Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
(Mark One)
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the
quarterly period ended June 30, 2008
OR
o
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
Commission
File Number 000-51281
TENNESSEE COMMERCE BANCORP, INC.
(Exact name of registrant as specified in its
charter)
Tennessee
|
|
62-1815881
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(State or other jurisdiction
|
|
(I.R.S. Employer
|
of incorporation or
organization)
|
|
Identification No.)
|
|
|
|
381
Mallory Station Road, Suite 207
Franklin,
Tennessee
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|
37067
|
(Address of principal
executive offices)
|
|
(Zip Code)
|
(615) 599-2274
(Registrants telephone number, including
area code)
Not
Applicable
(Former name, former address and former
fiscal year if changed since last report)
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
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting
company
o
|
(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
o
No
x
As
of August 06, 2008 there were 4,731,696 shares of common stock, $0.50 par
value per share, issued and outstanding.
Table of Contents
PART I:
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TENNESSEE COMMERCE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 (UNAUDITED) AND
DECEMBER 31, 2007
(Dollars in thousands, except per share data)
|
|
June 30,
2008
|
|
December 31,
2007 (1)
|
|
ASSETS
|
|
|
|
|
|
Cash and due from financial institutions
|
|
$
|
5,287
|
|
$
|
5,236
|
|
Federal funds sold
|
|
909
|
|
9,573
|
|
Cash and cash equivalents
|
|
6,196
|
|
14,809
|
|
Securities available for sale
|
|
96,030
|
|
73,753
|
|
Loans
|
|
938,636
|
|
794,322
|
|
Allowance for loan losses
|
|
(11,520
|
)
|
(10,321
|
)
|
Net loans
|
|
927,116
|
|
784,001
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
1,453
|
|
1,413
|
|
Accrued interest receivable
|
|
6,881
|
|
5,901
|
|
Restricted equity securities
|
|
1,376
|
|
938
|
|
Deferred tax asset
|
|
436
|
|
|
|
Income tax receivable
|
|
|
|
1,886
|
|
Other assets
|
|
26,497
|
|
17,452
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,065,985
|
|
$
|
900,153
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
21,235
|
|
$
|
27,427
|
|
Interest-bearing
|
|
934,013
|
|
787,626
|
|
Total deposits
|
|
955,248
|
|
815,053
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
8,300
|
|
2,000
|
|
Accrued interest payable
|
|
2,982
|
|
2,292
|
|
Short-term borrowings
|
|
9,500
|
|
7,000
|
|
Accrued Bonuses
|
|
499
|
|
1,700
|
|
Long-term subordinated debt
|
|
23,198
|
|
8,248
|
|
Deferred tax liabilities
|
|
|
|
139
|
|
Other liabilities
|
|
606
|
|
600
|
|
Total liabilities
|
|
1,000,333
|
|
837,032
|
|
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 June 30, 2008 and December 31, 2007; 4,731,696
and 4,724,196 shares issued and outstanding at June 30, 2008 and
December 31, 2007, respectively.
|
|
2,366
|
|
2,362
|
|
Additional paid-in capital
|
|
45,150
|
|
45,024
|
|
Retained earnings
|
|
18,647
|
|
15,426
|
|
Accumulated other comprehensive income/
loss
|
|
(511
|
)
|
309
|
|
Total shareholders equity
|
|
65,652
|
|
63,121
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,065,985
|
|
$
|
900,153
|
|
(1) The
balance sheet at December 31, 2007 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements.
See
accompanying notes to consolidated financial statements.
3
Table of Contents
TENNESSEE COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF
INCOME
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
THREE MONTHS ENDED JUNE 30, 2008 AND
2007
(UNAUDITED)
|
|
Six Months Ended June 30,
|
|
Three Months Ended June 30,
|
|
(Dollars in thousands, except share data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
33,597
|
|
$
|
25,985
|
|
$
|
17,215
|
|
$
|
13,886
|
|
Securities
|
|
2,177
|
|
1,587
|
|
1,144
|
|
823
|
|
Federal funds sold
|
|
141
|
|
251
|
|
70
|
|
143
|
|
Total interest income
|
|
35,915
|
|
27,823
|
|
18,429
|
|
14,852
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
19,438
|
|
15,273
|
|
9,694
|
|
8,047
|
|
Other
|
|
619
|
|
319
|
|
339
|
|
159
|
|
Total interest expense
|
|
20,057
|
|
15,592
|
|
10,033
|
|
8,206
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
15,858
|
|
12,231
|
|
8,396
|
|
6,646
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
3,940
|
|
3,000
|
|
2,340
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for
loan losses
|
|
11,918
|
|
9,231
|
|
6,056
|
|
5,146
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
49
|
|
69
|
|
25
|
|
32
|
|
Securities gains
|
|
30
|
|
10
|
|
|
|
|
|
Gain on sale of loans
|
|
1,418
|
|
1,280
|
|
852
|
|
463
|
|
Other
|
|
(167
|
)
|
73
|
|
(74
|
)
|
115
|
|
Total non-interest income
|
|
1,330
|
|
1,432
|
|
803
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
4,093
|
|
3,238
|
|
1,809
|
|
1,766
|
|
Occupancy and equipment
|
|
722
|
|
512
|
|
362
|
|
244
|
|
Data processing fees
|
|
534
|
|
505
|
|
249
|
|
279
|
|
Professional fees
|
|
904
|
|
492
|
|
529
|
|
254
|
|
Other
|
|
1,741
|
|
965
|
|
901
|
|
554
|
|
Total non-interest expense
|
|
7,994
|
|
5,712
|
|
3,850
|
|
3,097
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
5,254
|
|
4,951
|
|
3,009
|
|
2,659
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
2,033
|
|
1,934
|
|
1,163
|
|
1,048
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,221
|
|
$
|
3,017
|
|
$
|
1,846
|
|
$
|
1,611
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (EPS):
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
0.68
|
|
$
|
0.67
|
|
$
|
0.39
|
|
$
|
0.36
|
|
Diluted EPS
|
|
0.66
|
|
0.63
|
|
0.38
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
4,730,707
|
|
4,517,133
|
|
4,731,696
|
|
4,502,985
|
|
Diluted
|
|
4,890,911
|
|
4,818,619
|
|
4,891,111
|
|
4,788,889
|
|
See
accompanying notes to consolidated financial statements.
4
Table of Contents
TENNESSEE COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS EQUITY
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
(Dollars in thousands)
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
Total
Shareholders
Equity
|
|
Balance at December 31, 2006
|
|
$
|
2,226
|
|
$
|
40,755
|
|
$
|
8,530
|
|
$
|
(287
|
)
|
$
|
51,224
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
3,017
|
|
|
|
3,017
|
|
Other comprehensive income, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities available
for sale during the period
|
|
|
|
|
|
|
|
(492
|
)
|
(492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options to purchase
43,350 common shares and related tax benefit
|
|
110
|
|
3,356
|
|
|
|
|
|
3,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007
|
|
$
|
2,336
|
|
$
|
44,111
|
|
$
|
11,547
|
|
$
|
(779
|
)
|
$
|
57,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
2,362
|
|
$
|
45,024
|
|
$
|
15,426
|
|
$
|
309
|
|
$
|
63,121
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
3,221
|
|
|
|
3,221
|
|
Other comprehensive income, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities available
for sale during the period
|
|
|
|
|
|
|
|
(820
|
)
|
(820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
2,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
40
|
|
|
|
|
|
40
|
|
Exercise of stock options to purchase 7,500
common shares and related tax benefit
|
|
4
|
|
86
|
|
|
|
|
|
90
|
|
Balance at June 30, 2008
|
|
$
|
2,366
|
|
$
|
45,150
|
|
$
|
18,647
|
|
$
|
(511
|
)
|
$
|
65,652
|
|
See
accompanying notes to consolidated financial statements.
