UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the
transition period from
to
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Commission
file number 000-51281
Tennessee
Commerce Bancorp, Inc.
(Exact name of registrant as specified in its
charter)
Tennessee
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62-1815881
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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381 Mallory Station Road,
Suite 207, Franklin,
Tennessee
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37067
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(Address of principal executive offices)
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(Zip Code)
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Registrants
telephone number, including area code
(615)
599-2274
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock, $0.50 par value per
share
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NASDAQ Global Market
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(Title of each class)
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(Name of each exchange of
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which registered)
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Securities
registered pursuant to Section 12(g) of the Act:
Indicate
by check mark if the registrant is a well-known, seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
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No
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Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act. Yes
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No
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Indicate
by check mark whether registrant (1) has filed reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
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No
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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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 definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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(Do not check if a
smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
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No
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The
aggregate market value of the registrants voting stock held by non-affiliates
of the registrant at June 30, 2007 was $96.5 million, based upon the
average sale price on that date.
As of March 14,
2008, there were 4,731,696 shares of the registrants common stock outstanding.
Documents Incorporated by Reference:
Part III
information is incorporated herein by reference, pursuant to Instruction G of Form 10-K,
to registrants Definitive Proxy Statement for its 2008 Annual Meeting of
shareholders to be held on June 25, 2008, which will be filed with the
Commission no later than April 29, 2008 (the Proxy Statement). Certain Part II
information required by Form 10-K is incorporated by reference to the
registrants Annual Report to Shareholders, but the Annual Report to
Shareholders shall not be deemed filed with the Commission.
PART I
ITEM 1.
BUSINESS
General
Tennessee Commerce Bancorp, Inc. (the Corporation or we or us)
is a bank holding company formed as a Tennessee corporation to own the shares
of Tennessee Commerce Bank (the Bank). The Bank commenced operations January 14,
2000, and is a full service financial institution located in Franklin,
Tennessee, 15 miles south of Nashville. Franklin is in Williamson County, one
of the most affluent and rapidly growing counties in the nation and the Bank
conducts business from a single location in the Cool Springs commercial area of
Franklin. The Bank had total assets at December 31, 2007 of $900 million.
Although the Bank offers a full range of banking services and products, it
operates with a focused Business Bank strategy. The Business Bank
strategy emphasizes banking services for small- to medium-sized businesses,
entrepreneurs and professionals in the local market. The Bank competes by
combining the personal service and appeal of a community bank institution with
the sophistication and flexibility of a larger bank. This strategy
distinguishes the Bank from its competitors in efforts to attract loans and
deposits of local businesses. In addition, the Bank accesses a national market
through a network of financial service companies and vendor partners that
provide indirect funding opportunities for the Bank nationwide.
The Bank does not compete based on the traditional definition of convenience
and does not have a branch network for that purpose. Business is conducted from
a single office with no teller line, drive-through window or extended banking
hours. The Bank competes by providing responsive and personalized service
to meet customer needs. Convenience is created by technology and by a
free courier service which transports deposits directly from the local business
location to the Bank. The Bank provides free electronic banking and cash
management tools and on-site training for business customers. The Bank
competes for local consumer business by providing superior products, attractive
deposit rates, free Internet Banking services and access to a third party
regional automated teller machine (ATM) network. The Bank targets service,
manufacturing and professional customers and avoids retail businesses with high
transaction volume.
The Bank offers a full range of competitive retail and commercial
banking services. The deposit services offered include various types of
checking accounts, savings accounts, money market investment accounts,
certificates of deposits and retirement accounts. Lending services
include consumer installment loans, various types of mortgage loans, personal
lines of credit, home equity loans, credit cards, real estate construction
loans, commercial loans to small-and-medium size businesses and professionals,
and letters of credit. The Bank issues VISA credit cards and is a merchant
depository for cardholder drafts under VISA credit cards. The Bank also
offers check cards and debit cards. The Bank offers its local customers
courier services, access to third-party ATMs and state of the art electronic
banking. The Bank has trust powers but does not have a trust department.
The Business Bank strategy is evident in differences between the
financial statements of the Bank and more traditional financial
institutions. The Business Bank model creates a high degree of
leverage. By avoiding the investment and maintenance costs of a typical
branch network, the Bank is able to maintain earning assets at a higher level
than peer institutions. Management targets a minimum earning asset ratio
of 97% compared to the average of 90 to 92% for all banks insured by the
Federal Deposit Insurance Corporation (FDIC). Assets of the Bank are centered
in the loan portfolio which consists primarily of commercial and industrial
loans. Management targets a loan mix of 60% commercial loans and 40% real
estate. At December 31, 2007, the composition of the $794 million
loan portfolio was 60.14% commercial, 36.50% secured by real estate (both
commercial and consumer) and 0.50% in consumer and credit card loans.
The Bank offers a full range of loan products to local consumers and
businesses. Consumer products include secured and unsecured lines of
credit, term loans and credit cards. Loans secured by real estate include
construction and acquisition loans in the form of 1
st
and 2
nd
mortgage term loans and home equity lines.
The Bank specializes in lending to businesses. Customized business loans
include lines of credit and term loans secured by accounts receivable,
inventory, equipment, and real estate. Commercial real estate products
include acquisition and construction loans for business properties and term
loan financing of commercial real estate.
1
In addition to lending in the local marketplace, the Bank generates
assets in the national market by providing collateral-based loans to business
borrowers located in other states through two types of indirect funding programs.
In both programs, the transactions are originated by a third party, such as an
equipment vendor or financial services company, who provides the Bank with a
borrowers financial information and arranges for a borrowers execution of
loan documentation. The Bank funds these transactions earning strong yields and
has no servicing expense or residual risk in any transaction originated by
these financial service companies and vendors. The Bank has management and
personnel who are experienced in this type of transaction and are able to
evaluate and partner effectively with the companies who originate these
transactions. All indirect funding is secured by the business asset financed,
and is subject to the Banks minimum credit score and documentation
standards. These national market transactions provide geographic and
collateral diversity for the portfolio and represent approximately 35.72% of
the total loan portfolio at December 31, 2007.
The two national market funding programs fund different size loans
through two different networks. In the first type, the Bank uses an established
network of financial service companies and vendor partners that provide the
Bank funding opportunities to national middle-market and investment grade
companies. At December 31, 2007, the average size of this type of loan in
the loan portfolio was $289,000 and earned an average yield of 7.91%. Funding
under this program represents approximately 16.44% of the $794 million total
loan portfolio. In the second program, the Bank partners with a second
network of financial service companies and vendors located in Tennessee,
Alabama, Georgia, California and Michigan. This program is for smaller
transactions. These loans that finance business assets are less than $125,000
at origination. Management has installed a standardized credit approval process
that delivers quick responsive service. At December 31, 2007, the average
size of this type of loan in the loan portfolio was $45,000, and the average
yield on these loans was 8.75%. Funding under this program represents
approximately 19.28% of the $794 million total loan portfolio.
Management believes the Business Bank model is highly efficient.
The Bank targets the non-retail sector of the commercial market, which is
characterized by lower levels of transactions and processing costs. The
commercial customer mix and the strategic outsourcing of certain administrative
functions, such as data processing, allow the Bank to operate with a smaller,
more highly trained staff. Management targets an average asset per
employee ratio of $7.5 million compared to the average of less than $3.4
million in assets per employee for Tennessee state-chartered banks at the end
of September 30, 2007, as reported by SNL. The Bank also promotes the use
of technology, both internally and externally, to maximize the efficiency of
operations. Management targets an operating efficiency ratio (total
operating expense divided by total revenue) of 40% to 45%.
The Bank is subject to the regulatory authority of the Department of
Financial Institutions of the State of Tennessee (TDFI) and the FDIC.
The Banks principal executive offices are located at 381 Mallory
Station Road, Suite 207, Franklin, Tennessee 37067, and its telephone
number is (615) 599-2274.
We were incorporated on March 22, 2000, for the purpose of
acquiring 100% of the shares of the Bank by means of a share exchange, and
becoming a registered bank holding company under the Federal Reserve Act.
The share exchange was completed on May 31, 2000. The activities of
the Corporation are subject to the supervision of the Board of Governors of the
Federal Reserve System (Federal Reserve Board). Our offices are the
same as the principal office of the Bank. On March 29, 2005, we
formed a wholly owned subsidiary, Tennessee Commerce Bank Statutory Trust I
(the Trust). The Bank and the Trust are our only subsidiaries. At this time,
we have no plans to conduct any business apart from the activities of the Bank.
The Bank commenced operations as a Tennessee state chartered bank on January 14,
2000, and is headquartered in Franklin, Tennessee.
Market
Area and Competition
All phases of the Banks business are highly competitive. The
Bank is subject to intense competition from various financial institutions and
other companies or firms that offer financial services. The Bank competes
for deposits with other commercial banks, savings and loan associations, credit
unions and issuers of commercial paper and other securities, such as
money-market and mutual funds. In making loans, the Bank is expected to
compete with other commercial banks, savings and loan associations, consumer
finance companies, credit unions, leasing companies and other lenders.
2
The Banks primary market area is Davidson County and Williamson County
in Tennessee. In Davidson County, as of June 30, 2007, there were 25
banks and no savings and loan institutions, with at least 205 offices actively
engaged in banking activities, including eight major state-wide financial
institutions, according to SNL. Total deposits held by banks in Davidson
County as of June 30, 2007, were approximately $16.7 billion. In
Williamson County, as of June 30, 2007, there were 22 banks and two
savings and loan institutions, with at least 83 offices actively engaged in
banking activities, including eight major state-wide financial
institutions. Total deposits held by banks and savings and loan
associations in Williamson County as of June 30, 2007, were approximately
$4.6 billion, according to SNL. In addition, there are numerous credit
unions, finance companies, and other financial services providers.
Demographic information published by SNL Financial shows a total
estimated population of 164,410 for Williamson County in 2007, which is a
29.83% increase from 126,638 in 2000. The estimated number of households in the
county in 2007 was 58,965, up from 44,725 in 2000, averaging 2.79 persons per
household. In 2007, the median household income was $88,854, while per capita
income was $44,942. At the end of 2007, the unemployment rate was 3.6%.
Demographic information published by SNL Financial shows an estimated
population of 599,512 for Davidson County in 2007, which is a 5.2% increase
over the population of 569,891 in 2000. The estimated number of households in
the county in 2007 was 253,891, averaging 2.36 persons per household. In 2007,
the median household income was $51,811, while per capita income was
$30,129. At the end of 2007, the unemployment rate was 4.1%.
Employees
At December 31, 2007, the Corporation employed no persons and the
Bank employed 64 persons on a full-time basis. The Banks employees are not
represented by any union or other collective bargaining agreement and
management of the Bank believes its employee relations are satisfactory.
Supervision
and Regulation
Bank
Holding Company Regulation
We are a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the Holding Company Act), and are registered
with the Federal Reserve Board. Our banking subsidiary is subject to
restrictions under federal law which limit the transfer of funds by the Bank to
the Corporation, whether in the form of loans, extensions of credit,
investments or asset purchases. Such transfers by any subsidiary bank to
its holding company or any non-banking subsidiary are limited in amount to 10%
of the subsidiary banks capital and surplus and, with respect to the
Corporation and the Bank, to an aggregate of 20% of the Banks capital and
surplus. Furthermore, such loans and extensions of credit are required to
be secured in specified amounts. The Holding Company Act also prohibits,
subject to certain exceptions, a bank holding company from engaging in or
acquiring direct or indirect control of more than 5% of the voting stock of any
company engaged in non-banking activities. An exception to this
prohibition is for activities expressly found by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto or financial in nature.
As a bank holding company, we are required to file with the Federal
Reserve Board semiannual reports and such additional information as the Federal
Reserve Board may require. The Federal Reserve Board also makes
examinations of us at its discretion.
According to Federal Reserve Board policy, bank holding companies are
expected to act as a source of financial strength to each subsidiary bank and
to commit resources to support each such subsidiary. This support may be
required at times when a bank holding company may not be able to provide such
support. Furthermore, in the event of a loss suffered or anticipated by
the FDIC either as a result of default of our banking subsidiary or related
to FDIC assistance provided to a subsidiary in danger of default our banking
subsidiary may be assessed for the FDICs loss, subject to certain exceptions.
3
Various federal and state statutory provisions limit the amount of
dividends the subsidiary banks can pay to their holding companies without
regulatory approval. The payment of dividends by any bank also may be
affected by other factors, such as the maintenance of adequate capital for such
subsidiary bank. In addition to the foregoing restrictions, the Federal
Reserve Board has the power to prohibit dividends by bank holding companies if
their actions constitute unsafe or unsound practices. The Federal Reserve
Board has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the Federal Reserve Boards view that a bank
holding company experiencing earnings weaknesses should not pay cash dividends
that exceed its net income or that could only be funded in ways that weaken the
bank holding companys financial health, such as by borrowing. Furthermore,
the TDFI also has authority to prohibit the payment of dividends by a Tennessee
bank when it determines such payment to be an unsafe and unsound banking
practice.
A bank holding company and its subsidiaries are also prohibited from
acquiring any voting shares of, or interest in, any banks located outside of
the state in which the operations of the bank holding companys subsidiaries
are located, unless the acquisition is specifically authorized by the statutes
of the state in which the target is located. Further, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with the extension of credit or provision of any
property or service. Thus, an affiliate of a bank holding company may not
extend credit, lease or sell property, or furnish any services or fix or vary
the consideration for these on the condition that (i) the customer must
obtain or provide some additional credit, property or services from or to its
bank holding company or subsidiaries thereof or (ii) the customer may not
obtain some other credit, property or services from a competitor, except to the
extent reasonable conditions are imposed to assure the soundness of the credit
extended.
In approving acquisitions by bank holding companies of banks and
companies engaged in the banking-related activities described above, the
Federal Reserve Board considers a number of factors, including the expected
benefits to the public such as greater convenience, increased competition, or
gains in efficiency, as weighed against the risks of possible adverse effects
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest, or unsound banking practices. The Federal Reserve
Board is also empowered to differentiate between new activities and activities
commenced through the acquisition of a going concern.
The Attorney General of the United States may, within 30 days after
approval by the Federal Reserve Board of an acquisition, bring an action
challenging such acquisition under the federal antitrust laws, in which case
the effectiveness of such approval is stayed pending a final ruling by the
courts. Failure of the Attorney General to challenge an acquisition does
not, however, exempt the holding company from complying with both state and
federal antitrust laws after the acquisition is consummated or immunize the
acquisition from future challenge under the anti-monopolization provisions of
the Sherman Act.
Bank Regulation
The Bank is a Tennessee state-chartered bank and is subject to the
regulations of and supervision by the FDIC as well as the Commissioner of the
TDFI (the Commissioner), Tennessees state banking authority. The Bank
is also subject to various requirements and restrictions under federal and
state law, including without limitation restrictions on permitted activities,
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon and limitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and
regulations also affect the operations of the Bank. In addition to the
impact of regulation, commercial banks are affected significantly by the
actions of the Federal Reserve Board as it attempts to control the money supply
and credit availability in order to influence the economy.
The FDIC and the Commissioner periodically conduct examinations of the
Bank. If, as a result of an examination
of the Bank, the FDIC determines that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other
aspects of the Banks operations are unsatisfactory or that the Bank or its
management is violating or has violated any law or regulation, various remedies
are available to the FDIC. Such remedies include the power to enjoin unsafe
or unsound practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order that
can be judicially enforced, to direct an increase in capital, to restrict the
growth of the Bank, to assess civil monetary penalties, to remove officers and
directors and ultimately to terminate a Banks deposit insurance. The
Commissioner has many of the same remedial powers, including the power to take
possession of a bank whose capital becomes impaired. As of December 31,
2007, the Bank was not the subject of any such action by the FDIC or the
Commissioner.
The deposits of the Bank are insured by the FDIC in the manner and to
the extent provided by law. For this protection, the Bank pays a
semiannual statutory assessment.
4
Although the Bank is not a member of the Federal Reserve System, it is
nevertheless subject to certain regulations of the Federal Reserve Board.
Tennessee law contains limitations on the interest rates that may be
charged on various types of loans and restrictions on the nature and amount of
loans that may be granted and on the types of investments that may be
made. The operations of banks are also affected by various consumer laws
and regulations, including those relating to equal credit opportunity and
regulation of consumer lending practices. All Tennessee banks must become
and remain insured banks under the Federal Deposit Insurance Act (the FDIA).
Capital Requirements
The Federal Reserve Board has risk-based capital requirements for bank
holding companies and member banks, and the FDIC adopted risk-based capital
requirements for banks and bank holding companies effective after December 31,
1990. The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
to account for off-balance sheet exposure and to minimize disincentives for
holding liquid assets. 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. The guidelines require all federally
regulated banks to maintain a minimum risk-based total capital ratio of 8%, of
which at least 4% must be Tier I Capital (as defined below). Under the guidelines, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
items, such as standby letters of credit) is 8%. To be considered a well
capitalized bank or bank holding company under the guidelines, a bank or bank
holding company must have a total risk based capital ratio in excess of 10% (in
addition to meeting other requirements).
At least half of the total capital of a bank is to be comprised of
common equity, retained earnings and a limited amount of perpetual preferred
stock, after subtracting goodwill and certain other adjustments (Tier I
Capital). The remainder may consist of perpetual debt, mandatory
convertible debt securities, a limited amount of subordinated debt, other
preferred stock not qualifying for Tier I Capital and a limited amount of loan
loss reserves (Tier II Capital). Under the risk-based capital
requirements, total capital consists of Tier I Capital, which is generally
common shareholders equity less goodwill, and Tier II Capital, which is
primarily a portion of the allowance for loan losses and certain qualifying
debt instruments. In determining risk-based capital requirements, assets
are assigned risk-weights of 0% to 100%, depending primarily on the regulatory
assigned levels of credit risk associated with such assets. Off-balance
sheet items are considered in the calculation of risk-adjusted assets through
conversion factors established by the regulators. The framework for
calculating risk-based capital requires banks and bank holding companies to
meet the regulatory minimums of 4% Tier I Capital and 8% total risk-based
capital.
The Federal Reserve Board and the FDIC have adopted a minimum leverage
ratio of 3%. Generally, banking organizations are expected to operate
well above the minimum required capital level of 3% unless they meet certain
specified criteria, including having the highest regulatory ratings. Most
banking organizations are required to maintain a leverage ratio of 3%, plus an
additional cushion of at least 1% to 2%. State regulatory authorities and
the FDIC encourage most community banks to maintain a leverage ratio of 6.5% to
7.0%. The FDIC has a regulation requiring certain banking organizations to
maintain additional capital of 1% to 2% above a 3% minimum Tier I leverage
capital ratio (ratio of Tier I Capital, less intangible assets, to total
assets). In order for an institution to operate at or near the minimum
Tier I leverage capital requirement of 3%, the FDIC expects that such institution
would have well-diversified risk, no undue rate risk exposure, excellent asset
quality, high liquidity and good earnings. In general, the Bank would
have to be considered a strong banking organization, rated in the highest
category under the bank rating system and have no significant plans for
expansion. Higher Tier I leverage capital ratios of up to 5% will
generally be required if all of the above characteristics are not exhibited or
if the institution is undertaking expansion, seeking to engage in new
activities or otherwise faces unusual or abnormal risks. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance upon intangible assets. The Banks Tier I leverage capital ratio at December 31,
2007 was 8.75%.
5
Under the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 (FIRREA), failure to meet the capital guidelines could subject a
banking institution to a variety of enforcement remedies available to federal
regulatory authorities, including the termination of deposit insurance by the
FDIC. Institutions not in compliance
with the capital guidelines are expected to be operating in compliance with a
capital plan or agreement with the regulator. If they do not do so, they
are deemed to be engaging in an unsafe and unsound practice and may be subject to
enforcement action. In addition, failure by an institution to maintain
capital of at least 2% of assets constitutes an unsafe and unsound practice and
may subject the institution to enforcement action. An institutions
failure to maintain capital of at least 2% of assets constitutes an unsafe and
unsound condition justifying termination of FDIC insurance.
In
1999, the Basel Committee on Banking Supervision (Basel Committee) launched
its efforts to develop an improved capital adequacy framework by issuing its
proposals to revise the 1988 Basel Capital Accord. In June 2004, the Basel Committee issued
its final framework. The new capital
framework (Basel II) consists of minimum capital requirements, a supervisory
review process and the effective use of market discipline. Basel II seeks to ensure that a banks
capital position is consistent with its overall risk profile and strategy,
encourages early supervisory intervention when a banks capital position
deteriorates and calls for detailed disclosure of a banks capital adequacy and
how it evaluates its own capital adequacy.
In September 2006,
the U.S. regulators published a revised Notice of Proposed Rulemaking (NPR)
for Basel II. The Final Rule on
Advanced Capital Adequacy FrameworkBasel II (the Final Rule), has been
approved by all regulatory agencies and took effect on April 1, 2008. The
Final Rule currently applies only to certain core banks with total assets
of $250 billion or more, but allows non-core banks to opt in. Under the Final Rule, the Bank is considered
to be a non-core bank. For those non-core banks that do not opt in, a NPR was
issued in December 2006, known as Basel IA, which proposed certain
revisions to the current Basel I capital rules.
The
agencies are currently developing a NPR that would provide non-core banks the
option of adopting the Standardized Approach of the Basel II Framework. The Basel II Standardized NPR is expected to
replace the Basel IA NPR.
Payment of Dividends
The
Corporation is a legal entity separate and distinct from its banking and other
subsidiaries. The principal source of
cash flow of the Company, including cash flow to pay dividends on its stock or
principal (premium, if any) and interest on debt securities, is dividends from
the Bank. There are state and federal
statutory and regulatory limitations on the payment of dividends by the Bank to
the Company, as well as by the Company to its shareholders.
Under the FDIA, the Bank may not make any capital distributions
(including the payment of dividends) or pay any management fees to its holding
company or pay any dividend if it is undercapitalized or if such payment would
cause it to become undercapitalized. In
addition, the Bank is restricted from paying dividends under certain
circumstance by the Tennessee Banking Act. The payment of dividends by any bank
is dependent upon its earnings and financial condition and subject to the
statutory power of certain federal and state regulatory agencies to act to
prevent what they deem unsafe or unsound banking practices. The payment
of dividends could, depending upon the financial condition of the Bank, be
deemed to constitute such an unsafe or unsound banking practice. Under
Tennessee law, the board of directors of a state bank may not declare dividends
in any calendar year that exceeds the total of its retained net income of the
preceding two (2) years without the prior approval of the TDFI. The
FDIA prohibits a state bank, the deposits of which are insured by the FDIC,
from paying dividends if it is in default in the payment of any assessments due
the FDIC. The Bank is also subject to the minimum capital requirements of
the FDIC which impact the Banks ability to pay dividends. If the Bank
fails to meet these standards, it may not be able to pay dividends or to accept
additional deposits because of regulatory requirements.
If, in
the opinion of the FDIC or the Federal Reserve Board, a depository institution
or a holding company is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the depository
institution or holding company, could include the payment of dividends), such
authority may require that such institution or holding company cease and desist
from such practice. The FDIC and the Federal
Reserve Board have indicated that paying dividends that deplete a depository
institutions or holding companys capital base to an inadequate level would be
such an unsafe and unsound banking practice. Moreover, the Federal Reserve
Board and the FDIC have issued policy statements which provide that bank
holding companies and insured depository institutions generally should only pay
dividends out of current operating earnings.
6
Under Tennessee law, the Corporation is not permitted to pay dividends
if, after giving effect to such payment, it would not be able to pay its debts
as they become due in the usual course of business or the Corporations total
assets would be less than the sum of its total liabilities plus any amounts
needed to satisfy any preferential rights if the Corporation was
dissolving. In addition, in deciding
whether or not to declare a dividend of any particular size, the Corporations
Board must consider the Corporations current and prospective capital,
liquidity, and other needs.
The payment of dividends by the Corporation and the Bank may also be
affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines and debt covenants.
FIRREA
FIRREA provides that a depository institution insured by the FDIC can
be held liable for any loss incurred by, or reasonably expected to be incurred
by, the FDIC after August 9, 1989 in connection with (i) the default
of a commonly controlled FDIC-insured depository institution or (ii) any
assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default. FIRREA provides that certain
types of persons affiliated with financial institutions can be fined by the
federal regulatory agency having jurisdiction over a depository institution
with federal deposit insurance (such as the Bank) up to $1 million per day for
each violation of certain regulations related (primarily) to lending to and
transactions with executive officers, directors, principal shareholders and the
interests of these individuals. Other violations may result in civil
money penalties of $5,000 to $30,000 per day or in criminal fines and
penalties. In addition, the FDIC has been granted enhanced authority to
withdraw or to suspend deposit insurance in certain cases.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires, among other things, the federal banking regulators to take prompt
corrective action in respect of FDIC-insured depository institutions that do
not meet minimum capital requirements. FDICIA establishes five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. Under applicable
regulations, a FDIC-insured depository institution is well capitalized if it
maintains a Leverage Ratio of at least 5%, a risk adjusted Tier 1 Capital Ratio
of at least 6% and a Total Capital Ratio of at least 10% and is not subject to
a directive, order or written agreement to meet and maintain specific capital
levels. An insured depository institution is adequately capitalized if it
meets all of the minimum capital requirements as described above. In
addition, an insured depository institution will be considered undercapitalized
if it fails to meet any minimum required measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to maintain a level of tangible equity equal to
not less than 2% of total assets. An insured depository institution may
be deemed to be in a capitalization category that is lower than is indicated by
its actual capital position if it receives an unsatisfactory examination rating.
