Table of Contents
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, 2009
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OR
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o
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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
.
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:
(Title of each
class)
Indicate by check mark if
the registrant is a well-known, seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
o
No
x
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
o
No
x
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 registrant the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
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.
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 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
o
Non-accelerated filer
x
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
The aggregate market
value of the registrants voting stock held by non-affiliates of the registrant
at June 30, 2009 was $20.01 million, based upon the average sale price on
that date.
As of March 03,
2010, there were 5,648,384 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 2010 annual meeting of
shareholders to be held on May 20, 2010, which will be filed with the
Commission no later than April 29, 2010. 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.
Table of Contents
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. The Bank
conducts business from a single location in the Cool Springs commercial area of
Franklin. The Bank had total assets at December 31, 2009 of $1.4 billion.
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 without a 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 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 86%, as of December 31, 2009, 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, 2009, the
composition of the $1.17 billion loan portfolio was 55.45% commercial, 37.88%
secured by real estate (both commercial and consumer) and 6.67% in consumer and
credit card loans.
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 25.40% of the total loan
portfolio at December 31, 2009.
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,
2009, the average size of this type of loan in the loan portfolio was
approximately $389,000 and earned an average yield of 6.72%. Funding under this
program represents approximately 11.15% of the $1.17 billion 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 $150,000 at origination.
Management has installed a standardized credit approval process that delivers
quick responsive service. At December 31, 2009, the average size of this
type of loan in the loan portfolio was approximately $45,000, and the average
yield on these loans was 6.88%. Funding under this program represents 14.26% of
the $1.17 billion total loan portfolio.
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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 $15.0 million
compared to its peer group ratio of $5.12 million at the end of December 31,
2009, as reported by the FDIC. 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.
The
Corporation was 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 Corporations
activities are subject to the supervision of the Board of Governors of the
Federal Reserve System (Federal Reserve Board). The Corporations
offices are the same as the principal office of the Bank. On March 29,
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) and in July 2008, the Corporation formed a wholly owned
subsidiary, TCB Commercial Asset Services, Inc (TCB). As of December 31,
2009, the Bank, the Trust I, the Trust II and TCB were the only subsidiaries of
the Corporation. The accompanying consolidated financial statements include the
accounts of the Corporation, the Bank and TCB. 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 Bank commenced operations as a Tennessee state
chartered bank on January 14, 2000, and is headquartered in Franklin,
Tennessee.
Corporation
Overview
The
Corporation, headquartered in Franklin, Tennessee, is the bank holding company
for the Bank. Organized in January 2000, the 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. The
Corporation calls this strategy its Business Bank strategy. The Corporation
primarily conducts business from a single location in the Cool Springs
commercial area of Franklin, Tennessee, 15 miles south of Nashville. The
Corporation also operates three loan production offices - one in each of
Birmingham, Alabama, Minneapolis, Minnesota and Atlanta, Georgia. Each of these
offices is staffed with one senior lending officer.
The
Corporation offers a full range of competitive retail and commercial banking
services to local customers in the Nashville MSA. The Corporations
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. The
Corporation issues VISA credit cards and is a merchant depository for
cardholder drafts under VISA credit cards. The Corporation also offers
check cards and debit cards and offers its local customers free courier
services, access to third-party automated teller machines, or ATMs, remote
deposit and state-of-the-art electronic banking. The Corporation has trust
powers but does not have a trust department.
Employees
At December 31,
2009, the Bank employed 91 people on a full-time basis. The Corporation has
entered into employment agreements with two of its executive officers who are
also employees of the Bank. 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.
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Supervision
and Regulation
Bank Holding Company Regulation
The
Corporation is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the Holding Company Act), and is registered
with the Federal Reserve Board. The Corporations banking subsidiary is
subject to restrictions under federal laws 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, the Corporation is 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 the Corporation 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 the Bank or related to FDIC assistance
provided to a subsidiary in danger of default the Bank may be assessed for
the FDICs loss, subject to certain exceptions.
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 engaging in
certain activities, including certain merger activities, outside of the state
in which the operations of the bank holding companys subsidiaries are located,
unless these activities are allowed under 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
United States Department of Justice 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.
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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.
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 quarterly statutory
assessment.
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 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. One aspect of this is to assign assets and
off-balance sheet items to a broad number of risk categories each with
appropriate weights. The guidelines require all federally regulated banks
to maintain a minimum Capital Ratio (ratio of total capital to risk-weighted
assets) of at least 8%, a Tier I Capital
Ratio (as defined below) of at least 4%, and a Tier I Leverage Ratio (Tier I
Capital divided by average total assets) of at least 4%. To be considered
a well capitalized bank or bank holding company under the guidelines, a bank
or bank holding company must have a Capital Ratio of at least 10%, a Tier I
Capital Ratio of at least 6% and a Tier I Leverage Ratio of at least 5%. Regulators may require a bank to retain
capital ratios higher than the minimum statutory threshold based on the risk
profile of the bank. As of December 31, 2009, the Banks Capital Ratio was
10.63%, its Tier I Capital Ratio was 9.37%, and its Tier I Leverage Ratio was
8.74%.
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.
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Under
the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA),
as an institutions capital position deteriorates, it is subject to varying and
increasingly restorative enforcement actions. These sanctions may include
compliance with a capital plan or agreement with the regulator, limitations on
activities and, ultimately, a termination of deposit 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 II capital rules.
The
agencies have proposed a NPR that would provide non-core banks the option of
adopting the Standardized Approach of the Basel II Framework.
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 Corporation,
including cash flow to pay dividends to holders of trust preferred securities
of the Corporations trusts, holders of the Fixed Rate Cumulative Perpetual
Preferred Stock of the Corporation Series A (Series A Preferred
Stock) and to the Corporations common stock shareholders, will be dividends
that the Bank pays to the Corporation as its sole shareholder. Under Tennessee
law, the Corporation is not permitted to pay dividends if, after giving effect
to such payment, the Corporation would not be able to pay the Corporations
debts as they become due in the usual course of business or the Corporations
total assets would be less than the sum of the Corporations total liabilities
plus any amounts needed to satisfy any preferential rights if the Corporation
were dissolving. In addition, in deciding whether or not to declare a dividend
of any particular size, the Corporations board of directors must consider the
Corporations current and prospective capital, liquidity, and other needs.
In
addition to the limitations on the Corporations ability to pay dividends under
Tennessee law, the Corporations ability to pay dividends on the Corporations
common stock is also limited by the Corporations participation in the Troubled
Asset Relief Program (TARP) Capital Purchase Program (CPP) and by certain
statutory or regulatory limitations. Prior to December 19, 2011, unless
the Corporation has redeemed the Series A Preferred Stock or U.S.
Department of the Treasury (Treasury) has transferred the Series A
Preferred Stock to a third party, the consent of the Treasury must be received
before the Corporation can declare or pay any dividend or make any distribution
on the Corporations common stock. Furthermore, if the Corporation is not
current in the payment of quarterly dividends on the Series A Preferred
Stock, the Corporation cannot pay dividends on the Corporations common stock.
Moreover,
the terms of the Series A Preferred Stock include a restriction against
increasing the Corporations common stock dividends from levels at the time of
the initial investment by Treasury and prevent the Corporation from redeeming,
purchasing or otherwise acquiring its common stock other than for certain
stated exceptions. Historically, the Corporation has paid no dividends on its
common stock. Therefore, the Corporation would have to seek Treasurys consent
to pay any dividends on shares of Corporation common stock. These restrictions
will terminate on the earlier of the third anniversary of the date of issuance
of the Series A Preferred Stock to Treasury and the date on which the Series A
Preferred Stock issued to Treasury has been redeemed in whole or Treasury has
transferred all of its Series A Preferred Stock to third parties. In
addition, the Corporation will be unable to declare or pay dividends or distributions
on, or repurchase, redeem or otherwise acquire for consideration, shares of its
common stock or other stock ranking junior to, or in parity with, the Series A
Preferred Stock if the Corporation fails to declare and pay full dividends (or
declare and set aside a sum sufficient for payment thereof) on its Series A
Preferred Stock.
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There
are state and federal statutory and regulatory limitations on the payment of
dividends by the Bank to the Corporation, as well as by the Corporation 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 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.
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%. 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.
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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
one year after enactment. The Interstate Act contains a 30% intrastate
deposit cap, except for the initial acquisition in the state, a 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. The FDIC has
proposed an amendment to this regulation that would change the comparison rate
from a specific market rate to a prevailing national average rate, as published
by the FDIC. Because the Bank was well capitalized as of December 31,
2009, 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.
As of January 1,
2007, the previous nine risk categories utilized in the risk matrix were
condensed into four risk categories which continue to be distinguished by
capital levels and supervisory ratings. In an effort to restore capitalization
levels and to ensure the DIF will adequately cover projected losses from future
bank failures, the FDIC raised the base assessment rates uniformly by seven
basis points for the assessment for the first quarter of 2009. In addition, the
FDIC imposed a 5 basis point emergency special assessment on June 30,
2009, that was collected on September 30, 2009. The FDIC also
adopted an interim rule that permits an emergency special assessment after
June 30, 2009 of up to ten basis points. On September 29, 2009,
the FDIC, adopted a notice of proposed rulemaking with request for comment to
amend its assessment regulations to require all institutions to prepay, on December 30,
2009, their estimated risk-based assessments for the fourth quarter of 2009,
and for all of 2010, 2011, and 2012, at the same time that institutions pay
their regular quarterly deposit insurance assessments for the third quarter of
2009. This proposal rule was adopted and the Bank prepaid these
assessments and accounted for the prepaid assessment as a prepaid expense (an
asset). The DIF will initially account for the amount collected as both an
asset (cash) and an offsetting liability (deferred revenue). The Banks
quarterly risk-based deposit insurance assessments will be paid from the amount
it prepaid until that amount is exhausted or until December 30, 2014, when
any amount remaining would be returned to it. On December 31, 2009
the Bank paid the FDIC $8.05 million for the fourth quarter 2009 and the next
three years.
