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TBNC > SEC Filings for TBNC > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for T BANCSHARES, INC.


15-May-2013

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis represents our consolidated financial condition as of March 31, 2013 and December 31, 2012, and our consolidated results of operations for the three months ended March 31, 2013 and 2012. 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, 2012, including the following:

we have limited operating history upon which to base an estimate of our future financial performance;

if we are unable to implement our business plan and strategies, we will be hampered in our ability to develop business and serve our customers, which, in turn, could have an adverse effect on our financial performance;

we are subject to significant government regulation and legislation that increases the cost of doing business and inhibits our ability to compete including the potential impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 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;

our ability to successfully launch and manage our new SBA division;

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;

the Bank's current legally mandated lending limits are lower than those of our competitors, which may impair our ability to attract borrowers;

changes in governmental economic and monetary policies, the Internal Revenue Code and banking and credit regulations, as well as other factors, will affect the demand for loans and the ability of the Bank to attract deposits;

changes in the general level of interest rates and other economic factors can affect the Bank's interest income by affecting the spread between interest-earning assets and interest-bearing liabilities;

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, 2012 could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement reflects only information known to us as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise.

Executive Overview

Introduction

The Company is a bank holding company headquartered in Dallas, Texas, offering a broad array of banking services through the Bank. Our principal markets include North Dallas, Addison, Plano, Frisco, Southlake and the neighboring Texas communities. As of March 31, 2013, we had, on a consolidated basis, total assets of $122.4 million, net loans of $94.5 million, total deposits of $88.2 million, and shareholders' equity of $17.4 million. We currently operate through a main office located at 16000 Dallas Parkway, Dallas, Texas and a branch office at 8100 North Dallas Parkway, Plano, Texas as well as loan production offices serving the Phoenix, Arizona, Denver, Colorado, Portland, Oregon and Youngstown, Florida markets staffed by experienced bankers with significant experience in the origination, administration, and servicing of loans pursuant to programs promulgated by the Small Business Administration ("SBA").

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 March 31, 2013 and December 31, 2012, and our results of operations for the three months ended March 31, 2013 and March 31, 2012.

Recent Developments

On April 1, 2013, the Small Business Administration approved the Bank to sell the guaranteed portion of SBA 7(a) loans in the secondary market. During April 2013 the Bank sold $5.6 million of loans held for sale as of March 31, 2013. Also during April 2013, the Bank purchased and subsequently sold an additional $3.5 million of loans held for sale. The estimated net recognized gain on these sales is $1 million.

On April 25, 2013, the Bank acquired a two story, 33,000 square foot commercial office building with the intent to re-locate its main office to that location within the next 12 months, at or prior to the termination of the current lease covering the Bank's main office. The purchased building is located within a quarter mile of the Bank's current main office. The purchase price was $1.9 million, or approximately $58 per square foot. The building is approximately 64% leased and the Bank anticipates that it will occupy approximately 11,000 square feet of the vacant space. The building will require significant remodeling prior to the Bank's occupancy. These costs are currently being determined; however, management believes that the Company's occupancy expense for its main office will be lower on a per square foot basis than the current expense. The Bank's main branch relocation to the new facility is subject to regulatory approval.

On May 1, 2013, the Bank entered into a sub-lease agreement covering its space located at 850 Hwy 114, Southlake, Texas. The term of the sub-lease runs concurrently with the term of the Bank's primary lease ending on February 28, 2017. The monthly lease payment pursuant to the sub-lease is $5,240. The Bank's payment under the primary lease is $5,785.

The Bank filed an application with the Comptroller of the Currency ("Comptroller") to establish a mobile branch and courier service that will be operated as a Banking Concierge service. This service will deliver most banking products and branch services that are available inside a physical branch location to the customer location of current and future small business customers of the Bank. This application was approved by the Comptroller on April 30, 2013. We anticipate the Banking Concierge service will be fully operational and available during the third quarter of 2013.