The capital-based prompt corrective action provisions of FDICIA and
their implementing regulations apply to FDIC-insured depository institutions
and are not directly applicable to holding companies that control such
institutions. However, the Federal Reserve Board has indicated that, in
regulating bank holding companies, it will take appropriate action at the
holding company level based on an assessment of the effectiveness of
supervisory actions imposed upon subsidiary depository institutions pursuant to
such provisions and regulations.
Undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve System. In addition, undercapitalized
depository institutions are subject to growth limitations and are required to
submit capital restoration plans. A depository institutions holding
company must guarantee the capital plan, up to an amount equal to the lesser of
5% of the depository institutions assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institutions capital. If a depository institution fails to
submit an acceptable plan, it is treated as if it is significantly
undercapitalized.
7
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to
reduce total assets and cessation of receipt of deposits from correspondent
banks. Critically undercapitalized depository institutions are subject to
appointment of a receiver or conservator generally within 90 days of the date
on which they became critically undercapitalized.
FDICIA contains numerous other provisions, including accounting, audit
and reporting requirements, termination of the too big to fail doctrine
except in special cases, limitations on the FDICs payment of deposits at
foreign branches, new regulatory standards in such areas as asset quality,
earnings and compensation and revised regulatory standards for, among other
things, powers of state banks, real estate lending and capital adequacy.
FDICIA also requires that a depository institution provide 90 days prior notice
of the closing of any branches.
Riegle-Neal Interstate Banking and Branching Efficiency Act
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(Interstate Act), among other things and subject to certain conditions and
exceptions, permits on an interstate basis (i) bank holding company
acquisitions commencing one year after enactment of banks of a minimum age of
up to five years as established by state law in any state, (ii) mergers of
national and state banks after May 31, 1997 unless the home state of
either bank has opted out of the interstate bank merger provision, (iii) branching
de novo by national and state banks if the host state has opted-in to this
provision of the Interstate Act, and (iv) certain bank agency activities
after one year after enactment. The Interstate Act contains a 30%
intrastate deposit cap, except for the initial acquisition in the state,
restriction that applies to certain interstate acquisitions unless a different
intrastate cap has been adopted by the applicable state pursuant to the provisions
of the Interstate Act and a 10% national deposit cap restriction.
Tennessee has opted-in to the Interstate Act. Management cannot predict
the extent to which the business of the Bank may be affected by the Interstate
Act. Tennessee has also adopted legislation allowing banks to acquire
branches across state lines subject to certain conditions, including the
availability of similar legislation in the other state.
Brokered Deposits and Pass-Through Insurance
The FDIC has adopted regulations under FDICIA governing the receipt of
brokered deposits and pass-through insurance. Under the regulations, a
bank cannot accept or rollover or renew brokered deposits unless (i) it is
well capitalized or (ii) it is adequately capitalized and receives a
waiver from the FDIC. A bank that cannot receive brokered deposits also
cannot offer pass-through insurance on certain employee benefit
accounts. Whether or not it has obtained such a waiver, an adequately
capitalized bank may not pay an interest rate on any deposits in excess of 75
basis points over certain index prevailing market rates specified by
regulation. There are no such restrictions on a bank that is well
capitalized. Because it believes that the Bank was well capitalized as of
December 31, 2007, management of the Bank believes the brokered deposits
regulation will have no material effect on the funding or liquidity of the
Bank.
FDIC Insurance Premiums
The Bank is required to pay semiannual FDIC deposit insurance
assessments to the Deposit Insurance Fund (DIF). The FDIC merged the
Bank Insurance Fund and the Savings Association Insurance Fund to form the DIF
on March 31, 2006 in accordance with the Federal Deposit Insurance Reform
Act of 2005. The FDIC maintains the DIF by assessing depository institutions
an insurance premium. The amount each institution is assessed is based
upon statutory factors that include the balance of insured deposits as well as
the degree of risk the institution poses to the insurance fund. The FDIC
uses a risk-based premium system that assesses higher rates on those
institutions that pose greater risks to the DIF.
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.
8
Gramm-Leach-Bliley
Act
The Gramm-Leach-Bliley Act of 1999 (the GLBA) ratified new powers for
banks and bank holding companies, especially in the areas of securities and
insurance. The GLBA also includes requirements regarding the privacy and
protection of customer information held by financial institutions, as well as
many other providers of financial services. There are provisions
providing for functional regulation of the various services provided by
institutions among different regulators. There are other provisions which
limit the future expansion of unitary thrift holding companies. Finally,
among many other sections of the GLBA, there is some relief for small banks
from the regulatory burden of the Community Reinvestment Act. The regulatory
agencies have been adopting many new regulations to implement the GLBA.
USA
Patriot Act
The Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act)
contains the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the IMLAFA). The IMLAFA substantially
broadened existing anti-money laundering legislation and the extraterritorial
jurisdiction of the United States, imposed new compliance and due diligence
obligations, created new crimes and penalties, compelled the production of
documents located both inside and outside the United States, including those of
foreign institutions that have a correspondent relationship in the United
States, and clarified the safe harbor from civil liability to customers.
The U.S. Treasury Department has issued a number of regulations implementing
the USA Patriot Act that apply certain of its requirements to financial
institutions such as our banking subsidiary. The regulations imposed new
obligations on financial institutions to maintain appropriate policies,
procedures and controls to detect, prevent and report money laundering and
terrorist financing. The Treasury Department is expected to issue a
number of additional regulations which will further clarify the USA Patriot Acts
requirements.
The IMLAFA required all financial institutions, as defined therein,
to establish anti-money laundering compliance and due diligence programs no
later than April 2003. Such programs must include, among other
things, adequate policies, the designation of a compliance officer, employee
training programs, and an independent audit function to review and test the
program. The Bank has established anti-money laundering compliance and
due diligence programs which management believes comply with the IMLAFA.
Depositor
Preference
The Omnibus Budget Reconciliation Act of 1993 provides that deposits
and certain claims for administrative expenses and employee compensation
against an insured depositary institution would be afforded a priority over
other general unsecured claims against such an institution, including federal
funds and letters of credit, in the liquidation or other resolution of such
an institution by any receiver.
Effect
of Governmental Policies
The Company and the Bank are affected by the policies of regulatory
authorities, including the Federal Reserve System. An important function
of the Federal Reserve System is to regulate the national money supply.
Among the instruments of monetary policy used by the Federal Reserve are: (i) purchases
and sales of U.S. Government securities in the marketplace; (ii) changes
in the discount rate, which is the rate any depository institution must pay to
borrow from the Federal Reserve; (iii) and changes in the reserve
requirements of depository institutions. These instruments are effective
in influencing economic and monetary growth, interest rate levels and
inflation.
The monetary policies of the Federal Reserve System and other
governmental policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future. Because of changing conditions in the national economy and in the
money market, as well as the result of actions by monetary and fiscal
authorities, it is not possible to predict with certainty future changes in
interest rates, deposit levels, loan demand or the business and earnings of the
Bank or whether the changing economic conditions will have a positive or
negative effect on operations and earnings.
9
Bills are pending before the United States Congress and the Tennessee
General Assembly and proposed regulations are pending before the various state
and federal regulatory agencies that could affect the business of the Company
and the Bank, and there are indications that other similar bills and proposed
regulations may be introduced in the future. It cannot be predicted
whether or in what form any of these or future proposals will be adopted or the
extent to which the business of the Company and the Bank may be affected
thereby.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 represents a comprehensive revision of
laws affecting corporate governance, accounting obligations and corporate
reporting. The Sarbanes-Oxley Act is applicable to all companies with equity
securities registered, or that file reports, under the Securities Exchange Act
of 1934, as amended. In particular, the act established (i) requirements
for audit committees, including independence, expertise and responsibilities; (ii) responsibilities
regarding financial statements for the chief executive officer and chief
financial officer of the reporting company and new requirements for them to
certify the accuracy of periodic reports; (iii) standards for auditors and
regulation of audits; (iv) disclosure and reporting obligations for the
reporting company and its directors and executive officers; and (v) civil
and criminal penalties for violations of the federal securities laws. The
legislation also established a new accounting oversight board to enforce
auditing standards and restrict the scope of services that accounting firms may
provide to their public company audit clients.
Availability of Information
We file periodic reports with the SEC. The SEC maintains an internet
website, www.sec.gov, that contains reports, proxy and information statements,
and other information regarding us that we file electronically with the
SEC. The Corporation makes its annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports available free of charge on the Banks website at
www.tncommercebank.com under the Investor Relations heading.
ITEM 1A.
RISK FACTORS
Changes in interest rates could
adversely affect our results of operations and financial condition.
Changes in interest rates may affect our level of interest income,
the primary component of our gross revenue, as well as the level of our
interest expense. Interest rates are highly sensitive to many factors that are
beyond our control, including general economic conditions and the policies of
various governmental and regulatory authorities. Accordingly, changes in
interest rates could decrease our net interest income. Changes in the
level of interest rates also may negatively affect our ability to
originate loans, the value of our assets and our ability to realize gains from
the sale of our assets, all of which ultimately affects our earnings.
Our business is subject to the
success of the local economies where we operate.
Our success significantly depends upon the growth in population, income
levels, deposits and new businesses in the Nashville MSA and our other market
areas. If the communities in which we operate do not grow or if prevailing
economic conditions locally or nationally are unfavorable, our business
may not succeed. Adverse economic conditions in our specific market areas
could reduce our growth rate, affect the ability of our customers to repay
their loans to us and generally affect our financial condition and results of
operations. Moreover, we cannot give any assurance that we will benefit from
any market growth or favorable economic conditions in our primary market areas
if they do occur.
Our business strategy includes the
continuation of growth plans, and our financial condition and results of
operations could be negatively affected if our business strategies are not
effectively executed.
We intend to continue pursuing a growth strategy for our business
through organic growth of the loan portfolio. Our prospects must be considered
in light of the risks, expenses and difficulties that can be encountered by
financial service companies in rapid growth stages, which include the risks
associated with the following:
10
·
maintaining loan quality;
·
maintaining adequate management personnel and
information systems to oversee such growth;
·
maintaining adequate control and compliance
functions; and
·
securing capital and liquidity needed to
support our anticipated growth.
There can be no assurance that we will maintain or achieve deposit
levels, loan balances or other operating results necessary to avoid losses or
produce profits. Our growth will cause growth in overhead expenses as we
routinely add staff. As a result, historical results may not be indicative
of future results. Failure to successfully address these issues identified above
could have a material adverse effect on our business, future prospects,
financial condition or results of operations.
We rely heavily on the services of
key personnel.
We depend substantially on the strategies and management services of
our executive officers Arthur F. Helf, Chairman and Chief Executive Officer,
Michael R. Sapp, President, George W. Fort, Chief Financial Officer, and H.
Lamar Cox, Chief Administrative Officer and acting Chief Financial Officer. The
loss of the services of any of these executive officers could have a material
adverse effect on our business, results of operations and financial condition.
We are also dependent on certain other key officers who have important customer
relationships or are instrumental to our operations. Changes in key personnel
and their responsibilities may be disruptive to our business and could
have a material adverse effect on our business, financial condition and results
of operations. We believe that our future results will also depend in
part upon our attracting and retaining highly skilled and qualified
management, as well as sales and marketing personnel. Competition for such
personnel is intense, and we cannot assure you that we will be successful in
attracting or retaining such personnel.
National market funding outside of
the Nashville MSA has different risks.
Approximately 35.72% of our loan portfolio is composed of national
market funding loans to non-Middle Tennessee businesses referred to us by a
small network of equipment vendors and financial service companies. These loans
account for approximately 32.72% and 32.04%, respectively, of the increase in
total loans at December 31, 2007 and 2006, over the prior year. This
lending causes us to have somewhat different risks than those typical for community
banks generally. Our loan portfolio is more geographically diverse, and as a
result the loan collateral is also more widely dispersed geographically. This
may result in longer time periods to locate collateral and higher costs to
dispose of collateral in the event that the collateral is used to satisfy the
loan obligation. This part of our portfolio also provides geographic risk
diversification by reducing the adverse impact of a regional downturn in the
economy.
Our ability to attract deposits may
restrict growth.
We derive a substantial portion of our deposits through internet-based
wholesale funding alternatives. In the event that we were no longer able to
sell our deposits easily to institutional and retail investors, our ability to
fund our loan portfolio could be adversely affected. We post rates to an
internet-based program that retail and institutional investors nationwide
subscribe to in order to invest funds. Our wholesale funding portfolio is
therefore geographically dispersed and generally made up of deposits in FDIC
insured amounts of $100,000 or less.
An inadequate allowance for loan
losses would reduce our earnings.
The risk of credit losses on loans varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the value and marketability of the collateral for the loan. Management
maintains an allowance for loan losses based upon, among other things, historical
experience, an evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Based upon such factors, management
makes various assumptions and judgments about the ultimate collectability of
the loan portfolio and provides an allowance for loan losses based upon a
percentage of the outstanding balances and takes a charge against earnings with
respect to specific loans when their ultimate collectability is considered
questionable. If managements assumptions and judgments prove to be incorrect
and the allowance for loan losses is inadequate to absorb losses, or if the
bank regulatory authorities require us to increase the allowance for loan
losses as a part of their examination process, our earnings and capital
could be significantly and adversely affected.
11
Our ability to maintain adequate
capital may restrict our activities.
Our continued pace of growth may require us to raise additional capital
in the future, but that capital may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain
adequate levels of capital to support our operations, so we may at some point
need to raise additional capital to support any continued growth.
Our ability to raise additional capital, if needed, will depend on
conditions in the capital markets at that time, which are outside our control,
and on our financial performance. Accordingly, we cannot assure our
shareholders that we will be able to raise additional capital if needed on
terms acceptable to us. If we cannot raise additional capital when needed, our
ability to continue our growth could be materially impaired.
Competition from financial
institutions and other financial service providers may adversely affect
our profitability.
The banking business is highly competitive and we experience
competition in our markets from many other financial institutions. We
compete with commercial banks, credit unions, savings and loan associations,
mortgage banking firms, consumer finance companies, securities brokerage firms,
insurance companies, money market funds, and other mutual funds, as well as
other community banks and super-regional and national financial institutions
that operate in the Nashville MSA and elsewhere. We not only compete with
these companies in the Nashville MSA, but also in the regional and national
markets in which we engage in our indirect funding programs.
Additionally, in the Nashville MSA, we face competition from de novo
community banks, including those with senior management who were previously
affiliated with other local or regional banks or those controlled by investor
groups with strong local business and community ties. These de novo community
banks may offer higher deposit rates or lower cost loans in an effort to
attract our customers, and may attempt to hire our management and
employees.
We compete with these other financial institutions both in attracting
deposits and in making loans. In addition, we have to attract our customer base
in the Nashville MSA from consumers with an existing relationship with other
financial institutions and from new residents. We expect competition to
increase in the future as a result of legislative, regulatory and technological
changes and the continuing trend of consolidation in the financial services
industry. Our profitability depends upon our continued ability to successfully
compete with an array of financial institutions in the Nashville MSA and
regionally and nationally with respect to our indirect funding programs.
Liquidity needs could adversely
affect our results of operations and financial condition.
The primary source of our funds is customer deposits and loan
repayments. While scheduled loan repayments are a relatively stable source of
funds, they are subject to the ability of borrowers to repay the loans. The
ability of borrowers to repay loans can be adversely affected by a number of
factors, including changes in general economic conditions, adverse trends or events
affecting business industry groups, reductions in real estate values or
markets, business closings or lay-offs, inclement weather, natural disasters
and international instability. Additionally, deposit levels may be
affected by a number of factors, including rates paid by competitors, general
interest rate levels, returns available to customers on alternative investments
and general economic conditions. Accordingly, we may be required from time
to time to rely on secondary sources of liquidity to meet withdrawal demands or
otherwise fund operations. These sources include Federal Home Loan Bank
advances and federal funds lines of credit from correspondent banks. While our
management believes that these sources are currently adequate, there can be no
assurance they will be sufficient to meet future liquidity demands. We
may be required to slow or discontinue loan growth, capital expenditures
or other investments or liquidate assets should these sources not be adequate.
12
We are subject to extensive
regulation that could limit or restrict our activities.
We operate in a highly regulated industry and are subject to
examination, supervision and comprehensive regulation by various federal and
state agencies including the Federal Reserve Board, the FDIC and the TDFI. Our
regulatory compliance is costly and restricts certain of our activities,
including payment of dividends, mergers and acquisitions, investments, loans
and interest rates charged, and interest rates paid on deposits. We are also
subject to capitalization guidelines established by our regulators, which
require us to maintain adequate capital to support our growth.
The laws and regulations applicable to the banking industry could
change at any time, and we cannot predict the effects of these changes on our
business and profitability. Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding
companies, our cost of compliance could adversely affect our ability to operate
profitably.
The Sarbanes-Oxley Act of 2002, and the related rules and
regulations promulgated by the Securities and Exchange Commission and The
NASDAQ Stock Market that are applicable to us, have increased the scope, complexity
and cost of our corporate governance, reporting and disclosure practices. As a
result, we have experienced, and may continue to experience, greater
compliance costs.
Our ability to continue to engage
in and grow our national market funding programs depends on stable business
relationships.
Our ability to continue to grow the national market funding portion of
our portfolio is dependent upon our retaining those members of our senior
management and those loan officers who have experience and relationships with
those equipment vendors and financial services companies who originate the
underlying lease transactions. In the event that any of these members of senior
management, particularly President Mike Sapp, were to terminate his or her
employment with us, or in the event that our relationships with any of these
vendor/brokers were to be discontinued, our ability to continue to increase our
national market funding portfolio could be adversely affected.
Material fluctuations in
non-interest income may occur.
A substantial portion of our non-interest income is derived from the
sale of loans, particularly loans generated for our national market funding
portfolio. The timing and extent of these loan sales may not be predictable,
and could cause material variation in our non-interest income on a quarter to
quarter basis.
The success and growth of our
business will depend on our ability to adapt to technological changes.
The banking industry and the ability to deliver financial services is
becoming more dependent on technological advancement, such as the ability to
process loan applications over the Internet, accept electronic signatures,
provide process status updates instantly and offer on-line banking capabilities
and other customer expected conveniences that are cost efficient to our
business processes. As these technologies are improved in the future, we may,
in order to remain competitive, be required to make significant capital
expenditures.
We could sustain losses if our
asset quality declines.
Our earnings are affected by our ability to properly originate,
underwrite and service loans. We could sustain losses if we incorrectly
assess the creditworthiness of our borrowers or fail to detect or respond to
deterioration in asset quality in a timely manner. Problems with asset
quality could cause our interest income and net interest margin to decrease and
our provision for loan losses to increase, which could adversely affect our
results of operations and financial condition.
We may issue additional common stock or other equity
securities in the future which could dilute the ownership interest of existing
shareholders.
In order to maintain our capital at desired levels or required
regulatory levels, or to fund future growth, our board of directors may decide
from time to time to issue additional shares of common stock, or securities
convertible into, exchangeable for or representing rights to acquire shares of
our common stock. The sale of these securities may significantly dilute
our shareholders ownership interest as a shareholder and the market price of
our common stock. New investors of other equity securities issued by us in the
future may also have rights, preferences and privileges senior to our
current shareholders which may adversely impact our current shareholders.
13
Holders of our subordinated debentures have rights that are
senior to those of our common shareholders.
In 2005, we supported our continued growth through the issuance of
trust preferred securities from an affiliated special purpose trust and
accompanying subordinated debentures. At December 31, 2007, we had
outstanding trust preferred securities and accompanying subordinated debentures
totaling $8.2 million. Our board of directors may also decide to issue
additional tranches of trust preferred securities in the future. We
conditionally guarantee payments of the principal and interest on the trust
preferred securities. Further, the accompanying subordinated debentures we
issued to the trust are senior to our shares of common stock. As a result, we
must make payments on the subordinated debentures before any dividends can be
paid on our common stock and, in the event of our bankruptcy, dissolution or
liquidation, the holders of the subordinated debentures must be satisfied
before any distributions can be made on our common stock. We have the right to
defer distributions on our subordinated debentures (and the related trust
preferred securities) for up to five years (from the date of issuance) during
which time we may not pay dividends on our common stock.
Changes in monetary policy could
adversely affect operating results.
Like all regulated financial institutions, we are affected by monetary
policies implemented by the Federal Reserve Board and other federal
instrumentalities. A primary instrument of monetary policy employed by
the Federal Reserve Board is the restriction or expansion of the money supply
through open market operations. This instrument of monetary policy frequently
causes volatile fluctuations in interest rates, and it can have a direct,
adverse effect on the operating results of financial institutions.
Borrowings by the United States government to finance the government debt may
also cause fluctuations in interest rates and have similar effects on the
operating results of such institutions.
Our ability to declare and pay dividends on our common stock
is limited by law and we may be unable to pay future dividends.
We derive our income solely from dividends on the shares of common
stock of the bank. The banks ability to declare and pay dividends to us is
limited by its obligations to maintain sufficient capital and by other general
restrictions on its dividends that are applicable to banks that are regulated
by the FDIC and the TDFI. The Federal Reserve Board may also impose
restrictions on our ability to pay dividends on our common stock. In addition,
we must make payments on the subordinated debentures before any dividends can
be paid on our common stock, and we may not pay dividends while we are
deferring interest payments on our trust preferred securities and the related
subordinated debentures. As a result, we cannot assure our shareholders that we
will declare or pay dividends on shares of our common stock in the future.
Even though our common stock is currently traded on The
NASDAQ Global Market, the trading volume of our common stock has been low and
the sale of substantial amounts of our common stock in the public market could
depress the price of our common stock.
While we believe that because we are listed on The NASDAQ Global
Market, the trading volume of our common stock should increase, we cannot be
certain when a more active and liquid trading market for our common stock will
develop or be sustained. Because of this, our shareholders may not be able
to sell their shares at the volumes, prices or times that they desire.
We cannot predict the effect, if any, that future sales of our common
stock in the market, or availability of shares of our common stock for sale in
the market, will have on the market price of our common stock. We, therefore,
can give no assurance that sales of substantial amounts of our common stock in
the market, or the potential for large amounts of sales in the market, would
not cause the price of our common stock to decline or impair our ability to
raise capital through sales of our common stock.
14
The market price of our common stock may fluctuate in the future,
and these fluctuations may be unrelated to our performance. General market
price declines or overall market volatility in the future could adversely
affect the price of our common stock, and the current market price may not
be indicative of future market prices.
Our recent results may not be
indicative of our future results.
We may not be able to sustain our historical rate of growth or
may not even be able to grow our business at all. In addition, our recent
growth may distort some of our historical financial ratios and statistics.
In the future, we may not have the benefit of several recently favorable
factors, a strong local business environment, and relationships with an
extensive group of equipment vendors and financial services companies. Various
factors, such as economic conditions, regulatory and legislative considerations
and competition, may also impede or prohibit our ability to grow.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None
ITEM 2.
PROPERTIES
Our main office is located in Williamson County at 381 Mallory Station
Road, Suite 207, Franklin, Tennessee 37067, which is also the main office
of the Bank. This location is centrally located and in a high
traffic/exposure area. The Bank leases 32,711 square feet at a competitive rate
and the term of the lease expires in December 2017. The Bank
provides services throughout the community by use of a network of couriers,
third party ATMs and state-of-the-art electronic banking. The Bank also
operates a loan production office located in Jefferson County at One Chase
Corporate Center, Suite 400, Birmingham, Alabama 35244, where the Bank
leases 560 square feet at a competitive rate under the terms of a lease.
ITEM 3.
LEGAL PROCEEDINGS
To the best of our knowledge, there are no pending legal proceedings,
other than routine litigation incidental to the business, to which we or the
Bank is a party or of which any of our or the Banks property is the subject.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 2007 through the solicitation of proxies or otherwise.
15
PART II
ITEM 5.
MARKET FOR REGISTRANTS
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock has been listed on The NASDAQ Global Market since June 9,
2006. Before that date, it was traded on the Over-The-Counter Bulletin Board
from December 16, 2005, and prior to that time, it was not traded through
an organized exchange. The number of shareholders of record at March 14,
2008, was 411. The table below shows the quarterly range of high and low sale
prices for our common stock during the fiscal years 2007 and 2006. These sale prices
represent known transactions and do not necessarily represent all trading
transactions for the periods.
Year
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
2006:
|
|
First Quarter
|
|
$
|
25.00
|
|
$
|
19.00
|
|
|
|
Second Quarter
|
|
$
|
20.50
|
|
$
|
17.90
|
|
|
|
Third Quarter
|
|
$
|
22.23
|
|
$
|
15.91
|
|
|
|
Fourth Quarter
|
|
$
|
32.20
|
|
$
|
22.15
|
|
2007:
|
|
First Quarter
|
|
$
|
31.00
|
|
$
|
26.89
|
|
|
|
Second Quarter
|
|
$
|
30.00
|
|
$
|
23.52
|
|
|
|
Third Quarter
|
|
$
|
28.19
|
|
$
|
21.04
|
|
|
|
Fourth Quarter
|
|
$
|
27.10
|
|
$
|
19.75
|
|
Dividends
We have never declared or paid dividends on our common stock. Our
payment of cash dividends is subject to the discretion of our Board of
Directors and the Banks ability to pay dividends. The Banks ability to
pay dividends is restricted by applicable regulatory requirements. For more information
on these restrictions, please see PART I, ITEM 1 BUSINESS Supervision
and Regulation Payment of Dividends. No assurances can be given that
any dividend will be declared or, if declared, what the amount of such dividend
would be or whether such dividends would continue in the future.
Recent Sales of Unregistered Securities
At various times during 2007, options to purchase 272,522 shares of our
common stock were exercised by employees of the Bank, in 38 different
transactions, at exercise prices ranging from $5.00 to $16.00 per share for an
aggregate price of $2.1 million. We issued these shares of our common stock in
reliance upon the exemption from the registration requirements of the
Securities Act of 1933, as amended, as set forth in Section 4(2) under
the Securities Act and Rule 701 of Regulation D promulgated thereunder
relating to sales by an issuer not involving any public offering, to the extent
an exemption from such registration was required.