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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.
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 the
Bank. 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
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.
Emergency Economic
Stabilization Act
In
response to recent, unprecedented market turmoil, Congress enacted the
Emergency Economic Stabilization Act (EESA) on October 3, 2008. EESA
authorizes the Secretary of Treasury (the Secretary) to purchase up to $700
billion in troubled assets from financial institutions under TARP. Troubled
assets include residential or commercial mortgages and related instruments
originated prior to March 14, 2008 and any other financial instrument the
purchase of which the Secretary determines, after consultation with the
Chairman of the Board of Governors of the Federal Reserve System, is necessary
to promote financial stability. The Secretary was authorized to purchase
up to $250 billion in troubled assets immediately and up to $350 billion upon
request by the President, subject to action by Congress. EESA also increased
the maximum deposit insurance amount up to $250,000 until December 31,
2013. Pursuant to his authority under EESA, the Secretary created the
TARP CPP under which Treasury is investing up to $250 billion in senior
preferred stock of U.S. banks and savings associations or their holding
companies.
The
Corporation applied for, and Treasury approved, a capital purchase in the
amount of $30 million under the CPP. The Corporation entered into a
Letter Agreement with Treasury, pursuant to which the Corporation issued and
sold to Treasury, for an aggregate purchase price of $30 million in cash, (i) 30,000
shares of Series A Preferred Stock having a liquidation preference of
$1,000, and (ii) a ten-year warrant to purchase up to 461,538 shares of
common stock, at an exercise price of $9.75 per share, subject to certain
anti-dilution and other adjustments. The Series A Preferred Stock
will pay cumulative dividends at a rate of 5% per annum for the first five
years and 9% per annum thereafter. The CCP transaction closed on December 19,
2008.
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American Recovery and
Reinvestment Act of 2009
The
American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law on February 17,
2009. ARRA contains a wide variety of programs intended to stimulate the
economy and provide for extensive infrastructure, energy, health and education
needs. In addition, ARRA imposes certain new executive compensation and
corporate expenditure limits on all current and future TARP recipients until
they have repaid Treasury, which is permitted under ARRA without the need to
raise new capital, subject to Treasury consulting with the recipients appropriate
regulatory agency.
Effect of Governmental
Policies
The
Corporation 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.
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 Corporation
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 Corporation 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
The
Corporation files 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 the Corporation that it files 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.
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ITEM 1A.
RISK FACTORS
Our concentration of commercial loans and
commercial real estate loans expose us to credit risks.
At December 31,
2009, our portfolio of commercial loans totaled $649.5 million, or 55.45% of
total loans, and our commercial real estate loan portfolio was $443.8 million,
or 37.88% of total loans. These types of
loans generally expose us to a greater risk of nonpayment and loss than
residential real estate loans because repayment of such loans often depends on
the successful operations and income stream of the borrowers. Additionally,
such loans typically involve larger loan balances to single borrowers or groups
of related borrowers compared to residential real estate loans and many of our
borrowers have more than one such loan outstanding. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us
to a significantly greater risk of loss compared to an adverse development with
respect to a residential real estate loan. Further, we could sustain losses if
we incorrectly assess the creditworthiness of such 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.
Commercial loans are generally secured by a variety of
forms of collateral related to the underlying business, such as equipment,
accounts receivable and inventory. Should a commercial loan require us to
foreclose on the underlying collateral, the foreclosure expense may be
significant if the collateral is of a unique nature. The collateral may be
difficult to liquidate, and deteriorating market conditions may depress the
value of such collateral, increasing the risk to us of recovering the principal
amount of the loan. Accordingly, our financial condition may be adversely
affected by defaults in this portfolio.
Some economists believe that deterioration in income
producing commercial real estate is likely to worsen as vacancy rates continue
to rise and absorption rates of existing square footage and/or units continue
to decline. Because of the current, general economic slowdown, these loans
represent a high risk, could result in a sharp increase in our total net charge-offs
and could require us to significantly increase our allowance for loan losses,
which could have a material adverse effect on our financial condition or
results of operations.
Our
current sources of funds might not be sufficient to meet our future liquidity
needs.
The
primary sources of our funds are loan repayments and customer deposits. 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, rising fuel prices, inclement weather,
natural disasters and international instability. Customer 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 brokered deposits, internet
deposits 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.
Our
reliance on internet and brokered deposits could adversely affect our liquidity
and results of operations.
Recently
our loan demand has exceeded the rate at which we have been able to increase
our deposits and, as a result, we have relied on internet and brokered deposits
as a source of funds with which to make loans and provide liquidity. We
post rates to an Internet-based program that retail and institutional investors
nationwide subscribe to in order to invest funds. As of December 31,
2009, internet and brokered deposits, amounted to $526.4 million, or 42.36% of
total deposits. Generally, brokered deposits
may not be as stable as other types of deposits and, in the future, those
depositors may not renew their time deposits when they mature, or we may
have to pay a higher rate of interest to keep those deposits or to replace them
with other deposits or with funds from other sources. Additionally, if we
cease to be well capitalized for bank regulatory purposes or are placed under
a formal enforcement action with corresponding restrictions, we will
not be able to accept, renew or rollover brokered deposits without a
waiver from the FDIC. An inability to maintain or replace these brokered
deposits as they mature could adversely affect our
liquidity. Further, paying higher interest rates to maintain or
replace these deposits could adversely affect our net interest margin
and our results of operations.
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Capital constraints may
affect our pace of growth and our ability to raise additional capital when
needed is dependent on conditions outside our control.
Our
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 specific 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 provide any assurance 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.
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, 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.
In the future we may become
subject to informal or formal enforcement actions that could have a
material adverse effect on our business, operations, financial condition,
results of operations or the value of our common stock.
Our
bank subsidiary is not currently under, nor does management expect it to be
placed under, a formal enforcement action. Nonetheless, we can provide no
assurance that we will not become subject to a regulatory action, possibly
including a memorandum of understanding, cease and desist order, prompt
corrective action and/or other regulatory enforcement action. If our regulators
take any informal or formal enforcement actions, then we could, among other things,
become subject to restrictions on our ability to develop any new business, as
well as restrictions on our existing business, and we could be required to
raise additional capital, dispose of certain assets and liabilities within a
prescribed period of time, or both. The terms of any such enforcement action
could have a material adverse effect on our business, operations, financial
condition, results of operations and the value of our common stock.
We
rely heavily on the services of key personnel.
We depend
substantially on the strategies and management services of our executive
officers Michael R. Sapp, Chairman, Chief Executive Officer and President,
Frank Perez, Chief Financial Officer and H. Lamar Cox, Chief Operating 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. We compete with a large number other financial
institutions in the Nashville MSA for such personnel, and we cannot assure you
that we will be successful in attracting or retaining such personnel.
Prepayment of FDIC insurance premiums and higher
FDIC assessment rates could adversely affect our results of operations.
As a result of the large
number of recent bank failures that have depleted the DIF, the FDIC required
financial institutions, such as our bank subsidiary, to prepay on December 30,
2009 their estimated quarterly risk-based assessments for the fourth quarter of
2009 and for all of 2010 through and including 2012 in order to re-capitalize
the DIF. The amount of our prepayment was $8.05 million. The FDIC also
increased the assessment rates by three basis points effective January 1,
2011. We cannot predict if the aggregate amount of all FDIC premium prepayments
will be sufficient to cover expected bank failures. Therefore, we can give no
assurance that the FDIC will not impose additional special assessments in the
future to cover the costs associated with such failures.
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Our business is subject to
the success of certain local economies.
Our
success significantly depends upon the growth in population, income levels,
deposits and new businesses in the Nashville metropolitan statistical area, or
Nashville MSA, and the other markets in which we have significant loan
production efforts. 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.
National market funding
outside of the Nashville MSA has risks related to the potential disposition of
collateral upon foreclosure.
At December 31,
2009, 25.71%
of
our loan portfolio was 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. This
lending causes us to have somewhat different risks than those typical for
community banks generally. Our loan portfolio is somewhat geographically
diverse, and as a result the loan collateral is also 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.
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:
·
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 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.
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.
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.
Material
fluctuations in non-interest income may occur.
Historically,
a substantial portion of our non-interest income is derived from the sale of
loans. We sell 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.
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Negative developments in the financial services industry and U.S. and
global credit markets may adversely impact our operations and results.