5
Table of Contents
TENNESSEE COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
|
$
|
3,221
|
|
$
|
3,017
|
|
Adjustments to reconcile net income to net
cash provided by (used by) operating activities
|
|
|
|
|
|
Depreciation
|
|
175
|
|
167
|
|
Deferred loan fees
|
|
(242
|
)
|
(261
|
)
|
Stock based compensation expense
|
|
40
|
|
|
|
Provision for loan losses
|
|
3,940
|
|
3,000
|
|
Deferred income tax
|
|
(71
|
)
|
(924
|
)
|
Net amortization of investment securities
|
|
(38
|
)
|
6
|
|
Gain on sales of securities
|
|
(30
|
)
|
(10
|
)
|
Change in:
|
|
|
|
|
|
Accrued interest receivable
|
|
(980
|
)
|
(1,175
|
)
|
Accrued interest payable
|
|
690
|
|
12
|
|
Other assets
|
|
(6,709
|
)
|
(3,725
|
)
|
Other liabilities
|
|
1,305
|
|
(947
|
)
|
Net cash provided by (used by) operating
activities
|
|
1,301
|
|
(840
|
)
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
Purchases of securities available for sale
|
|
(57,300
|
)
|
(17,987
|
)
|
Proceeds from sales of securities available
for sale
|
|
12,271
|
|
11,275
|
|
Proceeds from maturities, prepayments and
calls of securities available for sale
|
|
21,496
|
|
1,166
|
|
Net change in loans
|
|
(146,813
|
)
|
(108,090
|
)
|
Purchases of FHLB Stock
|
|
(438
|
)
|
(305
|
)
|
Net purchases of premises and equipment
|
|
(215
|
)
|
(77
|
)
|
Net cash used by investing activities
|
|
(170,999
|
)
|
(114,018
|
)
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
Net change in deposits
|
|
140,195
|
|
122,818
|
|
Net change in federal funds purchased and
repurchase agreements
|
|
6,300
|
|
|
|
Proceeds from long-term subordinated debt
|
|
14,950
|
|
|
|
Purchases of capital securities of
unconsolidated subsidiary
|
|
(450
|
)
|
|
|
Proceeds from exercise of common stock
options
|
|
38
|
|
1,714
|
|
Excess tax benefit from option exercises
|
|
52
|
|
1,752
|
|
Net cash provided by financing activities
|
|
161,085
|
|
126,284
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(8,613
|
)
|
11,426
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of
period
|
|
14,809
|
|
13,997
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,196
|
|
$
|
25,423
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Cash paid during period for interest
|
|
$
|
19,367
|
|
$
|
15,580
|
|
Cash paid during period for income taxes
|
|
199
|
|
2,685
|
|
See
accompanying notes to consolidated financial statements.
6
Table of Contents
TENNESSEE
COMMERCE BANCORP, INC.
Notes to Consolidated Financial Statements
(unaudited)
Note
1 Basis of Presentation
Tennessee Commerce Bancorp, Inc. (the Corporation) is the bank
holding company for Tennessee Commerce Bank (the Bank). In March 2005,
the Corporation formed a wholly owned subsidiary, Tennessee Commerce Bank
Statutory Trust I (the Trust I). In June 2008,
the Corporation formed a wholly owned subsidiary, Tennessee Commerce Bank
Statutory Trust II (the Trust II). As of June 30, 2008, the Bank, the
Trust I and the Trust II were the only subsidiaries of the Corporation. The
accompanying consolidated financial statements include the accounts of the
Corporation and the Bank. The Trust I and the Trust II are not consolidated in
accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46(R)
(revised December 2003), Consolidation of Variable Interest Entities.
Material intercompany accounts and transactions have been eliminated.
The unaudited consolidated financial statements as of June 30,
2008 and for the six- and three-month periods ended June 30, 2008 and 2007
have been prepared in accordance with accounting principles generally accepted
in the United States of America and in accordance with the instructions to Form 10-Q
and Article 10 of Regulation S-X as promulgated by the Securities and
Exchange Commission (SEC), and in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, to present fairly the information
included therein. They do not include all the information and notes required by
generally accepted accounting principles for complete financial statements.
Operating results for the six- and three-month periods ended June 30, 2008
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008. For further information, refer to the
consolidated financial statements and notes thereto included in the Corporations
Annual Report on Form 10-K for the year ended December 31, 2007.
Note
2 Earnings per Share of Common Stock
The factors used in the earnings per share
computation follow:
|
|
Six Months Ended
June 30,
|
|
Three Months Ended
June 30,
|
|
(Dollars in thousands, except per share data)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,221
|
|
$
|
3,017
|
|
$
|
1,846
|
|
$
|
1,611
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
4,730,707
|
|
4,517,133
|
|
4,731,696
|
|
4,502,985
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.68
|
|
$
|
0.67
|
|
$
|
0.39
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,221
|
|
$
|
3,017
|
|
$
|
1,846
|
|
$
|
1,611
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
for basic earnings per common share
|
|
4,730,707
|
|
4,517,133
|
|
4,731,696
|
|
4,502,985
|
|
Add: Dilutive effects of assumed exercises
of stock options
|
|
160,204
|
|
301,486
|
|
159,415
|
|
285,904
|
|
|
|
|
|
|
|
|
|
|
|
Average shares and dilutive potential
common shares
|
|
4,890,911
|
|
4,818,619
|
|
4,891,111
|
|
4,788,889
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.66
|
|
$
|
0.63
|
|
$
|
0.38
|
|
$
|
0.34
|
|
7
Table
of Contents
Note
3 Stock-Based Compensation
On January 1, 2006, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS
No. 123(R)), which addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for
equity instruments. SFAS No. 123(R) eliminates the ability to account
for share-based compensation transactions, as the Corporation formerly did,
using the intrinsic value method as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and generally
requires that such transactions be accounted for using a fair-value-based
method and recognized as expense in the accompanying consolidated statement of
income.
The Corporation adopted SFAS No. 123(R) using the modified
prospective method which requires the application of the accounting standard as
of January 1, 2006. The accompanying consolidated financial statements as
of and for the periods ending June 30, 2008 reflect the impact of adopting
SFAS No. 123(R). In accordance with the modified prospective method, the
consolidated financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS No. 123(R).
Stock-based compensation expense recognized during the period is based
on the value of the portion of stock-based payment awards that is ultimately
expected to vest. Stock-based compensation expense recognized in the
accompanying consolidated statements of income for the periods ending June 30,
2008 included any compensation expense for stock-based payment awards vesting
during the period based on the grant date fair value estimated in accordance
with SFAS No. 123(R). As stock-based compensation expense recognized in
the accompanying statement of income for the period ending June 30, 2008
is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS No. 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
For the six months ended June 30, 2008, the Corporation granted
options to purchase 150,000 shares of Corporation common stock and 10,955
restricted shares of Corporation common stock and there were 160,000 non-vested
options outstanding prior to that period with 40,000 forfeited. There was
approximately $40,000 stock-based expense recognized for the six months ended June 30,
2008.
8
Table
of Contents
A summary of the activity in the Corporations stock-based compensation
plan is as follows:
|
|
Number
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Contractual
Remaining
Term
(in years)
|
|
Aggregate
Intrinsic
Value (1)
(000s)
|
|
Stock-based awards outstanding at
December 31, 2007
|
|
798,570
|
|
$
|
13.14
|
|
|
|
|
|
Options granted
|
|
150,000
|
|
22.15
|
|
|
|
|
|
Shares of restricted stock granted
|
|
10,955
|
|
|
|
|
|
|
|
Options exercised
|
|
(7,500
|
)
|
5.00
|
|
|
|
|
|
Options forfeited or expired
|
|
(100,000
|
)
|
23.58
|
|
|
|
|
|
Stock-based awards outstanding at
June 30, 2008
|
|
852,025
|
|
$
|
13.58
|
|
5.16
|
|
$
|
1,718
|
|
Stock-based awards outstanding and expected
to vest at June 30, 2008
|
|
852,025
|
|
$
|
13.58
|
|
5.16
|
|
$
|
1,718
|
|
Options exercisable at June 30, 2008
|
|
621,070
|
|
$
|
9.99
|
|
4.26
|
|
$
|
4,006
|
|
(1)
The aggregate intrinsic value is calculated as the difference between the
exercise price of each option and the closing price per share of Corporation
common stock of $16.55 for the 852,025 options outstanding and 621,070 options
exercisable at June 30, 2008.
The estimated fair values are computed using the Black-Scholes option
valuation model, using the following weighted-average assumptions as of the
grant date shown below:
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
3.27
|
%
|
4.94
|
%
|
Expected option life
|
|
3.5 years
|
|
3.5 years
|
|
Dividend yield
|
|
0.0
|
%
|
0.0
|
%
|
The Corporation granted options to purchase 150,000 shares of
Corporation common stock and 10,955 restricted shares of Corporation common
stock in the first six months of 2008. The options granted in 2008 had an
estimated fair value of $4.45. The options granted in 2007 had an estimated fair
value of $5.60. The weighted average fair value of options granted during the
year was $5.16 for 2008 and $5.60 for 2007.
9
Table
of Contents
Note
4 Trust Preferred Securities
In
March 2005, the Trust I issued and sold 8,000 of its 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 three-month LIBOR rate plus 1.98% thereafter. At the same time, the
Corporation issued to the Trust I $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 fixed/floating rate capital securities qualify as Tier I
Capital for the Corporation 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 three-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 I.
