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TBNC > SEC Filings for TBNC > Form 10-K on 31-Mar-2014All Recent SEC Filings

Show all filings for T BANCSHARES, INC.

Form 10-K for T BANCSHARES, INC.


Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.

This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see "Item 1-Business-Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with our audited consolidated financial statements and the notes to our audited consolidated financial statements included elsewhere in this report. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under "Item 1A-Risk Factors" and included in other portions of this report.


We are a bank holding company headquartered in Dallas, Texas, offering a broad array of banking services through our wholly owned banking subsidiary, T Bank, N.A.

We were incorporated under the laws of the State of Texas on December 23, 2002 to organize and serve as the holding company for the Bank. The Bank opened for business on November 2, 2004.

Business Strategy

We believe we can effectively compete as a community bank in our market area and the niche markets we serve. We focus our marketing efforts in three areas. We serve our local geographic market which is the Dallas - Fort Worth metropolitan area. We serve the dental and other health professional industries through a centralized loan and deposit platform that operates out of our main office in Dallas, Texas and serves clients in 30 states. Since the fourth quarter, 2012, we have expanded to serve the small business community by offering loans guaranteed by the SBA as well as the U.S. Department of Agriculture ("USDA"). We are registered in Colorado and Oregon as a lender and our employees maintain home offices in those states from which we originate and underwrite those loans. We anticipate that these loans will also be originated nationwide.

We offer a broad range of commercial and consumer banking services primarily to small to medium-sized businesses and their employees. Because of our technological capabilities, including worldwide free ATM withdrawals, sophisticated on-line banking capabilities, electronic funds transfer capabilities, and economical remote deposit solutions, we believe we can be the primary bank for most customers no matter where they are located. We believe that meeting the needs of our customers and making their banking experience more efficient leads to increased customer loyalty. In addition to our traditional banking services, we offer trust services to individuals and benefit plans.

We are able to utilize relatively low cost deposits provided by our trust activities to fund additional loan growth. The amount of deposits available to us while maintaining full FDIC insurance protection for our trust customers has consistently exceeded $30 million for the last three years. We anticipate the trust custodial deposits to be relatively low cost and comparable to the rate we pay non-trust customers on money market account balances.

The Bank's goals are as follows:

sustain profitability;

maintain controlled growth by focusing on increasing our loan and deposit market share by providing personalized customer service;

closely manage yields on earning assets and rates on interest-bearing liabilities;

continue focusing on noninterest income opportunities including our trust business;

maintain our positive working relationship with our regulators;

control noninterest expenses; and,

maintain strong asset quality.

Table of Contents

2013 Executive Overview

Financial Highlights

The following were significant factors related to 2013 results as compared to 2012.

Net income for 2013 was $4.1 million, or $1.01 diluted per common share, compared to $2.1 million, or $0.58 diluted per share in 2012. For the year ended December 31, 2013, return on average assets was 3.20% and return on average equity was 23.28%. For the year ended December 31, 2012, return on average assets was 1.98% and return on average equity was 14.82%.

Net interest income increased $931,000 for the year ending 2013 to $6.2 million compared to $5.3 million for the year ending 2012. Net interest margin decreased slightly from 5.2% for 2012 to 5.1% for 2013.

Non-interest income increased $4.0 million in 2013, which included an increase of $2.0 million in gain on sale of loans and an increase of $1.9 million in Trust management fees.

Non-interest expense increased $2.4 million in 2013, which included an increase of $1.0 million in salaries and employee benefits and $954,000 increase in Trust consulting fees.

The Company recorded a provision for loan losses of $1.2 million for the year ended December 31, 2013 compared to a credit of $168,000 in 2012. The Company had net charge-offs of $218,000 for the year ended December 31, 2013 and net recoveries of $154,000 for the year ended December 31, 2012.

Total assets at December 31, 2013 increased $30.1 million, or 26.3%, to $144.5 million, compared to $114.4 million at December 31, 2012. This increase was primarily due to an increase in commercial and SBA loans. Our loans held for investment increased $19.7 million, or 21.3%, to $112.3 million as of December 31, 2013, compared to $92.6 million as of December 31, 2012. At December 31, 2013, a receivable of $7.5 million was recorded for SBA loans that were sold as of December 31, 2013, but the sales proceeds were not received until January 2014.