Negative
developments in the latter half of 2007 and throughout 2008 and 2009 in the
capital markets have resulted in uncertainty in the financial markets in
general with the expectation of the general economic downturn continuing
through 2009 and into 2010. The performance of loan portfolios has deteriorated
at many institutions resulting from, among other factors, a weak economy and a
decline in the value of the collateral supporting the loans. The competition
for our deposits has increased significantly as a result of liquidity concerns
at other institutions. Stock prices of bank holding companies, like ours, have
been negatively affected by the current condition of the financial markets, as
has our ability, if needed, to raise capital or borrow in the debt markets. As
a result, there is a potential for new federal or state laws and regulations
regarding lending and funding practices and capital and liquidity standards,
and financial institution regulatory agencies are expected to be very
aggressive in responding to concerns and trends identified in examinations,
including the expected issuance of many formal enforcement actions.
Recent legislative and
regulatory initiatives to address difficult market and economic conditions may
not stabilize the U.S. banking system.
The Emergency Economic
Stabilization Act of 2008 and the American Recovery and Reinvestment Act of
2009 followed, and have been followed by, numerous actions by the Federal
Reserve Board, Congress, Treasury, the FDIC, the SEC and others to address the
current liquidity and credit crisis that has followed the sub-prime meltdown
that commenced in 2007. These measures
include homeowner relief that encourages loan restructuring and modification;
the establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate;
emergency action against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper funding facility
to provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the
banking sector. The purpose of these legislative and regulatory actions is to
stabilize the U.S. banking system. These initiatives may not have their desired
effects. If the volatility
in the markets continues and economic conditions fail to improve
significantly or worsen, our business, financial condition and results of
operations could be materially and adversely affected.
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 affect our earnings.
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. Further, the impact of new
legislation in response to negative developments in the financial industry
could adversely affect our operations by restricting our business operations.
The Sarbanes-Oxley Act of 2002,
and the related rules and regulations promulgated by the SEC 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,
significant compliance costs.
13
Table
of Contents
Even though our common stock
is currently listed 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 our common stock is listed
on The NASDAQ Global Market, the trading volume of our common stock is
relatively low and we cannot be certain when a more active and liquid trading
market for our common stock will develop or whether such a market could 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, or availability of shares of our
common stock for sale, 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, or the potential for large amounts of sales, would not cause the
price of our common stock to decline or impair our ability to raise capital
through sales of our common stock.
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 issuance of securities
to Treasury may limit our ability to return capital to our shareholders, may be
dilutive to the holders of our common stock and may result in other
restrictions to our operations.
In connection with our sale of
$30 million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A,
or Series A Preferred Stock, to Treasury on December 19, 2008, we
also issued to Treasury a warrant to purchase 461,538 shares of our common
stock. The terms of the transaction with Treasury will result in limitations on
our ability to pay dividends and repurchase our shares. Until December 19,
2011 or until Treasury no longer holds any shares of the Series A
Preferred Stock, we will not be able to pay dividends or repurchase any of our
shares without the approval of Treasury, with limited exceptions. In addition,
we will not be able to pay any dividends at all on our common stock unless we
are current on our dividend payments on the Series A Preferred Stock.
These restrictions, as well as the dilutive impact of the warrant, may have a
negative effect on the market price of our common stock and may be dilutive of
our earnings per share. In addition, we are required to pay cumulative
dividends at a rate of 5% per annum for the first five years, and thereafter at
a rate of 9% per annum. Depending on our financial condition at the time, these
dividends could have a negative effect on our liquidity. The shares of Series A
Preferred Stock will receive preferential treatment in the event of our
liquidation, dissolution or winding up.
Holders of the Series A
Preferred Stock may, under certain circumstances, have the right to elect two
directors to our board of directors.
In the event that we fail to pay
dividends on the Series A Preferred Stock for an aggregate of six
quarterly dividend periods or more (whether or not consecutive), the authorized
number of directors then constituting our board of directors will be increased
by two. Holders of the Series A Preferred Stock, together with the holders
of any outstanding parity stock with like voting rights voting as a single
class, will then be entitled to elect the two additional members of our board
of directors at the next annual meeting (or at a special meeting called for the
purpose of electing such directors prior to the next annual meeting) and at
each subsequent annual meeting until all accrued and unpaid dividends for all
past dividend periods have been paid in full.
Holders of our subordinated
debentures have rights that are senior to those of our common shareholders.
In 2005 and 2008, we supported
our continued growth through the issuance of trust preferred securities from
two affiliated special purpose trusts and accompanying subordinated debentures.
At September 30, 2009, we had outstanding trust preferred securities and
accompanying subordinated debentures totaling $23 million. Our board of
directors may decide to issue additional tranches of trust preferred securities
in the future if markets for these securities improve. 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.
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 in 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.
14
Table
of Contents
ITEM 1B.
UNRESOLVED STAFF
COMMENTS
None.
ITEM 2.
PROPERTIES
The Corporations 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 66,167 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 loan production
offices located at One Chase Corporate Center, Suite 400, Birmingham, Alabama
35244, at 7900 International Drive, Suite 200, Bloomington, Minnesota
55425 and at 125 TownPark Drive, Suite 300, Kennesaw, Georgia 30144. All
three loan production office facilities are leased.
ITEM 3.
LEGAL PROCEEDINGS
The Corporation is party
to proceedings arising from the May 6, 2008 termination of its former
Chief Financial Officer, George Fort. Those proceedings include a complaint
filed by Mr. Fort under the Sarbanes-Oxley Act of 2002 (SOX) with the
United States Department of Labor (the SOX Complaint) and a lawsuit styled
George Fort v. Tennessee Commerce Bancorp, Inc.
and Tennessee Commerce Bank
(Case No. 3:08-cv-0668), filed on July 9,
2008 in the United States District Court for the Middle District of Tennessee
(the Federal Litigation).
In the SOX Complaint, Mr. Fort
alleges that his March 7, 2008 placement on administrative leave and his
subsequent termination on May 6, 2008 were in retaliation for his raising
various alleged weaknesses in the Corporations internal controls to the Audit
Committee of the Corporations Board of Directors. In the Federal Litigation, Mr. Fort
alleges that his termination constituted a breach of his Employment Agreement
(the Employment Agreement) with the Bank and retaliation under the Tennessee
Public Protection Act and the Federal Deposit Insurance Corporation Improvement
Act. Mr. Fort also asserts a claim for libel based upon certain press
releases issued by the Corporation in connection with his former employment.
The Corporation has brought a counter-claim against Mr. Fort that he
engaged in misfeasance and malfeasance as the Corporations Chief Financial
Officer, in breach of his fiduciary duty as an officer of the Corporation under
Tennessee law.
In 2009, the Department
of Labor (the DOL) indicated that it will likely issue a preliminary order on
the SOX Complaint finding probable cause that the Corporation placed Mr. Fort
on administrative leave and subsequently discharged him in retaliation for
engaging in protected activity under SOX. The Corporation has objected to the
issuance of a preliminary order and the DOL has not opined with respect to
those objections. If the DOL issues an
adverse preliminary order, then the Corporation intends to appeal any such
finding through the DOLs administrative review process. Trial in the Federal
Litigation is currently scheduled to begin late in the fourth quarter of 2010.
The Corporation denies
any liability to Mr. Fort or violation of any law, contract or otherwise
and intends to contest all matters brought by Mr. Fort vigorously. In
summary, the Corporation maintains that (i) Mr. Fort did not engage
in protected activity, because his report did not involve any of the specific
activities enumerated in Section 806 of SOX, (ii) it placed Mr. Fort
on administrative leave so that he could focus his attention on addressing the
issues he raised to the Audit Committee after he refused to participate in good
faith in such efforts and (iii) Mr. Fort grossly neglected his duties
in the implementation of the Corporations SOX program based on reports from
external auditors that revealed that, despite Mr. Forts assurances that
SOX implementation was on track, it was not. The Corporation further
maintains that the terms of the Employment Agreement created an at-will employment
relationship as a matter of law and that, regardless, Mr. Forts gross
neglect of his duties constituted cause for termination under the Employment
Agreement.
15
Table
of Contents
PART II
ITEM 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
The Corporations common
stock has been listed on The NASDAQ Global Market since June 2006. The
number of shareholders of record at March 1, 2010, was 400. The table
below shows the quarterly range of high and low sale prices for the Corporations
common stock during the fiscal years 2009 and 2008.
Year
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
2008:
|
|
First Quarter
|
|
$
|
26.23
|
|
$
|
13.72
|
|
|
|
Second Quarter
|
|
$
|
19.94
|
|
$
|
15.67
|
|
|
|
Third Quarter
|
|
$
|
17.25
|
|
$
|
10.35
|
|
|
|
Fourth Quarter
|
|
$
|
14.48
|
|
$
|
5.00
|
|
2009:
|
|
First Quarter
|
|
$
|
11.74
|
|
$
|
5.43
|
|
|
|
Second Quarter
|
|
$
|
9.39
|
|
$
|
4.76
|
|
|
|
Third Quarter
|
|
$
|
5.70
|
|
$
|
4.00
|
|
|
|
Fourth Quarter
|
|
$
|
6.00
|
|
$
|
3.07
|
|
Dividends
The Corporation has never
declared or paid dividends on its common stock. The payment of cash dividends
is subject to the discretion of the Board of Directors, the Banks ability to
pay dividends and the priority of holders of the Corporations subordinated
debentures and Series A Preferred Stock. The Banks ability to pay
dividends is restricted by applicable regulatory requirements. For more
information on these restrictions, see ITEM 1 BUSINESS Supervision and
Regulation Payment of Dividends of this Annual Report on Form 10-K.
