanced up to a maximum of $100,000. A total of 96,750 warrants were issued and remain outstanding at September 30, 2014. These warrants are exercisable at a price of $10 per share at any time until November 2, 2014. The outstanding warrants were not included in the earnings per share computations for the respective three and nine months ended September 30, 2014 and 2013 because their effect was anti-dilutive.
NOTE 15. 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 consolidated 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 September 30, 2014, the Company had commitments to extend credit and standby letters of credit of approximately $18.3 million and $10,000, respectively. At December 31, 2013, the Company had commitments to extend credit and standby letters of credit of approximately $12.8 million and $10,000, 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 has one office lease agreement, which expires in 2017. In addition to the lease for office space, the Company also leases various pieces of office equipment under short-term agreements. Lease expense for the nine months ended September 30, 2014 and 2013 was $79,000 and $186,000, respectively. The decrease is related to the termination of the office lease at 16200 Dallas Parkway, Dallas, Texas in May 2014.
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 has entered into employment agreements with four officers of the Company, Steve Jones, Craig Barnes, Ken Bramlage and Patrick Howard. The agreements are for “at will” employment and may be terminated at any time in accordance with the terms of such employment agreements.
NOTE 16. 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. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.
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 below.
(000's)
|
Actual
|
For Capital
Adequacy Purposes
|
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
|
|||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
As of September 30, 2014
|
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets)
|
$
|
23,507
|
16.74
|
%
|
$
|
11,235
|
8.00
|
%
|
$
|
14,044
|
10.00
|
%
|
||||||||||||
Tier 1 Capital (to Risk Weighted Assets)
|
21,821
|
15.54
|
5,618
|
4.00
|
8,426
|
6.00
|
||||||||||||||||||
Tier 1 Capital (to Average Assets)
|
21,821
|
13.48
|
6,474
|
4.00
|
8,093
|
5.00
|
||||||||||||||||||
As of December 31, 2013
|
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets)
|
$
|
21,381
|
17.20
|
%
|
$
|
9,945
|
8.00
|
%
|
$
|
12,431
|
10.00
|
%
|
||||||||||||
Tier 1 Capital (to Risk Weighted Assets)
|
19,818
|
15.94
|
4,972
|
4.00
|
7,459
|
6.00
|
||||||||||||||||||
Tier 1 Capital (to Average Assets)
|
19,818
|
13.94
|
5,685
|
4.00
|
7,106
|
5.00
|
NOTE 17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
T BANCSHARES, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
(000's)
|
September 30,
2014
|
December 31,
2013
|
||||||
ASSETS
|
||||||||
Cash and due from banks
|
$
|
873
|
$
|
921
|
||||
Investment in subsidiary
|
21,743
|
19,512
|
||||||
Total assets
|
$
|
22,616
|
$
|
20,433
|
||||
LIABILITIES AND CAPITAL
|
||||||||
Capital
|
22,616
|
20,433
|
||||||
Total liabilities and capital
|
$
|
22,616
|
$
|
20,433
|
T BANCSHARES, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
(000's)
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Equity in income from subsidiary
|
$
|
1,184
|
$
|
716
|
$
|
2,004
|
$
|
2,802
|
||||||||
Non-interest expense:
|
||||||||||||||||
Professional and administrative
|
13
|
33
|
56
|
64
|
||||||||||||
Stock based compensation
|
8
|
2
|
17
|
7
|
||||||||||||
Total non-interest expenses
|
21
|
35
|
73
|
71
|
||||||||||||
Net income
|
$
|
1,163
|
$
|
681
|
$
|
1,931
|
$
|
2,731
|
T BANCSHARES, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
(000's)
|
2014
|
2013
|
2014
|
2013
|
||||||||||||
Net Income
|
$
|
1,163
|
$
|
681
|
$
|
1,931
|
$
|
2,731
|
||||||||
Other comprehensive income (loss):
|
||||||||||||||||
Securities available for sale:
|
||||||||||||||||
Change in net unrealized gain (loss) on investment
securities available for sale
|
(5
|
)
|
(126
|
)
|
227
|
(509
|
)
|
|||||||||
Gain on sale distributed to third party issuer
|
-
|
-
|
-
|
(93
|
)
|
|||||||||||
Gain on sale included in net income
|
-
|
-
|
-
|
(31
|
)
|
|||||||||||
Reclassification adjustment for gain on sale
|
-
|
-
|
-
|
(124
|
)
|
|||||||||||
Total securities available for sale
|
(5
|
)
|
(126
|
)
|
227
|
(633
|
)
|
|||||||||
Comprehensive income
|
$
|
1,158
|
$
|
555
|
$
|
2,158
|
$
|
2,098
|
T BANCSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended September 30,
|
|||||||
(000's)
|
2014
|
2013
|
||||||
Cash Flows from Operating Activities
|
||||||||
Net income
|
$
|
1,931
|
$
|
2,731
|
||||
Adjustments to reconcile net income to net cash used in operating activities:
|
||||||||
Equity in income of Bank
|
(2,004
|
)
|
(2,802
|
)
|
||||
Stock based compensation
|
17
|
7
|
||||||
Net change in other liabilities
|
-
|
(21
|
)
|
|||||
Net cash used in operating activities
|
(56
|
)
|
(85
|
)
|
||||
Cash Flows from Investing Activities
|
||||||||
Cash Flows from Financing Activities
|
||||||||
Net proceeds from stock options exercised
|
8
|
-
|
||||||
Net change in cash and cash equivalents
|
(48
|
)
|
(85
|
)
|
||||
Cash and cash equivalents at beginning of period
|
921
|
1,040
|
||||||
Cash and cash equivalents at end of period
|
$
|
873
|
$
|
955
|
NOTE 18. 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.
|
·
|
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.
|
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities in the Level 1 or Level 3 inputs.
The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, 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 September 30, 2014
|
||||||||||||||||
Securities available for sale:
|
||||||||||||||||
U.S. government agencies
|
$
|
-
|
$
|
5,511
|
$
|
-
|
$
|
5,511
|
||||||||
Mortgage-backed securities
|
-
|
3,319
|
-
|
3,319
|
||||||||||||
As of December 31, 2013
|
||||||||||||||||
Securities available for sale:
|
||||||||||||||||
U.S. government agencies
|
$
|
-
|
$
|
5,652
|
$
|
-
|
$
|
5,652
|
||||||||
Mortgage-backed securities
|
-
|
3,619
|
-
|
3,619
|
The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods. From December 31, 2013 to September 30, 2014, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis during the reported periods include:
At September 30, 2014, impaired loans with a carrying value of $990,000 were reduced by specific valuation allowances totaling $81,000, resulting in a net fair value of $909,000 based on Level 3 inputs. At December 31, 2013, impaired loans with a carrying value of $2.2 million were reduced by specific valuation allowances totaling $927,000, resulting in a net fair value of $1.2 million based on Level 3 inputs. The significant unobservable (Level 3) inputs used in the fair value measurement of impaired loans primarily relate to discounted cash flows using current market rates applied to the estimated life and credit risk.
The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent impaired loans primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan. As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount. During the reported periods, there were no loans discounted for cash flows.
The significant unobservable inputs (Level 3) used in the fair value measurement of cash flow impaired loans relate to discounted cash flows models using current market rates applied to the estimated life of the loan and credit risk adjustments. Future cash flows are discounted using current interest rates for similar credit risks. During the reported periods, the cash flow discounts ranged from 3% to 27% for three cash flow impaired loans.