In
June 2008, the Trust II issued and sold 14,500 of its floating rate
capital securities, with a liquidation amount of $1,000 per capital security,
in a private placement. The securities pay a floating rate per annum, reset
quarterly, equal to the prime rate of interest published in
The Wall Street Journal
on the first
business day of each distribution period plus 50 basis points (but in no event
greater than 8.0% or less than 5.75%). At the same time, the Corporation issued
to the Trust II $14.95 million of floating rate junior subordinated deferrable
interest debentures due 2038. The Corporation guarantees the payment of
distributions and payments for redemptions or liquidation of the capital
securities. The floating rate capital securities qualify as Tier I Capital
for the Corporation under current regulatory definitions subject to certain
limitations.
The
debentures pay a floating rate per annum, reset quarterly, equal to the prime
rate of interest published in
The Wall
Street Journal
on the first business day of each distribution period
plus 50 basis points (but in no event greater than 8.0% or less than 5.75%).
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 2013 at par. The Corporation reports as
liabilities the subordinated debentures issued by the Corporation and held by
the Trust II.
10
Table
of Contents
Note
5 New Accounting Standards
In September 2006, 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. In February 2008, the FASB issued FASB Staff Position (FSP) FHS
157-2, Effective Date of FASB Statement No. 157, which delays the
effective date of SFAS 157 for non-financial assets and non-financial
liabilities that are recognized or disclosed in the financial statements on a
non-recurring basis. The Corporation and the Bank both adopted SFAS No. 157
on January 1, 2008 and management does not expect the adoption of this
statement will have a material 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 one-time
reclassification of available-for-sale securities to trading securities for
securities which are identified as off-setting 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. Adoption of this statement has had no material impact on the Corporations
consolidated financial statements.
11
Table
of Contents
Note
6 Fair Value Measurement
The Bank has an established
process for determining fair values, in accordance with SFAS No. 157. Fair
value is based upon quoted market prices, where available. If listed prices or
quotes are not available, fair value is based upon internally developed models
or processes that use primarily market-based or independently-sourced market
data, including interest rate yield curves, option volatilities and third party
information. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. These adjustments include amounts to
reflect counterparty credit quality (for financial assets reflected at fair
value), the Banks creditworthiness (for financial liabilities reflected at
fair value), liquidity and other unobservable parameters that are applied consistently
over time as follows:
·
|
Credit valuation adjustments are necessary when
the market price (or parameter) is not indicative of the credit quality of
the counterparty.
|
|
|
·
|
Debit valuation adjustments are necessary to
reflect the credit quality of the Bank in the valuation of liabilities
measured at fair value.
|
|
|
·
|
Liquidity valuation adjustments are necessary when
the Bank may not be able to observe a recent market price for a financial
instrument that trades in inactive (or less active) markets or to reflect the
cost of exiting larger- than-normal market-size risk positions.
|
|
|
·
|
Unobservable parameter valuation adjustments are
necessary when positions are valued using internally developed models that
use as their basis unobservable parameters that is, parameters that must be
estimated and are, therefore, subject to management judgment to substantiate
the model valuation. These financial instruments are normally traded less
actively.
|
The methods described above
may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, while the
Bank believes its valuation methods are appropriate and consistent with other
market participants, the use of different methodologies, or assumptions, to
determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date.
Valuation Hierarchy
SFAS No.157 establishes a
three-level valuation hierarchy for disclosure of fair value measurements. The
valuation hierarchy is based upon the transparency of inputs to the valuation
of an asset or liability as of the measurement date. The three levels are
defined as follows:
·
|
Level 1 inputs to the valuation methodology are
quoted prices (unadjusted) for identical assets or liabilities in active
markets.
|
|
|
·
|
Level 2 inputs to the valuation methodology
include quoted prices for similar assets and liabilities in active markets,
and inputs that are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial instrument.
|
|
|
·
|
Level 3 inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
|
A financial instruments
categorization within the valuation hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. Below is a
description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy.
12
Table of Contents
Assets
Securities
-
Available-for-sale
securities are recorded at fair value on a recurring basis. Where quoted
prices are available in an active market, securities are classified within
level 1 of the valuation hierarchy. Level 1 securities include highly
liquid government bonds, federal funds sold and certain other products.
Fair value measurement is based upon quoted prices, if available. If
quoted prices are not available, securities would generally be classified
within level 2, and fair value would be determined by matrix pricing, which is
a mathematical technique widely used in the industry to value debt securities
without relying exclusively on quoted prices for the specific securities but
rather by relying on the securities relationship to other benchmark quoted
securities. In certain cases where there is limited activity or less
transparency around inputs to the valuation, securities are classified within
level 3 of the valuation hierarchy. For the six months ended June 30,
2008, the entire Banks available-for-sale securities were valued using matrix
pricing and were classified within level 2 of the valuation hierarchy. At
June 30, 2008, the Bank had no securities classified within level 3.
Liabilities
Liabilities
At June 30, 2008, the Bank had no liabilities measured at fair
value on a recurring basis classified within the valuation hierarchy.
The following table presents
the financial instruments carried at fair value as of June 30, 2008, by
caption on the consolidated balance sheets and by SFAS No. 157 valuation
hierarchy (as described above) (dollars in thousands):
Assets and
liabilities measured at fair value on a recurring basis as of June 30,
2008
|
|
Total
carrying
value in the
consolidated
balance
|
|
Quoted
market
prices in an
active
market
|
|
Internal
models with
significant
observable
market
parameters
|
|
Internal
models with
significant
unobservable
market
parameters
|
|
|
|
sheet
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Federal funds sold
|
|
909
|
|
909
|
|
|
|
|
|
Securities available for sale
|
|
96,030
|
|
|
|
96,030
|
|
|
|
Total assets at fair value
|
|
$
|
96,939
|
|
$
|
909
|
|
$
|
96,030
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
13
Table
of Contents
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 our operating results, vesting of stock-based awards, recently
adopted accounting standards, fair value measurements, allowance for loan
losses, business bank strategy, managements review of the loan portfolio, loan
classifications, loan commitments, interest rate risk, economic value of equity
model, loan sale transactions, tax rates, non-accrual loans, liquidity, internal
control over financial reporting and our future growth and profitability. 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 per share data, throughout this Item 2)
The results of operations for the quarter ended June 30, 2008
compared to the quarter ended June 30, 2007 reflected a 14.59% increase in
net income and an 11.76% increase in diluted earnings per share. The increase
in earnings resulted primarily from a 26.33% increase in net interest income
because of higher average loan balances. Increased net interest income was
partially offset by increases in non-interest expense. For the three months
ended June 30, 2008, net income was $1,846, an increase of $235 or 14.59%
compared to net income of $1,611 for the same period in 2007. Diluted earnings
per share increased $0.04 per share or 11.76% for the three months ended June 30,
2008 compared to the same period in 2007. The six months ended June 30,
2008 reflected a continuation of our banks trend of rapid asset growth,
increasing by $165,832 or 18.42% from $900,153 at December 31, 2007 to
$1,065,985 at June 30, 2008. Net loans increased by 18.25% or $143,115
from December 31, 2007 to June 30, 2008, while total deposits
increased by 17.20% or $140,195 during that same period.
14
Table
of Contents
Corporation Overview
Tennessee Commerce Bancorp, Inc.,
headquartered in Franklin, Tennessee, is the bank holding company for Tennessee
Commerce Bank (the Bank). Organized in January 2000, Tennessee
Commerce Bank has a focused strategy that serves the banking needs of small to
medium-sized businesses, entrepreneurs and professionals in the Nashville
metropolitan statistical area, or the Nashville MSA, as well as the funding
needs of certain national and regional equipment vendors and financial services
companies. We call this strategy our business bank strategy. We
primarily conduct business from a single location in the Cool Springs
commercial area of Franklin, Tennessee, 15 miles south of Nashville. We
also operate three loan production offices-one in Birmingham, Alabama, and two
new offices in Minneapolis, Minnesota and Atlanta, Georgia, both of which we
opened in April and May 2008, respectively. Each of the two new
offices is staffed with one senior lending officer.
We offer a full range of
competitive retail and commercial banking services to local customers in the
Nashville MSA. Our deposit services include a broad offering 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-sized businesses and professionals, and letters of
credit. We issue VISA credit cards and are a merchant depository for cardholder
drafts under VISA credit cards. We also offer check cards and debit
cards. We offer our local customers free courier services, access to
third-party automated teller machines, or ATMs, and state-of-the-art electronic
banking. We have trust powers but do not have a trust department.