Results of Operations

Key Performance Indicators at March 31, 2013

The following were key indicators of our performance and results of operations through the first quarters of 2013:

total assets were $122.4 million at the end of the first quarter of 2013, representing an increase of $8.0 million, or 7.0%, from $114.4 million at the end of 2012;

total loans held for investment, net of allowance for loan losses and deferred loan fees, increased $1.9 million, or 2.1%, to $94.5 million at the end of the first quarter of 2013, compared to $92.6 million at the end of 2012;

total loans held for sale, which consists primarily of the guaranteed portion of SBA 7(a) loans, increased $4.3 million, or 331%, to $5.6 million at the end of the first quarter of 2013, compared to $1.3 million at the end of 2012;

total deposits increased $7.5 million, or 9.3%, to $88.2 million at the end of the first quarter of 2013, compared to $80.7 million at the end of 2012;

net income was $534,000 for the three months ended March 31, 2013, compared to $528,000 for the same period in the prior year;

return on average assets was 1.80% and return on average equity was 13.15% for the three months ended March 31, 2013 compared to a return on average assets of 1.98% and return on average equity of 14.82% for the year ended December 31, 2012;

total revenue increased $561,000, or 15.2%, to $4.3 million for the three months ended March 31, 2013, compared to $3.7 million for the same period in the prior year;

Tier 1 capital to average assets and total capital ratios for the Bank at March 31, 2013 were 13.65% and 17.54%, respectively, compared to 13.39% and 17.57% at December 31, 2012.

The following tables set forth our average balances of assets, liabilities and shareholders' equity, in addition to the major components of net interest income and our net interest margin for the three months ended March 31, 2013 and March 31, 2012.

                               FINANCIAL SUMMARY

         Consolidated Daily Average Balances, Average Yields and Rates



                                                               Three Months Ended March 31,
                                                     2013                                        2012
                                     Average                      Average        Average                      Average
(000's) except earnings per share    Balance       Interest        Yield         Balance       Interest        Yield
Interest-earning assets

Loans, net of reserve (1)           $  97,950     $    1,597            6.6 %   $  81,162     $    1,435            7.1 %
Federal funds sold                        402              -            0.2 %         212              -            0.2 %
Securities and other                   15,505             73            1.9 %      12,572             55            1.7 %
Total earning assets                  113,857          1,670            5.9 %      93,946          1,490            6.4 %
Cash and other assets                   4,568                                       4,620
Total assets                        $ 118,425                                   $  98,566

Interest-bearing liabilities
NOW accounts                        $   2,855              2            0.2 %   $   3,237              2            0.3 %
Money market accounts                  26,060             30            0.5 %      27,223             38            0.6 %
Savings accounts                          608              1            0.5 %         354              -            0.5 %
Certificates of deposit less than
$100,000                                3,919             13            1.3 %       6,427             42            2.6 %
Certificates of deposit $100,000
or greater                             37,440             73            0.8 %      28,772            170            2.4 %
Total interest bearing deposits        70,882            119            0.7 %      66,013            252            1.5 %
Borrowed funds                         15,089              4            0.1 %       8,264              3            0.1 %
Total interest bearing
liabilities                            85,971            123            0.6 %      74,277            255            1.4 %
Noninterest bearing deposits           15,044                                      12,359
Other liabilities                       1,163                                       1,002
Shareholders' equity                   16,247                                      10,928
Total liabilities and
shareholders' equity                $ 118,425                                   $  98,566

Net interest income                                    1,547                                       1,235
Net interest spread                                                     5.4 %                                       5.0 %
Net interest margin                                                     5.5 %                                       5.3 %

Provision (credit) for loan loss                           -                                        (103 )
Non-interest income                                    2,612                                       2,231
Non-interest expense                                   3,625                                       3,041
Income before income taxes                               534                                         528
Income taxes expense (benefit)                             -                                           -
Net income                                        $      534                                  $      528

Earnings per share                                $     0.13                                  $     0.23
Return on average equity                               13.15 %                                     19.33 %
Return on average assets                                1.80 %                                      2.14 %
Equity to assets ratio                                 13.72 %                                     11.09 %

(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 following table presents the changes in net interest income and identifies the changes due to differences in the average volume of earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each.