Our assessment of the significance of a particular input to the Level 3 fair value measurements in their entirety requires judgment and considers factors specific to the assets. It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future.
Loans held for sale include the guaranteed portion of SBA loans and are reported at the lower of cost or estimated fair value. Fair value for SBA loans is based on market indications available in the market.
Non-financial assets measured at fair value on a non-recurring basis during the reported periods include OREO which, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were re-measured at fair value through a write-down included in other non-interest expense. Regulatory guidelines require the Company to reevaluate the fair value of OREO on at least an annual basis. The fair value of foreclosed assets, upon initial recognition and impairment, were re-measured using Level 2 inputs based on observable market data. Estimated fair value of OREO is based on appraisals. Appraisers are selected from the list of approved appraisers maintained by management.
The following table presents foreclosed assets that were re-measured subsequent to their initial transfer to OREO from loans and reported at fair value:
Nine Months Ended
September 30,
|
||||||||
2014
|
2013
|
|||||||
Carrying value of OREO prior to re-measurement
|
$
|
-
|
$
|
874
|
||||
Write-downs included in other non-interest expense
|
-
|
|
-
|
|
||||
Fair value
|
$
|
-
|
$
|
874
|
The methods and assumptions used to estimate fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, restricted securities, accrued interest receivable and accrued interest payable. The estimated fair value of demand and savings deposits is the carrying amount since rates are regularly adjusted to market rates and amounts are payable on demand. For borrowed funds and variable rate loans or deposits that re-price frequently and fully, the estimated fair value is the carrying amount. 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. For loans held for sale, the estimated fair value is based on market indications for similar assets in the active market. The estimated fair value of other financial instruments and off-balance-sheet loan commitments approximate cost and are not considered significant to this presentation.
Carrying amount and estimated fair values of other financial instruments by level of valuation input were as follows:
September 30, 2014
|
||||||||
(000's)
|
Carrying
Amount
|
Estimated
Fair Value
|
||||||
Financial assets:
|
||||||||
Level 1 inputs:
|
||||||||
Cash and cash equivalents
|
$
|
9,606
|
$
|
9,606
|
||||
Level 2 inputs:
|
||||||||
Securities, restricted
|
1,039
|
1,039
|
||||||
Loans held for sale
|
7,653
|
8,648
|
||||||
Loans, net
|
124,842
|
125,762
|
||||||
Accrued interest receivable
|
446
|
446
|
||||||
Level 3 inputs:
|
||||||||
Servicing asset (included in other assets)
|
900
|
900
|
||||||
Financial liabilities:
|
||||||||
Level 1 inputs:
|
||||||||
Non-interest-bearing deposits
|
20,532
|
20,532
|
||||||
Level 2 inputs:
|
||||||||
Interest-bearing deposits
|
111,216
|
110,739
|
||||||
Borrowed funds
|
5,000
|
5,000
|
||||||
Accrued interest payable
|
24
|
24
|
December 31, 2013
|
||||||||
(000's)
|
Carrying
Amount
|
Estimated
Fair Value
|
||||||
Financial assets:
|
||||||||
Level 1 inputs:
|
||||||||
Cash and cash equivalents
|
$
|
5,444
|
$
|
5,444
|
||||
Level 2 inputs:
|
||||||||
Securities, restricted
|
1,230
|
1,230
|
||||||
Loans held for sale
|
2,120
|
2,359
|
||||||
Loans, net
|
112,281
|
112,581
|
||||||
Accrued interest receivable
|
404
|
404
|
||||||
Receivable for sold loans
|
7,465
|
7,465
|
||||||
Level 3 inputs:
|
||||||||
Servicing asset (included in other assets)
|
565
|
565
|
||||||
Financial liabilities:
|
||||||||
Level 1 inputs:
|
||||||||
Non-interest-bearing deposits
|
16,302
|
16,302
|
||||||
Level 2 inputs:
|
||||||||
Interest-bearing deposits
|
89,501
|
89,397
|
||||||
Borrowed funds
|
16,000
|
16,000
|
||||||
Accrued interest payable
|
17
|
17
|
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 September 30, 2014 and December 31, 2013, and our consolidated results of operations for the three and nine months ended September 30, 2014 and 2013. 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 (the “Exchange Act”), 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, 2013, including the following:
·
|
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, the Consumer Financial Protection Bureau 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;
|
·
|
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;
|
·
|
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;
|
|
·
|
our dependence on internal computer systems and the technology of outside service providers, as well as the potential impacts of third-party security breaches, subjects us to potential business disruptions or financial losses resulting from deliberate attacks or unintentional events;
|
|
·
|
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 Company to attract deposits;
|
·
|
changes in the general level of interest rates and other economic factors can affect the Company’s interest income by affecting the spread between interest-earning assets and interest-bearing liabilities;
|
·
|
changes in consumer spending, borrowing and savings habits;
|
·
|
changes in the Company’s liquidity position;
|
·
|
acts of God or of war or terrorism;
|
·
|
we have no current intentions of paying cash dividends;
|
·
|
we may not be able to raise additional capital on terms favorable to us or we may be required to raise capital under terms which are dilutive to existing shareholders; 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, 2013 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 banking markets include Dallas, Tarrant, Denton, Collin and Rockwall counties which encompass an area commonly referred to as the Dallas/Fort Worth Metroplex. We currently operate through a main office located at 16200 Dallas Parkway, Dallas, Texas, as well as loan production offices located in the Phoenix, Arizona, Denver, Colorado, Greenville, South Carolina and Portland, Oregon markets. These offices originate loans throughout the United States with a focus on the western U.S. The offices are staffed by experienced bankers with significant experience in the origination, administration, and servicing of loans pursuant to programs promulgated by the SBA and the USDA. The Bank is a Preferred Lender Participant (“PLP”) in the SBA program.
We were incorporated under the laws of the State of Texas on December 23, 2002 to organize and serve as the holding company for the Bank. The Bank opened for business on November 2, 2004.
The following discussion focuses on our financial condition at September 30, 2014 and December 31, 2013, and our results of operations for the three and nine months ended September 30, 2014 and 2013.
Results of Operations
Key Performance Indicators at September 30, 2014
The following were key indicators of our performance and results of operations through the first three quarters of 2014:
·
|
total assets were $162.3 million at the end of the third quarter of 2014, representing an increase of $17.8 million, or 12.3%, from $144.5 million at the end of 2013;
|
·
|
total loans held for investment, net of allowance for loan losses and deferred loan fees, increased $12.5 million, or 11.1%, to $124.8 million at the end of the third quarter of 2014, compared to $112.3 million at the end of 2013;
|
|
·
|
total loans held for sale, which consists primarily of the guaranteed portion of SBA 7(a) loans, increased $5.6 million, or 266.7%, to $7.7 million at the end of the third quarter of 2014, compared to $2.1 million at the end of 2013;
|
·
|
total deposits increased $25.9 million, or 24.5%, to $131.7 million at the end of the third quarter of 2014, compared to $105.8 million at the end of 2013;
|
·
|
net income before income taxes was $1.8 million for the three months ended September 30, 2014, compared to $681,000 for the same period in the prior year. The increase was primarily due to the increase in gain on loans sold. The Company recorded a provision for loan loss of $284,000 for the three months ended September 30, 2013. No provision for loan loss was recorded for the three months ended September 30, 2014. The Company recognized income tax expense of $612,000 for the three months ended September 30, 2014. There was no income tax recorded for the three months ended September 30, 2013. Net income before income taxes was $3.0 million for the nine months ended September 30, 2014, compared to $2.7 million for the same period in the prior year. The Company recognized income tax expense of $1.1 million for the nine months ended September 30, 2014. There was no income tax expense recorded for the nine months ended September 30, 2013;
|
|
·
|
return on average assets was 1.66% and 2.85% for the three and nine months ended September 30, 2014, respectively, compared to 2.13% and 2.96% for the same periods in 2013. Return on average equity was 12.72% and 21.93% for the three and nine months ended September 30, 2014, respectively, compared to 15.07% and 21.06% for the same periods in 2013;
|
·
|
total revenue increased $1.1 million, or 22.0% to $6.1 million for the three months ended September 30, 2014, compared to $5.0 million for the same period in the prior year, and increased $1.6 million, or 11.0%, to $16.2 million for the nine months ended September 30, 2014, compared to $14.6 million for the same period in the prior year;
|
|
·
|
tier 1 capital to average assets and total capital ratios for the Bank at September 30, 2014 were 13.48% and 16.74%, respectively, compared to 13.94% and 17.20%, respectively, at December 31, 2013; and
|
·
|
the tangible book value of our stock increased to $5.61 at September 30, 2014, compared to $4.76 at September 30, 2013.