Our Business Strategy
We execute our business bank
strategy by combining the personal service and appeal of a community banking
institution with the sophistication of a larger bank. We believe this
strategy distinguishes us from our competitors in efforts to attract loans and
deposits of local small to medium-sized businesses and national and regional
equipment vendors and financial services companies. Further, the rapid
growth within the Nashville MSA, along with several bank mergers and
acquisitions, has left many business owners without significant banking
relationships. We seek to take advantage of this opportunity.
We do not compete based on
the traditional definition of convenience and currently have no plans to
develop a comprehensive branch bank network. For us, convenience is
created by technology and by a free courier service for local customers which
transports deposits directly from the business location to the bank. We
conduct business primarily from a single banking office with no teller line,
drive-through window or extended banking hours. We compete by providing
responsive and personalized service to meet customer needs. We provide
free electronic banking and cash management tools and on-site training for
business customers. We compete for consumer business by providing
superior products, attractive deposit rates, and free internet banking services
and access to a third-party regional ATM network.
The business bank strategy
is highlighted by differences between the financial statements of our 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, we are 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 95% for all FDIC-insured banks
at the end of the first quarter of 2008. At June 30, 2008, we had an
earning asset ratio of 96.07%.
The business bank model is
also highly efficient. We primarily target the non-retail (service,
manufacturing and professional) 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 non-customer
functions, such as data processing, information technology and internal audit,
allow us to operate with a small, highly-trained staff. Management
targets a minimum asset per employee ratio of $10,000 compared to the average
ratio of approximately $3,380 assets per employee for Middle Tennessee banks at
the end of the first quarter of 2008. At June 30, 2008, our assets per
employee were $14,210.
15
Table of Contents
In addition to our Nashville
MSA focus, we have developed expertise in indirect lending that allows us to
access a national market. Our indirect lending transactions are fixed-rate
monthly installment loans originated through a third-party equipment vendor or
financial services company. Our national market lending is divided into two
programs based on loan size. In the first program, through an established
network of vendors and financial service companies, we have opportunities to
finance business asset secured loan transactions nationally for middle-market
and investment grade companies. In the second program, a different network of
vendors and financial service companies located in Tennessee, Alabama, Georgia,
California and Michigan partner with us in financing smaller transactions
(generally $150 or less per transaction). Both national market programs provide
geographic and collateral diversity for our portfolio.
Comparison of Operating Results for the Three Months
Ended June 30, 2008 and June 30, 2007
Net Income
- Net income for the three months ended June 30,
2008 was $1,846, an increase of $235 or 14.59% compared to net income of $1,611
for the three months ended June 30, 2007. The increase is
attributable to a $193 increase in non-interest income from $610 for the three
months ended June 30, 2007 to $803 for the same period in 2008. We
experienced an increase of $753 in operating expense which was the result of
our overall growth, including a $142 increase in FDIC assessment at June 30,
2008 compared to the same date in 2007, as well as an increase in personnel and
general operating expenses because of our growth.
|
|
Three Months Ended
June 30,
|
|
|
|
(Dollars in thousands)
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
18,429
|
|
$
|
14,852
|
|
24.08
|
%
|
Interest expense
|
|
10,033
|
|
8,206
|
|
22.26
|
|
Net interest income
|
|
8,396
|
|
6,646
|
|
26.33
|
|
Provision for loan losses
|
|
2,340
|
|
1,500
|
|
56.00
|
|
Net interest after provision for loan
losses
|
|
6,056
|
|
5,146
|
|
17.68
|
|
Non-interest income
|
|
803
|
|
610
|
|
31.64
|
|
Non-interest expense
|
|
3,850
|
|
3,097
|
|
24.31
|
|
Net income before taxes
|
|
3,009
|
|
2,659
|
|
13.16
|
|
Income tax expense
|
|
1,163
|
|
1,048
|
|
10.97
|
|
Net income
|
|
$
|
1,846
|
|
$
|
1,611
|
|
14.59
|
%
|
Provision for Loan Losses
- The provision for loan losses for the
three months ended June 30, 2008 was $2,340, an increase of $840, or
56.00%, above the provision of $1,500 expensed in the same period in
2007. This increase was primarily a result of the increase in loan
volume. At June 30, 2008, the loan loss reserve of $11,520 was 1.23% of
gross loans of $938,636.
16
Table
of Contents
Non-interest Income
- Non-interest income increased by 31.64% or
$193, from $610 in the quarter ended June 30, 2007 to $803 for the same
period in 2008. The increase was primarily a result of higher gains on loan
sales. The gain on loan sales was $852 and $463 for the three-month
periods ended June 30, 2008 and 2007, respectively.
We earned $12 in mortgage origination fees during the three months
ended June 30, 2008 compared to $25 earned during the same period in 2007,
a decrease of $13 or 52.00%, primarily as a result of a slower market. We recognized no gain or loss on the sale of
securities in the three months ended June 30, 2008 and the same period in
2007.
We earned $852 on loan sale transactions in the three months ended June 30,
2008, an 84.02% increase compared to $463 during the same period in 2007. This
increase was primarily as a result of timing differences. Management will
continue to consider loan sale transactions if the opportunity for a reasonable
return is available.
Non-interest Expense
- Non-interest expense for the three months
ended June 30, 2008 was $3,850, an increase of $753 or 24.31%, over the
$3,097 expensed in the same period in 2007. Approximately 36.52% of the
increase was a result of increases in FDIC insurance.
Net Interest Margin
- The net interest margin decreased from
3.89% for the three months ended June 30, 2007 to 3.44% for the same
period in 2008 because of a lower average yield from the loan portfolio that
was not fully offset by a decrease in our cost for deposits. Interest
income increased by $3,577 or 24.08%, from $14,852 during the three months
ended June 30, 2007 to $18,429 during the same period in 2008. The
increase was primarily a result of increased loan volume. Average earning
assets increased from $684,531 in the three months ended June 30, 2007 to
$983,332 in the same period in 2008, an increase of $298,801 or 43.65%.
The increase in earning assets was primarily a result of loan growth. Average
loan balances increased by $274,263 or 44.77% for the three months ending June 30,
2008, from the same period in 2007. The average yield on earning assets
decreased from 8.70% in the three months ended June 30, 2007 to 7.54% in
the same period in 2008. The decrease in the cost of funds, as a percentage of
average balances was primarily a result of decreases in short-term interest
rates paid on deposits that support our loan growth. Between June 30, 2007
and June 30, 2008, the Federal Reserve Open Market Committee, or FOMC,
lowered the federal funds rate by 325 basis points.
Interest Expense
Interest expense increased from $8,206 in
the three months ended June 30, 2007 to $10,033 in the three months ended June 30,
2008. The $1,827, or 22.26%, increase in expense was a result of increases
in the volume of deposits partially offset by a decrease in the cost of funds.
Average interest earning liabilities increased by $296,630 or 47.18%. The
cost of funds decreased from 5.24% in the three months ended June 30, 2007
to 4.36% during the same three months in 2008, a decrease of 88 basis points.
Income Taxes
- Our effective tax rate for the three
months ended June 30, 2008 was 38.65% compared to 39.41% for the three
months ended June 30, 2007. Management anticipates that tax rates in
future periods will approximate the rates paid in 2008.
Efficiency Ratio
- Our efficiency ratio for the three months
ending June 30, 2008 and 2007 was 41.85% and 42.68%, respectively, a
decrease of 83 basis points. The following table reflects the calculation of
the efficiency ratio:
|
|
Three Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2008
|
|
2007
|
|
Non-interest expense
|
|
$
|
3,850
|
|
$
|
3,097
|
|
|
|
|
|
|
|
Net interest income
|
|
8,396
|
|
6,646
|
|
Non-interest income
|
|
803
|
|
610
|
|
Total Revenues
|
|
$
|
9,199
|
|
$
|
7,256
|
|
|
|
|
|
|
|
Efficiency Ratio
|
|
41.85
|
%
|
42.68
|
%
|
17
Table
of Contents
Comparison of Operating Results for the Six Months
Ended June 30, 2008 and June 30, 2007
Net Income
- Net income for the six months ended June 30,
2008 was $3,221, an increase of $204 or 6.76% compared to net income of $3,017
for the six months ended June 30, 2007. The increase is attributable
to a 29.08% increase in interest income from $27,823 for the six months ended June 30,
2007 to $35,915 for the same period in 2008. We experienced an increase of
$2,282 in operating expense which was the result of our overall growth,
including a $283 increase in FDIC assessment at June 30, 2008 compared to
the same date in 2007, as well as an increase in personnel and general
operating expenses because of our growth.