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
During 2009, Corporation
did not sell any of its securities which were not registered under the
Securities Act of 1933.
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, 2009.
16
Table
of Contents
ITEM 6.
SELECTED FINANCIAL DATA
The following selected
financial data for the years ended December 31, 2009, 2008, 2007, 2006 and
2005 should be read in conjunction with the financial statements included in
Item 8 of this Annual Report on Form 10-K:
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands except share data)
|
|
Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
Total interest
income
|
|
$
|
81,108
|
|
$
|
75,978
|
|
$
|
62,206
|
|
$
|
41,245
|
|
$
|
23,633
|
|
Total interest
expense
|
|
36,192
|
|
41,027
|
|
34,934
|
|
21,868
|
|
10,006
|
|
Net interest
income
|
|
44,916
|
|
34,951
|
|
27,272
|
|
19,377
|
|
13,627
|
|
Provision for
loan losses
|
|
(31,039
|
)
|
(9,111
|
)
|
(6,350
|
)
|
(4,350
|
)
|
(3,700
|
)
|
Net interest
income after provision for loan losses
|
|
13,877
|
|
25,840
|
|
20,922
|
|
15,027
|
|
9,927
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities gains
|
|
1,118
|
|
447
|
|
26
|
|
|
|
4
|
|
(Loss) gain on
sale of loans
|
|
(1,928
|
)
|
3,750
|
|
2,687
|
|
2,025
|
|
1,106
|
|
Other (loss)
income
|
|
(747
|
)
|
97
|
|
167
|
|
(262
|
)
|
201
|
|
Non-interest
expense
|
|
(21,305
|
)
|
(17,608
|
)
|
(13,263
|
)
|
(9,056
|
)
|
(6,246
|
)
|
(Loss) income
before income taxes
|
|
(8,985
|
)
|
12,526
|
|
10,539
|
|
7,734
|
|
4,992
|
|
Income tax
benefit (expense)
|
|
3,407
|
|
(4,772
|
)
|
(3,643
|
)
|
(2,985
|
)
|
(1,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income
|
|
(5,578
|
)
|
7,754
|
|
6,896
|
|
4,749
|
|
3,067
|
|
CPP preferred
dividends
|
|
(1,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
income available to common shareholders
|
|
$
|
(7,124
|
)
|
$
|
7,754
|
|
$
|
6,896
|
|
$
|
4,749
|
|
$
|
3,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data :
|
|
|
|
|
|
|
|
|
|
|
|
Net income,
basic
|
|
$
|
(1.50
|
)
|
$
|
1.64
|
|
$
|
1.49
|
|
$
|
1.24
|
|
$
|
0.95
|
|
Net income,
diluted
|
|
$
|
(1.50
|
)
|
$
|
1.60
|
|
$
|
1.41
|
|
$
|
1.14
|
|
$
|
0.87
|
|
Book value
|
|
$
|
20.32
|
|
$
|
21.50
|
|
$
|
13.36
|
|
$
|
11.51
|
|
$
|
8.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
1,383,432
|
|
$
|
1,218,084
|
|
$
|
900,153
|
|
$
|
623,518
|
|
$
|
404,040
|
|
Loans, net
|
|
1,151,388
|
|
1,023,271
|
|
784,001
|
|
538,550
|
|
344,187
|
|
Investments
|
|
93,668
|
|
101,290
|
|
73,753
|
|
56,943
|
|
31,992
|
|
Cash and due
from financial institutions
|
|
22,864
|
|
5,260
|
|
5,236
|
|
177
|
|
6,877
|
|
Federal funds
sold
|
|
15,010
|
|
35,538
|
|
9,573
|
|
13,820
|
|
12,535
|
|
Premises and
equipment, net
|
|
1,967
|
|
2,330
|
|
1,413
|
|
1,633
|
|
769
|
|
Deposits
|
|
1,242,542
|
|
1,069,143
|
|
815,053
|
|
560,567
|
|
367,705
|
|
Federal funds
purchased
|
|
|
|
|
|
2,000
|
|
|
|
|
|
Long-term debt
|
|
23,198
|
|
23,198
|
|
8,248
|
|
8,248
|
|
8,248
|
|
Other
liabilities
|
|
21,400
|
|
15,100
|
|
11,592
|
|
3,479
|
|
1,657
|
|
Shareholders
equity
|
|
96,292
|
|
101,747
|
|
63,121
|
|
51,224
|
|
26,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Overhead ratio
(1)
|
|
1.63
|
%
|
1.52
|
%
|
1.76
|
%
|
1.80
|
%
|
1.98
|
%
|
Efficiency ratio
(2)
|
|
49.14
|
%
|
44.87
|
%
|
43.99
|
%
|
42.84
|
%
|
41.81
|
%
|
Net yield on
earning assets
|
|
6.62
|
%
|
7.45
|
%
|
8.50
|
%
|
8.46
|
%
|
7.70
|
%
|
Cost of funds
|
|
3.00
|
%
|
4.16
|
%
|
5.18
|
%
|
4.94
|
%
|
3.66
|
%
|
Net Interest
margin
|
|
3.66
|
%
|
3.43
|
%
|
3.72
|
%
|
3.98
|
%
|
4.44
|
%
|
Operating
expenses to average earning assets
|
|
1.74
|
%
|
1.73
|
%
|
1.81
|
%
|
1.86
|
%
|
2.03
|
%
|
Return on
average assets
|
|
(0.54
|
)%
|
0.73
|
%
|
0.91
|
%
|
0.95
|
%
|
0.97
|
%
|
Return on
average common equity
|
|
(10.86
|
)%
|
11.34
|
%
|
12.13
|
%
|
12.68
|
%
|
12.29
|
%
|
Average common equity
to average assets
|
|
5.02
|
%
|
6.48
|
%
|
7.53
|
%
|
7.46
|
%
|
7.90
|
%
|
Ratio of
nonperforming assets to average assets
|
|
1.63
|
%
|
3.42
|
%
|
1.14
|
%
|
0.94
|
%
|
1.40
|
%
|
Ratio of
allowance for loan losses to average assets
|
|
1.52
|
%
|
1.27
|
%
|
1.37
|
%
|
1.39
|
%
|
1.39
|
%
|
Ratio of
allowance for loan losses to nonperforming assets (3)
|
|
93.52
|
%
|
37.21
|
%
|
119.94
|
%
|
146.91
|
%
|
99.43
|
%
|
(1) Operating expenses divided by average assets.
(2) Operating expenses divided by net interest income and
noninterest income.
(3) Nonperforming assets are made up of non-accruing loans,
accruing loans 90 days past due and other real estate owned.
17
Table
of Contents
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, target, predict, should, 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 and financial condition, recent developments in the financial
services industry, recently adopted accounting standards, fair value
measurements, allowance for loan losses, Business Bank strategy, restrictions
with respect to our Fixed Rate Cumulative Perpetual Preferred Stock Series A,
our warrant issued to Treasury, dividends, managements review of the loan
portfolio, loan classifications, loan commitments, interest rate risk, economic
value of equity model, loan sale transactions, tax rates, liquidity,
legislation and regulations affecting banks or bank holding companies, FDIC
insurance premiums, rate sensitivity gap analysis, maturities of debt
securities, growth of our market area, the impact of the economic environment,
competition for loans, non-interest income, net interest income, revenue
provided by our mortgage unit, hiring of employees, ratio of assets per
employee, ratio of earning assets to total assets, accessing the wholesale
deposit market by means of an electronic bulletin board, engagement of deposit
brokers, cost of funds, loan loss reserve, capital adequacy, informal
corrective actions, net interest margin, cash flows, interest-only strips
receivable, servicing assets and liabilities, available-for-sale securities,
maturities of time deposits, our split dollar life insurance plan, commitments
to extend credit, lease payments, tax benefits and credits, net operating loss
carryforward, our 2007 Equity Plan, payments under executive employment
agreements, stock-based compensation expense, capital stock, use of proceeds
from equity offerings, 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 share
data in this Item 7.)
The results of operations
for the year 2009 compared to 2008 reflected a 191.88% decrease in net income
and a 193.75% decrease in diluted earnings per share. The decrease in
earnings resulted primarily from an increased provision for loan losses as well
as an additional accrual for an FDIC special assessment. The net interest margin for 2009 was 3.66%
compared to 3.43% for 2008. The year 2009 reflected the Banks management
of asset growth, increasing by $165,348 or 13.57% from $1,218,084 at December 31,
2008 to $1,383,432 at December 31, 2009. Net loans increased by 12.52% or
$128,117 from December 31, 2008 to December 31, 2009, while total
deposits increased by 16.22% or $173,399 during that same period.
The Corporations 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 2009, the Banks market
area experienced explosive growth. In Williamson County, demographic
information shows a 41.57% growth in the number of households from 2000 to
2009. Estimates from SNL Financial LC show that by 2014 the number of
households in this county will have grown by another 18.39%. Although estimates
of growth are not guaranteed and actual growth may be affected by factors
beyond the Corporations control, management believes that the projected growth
of the Banks market area will positively impact the Banks future growth.
18
Table
of Contents
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 0.90
basis point or a 24.59% decrease in the net interest margin from 2004 to 2009.