|
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 and nine months ended September 30, 2014 and 2013.
FINANCIAL SUMMARY
Consolidated Daily Average Balances, Average Yields and Rates
Three Months Ended September 30, | ||||||||||||||||||||||||
2014 | 2013 | |||||||||||||||||||||||
(000's) except earnings per share
|
Average
Balance
|
Interest
|
Average
Yield
|
Average
Balance
|
Interest
|
Average
Yield
|
||||||||||||||||||
Interest-earning assets
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Loans, net of unearned discount(1)
|
$
|
136,755
|
$
|
1,965
|
5.70
|
%
|
$
|
107,119
|
$
|
1,630
|
6.04
|
%
|
||||||||||||
Interest-bearing deposits and
|
||||||||||||||||||||||||
federal funds sold
|
6,585
|
4
|
0.24
|
%
|
5,518
|
4
|
0.29
|
%
|
||||||||||||||||
Securities
|
10,149
|
64
|
2.50
|
%
|
10,244
|
63
|
2.44
|
%
|
||||||||||||||||
Total earning assets
|
153,489
|
2,033
|
5.25
|
%
|
122,881
|
1,697
|
5.48
|
%
|
||||||||||||||||
Cash and other assets
|
10,069
|
6,388
|
||||||||||||||||||||||
Allowance for loan losses
|
(1,724
|
)
|
(1,345
|
)
|
||||||||||||||||||||
Total assets
|
$
|
161,834
|
$
|
127,924
|
||||||||||||||||||||
|
||||||||||||||||||||||||
Interest-bearing liabilities
|
||||||||||||||||||||||||
NOW accounts
|
$
|
5,212
|
4
|
0.30
|
%
|
$
|
3,259
|
2
|
0.24
|
%
|
||||||||||||||
Money market accounts
|
36,239
|
46
|
0.50
|
%
|
30,322
|
36
|
0.47
|
%
|
||||||||||||||||
Savings accounts
|
3,016
|
4
|
0.53
|
%
|
811
|
1
|
0.49
|
%
|
||||||||||||||||
Certificates of deposit less than $100,000
|
4,278
|
11
|
1.02
|
%
|
3,634
|
11
|
1.20
|
%
|
||||||||||||||||
Certificates of deposit $100,000 or greater
|
62,930
|
135
|
0.85
|
%
|
42,761
|
80
|
0.74
|
%
|
||||||||||||||||
Total interest-bearing deposits
|
111,675
|
200
|
0.71
|
%
|
80,787
|
130
|
0.64
|
%
|
||||||||||||||||
Borrowed funds
|
6,913
|
3
|
0.17
|
%
|
11,692
|
4
|
0.14
|
%
|
||||||||||||||||
Total interest-bearing liabilities
|
118,588
|
203
|
0.68
|
%
|
92,479
|
134
|
0.57
|
%
|
||||||||||||||||
Non-interest-bearing deposits
|
19,992
|
15,943
|
||||||||||||||||||||||
Other liabilities
|
2,202
|
1,428
|
||||||||||||||||||||||
Shareholders’ equity
|
21,052
|
18,074
|
||||||||||||||||||||||
Total liabilities and shareholders’ equity
|
$
|
161,834
|
$
|
127,924
|
||||||||||||||||||||
|
||||||||||||||||||||||||
Net interest income
|
1,830
|
1,563
|
||||||||||||||||||||||
Net interest spread
|
4.58
|
%
|
4.90
|
%
|
||||||||||||||||||||
Net interest margin
|
4.73
|
%
|
5.05
|
%
|
||||||||||||||||||||
|
||||||||||||||||||||||||
Provision for loan loss
|
-
|
284
|
||||||||||||||||||||||
Non-interest income
|
4,029
|
3,258
|
||||||||||||||||||||||
Non-interest expense
|
4,084
|
3,856
|
||||||||||||||||||||||
Income before income taxes
|
1,775
|
681
|
||||||||||||||||||||||
Income taxes expense
|
612
|
-
|
||||||||||||||||||||||
Net income
|
$
|
1,163
|
$
|
681
|
||||||||||||||||||||
|
||||||||||||||||||||||||
Earnings per share
|
$
|
0.29
|
$
|
0.17
|
||||||||||||||||||||
Return on average equity
|
21.93
|
%
|
15.07
|
%
|
||||||||||||||||||||
Return on average assets
|
2.85
|
%
|
2.13
|
%
|
||||||||||||||||||||
Equity to assets ratio
|
13.01
|
%
|
14.13
|
%
|
(1)
|
Includes nonaccrual loans
|
FINANCIAL SUMMARY
Consolidated Daily Average Balances, Average Yields and Rates
Nine Months Ended September 30,
|
||||||||||||||||||||||||
2014
|
2013
|
|||||||||||||||||||||||
(000's) except earnings per share
|
Average
Balance
|
Interest
|
Average
Yield
|
Average
Balance
|
Interest
|
Average
Yield
|
||||||||||||||||||
Interest-earning assets
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Loans, net of unearned discount (1)
|
$
|
130,253
|
$
|
5,598
|
5.75
|
%
|
$
|
102,367
|
$
|
4,747
|
6.20
|
%
|
||||||||||||
Interest-bearing deposits and
|
||||||||||||||||||||||||
federal funds sold
|
6,553
|
12
|
0.24
|
%
|
5,877
|
12
|
0.27
|
%
|
||||||||||||||||
Securities
|
10,329
|
197
|
2.55
|
%
|
10,657
|
193
|
2.42
|
%
|
||||||||||||||||
Total earning assets
|
147,135
|
5,807
|
5.28
|
%
|
118,901
|
4,952
|
5.57
|
%
|
||||||||||||||||
Cash and other assets
|
9,573
|
5,600
|
||||||||||||||||||||||
Allowance for loan losses
|
(1,759
|
)
|
(1,341
|
)
|
||||||||||||||||||||
Total assets
|
$
|
154,949
|
$
|
123,160
|
||||||||||||||||||||
|
||||||||||||||||||||||||
Interest-bearing liabilities
|
||||||||||||||||||||||||
NOW accounts
|
$
|
4,164
|
10
|
0.32
|
%
|
$
|
3,096
|
5
|
0.22
|
%
|
||||||||||||||
Money market accounts
|
33,831
|
124
|
0.49
|
%
|
28,020
|
99
|
0.47
|
%
|
||||||||||||||||
Savings accounts
|
2,495
|
9
|
0.48
|
%
|
705
|
3
|
0.50
|
%
|
||||||||||||||||
Certificates of deposit less than $100,000
|
4,146
|
33
|
1.06
|
%
|
3,712
|
34
|
1.22
|
%
|
||||||||||||||||
Certificates of deposit $100,000 or greater
|
59,748
|
369
|
0.83
|
%
|
40,741
|
228
|
0.75
|
%
|
||||||||||||||||
Total interest-bearing deposits
|
104,384
|
545
|
0.70
|
%
|
76,274
|
369
|
0.65
|
%
|
||||||||||||||||
Borrowed funds
|
9,022
|
8
|
0.12
|
%
|
13,252
|
12
|
0.12
|
%
|
||||||||||||||||
Total interest-bearing liabilities
|
113,406
|
553
|
0.65
|
%
|
89,526
|
381
|
0.57
|
%
|
||||||||||||||||
Non-interest-bearing deposits
|
19,563
|
15,072
|
||||||||||||||||||||||
Other liabilities
|
1,733
|
1,273
|
||||||||||||||||||||||
Shareholders’ equity
|
20,247
|
17,289
|
||||||||||||||||||||||
Total liabilities and shareholders’ equity
|
$
|
154,949
|
$
|
123,160
|
||||||||||||||||||||
|
||||||||||||||||||||||||
Net interest income
|
5,254
|
4,571
|
||||||||||||||||||||||
Net interest spread
|
4.63
|
%
|
5.00
|
%
|
||||||||||||||||||||
Net interest margin