|
|
Six Months Ended
June 30,
|
|
|
|
(Dollars in thousands)
|
|
2008
|
|
2007
|
|
% Change
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
35,915
|
|
$
|
27,823
|
|
29.08
|
%
|
Interest expense
|
|
20,057
|
|
15,592
|
|
28.64
|
|
Net interest income
|
|
15,858
|
|
12,231
|
|
29.65
|
|
Provision for loan losses
|
|
3,940
|
|
3,000
|
|
31.33
|
|
Net interest after provision for loan
losses
|
|
11,918
|
|
9,231
|
|
29.11
|
|
Non-interest income
|
|
1,330
|
|
1,432
|
|
(7.12
|
)
|
Non-interest expense
|
|
7,994
|
|
5,712
|
|
39.95
|
|
Net income before taxes
|
|
5,254
|
|
4,951
|
|
6.12
|
|
Income tax expense
|
|
2,033
|
|
1,934
|
|
5.12
|
|
Net income
|
|
$
|
3,221
|
|
$
|
3,017
|
|
6.76
|
%
|
Provision for Loan Losses
- The provision for loan losses for the six
months ended June 30, 2008 was $3,940, an increase of $940, or
31.33%, above the provision of $3,000 expensed in the same period in
2007. This increase was primarily a result of the increase in loan
volume. At June 30, 2008, the loan loss reserve of $11,520 was 1.23% of
gross loans of $938,636.
Non-interest Income
- Non-interest income decreased by 7.12% or
$102, from $1,432 in the six months ended June 30, 2007 to $1,330 for the
same period in 2008. The decrease was primarily a result of
repossessions. The gain on loan sales was $1,418 and $1,280 for the
six-month periods ended June 30, 2008 and 2007, respectively.
We earned $24 in mortgage origination fees during the six months ended June 30,
2008 compared to $49 earned during the same period in 2007, a decrease of $25
or 51.02%, primarily as a result of a slower market. We recognized $30 on
the sale of securities in the six months ended June 30, 2008 compared with
$10 for the same period in 2007, primarily as a result of the restructuring of
portfolios in response to the current economic situation.
We earned $1,418 on loan sale transactions in the six months ended June 30,
2008, a 10.78% increase compared to $1,280 during the same period in 2007. This
increase was primarily a result of timing differences. Management will continue
to consider loan sale transactions if the opportunity for a reasonable return
is available.
Non-interest Expense
- Non-interest expense for the six months
ended June 30, 2008 was $7,994, an increase of $2,282 or 39.95%, over the
$5,712 expensed in the same period in 2007. Approximately 37.47% of the
increase was a result of increases in personnel. At June 30, 2008, the
Bank had 75 full-time employees compared with 60 employees at June 30,
2007.
Net Interest Margin
- The net interest margin decreased from
3.76% for the six months ended June 30, 2007 to 3.37% for the same period
in 2008 because of a lower average yield from the loan portfolio that was not
fully offset by a decrease in our cost for deposits. Interest income
increased by $8,092 or 29.08%, from $27,823 during the six months ended June 30,
2007 to $35,915 during the same period in 2008. The increase was primarily a
result of increased loan volume. Average earning assets increased from
$655,285 in the six months ended June 30, 2007 to $946,492 in the same
period in 2008, an increase of $291,207 or 44.44%. The increase in
earning assets was primarily a result of loan growth. Average loan balances
increased by $269,682 or 45.98% for the six months ending June 30, 2008,
from the same period in 2007. The average yield on earning assets
decreased from 8.55% in the six months ended June 30, 2007 to 7.64% in the
same period in 2008. The decrease in the cost of funds, as a percentage of
average balances was primarily a result of decreases in short-term interest
rates paid on deposits that support our loan growth. Between June 30, 2007
and June 30, 2008, the Federal Reserve Open Market Committee, or FOMC,
lowered the federal funds rate by 325 basis points.
18
Table of Contents
Interest Expense
Interest expense increased from $15,592 in
the six months ended June 30, 2007 to $20,057 in the six months ended June 30,
2008. The $4,465, or 28.64%, increase in expense was a result of increases
in the volume of deposits partially offset by a decrease in the cost of funds.
Average interest earning liabilities increased by $286,163 or 47.71%. The
cost of funds decreased from 5.24% in the six months ended June 30, 2007
to 4.55% during the same six months in 2008, a decrease of 69 basis points.
Income Taxes
Our effective tax rate for the six months
ended June 30, 2008 was 38.69% compared to 39.06% for the six months ended
June 30, 2007. Management anticipates that tax rates in future periods
will approximate the rates paid in 2008.
Efficiency Ratio
Our efficiency ratio for the six months
ending June 30, 2008 and 2007 was 46.51% and 41.81%, respectively, an
increase of 470 basis points. The following table reflects the calculation of
the efficiency ratio:
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2008
|
|
2007
|
|
Non-interest expense
|
|
$
|
7,994
|
|
$
|
5,712
|
|
|
|
|
|
|
|
Net interest income
|
|
15,858
|
|
12,231
|
|
Non-interest income
|
|
1,330
|
|
1,432
|
|
Total Revenues
|
|
$
|
17,188
|
|
$
|
13,663
|
|
|
|
|
|
|
|
Efficiency Ratio
|
|
46.51
|
%
|
41.81
|
%
|
Net Interest Income
Net interest income for the six months
ended June 30, 2008 was $15,858 compared to $12,231 for the same period in
2007, a gain of $3,627 or 29.65%. The increase in net interest income was
largely attributable to strong loan growth. The average net loan balance
for the six months ended June 30, 2008 increased by 45.98% or $269,682
from $586,501 for that period in 2007 to $856,183 for the same period in 2008.
Loan growth was accompanied by an increase in average interest-bearing deposits
from $590,119 for the six months ended June 30, 2007, to $862,419 for the
same period in 2008, an increase of $272,300 or 46.14%.
The following table outlines the components of net interest income for
the six-month periods ended June 30, 2008 and 2007 and identifies the
impact of changes in volume and rate:
|
|
June 30, 2008 change from
June 30, 2007 due to:
|
|
(Dollars in thousands)
|
|
Volume
|
|
Rate
|
|
Total
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
Loans
|
|
$
|
10,854
|
|
$
|
(3,242
|
)
|
$
|
7,612
|
|
Securities (taxable) (1)
|
|
556
|
|
34
|
|
590
|
|
Federal funds sold
|
|
39
|
|
(149
|
)
|
(110
|
)
|
Total interest income
|
|
11,449
|
|
(3,357
|
)
|
8,092
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
Deposits (other than demand)
|
|
6,336
|
|
(2,171
|
)
|
4,165
|
|
Federal funds purchased
|
|
78
|
|
(28
|
)
|
50
|
|
Subordinated debt
|
|
281
|
|
(31
|
)
|
250
|
|
Total interest expense
|
|
6,695
|
|
(2,230
|
)
|
4,465
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
4,754
|
|
$
|
(1,127
|
)
|
$
|
3,627
|
|
(1) Unrealized
gain of $661 and $579 is excluded from yield calculation for the six months
ended June 30, 2008 and 2007, respectively.
19
Table
of Contents
Average Balance Sheets, Net Interest Income, and Changes in
Interest Income and Interest Expense
The
table below shows the average daily balances of each principal category of our
assets, liabilities and shareholders equity, and an analysis of net interest
income, and the change in interest income and interest expense segregated into
amounts attributable to changes in volume and changes in rates for the
six-month periods ended June 30, 2008 and 2007. The table is presented on
a tax equivalent basis, as applicable.