Purchases of Equity Securities by the Registrant and
Affiliated Purchasers
The Corporation made no repurchases of its equity securities, and no
Affiliated Purchasers (as defined in Rule 10b-18(a)(3) under the
Securities Exchange Act of 1934) purchased any shares of the Corporations
equity securities during the fourth quarter of the fiscal year ended December 31,
2007.
16
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31,
2007, 2006, 2005, 2004 and 2003 should be read in conjunction with the
financial statements included in Item 8:
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars in Thousands except share data)
|
|
Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
$
|
62,206
|
|
$
|
41,245
|
|
$
|
23,633
|
|
$
|
13,185
|
|
$
|
8,205
|
|
Total
interest expense
|
|
34,934
|
|
21,868
|
|
10,006
|
|
4,265
|
|
2,976
|
|
Net interest
income
|
|
27,272
|
|
19,377
|
|
13,627
|
|
8,920
|
|
5,229
|
|
Provision
for loan losses
|
|
(6,350
|
)
|
(4,350
|
)
|
(3,700
|
)
|
(2,420
|
)
|
(1,115
|
)
|
Net interest
income after provision for loan losses
|
|
20,922
|
|
15,027
|
|
9,927
|
|
6,500
|
|
4,114
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities gains
|
|
26
|
|
|
|
4
|
|
33
|
|
132
|
|
Gain on sale
of loans
|
|
2,687
|
|
2,025
|
|
1,106
|
|
504
|
|
|
|
Other income
|
|
167
|
|
(262
|
)
|
201
|
|
263
|
|
300
|
|
Non-interest
expense
|
|
(13,263
|
)
|
(9,056
|
)
|
(6,246
|
)
|
(4,552
|
)
|
(3,459
|
)
|
Income
before income taxes
|
|
10,539
|
|
7,734
|
|
4,992
|
|
2,748
|
|
1,087
|
|
Income tax
(expense) benefit
|
|
(3,643
|
)
|
(2,985
|
)
|
(1,925
|
)
|
(1,082
|
)
|
(188
|
)
|
Net income
|
|
$
|
6,896
|
|
$
|
4,749
|
|
$
|
3,067
|
|
$
|
1,666
|
|
$
|
899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data :
|
|
|
|
|
|
|
|
|
|
|
|
Net income,
basic
|
|
$
|
1.49
|
|
$
|
1.24
|
|
$
|
0.95
|
|
$
|
0.57
|
|
$
|
0.40
|
|
Net income,
diluted
|
|
$
|
1.41
|
|
$
|
1.14
|
|
$
|
0.87
|
|
$
|
0.53
|
|
$
|
0.38
|
|
Book value
|
|
$
|
13.36
|
|
$
|
11.51
|
|
$
|
8.16
|
|
$
|
7.29
|
|
$
|
5.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
900,153
|
|
$
|
623,518
|
|
$
|
404,040
|
|
$
|
245,917
|
|
$
|
156,075
|
|
Loans, net
|
|
784,001
|
|
538,550
|
|
344,187
|
|
213,326
|
|
133,187
|
|
Investments
|
|
73,753
|
|
56,943
|
|
31,992
|
|
18,690
|
|
12,978
|
|
Cash and due
from financial institutions
|
|
5,236
|
|
177
|
|
6,877
|
|
3,838
|
|
5,224
|
|
Federal
funds sold
|
|
9,573
|
|
13,820
|
|
12,535
|
|
6,582
|
|
2,498
|
|
Premises and
equipment, net
|
|
1,413
|
|
1,633
|
|
769
|
|
609
|
|
673
|
|
Deposits
|
|
815,053
|
|
560,567
|
|
367,705
|
|
221,394
|
|
142,293
|
|
Federal
funds purchased
|
|
2,000
|
|
|
|
|
|
|
|
|
|
Long term
debt
|
|
8,248
|
|
8,248
|
|
8,248
|
|
|
|
|
|
Other
liabilities
|
|
11,592
|
|
3,479
|
|
1,657
|
|
923
|
|
384
|
|
Shareholders
equity
|
|
63,121
|
|
51,224
|
|
26,430
|
|
23,600
|
|
13,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Overhead
ratio (1)
|
|
1.76
|
%
|
1.80
|
%
|
1.98
|
%
|
2.26
|
%
|
2.70
|
%
|
Efficiency
ratio (2)
|
|
43.99
|
%
|
42.84
|
%
|
41.81
|
%
|
46.83
|
%
|
61.11
|
%
|
Net yield on
earning assets
|
|
8.50
|
%
|
8.46
|
%
|
7.70
|
%
|
6.74
|
%
|
6.62
|
%
|
Cost of
funds
|
|
5.18
|
%
|
4.94
|
%
|
3.66
|
%
|
2.54
|
%
|
2.75
|
%
|
Net Interest
margin
|
|
3.72
|
%
|
3.98
|
%
|
4.44
|
%
|
4.56
|
%
|
4.22
|
%
|
Operating
expenses to average earning assets
|
|
1.81
|
%
|
1.86
|
%
|
2.03
|
%
|
2.33
|
%
|
2.79
|
%
|
Return on
average assets
|
|
0.91
|
%
|
0.95
|
%
|
0.97
|
%
|
0.83
|
%
|
0.70
|
%
|
Return on
average equity
|
|
12.13
|
%
|
12.68
|
%
|
12.29
|
%
|
8.92
|
%
|
8.00
|
%
|
Average
equity to average assets
|
|
7.53
|
%
|
7.46
|
%
|
7.90
|
%
|
9.28
|
%
|
8.78
|
%
|
Ratio of
nonperforming assets to average assets
|
|
1.14
|
%
|
0.94
|
%
|
1.40
|
%
|
1.90
|
%
|
1.99
|
%
|
Ratio of
allowance for loan losses to average assets
|
|
1.37
|
%
|
1.39
|
%
|
1.39
|
%
|
1.41
|
%
|
1.56
|
%
|
Ratio of
allowance for loan losses to nonperforming assets
|
|
119.94
|
%
|
146.91
|
%
|
99.43
|
%
|
74.45
|
%
|
78.59
|
%
|
(1) Operating
expenses divided by average assets.
(2) Operating
expenses divided by net interest income and noninterest income.
17
ITEM
7.
|
|
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|
Forward-Looking Statements
Certain
statements contained in this report may not be based on historical facts and
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements may be
identified by reference to a future period or by the use of forward-looking
terminology, such as expect, anticipate, believe, estimate, foresee, may,
might, will, intend, could, would, plan, forecast or future or
conditional verb tenses and variations or negatives of such terms. These
forward-looking statements include, without limitation, those relating to the
efficiency and efficacy of the business bank model, the conduct of business
apart from the activities of the Bank, competition, employee relations of the
Bank, legislative changes affecting banks or bank holding companies, the
payment of dividends, the Banks capitalization under FDICIA, the impact of the
Interstate Act on the Bank, brokered deposits regulation, FDIC insurance
premiums, monetary policies of the Federal Reserve System, liquidity, capital
adequacy and the Banks ability to raise additional capital, growth of our
market area, an acquisitive banking environment, our practice of competing for
loans based on superior service rather than lowest price, loan loss reserve,
loans classified as doubtful or substandard, allowance for loan losses,
non-interest income, revenue results from our mortgage unit, loan sales,
opportunities offered by Bank growth, the hiring of additional employees,
salaries and benefits expense, tax rates, earning asset to total asset ratio,
the cost of funds for local deposits, utilization of an electronic bulletin
board for funding in the wholesale deposit market, engagement of a deposit
broker, borrowers ability to repay loans, the impact of recent accounting
pronouncements, rate sensitivity gap analysis, economic value of equity,
maturities of debt securities, fair value of debt securities, unrecognized tax
benefits and the issuance of preferred stock. We caution you not to place undue
reliance on the forward-looking statements contained in this report because
actual results could differ materially from those indicated in such
forward-looking statements as a result of a variety of factors. These factors
include, but are not limited to, changes in economic conditions, competition
for loans, mortgages and other financial services and products, changes in
interest rates, concentrations within our loan portfolio, our ability to
maintain credit quality, the effectiveness of our risk monitoring systems,
changes in consumer preferences, the ability of our borrowers to repay loans,
the availability of and costs associated with maintaining and/or obtaining
adequate and timely sources of liquidity, changes in our operating strategy,
our ability to meet regulatory capital adequacy requirements, our ability to
collect amounts due under loan agreements and to attract deposits, our ability
to attract, train and retain qualified personnel, the geographic concentration
of our assets, our ability to operate and integrate new technology, our ability
to provide market competitive products and services, our ability to diversify
revenue, our ability to fund growth with lower cost liabilities, laws and
regulations affecting financial institutions in general and other factors
detailed from time to time in our press releases and filings with the
Securities and Exchange Commission. We undertake no obligation to update
these forward-looking statements to reflect the occurrence of changes or
unanticipated events, circumstances or results that occur after the date of
this report.
Overview
(Dollars in thousands except share data in the remainder of
this Item 7.)
The results of operations for the year 2007 compared to 2006 reflected
a 45.21% increase in net income and a 23.68% increase in diluted earnings per share.
The increase in earnings resulted primarily from a 40.74% increase in net
interest income because of higher average loan balances. The net interest
margin for 2007 was 3.72%. The increased revenue was partially offset by
increases in non-interest expense and the provision for loan losses. The
year 2007 reflected a continuation of the Banks trend of rapid asset
growth. The asset growth was a result of the strength of the Middle
Tennessee economy and the success of our Business Bank operating strategy.
Our growth in assets was a result of growth in the market area and
effective marketing. The improvement in results including net income and
earnings per share was a result of the business focus of the Bank. From 2000 to
2007, the Banks market area experienced explosive growth. In Williamson
County, demographic information shows a 31.84% growth in the number of
households from 2000 to 2007. Estimates from SNL show that by 2012 the
number of households will have grown by another 20.63%. Although estimates of
growth are not guaranteed and actual growth may be affected by factors beyond
our control, management believes that the projected growth of our market area
will positively impact the Banks future growth.
18
The Bank has also grown by marketing to business owners that have been
left without a long standing banking relationship. The Middle Tennessee area
has experienced several bank mergers or acquisitions in the last ten years
resulting in the termination of many long standing relationships. These
acquisitions also resulted in loan funding decisions being made out-of-state,
creating unpredictability for local lending personnel and uncertainty for local
businesses. The Bank has taken advantage of this uncertainty by offering loans
at a fair rate and funded locally in a timely manner. Management believes the
competitive advantage created by this environment will continue to positively
impact results from operations.
The Business Bank operating strategy has enabled management to focus on
managing results. Rather than focusing on building a multi-branch
infrastructure including hiring and construction of buildings, management
focuses on managing net interest margin aggressively and controlling non-interest
expense. This has resulted in a 11.85% decrease in the net interest margin from
2003 to 2007. Non-interest expense is controlled by efficiently staffing the
Banks operations. In 2007, that resulted in $14,060 in assets per employee at
year end. Management believes that the Business Bank operating strategy will
continue to be an effective model in the future.
Changes in Results of Operations
Net Income
- Net income for 2007 was $6,896, an
increase of $2,147, or 45.21%, compared to the $4,749 earned in 2006. The
increase was attributable to a 40.74% increase in net interest income from
$19,377 in 2006 to $27,272 in 2007. The increase of $7,895 in net interest
income was the result of higher average loan balances. Non-interest income
increased by $1,117, from $1,763 to $2,880, or 63.36%, primarily a result of
gains on loan sales. These positive effects were partially offset by a 45.98%
increase in the provision for loan losses, from $4,350 in 2006 to $6,350 in
2007, and an increase of $4,207 in non-interest expense, up 46.46% to $13,263
in 2007 compared to $9,056 in 2006. The increase in the provision for loan
losses was the result of funding the loan loss reserve to match the growth in
the loan portfolio and loan charge-offs. The increase in non-interest expense
was a result of the increase in personnel and general operating expenses
attributable to the Corporations growth.
Net income for 2006 was $4,749, an increase of $1,682, or 54.84%,
compared to the $3,067 earned in 2005. The increase was attributable to a
42.20% increase in net interest income from $13,627 in 2005 to $19,377 in
2006. The increase of $5,750 in net interest income was the result of
higher average loan balances. Non-interest income increased by $452, from
$1,311 to $1,763, or 34.48%, primarily as a result of to gains on loan
sales. These positive effects were partially offset by a 17.57% increase
in the provision for loan losses, from $3,700 in 2005 to $4,350 in 2006 and an
increase of $2,810 in non-interest expense, up 44.99% to $9,056 in 2006
compared to $6,246 in 2005. The increase in the provision for loan losses
was the result of funding the loan loss reserve to match the growth in the loan
portfolio and loan charge-offs. The increase in non-interest expense was
a result of the increase in personnel and general operating expenses
attributable to the Corporations growth.
Net Interest Income
- The primary source of earnings for the
Bank is net interest income, which is the difference between the interest
earned on interest earning assets and the interest paid on interest bearing
liabilities. The major factors which affect net interest income are
changes in volumes, the yield on earning assets and the cost of interest
bearing liabilities. Managements ability to respond to changes in
interest rates by effective asset-liability management techniques is critical
to maintaining the stability of the net interest margin and the momentum of the
Banks primary source of earnings.
In mid-2004, the Federal Reserve Open Market Committee (FOMC) began a
series of increases in short-term interest rates. By year-end 2007, the
FOMC had increased rates by 300 basis points. During 2007, $20,656 of our net
loan growth occurred in floating rate construction loans and approximately
14.63% of the $141,156 increase in commercial loans was related to floating
rate transactions. Management expects to continue its practice of competing for
loans based on providing superior service rather than the lowest price.
Net interest income for 2007 was $27,272 compared to $19,377, a gain of
$7,895 or 40.74%. The increase in net interest income was largely attributable
to strong loan growth. Net loans increased from $538,550 at December 31,
2006 to $784,001 at December 31, 2007, an increase of $245,451 or 45.58%. Net interest income was favorably impacted by
the increase in the Banks indirect funding program for small transactions.
These loans, which are purchased at a minimum rate of 8%, increased from
$113,400 at year-end 2006 to $153,100 at the end of 2007. The loan growth was
matched by an increase in deposits from $560,567 at December 31, 2006 to
$815,053 in 2007, an increase of $254,486 or 45.40%.
19
Net interest income for 2006 was $19,377 compared to $13,627 in 2005, a
gain of $5,750 or 42.20%. The increase in net interest income was largely
attributable to strong loan growth. Net loans increased from $344,187 at December 31,
2005 to $538,550 at December 31, 2006 an increase of $194,363 or 56.47%.
Net interest income was favorably impacted by the expansion of the Banks
indirect funding program for small transactions. These loans, which are
purchased at a minimum rate of 8%, increased from $87,000 at year-end 2005 to
$113,400 at the end of 2006. This high yielding portfolio was a key
component in the stability and strength of net interest income. The loan
growth was matched by an increase in deposits from $367,705 at December 31,
2005 to $560,567 in 2006 an increase of $192,862 or 52.45%.
Investments
- The Bank views the investment
portfolio as a source of income and liquidity. Managements investment strategy
is to accept a lower immediate yield in the investment portfolio by targeting
shorter term investments. The Banks investment policy requires a
minimum portfolio level equal to 7.00% of total assets and a maximum portfolio
level of 20.00% of total assets. Management has maintained the portfolio
at the lower end of the policy guidelines with the portfolio at 8.19%, 9.13%
and 7.91% of total assets at year-end in 2007, 2006 and 2005, respectively.
The investment portfolio at December 31, 2007 was $73,753 compared
to $56,943 at year-end 2006. The interest earned on investments rose from
$2,216 in 2006 to $3,492 in 2007, as a result of higher average portfolio
balances as well as increased yields. The average yield on the investment
portfolio investments rose from 4.91% in 2006 to 5.43% in 2007, or 52 basis
points.
The investment portfolio at December 31, 2006 was $56,943,
compared to $31,992 at year-end 2005. The average yield on the investment
portfolio was 4.91% in 2006 compared to 4.19% in 2005.
Net Interest Margin Analysis
- The net interest margin is impacted by
the average volumes of interest sensitive assets and interest sensitive
liabilities and by the difference between the yield on interest sensitive
assets and the cost of interest sensitive liabilities (spread). Loan fees
collected at origination represent an additional adjustment to the yield on
loans. The Banks spread can be affected by economic conditions, the
competitive environment, loan demand and deposit flows. The net yield on
earning assets is an indicator of the effectiveness of a banks ability to
manage the net interest margin by managing the overall yield on assets and the
cost of funding those assets.
The two factors that make up the spread are the interest rates received
on loans and the interest rates paid on deposits. The Bank has been disciplined
in raising interest rates on deposits only as the market demands and thereby
managing the cost of funds. Also, the Bank has not competed for new loans on
interest rate alone but has relied on effective marketing to business
customers. Business customers are not influenced by interest rates alone but
are influenced by other factors such as timely funding.
The net interest margin declined from 3.98% in 2006 to 3.72% in 2007
because the cost of funds rose faster than the yield on earning assets during
2007. Interest income increased by $20,961, or 50.82%, from $41,245 in 2006 to
$62,206 in 2007. The increase was primarily a result of increased loan volume.
Average earning assets increased from $486,668 in 2006 to $731,749 in 2007, an
increase of $245,081 or 50.36%. The increase in earning assets was a result of
loan growth. Average loans increased $228,024 or 53.25% from 2006 to 2007. The
average yield on earning assets increased from 8.46% in 2006 to 8.50% in 2007,
or 4 basis points. The increase in the Banks indirect funded small loan
portfolio favorably impacted the average yield on earning assets. The average
yield on this type of loan in 2007 was 8.75%. These loans increased 35.01% from
$113,400 at year-end 2006 to $153,100 at the end of 2007. Interest
expense increased from $21,868 in 2006 to $34,934 in 2007. The $13,066, or
59.75%, increase in expense was a result of increases in the volume of deposits
as well as an increase in the cost of funds. Average deposits increased from
$451,235 in 2006 to $685,063 in 2007, an increase of $233,828 or 51.82%. The
cost of funds increased from 4.94% in 2006 to 5.18% in 2007, or 24 basis
points.
20
The net interest margin declined from 4.44% in 2005 to 3.98% in 2006
because of the cost of funds rose faster than the yield on earning assets
during 2006. Interest income increased by $17,612, or 74.52%, from
$23,633 in 2005 to $41,245 in 2006. The increase was primarily a result
of increased loan volume. Average earning assets increased from $306,765
in 2005 to $486,668 in 2006, an increase of $179,903 or 58.65%. The
increase in earning assets was a result of loan growth. Average loans increased
$150,365 or 54.12%. The average yield on earning assets increased from
7.70% in 2005 to 8.46% in 2006, or 76 basis points. The net interest margin was
favorably impacted by the expansion of the Banks indirect funded small loan
portfolio. These loans increased from $87,100
at
year-end 2005 to $113,400 at the end of 2006. This high yielding
portfolio is a key component in the strength of the net interest margin.
Interest expense increased from $21,868 in 2006 to $34,934 in
2007. The $13,066, or 59.75%, increase in expense was a result of
increases in the volume of deposits as well as interest rates. Average interest
bearing deposits increased from $432,910 in 2006 to $663,816 in 2007, an
increase of $230,906 or 53.34%. Additionally, the cost of funds increased from
4.94% in 2006 to 5.18% in 2007.
Interest expense increased from $10,006 in 2005 to $21,868 in
2006. The $11,862, or 118.55%, increase in expense was a result of
increases in the volume of deposits. Average interest bearing
deposits increased from $266,214 in 2005 to $432,910 in 2006, an increase of
$166,696 or 62.62%. Despite the fact that rates started increasing in the
last half of 2006, management was aggressive in lowering interest rates on
savings accounts and other products during the year. As a result, the
cost of funds increased from 3.66% in 2005 to 4.94% in 2006, an increase of 128
basis points. The local deposit market is highly competitive and rates tend to
lead national averages. The Bank partially offsets the higher cost of
local deposits by acquisition of wholesale funding in the national market.
Provision for Loan Losses
- Management assesses the adequacy of
the allowance for loan losses with a combination of qualitative and
quantitative factors. At inception, each loan is assigned a risk rating
that ranges from RR1 to RR4. An RR1 assignment indicates a Superior
credit, RR2 represents an Excellent credit, RR3 represents an Above-Average
loan, and RR4 designates an Average credit. The assignment of a risk
rating is based on an evaluation of the credit risk in the transaction.
The evaluation includes consideration of the borrowers financial capacity,
collateral, cash flows, liquidity, and alternative sources of repayment.
If a loan deteriorates and the level of risk increases, management downgrades
the loan to RR5Watch, RR6Criticized, or RR7Substandard, depending on
the circumstances. A review by an independent accounting firm of the
assigned risk ratings is an integral part of the Banks external loan review
program.
Management reviews the loan portfolio regularly to determine if loans
should be placed on non-accrual for revenue recognition. If a loan is placed on
non-accrual, all interest earned since the last current payment is immediately
reversed. Loans may remain on non-accrual status until the underlying
collateral is repossessed and valued or until the amount of loss in the credit
can be reasonably determined. Once collateral is repossessed and
appraised, the collateral is recorded as a repossession at the lower of fair
value or the investment in the related loan. Any difference between the
estimated fair value of the collateral and the loan balance is charged
off. Variances in fair value estimates are recorded as a gain or loss on
sale when the collateral is sold. Non-accrual loans totaled $6,465,
$2,689 and $2,928 at year-end 2007, 2006 and 2005, respectively. These
amounts represented 0.82%, 0.50% and 0.85%, respectively, of net loans at the
end of each year.
Management uses the weighted average risk rating to monitor the overall
credit quality and trends in the loan portfolio. At December 31, 2007, the
weighted average risk rating of the $784,001 net loan portfolio was 3.56. At December 31,
2006, the weighted average risk rating of the $538,550 net loan portfolio was
3.56. The Board of Directors reviews the weighted average risk rating of
loans booked during the previous month. In addition, the Board reviews
all credits classified RR5 or higher monthly. Management closely monitors
other key loan quality indicators including delinquencies, changes in the
portfolio mix and general economic conditions. These actions provide a
degree of objectivity in assessing the risk in the portfolio and establishing
an adequate loan loss reserve. To the extent that actual and anticipated
losses differ, adjustments are made to the loan loss provision or to the level
of the allowance for loan losses. At December 31, 2007, the loan loss
reserve of $10,321 was 1.30% of gross loans of $794,322.
The provision for loan losses in 2007 was $6,350, an increase of
$2,000, or 45.98%, above the provision of $4,350 expensed in 2006. Of this
provision, $3,353, or 52.80%, was attributable to loan growth recorded during
2007. The remainder of the loan loss provision in 2007 funded net charge offs
of $2,997.
21
The provision for loan losses in 2006 was $4,350, an increase of $650,
or 17.57%, above the provision expensed in 2005. Of this provision,
$2,569, or 59.06%, was attributable to maintaining a general reserve for the
loan growth recorded during 2006. The remainder of the loan loss
provision in 2006 funded net charge offs of $1,781.
The Bank targets small and medium sized businesses as loan customers.
Because of their size, these borrowers may be less able to withstand
competitive or economic pressures than larger borrowers in periods of economic
weakness. If loan losses occur to a level where the loan loss reserve is not
sufficient to cover actual loan losses, the Banks earnings will decrease. The
Bank uses an independent accounting firm to review our loans quarterly for
quality in addition to the reviews that may be conducted by bank regulatory
agencies as part of their usual examination process.
The following table presents information regarding non-accrual, past
due and restructured loans at December 31, 2007, 2006, 2005, 2004 and
2003:
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual loans
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
130
|
|
60
|
|
46
|
|
17
|
|
12
|
|
Amount
|
|
$
|
6,465
|
|
$
|
2,689
|
|
$
|
2,928
|
|
$
|
2,161
|
|
$
|
1,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans which are contractually past due 90 days or more as to
principal and interest payments
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
44
|
|
18
|
|
9
|
|
4
|
|
6
|
|
Amount
|
|
$
|
1,992
|
|
$
|
940
|
|
$
|
352
|
|
$
|
111
|
|
$
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans defined as troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
1
|
|
3
|
|
3
|
|
2
|
|
1
|
|
Amount
|
|
$
|
148
|
|
$
|
1,114
|
|
$
|
1,144
|
|
$
|
1,544
|
|
$
|
1,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest income lost on the non-accrual loans
|
|
$
|
436
|
|
$
|
174
|
|
$
|
133
|
|
$
|
82
|
|
$
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income included in net income on the accruing loans
|
|
$
|
605
|
|
$
|
73
|
|
$
|
31
|
|
$
|
48
|
|
$
|
29
|
|
As of December 31,
2007, there were no loans classified for regulatory purposes as doubtful or
substandard that have not been disclosed in the above table, which (i) represent
or result from trends or uncertainties that management reasonably expects will
materially impact future operating results, liquidity, or capital resources, or
(ii) represent material credits about which management is aware of any
information which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
The Bank had no tax-exempt loans during the years ended December 31,
2007 and December 31, 2006. The Bank had no loans outstanding to
foreign borrowers at December 31, 2007 and December 31, 2006.