|
4.78
|
%
|
5.14
|
%
|
||||||||||||||||||||
|
||||||||||||||||||||||||
Provision for loan loss
|
492
|
284
|
||||||||||||||||||||||
Non-interest income
|
10,415
|
9,648
|
||||||||||||||||||||||
Non-interest expense
|
12,190
|
11,204
|
||||||||||||||||||||||
Income before income taxes
|
2,987
|
2,731
|
||||||||||||||||||||||
Income taxes expense
|
1,056
|
-
|
||||||||||||||||||||||
Net income
|
$
|
1,931
|
$
|
2,731
|
||||||||||||||||||||
|
||||||||||||||||||||||||
Earnings per share
|
$
|
0.48
|
$
|
0.68
|
||||||||||||||||||||
Return on average equity
|
12.72
|
%
|
21.06
|
%
|
||||||||||||||||||||
Return on average assets
|
1.66
|
%
|
2.96
|
%
|
||||||||||||||||||||
Equity to assets ratio
|
13.07
|
%
|
14.04
|
%
|
(1)
|
Includes nonaccrual loans
|
Net Interest Income and Net Interest Margin
Net interest income is the difference between interest income, principally from loan 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 Federal Reserve Board sets various benchmark rates, including the Federal Funds rate, and thereby influences the general market rates of interest, including the deposit and loan rates offered by financial institutions. The Federal Funds rate, which is the cost to banks of immediately available overnight funds, was lowered on December 16, 2008 to a historic low of zero to 0.25% where it has remained since that time.
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 September 30, 2014 Compared to
Three Months Ended September 30, 2013
|
||||||||||||
Increase (Decrease) Due to
Change in
|
||||||||||||
(000’s) | Yield/
Rate
|
Average
Volume
|
Total
Change
|
|||||||||
Interest-bearing deposits and federal funds sold
|
$
|
(1
|
)
|
$
|
1
|
$
|
-
|
|||||
Securities
|
2
|
(1
|
)
|
1
|
||||||||
Loans, net of unearned discount (1)
|
(91
|
)
|
426
|
335
|
||||||||
Total earning assets
|
(90
|
)
|
426
|
336
|
||||||||
NOW
|
1
|
1
|
2
|
|||||||||
Money market
|
2
|
8
|
10
|
|||||||||
Savings
|
-
|
3
|
3
|
|||||||||
Certificates of deposit $100,000 or less
|
(2
|
)
|
2
|
-
|
||||||||
Certificates of deposit $100,000 or more
|
12
|
43
|
55
|
|||||||||
Borrowed funds
|
1
|
(2
|
)
|
(1
|
) | |||||||
Total interest-bearing liabilities
|
14
|
55
|
69
|
|||||||||
Changes in net interest income
|
$
|
(104
|
)
|
$
|
371
|
$
|
267
|
(1)
|
Average loans include non-accrual.
|
Nine Months Ended September 30, 2014 Compared to
Nine Months Ended September 30, 2013
|
||||||||||||
Increase (Decrease) Due to
Change in
|
||||||||||||
(000’s) | Yield/
Rate
|
Average
Volume
|
Total
Change
|
|||||||||
Interest-bearing deposits and federal funds sold
|
$
|
(1
|
)
|
$
|
1
|
$
|
-
|
|
||||
Securities
|
11
|
(7
|
)
|
4
|
||||||||
Loans, net of unearned discount (1)
|
(347
|
)
|
1,198
|
851
|
||||||||
Total earning assets
|
(337
|
)
|
1,192
|
855
|
||||||||
NOW
|
2
|
3
|
5
|
|||||||||
Money market
|
4
|
21
|
25
|
|||||||||
Savings
|
-
|
6
|
6
|
|||||||||
Certificates of deposit $100,000 or less
|
(4
|
)
|
3
|
(1
|
) | |||||||
Certificates of deposit $100,000 or more
|
24
|
117
|
141
|
|||||||||
Borrowed funds
|
-
|
(4
|
)
|
(4
|
) | |||||||
Total interest-bearing liabilities
|
26
|
146
|
172
|
|||||||||
Changes in net interest income
|
$
|
(363
|
)
|
$
|
1,046
|
$
|
683
|
(1)
|
Average loans include non-accrual.
|
Net interest income for the three months ended September 30, 2014 increased $267,000, or 17.1%, compared to the same period in the prior year. The increase was due to an increase in the average volume of interest-earning assets, partially offset by a decrease in the average interest yield of earning assets and an increase in the average volume of interest-bearing liabilities. Net interest margin decreased 32 basis points from 5.05% during the three months ended September 30, 2013 to 4.73% during the three months ended September 30, 2014. The decrease in net interest margin was the result of a decrease in the average yield on loans and an increase in cost of interest-bearing deposits, as further discussed below.
Total interest income for the three months ended September 30, 2014 increased $336,000, or 19.8%, compared to the same period in the prior year. Average interest-earning asset volume increased $30.6 million to $153.5 for the three months ended September 30, 2014, compared to $122.9 million for the same period in the prior year, due to the increase in the loan portfolio. The average interest yield of earning assets decreased 23 basis points to 5.25% for the three months ended September 30, 2014, compared to 5.48% for the same period in the prior year. The average yield on loans was 5.70% during the three months ended September 30, 2014 compared to 6.04% during the three months ended September 30, 2013.
Total interest expense for the three months ended September 30, 2014 increased $69,000, or 51.5%, compared to same period in the prior year. The average cost of interest-bearing liabilities increased 11 basis points to 0.68% for the three months ended September 30, 2014, compared to 0.57% for the same period in the prior year. Average volume of interest-bearing liabilities increased $26.1 million to $118.6 million for the three months ended September 30, 2014, compared to $92.5 million for the same period in the prior year. Average interest-bearing deposits increased $30.9 million to $111.7 million for the three months ended September 30, 2014, compared to $80.8 million for the same period in the prior year. Average borrowed funds decreased $4.8 million to $6.9 million for the three months ended September 30, 2014, compared to $11.7 million for the same period in the prior year.