                                                        Three Months Ended March 31, 2013 Compared to
                                                              Three Months Ended March 31, 2012
                                                      Increase (Decrease) Due to
                                                               Change in
                                                      Yield/               Average                Total
(000's)                                                Rate                 Volume                Change
Federal funds sold                                $            -         $          -         $            -
Securities and other                                           5                   13                     18
Loans, net of reserve (1)                                   (112 )                274                    162

Total earning assets                                        (107 )                287                    180

NOW                                                            -                    -                      -
Money market                                                  (7 )                 (1 )                   (8 )
Savings                                                        -                    1                      1
Certificates of deposit $100,000 or less                     (20 )                 (9 )                  (29 )
Certificates of deposit $100,000 or more                    (114 )                 17                    (97 )
Borrowed funds                                                 -                    1                      1

Total interest-bearing liabilities                          (141 )                  9                   (132 )

Changes in net interest income                    $           34         $        278         $          312

(1) Average loans include non-accrual.

Net interest income for the three months ended March 31, 2013 increased $312,000, or 25.3%, compared to the same period in the prior year. The increase was due to lower cost of deposits and by an increase in the average volume of interest-earning assets.

Total interest income for the three months ended March 31, 2013 increased $180,000, or 12.1%, compared to the same period in the prior year. Average interest-earning asset volume increased $20.0 million, or 21.3%, to $113.9 for the three months ended March 31, 2013, compared to $93.9 million for the same period in the prior year, primarily due to the increase in the loan portfolio. The average interest yield of earning assets decreased to 5.9%, or 7.8%, for the three months ended March 31, 2013, compared to 6.4% for the same period in the prior year.

Total interest expense for the three months ended March 31, 2013 decreased $132,000, or 51.8%, compared to same period in the prior year. The average cost of funds for interest-bearing liabilities decreased to 0.6%, or 57.1%, for the three months ended March 31, 2013, compared to 1.4% for same period in the prior year. Average volume of interest-bearing liabilities increased $11.7 million, or 15.7%, to $86.0 million for the three months ended March 31, 2013, compared to $74.3 million for the same period in 2012. Average interest-bearing deposits increased $4.9 million, or 7.4%, to $70.9 million for the three months ended March 31, 2013, compared to $66.0 million for the same period in the prior year. Average borrowed funds increased $6.8 million, or 81.9%, to $15.1 million for the three months ended March 31, 2013, compared to $8.3 million for the same period in the prior year. The increase is a result of the attractive borrowing rates offered by the Federal Home Loan Bank versus other sources of liquidity available to the Bank.

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 March 31, 2013, compared to a net credit of $103,000 for the three months ended March 31, 2012. We had one small charge off of $300 and recoveries of $1,500 during the three months ended March 31, 2013, compared to charge-offs of $24,000 and recoveries of $158,000 for the same period in the prior year.

Non-interest Income

Non-interest income was primarily attributable to fee income generated by the Company for trust services and service charges on depository accounts.

Total non-interest income increased $381,000, or 17.1%, to $2.6 million for the three months ended March 31, 2013, compared to the same period in the prior year.

Trust income is earned on the value of managed and non-managed assets held in custody. Trust income increased $393,000, or 18.1%, to $2.6 million for the three months ended March 31, 2013, compared to $2.2 million for the same period in the prior year. Approximately $157,000 of the increase is a result of improvements in market values of assets in trust accounts during the first quarter of 2013 with the remaining increase due to the additional 10 basis point fee assessed to the common trust funds managed by the Bank that commenced in December, 2012.

The Company sold available-for-sale securities and recorded a gain of $31,000 for the three months ended March 31, 2013. For further details, see discussion in Note 3 for Securities. There were no sales of securities for the same period in the prior year.

Other income decreased $43,000, or 70.5% to $18,000 for the three months ended March 31, 2013, compared to $61,000, for the same period in the prior year. Included in other income for the three months ended March 31, 2012 was $39,000 for gain on sale of other real estate owned.

Non-interest Expense

Total non-interest expense increased $584,000, or 19.2%, to $3.6 million for the three months ended March 31, 2013, compared to $3.0 million for the same period in the prior year.