22
An analysis of the Banks loss experience is furnished in the following
table for December 31, 2007, 2006, 2005, 2004 and 2003, and the years then
ended:
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Allowance for loan losses at beginning of period
|
|
$
|
6,968
|
|
$
|
4,399
|
|
$
|
2,841
|
|
$
|
2,000
|
|
$
|
1,103
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
32
|
|
|
|
|
|
|
|
|
|
1 to 4 family residential
|
|
|
|
|
|
|
|
101
|
|
|
|
Other
|
|
|
|
|
|
|
|
131
|
|
|
|
Commercial, financial and agricultural
|
|
3,262
|
|
2,026
|
|
2,379
|
|
1,366
|
|
235
|
|
Consumer
|
|
16
|
|
11
|
|
32
|
|
57
|
|
48
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Total Charge-offs
|
|
3,310
|
|
2,037
|
|
2,411
|
|
1,655
|
|
283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
1 to 4 family residential
|
|
|
|
|
|
1
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
3
|
|
|
|
Commercial, financial and agricultural
|
|
313
|
|
234
|
|
245
|
|
68
|
|
64
|
|
Consumer
|
|
|
|
22
|
|
23
|
|
5
|
|
1
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Total Recoveries
|
|
313
|
|
256
|
|
269
|
|
76
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs
|
|
2,997
|
|
1,781
|
|
2,142
|
|
1,579
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses charged to expense
|
|
6,350
|
|
4,350
|
|
3,700
|
|
2,420
|
|
1,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of period
|
|
$
|
10,321
|
|
$
|
6,968
|
|
$
|
4,399
|
|
$
|
2,841
|
|
$
|
2,000
|
|
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Net charge-offs as a percentage of average total loans outstanding
during the year
|
|
0.45
|
%
|
0.41
|
%
|
0.76
|
%
|
0.89
|
%
|
0.20
|
%
|
Ending allowance for loan losses as a percentage of total loans
outstanding at end of year
|
|
1.30
|
%
|
1.28
|
%
|
1.26
|
%
|
1.31
|
%
|
1.48
|
%
|
The allowance for loan losses is established by charges to operations
based on managements evaluation of the loan portfolio, past due loan
experience, collateral values, current economic conditions and other factors
considered necessary to maintain the allowance at an adequate level. Management
believes that the allowance was adequate at December 31, 2007.
23
At December 31, 2007, 2006, 2005, 2004 and 2003, the allowance for
loan losses was allocated as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
(Dollars in thousands)
|
|
Amount
|
|
Percentage
of loans in
each
category to
total loans
|
|
Amount
|
|
Percentage
of loans in
each
category to
total loans
|
|
Amount
|
|
Percentage
of loans in
each
category to
total loans
|
|
Amount
|
|
Percentage
of loans in
each
category to
total loans
|
|
Amount
|
|
Percentage
of loans in
each
category to
total loans
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
1,132
|
|
14.15
|
%
|
$
|
745
|
|
13.65
|
%
|
$
|
383
|
|
10.98
|
%
|
$
|
175
|
|
10.55
|
%
|
$
|
71
|
|
7.68
|
%
|
1 to 4 family
residential
|
|
335
|
|
4.22
|
%
|
229
|
|
4.19
|
%
|
225
|
|
5.27
|
%
|
75
|
|
7.38
|
%
|
57
|
|
10.00
|
%
|
Other
|
|
1,440
|
|
18.13
|
%
|
840
|
|
15.40
|
%
|
504
|
|
14.45
|
%
|
265
|
|
15.59
|
%
|
331
|
|
14.85
|
%
|
Commercial,
financial and agricultural
|
|
7,130
|
|
60.14
|
%
|
5,048
|
|
64.89
|
%
|
3,197
|
|
67.11
|
%
|
2,272
|
|
64.68
|
%
|
1,510
|
|
65.03
|
%
|
Consumer
|
|
56
|
|
0.50
|
%
|
37
|
|
0.60
|
%
|
45
|
|
0.90
|
%
|
54
|
|
1.80
|
%
|
31
|
|
2.44
|
%
|
Other
|
|
228
|
|
2.86
|
%
|
69
|
|
1.27
|
%
|
45
|
|
1.29
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,321
|
|
100.00
|
%
|
$
|
6,968
|
|
100.00
|
%
|
$
|
4,399
|
|
100.00
|
%
|
$
|
2,841
|
|
100.00
|
%
|
$
|
2,000
|
|
100.00
|
%
|
Non-interest Income
- Non-interest income is income that is
not related to interest-earning assets. In a typical retail bank,
non-interest income consists primarily of service charges and fees on deposit
accounts and mortgage origination fees. Because of the business focus of
the Bank and its lack of a large retail customer base, revenues from these
traditional sources will remain modest.
The Bank earned $76 in mortgage origination fees in 2007 compared to
$89 earned in 2006, a decline of $13 or 14.61%. The decline in mortgage loan
demand and mortgage origination income was attributed to the disruption in the
mortgage market in 2007. Management believes that in 2008 the mortgage unit
will provide a value-added service with modest revenue results.
The Bank earned $2,687 in 2007 on a series of loan sale transactions
compared to $2,025 in 2006. The Bank is located in a vibrant market area and
can generate quality assets at a faster rate than it can adequately fund them.
In addition to lending in the local marketplace, the Bank provides
collateral-based loans to business borrowers in other states through two types
of indirect funding programs. Management has identified a network of community
banks eager to purchase quality assets. Management has installed appropriate systems
and processes to sell assets to other banks located in slower growing markets
and believes that loan sales will be a recurring source of revenue.
In 2006, the Bank earned $2,025 on a series of loan sale
transactions. The Bank earned $89 in mortgage origination fees in 2006
compared to $105 earned in 2005, a decline of $16 or 15.24%. The decline
in mortgage origination income was attributed to rising interest rates in
2006. Income earned in the form of service charges on deposits totaled $112,
a loss of $2, or 1.75% below the $114 earned in 2005. Gain on sales of
securities declined by $4 or 100% from $4 in 2005 to $0 in 2006.
Non-interest Expense
- Non-interest expense includes salaries
and benefits expense, occupancy costs and other operating expenses including
data processing, professional fees, supplies, postage, telephone and other
items. Management views the control of operating expense as a critical
element in the success of the Business Bank strategy. The Bank operates
more efficiently than most peer banks because it conducts business from a
single location and does not provide banking services for many retail customers
with high transaction volume.
Management targets $7,500 in assets per full-time employee as a measure
of staffing efficiency. Management believes that the growth of the Bank will
offer additional opportunities to leverage personnel resources. The Bank
does expect to hire employees in 2008, so salaries and benefits expense will
increase, but the target for Average Assets per Employee will remain at $7,500
per employee.
Non-interest expense for 2007 was $13,263, an increase of $4,207 or
46.46%, over the $9,056 expensed in 2006. Approximately 70% of the increase was
attributable to the addition of new employees during the year. The Bank ended
2007 with 64 full-time employees. Assets per employee were $14,060 at year-end
2007 compared to $12,500 at year-end 2006.
Non-interest expense for 2006 was $9,056, an increase of $2,810 or
44.99%, over the $6,246 expensed in 2005. Approximately 48% of the
increase was attributable to the addition of new employees during the
year. The Bank ended 2006 with 50 full-time employees. Assets per
employee were $12,500 at year-end 2006 and $9,800 at year-end 2005.
24
Income Taxes
Our effective tax rate in 2007 was
34.57% compared to 38.60% in 2006 and 38.56% in 2005. Management
anticipates that tax rates in future years will approximate the rates paid in
2007.
Changes in Financial Condition
Assets
-
Total assets at December 31, 2007
were $900,153, an increase of $276,635 or 44.37%, over total assets of $623,518
at December 31, 2006. Average assets for 2007 were $755,254, an increase
of $253,276, or 50.46% over average assets in 2006. Loan growth was the primary
reason for the increases. Year-end 2007 net loans were $784,001, up $245,451,
or 45.58% over the year-end 2006 total net loans of $538,550.
Total assets at December 31, 2006, were $623,518, an increase of
$219,478 or 54.32%, over total assets of $404,040 at December 31,
2005. Average assets for 2006 were $501,978, an increase of $186,004, or
58.87% over average assets in 2005. Loan growth was the primary reason
for the increases. Year-end 2006 net loans were $538,550, up $194,363, or
56.47% over the year-end 2005 total net loans of $344,187.
The Banks Business Bank model of operation results in a higher level
of earning assets than most peer banks. Earning assets are defined as
assets that earn interest income. Earning assets include short-term
investments, the investment portfolio and net loans. The Bank maintains a
relatively high level of earning assets because few assets are allocated to
facilities, cash and due-from bank accounts used for transaction processing.
Earning assets at December 31, 2007 were $867,327, or 96.35% of total
assets of $900,153. Earning assets at December 31, 2006 were $610,322, or
97.88% of total assets of $623,518. Management targets an earning asset
to total asset ratio of 97% or higher. This ratio is expected to generally
continue at these levels, although it may be affected by economic factors
beyond the Banks control.
Liabilities
-
The Bank relies on increasing its
deposit base to fund loan and other asset growth. The Williamson County
marketplace is highly competitive with 24 financial institutions and 83 banking
facilities (as of June 30, 2007). The Bank competes for local deposits by
offering attractive products with premium rates. The Bank expects to have
a higher average cost of funds for local deposits than most competitor banks
because of its single location and lack of a branch network. Managements
strategy is to offset the higher cost of funding with a lower level of
operating expense and firm pricing discipline for loan products. The Bank
has promoted electronic banking services by providing them without charge and
by offering in-bank customer training.
The Bank also obtains funding in the wholesale deposit market which is
accessed by means of an electronic bulletin board. This electronic market
links banks and sellers of deposits to deposit purchasers such as credit
unions, school districts, labor unions, and other organizations with excess
liquidity. Deposits may be raised in $99 or $100 increments in maturities
from two weeks to five years. Management believes the utilization of the
electronic bulletin board is highly efficient and the average rate has been
generally less than rates paid in the local market. Participants in the
electronic market pay a modest annual licensing fee and there are no
transaction charges. Management has established policies and procedures
to govern the acquisition of funding through the wholesale market.
Wholesale deposits are categorized as Purchased Time Deposits on the detail
of deposits shown in this Item 7. Management may also, from time to time,
engage the services of a deposit broker to raise a block of funding at a
specified maturity date.
Total average deposits in 2007 were $685,063, an increase of $233,828,
or 51.82% over the total average deposits of $451,235 in 2006. Average
non-interest bearing deposits increased by $2,922, or 15.95%, from $18,325 in
2006 to $21,247 in 2007. Average savings deposits decreased by $5,423 from
$12,678 in 2006 to $7,255 in 2007. Average purchased deposits increased by
$62,547, or 32.57%, from $192,064 in 2006 to $254,611 in 2007. The average rate
paid on purchased deposits in 2007 was 5.28% compared to 4.82% in 2006.
Purchased time deposit funding represented 37.27% of total funding in 2007
compared to 33.96% in 2006.
Total average deposits in 2006 were $451,235, an increase of $168,532,
or 59.61% over the total average deposits of $282,703 in 2005. Average
non-interest bearing deposits increased by $1,836 or 11.13%, from $16,489 in
2005 to $18,325 in 2006. Average savings deposits decreased by $10,107 from
$22,785 in 2005 to $12,678 in 2006. Average purchased deposits increased
by $45,738, or 31.26%, from $146,326 in 2005 to $192,064 in 2006. The
average rate paid on purchased time deposits in 2006 was 4.82% compared to
3.55% in 2005. Purchased time deposit funding represented 42.56% of total
funding in 2006 compared to 51.34% in 2005.
25
Loan Policy
-
Lending activity is conducted under
guidelines defined in the Banks Loan Policy. The Loan Policy establishes
guidelines for analyzing financial transactions including an evaluation of a
borrowers credit history, repayment capacity, collateral value, and cash
flow. Loans may be at a fixed or variable rate, with the maximum maturity
of fixed rate loans set at five years.
All lending activities of the Bank are under the direct supervision and
control of the Officers Loan Committee, the Executive Committee of the Board
and, in some cases, the full Board of Directors. The Officers Loan Committee
consists of Arthur F. Helf, Michael R. Sapp and H. Lamar Cox, and approves
loans up to $1,000. The Executive Committee consists of Arthur F. Helf, Michael
R. Sapp and H. Lamar Cox and two outside directors, and approves loans up to
15% of Tier I Capital. The full Board of Directors approves all loans above
those limits. The full Board of Directors also approves loan authorizations, if
any, for any executive officer. The Banks established maximum loan volume to
deposits is 100%. The Executive Committee of the Board makes a monthly review
of loans which are 90 days or more past due and the full Board of Directors
makes a quarterly review of loans which are 90 days or more past due.
Management of the Bank periodically reviews the loan portfolio,
particularly non-accrual and renegotiated loans. The review may result in
a determination that a loan should be placed on a non-accrual status for income
recognition. In addition, to the extent that management identifies potential
losses in the loan portfolio, it reduces the book value of such loans, through
charge-offs, to their estimated collectible value. The Banks policy is
that accrual of interest is discontinued on a loan when management of the Bank
determines that collection of interest is doubtful based on consideration of
economic and business factors affecting collection efforts.
When a loan is classified as non-accrual, any unpaid interest is
reversed against current income. Interest is included in income
thereafter only to the extent received in cash. The loan remains in a
non-accrual classification until such time as the loan is brought current, when
it may be returned to accrual classification. When principal or interest
on a non-accrual loan is brought current, if in managements opinion future
payments are questionable, the loan would remain classified as
non-accrual. After a non-accrual or renegotiated loan is charged off, any
subsequent payments of either interest or principal are applied first to any
remaining balance outstanding, then to recoveries and lastly to income.
The Banks underwriting guidelines are applied to four major categories
of loans, commercial and industrial, consumer, agricultural and real estate
which includes residential, construction and development and certain other real
estate loans. The Bank requires its loan officers and loan committee to
consider the borrowers character, the borrowers financial condition, the
economic environment in which the loan will be repaid, as well as, for commercial
loans, the borrowers management capability and the borrowers industry. Before
approving a loan, the loan officer or committee must determine that the
borrower is creditworthy, is a capable manager, understands the specific
purpose of the loan, understands the source and plan of repayment, and
determine that the purpose, plan and source of repayment as well as collateral
are acceptable, reasonable and practical given the normal framework within
which the borrower operates.
The maintenance of an adequate loan loss reserve is one of the
fundamental concepts of risk management for every financial institution.
Management is responsible for ensuring that controls are in place to monitor
the adequacy of the loan loss reserve in accordance with generally accepted
accounting principles (GAAP), the Banks stated policies and procedures, and
regulatory guidance. Quantification of the level of reserve which is
prudently conservative, but not excessive, involves a high degree of judgment.
Managements assessment of the adequacy of the loan loss reserve
considers a wide range of factors including portfolio growth, mix, collateral
and geographic diversity, and terms and structure. Portfolio performance
trends, including past dues and charge-offs, are monitored closely.
Managements assessment includes a continuing evaluation of current and
expected market conditions and the potential impact of economic events on
borrowers. Managements assessment program is monitored by an ongoing
loan review program conducted by an independent accounting firm and periodic
examinations by bank regulators.
Management uses a variety of financial methods to quantify the level of
the loan loss reserve. At inception, each loan transaction is assigned a
risk rating that ranges from RR1Excellent to RR4Average. The risk
rating is determined by an analysis of the borrowers credit history and
capacity, collateral, and cash flow. The weighted average risk rating of
the portfolio provides an indication of overall risk and identifies
trends. The portfolio is additionally segmented by loan type, collateral,
and purpose. Loan transactions that have exhibited signs of increased
risk are downgraded to a Watch, Critical, or Substandard classification,
i.e., RR5, RR6 and RR7, respectively. These loans are closely monitored
for rehabilitation or potential loss and the loan loss reserve is adjusted
accordingly.
26
It is managements intent to maintain a loan loss reserve that is adequate
to absorb current and estimated losses which are inherent in a loan
portfolio. The historical loss ratio (net charge-offs as a percentage of
average loans) was 0.76%, 0.41% and 0.45% for the years ended December 31,
2005, 2006 and 2007, respectively. The year end loan loss reserve as a
percentage of end of period loans was 1.26%, 1.28% and 1.30%, respectively, for
the same years. Because of the commercial emphasis of the banks
operation, management has kept a reserve level in excess of historical results.
The provision for loan losses for 2007 was $6,350,000, an increase of
$2,000,000 over the $4,350,000 provision for 2006. In 2007, expense
reflected the impact of $3,310,000 in charge-offs during the year and the
incremental provision required as a result of the $249,000 increase in loan
volume.
Credit
Risk Management and Reserve for Loan Losses
Credit risk and exposure to loss are inherent parts of the banking
business. Management seeks to manage and minimize these risks through its
loan and investment policies and loan review procedures. Management
establishes and continually reviews lending and investment criteria and
approval procedures that it believes reflect the risk sensitive nature of the
Bank. The loan review procedures are set to monitor adherence to the
established criteria and to ensure that on a continuing basis such standards
are enforced and maintained. Managements objective in establishing
lending and investment standards is to manage the risk of loss and provide for
income generation through pricing policies.
The Bank targets small- and medium-sized businesses as loan customers.
Because of their size, these borrowers may be less able to withstand
competitive or economic pressures than larger borrowers in periods of economic weakness.
If loan losses occur to a level where the loan loss reserve is not sufficient
to cover actual loan losses, the Banks earnings will decrease. The Bank uses
an independent accounting firm to review its loans for quality in addition to
the reviews that may be conducted by bank regulatory agencies as part of their
usual examination process.
Management regularly reviews the loan portfolio and determines the
amount of loans to be charged-off. In addition, management considers such
factors as the Banks previous loan loss experience, prevailing and anticipated
economic conditions, industry concentrations and the overall quality of the
loan portfolio. While management uses available information to recognize
losses on loans and real estate owned, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowances for losses on loans and real estate owned.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available at the time of their
examinations. In addition, any loan or portion thereof which is
classified as a loss by regulatory examiners is charged-off.
Financial Tables
The following financial information regarding the Corporation and the
Bank should be read in conjunction with our financial statements included in
Item 8 of this Report.
Average Balance Sheets, Net Interest Income and
Changes in Interest Income and Interest Expense
The following tables present the average yearly balances of each
principal category of assets, liabilities and stockholders equity of the
Corporation and the Bank. The tables are presented on taxable equivalent
basis, as applicable.
27
|
|
12 months Ended December 31, 2007
|
|
|
|
Average
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
Taxable (1)
|
|
$
|
63,838
|
|
$
|
3,492
|
|
5.43
|
%
|
Tax-exempt
|
|
|
|
|
|
|
|
Total securities
|
|
63,838
|
|
3,492
|
|
5.43
|
%
|
|
|
|
|
|
|
|
|
Loans (2) (3)
|
|
656,210
|
|
58,114
|
|
8.86
|
%
|
Federal funds sold
|
|
11,701
|
|
600
|
|
5.13
|
%
|
Total interest earning assets
|
|
731,749
|
|
62,206
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
5,057
|
|
|
|
|
|
Net fixed assets and equipment
|
|
1,539
|
|
|
|
|
|
Accrued interest and other assets
|
|
16,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
755,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
Deposits (other than demand)
|
|
$
|
663,816
|
|
34,245
|
|
5.16
|
%
|
Federal funds purchased
|
|
889
|
|
57
|
|
6.41
|
%
|
Subordinated debt
|
|
9,355
|
|
632
|
|
6.76
|
%
|
Total interest bearing liabilities
|
|
674,060
|
|
34,934
|
|
5.18
|
%
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
21,247
|
|
|
|
|
|
Other liabilities
|
|
3,090
|
|
|
|
|
|
Shareholders equity
|
|
56,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
755,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
3.32
|
%
|
|
|
|
|
Net interest margin
|
|
3.72
|
%
|
(1)
Unrealized loss of $463 is excluded from yield calculation.
(2)
Non-accrual loans are included in average loan balances and loan fees of $3,890
are included in interest income.
(3)
Loans are presented net of allowance for loan loss.
28
|
|
12 months Ended December 31, 2006
|
|
|
|
Average
|
|
Average
|
|
|
|
(Dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
Taxable (1)
|
|
$
|
44,317
|
|
$
|
2,216
|
|
4.91
|
%
|
Tax-exempt
|
|
|
|
|
|
|
|
Total securities
|
|
44,317
|
|
2,216
|
|
4.91
|
%
|
|
|
|
|
|
|
|
|
Loans (2) (3)
|
|
428,186
|
|
38,382
|
|
8.96
|
%
|
Federal funds sold
|
|
14,165
|
|
647
|
|
4.57
|
%
|
Total interest earning assets
|
|
486,668
|
|
41,245
|
|
8.46
|
%
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
4,268
|
|
|
|
|
|
Net fixed assets and equipment
|
|
1,146
|
|
|
|
|
|
Accrued interest and other assets
|
|
9,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
501,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
Deposits (other than demand)
|
|
$
|
432,910
|
|
21,216
|
|
4.90
|
%
|
Federal funds purchased
|
|
990
|
|
55
|
|
5.56
|
%
|
Subordinated debt
|
|
8,804
|
|
597
|
|
6.78
|
%
|
Total interest bearing liabilities
|
|
442,704
|
|
21,868
|
|
4.94
|
%
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
18,325
|
|
|
|
|
|
Other liabilities
|
|
3,508
|
|
|
|
|
|
Shareholders equity
|
|
37,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
501,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
3.52
|
%
|
|
|
|
|
Net interest margin
|
|
3.98
|
%
|
(1)
Unrealized loss of $803 is excluded from yield calculation.
(2)
Non-accrual loans are included in average loan balances and loan fees of $2,774
are included in interest income.
(3)
Loans are presented net of allowance for loan loss.
29
|
|
12 months Ended December 31, 2005
|
|
|
|
Average
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
Taxable (1)
|
|
$
|
23,034
|
|
$
|
980
|
|
4.19
|
%
|
Tax-exempt
|
|
|
|
|
|
|
|
Total securities
|
|
23,034
|
|
980
|
|
4.19
|
%
|
|
|
|
|
|
|
|
|
Loans (2) (3)
|
|
277,821
|
|
22,488
|
|
8.09
|
%
|
Federal funds sold
|
|
5,910
|
|
165
|
|
2.79
|
%
|
Total interest earning assets
|
|
306,765
|
|
23,633
|
|
7.70
|
%
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
4,097
|
|
|
|
|
|
Net fixed assets and equipment
|
|
731
|
|
|
|
|
|
Accrued interest and other assets
|
|
4,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
315,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities
|
|
|
|
|
|
|
|
Deposits (other than demand)
|
|
$
|
266,214
|
|
9,568
|
|
3.59
|
%
|
Federal funds purchased
|
|
589
|
|
22
|
|
3.74
|
%
|
Subordinated debt
|
|
6,237
|
|
416
|
|
6.68
|
%
|
Total interest bearing liabilities
|
|
273,040
|
|
10,006
|
|
3.66
|
%
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
16,489
|
|
|
|
|
|
Other liabilities
|
|
1,481
|
|
|
|
|
|
Shareholders equity
|
|
24,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
315,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
4.03
|
%
|
|
|
|
|
Net interest margin
|
|
4.44
|
%
|
(1) Unrealized loss of $357 is excluded from yield
calculation.
(2) Non-accrual loans are included in average loan balances
and loan fees of $1,438 are included in interest income.
(3) Loans are presented net of allowance for loan loss.
The following tables outline
the components of the net interest margin for the years 2007, 2006 and 2005 and
identify the impact of changes in volume and rate.
30
|
|
December 31, 2007 change from
|
|
|
|
December 31, 2006 a result of:
|
|
(Dollars in thousands)
|
|
Volume
|
|
Rate
|
|
Total
|
|
Interest income
|
|
|
|
|
|
|
|
Loans
|
|
$
|
20,199
|
|
$
|
(467
|
)
|
$
|
19,732
|
|
Securities taxable
|
|
1,041
|
|
235
|
|
1,276
|
|
Federal funds sold
|
|
(121
|
)
|
74
|
|
(47
|
)
|
Total interest income
|
|
21,119
|
|
(158
|
)
|
20,961
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
Deposits (other than demand)
|
|
11,858
|
|
1,171
|
|
13,029
|
|
Federal funds purchased
|
|
(6
|
)
|
8
|
|
2
|
|
Subordinated debt
|
|
37
|
|
(2
|
)
|
35
|
|
Total interest expense
|
|
11,889
|
|
1,177
|
|
13,066
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
9,230
|
|
$
|
(1,335
|
)
|
$
|
7,895
|
|
|
|
December 31, 2006 change from
|
|
|
|
December 31, 2005 a result of:
|
|
(Dollars in thousands)
|
|
Volume
|
|
Rate
|
|
Total
|
|
Interest income
|
|
|
|
|
|
|
|
Loans
|
|
$
|
13,262
|
|
$
|
2,632
|
|
$
|
15,894
|
|
Securities taxable
|
|
1,021
|
|
215
|
|
1,236
|
|
Federal funds sold
|
|
331
|
|
151
|
|
482
|
|
Total interest income
|
|
14,614
|
|
2,998
|
|
17,612
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
Deposits (other than demand)
|
|
7,369
|
|
4,279
|
|
11,648
|
|
Federal funds purchased
|
|
19
|
|
14
|
|
33
|
|
Subordinated debt
|
|
174
|
|
7
|
|
181
|
|
Total interest expense
|
|
7,562
|
|
4,300
|
|
11,862
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
7,052
|
|
$
|
(1,302
|
)
|
$
|
5,750
|
|
Liability and Asset
Management
The matching of assets and liabilities may be
analyzed by examining the extent to which such assets and liabilities are interest
rate sensitive and by monitoring an institutions interest rate sensitivity gap.
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The
interest rate sensitivity gap is defined as the difference between the dollar
amount of rate sensitive assets re-pricing during a period and the volume of
rate sensitive liabilities re-pricing during the same period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income while a positive gap would tend to result in an increase in net interest
income. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income while a positive gap would
tend to adversely affect net interest income.
The Banks Asset Liability and Investment
Committee, which consists of our executive officers, Arthur F. Helf, Michael R.