Net interest income for the nine months ended September 30, 2014 increased $683,000, or 14.9%, compared to the same period in the prior year. The increase was due to an increase in the average volume of interest-earning assets, partially offset by a decrease in the average interest yield of earning assets and an increase in the average volume of interest-bearing liabilities. Net interest margin decreased 36 basis points from 5.14% during the nine months ended September 30, 2013 to 4.78% during the nine months ended September 30, 2014. The decrease in net interest margin was the result of a decrease in the average yield on loans and an increase in cost of interest-bearing deposits, as further discussed below.
Total interest income for the nine months ended September 30, 2014 increased $855,000, or 17.3%, compared to the same period in the prior year. Average interest-earning asset volume increased $28.2 million to $147.1 for the nine months ended September 30, 2014, compared to $118.9 million for the same period in the prior year, due to the increase in the loan portfolio. The average interest yield of earning assets decreased 29 basis points to 5.28% for the nine months ended September 30, 2014, compared to 5.57% for the same period in the prior year. The average yield on loans was 5.75% during the nine months ended September 30, 2014 compared to 6.20% during the nine months ended September 30, 2013.
Total interest expense for the nine months ended September 30, 2014 increased $172,000, or 45.1%, compared to same period in the prior year. The average cost of interest-bearing liabilities increased 8 basis points to 0.65% for the nine months ended September 30, 2014, compared to 0.57% for the same period in the prior year. Average volume of interest-bearing liabilities increased $23.9 million to $113.4 million for the nine months ended September 30, 2014, compared to $89.5 million for the same period in the prior year. Average interest-bearing deposits increased $28.1 million to $104.4 million for the nine months ended September 30, 2014, compared to $76.3 million for the same period in the prior year. Average borrowed funds decreased $4.3 million to $9.0 million for the nine months ended September 30, 2014, compared to $13.3 million for the same period in the prior year.
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.”
We did not record a provision for loan loss for the three months ended September 30, 2014. We had loan charge-offs of $81,000, and recoveries of $25,000 during the third quarter of 2014. For the nine months ended September 30, 2014, provision for loan losses was $492,000. For the nine months ended September 30, 2014, we had charge-offs of $1.2 million, primarily consisting of one dental loan of $1.1 million which was charged-off during the first quarter of 2014, and recoveries of $30,000. For the three and nine months ended September 30, 2013, we recorded a provision for loan losses of $284,000, and we had recoveries of $2,000 and $5,000, respectively. We had no charge-offs during the three months ended September 30, 2013 and just one loan charge-off of $300 for the nine months ended September 30, 2013.
Non-interest Income
The components of non-interest income were as follows:
(000's)
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2014
|
2013
|
2014
|
2013
|
|||||||||||||
Trust income
|
$
|
2,902
|
$
|
2,721
|
$
|
8,549
|
$
|
7,928
|
||||||||
Gain on sale of loans
|
949
|
450
|
1,386
|
1,509
|
||||||||||||
Service fees and other income
|
97
|
21
|
241
|
55
|
||||||||||||
Rental income
|
81
|
66
|
239
|
125
|
||||||||||||
Gain on sale of securities
|
-
|
-
|
-
|
31
|
||||||||||||
Total
|
$
|
4,029
|
$
|
3,258
|
$
|
10,415
|
$
|
9,648
|
Total non-interest income for the three and nine months ended September 30, 2014 increased $771,000, or 23.7%, and $767,000, or 8.0%, respectively, compared to the same periods in the prior year. The increase during the three months ended September 30, 2014 was primarily due to an increase in the gain on sale of loans and trust income, and the increase during the nine months ended September 30, 2014 was primarily due to increases in trust income, loan servicing income and rental income.
Trust income is earned on the value of managed and non-managed assets held in custody. For the three and nine months ended September 30, 2014 trust income increased $181,000, or 6.7%, and $621,000, or 7.8%, respectively, compared to the same periods in the prior year. These increases were a result of improvements in market values of assets in trust accounts during 2014.
Gain on sale of loans increased $499,000, or 110.9%, for the three months ended September 30, 2014, and decreased $123,000, or 8.2%, respectively for the nine months ended September 30, 2014. For the three months ended September 30, 2014 and 2013, the Company sold $9.6 million and $5.4 million, respectively, of loans held for sale resulting in gains on sale of loans of $949,000 and $450,000, respectively. For the nine months ended September 30, 2014 and 2013, the Company sold 13.8 million and $19.1 million, respectively, of loans held for sale resulting in gains on sale of loans of $1.4 million and $1.5 million, respectively.
Service fees and other income for the three and nine months ended September 30, 2014 increased $76,000, or 361.9%, and $186,000, or 338.2%, respectively, compared to the same periods in the prior year. These increases were primarily due to an increase in loan servicing fees related to an increase in the amount of loans sold with servicing retained by the Company.
Rental income for the three and nine months ended September 30, 2014 increased $15,000, or 22.7%, and $114,000, or 91.2%, respectively, compared to the same periods in the prior year. The increase in rental income for the nine months ended September 30, 2014 resulted from there being no rental income recorded by the Company prior to the purchase of the office building in April 2013.
There has been no gain on sale of securities during the three and nine months ended September 30, 2014. The Company has not sold any investment securities since the first quarter of 2013.
Non-interest Expense
The components of non-interest expense were as follows:
(000's)
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
||||||||||||||
2014
|
2013
|
2014
|
2013
|
|||||||||||||
Salaries and employee benefits
|
$
|
981
|
$
|
932
|
$
|
3,051
|
$
|
2,755
|
||||||||
Occupancy and equipment
|
344
|
285
|
928
|
735
|
||||||||||||
Trust expenses
|
2,290
|
2,178
|
6,741
|
6,208
|
||||||||||||
Professional fees
|
57
|
101
|
283
|
349
|
||||||||||||
Data processing
|
199
|
206
|
593
|
591
|
||||||||||||
Other
|
213
|
154
|
594
|
566
|
||||||||||||
Total
|
$
|
4,084
|
$
|
3,856
|
$
|
12,190
|
$
|
11,204
|
Total non-interest expense for the three and nine months ended September 30, 2014 increased $228,000, or 5.9%, and $986,000, or 8.8%, respectively, compared to the same periods in the prior year.
Salaries and employee benefits for the three and nine months ended September 30, 2014 increased $49,000, or 5.3%, and $296,000, or 10.7%, respectively, compared to the same periods in the prior year. These increases were primarily related to an increase in the number of employees in the loan production and operational support areas of the Company and to a one time discretionary bonus of $80,000 awarded to the President and CEO of the Company in April 2014 to adjust his 2013 salary to market.
Occupancy and equipment expenses for the three and nine months ended September 30, 2014 increased $59,000, or 20.7%, and $193,000, or 26.3%, respectively, compared to the same periods in the prior year. These increases were primarily due to expenses related to the maintenance of the new office building and the Company’s relocation from the previous leased office building to the new office building in May 2014.
Trust expenses are advisory fees paid to a fund advisor to advise the Company on the common trust funds managed by the Company and are based on the value of the assets held in custody. For the three and nine months ended September 30, 2014, trust expenses increased $112,000, or 5.1%, and $533,000, or 8.6%, respectively, compared to the same periods in the prior year. These increases were related to improvements in market values of the assets during 2014.