|
|
Six Months Ended June 30,
2008
|
|
Six Months Ended June 30,
2007
|
|
|
|
Average
|
|
|
|
Average
|
|
Average
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities (taxable) (1)
|
|
$
|
79,270
|
|
$
|
2,177
|
|
5.57
|
%
|
$
|
59,423
|
|
$
|
1,587
|
|
5.33
|
%
|
Loans (2) (3)
|
|
856,183
|
|
33,597
|
|
7.89
|
%
|
586,501
|
|
25,985
|
|
8.93
|
%
|
Federal funds sold
|
|
11,039
|
|
141
|
|
2.57
|
%
|
9,361
|
|
251
|
|
5.41
|
%
|
Total interest earning assets
|
|
946,492
|
|
35,915
|
|
7.64
|
%
|
655,285
|
|
27,823
|
|
8.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
3,448
|
|
|
|
|
|
5,529
|
|
|
|
|
|
Net fixed assets and equipment
|
|
1,458
|
|
|
|
|
|
1,593
|
|
|
|
|
|
Accrued interest and other assets
|
|
27,200
|
|
|
|
|
|
14,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
978,598
|
|
|
|
|
|
$
|
676,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (other than demand)
|
|
$
|
862,419
|
|
$
|
19,438
|
|
4.53
|
%
|
$
|
590,119
|
|
$
|
15,273
|
|
5.22
|
%
|
Federal funds purchased
|
|
6,084
|
|
91
|
|
3.01
|
%
|
1,430
|
|
41
|
|
5.78
|
%
|
Subordinated debt
|
|
17,457
|
|
528
|
|
6.08
|
%
|
8,248
|
|
278
|
|
6.80
|
%
|
Total interest-bearing liabilities
|
|
885,960
|
|
20,057
|
|
4.55
|
%
|
599,797
|
|
15,592
|
|
5.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits
|
|
24,143
|
|
|
|
|
|
19,957
|
|
|
|
|
|
Other liabilities
|
|
3,922
|
|
|
|
|
|
3,159
|
|
|
|
|
|
Shareholders equity
|
|
64,573
|
|
|
|
|
|
53,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
978,598
|
|
|
|
|
|
$
|
676,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
3.09
|
%
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
3.37
|
%
|
|
|
|
|
3.76
|
%
|
|
|
|
|
(1)
|
Unrealized
losses of $661 and $579 are excluded from yield calculation for the six
months ended June 30, 2008 and 2007, respectively.
|
(2)
|
Non-accrual
loans are included in average loan balances, and loan fees of $2,070 and
$1,928 are included in interest income for the six months ended June 30,
2008 and 2007, respectively.
|
(3)
|
Loans
are presented net of allowance for loan loss.
|
20
Table
of Contents
Comparison of Financial Condition at June 30, 2008 and December 31,
2007
Assets
Total
assets at June 30, 2008 were $1,065,985, an increase of $165,832, or
18.42%, over total assets of $900,153 at December 31, 2007. Loan growth
was the primary reason for the increase. At June 30, 2008, net loans
equaled $927,116, up $143,115, or 18.25%, over the December 31, 2007 total
net loans of $784,001. The cash and cash equivalents balance decreased by
$8,613 between December 31, 2007 and June 30, 2008, as funds were
used to fund loans made in the first two quarters of 2008.
Our business bank model of operation generally results in a higher
level of earning assets than our peer banks. Earning assets are defined
as assets that earn interest income and include short-term investments, the
investment portfolio and net loans. We generally maintain a higher level
of earning assets than our peer banks because fewer assets are allocated to
facilities, cash and due from bank accounts used for transaction
processing. Earning assets at June 30, 2008 were $1,024,055 or
96.07% of total assets of $1,065,985. Earning assets at December 31,
2007 were $867,327, or 96.35% of total assets of $900,153.
Loans
We had total net loans of $927,116 at June 30, 2008. The
following table sets forth the composition of our loan portfolio at June 30,
2008 and December 31, 2007:
(Dollars in thousands)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Real estate
|
|
|
|
|
|
Construction
|
|
$
|
152,075
|
|
$
|
112,405
|
|
1 to 4 family residential
|
|
34,165
|
|
33,560
|
|
Other
|
|
153,770
|
|
143,973
|
|
Commercial, financial and agricultural
|
|
556,056
|
|
477,666
|
|
Consumer
|
|
3,375
|
|
3,966
|
|
Other
|
|
39,195
|
|
22,752
|
|
|
|
|
|
|
|
Total loans
|
|
938,636
|
|
794,322
|
|
Less: allowance for loan losses
|
|
(11,520
|
)
|
(10,321
|
)
|
|
|
|
|
|
|
Net loans
|
|
$
|
927,116
|
|
$
|
784,001
|
|
The
following table sets forth the percentage composition of our loan portfolio by
type at June 30, 2008 and December 31, 2007:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Real estate:
|
|
|
|
|
|
Construction
|
|
16.20
|
%
|
14.15
|
%
|
1 to 4 family residential
|
|
3.64
|
|
4.22
|
|
Other
|
|
16.38
|
|
18.13
|
|
Commercial, financial and agricultural
|
|
59.24
|
|
60.14
|
|
Consumer
|
|
0.36
|
|
0.50
|
|
Other
|
|
4.18
|
|
2.86
|
|
|
|
|
|
|
|
Total
|
|
100.00
|
%
|
100.00
|
%
|
21
Table
of Contents
The following table sets forth the composition of our commercial loan
portfolio by source at June 30, 2008 and December 31, 2007:
|
|
June 30,
2008
|
|
December 31,
2007
|
|
(Dollars in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Direct funding
|
|
$
|
208,795
|
|
37.55
|
%
|
$
|
193,943
|
|
40.60
|
%
|
Indirect funding:
|
|
|
|
|
|
|
|
|
|
Large
|
|
161,942
|
|
29.12
|
|
130,583
|
|
27.34
|
|
Small
|
|
185,319
|
|
33.33
|
|
153,140
|
|
32.06
|
|
Total
|
|
$
|
556,056
|
|
100.00
|
%
|
$
|
477,666
|
|
100.00
|
%
|
Management periodically reviews our 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.
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.
The following table presents information regarding non-accrual, past
due and restructured loans at June 30, 2008 and December 31, 2007:
(Dollars in thousands)
|
|
June 30,
2008
|
|
December 31,
2007
|
|
Non-accrual loans:
|
|
|
|
|
|
Number
|
|
115
|
|
130
|
|
Amount
|
|
$
|
5,566
|
|
$
|
6,465
|
|
|
|
|
|
|
|
Accruing loans which are contractually past
due 90 days or more as to principal and interest payments:
|
|
|
|
|
|
Number
|
|
59
|
|
44
|
|
Amount
|
|
$
|
3,245
|
|
$
|
1,992
|
|
|
|
|
|
|
|
Loans defined as troubled debt
restructurings:
|
|
|
|
|
|
Number
|
|
9
|
|
1
|
|
Amount
|
|
$
|
3,633
|
|
$
|
148
|
|
As of June 30, 2008 and December 31, 2007, there were no loans
classified for regulatory purposes as doubtful or substandard that are not
disclosed in the above table, which (i) represent or result from trends or
uncertainties which 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 that causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms. During the six months ended June 30, 2008,
non-performing loans increased as a result of the restructuring of three
credits in a total amount of $3,500.
22
Table
of Contents
Allowance for Loan Losses
The maintenance of an adequate allowance
for loan losses, or ALL, is one of the fundamental concepts of risk management
for every financial institution. Management is responsible for ensuring that
controls are in place to ensure the adequacy of the loan loss reserve in
accordance with generally accepted accounting principles, our stated policies
and procedures, and regulatory guidance.
It is managements intent to maintain an ALL 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
0.32% for the six months ended June 30, 2008, and 0.23% for the six months
ended June 30, 2007. The ALL as a percentage of the outstanding loans at
the end of the period was 1.23% at June 30, 2008, and 1.32% at June 30,
2007.
An analysis of our allowance for loan loss and net charge-offs is
furnished in the following table for the six months ended June 30, 2008
and the same period ended June 30, 2007:
(Dollars in thousands)
|
|
June 30,
2008
|
|
June 30,
2007
|
|
Allowance for loan losses at beginning of
period
|
|
$
|
10,321
|
|
$
|
6,968
|
|
Charge-offs:
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
Construction
|
|
150
|
|
|
|
1 to 4 family residential
|
|
|
|
|
|
Other
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
2,548
|
|
1,516
|
|
Consumer
|
|
77
|
|
11
|
|
Total Charge-offs
|
|
2,775
|
|
1,527
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
Construction
|
|
|
|
|
|
1 to 4 family residential
|
|
|
|
|
|
Other
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
33
|
|
178
|
|
Consumer
|
|
1
|
|
|
|
Total Recoveries
|
|
34
|
|
178
|
|
|
|
|
|
|
|
Net Charge-offs
|
|
2,741
|
|
1,349
|
|
|
|
|
|
|
|
Provision for loans charged to expense
|
|
3,940
|
|
3,000
|
|
Allowance for loan losses at end of period
|
|
$
|
11,520
|
|
$
|
8,619
|
|
|
|
June 30,
2008
|
|
June 30,
2007
|
|
Net charge-offs as a percentage of average
total loans outstanding during the period
|
|
0.32
|
%
|
0.23
|
%
|
|
|
|
|
|
|
Ending allowance for loan losses as a
percentage of total loans outstanding at end of the period
|
|
1.23
|
%
|
1.32
|
%
|
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.
Securities
The securities portfolio at June 30,
2008 was $96,030 compared to $73,753 at December 31, 2007. We view
the securities portfolio as a source of income and liquidity. The
securities portfolio was 9.01% of total assets at June 30, 2008 and 8.19%
of total assets at December 31, 2007.