Sapp, H. Lamar Cox and George W. Fort, is charged with monitoring the liquidity
and funds position of the Bank. The committee regularly reviews (a) the
rate sensitivity position on a three-month, six-month and one-year time
horizon; (b) loans to deposit ratios; and (c) average maturity for
certain categories of liabilities. The Bank operates an asset/liability
management model. At December 31, 2007, the Bank had a negative
cumulative re-pricing gap within one year of approximately $(59,608) or
approximately 6.79% of total year-end earning assets. See Part II, Item 7A
QUANTITATIVE AND QUALITATIVE ANALYSIS OF MARKET RISK for additional
information.
31
Deposits
The Banks primary source of funds is
interest-bearing deposits. The following tables present the average amount of
and average rate paid on each of the following deposit categories for 2007,
2006 and 2005:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
Rate
|
|
Average
|
|
Rate
|
|
Average
|
|
Rate
|
|
(Dollars in thousands)
|
|
Balance
|
|
Paid
|
|
Balance
|
|
Paid
|
|
Balance
|
|
Paid
|
|
Types of Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
$
|
21,247
|
|
|
|
$
|
18,325
|
|
|
|
$
|
16,489
|
|
|
|
Interest-bearing demand deposits
|
|
6,659
|
|
3.36
|
%
|
5,119
|
|
3.64
|
%
|
3,097
|
|
1.90
|
%
|
Money market accounts
|
|
111,747
|
|
4.84
|
%
|
72,866
|
|
5.23
|
%
|
39,485
|
|
3.88
|
%
|
Savings accounts
|
|
7,255
|
|
2.66
|
%
|
12,678
|
|
2.67
|
%
|
22,785
|
|
2.61
|
%
|
IRA accounts
|
|
17,522
|
|
5.88
|
%
|
5,450
|
|
4.91
|
%
|
2,183
|
|
4.31
|
%
|
Purchased time deposits
|
|
254,611
|
|
5.28
|
%
|
192,064
|
|
4.82
|
%
|
146,326
|
|
3.55
|
%
|
Time deposits
|
|
266,022
|
|
5.29
|
%
|
144,733
|
|
5.09
|
%
|
52,338
|
|
4.00
|
%
|
Total deposits
|
|
$
|
685,063
|
|
|
|
$
|
451,235
|
|
|
|
$
|
282,703
|
|
|
|
The following table indicates amount
outstanding of time certificates of deposit of $100,000 or more and respective
maturities as of December 31, 2007 (in thousands):
|
|
2007
|
|
|
|
|
|
Three months or less
|
|
$
|
69,310
|
|
|
|
|
|
Over three through 12 months
|
|
201,332
|
|
|
|
|
|
More than 12 months
|
|
94,155
|
|
Total
|
|
$
|
364,797
|
|
Investment Portfolio
The Banks investment portfolio at December 31,
2007, 2006 and 2005 consisted of the following (dollars in thousands):
32
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
|
|
Cost
|
|
Gain
|
|
Loss
|
|
Value
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
63,622
|
|
$
|
504
|
|
$
|
(36
|
)
|
$
|
64,090
|
|
Mortgage-backed securities
|
|
5,410
|
|
|
|
(104
|
)
|
5,306
|
|
Corporate debt securities
|
|
3,841
|
|
1
|
|
(66
|
)
|
3,776
|
|
Other
|
|
380
|
|
201
|
|
|
|
581
|
|
Total
|
|
$
|
73,253
|
|
$
|
706
|
|
$
|
(206
|
)
|
$
|
73,753
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
45,859
|
|
$
|
134
|
|
$
|
(514
|
)
|
$
|
45,479
|
|
Mortgage-backed securities
|
|
6,672
|
|
|
|
(207
|
)
|
6,465
|
|
Corporate debt securities
|
|
4,495
|
|
|
|
(50
|
)
|
4,445
|
|
Other
|
|
380
|
|
174
|
|
|
|
554
|
|
Total
|
|
$
|
57,406
|
|
$
|
308
|
|
$
|
(771
|
)
|
$
|
56,943
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
22,195
|
|
$
|
7
|
|
$
|
(411
|
)
|
$
|
21,791
|
|
Mortgage-backed securities
|
|
8,059
|
|
|
|
(254
|
)
|
7,805
|
|
Corporate debt securities
|
|
1,958
|
|
|
|
(22
|
)
|
1,936
|
|
Other
|
|
380
|
|
80
|
|
|
|
460
|
|
Total
|
|
$
|
32,592
|
|
$
|
87
|
|
$
|
(687
|
)
|
$
|
31,992
|
|
The following schedule presents the estimated
maturities and weighted average yields of investment securities of the Bank at December 31,
2007:
|
|
|
|
Estimated
|
|
Weighted
|
|
|
|
Amortized
|
|
Market
|
|
Average
|
|
|
|
Cost
|
|
Value
|
|
Yield
|
|
Obligations of U.S. Government agencies
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
|
|
$
|
|
|
|
%
|
Due after one through five years
|
|
8,757
|
|
8,776
|
|
4.60
|
%
|
Due after five through ten years
|
|
22,459
|
|
22,582
|
|
5.25
|
%
|
Due after ten years
|
|
32,406
|
|
32,732
|
|
5.99
|
%
|
Total obligations of U.S. Government
agencies
|
|
63,622
|
|
64,090
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
5,410
|
|
5,306
|
|
4.03
|
%
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
|
|
|
|
Due in one year or less
|
|
|
|
|
|
|
|
Due after one through five years
|
|
3,209
|
|
3,179
|
|
4.52
|
%
|
Due after five through ten years
|
|
632
|
|
597
|
|
4.53
|
%
|
Due after ten years
|
|
|
|
|
|
|
|
Total corporate debt securities
|
|
3,841
|
|
3,776
|
|
|
|
|
|
|
|
|
|
|
|
Other securities
|
|
380
|
|
581
|
|
2.31
|
%
|
Total securities available for sale
|
|
$
|
73,253
|
|
$
|
73,753
|
|
|
|
The Bank owned no tax-exempt securities during the
period ended December 31, 2007.
33
Investment Policy
The objective of the Banks investment policy
is to invest funds not otherwise needed to meet the loan demand of its market
area to earn the maximum return for the Bank, yet still maintain sufficient
liquidity to meet fluctuations in the Banks loan demand and deposit
structure. In doing so, the Bank balances the market and credit risks
against the potential investment return, makes investments compatible with the
pledge requirements of the Banks deposits of public funds, maintains
compliance with regulatory investment requirements and assists the various
public entities with their financing needs. The asset liability and
investment committee has full authority over the investment portfolio and makes
decisions on purchases and sales of securities. The entire portfolio,
along with all investment transactions occurring since the previous Board of
Directors meeting, is reviewed by the Board at each monthly meeting. The
investment policy allows portfolio holdings to include short-term securities
purchased to provide the Banks needed liquidity and longer term securities purchased
to generate level income for the Bank over periods of interest rate
fluctuations.
Loan Portfolio
The Bank had net loans of $784,001 at December 31,
2007. As the loan portfolio is concentrated in Davidson County and
Williamson County, there is a risk that the borrowers ability to repay the
loans could be affected by changes in local economic conditions. The following
schedule details the loans of the Bank at December 31, 2007, 2006, 2005,
2004 and 2003:
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
112,405
|
|
$
|
74,482
|
|
$
|
38,279
|
|
$
|
22,813
|
|
$
|
10,386
|
|
1 to 4 family residential
|
|
33,560
|
|
22,873
|
|
18,358
|
|
15,963
|
|
13,520
|
|
Other
|
|
143,973
|
|
83,985
|
|
50,371
|
|
33,694
|
|
20,072
|
|
Commercial, financial and agricultural
|
|
477,666
|
|
353,996
|
|
233,948
|
|
139,799
|
|
87,908
|
|
Consumer
|
|
3,966
|
|
3,246
|
|
3,149
|
|
3,898
|
|
3,301
|
|
Other
|
|
22,752
|
|
6,936
|
|
4,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
794,322
|
|
545,518
|
|
348,586
|
|
216,167
|
|
135,187
|
|
Less: allowance for loan losses
|
|
(10,321
|
)
|
(6,968
|
)
|
(4,399
|
)
|
(2,841
|
)
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
784,001
|
|
$
|
538,550
|
|
$
|
344,187
|
|
$
|
213,326
|
|
$
|
133,187
|
|
The following table reflects the composition of loan
portfolio by type:
|
|
As of December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
14.15
|
%
|
13.65
|
%
|
10.98
|
%
|
10.55
|
%
|
7.68
|
%
|
1 to 4 family residential
|
|
4.22
|
%
|
4.19
|
%
|
5.27
|
%
|
7.38
|
%
|
10.00
|
%
|
Other
|
|
18.13
|
%
|
15.40
|
%
|
14.45
|
%
|
15.59
|
%
|
14.85
|
%
|
Commercial, financial and agricultural
|
|
60.14
|
%
|
64.89
|
%
|
67.11
|
%
|
64.68
|
%
|
65.03
|
%
|
Consumer
|
|
0.50
|
%
|
0.60
|
%
|
0.90
|
%
|
1.80
|
%
|
2.44
|
%
|
Other
|
|
2.86
|
%
|
1.27
|
%
|
1.29
|
%
|
0.00
|
%
|
0.00
|
%
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
34
The following table reflects the composition of commercial loan
portfolio by sourcing program type:
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Commercial, financial and agricultural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
193,943
|
|
40.60
|
%
|
$
|
151,692
|
|
42.85
|
%
|
$
|
94,742
|
|
40.50
|
%
|
Indirect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
|
|
130,583
|
|
27.34
|
%
|
88,569
|
|
25.02
|
%
|
52,144
|
|
22.29
|
%
|
Small
|
|
153,140
|
|
32.06
|
%
|
113,735
|
|
32.13
|
%
|
87,062
|
|
37.21
|
%
|
Total
|
|
477,666
|
|
100.00
|
%
|
353,996
|
|
100.00
|
%
|
233,948
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule details maturities and
sensitivity to interest rates changes for loans of the Bank at December 31,
2007:
|
|
Due in 1
|
|
Due in 1
|
|
Due after
|
|
|
|
Type of Loan (1)
|
|
year or less
|
|
to 5 years
|
|
5 Years
|
|
Total
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
47,059
|
|
$
|
55,897
|
|
$
|
9,449
|
|
$
|
112,405
|
|
1 to 4 family residential
|
|
7,558
|
|
19,729
|
|
6,273
|
|
33,560
|
|
Other
|
|
23,279
|
|
116,807
|
|
3,887
|
|
143,973
|
|
Commercial, financial and agricultural
|
|
94,669
|
|
373,890
|
|
9,107
|
|
477,666
|
|
Consumer
|
|
1,631
|
|
2,022
|
|
313
|
|
3,966
|
|
Other
|
|
|
|
|
|
22,752
|
|
22,752
|
|
Total
|
|
$
|
174,196
|
|
$
|
568,345
|
|
$
|
51,781
|
|
$
|
794,322
|
|
|
|
|
|
|
|
|
|
|
|
Less: allowance for loan loss
|
|
|
|
|
|
|
|
(10,321
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
|
|
|
|
|
$
|
784,001
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate sensitivity:
|
|
|
|
|
|
|
|
|
|
Fixed interest rates
|
|
29,760
|
|
551,290
|
|
17,529
|
|
598,579
|
|
Floating or adjustable rates
|
|
144,436
|
|
17,055
|
|
34,252
|
|
195,743
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
174,196
|
|
$
|
568,345
|
|
$
|
51,781
|
|
$
|
794,322
|
|
(1) Includes non-accrual loans.
Capital Resources / Liquidity
Liquidity
Of primary importance to
depositors, creditors and regulators is the ability to have readily available
funds sufficient to repay fully maturing liabilities. The Banks
liquidity, represented by cash and cash due from banks, is a result of its
operating, investing and financing activities. In order to ensure funds
are available at all times, the Bank devotes resources to projecting on a monthly
basis the amount of funds that will be required and maintains relationships
with a diversified customer base so funds are accessible. Liquidity
requirements can also be met through short-term borrowings or the disposition
of short-term assets which are generally matched to correspond to the maturity
of liabilities.
Although the Bank has no formal liquidity
policy, in the opinion of management, its liquidity levels are considered
adequate. The Bank is subject to general FDIC guidelines which do not
require a minimum level of liquidity. Management believes its liquidity
ratios meet or exceed these guidelines. Management does not know of any
trends or demands that are reasonably likely to result in liquidity increasing
or decreasing in any material manner.
35
Impact of Inflation and Changing
Prices
The financial statements and related
financial data presented herein have been prepared in accordance with GAAP
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time and a result of inflation. The impact
of inflation on operations of the Bank is reflected in increased operating
costs. Unlike most industrial companies, virtually all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest
rates have a more significant impact on the Banks performance than the effects
of general levels of inflation. Interest rates do not necessarily move in
the same direction or in the same magnitude as the price of goods and services.
Capital Adequacy
Capital adequacy refers to the level of
capital required to sustain asset growth over time and to absorb losses.
To continue to grow, the Bank must increase capital by generating earnings,
issuing equity securities, borrowing funds or a combination of those
activities. If growth exceeds expectations, the Bank may need to raise capital
in the capital markets. The Banks ability to raise capital will depend in part
on conditions in the capital markets which are outside the Banks control. If
the Bank cannot raise capital on terms acceptable to it, the Banks ability to
continue growing would be materially impaired.
The objective of the Banks management is to
maintain a level of capitalization that is sufficient to take advantage of
profitable growth opportunities while meeting regulatory requirements including
remaining well capitalized. This is achieved by improving profitability through
effectively allocating resources to more profitable businesses, improving asset
quality, strengthening service quality and streamlining costs. The
primary measures used by management to monitor the results of these efforts are
the ratios of average equity to average assets, average tangible equity to
average tangible assets and average equity to net loans.
The Federal Reserve Board has adopted capital
guidelines governing the activities of bank holding companies. These
guidelines require the maintenance of an amount of capital based on
risk-adjusted assets so that categories of assets with potentially higher
credit risk will require more capital backing than assets with lower
risk. In addition, banks and bank holding companies are required to
maintain capital to support, on a risk-adjusted basis, certain off-balance
sheet activities such as loan commitments.
We and the Bank are required to maintain
certain capital ratios. These include Tier I, Total Capital and Leverage Ratios.
Certain ratios for us and the Bank for 2007 and 2006 are set forth below:
|
|
Capital Level Meeting
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Definition of
|
|
Corporation
|
|
Bank
|
|
|
|
Well Capitalized
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
Tier I Capital Ratio
|
|
6.00
|
|
8.55
|
|
10.45
|
|
9.26
|
|
9.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Ratio
|
|
10.00
|
|
9.80
|
|
11.68
|
|
10.51
|
|
10.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
5.00
|
|
8.09
|
|
9.94
|
|
8.75
|
|
8.78
|
|
Based solely on analysis of federal banking
regulatory categories, it appears on December 31, 2007 that we and the
Bank fall within the well capitalized categories under the regulations.
Off-Balance Sheet Arrangements
The Bank 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. Those
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank has in
those particular financial instruments.
36
The Banks exposure to credit loss in the
event of nonperformance by the other party to the financial instrument is
represented by the contractual or notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Financial instruments for which contract
amounts represented credit risk as of December 31:
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars in thousands)
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
18,380
|
|
$
|
107,663
|
|
$
|
9,601
|
|
$
|
65,123
|
|
$
|
2,404
|
|
$
|
38,859
|
|
Standby letters of credit and financial
guarantees
|
|
|
|
11,063
|
|
|
|
5,776
|
|
|
|
5,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to make loans are generally made
for periods of one year or less. The fixed rate loan commitments have
interest rates ranging from 4.31% to 9.00% and maturities ranging from three
months to six years.
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 are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customers creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary
by the Bank upon extension of credit is based on managements credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing and
similar transactions. All letters of credit are due within one year or
less of the original commitment date. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
Contractual Obligations
At December 31, 2007, the Bank had certain
contractual obligations as shown below.
|
|
Payments due by Period
|
|
Contractual Obligations (1)
|
|
Total
|
|
Less Than
1 Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More than 5
Years
|
|
|
|
(Dollars in thousands)
|
|
Deposits without a stated maturity
|
|
$
|
142,520
|
|
$
|
142,520
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Certificates of deposit
|
|
672,533
|
|
526,017
|
|
141,225
|
|
5,291
|
|
|
|
Subordinated long term debt
|
|
8,248
|
|
|
|
|
|
|
|
8,248
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
5,849
|
|
554
|
|
1,696
|
|
588
|
|
3,011
|
|
Purchase obligations
|
|
|
|
|
|
|
|
|
|
|
|
Other long term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
829,150
|
|
$
|
669,091
|
|
$
|
142,921
|
|
$
|
5,879
|
|
$
|
11,259
|
|
(1) Excludes
interest.
37
Recent Accounting Pronouncements
In September 2006, the Financial Accounting
Standards Board (the FASB) released Statement of Financial Accounting
Standards No. 157 (SFAS No. 157), Fair Value Measurements. This
statement defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 clarifies the exchange price notion
in the fair value definition to mean the price that would be received to sell
the asset or paid to transfer the liability (an exit price), not the price that
would be paid to acquire the asset or received to assume the liability (an
entry price). This statement also clarifies that market participant assumptions
should include assumptions about risk, should include assumptions about the
effect of a restriction on the sale or use of an asset and should reflect its
nonperformance risk (the risk that the obligation will not be fulfilled).
Nonperformance risk should include the reporting entitys credit risk. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after November 15,
2007. The Corporation adopted SFAS No. 157 on January 1, 2008 and
management is still evaluating the impact on the Corporations consolidated
financial statements.
In March 2006, the FASB
issued Statement No. 156, Accounting
for Servicing of Financial Assets-an amendment of FASB Statement No. 140.
This statement provides the following: (i) revised guidance on when a
servicing asset and servicing liability should be recognized; (ii) requires
all separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable; (iii) permits an entity
to elect to measure servicing assets and servicing liabilities at fair value
each reporting date and report changes in fair value in earnings in the period
in which the changes occur; (iv) upon initial adoption, permits a onetime
reclassification of available-for-sale securities to trading securities for
securities which are identified as offsetting the entitys exposure to changes
in the fair value of servicing assets or liabilities that a servicer elects to
subsequently measure at fair value; and (v) requires separate presentation
of servicing assets and servicing liabilities subsequently measured at fair
value in the statement of financial position and additional footnote
disclosures. This standard is effective as of the beginning of an entitys
first fiscal year that begins after September 15, 2006 with the effects of
initial adoption being reported as a cumulative-effect adjustment to retained
earnings. Management does not expect the adoption of this statement will
have a material impact on our consolidated financial statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative
Analysis of Market Risk
Like all financial institutions, we are
subject to market risk from changes in interest rates. Interest rate risk
is inherent in the balance sheet because of the mismatch between the maturities
of rate sensitive assets and rate sensitive liabilities. If rates are
rising, and the level of rate sensitive liabilities exceed the level of rate
sensitive assets, the net interest margin will be negatively impacted.
Conversely, if rates are falling, and the level of rate sensitive liabilities
is greater than the level of rate sensitive assets, the impact on the net
interest margin will be favorable. Managing interest rate risk is further
complicated by the fact that all rates do not change at the same pace; in other
words, short-term rates may be rising while longer term rates remain
stable. In addition, different types of rate sensitive assets and rate
sensitive liabilities react differently to changes in rates.
To manage interest rate risk, we must take a
position on the expected future trend of interest rates. Rates may rise,
fall or remain the same. The Asset-Liability Committee of the Bank
develops its view of future rate trends by monitoring economic indicators,
examining the views of economists and other experts, and understanding the
current status of our balance sheet. Our annual budget reflects the
anticipated rate environment for the next 12 months. The Asset-Liability
Committee conducts a quarterly analysis of the rate sensitivity position.
The results of the analysis are reported to the Board.
The Asset-Liability Committee uses a computer
model to analyze the maturities of rate sensitive assets and liabilities.
The model measures the gap, which is the difference between the dollar amount
of rate sensitive assets re-pricing during a period and the volume of rate
sensitive liabilities re-pricing during the same period. Gap is also expressed
as the ratio of rate sensitive assets divided by rate sensitive
liabilities. If the ratio is greater than one, the dollar value of assets
exceeds the dollar value of liabilities and the balance sheet is asset
sensitive.
Conversely,
if the value of liabilities exceeds the value of assets, the ratio is less than
one and the balance sheet is liability sensitive. Policy requires
management to maintain the gap within a range of 0.75 to 1.25.
The model measures scheduled maturities in
periods of three months, four to 12 months, one to five years and over five
years. The chart below illustrates our rate sensitive position at December 31,
2007. Management uses the one year gap as the appropriate time period for
setting strategy.
38
Rate Sensitivity Gap Analysis
Maturities:
(Dollars in thousands)
|
|
Floating
|
|
1-3
Months
|
|
4-12
Months
|
|
1-5
Years
|
|
Over
5 years
|
|
Total
|
|
Interest Earnings Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
9,573
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
9,573
|
|
Interest bearing deposits
in banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
|
32,045
|
|
|
|
6,259
|
|
29,796
|
|
68,100
|
|
Mortgage-backed and corporate debt securities
|
|
|
|
988
|
|
2,281
|
|
1,516
|
|
868
|
|
5,653
|
|
Total securities
|
|
|
|
33,033
|
|
2,281
|
|
7,775
|
|
30,664
|
|
73,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
213,600
|
|
90,128
|
|
221,245
|
|
247,042
|
|
22,307
|
|
794,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning
assets
|
|
223,173
|
|
123,161
|
|
223,526
|
|
254,817
|
|
52,971
|
|
877,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
22,505
|
|
22,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
223,173
|
|
$
|
123,161
|
|
$
|
223,526
|
|
$
|
254,817
|
|
$
|
75,476
|
|
$
|
900,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
6,022
|
|
$
|
|
|
$
|
|
|
$
|
1,233
|
|
$
|
|
|
$
|
7,255
|
|
Money market and savings
|
|
88,426
|
|
|
|
|
|
19,410
|
|
|
|
107,836
|
|
Time deposits
|
|
|
|
136,597
|
|
389,423
|
|
146,515
|
|
|
|
672,535
|
|
Total deposits
|
|
94,448
|
|
136,597
|
|
389,423
|
|
167,158
|
|
|
|
787,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
2,000
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term debt
|
|
|
|
|
|
7,000
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated long term
debt
|
|
|
|
|
|
|
|
|
|
8,248
|
|
8,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing
liabilities
|
|
96,448
|
|
136,597
|
|
396,423
|
|
167,158
|
|
8,248
|
|
804,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
32,158
|
|
32,158
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
63,121
|
|
63,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
96,448
|
|
$
|
136,597
|
|
$
|
396,423
|
|
$
|
167,158
|
|
$
|
103,527
|
|
$
|
900,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive gap by
period
|
|
$
|
126,725
|
|
$
|
(13.436
|
)
|
$
|
(172,897
|
)
|
$
|
87,659
|
|
$
|
44,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap
|
|
|
|
$
|
113,289
|
|
$
|
(59,608
|
)
|
$
|
28,051
|
|
$
|
72,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as a
percent of total assets
|
|
|
|
12.59
|
%
|
(6.62
|
)%
|
3.12
|
%
|
8.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive assets/rate
sensitive liabilities (cumulative)
|
|
2.31
|
|
1.49
|
|
0.91
|
|
1.04
|
|
1.09
|
|
|
|
39
In mid-2004, the FOMC began a series of interest rate increases which
the FOMC indicated would continue at a measured pace. From mid-year 2004
to the end of 2007, short-term interest rates had increased by 325 basis points. We are now positioned for a
falling rate environment by maintaining a moderately liability sensitive
balance sheet in which more liabilities will reprice than assets. At
year-end 2007, our one-year ratio was 0.92.
The interest rate risk model that defines the gap position also
performs a rate shock test of the balance sheet. The rate shock
procedure measures the impact on the economic value of equity (EVE) which is
a measure of long-term interest rate risk. EVE is the difference between the
market value of the assets and the liabilities and is the liquidation value of
the bank. In this analysis, the model calculates the discounted cash flow or
market value of each category on the balance sheet. The percent change in EVE
is a measure of the volatility of risk. Regulatory guidelines specify a maximum
change of 30% for a 200bps rate change. At December 31, 2007, the percent
change in EVE for a plus or minus 200bps is well within that range at (20.9)%
and 12.8%, respectively.
The one year gap of 0.91 indicates that the Bank would show an increase
in net interest income in a falling rate environment, and the EVE rate shock
shows that the EVE would rise in a falling rate environment. The EVE simulation
model is a static model that provides information only at a certain point in
time. For example, in a rising rate environment, the model does not take into
account actions that management might take to change the impact of rising rates
on the Bank. Given that limitation, it is still useful is assessing the impact
of an unanticipated movement in interest rates.
The above analysis may not on its own be an entirely accurate indicator
of how net interest income or EVE will be affected by changes in interest
rates. Income associated with interest earning assets and costs associated with
interest bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in interest
rates may have a significant impact on net interest income. Interest rates on
certain types of assets and liabilities fluctuate in advance of changes in
general market rates, while interest rates on other types may lag behind changes
in general market rates. The Asset-Liability Committee develops its view of
future rate trends by monitoring economic indicators, examining the views of
economists and other experts, and understanding the current status of our
balance sheet, and conducts a quarterly analysis of the rate sensitivity
position. The results of the analysis are reported to the Board.
ITEM 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The report of independent accountants, consolidated financial
statements and supplementary data required by Item 8 are set forth on pages F-1
through F-28 of this Annual Report on Form 10-K and are incorporated
herein by reference.
ITEM
9.