Professional fees for the three and nine months ended September 30, 2014 decreased $44,000, or 43.6%, and $66,000, or 18.9%, respectively, compared to the same periods in the prior year. The decreases were primarily due to reduction in audit and tax fees.
Data processing fees for the three months ended September 30, 2014 decreased $7,000, or 3.4%, for the three months ended September 30, 2014, and increased $2,000, or 0.3%, for the nine months ended September 30, 2014, compared to the same periods in the prior year.
Other expenses for the three and nine months ended September 30, 2014 increased $59,000, or 38.3%, and $28,000, or 4.9%, respectively, compared to the same periods in the prior year. The increases were primarily due to increase in marketing expenses.
Income Taxes
The provision for income taxes for the three and nine months ended September 30, 2014 was $612,000 and $1.1 million, respectively. The effective income tax rate was 34.0% for the three and nine months ended September 30, 2014. There was no provision for income taxes recorded for the three and nine months ended September 30, 2013, due to available operating losses to offset taxable income.
Financial Condition
Our total assets as of September 30, 2014 increased $17.8 million to $162.3 million, compared to $144.5 million as of December 31, 2013, primarily as a result of increase in total loans. Net loans held for investment increased $12.5 million, or 11.1%, to $124.8 million as of September 30, 2014, compared to $112.3 million as of December 31, 2013. Loans held for sale increased $5.6 million, or 266.7%, to $7.7 million as of September 30, 2014, compared to $2.1 million as of December 31, 2013. Total deposits increased $25.9 million, or 24.5%, to $131.7 million as of September 30, 2014, compared to $105.8 million as of December 31, 2013. Shareholders’ equity increased $2.2 million, or 10.8%, to $22.6 million as of September 30, 2014, compared to $20.4 million as of December 31, 2013.
Cash and Due From Banks
Cash and due from banks increased $310,000 to $1.4 million as of September 30, 2014, compared to $1.1 million as of December 31, 2013. The increase is a result of ordinary variances in operating cash.
Short-Term Investments and Interest-bearing Deposits in Other Financial Institutions
Interest-bearing deposits and fed funds sold increased $3.8 million to $8.2 million as of September 30, 2014, compared to $4.4 million as of December 31, 2013. 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.
As of September 30, 2014 and December 31, 2013, the Company held Federal Reserve Bank of Dallas stock of $570,000 and $528,000, respectively, and Federal Home Loan Bank of Dallas stock of $469,000 and $702,000, respectively. As of September 30, 2014 and December 31, 2013, we had government agency securities with amortized cost of $5.6 million and $5.9 million, respectively, and fair value of $5.5 million and $5.7 million, respectively. As of September 30, 2014 and December 31, 2013, we had mortgage-backed securities with amortized cost of $3.3 million and $3.7 million, respectively, and fair value of $3.3 million and $3.6 million, respectively.
At September 30, 2014 and December 31, 2013, securities with fair value of $6.8 million and $7.1 million, respectively, were pledged against borrowed funds at the Federal Home Loan Bank of Dallas and securities with fair value of $1.2 million and $1.3 million, respectively, were pledged against trust deposit balances held at the Bank. One security was pledged against borrowed funds at the Federal Reserve Bank of Dallas at September 30, 2014 and December 31, 2013 with fair value of $875,000 and $878,000, respectively.
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:
(000's)
|
September 30,
2014
|
December 31,
2013
|
||||||
Commercial and industrial
|
$
|
73,910
|
$
|
76,445
|
||||
Consumer installment
|
1,603
|
1,826
|
||||||
Real estate - mortgage
|
26,155
|
18,310
|
||||||
Real estate - construction and land
|
5,385
|
5,756
|
||||||
SBA:
|
||||||||
SBA 7(a) unguaranteed portion
|
13,348
|
7,031
|
||||||
SBA 504
|
5,463
|
5,174
|
||||||
USDA
|
1,909
|
1,007
|
||||||
Other
|
-
|
10
|
||||||
Gross Loans
|
127,773
|
115,559
|
||||||
Less:
|
||||||||
Allowance for loan losses
|
1,686
|
2,318
|
||||||
Deferred loan costs
|
(120
|
)
|
(69
|
)
|
||||
Discount on loans purchased
|
1,365
|
1,029
|
||||||
Net loans
|
$
|
124,842
|
$
|
112,281
|
As of September 30, 2014 and December 31, 2013, total loans held for investment were $124.8 million and $112.3 million, respectively. Total loans, net of deferred fees, discount and reserves as a percentage of total assets were 76.9% as of September 30, 2014 and 77.7% as of December 31, 2013.
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. As of September 30, 2014 and December 31, 2013, commercial loans totaled $73.9 million and $76.4 million, respectively, representing approximately 57.8% and 66.1% 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. 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. As of September 30, 2014 and December 31, 2013, consumer loans totaled $1.6 million and $1.8 million, respectively, approximately 1.3% and 1.6% of our total funded loans, respectively.
Our real estate loan portfolio is composed of construction loans and 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. 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 September 30, 2014 and December 31, 2013, real estate loans totaled $31.5 million and $24.1 million, respectively, approximately 24.7% and 20.9% of our total loans, respectively.
Our SBA loan portfolio consists of loans guaranteed by the Small Business Administration (“SBA 7(a)”) and conventional loans promulgated under the SBA’s 504 loan program which serve the small business community. The SBA 7(a) loans are generally guaranteed by the SBA up to 75% of the principal balance. The guaranteed portion of these loans is readily marketable on a servicing-retained basis in an active national secondary market. The Company records the guaranteed portion of the loans as held for sale. As of September 30, 2014 and December 31, 2013, SBA loans held for investment totaled $18.8 million and $12.2 million, respectively, representing approximately 14.7% and 10.6% of our total funded loans, respectively. As of September 30, 2014 and December 31, 2013, SBA 7(a) loans held for sale totaled $7.7 million and $2.1 million, respectively.
Our USDA loan portfolio consists of loans guaranteed by the USDA which serve rural areas. USDA loans are guaranteed up to 90% of the principal balance. As of September 30, 2014 and December 31, 2013, USDA loans held for investment totaled $1.9 and $1.0 million, respectively, representing approximately 1.5% and 0.9% of our total funded 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. As of September 30, 2014, our commercial loan and real estate loan portfolio included $63.7 million of loans, approximately 49.8% of our total funded loans, to dental professionals. These loans were made 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.
The following table shows the maturity/reset date distribution and type of loan within our loan portfolio as of September 30, 2014:
As of September 30, 2014 | ||||||||||||||||||||||||
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)
|
$
|
7,751
|
$
|
12,177
|
$
|
21,458
|
$
|
32,300
|
$
|
224
|
$
|
73,910
|
||||||||||||
Consumer installment
|
1,099
|
504
|
-
|
-
|
-
|
1,603
|
||||||||||||||||||
Real estate - mortgage
|
7,112
|
6,157
|
4,531
|
6,624
|
1,731
|
26,155
|
||||||||||||||||||
Real estate - construction and land
|
3,280
|
344
|
775
|
986
|
-
|
5,385
|
||||||||||||||||||
SBA 7(a)
|
13,271
|
-
|
-
|
77
|
-
|
13,348
|
||||||||||||||||||
SBA 504
|
5,463
|
-
|
-
|
-
|
-
|
5,463
|
||||||||||||||||||
USDA
|
912
|
-
|
997
|
-
|
-
|
1,909
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Total
|
$
|
38,888
|
$
|
19,182
|
$
|
27,761
|
$
|
39,987
|
$
|
1,955
|
$
|
127,773
|
(1)
|
Includes non-accrual and other loans at September 30, 2014.
|
Non-performing Assets and Restructured Loans
Non-performing assets consist of loans on non-accrual 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, OREO, and other repossessed assets. As of September 30, 2014, we had no loans 90 days or more past due and still accruing interest, $632,000 in loans on non-accrual status and no OREO. At December 31, 2013, we had no loans 90 days or more past due and still accruing interest, $750,000 in loans on non-accrual status and $749,000 in OREO. Total non-performing assets as of September 30, 2014 were $632,000, unchanged from December 31, 2013.