Non-interest expense is controlled by efficiently staffing the Banks
operations. In 2009, that resulted in $15,200 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
loss for 2009 was $7,124, a decrease of $14,878, or 191.88%, compared to net
income of $7,754 for 2008. The decrease was primarily attributable to a 240.68%
increase in the provision for loan losses from $9,111 in 2008 to $31,039 in
2009. The increase of $21,928 in the provision for loan losses was the result
of higher charge-offs and repossessions. Non-interest income decreased by
$5,851, from $4,294 to a loss of $1,557, or 136.26%, primarily a result of
losses in the sale of loans and repossessions. These negative effects were
partially offset by a 150.11% increase in the gain on the sale of securities,
from $447 in 2008 to $1,118 in 2009, and an increase of $5,130 in interest
income, up 6.75% to $81,108 in 2009 compared to $75,978 in 2008. The increase
in non-interest expense was a result of the increase in FDIC premiums and the
FDIC special assessment. In 2009, the Bank paid FDIC deposit insurance
assessments totaling approximately $1,920, including a special assessment of
$300 paid during the third quarter of 2009 and a prepaid assessment of $8,050
paid in the fourth quarter of 2009, as compared to an aggregate payments of
approximately $682 in 2008.
Net income for 2008 was
$7,754, an increase of $858, or 12.44%, compared to $6,896 for 2007. The
increase was primarily attributable to a 28.16% increase in net interest income
from $27,272 in 2007 to $34,951 in 2008. The increase of $7,679 in net interest
income was the result of higher average loan balances. Non-interest income
increased by $1,414, from $2,880 to $4,294, or 49.10%, primarily a result of
gains on loan sales. These positive effects were partially offset by a 43.48%
increase in the provision for loan losses, from $6,350 in 2007 to $9,111 in
2008, and an increase of $4,345 in non-interest expense, up 32.76% to $17,608
in 2008 compared to $13,263 in 2007. 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 and yield on earning assets
as well as the volumes 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.
During 2009, the Federal
Reserve Open Market Committee (FOMC) did not change short-term interest
rates. During 2009, $22,468 of the Corporations net loan growth occurred in
floating rate construction loans and approximately 74.15% of the $30,302
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
2009 was $44,916 compared to $34,951 for 2008, a gain of $9,965 or 28.51%. The
increase in net interest income was largely attributable to strong loan growth.
Net loans increased from $1,023,271 at December 31, 2008 to $1,151,388 at December 31,
2009, an increase of $128,117 or 12.52%. Net interest income was
favorably impacted by a 3.87% decrease in the Banks indirect funding program
for small transactions. These loans, which are purchased at a minimum rate of
8%, decreased from $173,438 at year-end 2008 to $166,969 at the end of 2009.
The loan growth was matched by an increase in deposits from $1,069,143 at December 31,
2008 to $1,242,542 in 2009, an increase of $173,399 or 16.22%.
19
Table
of Contents
Net interest income for
2008 was $34,951 compared to $27,272 for 2007, a gain of $7,679 or 28.16%. The
increase in net interest income was largely attributable to strong loan growth.
Net loans increased from $784,001 at December 31, 2007 to $1,023,271 at December 31,
2008, an increase of $239,270 or 30.52%. 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 $153,140 at year-end 2007 to $173,438 at the end of 2008. The
loan growth was matched by an increase in deposits from $815,053 at December 31,
2007 to $1,069,143 in 2008, an increase of $254,090 or 31.17%.
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% of total assets and a maximum portfolio
level of 20% of total assets. Management has maintained the portfolio at
the lower end of the policy guidelines with the portfolio at 6.77%, 8.32% and
8.19% of total assets at year-end in 2009, 2008 and 2007, respectively.
The investment portfolio
at December 31, 2009 was $93,668 compared to $101,290 at year-end 2008.
The interest earned on investments rose from $4,717 in 2008 to $5,325 in 2009,
as a result of higher average portfolio balances. The average yield on the
investment portfolio investments fell from 5.59% in 2008 to 5.14% in 2009, or
45 basis points.
The investment portfolio
at December 31, 2008 was $101,290, compared to $73,753 at year-end
2007. The average yield on the investment portfolio was 5.59% in 2008
compared to 5.43% in 2007.
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
increased from 3.43% in 2008 to 3.66% in 2009 because the yield on earning
assets decreased less than the cost of funds. Interest income increased by
$5,130, or 6.75%, from $75,978 in 2008 to $81,108 in 2009. The increase was
primarily a result of increased loan volume. Average earning assets increased
from $1,019,887 in 2008 to $1,224,775 in 2009, an increase of $204,888 or
20.09%. The increase in earning assets was a result of loan growth. Average
loans increased $187,485 or 20.19% from 2008 to 2009. The average yield on
earning assets decreased from 7.45% in 2008 to 6.62% in 2009, or 83 basis
points. The decrease in the Banks federal funds sold unfavorably impacted the
average yield on earning assets. The average yield on this type of asset in
2009 was 0.22%. The federal funds sold decreased 19.24% from $7,374 at year-end
2008 to $5,955 in 2009. Interest
expense decreased from $41,027 in 2008 to $36,192 in 2009. The decrease of
$4,835, or 11.78%, in interest expense was a result of a lower cost of funds.
Average deposits increased from $949,005 in 2008 to $1,157,759 in 2009, an
increase of $208,754 or 22.00%. The cost of funds decreased from 4.17% in 2008
to 3.00% in 2009, or 117 basis points.
The net interest margin
declined from 3.72% in 2007 to 3.43% in 2008 because the yield on earning
assets decreased faster than the cost of funds, resulting in a compression on
the yield on earning assets during 2008. Interest income increased by $13,772,
or 22.14%, from $62,206 in 2007 to $75,978 in 2008. The increase was primarily
a result of increased loan volume. Average earning assets increased from
$731,749 in 2007 to $1,019,887 in 2008, an increase of $288,138 or 39.38%. The
increase in earning assets was a result of loan growth. Average loans increased
$272,298 or 41.50% from 2007 to 2008. The average yield on earning assets
decreased from 8.50% in 2007 to 7.45% in 2008, or 105 basis points. The
decrease in the Banks federal funds sold unfavorably impacted the average
yield on earning assets. The average yield on this type of asset in 2008 was
2.17%. These federal funds sold decreased 36.98% from $11,701 at year-end 2007
to $7,374 at the end of 2008. Interest
expense increased from $34,934 in 2007 to $41,027 in 2008. The $6,093, or
17.44%, increase in expense was a result of increases in the volume of
deposits. Average deposits increased from $685,063 in 2007 to $949,005 in 2008,
an increase of $263,942 or 38.53%. The cost of funds decreased from 5.18% in
2007 to 4.17% in 2008, or 101 basis points.
20
Table
of Contents
Provision
for Loan Losses
- The allowance for loan losses represents the Corporations estimate of probable
losses inherent in the loan portfolio, the largest asset category on the
consolidated balance sheet. Determining the amount of the allowance for loan
losses is considered a critical accounting policy because it requires
significant judgment and the evaluation of several factors: the ongoing review
and grading of the loan portfolio; consideration of the Corporations and
relevant banking industrys past loan loss experience; trends in past-due and
nonperforming loans; risk characteristics of the various classifications of
loans; existing economic conditions; the fair value of underlying collateral;
the size and diversity of individual large credits; and other qualitative and
quantitative factors that could affect probable credit losses. Other
considerations include the use of estimates related to the amount and timing of
expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on the Corporations historical loss experience and
additional qualitative factors for various issues. Additionally, an allocation
of reserves is established for special situations that are unique to the
measurement period with consideration of current economic trends and
conditions. Because economic conditions can change and future events are inherently
difficult to predict, the anticipated amount of estimated loan losses, and
therefore the adequacy of the allowance, could change significantly.
The Corporations
allowance for loan loss methodology is based on GAAP. Portions of the allowance
may be allocated for specific credits; however, the entire allowance is
available for any credit that, in managements judgment, should be charged off.
While management utilizes its best judgment and information available, the
ultimate adequacy of the allowance is dependent upon a variety of factors
beyond the Corporations control, including the performance of the Corporations
loan portfolio, the economy, changes in interest rates and the view of the
regulatory authorities toward loan classifications.
The Corporations
allowance for loan losses consists of three elements: (i) specific
allocated allowances based on probable losses on specific commercial or
commercial real estate loans or restructured residential mortgage or consumer
loans; (ii) risk allocated allowance, which is comprised of several loan
pool valuation allowances, based on the Corporations historical quantitative
loan loss experience for similar loans with similar risk characteristics,
including additional qualitative risks; and (iii) general valuation
allowances based on existing regional and local economic factors, including
deterioration in commercial and residential real estate values, a macroeconomic
adjustment factor used to calibrate for the current economic cycle the
Corporation is experiencing, and other subjective factors supported by
qualitative documentation.
Specific allocated
allowances are established in cases where management has identified significant
conditions or circumstances related to a credit that management believes indicates
that it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan. The specific credit
allocations are based on a regular analysis of all commercial and commercial
real estate loans over a fixed dollar amount where the internal credit rating
is at or below a predetermined classification and on all restructured
residential mortgage and consumer loans over a fixed dollar amount.