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
a)
Evaluation of Disclosure Controls and
Procedures
. The
Corporation maintains disclosure controls and procedures, as defined in Rule 13a-15(a) promulgated
under the Securities Exchange Act of 1934, as amended (the Exchange Act),
that are designed to ensure that information required to be disclosed by it in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time period specified in the SECs
rules and forms and that such information is accumulated and communicated
to the Corporations management, including its Chief Executive Officer and
Chief Financial Officer. The Corporation carried out an evaluation, under the
supervision and with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures as of the end of
the period covered by this report. Based on the evaluation of these disclosure
controls and procedures, the Chief Executive Officer and Chief Financial
Officer concluded that the Corporations disclosure control and procedures were
effective.
40
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, the Corporation has
included a report of managements assessment of the design and operating
effectiveness of its internal controls as part of this Annual Report on Form 10-K.
The Corporations independent registered public accounting firm reported on the
effectiveness of internal control over financial reporting. Managements report
and the independent registered public accounting
firms report are included with our 2007 consolidated financial statements in
Item 8 of this Annual Report on Form 10-K under the captions entitled
Managements Report on Internal Control Over Financial Reporting and Report
of Independent Registered Public Accounting Firm.
b)
Changes in
Internal Controls and Procedures
. There were no changes in the Corporations
internal control over financial reporting during the Corporations fiscal
quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, its internal control over financial
reporting.
ITEM 9B.
OTHER INFORMATION
None.
41
PART III
ITEM 10.
DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
Directors
Information relating to our directors is incorporated by reference to
the information contained under the caption Proposal 1: Election of Directors
included in our proxy statement relating to our 2008 annual meeting of
shareholders.
Executive
Officers
Information relating to our executive officers incorporated by
reference to the information contained under the caption Executive Officers
included in our proxy statement relating to our 2008 annual meeting of
shareholders.
Compliance
with Section 16(a) of the Exchange Act
Information with respect to compliance with Section 16(a) of
the Securities Exchange Act of 1934, as amended, is incorporated by reference to the information
contained under the caption General Information Section 16(a) Beneficial
Ownership Reporting Compliance included in our proxy statement relating to our
2008 annual meeting of shareholders.
Code of
Ethics
Information with respect to our Code of Ethics is incorporated by
reference to the information contained under the caption Corporate Governance
Code of Ethics included in our proxy statement relating to our 2008 annual
meeting of shareholders.
Shareholder
Nominees
Information with respect to procedures by which shareholders may recommend nominees to the
Board of Directors is incorporated by reference to the information contained
under the caption Corporate Governance Shareholder Nomination of Directors
included in our proxy statement relating to our 2008 annual meeting of
shareholders.
Audit and
Compliance Committee
Information relating to the Audit and Compliance Committee is
incorporated by reference to the information contained under the caption Audit
Committee Report included in our proxy statement relating to our 2008 annual
meeting of shareholders.
ITEM 11.
EXECUTIVE COMPENSATION
Information regarding the Executive Compensation is incorporated by
reference to the information contained under the caption Compensation
Discussion and Analysis, Executive Compensation, Director Compensation, Compensation
Committee Report and Compensation Committee Interlocks and Inside
Participation included in our proxy statement relating to our 2008 annual
meeting of shareholders.
42
ITEM 12.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security
Ownership of Certain Beneficial Owners and Management
This information is incorporated is incorporated by reference to the
information contained under the caption Security Ownership of Certain
Beneficial Owners and Management included in our proxy statement relating to
our 2008 annual meeting of shareholders.
Equity Compensation Plan Information
The following table provides information as of December 31, 2007,
with respect to compensation plans under which shares of our common stock are
authorized for issuance:
Plan Category
|
|
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
|
|
Weighted-average Exercise
Price of Outstanding Options,
Warrants, and Rights
(b)
|
|
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plans Approved by Shareholders (1)
|
|
200,000
|
|
$
|
25.00
|
|
800,000
|
|
Equity Compensation Plans Not Approved by Shareholders (incentive
options for executive officers, directors, and incorporators) (2)
|
|
598,570
|
|
$
|
8.78
|
|
|
|
Total
|
|
798,570
|
|
$
|
13.14
|
|
800,000
|
|
|
(1)
|
Includes the Tennessee
Commerce Bancorp, Inc. 2007 Equity Plan.
|
|
|
|
|
(2)
|
Includes various stock
option agreements entered into with employees of the Bank between
January 14, 2000 and November 1, 2005.
|
ITEM 13.
CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
This information is incorporated is incorporated by
reference to the information contained under the caption Certain Relationships
and Related Transactions and Corporate Governance-Director Independence
included in our proxy statement relating to our 2008 annual meeting of
shareholders.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND
SERVICES
This information is incorporated is incorporated by
reference to the information contained under the caption Proposal 2:
Ratification of the Appointment of Independent Registered Accounting Firm
included in our proxy statement relating to our 2008 annual meeting of
shareholders.
43
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
(a)(1)
Financial Statements:
(2)
Schedules required by Article 12 of Regulation
S-X are either omitted because they are not applicable or because the required
information is shown in the financial statements or the notes thereto.
(3)
Exhibits:
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
Charter of Tennessee
Commerce Bancorp, Inc., as amended(1)
|
3.2
|
|
Articles of Amendment
to the Charter of Tennessee Commerce Bancorp, Inc.
|
3.3
|
|
Bylaws of Tennessee
Commerce Bancorp, Inc.(1)
|
3.4
|
|
Amendment to Bylaws of
Tennessee Commerce Bancorp, Inc.(2)
|
4.1
|
|
Shareholders
Agreement(1)
|
4.2
|
|
Form of Stock
Certificate(3)
|
10.1
|
|
Tennessee Commerce
Bancorp, Inc. Stock Option Plan - Employees(1)
|
10.2
|
|
Form of Tennessee
Commerce Bancorp, Inc. Directors Common Stock Option(1)
|
10.3
|
|
Form of Tennessee
Commerce Bancorp, Inc. Incorporators Common Stock Option(1)
|
10.4
|
|
Form of Tennessee
Commerce Bancorp, Inc. - Stock Option Agreement(1)
|
10.5
|
|
Tennessee Commerce
Bancorp, Inc. - Stock Option Agreement with Arthur F. Helf(1)
|
10.6
|
|
Tennessee Commerce
Bancorp, Inc. - Stock Option Agreement with Michael R. Sapp(1)
|
10.7
|
|
Tennessee Commerce
Bancorp, Inc. 1999 Stock Option Agreement with H. Lamar Cox(1)
|
10.8
|
|
Employment Agreement
between Tennessee Commerce Bancorp, Inc. and Arthur F. Helf(1)
|
10.9
|
|
Employment Agreement
between Tennessee Commerce Bancorp, Inc. and Michael R. Sapp(1)
|
10.10
|
|
Employment Agreement
between Tennessee Commerce Bancorp, Inc. and H. Lamar Cox(1)
|
10.11
|
|
Employment Agreement
between Tennessee Commerce Bancorp, Inc. and George W. Fort(4)
|
10.12
|
|
Tennessee Commerce
Bancorp, Inc. 2007 Equity Plan(5)
|
10.13
|
|
Summary of Tennessee
commerce Bancorp, Inc. Executive Officer Compensation(6)
|
21.1
|
|
Subsidiaries
|
23.1
|
|
Report of Independent
Registered Public Accounting Firm
|
31.1
|
|
Certification
of Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2
|
|
Certification
of Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1
|
|
Certification
of Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
|
Certification
of Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
(1)
|
Previously
filed as an exhibit to Tennessee Commerce Bancorp, Inc.s Registration
Statement on Form 10, as filed with the Securities and Exchange
Commission on April 29, 2005, and incorporated herein by reference.
|
|
|
|
|
(2)
|
Previously
filed as an exhibit to Tennessee Commerce Bancorp, Inc.s Current Report
on Form 8-K, as filed with the Securities and Exchange Commission on February 5,
2008, and incorporated herein by reference.
|
|
|
|
|
(3)
|
Previously
filed as an exhibit to Tennessee Commerce Bancorp, Inc.s Registration
Statement on Form S-8, as filed with the Securities and Exchange
Commission on December 31, 2007 (Registration No. 333-148415), and
incorporated herein by reference.
|
44
|
(4)
|
Previously
filed as an exhibit to Tennessee Commerce Bancorp, Inc.s Registration
Statement on Form S-1, as filed with the Securities and Exchange
Commission on April 25, 2006 (Registration No. 333-148415), and
incorporated herein by reference.
|
|
|
|
|
(5)
|
Previously
filed as an exhibit to Tennessee Commerce Bancorp, Inc.s Quarterly
Report on Form 10-Q, as filed with the Securities and Exchange
Commission on August 14, 2007, and incorporated herein by reference.
|
|
|
|
|
(6)
|
Previously
filed as an exhibit to Tennessee Commerce Bancorp, Inc.s Current Report
on Form 8-K, as filed with the Securities and Exchange Commission on
June 26, 2007, and incorporated herein by reference.
|
45
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2007
and 2006
CONTENTS
F-1
Managements Report on Internal Control Over Financial Reporting
Management of the Company is responsible for
establishing and maintaining adequate internal control over financial
reporting, (as defined in Rules 13a-15(f) and 15d-15(f) of the
Securities Exchange Act of 1934, as amended) that is designed to produce
reliable financial statements in conformity with accounting principles
generally accepted in the United States.
The Companys internal control over financial reporting includes those
policies and procedures that: (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the
Company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements.
The system of internal control over financial
reporting as it relates to the financial statements is evaluated for
effectiveness by management and tested for reliability through a program of
internal audits. Actions are taken to correct potential deficiencies as they
are identified. Any system of internal control, no matter how well designed,
has inherent limitations, including the possibility that a control can be circumvented
or overridden, and misstatements resulting from error or fraud may occur and
not be detected. Also, because of changes in conditions, internal control
effectiveness may vary over time. Accordingly, even an effective system of
internal control will provide only reasonable assurance with respect to
financial statement preparation.
Management, with the participation of the Companys
Chief Executive Officer and acting Chief Financial Officer, conducted an
assessment of the effectiveness of the Companys system of internal control
over financial reporting as of December 31, 2007, based on criteria for
effective internal control over financial reporting described in Internal
Control - Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Based on this assessment, management identified the following material
weaknesses in internal control over financial reporting as of December 31,
2007:
Employee Accounts Certain transactions related to
employee accounts were not appropriately processed, reviewed and approved in
accordance with Company policy; and
Asset/Liability Management Committee While the
Company has an Asset/Liability Management Committee (the ALCO) that provides
information to the Companys Board of Directors, no meetings of the ALCO were
held during 2007.
These control deficiencies had no known impact on the
Companys financial reporting.
A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of the companys annual
or interim financial statements would not be prevented or detected on a timely
basis. As a result of the two material weaknesses described in the preceding
paragraph, management has concluded that the Companys internal control over
financial reporting was not effective as of December 31, 2007 based on the
criteria described in the Internal Control Integrated Framework.
KraftCPAs PLLC, the Companys independent registered
public accounting firm, has issued an attestation report on the Companys
internal control over financial reporting which appears on page F-4 of
this annual report.
Changes in
Internal Control Over Financial Reporting
Management
of the Company has evaluated, with the participation of the Companys Chief
Executive Officer and acting Chief Financial Officer, changes in the Companys
internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934, as amended) during the
fourth quarter of 2007. In connection with such evaluation, the Company has
determined that there have been changes in internal control over financial
reporting that are reasonably likely to materially affect the Companys
internal control over financial reporting. As discussed in Managements Report
on Internal Control Over Financial Reporting, the Company identified two control deficiencies it concluded were material
weaknesses in internal control over financial reporting.
F-2
As
of December 31, 2007, the Company had not fully remediated the material weaknesses in the Companys
internal control over financial reporting. However, since January 15,
2008, the Company has taken the following remedial actions:
·
Employees have been informed that, in
accordance with Company policy, all personal transactions are to be handled in
the same manner as customer transactions.
Management has initiated a training program for all employees to ensure
understanding of the necessity for adherence to policies governing personal
transactions.
·
Management has established controls to ensure
that all employees sign acknowledgement forms regarding Company policies,
including the Employee Financial Services Policy (relating to employees
personal transactions) and other key Company policies.
·
In February 2008, the Chair of the Audit
Committee of the Companys Board of Directors was appointed Chair of the
ALCO. Also in February 2008, the
ALCO met, determined that the ALCO-related information provided to the Board of
Directors during 2007 was accurate and complete, and ratified such information
as previously provided to the Board of Directors.
The ALCO has been directed to meet at least
quarterly during 2008 and provide reports of those meetings to the Board of
Directors.
F-3
Report of Independent Registered Public
Accounting Firm
To the Board of Directors
and Shareholders
Tennessee Commerce Bancorp, Inc.
We have audited the
consolidated balance sheets of Tennessee Commerce Bancorp, Inc. and
subsidiaries (collectively, the Company) as of December 31, 2007 and
2006, and the related consolidated statements of income, changes in shareholders
equity and cash flows for each of the three years in the period ended December 31,
2007. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Tennessee Commerce Bancorp, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), Tennessee Commerce Bancorp, Inc. and subsidiaries
internal control over financial reporting as of December 31, 2007, based
on
criteria established
in
Internal ControlIntegrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our
report dated April 17, 2008 expressed an opinion that Tennessee Commerce
Bancorp, Inc. had not maintained effective internal control over financial
reporting as of December 31, 2007, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
KraftCPAs PLLC
Nashville, Tennessee
April 17, 2008
F-4
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders
Tennessee
Commerce Bancorp, Inc.
Franklin,
Tennessee
We have audited the internal
control over financial reporting of Tennessee Commerce Bancorp, Inc. and
subsidiaries (collectively, the Company) as of December 31, 2007, based
on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO
)
. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management Report on Internal Control Over
Financial Reporting. Our responsibility
is to express an opinion on the Companys internal control over financial
reporting based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk.
Our audit also included performing such other procedures as we
considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
A companys internal control
over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
F-5
A material weakness is a
deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a
material misstatement of the Companys annual or interim financial statements
will not be prevented or detected on a timely basis.
The following material
weaknesses have been identified and included in managements assessment. (1) The
Companys policy prohibiting employees from initiating transactions affecting
their own accounts without appropriate review was violated. Numerous transactions processed on employee
accounts were not appropriately reviewed and approved. (2) Formal meetings
of the Asset/Liability Management Committee did not occur during 2007. Furthermore, items discussed during informal
meetings between members of the Asset/Liability Management Committee were
presented to the Board of Directors in the form of formal minutes. These material weaknesses were considered in
determining the nature, timing, and extent of audit tests applied in our audit
of the 2007 financial statements, and this report does not affect our report
dated April 17, 2007 on those financial statements.
In our opinion, because of
the effects of the material weaknesses described above on the achievement of
the objectives of the control criteria, Tennessee Commerce Bancorp, Inc.
and subsidiaries has not maintained effective internal control over financial
reporting as of December 31, 2007, based on criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Tennessee Commerce Bancorp, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of income, changes in shareholders equity and cash
flows for each of the three years in the period ended December 31, 2007,
and our report dated April 17, 2008 expressed an unqualified opinion on
those consolidated financial statements.
KraftCPAs PLLC
Nashville, Tennessee
April 17, 2008
F-6
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
(Dollars in thousands except share data)
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Cash and due from financial institutions
|
|
$
|
5,236
|
|
$
|
177
|
|
Federal funds sold
|
|
9,573
|
|
13,820
|
|
Cash and cash equivalents
|
|
14,809
|
|
13,997
|
|
|
|
|
|
|
|
Securities available for sale
|
|
73,753
|
|
56,943
|
|
Loans
|
|
794,322
|
|
545,518
|
|
Allowance for loan losses
|
|
(10,321
|
)
|
(6,968
|
)
|
Net loans
|
|
784,001
|
|
538,550
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
1,413
|
|
1,633
|
|
Accrued interest receivable
|
|
5,901
|
|
4,116
|
|
Restricted equity securities
|
|
938
|
|
633
|
|
Deferred tax asset
|
|
|
|
635
|
|
Income tax receivable
|
|
1,886
|
|
|
|
Other assets
|
|
17,452
|
|
7,011
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
900,153
|
|
$
|
623,518
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
27,427
|
|
$
|
17,001
|
|
Interest-bearing
|
|
787,626
|
|
543,566
|
|
Total deposits
|
|
815,053
|
|
560,567
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
2,000
|
|
|
|
Accrued interest payable
|
|
2,292
|
|
1,728
|
|
Short-term borrowings
|
|
7,000
|
|
|
|
Accrued bonuses
|
|
1,700
|
|
623
|
|
Deferred tax liability
|
|
139
|
|
|
|
Other liabilities
|
|
600
|
|
1,128
|
|
Long-term subordinated debt
|
|
8,248
|
|
8,248
|
|
Total liabilities
|
|
837,032
|
|
572,294
|
|
Shareholders equity
|
|
|
|
|
|
Preferred stock, no par value, 1,000,000
shares authorized; none issued
|
|
|
|
|
|
Common stock, $0.50 par value; 10,000,000
shares authorized at December 31, 2007 and December 31, 2006;
4,724,196 and 4,451,674 shares issued and outstanding at December 31,
2007 and December 31, 2006, respectively
|
|
2,362
|
|
2,226
|
|
Additional paid-in capital
|
|
45,024
|
|
40,755
|
|
Retained earnings
|
|
15,426
|
|
8,530
|
|
Accumulated other comprehensive income
(loss)
|
|
309
|
|
(287
|
)
|
Total shareholders equity
|
|
63,121
|
|
51,224
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
900,153
|
|
$
|
623,518
|
|
See accompanying notes to consolidated
financial statements.
F-7
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands except share data)
|
|
2007
|
|
2006
|
|
2005
|
|
Interest income
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
58,114
|
|
$
|
38,382
|
|
$
|
22,488
|
|
Securities
|
|
3,492
|
|
2,216
|
|
980
|
|
Federal funds sold
|
|
600
|
|
647
|
|
165
|
|
Total interest income
|
|
62,206
|
|
41,245
|
|
23,633
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
Deposits
|
|
34,245
|
|
21,216
|
|
9,567
|
|
Other
|
|
689
|
|
652
|
|
439
|
|
Total interest expense
|
|
34,934
|
|
21,868
|
|
10,006
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
27,272
|
|
19,377
|
|
13,627
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
6,350
|
|
4,350
|
|
3,700
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan losses
|
|
20,922
|
|
15,027
|
|
9,927
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
132
|
|
112
|
|
114
|
|
Gain on sale of loans
|
|
2,687
|
|
2,025
|
|
1,106
|
|
Other
|
|
61
|
|
(374
|
)
|
91
|
|
Total non-interest income
|
|
2,880
|
|
1,763
|
|
1,311
|
|
|
|
|
|
|
|
|
|
Non interest expense
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
7,977
|
|
5,047
|
|
3,700
|
|
Occupancy and equipment
|
|
1,109
|
|
844
|
|
629
|
|
Data processing fees
|
|
983
|
|
701
|
|
474
|
|
Professional fees
|
|
779
|
|
786
|
|
398
|
|
Other
|
|
2,415
|
|
1,678
|
|
1,045
|
|
Total non-interest expense
|
|
13,263
|
|
9,056
|
|
6,246
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
10,539
|
|
7,734
|
|
4,992
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
3,643
|
|
2,985
|
|
1,925
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,896
|
|
$
|
4,749
|
|
$
|
3,067
|
|
|
|
|
|
|
|
|
|
Earnings per share (EPS):
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
1.49
|
|
$
|
1.24
|
|
$
|
0.95
|
|
Diluted EPS
|
|
1.41
|
|
1.14
|
|
0.87
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
4,613,342
|
|
3,822,655
|
|
3,238,674
|
|
Diluted
|
|
4,892,167
|
|
4,157,338
|
|
3,517,408
|
|
See accompanying notes to consolidated
financial statements.
F-8
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
Additional
|
|
|
|
Other
|
|
Total
|
|
|
|
Common
|
|
Paid-In
|
|
Retained
|
|
Comprehensive
|
|
Shareholders
|
|
(Dollars in thousands except share data)
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Income (Loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$
|
1,619
|
|
$
|
21,401
|
|
$
|
714
|
|
$
|
(134
|
)
|
$
|
23,600
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
3,067
|
|
|
|
3,067
|
|
Other comprehensive income, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities available for
sale during the period, net of $(146) in tax
|
|
|
|
|
|
|
|
(234
|
)
|
(234
|
)
|
Reclassification adjustment for gains
included in net income, net of $1 in tax
|
|
|
|
|
|
|
|
(3
|
)
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
2,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
1,619
|
|
21,401
|
|
3,781
|
|
(371
|
)
|
26,430
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
4,749
|
|
|
|
4,749
|
|
Other comprehensive income, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities available
for sale during the period, net of $53 in tax
|
|
|
|
|
|
|
|
84
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
4,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 1,150,000 common shares
|
|
575
|
|
18,452
|
|
|
|
|
|
19,027
|
|
Exercise of stock options to purchase
63,000 common shares and related tax benefit
|
|
32
|
|
820
|
|
|
|
|
|
852
|
|
Stock-based compensation expense
|
|
|
|
82
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
2,226
|
|
40,755
|
|
8,530
|
|
(287
|
)
|
51,224
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
6,896
|
|
|
|
6,896
|
|
Other comprehensive income, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities available
for sale during the period, net of $366 in tax
|
|
|
|
|
|
|
|
596
|
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
7,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options to purchase
272,522 common shares and related tax benefit
|
|
136
|
|
3,995
|
|
|
|
|
|
4,131
|
|
Stock-based compensation expense
|
|
|
|
259
|
|
|
|
|
|
259
|
|
Section 16 profit reimbursement
|
|
|
|
15
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
2,362
|
|
$
|
45,024
|
|
$
|
15,426
|
|
$
|
309
|
|
$
|
63,121
|
|
See accompanying notes to consolidated
financial statements.
F-9
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands except share data)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,896
|
|
$
|
4,749
|
|
$
|
3,067
|
|
Adjustments to reconcile net income to net
cash provided by operating activities
|
|
|
|
|
|
|
|
Depreciation
|
|
333
|
|
259
|
|
171
|
|
Deferred loan fees
|
|
919
|
|
234
|
|
86
|
|
Provision for loan losses
|
|
6,350
|
|
4,350
|
|
3,700
|
|
FHLB stock dividends
|
|
|
|
(32
|
)
|
(17
|
)
|
Stock-based compensation expense
|
|
259
|
|
82
|
|
|
|
Deferred income tax
|
|
408
|
|
(198
|
)
|
254
|
|
Net amortization of investment securities
|
|
11
|
|
14
|
|
40
|
|
Gain on sales of securities
|
|
(26
|
)
|
|
|
(4
|
)
|
Change in:
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
(1,785
|
)
|
(1,968
|
)
|
(1,045
|
)
|
Accrued interest payable
|
|
564
|
|
602
|
|
681
|
|
Income tax receivable
|
|
(1,886
|
)
|
|
|
|
|
Other assets
|
|
(10,442
|
)
|
(2,352
|
)
|
(3,567
|
)
|
Other liabilities
|
|
549
|
|
1,220
|
|
53
|
|
Net cash from operating activities
|
|
2,150
|
|
6,960
|
|
3,419
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Purchases of securities available for sale
|
|
(43,898
|
)
|
(26,781
|
)
|
(17,315
|
)
|
Proceeds from sales of securities available
for sale
|
|
25,850
|
|
|
|
1,489
|
|
Proceeds from maturities, prepayments and
calls of securities available for sale
|
|
2,216
|
|
1,953
|
|
2,104
|
|
Investment in unconsolidated subsidiary
|
|
|
|
|
|
(248
|
)
|
Net change in loans
|
|
(252,720
|
)
|
(198,947
|
)
|
(134,561
|
)
|
Purchases of FHLB Stock
|
|
(305
|
)
|
(218
|
)
|
(125
|
)
|
Net purchases of premises and equipment
|
|
(113
|
)
|
(1,123
|
)
|
(330
|
)
|
Net cash used by investing activities
|
|
(268,970
|
)
|
(225,116
|
)
|
(148,986
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Net change in deposits
|
|
254,486
|
|
192,862
|
|
146,311
|
|
Net change in federal funds purchased and
repurchase agreements
|
|
2,000
|
|
|
|
|
|
Proceeds from long-term subordinated debt
|
|
|
|
|
|
8,248
|
|
Proceeds from issuance of common stock
|
|
|
|
19,027
|
|
|
|
Proceeds from exercise of common stock
options
|
|
2,152
|
|
596
|
|
|
|
Proceeds from issuance of short-term debt
|
|
7,000
|
|
|
|
|
|
Excess tax benefit from option exercises
|
|
1,979
|
|
256
|
|
|
|
Section 16 profit reimbursement
|
|
15
|
|
|
|
|
|
Net cash provided by financing activities
|
|
267,632
|
|
212,741
|
|
154,559
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
812
|
|
(5,415
|
)
|
8,992
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of
period
|
|
13,997
|
|
19,412
|
|
10,420
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
14,809
|
|
$
|
13,997
|
|
$
|
19,412
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
Cash paid during period for interest
|
|
$
|
34,370
|
|
$
|
21,266
|
|
$
|
9,325
|
|
Cash paid during period for income taxes
|
|
4,745
|
|
2,075
|
|
2,089
|
|
See accompanying notes to consolidated financial statements.
F-10
TENNESSEE
COMMERCE BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting principles followed and the methods
of applying those principles conform with accounting principles generally accepted
in the United States of America and to general practices in the banking
industry. The significant policies are summarized as follows:
Principles of Consolidation
: The accompanying consolidated
financial statements include the accounts of Tennessee Commerce Bancorp, Inc.