23
Table
of Contents
Liabilities
We depend on a growing deposit base to fund
loan and other asset growth. We compete for local deposits by offering
attractive products with premium rates. We also obtain funding in the
wholesale deposit market which is accessed by means of an electronic bulletin
board. This electronic market links banks and acquirers of funds to
credit unions, school districts, labor unions and other organizations with
excess liquidity. The process is highly efficient and the average rate is generally
less than rates paid in the local market. Wholesale deposits are categorized as
Purchased time deposits on the detail of deposits shown in the table below.
Deposits
Total deposits at June 30, 2008 were $955,248, up $140,195 or
17.20% over the December 31, 2007 total deposits of $815,053. Total
average deposits during the six months ending June 30, 2008, were
$886,562, an increase of $276,486, or 45.32% over the total average deposits of
$610,076 during the six months ending June 30, 2007. Average non-interest
bearing deposits increased by $4,186, or 20.98%, from $19,957 in the six months
ending June 30, 2007, to $24,143 in the six months ending June 30,
2008.
The following table sets forth average deposit balances for the six
months ended June 30, 2008 and 2007 and the average rates paid on those
balances:
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
Average
Rate
Paid (1)
|
|
Average
Balance
|
|
Average
Rate
Paid (1)
|
|
Types of Deposits:
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
$
|
24,143
|
|
|
%
|
$
|
19,957
|
|
|
%
|
Interest-bearing demand deposits
|
|
7,100
|
|
1.00
|
|
6,316
|
|
3.85
|
|
Money market accounts
|
|
74,833
|
|
2.38
|
|
114,915
|
|
5.21
|
|
Savings accounts
|
|
6,379
|
|
2.69
|
|
7,777
|
|
2.70
|
|
IRA accounts
|
|
23,212
|
|
4.97
|
|
13,221
|
|
5.18
|
|
Purchased time deposits
|
|
398,029
|
|
4.82
|
|
224,472
|
|
5.25
|
|
Time deposits
|
|
352,866
|
|
4.74
|
|
223,418
|
|
5.32
|
|
Total deposits
|
|
$
|
886,562
|
|
|
|
$
|
610,076
|
|
|
|
(1)
Rate is annualized
Short-Term Debt
We have a $10,000 line of credit with
First Tennessee Bank, National Association. The outstanding principal balance
on this line of credit at June 30, 2008 was $9,500, and this line of
credit expires on October 1, 2008.
Subordinated Debt
In March 2005, we formed a financing
subsidiary, Tennessee Commerce Statutory Trust I, a Delaware statutory trust,
or the Trust I. In March 2005, the Trust I issued and sold 8,000 of the
Trust Is fixed/floating rate capital securities, with a liquidation amount of
$1 per capital security, to First Tennessee Bank, National Association. At the
same time, we issued to Trust I $8,248 of fixed/floating rate junior
subordinated deferrable interest debentures due 2035. The debentures pay a
6.73% fixed rate payable quarterly for the first five years and a floating rate
based on a three-month LIBOR rate plus a margin thereafter.
In
April 2008, we formed a financing subsidiary, Tennessee Commerce Statutory
Trust II, a Delaware statutory trust, or the Trust II. In June 2008, the
Trust II issued and sold 14,500 of the Trust IIs floating rate capital
securities, with a liquidation amount of $1 per capital security, in a private
placement. At the same time, we issued to Trust II $14,950 of floating rate
junior subordinated deferrable interest debentures due 2038. The debentures pay
a floating rate per annum, reset quarterly, equal to the prime rate of interest
published in
The Wall Street Journal
on the first business day of each distribution period plus 50 basis points (but
in no event greater than 8.0% or less than 5.75%).
In
accordance with FASB Interpretation No. 46 (revised December 2003) Consolidation
of Variable Interest Entities, neither the Trust I nor the Trust II is
consolidated. We report as liabilities the subordinated debentures issued by us
and held by the Trust I and Trust II.
24
Table
of Contents
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of our customers. At June 30,
2008, we had unfunded loan commitments outstanding of $154,104 and standby
letters of credit and financial guarantees of $12,916. 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 our involvement in those particular financial
instruments. We use the same credit policies in making commitments and
conditional obligations as we do for on-balance sheet instruments.
Because these commitments generally have fixed expiration dates and
many will expire without being drawn upon, the total commitment level does not
necessarily represent future cash requirements. If needed, we can liquidate
federal funds sold or securities available for sale or borrow and purchase
federal funds from other financial institutions, where we have available
federal fund lines at June 30, 2008 totaling $33,700.
Liquidity/ Capital
Resources
Liquidity
Of primary importance to depositors, creditors and regulators is the
ability to have readily available funds sufficient to repay fully maturing
liabilities. We are subject to general FDIC guidelines, which do not
require a minimum level of liquidity. Liquidity requirements can be met through
short-term borrowings or the disposition of short-term assets which are
generally matched to correspond to the maturity of liabilities. Management believes
our liquidity ratios meet the general FDIC guidelines and we have assets and
borrowing capacity to provide adequate liquidity. Management does not know of
any trends or demands that are reasonably likely to result in our liquidity
increasing or decreasing in any material manner.
Capital Resources
Our objective is to maintain a level of
capitalization that is sufficient to take advantage of profitable growth
opportunities while meeting regulatory requirements.
To continue to grow, we must increase capital by generating
earnings, issuing equities, borrowing funds or a combination of those
activities. In June 2008, the Trust II issued and sold $14,500 of capital
securities in a private placement.
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.
The capital guidelines classify capital into two tiers, referred to as
Tier I and Tier II. Under 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 preferred stock and 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 and 8% total risk-based capital. In 1990, regulators
added a leverage computation to the capital requirements, comparing Tier I
capital to total average assets less goodwill.
The Federal Deposit Insurance Corporation Improvement Act of 1991
established five capital categories for banks and bank holding companies. The
bank regulators adopted regulations defining these five capital categories in September 1992.
Under these regulations, each bank is classified into one of the five categories
based on its level of risk-based capital as measured by Tier I capital,
total risk-based capital, Tier I leverage ratios and its supervisory
ratings.
25
Table
of Contents
At June 30, 2008 and December 31, 2007, the Banks and our
risk-based capital ratios and the minimums for capital adequacy and to be
considered well-capitalized under the Federal Reserve Boards prompt corrective
action guidelines were as follows:
|
|
|
|
|
|
|
|
Minimum to
|
|
|
|
|
|
|
|
Minimum
|
|
be considered
|
|
|
|
June 30,
|
|
December 31,
|
|
for capital
|
|
well-
|
|
|
|
2008
|
|
2007
|
|
adequacy
|
|
capitalized
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio
|
|
|
|
|
|
|
|
|
|
Tennessee Commerce Bank
|
|
8.83
|
%
|
8.75
|
%
|
4.00
|
%
|
5.00
|
%
|
Tennessee Commerce Bancorp, Inc.
|
|
8.71
|
%
|
8.09
|
%
|
4.00
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 core capital to risk-weighted
assets
|
|
|
|
|
|
|
|
|
|
Tennessee Commerce Bank
|
|
9.14
|
%
|
9.26
|
%
|
4.00
|
%
|
6.00
|
%
|
Tennessee Commerce Bancorp, Inc.
|
|
9.01
|
%
|
8.55
|
%
|
4.00
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
Tennessee Commerce Bank
|
|
10.31
|
%
|
10.51
|
%
|
8.00
|
%
|
10.00
|
%
|
Tennessee Commerce Bancorp, Inc.
|
|
10.18
|
%
|
9.80
|
%
|
8.00
|
%
|
n/a
|
|
Based solely on our analysis of federal banking regulatory categories,
on June 30, 2008 and December 31, 2007, we and the Bank were within
the well capitalized categories under the regulations.
Impact of Inflation and Changing Prices
The financial statements and related
financial data presented herein have been prepared in accordance with U.S.
generally accepted accounting principles 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
resulting from inflation. The impact of inflation on operations of the Bank is
reflected in increased operating costs. Unlike most industrial companies,
almost 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.
26
Table
of Contents
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT 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 exceeds 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
Banks asset liability committee develops its view of future rate trends and
strives to manage rate risk within a targeted range 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 twelve months. The asset
liability committee conducts a quarterly analysis of the rate sensitivity
position and reports its results to the Banks board of directors.
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 defined as the difference between the dollar amount of rate sensitive
assets repricing during a period and the volume of rate sensitive liabilities
repricing 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. Our internal 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 June 30, 2008. Management uses
the one-year gap as the appropriate time period for setting strategy.