The Corporations risk
allocated allowance, which is comprised of several loan pool valuation
allowances is calculated based on historical data with additional qualitative
risk determined by the judgment of management. Qualitative factors, both
internal and external to the Corporation, considered by management include: (i) the
experience, ability and effectiveness of the Corporations lending management
and staff; (ii) the effectiveness of the Corporations loan policies,
procedures and internal controls; (iii) changes in asset quality; (iv) changes
in loan portfolio volume; (v) the composition and concentrations of
credit; (vi) the impact of competition on loan structuring and pricing; (vii) the
effectiveness of the internal loan review function; (viii) the impact of
environmental risks on the portfolio (ix) the impact of rising interest
rates on the portfolio and (x) the impact of loan modification programs.
The Corporation evaluates the degree of risk that these components have on the
quality of the loan portfolio on a quarterly basis. Based upon the Corporations
analysis, appropriate estimates for qualitative risks are established. Included
in the qualitative valuations are allocations for groups of similar loans with
risk characteristics that exceed certain concentration limits. Concentration
risk guidelines have been established, among other things, for certain industry
concentrations, large balance and highly leveraged credit relationships, and
loans originated with policy exceptions. Qualitative allowances may also
include estimates of inherent but undetected losses within the portfolio
because of uncertainties in economic conditions, delays in obtaining
information, including unfavorable information about a borrowers financial
condition, the difficulty in identifying triggering events that correlate
perfectly to subsequent loss rates, and risk factors that have not yet
manifested themselves in loss allocation factors. The historical losses used
may not be representative of actual losses inherent in the portfolio that have
not yet been realized.
The general valuation
allowance is based on managements estimate of the effect of current general
economic conditions on current loan pools and the inherent imprecision in loan
loss projection models. The uncertainty surrounding the strength and timing of
economic cycles, including concerns over the effects of the prolonged economic
downturn for the Corporations market area in the current cycle, also affects
the estimates of loss.
21
Table
of Contents
Continuous credit
monitoring processes and the analysis of loss components are the principal
methods relied upon by management to ensure that changes in estimated credit
loss levels are reflected in the Corporations allowance for loan losses on a
timely basis. The Corporation utilizes regulatory guidance and its own
experience in this analysis. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses. Such agencies may require additions to the allowance based on
their judgment on information available to them at the time of their
examination.
Actual loss ratios
experienced in the future may vary from those projected. In the event that
management overestimates future cash flows or underestimates losses on loan
pools, the Corporation may be required to increase the allowance for loan
losses through the provision for loan losses, which would have a negative
impact on the results of operations in the period in which the increase
occurred. Note 1 to the Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K describes the methodology used to
determine the allowance for loan losses.
The provision for loan
losses in 2009 was $31,039, an increase of $21,928, or 240.68%, above the
provision of $9,111 expensed in 2008. Of this provision, $6,459, or 20.81%, was
attributable to loan growth recorded during 2009. The remainder of the loan
loss provision in 2009 funded net charge-offs of $24,580.
The provision for loan
losses in 2008 was $9,111, an increase of $2,761, or 43.48%, above the
provision of $6,350 expensed in 2007. Of this provision, $3,133, or 34.39%, was
attributable to loan growth recorded during 2008. The remainder of the loan
loss provision in 2008 funded net charge-offs of $5,978.
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 semi-annually 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,
2009, 2008, 2007, 2006 and 2005:
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Non-accrual
loans
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
225
|
|
188
|
|
130
|
|
60
|
|
46
|
|
Amount
|
|
$
|
19,151
|
|
$
|
11,603
|
|
$
|
6,465
|
|
$
|
2,689
|
|
$
|
2,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans
which are contractually past due 90 days or more as to principal and interest
payments
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
30
|
|
51
|
|
44
|
|
18
|
|
9
|
|
Amount
|
|
$
|
1,328
|
|
$
|
18,788
|
|
$
|
1,992
|
|
$
|
940
|
|
$
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans defined as
troubled debt restructurings (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
1
|
|
1
|
|
1
|
|
3
|
|
3
|
|
Amount
|
|
$
|
111
|
|
$
|
130
|
|
$
|
148
|
|
$
|
1,144
|
|
$
|
1,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest
income lost on the non-accrual loans
|
|
$
|
2,708
|
|
$
|
870
|
|
$
|
436
|
|
$
|
174
|
|
$
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
included in net income on the accruing loans
|
|
$
|
112
|
|
$
|
1,674
|
|
$
|
605
|
|
$
|
73
|
|
$
|
31
|
|
(1)
Four loans
previously reported as troubled debt restructurings for 2008 were found to be
classified incorrectly. The number and amount for 2008 is correctly reported in
the table above.
22
Table
of Contents
As of December 31, 2009,
there were no loans which represent trends or uncertainties that management reasonably
expects will materially impact future operating results, liquidity, or capital
resources that have not been disclosed in the above table and classified for
regulatory purposes as doubtful or substandard.
The Bank had no
tax-exempt loans during the years ended December 31, 2009 and December 31,
2008. The Bank had no loans outstanding to foreign borrowers at December 31,
2009 and December 31, 2008.
An analysis of the Banks
loss experience is furnished in the following table for December 31, 2009,
2008, 2007, 2006 and 2005, and the years then ended:
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
Allowance for
loan losses at beginning of period
|
|
$
|
13,454
|
|
$
|
10,321
|
|
$
|
6,968
|
|
$
|
4,399
|
|
$
|
2,841
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
2,918
|
|
288
|
|
32
|
|
|
|
|
|
1 to 4 family
residential
|
|
346
|
|
9
|
|
|
|
|
|
|
|
Other
|
|
346
|
|
102
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
22,462
|
|
5,620
|
|
3,262
|
|
2,026
|
|
2,379
|
|
Consumer
|
|
13
|
|
80
|
|
16
|
|
11
|
|
32
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Total
Charge-offs
|
|
26,085
|
|
6,099
|
|
3,310
|
|
2,037
|
|
2,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
1 to 4 family
residential
|
|
|
|
|
|
|
|
|
|
1
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
1,504
|
|
118
|
|
313
|
|
234
|
|
245
|
|
Consumer
|
|
1
|
|
3
|
|
|
|
22
|
|
23
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Total Recoveries
|
|
1,505
|
|
121
|
|
313
|
|
256
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs
|
|
24,580
|
|
5,978
|
|
2,997
|
|
1,781
|
|
2,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
loan losses charged to expense
|
|
31,039
|
|
9,111
|
|
6,350
|
|
4,350
|
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
loan losses at end of period
|
|
$
|
19,913
|
|
$
|
13,454
|
|
$
|
10,321
|
|
$
|
6,968
|
|
$
|
4,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
as a percentage of average total loans outstanding during the year
|
|
2.17
|
%
|
0.64
|
%
|
0.45
|
%
|
0.41
|
%
|
0.76
|
%
|
Ending allowance
for loan losses as a percentage of total loans outstanding at end of year
|
|
1.70
|
%
|
1.30
|
%
|
1.30
|
%
|
1.28
|
%
|
1.26
|
%
|
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, 2009.
23
Table
of Contents
At December 31,
2009, 2008, 2007, 2006 and 2005, the allowance for loan losses was allocated as
follows:
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
(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
|
|
$
|
1,419
|
|
12.13
|
%
|
$
|
1,816
|
|
17.52
|
%
|
$
|
1,132
|
|
14.15
|
%
|
$
|
745
|
|
13.65
|
%
|
$
|
383
|
|
10.98
|
%
|
1 to 4 family
residential
|
|
288
|
|
3.62
|
%
|
384
|
|
3.65
|
%
|
335
|
|
4.22
|
%
|
229
|
|
4.19
|
%
|
225
|
|
5.27
|
%
|
Other
|
|
3,501
|
|
22.13
|
%
|
1,919
|
|
16.51
|
%
|
1,440
|
|
18.13
|
%
|
840
|
|
15.40
|
%
|
504
|
|
14.45
|
%
|
Commercial,
financial and agricultural
|
|
14,021
|
|
55.45
|
%
|
8,766
|
|
56.86
|
%
|
7,130
|
|
60.14
|
%
|
5,048
|
|
64.89
|
%
|
3,197
|
|
67.11
|
%
|
Consumer
|
|
20
|
|
0.30
|
%
|
39
|
|
0.35
|
%
|
56
|
|
0.50
|
%
|
37
|
|
0.60
|
%
|
45
|
|
0.90
|
%
|
Other
|
|
664
|
|
6.37
|
%
|
530
|
|
5.11
|
%
|
228
|
|
2.86
|
%
|
69
|
|
1.27
|
%
|
45
|
|
1.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,913
|
|
100.00
|
%
|
$
|
13,454
|
|
100.00
|
%
|
$
|
10,321
|
|
100.00
|
%
|
$
|
6,968
|
|
100.00
|
%
|
$
|
4,399
|
|
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 $31 in
mortgage origination fees in 2009 and in 2008. Management believes that in 2010
the mortgage unit will provide a value-added service with modest revenue
results.
The Bank lost $1,928 in
2009 on a series of loan sale transactions compared to a gain of $3,750 in
2008. 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 a process to sell assets to other banks located in slower growing markets
and believes that loan sales will be a recurring source of revenue. Gains on
sales of securities increased by $671, or 150.11% from $447 in 2008 to $1,118
in 2009.
In 2008, the Bank earned
$3,750 on a series of loan sale transactions.
The Bank earned $31 in mortgage origination fees in 2008 compared to $76
earned in 2007, a decline of $45 or 59.21%.