Salaries and employee benefits increased $260,000, or 40.1%, to $907,000 for the three months ended March 31, 2013, compared to $647,000 for the same period in the prior year. The increase is primarily due to the addition of the SBA division during the fourth quarter of 2012, and to an increase in incentive compensation expense accrual.

Occupancy and equipment expenses are primarily lease expenses and depreciation and amortization of leasehold improvements and furniture, fixtures and equipment. For the three months ended March 31, 2013, occupancy and equipment expense decreased $6,000, or 2.7%, to $218,000, compared to $224,000 for the same period in the prior year.

Trust expenses are advisory fees paid to a fund advisor to advise the Bank on the common trust funds managed by the Bank and are based on the value of the assets held in custody. For the three months ended March 31, 2013, trust expenses increased $179,000, or 10.0%, to $2.0 million, compared to $1.8 million for the same period in the prior year. The increase is related to improvements in market values of the assets during the first quarter of 2013.

Professional fees decreased $20,000, or 17.1%, to $97,000 for the three months ended March 31, 2013, compared to $117,000 for the same period in the prior year. The decrease was primarily due to a decrease in legal expense.

Data processing fees increased $145,000, or 223.1%, to $210,000 for the three months ended March 31, 2013, compared to $65,000 for the same period in the prior year. The increase was primarily attributable to higher monthly costs of a new trust accounting system with upgraded features to provide enhanced services to our trust customers. The improved system was implemented during the fourth quarter of 2012.

Other expenses increased $26,000, or 12.7%, to $230,000 for the three months ended March 31, 2013, compared to $204,000 for the same period in the prior year.

Income Taxes

No federal income tax expense was recorded for the three months ended March 31, 2013 and 2012, due to available operating losses to offset taxable income. The Company has determined that the federal tax benefit of these losses has a valuation allowance equal to the benefit. Cumulative net operating loss available to carry forward for tax purposes is approximately $3.3 million as of December 31, 2012.

Financial Condition

Our total assets as of March 31, 2013 increased $8.0 million to $122.4 million, compared to $114.4 million as of December 31, 2012, primarily as a result of increase in total loans. Net loans increased $6.3 million, or 6.7%, to $100.2 million as of March 31, 2013, compared to $93.9 million as of December 31, 2012. The SBA division originated $5.8 million during the quarter, of which $4.3 million represents the guaranty portion and is included in loans held for sale. The increase in loans was funded by an increase in certificate of deposits. Total deposits were $88.2 million as of March 31, 2013, compared to $80.7 million as of December 31, 2012.

As of March 31, 2013, shareholders' equity was $17.3 million, compared to $17.0 million as of December 31, 2012. The increase was associated with the $339,000 of comprehensive income for the three months ended March 31, 2013.

Cash and Due From Banks

Cash and due from banks decreased $1.1 million to $693,000 as of March 31, 2013, compared to $1.8 million as of December 31, 2012. The reduction is a result of ordinary variances in operating cash.

Short-Term Investments and Interest-bearing Deposits in Other Financial Institutions

Interest-bearing deposits increased $1.7 million to $6.4 million as of March 31, 2013, compared to $4.7 million as of December 31, 2012. 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 March 31, 2013 and December 31, 2012, the Bank held Federal Reserve Bank of Dallas stock of $458,700, and Federal Home Loan Bank of Dallas stock in the amount of $747,000 and $665,000, respectively. As of March 31, 2013 and December 31, 2012, we had government agency securities with amortized cost of $6.0 million and fair value of $6.1 million. We also had mortgage-backed securities with amortized cost and fair value of $3.8 million as of March 31, 2013, and amortized cost of $3.2 million and fair value of $3.5 million as of December 31, 2012.

At March 31, 2013 and December 31, 2012, securities with fair value of $8.4 million and $8.5 million, respectively, were pledged against borrowed funds at the Federal Home Loan Bank of Dallas and one security with fair value of $534,000 and $63,000, respectively, was pledged against trust deposit balances held at the Bank. One security was pledged against borrowed funds at the Federal Reserve Bank of Dallas at March 31, 2013 and December 31, 2012 with fair value of $1.0 million.

Loan Portfolio



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