(the Corporation) and its wholly-owned subsidiary, Tennessee Commerce Bank
(the Bank, and, together with the Corporation, the Company). Tennessee
Commerce Statutory Trust I is not consolidated and is accounted for under the equity
method. Material intercompany accounts and transactions have been eliminated.
Nature of Operations
: The Corporation was formed in July 2000.
The Bank received its charter as a state bank and opened for business in January 2000.
Substantially all of the assets, liabilities and operations presented in the
consolidated financial statements are attributable to the Bank. The Bank
provides a variety of banking services to individuals and businesses in Middle
Tennessee. Its primary deposit products are demand and savings deposits and
certificates of deposit, and its primary lending products are commercial, lease
financing, real estate mortgage and installment loans.
The Banks loans are generally secured by specific
items of collateral including real property, consumer assets and business
assets. Although the Bank has a diversified loan portfolio, a substantial
portion of its debtors ability to honor their contracts is dependent on local
economic conditions.
Use of Estimates
: To prepare financial statements in
conformity with accounting principles generally accepted in the United States
of America, management makes estimates and assumptions based on available
information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could
differ. The allowance for loan losses and fair value of financial instruments
are particularly subject to change.
Statement of Cash Flows
: For purposes of presentation in the
statements of cash flows, cash and cash equivalents include amounts due from
financial institutions and federal funds sold. Net cash flows are reported for
loan and deposit transactions.
Securities
: In accordance with Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for
Certain Debt and Equity Securities, all securities are classified as
available for sale. The Bank has no trading securities or held to maturity
securities as of December 31, 2007.
Securities classified as available for sale may be sold
in response to changes in interest rates, liquidity needs and for other
purposes. Available for sale securities are reported at fair value and include
securities not classified as held to maturity or trading.
Unrealized holding gains and losses for available
for sale securities are reported in other comprehensive income. Realized gains
(losses) on securities available for sale are included in other income
(expense) and, when applicable, are reported as a reclassification adjustment,
net of tax, in other comprehensive income. Gains and losses on sales of
securities are determined on the specific-identification method.
Interest income includes amortization of purchase
premium or discount. Gains and losses on sales are based on the amortized cost
of the security sold. Securities are written down to fair value when a decline
in fair value is not temporary. Any such losses are charged to earnings.
F-11
Mortgage
Banking Activities
: The Bank originates mortgage loans for sale
and these loans are carried at the lower of cost or fair value, determined on
an aggregate basis. Generally, a commitment is obtained from investors at
origination in order to minimize market risk directly related to interest rate
movements. Origination fees are recorded as income when the loans are sold to
third party investors. At the end of the year for each period presented there
were no loans held for sale.
Loans
: Loans that the Bank has the positive intent and ability to hold
to maturity are stated at the principal amount outstanding. Interest on loans
is computed daily based on the principal amount outstanding. Loan origination
fees are deferred, to the extent they exceed direct origination costs, and
recognized over the life of the related loans as yield adjustments.
Loans are generally placed on nonaccrual when a loan
is specifically determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously accrued on those
loans is reversed from income. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is remote.
Interest payments received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is recognized only
to the extent of interest payments received.
Tax leases
: Tax leases comprised $22,752,000 and $6,936,000 of loans on the
balance sheet at December 31, 2007 and 2006, respectively. In accordance
with the SFAS No. 140, Accounting
For Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, at the time of investment, the tax lease asset is recorded
along with unearned interest income followed by periodic journal entries to
record the interest income and maintain an accurate representation of the
investment balance. The current balance is part of Loans on the balance sheet
and as Other on the Summary of Loans in Note 3. For 2007, the tax leases
created a net timing difference of $4,800,328. Net deductions of
$4,800,328 were allowed for tax, but not book. For 2006, the tax leases created
a net timing difference of $1,550,007. Net deductions of $1,550,007 were
allowed for tax, but not book.
Allowance for Loan Losses
: The allowance for loan losses is
maintained at a level that, in managements judgment, is adequate to absorb
credit losses inherent in the loan portfolio. The amount of the allowance is
based on managements evaluation of the collectability of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, impaired loans and economic conditions. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. Because of uncertainties associated with
the regional economic conditions, collateral values and future cash flows on
impaired loans, it is reasonably possible that managements estimate of credit
losses inherent in the loan portfolio and the related allowance may change
materially in the near term. The allowance is increased by the provision for
loan losses and reduced by charge-offs, net of recoveries.
The allowance consists of specific and general
components. The specific component relates to loans that are individually
classified as impaired or loans otherwise classified as substandard or
doubtful. The general component covers non-classified loans and is based on
historical loss experience adjusted for current factors.
Management periodically reviews the loan portfolio.
A loan is placed on non-accrual status when it is 90 days or more past due and
immediate collection is doubtful. The non-accrual loans are reviewed
periodically for impairment. A loan is impaired when full payment under the
loan terms is not expected. Commercial and commercial real estate loans are
individually evaluated for impairment. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loans existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Large
groups of smaller balance homogeneous loans, such as consumer and residential
real estate loans, are collectively evaluated for impairment, and accordingly,
they are not separately identified for impairment disclosures. Loans are
charged-off at a time when the collection efforts are reasonably deemed
uncollectable.
Premises and Equipment
: Premises and equipment are stated at
cost, less accumulated depreciation and amortization. The provision for
depreciation is computed principally on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized over
the shorter of the lease term or useful life of the asset. Costs of major
additions and improvements are capitalized. Expenditures for maintenance and
repairs are charged to operations as incurred.
F-12
Other Real Estate
: Real estate acquired by foreclosure
is carried at the lower of the recorded investment in the property or its fair
value, less costs to sell, at the date of foreclosure, determined by appraisal.
Declines in value indicated by reappraisals as well as losses resulting from disposition
are charged to operations. Subsequent expenses are expensed as they occur after
any re-acquisitions.
Gain on Sale of Loans
: Transfers of financial assets are accounted
for as sales when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets have been isolated
from the Corporation, (2) the transferee obtains the right (free of
conditions that constrain it from taking advantage of the right) to pledge or
exchange the transferred assets, and (3) the Corporation does not maintain
effective over the transferred assets through an agreement to repurchase them
before maturity. The Bank records the transfer by allocating the carrying
amount of the financial asset between the assets sold, and the retained
interests, if any, based on their relative fair values at the date of transfer.
Estimates of expected future cash flows are used to determine fair value on the
date of transfer. The gain on sale is presented as a component of non-interest
income.
Interest-Only Strips Receivable
: Interest-only strips receivable are
related to loans originated and sold to others, and represent the difference
between the loans coupon rate and the rate passed through to investors. The
initial amount recorded as interest-only strips receivable (I/O) is computed
by applying present value factors to the investors expected cash flows
compared to expected cash flows from the borrowers. I/Os are carried at fair
value and unrealized losses or gains are recognized into income. I/Os are
included in other assets on the balance sheet.
Servicing Asset
: Servicing assets are recognized as separate
assets when rights are acquired through purchase or through sale of financial
assets. When the Bank sells loans to others that it continues to service, a
servicing asset is recorded at fair value. Capitalized servicing rights are
reported in other assets and are amortized over the life of the loan being
serviced.
Stock-Based Compensation
: Effective January 1, 2006, the
Corporation adopted SFAS No. 123(R), Share-based Payment, using the modified prospective transition
method. Accordingly, the Corporation has recorded stock-based employee
compensation cost based on the fair value method using the Black-Scholes
valuation model starting in 2006. For 2007, adopting this standard
resulted in a reduction of income before income taxes of $259,000, a reduction
in net income of $169,000 and a decrease in basic and diluted earnings per
share of $.04 and $.03. For 2006, adopting this standard resulted in a
reduction of income before income taxes of $82,000, a reduction in net income
of $51,000, and a decrease in basic and diluted earnings per share of $.01 and
$.01.
Prior to January 1, 2006, employee compensation
expense under stock options was reported using the intrinsic value method;
therefore, no stock-based compensation cost is reflected in net income for the
year ending December 31, 2005, as all options granted had an exercise
price equal to or greater than the market price of the underlying common stock
at date of grant.
The following table illustrates the effect on net
income and earnings per share if expense was measured using the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
for the year ending December 31, 2005:
(Dollars in thousands except share data)
|
|
2005
|
|
|
|
|
|
Net income as reported
|
|
$
|
3,067
|
|
Deduct: Stock-based compensation expense
determined under fair value based method
|
|
245
|
|
|
|
|
|
Pro forma net income
|
|
$
|
2,822
|
|
|
|
|
|
Basic earnings per share as reported
|
|
$
|
0.95
|
|
Pro forma basic earnings per share
|
|
0.87
|
|
|
|
|
|
Diluted earnings per share as reported
|
|
0.87
|
|
Pro forma diluted earnings per share
|
|
0.80
|
|
F-13
The pro forma effects are computed using option
pricing models, using the following weighted-average assumptions as of grant
date:
|
|
2005
|
|
|
|
|
|
Risk-free interest rate
|
|
3.96
|
%
|
Expected option life
|
|
5 years
|
|
Dividend yield
|
|
0.0
|
%
|
The weighted average fair value of options granted
during the year was $4.03 for 2005.
In June of 2007, the Tennessee Commerce Bancorp
2007 Equity Plan was adopted and the Corporation reserved authorized shares to
be issued, and not repurchased, in accordance with the provisions of the plan.
Stock Issuance
: On June 27, 2006, the Corporations
Registration Statement on Form S-1, as amended (Registration 333-133539),
was declared effective by the SEC. Pursuant to the registration
statement, the Corporation registered 1,150,000 shares of its common stock at a
price of $18.00 per share. On July 3, 2006, the Corporation received
$16,920,000 of net proceeds from the sale of 1,000,000 shares of its common
stock in connection with its public offering, and on July 28, 2006, the
Corporation received $2,538,000 of net proceeds from the sale of 150,000
additional shares of its common stock issued in connection with the
underwriters over-allotment option. As of July 28, 2006, all
1,150,000 shares offered under the registration statement had been fully
subscribed. FTN Midwest Securities Corp. and Sterne, Agee & Leach, Inc.
were the managing underwriters for the offering. The total expenses
incurred for the Corporations account in connection with the issuance and
distributions of the securities were $431,000. The net offering proceeds to the
Corporation after deducting the total expenses were $19,027,000. These
net proceeds were used to repay the $5,000,000 outstanding balance on our
revolving line of credit, to fund the continued expansion of our franchise and
for general corporate purposes.
Income Taxes
: Income tax expense is the total of
the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the expected
future tax amounts for the temporary differences between carrying amounts and
tax bases 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.
The Company adopted FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes, as of January 1, 2007. A tax position is recognized as a benefit
only if it is more likely than not that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on
examination. For tax positions not
meeting the more likely that not test, no tax benefit is recorded. The adoption had no effect on the Companys
financial statements.
The Company recognizes interest and/or penalties
related to income tax matters in income tax expense.
Advertising Costs
: Advertising costs are generally
charged to operations in the year incurred and totaled $73,000, $206,000, and
$140,000 in 2007, 2006 and 2005.
Off-Balance Sheet Financial Instruments
: Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans,
financial guarantees and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay. Such
financial instruments are recorded when they are funded.
Restrictions on Cash
: Cash on hand or on deposit with other
banks of $227,000 and $220,000 was required to meet regulatory reserve and
clearing requirements at year-end 2007 and 2006, respectively. These balances
do not earn interest.
F-14
Dividend Restrictions
: Banking regulations require
maintaining certain capital levels and may limit the dividends paid by the Bank
to the Corporation, which would limit dividends payable by the Corporation to
its shareholders.
Comprehensive Income
: Comprehensive income consists of net
income and other comprehensive income. Other comprehensive income includes
unrealized gains and losses on securities available for sale which are also
recognized as separate components of equity.
Fair Value of Financial Instruments
: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed in Note 13. 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.
Recently Issued Accounting Standards
: In September 2006,
the FASB released SFAS No. 157 (SFAS No. 157), Fair Value
Measurements. This statement defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.
SFAS No. 157 clarifies the exchange price notion in the fair value
definition to mean the price that would be received to sell the asset or paid
to transfer the liability (an exit price), not the price that would be paid to
acquire the asset or received to assume the liability (an entry price). This
statement also clarifies that market participant assumptions should include
assumptions about risk, should include assumptions about the effect of a
restriction on the sale or use of an asset and should reflect its
nonperformance risk (the risk that the obligation will not be fulfilled).
Nonperformance risk should include the reporting entitys credit risk. SFAS No. 157
is effective for financial statements issued for fiscal years beginning after November 15,
2007. The Corporation adopted SFAS No. 157 on January 1, 2008, and
management is still evaluating the impact on the Corporations consolidated
financial statements.
Operating Segments
: While the chief decision-makers
monitor the revenue streams of the various products and services, the
Corporation does not have any identifiable segments.
Reclassifications
: Some items in the prior year
financial statements were reclassified to conform to the current presentation.
F-15
NOTE 2 - SECURITIES
The fair value of available for sale securities and
the related gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss) were as follows:
|
|
|
|
Gross
|
|
Gross
|
|
|
|
Fair
|
|
Unrealized
|
|
Unrealized
|
|
(Dollars in thousands)
|
|
Value
|
|
Gains
|
|
Losses
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
64,090
|
|
$
|
504
|
|
$
|
(36
|
)
|
Mortgage-backed securities
|
|
5,306
|
|
|
|
(104
|
)
|
Corporate debt securities
|
|
268
|
|
|
|
(12
|
)
|
Corporate bonds
|
|
3,508
|
|
1
|
|
(54
|
)
|
Other
|
|
581
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
73,753
|
|
$
|
706
|
|
$
|
(206
|
)
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
45,479
|
|
$
|
134
|
|
$
|
(514
|
)
|
Mortgage-backed securities
|
|
6,465
|
|
|
|
(207
|
)
|
Corporate debt securities
|
|
319
|
|
|
|
(16
|
)
|
Corporate bonds
|
|
4,126
|
|
|
|
(34
|
)
|
Other
|
|
554
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
56,943
|
|
$
|
308
|
|
$
|
(771
|
)
|
Contractual maturities of debt securities at December 31,
2007 are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without prepayment penalties.
(Dollars in thousands)
|
|
Fair Value
|
|
|
|
|
|
Due in less than one year
|
|
$
|
|
|
Due after one through five years
|
|
11,955
|
|
Due after five through ten years
|
|
23,179
|
|
Due after ten years
|
|
33,313
|
|
Mortgage-backed securities
|
|
5,306
|
|
|
|
|
|
|
|
$
|
73,753
|
|
Gross gains of $26,000, $0, and $4,000 on sales of
securities were recognized in 2007, 2006 and 2005, respectively. Securities
carried at $11,735,000 and $10,535,000 at December 31, 2007 and 2006,
respectively, were pledged to secure deposits and for other purposes as
required or permitted by law.
Restricted equity securities consist of securities
which are restricted as to transferability. These securities are recorded at
cost.
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock
|
|
$
|
938
|
|
$
|
633
|
|
|
|
|
|
|
|
|
|
F-16
Securities
with unrealized losses at year-end 2007 and 2006, and the length of time they
have been in continuous loss positions are as follows:
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
(Dollars in thousands)
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
60,119
|
|
$
|
10
|
|
$
|
3,971
|
|
$
|
26
|
|
$
|
64,090
|
|
$
|
36
|
|
Mortgage-backed securities
|
|
|
|
|
|
5,234
|
|
104
|
|
5,234
|
|
104
|
|
Corporate debt securities
|
|
|
|
|
|
268
|
|
12
|
|
268
|
|
12
|
|
Corporate bonds
|
|
3,508
|
|
54
|
|
|
|
|
|
3,508
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,627
|
|
$
|
64
|
|
$
|
9,473
|
|
$
|
142
|
|
$
|
73,100
|
|
$
|
206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies
|
|
$
|
22,721
|
|
$
|
94
|
|
$
|
22,758
|
|
$
|
420
|
|
$
|
45,479
|
|
$
|
514
|
|
Mortgage-backed securities
|
|
|
|
|
|
6,465
|
|
207
|
|
6,465
|
|
207
|
|
Corporate debt securities
|
|
|
|
|
|
319
|
|
16
|
|
319
|
|
16
|
|
Corporate bonds
|
|
|
|
|
|
4,126
|
|
34
|
|
4,126
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,721
|
|
$
|
94
|
|
$
|
33,668
|
|
$
|
677
|
|
$
|
56,389
|
|
$
|
771
|
|
Unrealized
losses on U.S. government agency securities have not been recognized into
income because the securities are backed by the U.S. government or its
agencies, management has the intent and ability to hold for the foreseeable
future and the decline in fair value is largely a result of increases in market
interest rates. The unrealized losses on mortgage-backed securities and
corporate securities have not been recognized into income because management
has the intent and ability to hold for the foreseeable future, and the decline
in fair value is largely a result of increases in market interest rates. The
fair value of the securities above is expected to recover as the securities
approach their maturity dates and/or market rates decline.
NOTE
3 - LOANS
A
summary of loans outstanding by category at December 31:
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
112,405
|
|
$
|
74,482
|
|
1 to 4 family residential
|
|
33,560
|
|
22,873
|
|
Other
|
|
143,973
|
|
83,985
|
|
Commercial, financial and agricultural
|
|
477,666
|
|
353,996
|
|
Consumer
|
|
3,966
|
|
3,246
|
|
Other
|
|
22,752
|
|
6,936
|
|
|
|
794,322
|
|
545,518
|
|
Less: Allowance for loan losses
|
|
(10,321
|
)
|
(6,968
|
)
|
|
|
|
|
|
|
Net loans
|
|
$
|
784,001
|
|
$
|
538,550
|
|
The Bank records a transfer of financial assets as a
sale when it surrenders control over those financial assets to the extent that
consideration other than beneficial interests in the assets is received in
exchange. The amount of the proceeds for loans that were transferred with
recourse that were recorded as sales for each period follows.
F-17
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Proceeds from loans transferred with
recourse
|
|
$
|
40,590
|
|
$
|
26,022
|
|
$
|
19,571
|
|
|
|
|
|
|
|
|
|
|
|
|
The Bank services loans for the benefit of others.
The amount of loans being serviced for the benefit of others at year end for
each period follows.
|
|
December
31,
|
|
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Amount of loans being serviced
|
|
$
|
86,489
|
|
$
|
66,465
|
|
$
|
36,094
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain parties (principally executive officers and
directors of the Bank, including their related interests) were customers of,
and had loans with the Bank in the ordinary course of business. These loan transactions
were made on substantially the same terms as those prevailing at the time for
comparable loans to other persons. They did not involve more than the normal
risk of collectability or present other unfavorable features.
Loans
to principal officers, directors and their affiliates in 2007 were as follows.
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
8,724
|
|
$
|
6,465
|
|
New loans
|
|
4,475
|
|
3,788
|
|
|
|
|
|
|
|
Repayments
|
|
(6,395
|
)
|
(1,529
|
)
|
|
|
|
|
|
|
Ending balance
|
|
$
|
6,804
|
|
$
|
8,724
|
|
NOTE 4 ALLOWANCE FOR LOAN LOSSES
Changes
in the allowance for loan losses were as follows:
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
6,968
|
|
$
|
4,399
|
|
$
|
2,841
|
|
Provision charged to operating expenses
|
|
6,350
|
|
4,350
|
|
3,700
|
|
Loans charged-off
|
|
(3,310
|
)
|
(2,037
|
)
|
(2,411
|
)
|
Recoveries
|
|
313
|
|
256
|
|
269
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
10,321
|
|
$
|
6,968
|
|
$
|
4,399
|
|
Impaired
loans were as follows:
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Loans with allocated allowance for loan
losses
|
|
$
|
6,492
|
|
$
|
2,689
|
|
|
|
|
|
|
|
Amount of the allowance allocated to
impaired loans
|
|
$
|
2,442
|
|
$
|
1,539
|
|
F-18
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Average of impaired loans during the year
|
|
$
|
3,783
|
|
$
|
2,719
|
|
$
|
4,444
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of interest income recognized for the
time that these loans were impaired during 2007, 2006 and 2005 was not material
to the financial statements.
Nonperforming
loans were as follows:
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Loans past due over 90 days still on
accrual
|
|
$
|
1,992
|
|
$
|
940
|
|
$
|
352
|
|
Nonaccrual loans
|
|
6,465
|
|
2,689
|
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans include both smaller balance
homogeneous loans that are collectively evaluated for impairment and
individually classified impaired loans.
NOTE 5 PREMISES AND EQUIPMENT
The following is a summary of premises and equipment
as of December 31, 2007 and 2006. Depreciation expense for 2007, 2006 and
2005 was $333,000, $259,000 and $171,000, respectively.
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
903
|
|
$
|
901
|
|
Furniture and equipment
|
|
1,756
|
|
1,645
|
|
|
|
2,659
|
|
2,546
|
|
Less: Allowance for depreciation
|
|
1,246
|
|
913
|
|
|
|
|
|
|
|
|
|
$
|
1,413
|
|
$
|
1,633
|
|
The Bank leases office space, furniture and
equipment under operating leases. Rent expense recognized in 2007, 2006 and
2005 amounted to $390,000, $352,000 and $268,000, respectively. The remaining
minimum lease payments related to the leases are as follows, before considering
renewal options that generally are present:
(Dollars in thousands)
|
|
|
|
2008
|
|
$
|
554
|
|
2009
|
|
556
|
|
2010
|
|
564
|
|
2011
|
|
576
|
|
2012
|
|
588
|
|
2013-2017
|
|
3,011
|
|
|
|
|
|
|
|
$
|
5,849
|
|
F-19
NOTE 6 - DEPOSITS
Time
deposits greater than $100,000 amounted to $364,797,000 in 2007 and
$227,917,000 in 2006.
At
December 31, 2007, scheduled maturities of time deposits were as follows:
(Dollars in thousands)
|
|
|
|
|
|
|
|
2008
|
|
$
|
526,463
|
|
2009
|
|
103,383
|
|
2010
|
|
37,843
|
|
2011
|
|
4,678
|
|
2012
|
|
613
|
|
|
|
|
|
|
Deposits held at the Bank by directors, executive
officers and their related interests were approximately $3,960,000 and
$7,958,000 at December 31, 2007 and 2006, respectively.
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER DEBT
The Federal Home Loan Bank (FHLB) of Cincinnati
advances funds to the Bank with the requirement that the advances are secured
by securities and qualifying loans, essentially home mortgages (1-4 family
residential). The Bank has an available line of $17,967,407 with FHLB. To
participate in this program, the Bank is required to be a member of the FHLB
and own stock in the FHLB. The Corporation had $937,800 of such stock at December 31,
2007 to satisfy this requirement.
At December 31, 2007, the Bank had received no
advances from the FHLB and, therefore, had pledged no securities or qualifying
loans to the FHLB.
The Bank has approximately $24,000,000 in available
federal funds lines (or the equivalent thereof) with correspondent banks. At December 31, 2007, the Bank had
$2,000,000 of federal funds purchased.
In September 2007, we entered into a short-term
revolving line of credit with First Tennessee Bank, National Association,
pursuant to which First Tennessee agreed to loan us up to $10,000,000. First Tennessees obligation to make advances
to us under this line of credit terminates on October 1, 2008. At December 31, 2007, we had outstanding
borrowings of $7,000,000 under this line of credit.
NOTE 8 INCOME TAXES
Income tax expense (benefit) recognized in each year
is made up of current and deferred federal and state tax amounts shown below:
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Current federal
|
|
$
|
2,897
|
|
$
|
2,730
|
|
$
|
1,385
|
|
Current state
|
|
338
|
|
453
|
|
286
|
|
Deferred federal
|
|
369
|
|
(164
|
)
|
213
|
|
Deferred state
|
|
39
|
|
(34
|
)
|
41
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,643
|
|
$
|
2,985
|
|
$
|
1,925
|
|
F-20
The
tax effect of each type of temporary difference that results in net deferred
tax assets and liabilities is as follows:
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
Asset (liability)
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
3,428
|
|
$
|
1,994
|
|
Tax leases
|
|
(2,733
|
)
|
(895
|
)
|
Unrealized (gain) loss on securities
|
|
(191
|
)
|
175
|
|
Depreciation
|
|
(31
|
)
|
(47
|
)
|
SFAS 140 income adjustments
|
|
(1,476
|
)
|
(792
|
)
|
Nonaccrual loan interest
|
|
245
|
|
178
|
|
Net deferred loan fees
|
|
641
|
|
104
|
|
Other, net
|
|
(22
|
)
|
(82
|
)
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
(139
|
)
|
$
|
635
|
|
A reconciliation of the amount computed by applying
the federal statutory rate (34%) to pretax income with income tax expense
(benefit) follows:
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Tax expense at statutory rate
|
|
$
|
3,583
|
|
$
|
2,630
|
|
$
|
1,698
|
|
State income tax effect
|
|
249
|
|
277
|
|
216
|
|
Other
|
|
(189
|
)
|
78
|
|
11
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
3,643
|
|
$
|
2,985
|
|
$
|
1,925
|
|
The Corporation had no unrecognized tax benefits at January 1,
2007 and December 31, 2007. No
significant increase in expected over the next 12 months.
Should the accrual of any interest or penalties
relative to unrecognized tax benefits be necessary, it is the Corporations
policy to record such accruals in its income tax accounts; no such accruals
existed as of January 1, 2007 and December 31, 2007.
The Corporation and its subsidiary file a
consolidated U.S. federal income tax return and various returns in states where
its banking offices are located. The Corporations filed income tax returns are
no longer subject to examination by taxing authorities for years before 2004.
NOTE 9 COMMITMENTS AND CONTINGENCIES
The Bank 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, standby letters of credit and financial guarantees. Those
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheet. The contract or notional amounts of
those instruments reflect the extent of involvement the Bank has in those
particular financial instruments.