The decline in mortgage origination income was attributed to the
disruption in the mortgage market in 2007.
Income earned in the form of service charges on deposits totaled $122, a
7.58% reduction from the $132 earned in 2007.
Gain on sales of securities increased by $421 or 1,619% from $26 in 2007
to $447 in 2008.
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
$10,000 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 not expect to hire employees in 2010, so salaries and
benefits expense may increase slightly, but the target for assets per employee
will remain at $10,000.
Non-interest expense for
2009 was $21,305, an increase of $3,697 or 21.00%, over the $17,608 expensed in
2008. Approximately 33.54% of the increase was attributable to the increased FDIC
premiums, approximately 20.26% of the increase was attributable to the addition
of new employees during the year and approximately 13.34% of the increase was
attributable to increased collection efforts. The Bank ended 2009 with 91
full-time employees. Assets per employee were $15,203 at year-end 2009 compared
to $14,676 at year-end 2008.
Non-interest expense for
2008 was $17,608, an increase of $4,345 or 32.76%, over the $13,263 expensed in
2007. Approximately 28.38% of the increase was attributable to the increase in
professional fees (audit, legal, and accounting), and approximately 25.85% of
the increase was attributable to the addition of new employees during the year.
The Bank ended 2008 with 83 full-time employees. Assets per employee were $14,676
at year-end 2008 compared to $14,060 at year-end 2007.
24
Table
of Contents
Income
Taxes
The
Corporations effective tax rate in 2009 was 37.92% compared to 38.10% in 2008
and 34.57% in 2007. Management anticipates that tax rates in future years will
approximate the rates paid in 2009.
Changes in Financial Condition
Assets
-
Total assets at December 31, 2009
were $1,383,432, an increase of $165,348 or 13.57%, over total assets of
$1,218,084 at December 31, 2008. Average assets for 2009 were $1,307,205,
an increase of $251,346, or 23.80% over average assets in 2008. Loan growth was
the primary reason for these increases. Net loans were $1,151,388 at year-end
2009, up $128,117, or 12.52% over the year-end 2008 total net loans of
$1,023,271.
Total assets at December 31,
2008 were $1,218,084, an increase of $317,931 or 35.32%, over total assets of
$900,153 at December 31, 2007. Average assets for 2008 were $1,055,859, an
increase of $300,605, or 39.80% over average assets in 2007. Loan growth was
the primary reason for the increases. Net loans were $1,023,271 at year-end
2008, up $239,270, or 30.52% over the year-end 2007 total net loans of
$784,001.
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,
2009 were $1,260,066, or 91.08% of total assets of $1,383,432. Earning assets
at December 31, 2008 were $1,160,099, or 95.24% of total assets of
$1,218,084. 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 30 financial institutions and 94 banking facilities (as of June 30,
2009). 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
2009 were $1,157,759, an increase of $208,754, or 22.00% over the total average
deposits of $949,005 in 2008. Average non-interest bearing deposits increased
by $1,028, or 4.40%, from $23,344 in 2008 to $24,372 in 2009. Average savings
deposits increased by $85,979 from $6,531 in 2008 to $92,510 in 2009. Average
purchased deposits increased by $79,888, or 17.56%, from $455,054 in 2008 to
$534,942 in 2009. The average rate paid on purchased deposits in 2009 was 3.29%
compared to 4.50% in 2008. Purchased time deposit funding represented 42.36% of
total funding in 2009 compared to 47.95% in 2008.
Total average deposits in
2008 were $949,005, an increase of $263,942, or 38.53% over the total average
deposits of $685,063 in 2007. Average non-interest bearing deposits increased
by $2,097, or 9.87%, from $21,247 in 2007 to $23,344 in 2008. Average savings
deposits decreased by $724 from $7,255 in 2007 to $6,531 in 2008. Average
purchased deposits increased by $200,443, or 78.73%, from $254,611 in 2007 to
$455,054 in 2008. The average rate paid on purchased deposits in 2008 was 4.50%
compared to 5.28% in 2007. Purchased time deposit funding represented 47.95% of
total funding in 2008 compared to 37.27% in 2007.
25
Table
of Contents
Information
regarding the Corporations return on assets, return on equity and equity to
asset ratio is located in Item 6 of this Annual Report on Form 10-K.
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
Direct Loan Committee, the Indirect Loan Committee, the Presidents Committee
and, in some cases, the full Board of Directors of the Bank. The Direct and
Indirect Loan Committees are chaired by senior lenders John Burton and Doug
Rogers, respectively. The Chief Credit Officer and the Chief Operating Officer
serve as permanent members of both committees. These two committees approve any
new loans in an amount up to 15% of Tier I Capital. Any new loan in an amount
above 15% of Tier I Capital is sent for approval to the Presidents Loan
Committee, which
is chaired by Chairman/CEO/President Mike Sapp and
consists of the members of the Direct or Indirect Loan Committees, the Chief
Administrative Officer and the Senior Vice President of Risk Management.
The Bank Board of Directors must ratify
all proposed extensions of credit made by management that are in excess of
$5,000. In addition, the full Board must approve all extensions of credit to
the Banks directors, executive officers and their related parties.
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 three major categories of loans, commercial and
industrial, consumer, 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
Table
of Contents
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 2.17%, 0.64% and 0.45% for the years ended December 31,
2009, 2008 and 2007, respectively. The
year-end loan loss reserve as a percentage of the end of period loans was
1.70%, 1.30% 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 2009 was $31,039, an increase of $21,928 over the $9,111 provision
for 2008. In 2009, expenses reflected
the impact of $24,580 in net charge-offs during the year and the incremental
provision required as a result of the $128,117 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.
27
Table
of Contents
Financial
Tables
The financial information
below regarding the Corporation and the Bank should be read in conjunction with
the Corporations financial statements included in Item 8 of this Annual Report
on Form 10-K.
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 a taxable equivalent basis, as applicable.
|
|
12 Months Ended December 31, 2009
|
|
|
|
Average
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning
assets
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
Taxable (1)
|
|
$
|
102,827
|
|
$
|
5,325
|
|
5.14
|
%
|
Tax-exempt
|
|
|
|
|
|
|
|
Total securities
|
|
102,827
|
|
5,325
|
|
5.14
|
%
|
|
|
|
|
|
|
|
|
Loans
(2) (3)
|
|
1,115,993
|
|
75,770
|
|
6.79
|
%
|
Federal funds
sold
|
|
5,955
|
|
13
|
|
0.22
|
%
|
Total interest
earning assets
|
|
1,224,775
|
|
81,108
|
|
6.62
|
%
|
|
|
|
|
|
|
|
|
Non-interest
earning assets
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
8,452
|
|
|
|
|
|
Net fixed assets
and equipment
|
|
2,160
|
|
|
|
|
|
Accrued interest
and other assets
|
|
71,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,307,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
liabilities
|
|
|
|
|
|
|
|
Deposits (other
than demand)
|
|
$
|
1,133,387
|
|
34,213
|
|
3.02
|
%
|
Federal funds
purchased
|
|
14,467
|
|
89
|
|
0.62
|
%
|
Subordinated
debt
|
|
33,198
|
|
1,890
|
|
5.69
|
%
|
Total interest
bearing liabilities
|
|
1,181,052
|
|
36,192
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
Non-interest
bearing liabilities
|
|
|
|
|
|
|
|
Non-interest
bearing demand deposits
|
|
24,372
|
|
|
|
|
|
Other
liabilities
|
|
6,626
|
|
|
|
|
|
Shareholders
equity
|
|
95,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
1,307,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
spread
|
|
3.56
|
%
|
|
|
|
|
Net interest
margin
|
|
3.66
|
%
|
(1)
Unrealized loss of $806 is excluded from yield
calculation.
(2)
Non-accrual loans are included in average loan
balances and loan fees of $5,347 are included in interest income.
(3)
Loans are presented net of allowance for loan loss.
28
Table
of Contents
|
|
12 Months Ended December 31, 2008
|
|
|
|
Average
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning
assets
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
Taxable (1)
|
|
$
|
84,005
|
|
$
|
4,717
|
|
5.59
|
%
|
Tax-exempt
|
|
|
|
|
|
|
|
Total securities
|
|
84,005
|
|
4,717
|
|
5.59
|
%
|
|
|
|
|
|
|
|
|
Loans
(2) (3)
|
|
928,508
|
|
71,101
|
|
7.66
|
%
|
Federal funds
sold
|
|
7,374
|
|
160
|
|
2.17
|
%
|
Total interest
earning assets
|
|
1,019,887
|
|
75,978
|
|
7.45
|
%
|
|
|
|
|
|
|
|
|
Non-interest
earning assets
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
3,732
|
|
|
|
|
|
Net fixed assets
and equipment
|
|
1,918
|
|
|
|
|
|
Accrued interest
and other assets
|
|
30,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,055,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing
liabilities
|
|
|
|
|
|
|
|
Deposits (other
than demand)
|
|
$
|
925,661
|
|
39,271
|
|
4.24
|
%
|
Federal funds
purchased
|
|
10,380
|
|
269
|
|
2.59
|
%
|
Subordinated
debt
|
|
25,268
|
|
1,487
|
|
5.88
|
%
|
Total interest
bearing liabilities
|
|
961,309
|
|
41,027
|
|
4.27
|
%
|
|
|
|
|
|
|
|
|
Non-interest
bearing liabilities
|
|
|
|
|
|
|
|
Non-interest
bearing demand deposits
|
|
23,344
|
|
|
|
|
|
Other
liabilities
|
|
2,825
|
|
|
|
|
|
Shareholders
equity
|
|
68,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
1,055,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
spread
|
|
3.18
|
%
|
|
|
|
|
Net interest
margin
|
|
3.43
|
%
|
(1)
Unrealized loss of $318 is excluded from yield
calculation.