27
Table
of Contents
Rate
Sensitivity Gap Analysis
(Dollars in thousands)
|
|
|
|
1-3
|
|
4-12
|
|
1-5
|
|
Over
|
|
|
|
|
|
Floating
|
|
Months
|
|
Months
|
|
Years
|
|
5 years
|
|
Total
|
|
Maturities :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earnings Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
909
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agencies
|
|
|
|
47,384
|
|
504
|
|
1,222
|
|
46,600
|
|
95,710
|
|
Mortgage-backed securities
|
|
|
|
23
|
|
72
|
|
146
|
|
79
|
|
320
|
|
Total securities
|
|
|
|
47,407
|
|
576
|
|
1,368
|
|
46,679
|
|
96,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
247,420
|
|
109,116
|
|
237,967
|
|
311,173
|
|
32,960
|
|
938,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
248,329
|
|
156,523
|
|
238,543
|
|
312,541
|
|
76,639
|
|
1,035,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
30,410
|
|
30,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
248,329
|
|
$
|
156,523
|
|
$
|
238,543
|
|
$
|
312,541
|
|
$
|
110,049
|
|
$
|
1,065,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
3,091
|
|
$
|
|
|
$
|
|
|
$
|
2,970
|
|
$
|
|
|
$
|
6,061
|
|
Money market and savings
|
|
39,855
|
|
|
|
|
|
27,696
|
|
|
|
67,551
|
|
Time deposits
|
|
|
|
195,344
|
|
505,512
|
|
159,545
|
|
|
|
860,401
|
|
Total deposits
|
|
42,946
|
|
195,344
|
|
505,512
|
|
190,211
|
|
|
|
934,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
8,300
|
|
|
|
|
|
|
|
|
|
8,300
|
|
Short-term debt
|
|
|
|
9,500
|
|
|
|
|
|
|
|
9,500
|
|
Subordinated debt
|
|
|
|
|
|
|
|
|
|
23,198
|
|
23,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
51,246
|
|
204,844
|
|
505,512
|
|
190,211
|
|
23,198
|
|
975,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
25,322
|
|
25,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
65,652
|
|
65,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
51,246
|
|
$
|
204,844
|
|
$
|
505,512
|
|
$
|
190,211
|
|
$
|
114,172
|
|
$
|
1,065,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive gap by period
|
|
$
|
197,083
|
|
$
|
(48,321
|
)
|
$
|
(266,969
|
)
|
$
|
122,330
|
|
$
|
56,441
|
|
|
|
Cumulative gap
|
|
|
|
$
|
148,762
|
|
$
|
(118,207
|
)
|
$
|
4,123
|
|
$
|
60,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as a percentage of total
assets
|
|
|
|
13.96
|
%
|
(11.09
|
)%
|
0.39
|
%
|
5.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate sensitive assets / rate sensitive
liabilities (cumulative)
|
|
4.85
|
|
1.58
|
|
0.84
|
|
1.00
|
|
1.06
|
|
|
|
28
Table
of Contents
From June 30, 2007 to June 30, 2008, the FOMC decreased
interest rates by 325 basis points. Management has positioned the balance sheet
to be essentially neutral for asset and liability sensitivity. At June 30,
2008, our one-year gap was 0.84.
The interest rate risk model that defines the gap position also
performs a rate shock test of the balance sheet using an earnings simulation
model and an economic value of equity model. The rate shock test measures the
impact on the net interest margin and the economic value of equity of an
immediate shift in interest rates in either direction.
Our earnings simulation model measures the impact of changes in
interest rates on net interest income. To limit interest rate risk, we have a
guideline for our earnings at risk which sets a limit on the variance of net
interest income to less than a 5% percent decline for a 100-basis point
change up or down in rates from managements flat interest rate forecast over
the next twelve months. At June 30, 2008, we were in compliance with this
guideline.
Our economic value of equity model measures the extent that estimated
economic values of our assets, liabilities and off-balance sheet items will
change as a result of interest rate changes. To help limit interest rate risk,
we have a guideline stating that for an instantaneous 100-basis point increase
or decrease in interest rates, the economic value of equity will not decrease
by more than 10% from the base case. At June 30, 2008, we were in
compliance with this guideline.
The above analysis may not on its own be an entirely accurate indicator
of how net interest income or net interest margin 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 Banks board of
directors.
29
Table
of Contents
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) 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 us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and acting Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. We carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and acting Chief Financial Officer, of
the effectiveness of the design and operation of our 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 acting Chief Financial Officer concluded that our disclosure
controls and procedures are effective to allow timely decisions regarding
disclosure in the reports that we file or submit to the Securities and Exchange
Commission under the Exchange Act.
Internal
Control Over Financial Reporting
There
were no changes in our internal control over financial reporting during the
quarter ended June 30, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
30
Table
of Contents
PART II:
OTHER INFORMATION
ITEM 1A. RISK FACTORS.
There were no material changes to our risk factors included in Part I,
Item 1A of our Annual Report on Form 10-K for the year ended December 31,
2007, as filed with the Securities and Exchange Commission on April 18,
2008.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS.
The annual meeting of
shareholders (the Annual Meeting) of Tennessee Commerce Bancorp, Inc.
(the Corporation) was held June 24, 2008.
The following proposals were considered by
shareholders at the Annual Meeting:
Proposal
1
Election of Class II
Directors
The
following directors were elected to serve as Class II directors until
their respective successors are elected and qualified
|
|
Votes
|
|
|
|
|
|
For
|
|
Withheld
|
|
Abstained
|
|
Paul W. Dierksen
|
|
3,371,288
|
|
30,550
|
|
|
|
Dennis L. Grimaud
|
|
3,371,288
|
|
30,550
|
|
|
|
Michael R. Sapp
|
|
3,341,486
|
|
60,352
|
|
|
|
The
following directors continued in office following the Annual Meeting and they
will serve until the annual meeting of shareholders in the years indicated or
until their respective successors are elected and qualified:
|
|
Term
Expires
|
|
H. Lamar Cox
|
|
2010
|
|
Arthur F. Helf
|
|
2009
|
|
William W. McInnes
|
|
2009
|
|
Thomas R. Miller
|
|
2010
|
|
Darrel E. Reifschneider
|
|
2010
|
|
Paul A. Thomas
|
|
2009
|
|
Proposal 2
Ratification of the appointment of
KraftCPAs, PLLC as the Corporations independent accountants and auditors for
the fiscal year 2008
|
|
Votes
|
|
Broker
|
|
For
|
|
Against
|
|
Abstain
|
|
Non-Votes
|
|
3,369,948
|
|
28,890
|
|
3,000
|
|
|
|
31
Table
of Contents
ITEM 6. 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.(2)
|
3.3
|
|
Bylaws
of Tennessee Commerce Bancorp, Inc.(1)
|
3.4
|
|
Amendment
to Bylaws of Tennessee Commerce Bancorp, Inc.(3)
|
4.1
|
|
Shareholders
Agreement(1)
|
4.2
|
|
Form of
Stock Certificate(4)
|
4.3
|
|
Indenture,
dated as of June 20, 2008, between Tennessee Commerce Bancorp, Inc.
and Wilmington Trust Company, as trustee(5)
|
4.4
|
|
Amended
and Restated Declaration of Trust, dated as of June 20, 2008, among Tennessee
Commerce Bancorp, Inc. , as sponsor, Wilmington Trust Company, as
institutional and Delaware trustee, and Arthur F. Helf, H. Lamar Cox and
Michael R. Sapp, as administrators(6)
|
4.5
|
|
Guarantee
Agreement, dated as of June 20, 2008, between Tennessee Commerce
Bancorp, Inc. and Wilmington Trust Company(5)
|
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 Annual Report
on Form 10-K, as filed with the Securities and Exchange Commission on
April 18, 2008, and incorporated herein by reference.
|
|
|
|
(3)
|
|
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.
|
|
|
|
(4)
|
|
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.
|
|
|
|
(5)
|
|
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 23, 2008, and incorporated herein by reference.
|
|
|
|
(6)
|
|
Previously
filed as an exhibit to Tennessee Commerce Bancorp, Inc.s Current Report
on Form-8-K/A, as filed with the Securities and Exchange Commission on
June 30, 2008, and incorporated herein by reference.
|
32
Table
of Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Tennessee
Commerce
|
|
Bancorp, Inc.
|
|
(Registrant)
|
|
|
|
|
August 11,
2008
|
|
/s/
H. Lamar Cox
|
(Date)
|
|
H.
Lamar Cox
|
|
Acting
Chief Financial Officer
|
33
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