The Banks exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit, standby letters of credit and financial guarantees is
represented by the contractual or notional amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
F-21
The following table reflects financial
instruments for which contract amounts represented credit risk as of December 31,
for the following years:
|
|
2007
|
|
2006
|
|
|
|
Fixed
|
|
Variable
|
|
Fixed
|
|
Variable
|
|
(Dollars in thousands)
|
|
Rate
|
|
Rate
|
|
Rate
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
18,380
|
|
$
|
107,663
|
|
$
|
9,601
|
|
$
|
65,123
|
|
Standby
letters of credit and financial guarantees
|
|
|
|
11,063
|
|
|
|
5,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to make loans are generally made for
periods of one year or less. The fixed rate loan commitments have interest
rates ranging from 4.31% to 9.00% and maturities ranging from three months to
six years.
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 are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customers creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension
of credit, is based on managements credit evaluation. Collateral held varies
but may include accounts receivable, inventory, property, plant and equipment,
and income-producing commercial properties.
Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing, and
similar transactions. All letters of credit are due within one year or less of
the original commitment date. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers.
The Bank primarily serves customers located in
Middle Tennessee. As such, the Banks loans, commitments and letters of credit
have been granted to customers in that area. Concentration of credit by type of
loan is presented in Note 3.
NOTE 10 EMPLOYEE BENEFITS
The Bank maintains a 401(k) plan for all
employees who have satisfied the minimum age and service requirements. The Bank
may make discretionary contributions and employees vest in employer
contributions over five years. The Bank made no contributions to the plan
during 2007, 2006 or 2005.
NOTE 11 REGULATORY MATTERS
Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Bank are
required to meet specific capital adequacy guidelines that involve quantitative
measures of a banks assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Failure to meet minimum
capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a material
effect on the Banks financial condition.
The Corporation and the Banks capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. The risk-based guidelines
are based on the assignment of risk weights to assets and off-balance sheet
items depending on the level of credit risk associated with them. In addition
to minimum capital requirements, under the regulatory framework for prompt
corrective action, regulatory agencies have specified certain ratios an
institution must maintain to be considered undercapitalized, adequately
capitalized, and well capitalized. As of December 31, 2007 and 2006,
the most recent notification from the Banks regulatory authority categorized
the Corporation and the Bank as well capitalized. There are no conditions or
events since that notification that management believes have changed the
Corporation and the Banks category.
F-22
The Bank and the Corporations capital amounts and
ratios at December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
|
|
|
|
|
|
For Capital
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
Adequacy Purposes
|
|
Action Provisions
|
|
(Dollars in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
86,935
|
|
10.5
|
%
|
$
|
66,204
|
|
8.0
|
%
|
$
|
82,755
|
|
10.0
|
%
|
Corporation
|
|
$
|
81,133
|
|
9.8
|
%
|
$
|
66,240
|
|
8.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 to risk-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
76,614
|
|
9.3
|
%
|
$
|
33,102
|
|
4.0
|
%
|
$
|
49,653
|
|
6.0
|
%
|
Corporation
|
|
$
|
70,812
|
|
8.6
|
%
|
$
|
33,120
|
|
4.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
76,614
|
|
8.8
|
%
|
$
|
35,019
|
|
4.0
|
%
|
$
|
43,774
|
|
5.0
|
%
|
Corporation
|
|
$
|
70,812
|
|
8.1
|
%
|
$
|
35,029
|
|
4.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
59,514
|
|
10.5
|
%
|
$
|
45,561
|
|
8.0
|
%
|
$
|
56,951
|
|
10.0
|
%
|
Corporation
|
|
$
|
66,478
|
|
11.7
|
%
|
$
|
45,561
|
|
8.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 to risk-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
52,547
|
|
9.2
|
%
|
$
|
22,781
|
|
4.0
|
%
|
$
|
34,171
|
|
6.0
|
%
|
Corporation
|
|
$
|
59,511
|
|
10.5
|
%
|
$
|
22,781
|
|
4.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
52,547
|
|
8.8
|
%
|
$
|
23,949
|
|
4.0
|
%
|
$
|
29,936
|
|
5.0
|
%
|
Corporation
|
|
$
|
59,511
|
|
9.9
|
%
|
$
|
23,959
|
|
4.0
|
%
|
n/a
|
|
|
|
NOTE 12 STOCK OPTIONS
The following is a summary
of certain rights and provisions of the stock options the Corporation has
issued. All stock options and the related strike price reflect the impact of
the two-for-one stock split on December 31, 2003. All options expire ten
years from the date of grant.
The original 14
incorporators and members of the Board of Directors were granted an aggregate
of 122,500 options to purchase shares at $5.00 per share in connection with
organization activities. Each of the 122,500 options were immediately vested on
the date of grant. In 2002, 2006 and 2007 10,000, 11,000 and 65,900 options,
respectively, were exercised, leaving 35,600 options to purchase shares
outstanding.
In August 2003, the
Board of Directors approved an option plan for active directors and incorporators
in recognition of their four years of service to the Bank without compensation.
An aggregate of 320,000 options to purchase shares at a price of $10.50 per
share were included in this plan. The 320,000 options were immediately vested
on the date of grant. In 2006 and 2007, 50,000 and 60,000 options,
respectively, were exercised, leaving 210,000 options to purchase shares
outstanding.
In 2006, 1,000 options were
exercised and in 2007, 93,372 options were exercised leaving an outstanding
balance of 121,720 options to purchase shares. In August 2005, one
executive officer was granted 5,000 options. Of these, 2,500 options
immediately vested and the remaining vested one year later. In November 2005,
one executive officer was granted 6,250 options that immediately vested. Of
these 2005 grants, all were exercised in 2007, leaving no options outstanding
at December 31, 2007. In June 2007, four executive officers were
granted 50,000 options each at an exercise price of $25.00 per share to vest
over five years based 20% on service and 80% on performance. Of these, 200,000
options were outstanding with 40,000 options vested at December 31, 2007.
F-23
The Board of Directors has granted incentive options
to various employees who are not executive officers. Incentive options are used
for recruiting and retention purposes and to recognize performance. Employee
incentive options include 13,000 options to purchase shares at $5.00 per share
granted in 2000 and 2001. An aggregate of 5,000 options to purchase shares have
been forfeited by former employees, 3,000 options were exercised on December 31,
2003, and 1,000 options were exercised in 2004. An additional 2,000 options
were exercised in 2007 leaving 2,000 outstanding at December 31, 2007. In March 2003,
9,000 options to purchase shares at $7.50 per share were granted. In 2007,
4,000 of these options were exercised leaving 5,000 options outstanding at December 31,
2007. In December 2003, 31,000 options to purchase shares at $10.50 per
share were granted. Of these, 5,000 options were forfeited in 2004. In 2006,
1,000 options were exercised and in 2007, 12,000 options were exercised,
leaving 13,000 options outstanding at December 31, 2007. All of these
incentive options vested in two years. In July 2005 and August 2005,
69,000 and 10,000 options respectively were granted. On each grant date, half
of all options immediately vested with the remaining options vesting one year
later. In November 2005, 10,000 options were granted to employees and were
immediately vested. Of these 2005 grants, 3,750 options were forfeited in 2006
and in 2007, 24,000 options were exercised, leaving 61,250 options outstanding
at December 31, 2007.
The fair value options granted during 2007 were
computed using option pricing models, using the following weighted-average
assumptions as of grant date:
|
|
2007
|
|
|
|
|
|
Risk-free interest rate
|
|
4.94
|
%
|
Expected option life
|
|
3.5 years
|
|
Dividend
yield
|
|
0.0
|
%
|
Volatility
|
|
20.0
|
%
|
The weighted average fair value of options granted
during the year was $5.75 for 2007.
A
summary of the activity related to stock options is as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of year
|
|
871,092
|
|
$
|
8.78
|
|
937,842
|
|
$
|
8.85
|
|
837,592
|
|
$
|
7.99
|
|
Granted
|
|
200,000
|
|
25.00
|
|
|
|
|
|
100,250
|
|
16.00
|
|
Exercised
|
|
(272,522
|
)
|
7.91
|
|
(63,000
|
)
|
9.45
|
|
|
|
|
|
Forfeited or expired
|
|
|
|
|
|
(3,750
|
)
|
16.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
798,570
|
|
$
|
13.14
|
|
871,092
|
|
$
|
8.78
|
|
937,842
|
|
$
|
8.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
|
638,570
|
|
|
|
871,092
|
|
|
|
865,842
|
|
|
|
At December 31, 2007, options outstanding had a
weighted average remaining contractual term of 5.81 years and an aggregate
intrinsic value of $9,894,282. At December 31, 2007, options exercisable
had a weighted average remaining contractual term of 4.89 years and an
aggregate intrinsic value of $10,300,134. During the years ended December 31,
2007, 2006 and 2005, the aggregate intrinsic value of options exercised under
our stock option plans was $5,404,895, $667,500 and $0, respectively. As of December 31,
2007, there was $86,188 unrecognized compensation costs related to nonvested
stock options granted. This cost is expected to be recognized over a weighted
average period of four years. Of the 200,000 shares granted in 2007, none were
forfeited or exercised, and only 40,000 vested, leaving 160,000 shares unvested
as of December 31, 2007. The
respected weighted average fair values were $230,000 and $920,000.
F-24
Options outstanding at year-end 2007 were as
follows:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
|
|
Average
|
|
Exercise
|
|
|
|
Contractual
|
|
|
|
Exercise
|
|
Prices
|
|
Number
|
|
Life
|
|
Number
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
$5.00
|
|
159,320
|
|
2.0 years
|
|
159,320
|
|
$
|
5.00
|
|
$7.50
|
|
95,000
|
|
5.0 years
|
|
95,000
|
|
$
|
7.50
|
|
$10.50
|
|
223,000
|
|
5.0 years
|
|
223,000
|
|
$
|
10.50
|
|
$11.00
|
|
60,000
|
|
6.0 years
|
|
60,000
|
|
$
|
11.00
|
|
$16.00
|
|
61,250
|
|
7.8 years
|
|
61,250
|
|
$
|
16.00
|
|
$25.00
|
|
200,000
|
|
9.5 years
|
|
40,000
|
|
$
|
25.00
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at year-end
|
|
798,570
|
|
5.81 years
|
|
638,570
|
|
$
|
10.16
|
|
NOTE 13 FAIR VALUES OF FINANCIAL
INSTRUMENTS
The methods and assumptions used to estimate fair
value are described as follows:
Carrying amount is the estimated fair value for cash
and due from financial institutions, federal funds sold and purchased, accrued
interest receivable and payable, demand deposits and variable rate loans or
deposits that reprice frequently and fully. Security fair values are based on
market prices or dealer quotes, and if no such information is available, on the
rate and term of the security and information about the issue. For fixed rate
loans or deposits and for variable rate loans or deposits with infrequent
re-pricing or re-pricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. The
fair value of the subordinated long term debt is based on discounted cash flows
using current market rates applied to the estimated life of the debt. Other
assets and accrued liabilities are carried at fair value. The fair value of
off-balance-sheet loan commitments is considered nominal.
The estimated fair values of the Banks financial
instruments at December 31, 2007 and 2006 were as follows:
|
|
2007
|
|
2006
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
(Dollars in thousands)
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
Cash and due from financial institutions
|
|
$
|
5,236
|
|
$
|
5,236
|
|
$
|
177
|
|
$
|
177
|
|
Federal funds sold
|
|
9,573
|
|
9,573
|
|
13,820
|
|
13,820
|
|
Securities available for sale
|
|
73,753
|
|
73,753
|
|
56,943
|
|
56,943
|
|
Loans, net
|
|
784,001
|
|
799,545
|
|
538,550
|
|
537,756
|
|
Accrued interest receivable
|
|
5,901
|
|
5,901
|
|
4,116
|
|
4,116
|
|
Restricted equity securities
|
|
938
|
|
938
|
|
633
|
|
633
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
815,053
|
|
$
|
828,176
|
|
$
|
560,567
|
|
$
|
562,175
|
|
Accrued interest payable
|
|
2,292
|
|
2,292
|
|
1,728
|
|
1,728
|
|
Subordinated
long-term debt
|
|
8,248
|
|
8,221
|
|
8,248
|
|
8,066
|
|
Short-term
borrowings
|
|
7,000
|
|
7,000
|
|
|
|
|
|
F-25
NOTE 14
EMPLOYMENT AGREEMENTS
The Corporation has entered into two-year employment
agreements that are automatically renewable for indefinite duration, with four
executive officers. In the event of a change in control of the Corporation, the
Corporation has an obligation to pay 2.99 times the officers annual salary and
bonus which combined is not to be less than the previous years salary and
bonus.
NOTE 15 PREFERRED STOCK
The Corporations charter authorizes 1,000,000
shares of preferred stock, no par value. Shares of the preferred stock may be
issued from time to time in one or more series, each such series to be so
designated as to distinguish the shares from the shares of all other series and
classes. The Board of Directors has the authority to divide any or all classes
of preferred stock into series and to fix and determine the relative rights and
preferences of the shares of any series so established. The Board currently has
no intent to issue such preferred stock.
NOTE 16 PARENT COMPANY ONLY CONDENSED
FINANCIAL INFORMATION
Condensed financial information of Tennessee
Commerce Bancorp, Inc. follows:
CONDENSED BALANCE SHEETS
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
777
|
|
$
|
6,308
|
|
Investment in banking subsidiary
|
|
76,923
|
|
52,260
|
|
Interest receivable
|
|
|
|
1
|
|
Other
|
|
944
|
|
1,204
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
78,644
|
|
$
|
59,773
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Interest payable
|
|
$
|
25
|
|
$
|
23
|
|
Other short term payables
|
|
7,250
|
|
278
|
|
Subordinated long term debt
|
|
8,248
|
|
8,248
|
|
Shareholders equity
|
|
63,121
|
|
51,224
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
78,644
|
|
$
|
59,773
|
|
CONDENSED STATEMENTS OF INCOME
|
|
For Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Dividend and interest income
|
|
$
|
17
|
|
$
|
17
|
|
12
|
|
Interest expense
|
|
(632
|
)
|
(597
|
)
|
(416
|
)
|
Non-interest expense
|
|
(1,261
|
)
|
(826
|
)
|
(46
|
)
|
|
|
|
|
|
|
|
|
Income (loss) before income tax and undistributed
subsidiary income
|
|
(1,876
|
)
|
(1,406
|
)
|
(450
|
)
|
Income tax (expense) benefit
|
|
696
|
|
542
|
|
173
|
|
Equity in undistributed subsidiary income
|
|
8,076
|
|
5,613
|
|
3,344
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,896
|
|
$
|
4,749
|
|
$
|
3,067
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
For Years ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,896
|
|
$
|
4,749
|
|
$
|
3,067
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
Change in other assets and liabilities
|
|
234
|
|
(507
|
)
|
(150
|
)
|
|
Equity in undistributed subsidiary income
|
|
(8,076
|
)
|
(5,613
|
)
|
(3,344
|
)
|
|
Net cash from operating activities
|
|
(946
|
)
|
(1,371
|
)
|
(427
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
(15,990
|
)
|
(13,000
|
)
|
(7,000
|
)
|
|
Other assets
|
|
|
|
|
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
(15,990
|
)
|
(13,000
|
)
|
(7,248
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from subordinated long term debt
|
|
|
|
|
|
8,248
|
|
|
Proceeds from stock issue
|
|
|
|
19,027
|
|
|
|
|
Proceeds from exercise of stock options and excess
tax benefit
|
|
4,405
|
|
852
|
|
|
|
|
Proceeds from issuance of short-term debt
|
|
7,000
|
|
|
|
|
|
|
Net cash from financing activities
|
|
11,405
|
|
19,879
|
|
8,248
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(5,531
|
)
|
5,508
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
Beginning cash and cash equivalents
|
|
6,308
|
|
800
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
Ending
cash and cash equivalents
|
|
$
|
777
|
|
$
|
6,308
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 17 EARNINGS PER SHARE
The factors used in the earnings per share
computation follow:
(Dollars in thousands except share data)
|
|
2007
|
|
2006
|
|
2005
|
|
Basic
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,896
|
|
$
|
4,749
|
|
$
|
3,067
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
4,613,342
|
|
3,822,655
|
|
3,238,674
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
1.49
|
|
$
|
1.24
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,896
|
|
$
|
4,749
|
|
$
|
3,067
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for
basic earnings per common share
|
|
4,613,342
|
|
3,822,655
|
|
3,238,674
|
|
Add: Dilutive effects of assumed exercises of
stock options
|
|
278,825
|
|
334,683
|
|
278,734
|
|
|
|
|
|
|
|
|
|
Average shares and dilutive potential common
shares
|
|
4,892,167
|
|
4,157,338
|
|
3,517,408
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
1.41
|
|
$
|
1.14
|
|
$
|
0.87
|
|
F-27
No options were antidilutive for 2006 and 2005. For
2007, 40,000 vested options at a strike price of $25.00 were antidilutive and
were excluded from the calculation of diluted earnings per share.
NOTE 18 TRUST PREFERRED
SECURITIES
In March 2005, the Corporation formed a
financing subsidiary, Tennessee Commerce Statutory Trust I, a Delaware
statutory trust (the Trust). In March 2005, the Trust issued and sold
8,000 of the Trusts fixed/floating rate capital securities, with a liquidation
amount of $1,000 per capital security, to First Tennessee Bank National
Association. The securities pay a fixed rate of 6.73% payable quarterly for the
first five years and a floating rate based on a 3- month Libor rate plus 1.98%
thereafter. At the same time, the Corporation issued to the Trust $8,248,000 of
fixed/floating rate junior subordinated deferrable interest debentures due
2035. The Corporation guarantees the payment of distributions and payments for
redemptions or liquidation of the capital securities. The Trust Preferred
Securities qualify as Tier I Capital under current regulatory definitions
subject to certain limitations.
The debentures pay a fixed rate of 6.73% payable
quarterly for the first five years and a floating rate based on a 3-month Libor
rate plus 1.98% thereafter. The distributions on the capital securities are
accounted for as interest expense by the Corporation. Interest payments on the
debentures and the corresponding distributions on the capital securities may be
deferred at any time at the election of the Corporation for up to 20
consecutive quarterly periods (five years). The capital securities and
debentures are redeemable at any time commencing after June 2010 at par.
The Corporation reports as liabilities the subordinated debentures issued by
the Corporation and held by the Trust.
NOTE 19 QUARTERLY FINANCIAL
RESULTS (UNAUDITED)
A summary of selected consolidated quarterly
financial data for the years ended December 31, 2007 and 2006 follows:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
(In thousands except share data)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2007
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
12,971
|
|
$
|
14,852
|
|
$
|
16,371
|
|
$
|
18,012
|
|
Net interest income
|
|
5,585
|
|
6,646
|
|
7,090
|
|
7,951
|
|
Provision for loan losses
|
|
1,500
|
|
1,500
|
|
1,300
|
|
2,050
|
|
Income before taxes
|
|
2,292
|
|
2,659
|
|
2,893
|
|
2,695
|
|
Net income
|
|
1,406
|
|
1,611
|
|
1,777
|
|
2,102
|
|
Basic earnings per share
|
|
$
|
0.31
|
|
$
|
0.36
|
|
$
|
0.38
|
|
$
|
0.44
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
$
|
0.34
|
|
$
|
0.36
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
8,404
|
|
$
|
9,354
|
|
$
|
11,000
|
|
$
|
12,487
|
|
Net interest income
|
|
4,255
|
|
4,443
|
|
5,126
|
|
5,553
|
|
Provision for loan losses
|
|
1,000
|
|
1,000
|
|
1,150
|
|
1,200
|
|
Income before taxes
|
|
1,482
|
|
1,516
|
|
2,164
|
|
2,572
|
|
Net income
|
|
909
|
|
932
|
|
1,330
|
|
1,578
|
|
Basic earnings per share
|
|
$
|
0.28
|
|
$
|
0.29
|
|
$
|
0.31
|
|
$
|
0.36
|
|
Diluted earnings per share
|
|
$
|
0.25
|
|
$
|
0.27
|
|
$
|
0.29
|
|
$
|
0.33
|
|
F-28
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) 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.
|
TENNESSEE
COMMERCE BANCORP, INC.
|
|
|
|
|
|
By:
|
/s/
Arthur F. Helf
|
|
|
Arthur
F. Helf, Chairman and Chief Executive Officer
|
|
|
|
|
|
Date: April 17,
2008
|
|
|
|
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in their capacities as directors.
By:
|
/s/
H. Lamar Cox
|
|
By:
|
/s/ Paul W. Dierksen
|
|
H.
Lamar Cox
|
|
Paul
W. Dierksen
|
Date:
|
April 17,
2008
|
Date:
|
April 17,
2008
|
|
|
|
|
|
|
|
|
By:
|
/s/
Dennis L. Grimaud
|
|
By:
|
/s/ Arthur F. Helf
|
|
Dennis
L. Grimaud
|
|
Arthur
F. Helf
|
Date:
|
April 17,
2008
|
Date:
|
April 17,
2008
|
|
|
|
|
|
|
|
|
By:
|
/s/
William W. McInnes
|
|
By:
|
/s/ Thomas R. Miller
|
|
William
W. McInnes
|
|
Thomas
R. Miller
|
Date:
|
April 17,
2008
|
Date:
|
April 17,
2008
|
|
|
|
|
|
|
|
|
By:
|
/s/
Darrel Reifschneider
|
|
By:
|
/s/ Michael R. Sapp
|
|
Darrel
Reifschneider
|
|
Michael
R. Sapp
|
Date:
|
April 17,
2008
|
Date:
|
April 17,
2008
|
|
|
|
|
|
|
|
|
By:
|
/s/
Dr. Paul A. Thomas
|
|
|
|
|
Dr. Paul
A. Thomas
|
|
|
Date:
|
April 17,
2008
|
|
|
|
|
|
|
|
|
|
INDEX TO EXHIBITS
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
Charter
of Tennessee Commerce Bancorp, Inc., as amended(1)
|
3.2
|
|
Articles
of Amendment to the Charter of Tennessee Commerce Bancorp, Inc.
|
3.3
|
|
Bylaws
of Tennessee Commerce Bancorp, Inc.(1)
|
3.4
|
|
Amendment
to Bylaws of Tennessee Commerce Bancorp, Inc.(2)
|
4.1
|
|
Shareholders
Agreement(1)
|
4.2
|
|
Form of
Stock Certificate(3)
|
10.1
|
|
Tennessee
Commerce Bancorp, Inc. Stock Option Plan - Employees(1)
|
10.2
|
|
Form of
Tennessee Commerce Bancorp, Inc. Directors Common Stock Option(1)
|
10.3
|
|
Form of
Tennessee Commerce Bancorp, Inc. Incorporators Common Stock Option(1)
|
10.4
|
|
Form of
Tennessee Commerce Bancorp, Inc. - Stock Option Agreement(1)
|
10.5
|
|
Tennessee
Commerce Bancorp, Inc. - Stock Option Agreement with Arthur F. Helf(1)
|
10.6
|
|
Tennessee
Commerce Bancorp, Inc. - Stock Option Agreement with Michael R. Sapp(1)
|
10.7
|
|
Tennessee
Commerce Bancorp, Inc. 1999 Stock Option Agreement with H. Lamar Cox(1)
|
10.8
|
|
Employment
Agreement between Tennessee Commerce Bancorp, Inc. and Arthur F. Helf(1)
|
10.9
|
|
Employment
Agreement between Tennessee Commerce Bancorp, Inc. and Michael R.
Sapp(1)
|
10.10
|
|
Employment
Agreement between Tennessee Commerce Bancorp, Inc. and H. Lamar Cox(1)
|
10.11
|
|
Employment
Agreement between Tennessee Commerce Bancorp, Inc. and George W. Fort(4)
|
10.12
|
|
Tennessee
Commerce Bancorp, Inc. 2007 Equity Plan(5)
|
10.13
|
|
Summary
of Tennessee commerce Bancorp, Inc. Executive Officer Compensation(6)
|
21.1
|
|
Subsidiaries
|
23.1
|
|
Report
of Independent Registered Public Accounting Firm
|
31.1
|
|
Certification
of Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
31.2
|
|
Certification
of Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
|
32.1
|
|
Certification
of Chief Executive Officer of Tennessee Commerce Bancorp, Inc. pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
32.2
|
|
Certification
of Chief Financial Officer of Tennessee Commerce Bancorp, Inc. pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
(1)
Previously filed as an exhibit to Tennessee
Commerce Bancorp, Inc.s Registration Statement on Form 10, as filed
with the Securities and Exchange Commission on April 29, 2005, and
incorporated herein by reference.
(2)
Previously filed as an exhibit to Tennessee
Commerce Bancorp, Inc.s Current Report on Form 8-K, as filed with
the Securities and Exchange Commission on February 5, 2008, and
incorporated herein by reference.
(3)
Previously filed as an exhibit to Tennessee
Commerce Bancorp, Inc.s Registration Statement on Form S-8, as filed
with the Securities and Exchange Commission on December 31, 2007
(Registration No. 333-148415), and incorporated herein by reference.
(4)
Previously filed as an exhibit to Tennessee
Commerce Bancorp, Inc.s Registration Statement on Form S-1, as filed
with the Securities and Exchange Commission on April 25, 2006
(Registration No. 333-148415), and incorporated herein by reference.
(5)
Previously filed as an exhibit to Tennessee
Commerce Bancorp, Inc.s Quarterly Report on Form 10-Q, as filed with
the Securities and Exchange Commission on August 14, 2007, and
incorporated herein by reference.
(6)
Previously filed as an exhibit to Tennessee Commerce Bancorp, Inc.s
Current Report on Form 8-K, as
filed with the Securities and Exchange Commission on June 26, 2007, and
incorporated herein by reference.
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