Nonperforming assets increased 15.4%, from $1.3 million as of December 31, 2012 to $1.5 million as of December 31, 2013. Ratios of nonperforming assets as a percentage of total assets decreased from 1.16% at December 31, 2012 to 1.04% at December 31, 2013.

Recent Developments

At a regular meeting of the board of directors held on March 26, 2014, the Compensation Committee recommended, and the board approved, an amendment to the Amended and Restated Executive Employment Agreement, dated March 28, 2013, by and between T Bancshares, Inc., T Bank N.A., and Patrick Howard. The amendment increases Mr. Howard's base salary from $170,000 annually to $212,500 annually. No other terms or conditions of Mr. Howard's employment agreement were amended or modified. The amendment is effective April 1, 2014.

Critical Accounting Policies

The Company's financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Company must use its best judgment to arrive at the carrying value of certain assets. The following accounting policies are identified by management as being critical to the results of operations:

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required by considering the collectability of loans based on historical experience and the borrower's ability to repay, the nature and volume of the portfolio, information about specific borrower situations and the estimated value of any underlying collateral, economic conditions and other factors. The allowance consists of general and specific reserves. The specific component relates to loans that are individually evaluated and determined to be impaired. This evaluation is often based on significant estimates and assumptions due to the level of subjectivity and judgment necessary to account for highly uncertain matters of the susceptibility of such matters to change. The general component relates to the entire group of loans that are evaluated in the aggregate based primarily on industry historical loss experience adjusted for current economic factors. To the extent actual loan losses differ materially from management's estimate of these subjective factors, loan growth/run-off accelerates, or the mix of loan types changes, the level of the provision for loan loss, and related allowance can, and will, fluctuate. As of December 31, 2013, the allowance for loan losses was $2.3 million, which represented approximately 2.05% of total loans.

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Securities available for sale

Securities available for sale are evaluated periodically to determine whether a decline in their value is other than temporary. The term "other than temporary" is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security.

The initial indication of other than temporary impairment ("OTTI") for both debt and equity securities is a decline in the market value below the amount recorded for an investment, and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, our intent to sell the investment, and if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. For marketable equity securities, we also consider the issuer's financial condition, capital strength, and near-term prospects. For debt securities and for perpetual preferred securities that are treated as debt securities for the purpose of OTTI analysis, we also consider the cause of the price decline (general level of interest rates and industry- and issuer-specific factors), the issuer's financial condition, near-term prospects and current ability to make future payments in a timely manner, the issuer's ability to service debt, and any change in agencies' ratings at evaluation date from acquisition date and any likely imminent action. Once a decline in value is determined to be other than temporary, the security is segmented into credit- and noncredit-related components. Any impairment adjustment due to identified credit-related components is recorded as an adjustment to current period earnings, while noncredit-related fair value adjustments are recorded through other comprehensive income. In situations where we intend to sell or it is more likely than not that we will be required to sell the security, the entire OTTI loss must be recognized in earnings.

Income taxes

Deferred tax assets and liabilities are the expected future tax amounts for the temporary difference between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Prior to 2013, the Company has provided a 100% valuation allowance for its net deferred tax asset due to the Company's recent net operating loss history. No valuation allowance for deferred tax assets was recorded at December 31, 2013, 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 for the years ended December 31, 2013 and 2012. Positions taken by the Company in preparing the consolidated federal tax return are subject to the review of the Internal Revenue Service or to reinterpretation based on management's ongoing assessment of facts and evolving case law, and as such, positions taken by management could result in a material adjustment to the financial statements.

Periodically and in the ordinary course of business, we are involved in inquiries and reviews by tax authorities that normally require management to provide supplemental information to support certain tax positions we take in our tax returns. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Management believes it has taken appropriate positions on its tax returns, although the ultimate outcome of any tax review cannot be predicted with certainty. Still, the final outcome of these matters may be different than what is reflected in the current and historical financial statements.

Loan income recognition

Interest income on loans is accrued at the contractual rate based on the principal outstanding. Loan origination fees are deferred and amortized as a yield adjustment over the contractual loan terms. Accrual of interest is discontinued when its receipt is in doubt, which typically occurs when a loan becomes impaired. Any interest accrued to income in the year when interest accruals are discontinued is generally reversed. Management may elect to continue the accrual of interest when a loan is in the process of collection and the estimated fair value of the collateral is sufficient to satisfy the principal balance and accrued interest. Loans are returned to accrual status once the doubt concerning collectability has been removed and the borrower has demonstrated the ability to pay and remain current. Payments on nonaccrual loans are generally applied to principal.