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 non-performing 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 “pass-watch” are those loans that have been determined to require enhanced monitoring for potential weaknesses which require further investigation. 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 non-accrual status, or have been restructured. Loans classified as “loss” are those loans that are in the process of being charged-off. At September 30, 2014, the Company had $3.2 million in pass-watch loans, $2.6 million in special mention loans, $1.1 million in substandard loans and no doubtful loans. At December 31, 2013, the Company had $2.8 million in pass-watch loans, $3.6 million in special mention loans, $3.7 million in substandard loans and no doubtful loans.
The following table sets forth certain information regarding non-accrual loans by type, loans past due 90 days and accruing, OREO and restructured loans accruing as of the dates indicated. Trouble debt restructurings on non-accrual status are reported as non-accrual loans.
September 30, 2014
|
December 31, 2013
|
|||||||||||||||
(000's, except percentages):
|
Amount
|
Loan
Category to
Total Assets
|
Amount
|
Loan
Category to
Total Assets
|
||||||||||||
Commercial and industrial
|
$
|
632
|
0.39
|
%
|
$
|
750
|
0.52
|
%
|
||||||||
Total non-accrual loans
|
632
|
0.39
|
%
|
750
|
0.52
|
%
|
||||||||||
Loans past due 90 days and accruing
|
-
|
-
|
%
|
-
|
-
|
%
|
||||||||||
Restructured loans accruing
|
-
|
-
|
%
|
841
|
0.58
|
%
|
||||||||||
Other real estate owned
|
-
|
-
|
%
|
749
|
0.52
|
%
|
||||||||||
Total non-performing assets
|
$
|
632
|
0.39
|
%
|
$
|
2,340
|
1.62
|
%
|
||||||||
Restructured loans on non-accrual
|
$
|
531
|
0.33
|
%
|
$
|
750
|
0.52
|
%
|
We record interest payments received on impaired loans as interest income unless collections of the remaining recorded investment are placed on non-accrual, at which time we record payments received as reductions of principal. We recognized interest income on impaired loans of approximately $122,000 and $144,000 during the nine months ended September 30, 2014 and 2013, respectively. Interest not recognized on impaired loans during the three and nine months ended September 30, 2014 and 2013 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 $1.7 million, or 1.3% of total funded loans at September 30, 2014, and $2.3 million, or 2.0% of total funded loans at December 31, 2013. The decrease was primarily related to a $1.1 million commercial loan charge-off during the first quarter of 2014. The loan was impaired with a reserve allocated against it of $841,000 as of December 31, 2013.
Credit and loan decisions are made by management and the Board of Directors in conformity with loan policies established by the Board of Directors. 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 charge-offs of $1.2 million, of which $1.1 million was for one dental loan charged-off during the first quarter of 2014, and recoveries of $30,000 during the nine months ended September 30, 2014. During the nine months ended September 30, 2013, we had one small consumer loan charge-off of $300 and recoveries of $5,000.
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
September 30, 2014
|
As of
December 31, 2013
|
||||||||||||||
Allocated:
|
Amount
|
Loan
Category to
Gross Loans
|
Amount
|
Loan
Category to
Gross Loans
|
||||||||||||
Commercial and industrial
|
$
|
938
|
57.8
|
%
|
$
|
1,805
|
66.1
|
%
|
||||||||
Consumer installment
|
21
|
1.3
|
24
|
1.6
|
||||||||||||
Real estate - mortgage
|
327
|
20.5
|
229
|
15.8
|
||||||||||||
Real estate - construction and land
|
68
|
4.2
|
74
|
5.0
|
||||||||||||
SBA
|
294
|
14.7
|
166
|
10.6
|
||||||||||||
USDA
|
38
|
1.5
|
20
|
0.9
|
||||||||||||
Total allowance for loan losses
|
$
|
1,686
|
100.0
|
%
|
$
|
2,318
|
100.0
|
%
|
Deposits
Deposits are our primary source of funding. Total deposits at September30, 2014 and December 31, 2013 were $131.7 million and $105.8 million, respectively.
The following table shows the average deposit balances and average cost of funds for each category of deposits, for the periods ended September 30, 2014 and 2013:
For the nine months ended September 30,
|
||||||||||||||||||||||||
(000's)
|
2014
|
2013
|
||||||||||||||||||||||
Average
Balance
|
Percent of
Deposits
|
Average
Rate
|
Average
Balance
|
Percent of
Deposits
|
Average
Rate
|
|||||||||||||||||||
Non-interest-bearing deposits
|
$
|
19,563
|
15.8
|
%
|
0.00
|
%
|
$
|
15,072
|
16.5
|
%
|
0.00
|
%
|
||||||||||||
NOW accounts
|
4,164
|
3.4
|
0.32
|
3,096
|
3.4
|
0.22
|
||||||||||||||||||
Money market accounts
|
33,831
|
27.3
|
0.49
|
28,020
|
30.7
|
0.47
|
||||||||||||||||||
Savings accounts
|
2,495
|
2.0
|
0.48
|
705
|
0.8
|
0.50
|
||||||||||||||||||
Certificates of deposit, less than $100,000
|
4,146
|
3.3
|
1.06
|
3,712
|
4.0
|
1.22
|
||||||||||||||||||
Certificates of deposit, $100,000 or greater
|
59,748
|
48.2
|
0.83
|
40,741
|
44.6
|
0.75
|
||||||||||||||||||
Total deposits
|
$
|
123,947
|
100.0
|
%
|
0.59
|
%
|
$
|
91,346
|
100.0
|
%
|
0.54
|
%
|
The average volume of non-interest-bearing deposits increased $4.5 million for the nine months ended September 30, 2014, compared to the same period in 2013. The average volume of certificates of deposits and money market accounts increased $19.4 million and $5.8 million, respectively, for the nine months ended September 30, 2014, compared to the same period in 2013.
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)
|
September 30,
2014
|
December 31,
2013
|
||||||
Three months or less
|
$
|
9,082
|
$
|
12,811
|
||||
Over three months through six months
|
15,247
|
5,116
|
||||||
Over six months through twelve months
|
14,679
|
16,735
|
||||||
Over twelve months
|
22,432
|
16,795
|
||||||
Total
|
$
|
61,440
|
$
|
51,457
|
Shareholders’ Equity
As of September 30, 2014, shareholders’ equity increased to $22.6 million from $20.4 million as of December 31, 2013. The increase was due to comprehensive income of $2.2 million for the nine months ended September 30, 2014.
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 September 30, 2014. See Note 15 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 September 30, 2014, our established credit line with the Federal Home Loan Bank of Dallas was $22.8 million, or 14.1% of assets, of which $5.0 million was utilized. As of September 30, 2014, our established credit line with the Federal Reserve Bank of Dallas was $15.3 million, or 9.4% of assets, none of which was utilized. Additionally, we serve as trustee or custodian for $44.4 million in cash deposits held at BlackRock, Inc. in a money market fund, of which approximately $31.2 million could be held at the Bank in deposit accounts fully insured by the FDIC.
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 average 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. As of September 30, 2014, the Bank’s total capital to risk weighted assets ratio was 16.74%, and the Bank’s tier 1 capital to average assets ratio was 13.48%.
(000's) | Actual | For Capital
Adequacy Purposes
|
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
|
|||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of September 30, 2014 | ||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets)
|
$
|
23,507
|
16.74
|
%
|
$
|
11,235
|
8.00
|
%
|
$
|
14,044
|
10.00
|
%
|
||||||||||||
Tier 1 Capital (to Risk Weighted Assets)
|
21,821
|
15.54
|
5,618
|
4.00
|
8,426
|
6.00
|
||||||||||||||||||
Tier 1 Capital (to Average Assets)
|
21,821
|
13.48
|
6,474
|
4.00
|
8,093
|
5.00
|
||||||||||||||||||
As of December 31, 2013
|
||||||||||||||||||||||||
Total Capital (to Risk Weighted Assets)
|
$
|
21,381
|
17.20
|
%
|
$
|
9,945
|
8.00
|
%
|
$
|
12,431
|
10.00
|
%
|
||||||||||||
Tier 1 Capital (to Risk Weighted Assets)
|
19,818
|
15.94
|
4,972
|
4.00
|
7,459
|
6.00
|
||||||||||||||||||
Tier 1 Capital (to Average Assets)
|
19,818
|
13.94
|
5,685
|
4.00
|
7,106
|
5.00
|
On July 2, 2013, the Federal Reserve, and on July 9, 2013, the FDIC and OCC, adopted a final rule that implements the Basel III changes to the international regulatory capital framework and revises the U.S. risk-based and leverage capital requirements for U.S. banking organizations to strengthen identified areas of weakness in the capital rules and to address relevant provisions of the Dodd-Frank Act.
The final rule establishes a stricter regulatory capital framework that requires banking organizations to hold more and higher quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress. The final rule emphasizes common equity tier 1 (“CET1”) capital and implements strict eligibility criteria for regulatory capital instruments while also modifying the methodology for calculating risk-weighted assets to enhance risk sensitivity. The final rule also increases capital ratios for all banking organizations and introduces a “capital conservation buffer” which is in addition to each capital ratio. If a banking organization dips into its capital conservation buffer it may be restricted in its ability to pay dividends and discretionary bonus payments to its executive officers.
More specifically, under the final rule, all banking organizations are required to maintain capital ratios including: (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% capital conservation buffer (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a leverage ratio of 4.0%.
In addition, the final rule permits banking organizations with less than $15 billion in consolidated assets as of December 31, 2009 to include in their tier 1 capital on a permanent basis trust preferred securities and cumulative perpetual preferred stock issued and included in tier 1 capital prior to May 19, 2010, without any phase out. Although community banks must generally begin complying with the final rules on January 1, 2015, management believes that, as of September 30, 2014, the Company would satisfy the higher capital ratios imposed by Basel III.
The above BASEL III capital ratio requirements as applicable to the Bank after the full phase-in period are summarized in the table below. (1)
BASEL III Minimum
Capital Requirements
|
BASEL III
Additional Capital
Conservation
Buffer
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BASEL III Requirements with
Capital Conservation
Buffer(2)
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||||||||||
Total Capital (to risk weighted assets)
|
8.0 | % | 2.5 | % | 10.5 | % | ||||||
Tier 1 Capital (to risk weighted assets)
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6.0 | % | 2.5 | % | 8.5 | % | ||||||
Tier 1 Capital (to average assets) or Leverage ratio
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4.0 | % | — | % | 4.0 | % | ||||||
Common Equity Tier 1 (to risk weighted assets)
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4.5 | % | 2.5 | % | 7.0 | % |
(1)
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Because the BASEL III final rules modify the methodology for calculating risk-weighted assets and the deduction and adjustment to capital, the ratios above may not be comparable to the current applicable regulatory requirements, or the Company's actual capital ratios, as of September 30, 2014.
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(2)
|
Represents the fully phased-in requirements under Basel III.
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Liquidity Management
At September 30, 2014, the Company (excluding the Bank) had approximately $873,000 in cash. These funds can be used for Company operations, investment and for 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’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 September 30, 2014, we had outstanding loan origination commitments and unused commercial and retail lines of credit of $18.3 million and $10,000 in standby letters of credit. Certificates of deposit that are scheduled to mature within one year totaled $41.9 million at September 30, 2014.
The Bank’s significant contractual obligations and other potential funding needs at September 30, 2014 consist of:
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As of September 30, 2014
|
|||||||||||||||
(000's)
|
Less than
One
Year
|
One to Three
Years
|
Over Three to
Five Years
|
Over Five
Years
|
||||||||||||
Operating leases
|
$
|
69
|
$
|
93
|
$
|
-
|
$
|
-
|
||||||||
|
||||||||||||||||
Certificates of deposit
|
$
|
41,905
|
$
|
21,589
|
$
|
2,242
|
$
|
-
|
As of September 30, 2014, the Company had cash and cash equivalents of $9.6 million, or 5.9% of total assets, and loans held for sale of $7.7 million, or 4.7% of total assets. 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 September 30, 2014, the Bank’s established credit line with the Federal Home Loan Bank of Dallas was $22.8 million, or 14.1% of assets, of which $5.0 million was utilized at September 30, 2014. The established credit line with the Federal Reserve Bank of Dallas was $15.3 million, or 9.4% of assets, none of which was utilized at September 30, 2014.
As loan demand increases, greater pressure will be exerted on the Bank’s liquidity. As of September 30, 2014, the loan to deposit ratio was 94.8%. Total trust custodial cash available to the Bank as of September 30, 2014 was approximately $31.2 million. With additional advances available from the Federal Home Loan Bank of Dallas and Federal Reserve Bank of Dallas and the custodial cash available through the Bank’s trust department, the Bank has off-balance sheet liquidity available of 39.6% of total assets as of September 30, 2014. We believe that the Bank has adequate liquidity to meet anticipated future funding needs.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Because the registrant is a smaller reporting company, disclosure under this item is not required.
Item 4. Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Exchange Act, are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’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.
Based upon their controls evaluation, our principal executive officer and principal financial officer have concluded that our Disclosure Controls are effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2014 that materially affected, or were reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal proceedings to which the Company is a party or of which any of its property is subject. From time to time, the Company is a party to various legal proceedings incident to its business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None
Item 6. Exhibits and Financial Statement Schedules.
Exhibit
No.
|
Description of Exhibit
|
|
3.1
|
Articles of Incorporation (incorporated by reference from the Quarterly Report on Form 10-Q filed by Registrant with the SEC on August 14, 2007)
|
|
3.2
|
Bylaws (incorporated by reference from the Current Report on Form 8-K filed by Registrant with the SEC on April 30, 2008)
|
|
31.1
|
||
31.2
|
||
32
|
*
|
Filed Herewith
|
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.
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||
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|
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Date: November 14, 2014
|
By:
|
/s/ Patrick Howard
|
|
|
|
Patrick Howard
President and Chief Executive Officer/Principal Executive Officer
|
||
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|
|
|
By:
|
/s/ Ken Bramlage
|
Ken Bramlage
Executive Vice President and Chief Financial Officer/Principal Financial Officer
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43