Real estate acquired through foreclosure

We record foreclosed real estate assets at the lower of cost or estimated fair value on the acquisition date and at the lower of such initial amount or estimated fair value less estimated selling costs thereafter. Estimated fair value is based upon many subjective factors, including location and condition of the property and current economic conditions, among other things. Because the calculation of fair value relies on estimates and judgments relating to inherently uncertain events, results may differ from our estimates.

Table of Contents

Write-downs on foreclosed real estate assets at the time of transfer are made through the allowance for loan losses. Write-downs subsequent to transfer are included in our noninterest expenses, along with operating income, net of related expenses of such properties and gains or losses realized upon disposition.

Stock based compensation

The fair value of the Company's employee stock options is estimated at the date of grant using the Modified Black-Scholes-Merton option pricing model. In calculating the fair value of the options, management makes assumptions regarding the risk-free rate of return, the expected volatility of our common stock and the expected life of the options.

For the years ended December 31, 2013 and 2012, we recorded expense of $9,000 and $27,000, respectively, for outstanding option grants.

Fair value of financial instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Recent Accounting Pronouncements

Please refer to Note 1 of the accompanying Consolidated Financial Statements for information related to the adoption of new accounting standards and the effect of newly issued but not yet effective accounting standards.

Financial Condition

Investment Securities

The primary purpose of the Bank's investment portfolio is to provide a source of earnings for liquidity management purposes, to provide collateral to pledge against borrowings, and to control interest rate risk. In managing the portfolio, the Bank seeks to attain the objectives of safety of principal, liquidity, diversification, and maximized return on investment.

At December 31, 2013, securities available for sale consisted of U.S. government agencies and mortgage-backed securities guaranteed by U.S. government agencies. The Company has no securities held to maturity. Restricted securities consisted of Federal Reserve Bank of Dallas ("FRB") stock, having an amortized cost and fair value of $528,000, and Federal Home Loan Bank of Dallas ("FHLB") stock, having an amortized cost and fair value of $702,000. The weighted average yield for the securities was 2.36% at December 31, 2013.

At December 31, 2012, securities available for sale consisted of U.S. government agencies and mortgage-backed securities guaranteed by U.S. government agencies. The Company has no securities held to maturity. Restricted securities consisted of FRB stock, having an amortized cost and fair value of $459,000, FHLB stock, having an amortized cost and fair value of $665,000. The weighted average yield for the securities was 2.65% at December 31, 2012.

Table of Contents

The following presents the amortized cost and fair values of the securities portfolio at December 31, 2013 and 2012:

                                                           As of December 31,
                                                  2013                             2012
                                       Amortized       Estimated        Amortized       Estimated
(000's)                                  Cost          Fair Value         Cost          Fair Value
Securities available for sale:
U.S. government agencies              $     5,865     $      5,652     $     5,955     $      6,127
Mortgage-backed securities                  3,711            3,619           3,236            3,450
Securities, restricted:
Other                                       1,230            1,230           1,124            1,124
Total                                 $    10,806     $     10,501     $    10,315     $     10,701

The following tables summarize the maturity distribution schedule with corresponding weighted-average yields of securities available for sale as of December 31, 2013. Yields are calculated based on amortized cost. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Other securities classified as restricted include stock in the FRB and the FHLB, which have no maturity date. These securities have been included in the total column only and are not included in the total yield.

                                                               After One Year            After Five Years
                                        One Year                   Through                   Through                    After
                                        or Less                  Five Years                 Ten Years                 Ten Years                 Total
(000's), except percentages       Amount        Yield        Amount        Yield        Amount        Yield      Amount       Yield       Amount       Yield
Securities available for sale:
U.S. government agencies         $       -            - %   $      -            - %   $    5,014        2.32 %   $   851        3.99 %   $  5,865        2.57 %
Mortgage-backed securities               -            -          512         2.00              -           -       3,199        2.37        3,711        2.32
Securities, restricted:
Other                                    -            -            -            -              -           -           -           -        1,230           -
Total                            $       -            - %   $    512         2.00 %   $    5,014        2.32 %   $ 4,050        2.71 %   $ 10,806        2.53 %

Loan Portfolio Composition

Commercial and industrial loans comprise the largest group of loans in our portfolio amounting to $76.4 million, or 66.1% of the total loan portfolio, at December 31, 2013, which is up from $66.4 million, or 70.4% of the total loan portfolio, at December 31, 2012. Commercial real estate loans comprise the second largest group of loans in the portfolio. At December 31, 2013, commercial real estate loans totaled $24.1 million, or 20.8% of the total loan portfolio, compared to $25.2 million, or 26.7%, at year end in prior year. The following table sets forth the composition of our loan portfolio:

                                                    As of December 31,
(000's)                                       2013                      2012
Commercial and industrial             $  76,445        66.1 %   $ 66,433        70.4 %
Consumer installment                      1,826         1.6 %        829         0.9 %
Real estate - mortgage                   18,310        15.8 %     19,881        21.1 %
Real estate - construction and land       5,756         5.0 %      5,296         5.6 %
SBA 7a unguaranteed portion               7,031         6.1 %        258         0.2 %
SBA 504                                   5,174         4.5 %      1,687         1.8 %
USDA                                      1,007         0.9 %          -           -
Other                                        10         0.0 %         12         0.0 %
                                        115,559       100.0 %     94,396       100.0 %
Allowance for loan losses                 2,318                    1,338
Deferred loan fees/costs                   (69)                       73
Discount on loans purchased               1,029                      429
                                      $ 112,281                 $ 92,556

Table of Contents

Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2013, our loan portfolio included $65.2 million of loans, approximately 56.4% of our total funded loans, to the dental industry, as compared to $63.8 million, or 67.9% of total funded loans, at December 31, 2012. We believe that these loans are to credit worthy borrowers and are diversified geographically. As new loans are generated to replace loans which have paid off or reduced balances as a result of payments, the percentage of the total loan portfolio creating the foregoing concentration may remain constant thereby continuing the risk associated with industry concentration.

As of December 31, 2013, 26.1% of the loan portfolio consisting of commercial, consumer and real estate loans, or $30.1 million, matures or re-prices within one year or less. The following table presents the contractual maturity ranges for commercial, consumer and real estate loans outstanding at December 31, 2013 and 2012, and also presents for each maturity range the portion of loans that have fixed interest rates or variable interest rates over the life of the loan in accordance with changes in the interest rate environment as represented by the base rate:

                                                           As of December 31, 2013
                                     Over 1 Year through 5 Years                   Over 5 Years
                                                       Floating or                           Floating or
                  One Year or                           Adjustable                            Adjustable
(000's)              Less           Fixed Rate             Rate            Fixed Rate            Rate             Total
Commercial and   $       6,239      $      12,886       $      17,129      $      38,112      $       2,079     $     76,445
Consumer                 1,502                324                   -                  -                  -            1,826
Real estate -            5,666              5,381               3,002              2,485              1,776           18,310
Real estate -            4,598                363                 795                  -                  -            5,756
and land
SBA 7a                   6,949                  -                   -                 82                  -            7,031
SBA 504                  5,174                  -                   -                  -                  -            5,174
USDA                         -                  -               1,007                  -                  -            1,007
Other                       10                  -                   -                  -                  -               10
Total            $      30,138      $      18,954       $      21,933      $      40,679      $       3,855     $    115,559

                                                         As of December 31, 2012
                                     Over 1 Year through 5 Years                  Over 5 Years
                                                       Floating or                          Floating or
                  One Year or                           Adjustable                          Adjustable
(000's)              Less           Fixed Rate             Rate           Fixed Rate           Rate             Total
Commercial and   $       4,809      $       9,898       $      20,088      $     29,517      $      2,121     $    66,433
Consumer                   320                443                   -                66                 -             829
Real estate -            5,128              6,490               5,288               454             2,521          19,881
Real estate -            4,417                218                 661                 -                 -           5,296
and land
SBA 7a                     258                  -                   -                 -                 -             258
SBA 504                  1,687                  -                   -                 -                 -           1,687
Other                       12                  -                   -                 -                 -              12
Total            $      16,631      $      17,049       $      26,037      $     30,037      $      4,642     $    94,396

Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is less than their average contractual terms due to prepayments.

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Nonperforming Assets

Our primary business is making commercial, real estate, and consumer loans. That activity entails potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond our control. While we have instituted underwriting guidelines and policies and credit review procedures to protect us from avoidable credit losses, some losses will inevitably occur.

Non-performing assets include non-accrual loans, loans 90 days past due and . . .

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