(2)
Non-accrual loans are included in average loan
balances and loan fees of $5,730 are included in interest income.
(3)
Loans are presented net of allowance for loan loss.
29
Table of Contents
|
|
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.
30
Table
of Contents
|
|
December 31, 2009 change from
|
|
|
|
December 31, 2008 as
a result of:
|
|
(Dollars in thousands)
|
|
Volume
|
|
Rate
|
|
Total
|
|
Interest
income
|
|
|
|
|
|
|
|
Loans
|
|
$
|
13,314
|
|
$
|
(8,645
|
)
|
$
|
4,669
|
|
Securities
taxable
|
|
990
|
|
(382
|
)
|
608
|
|
Federal
funds sold
|
|
(26
|
)
|
(121
|
)
|
(147
|
)
|
Total
interest income
|
|
14,278
|
|
(9,148
|
)
|
5,130
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
Deposits
(other than demand)
|
|
7,700
|
|
(12,758
|
)
|
(5,058
|
)
|
Federal
funds purchased
|
|
78
|
|
(258
|
)
|
(180
|
)
|
Subordinated
debt
|
|
453
|
|
(50
|
)
|
403
|
|
Total
interest expense
|
|
8,231
|
|
(13,066
|
)
|
(4,835
|
)
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
6,047
|
|
$
|
3,918
|
|
$
|
9,965
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 change from
|
|
|
|
December 31, 2007 as a result of:
|
|
(Dollars in thousands)
|
|
Volume
|
|
Rate
|
|
Total
|
|
Interest
income
|
|
|
|
|
|
|
|
Loans
|
|
$
|
21,654
|
|
$
|
(8,667
|
)
|
$
|
12,987
|
|
Securities
taxable
|
|
1,125
|
|
100
|
|
1,225
|
|
Federal
funds sold
|
|
(172
|
)
|
(268
|
)
|
(440
|
)
|
Total
interest income
|
|
22,607
|
|
(8,835
|
)
|
13,772
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
Deposits
(other than demand)
|
|
11,854
|
|
(6,828
|
)
|
5,026
|
|
Federal
funds purchased
|
|
265
|
|
(53
|
)
|
212
|
|
Subordinated
debt
|
|
946
|
|
(91
|
)
|
855
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
13,065
|
|
(6,972
|
)
|
6,093
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
9,542
|
|
$
|
(1,863
|
)
|
$
|
7,679
|
|
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 the
Corporations non-independent board members and executive officers and certain
other bank officers, Arthur F. Helf, Michael R. Sapp, H. Lamar Cox, Frank Perez and Martin M. Zorn, 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, 2009, the Bank had
a positive cumulative re-pricing gap between four and twelve months of
approximately $155,229 or 11.22% of total year-end earning assets. See Item 7A
of this Annual Report on Form 10-K for additional information.
31
Table
of Contents
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 2009, 2008 and 2007:
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
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
|
|
$
|
24,372
|
|
|
|
$
|
23,344
|
|
|
|
$
|
21,247
|
|
|
|
Interest-bearing
demand deposits
|
|
6,693
|
|
0.13
|
%
|
6,517
|
|
0.74
|
%
|
6,659
|
|
3.36
|
%
|
Money
market accounts
|
|
42,030
|
|
0.90
|
%
|
65,269
|
|
2.04
|
%
|
111,747
|
|
4.84
|
%
|
Savings
accounts
|
|
92,510
|
|
2.22
|
%
|
6,531
|
|
2.71
|
%
|
7,255
|
|
2.66
|
%
|
IRA
accounts
|
|
37,711
|
|
3.62
|
%
|
25,363
|
|
4.66
|
%
|
17,522
|
|
5.88
|
%
|
Purchased
time deposits
|
|
534,942
|
|
3.29
|
%
|
455,054
|
|
4.50
|
%
|
254,611
|
|
5.28
|
%
|
Time
deposits
|
|
419,501
|
|
3.05
|
%
|
366,926
|
|
4.37
|
%
|
266,022
|
|
5.29
|
%
|
Total
deposits
|
|
$
|
1,157,759
|
|
|
|
$
|
949,004
|
|
|
|
$
|
685,063
|
|
|
|
The
following table indicates amount outstanding of time certificates of deposit of
$100,000 or more and respective maturities as of December 31, 2009 (in
thousands):
|
|
2009
|
|
|
|
|
|
Three
months or less
|
|
$
|
127,392
|
|
|
|
|
|
Over
three months through six months
|
|
76,191
|
|
|
|
|
|
Over
six months through 12 months
|
|
91,176
|
|
|
|
|
|
More
than 12 months
|
|
191,562
|
|
Total
|
|
$
|
486,321
|
|
32
Table
of Contents
Investment Portfolio
The
Banks investment portfolio at December 31, 2009, 2008 and 2007 consisted
of the following (dollars in thousands):
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Market
|
|
|
|
Cost
|
|
Gain
|
|
Loss
|
|
Value
|
|
As
of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
84,924
|
|
$
|
57
|
|
$
|
(2,138
|
)
|
$
|
82,843
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
|
182
|
|
6
|
|
|
|
188
|
|
Other
|
|
10,637
|
|
|
|
|
|
10,637
|
|
Total
|
|
$
|
95,743
|
|
$
|
63
|
|
$
|
(2,138
|
)
|
$
|
93,668
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
94,049
|
|
$
|
1,197
|
|
$
|
(51
|
)
|
$
|
95,195
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
|
730
|
|
2
|
|
(82
|
)
|
650
|
|
Other
|
|
5,217
|
|
228
|
|
|
|
5,445
|
|
Total
|
|
$
|
99,996
|
|
$
|
1,427
|
|
$
|
(133
|
)
|
$
|
101,290
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The
following table presents the estimated maturities and weighted average yields
of investment securities of the Bank at December 31, 2009:
|
|
|
|
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
|
|
|
|
|
|
|
%
|
Due
after five through ten years
|
|
22,018
|
|
21,706
|
|
4.22
|
%
|
Due
after ten years
|
|
62,906
|
|
61,137
|
|
4.46
|
%
|
Total
obligations of U.S. Government agencies
|
|
84,924
|
|
82,843
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
Corporate
debt securities
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
|
|
|
|
|
|
Due
after one through five years
|
|
182
|
|
188
|
|
4.01
|
%
|
Due
after five through ten years
|
|
|
|
|
|
|
%
|
Due
after ten years
|
|
|
|
|
|
|
|
Total
corporate debt securities
|
|
182
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
Other
securities
|
|
10,637
|
|
10,637
|
|
8.08
|
%
|
Total
securities available for sale
|
|
$
|
95,743
|
|
$
|
93,668
|
|
|
|
The Bank owned no
tax-exempt securities during the period ended December 31, 2009.
33
Table
of Contents
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 $1,151,388 at December 31, 2009. 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, 2009, 2008, 2007, 2006 and 2005:
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
Real
estate
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
142,109
|
|
$
|
181,638
|
|
$
|
112,405
|
|
$
|
74,482
|
|
$
|
38,279
|
|
1 to
4 family residential
|
|
42,425
|
|
37,822
|
|
33,560
|
|
22,873
|
|
18,358
|
|
Other
|
|
259,220
|
|
171,150
|
|
143,973
|
|
83,985
|
|
50,371
|
|
Commercial,
financial and agricultural
|
|
649,475
|
|
589,518
|
|
477,666
|
|
353,996
|
|
233,948
|
|
Consumer
|
|
3,476
|
|
3,572
|
|
3,966
|
|
3,246
|
|
3,149
|
|
Other
|
|
74,596
|
|
53,025
|
|
22,752
|
|
6,936
|
|
4,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
1,171,301
|
|
1,036,725
|
|
794,322
|
|
545,518
|
|
348,586
|
|
Less:
allowance for loan losses
|
|
(19,913
|
)
|
(13,454
|
)
|
(10,321
|
)
|
(6,968
|
)
|
(4,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
$
|
1,151,388
|
|
$
|
1,023,271
|
|
$
|
784,001
|
|
$
|
538,550
|
|
$
|
344,187
|
|
The following table
reflects the composition of loan portfolio by type:
|
|
As
of December 31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
12.13
|
%
|
17.52
|
%
|
14.15
|
%
|
13.65
|
%
|
10.98
|
%
|
1 to
4 family residential
|
|
3.62
|
%
|
3.65
|
%
|
4.22
|
%
|
4.19
|
%
|
5.27
|
%
|
Other
|
|
22.13
|
%
|
16.51
|
%
|
18.13
|
%
|
15.40
|
%
|
14.45
|
%
|
Commercial,
financial and agricultural
|
|
55.45
|
%
|
56.86
|
%
|
60.14
|
%
|
64.89
|
%
|
67.11
|
%
|
Consumer
|
|
0.30
|
%
|
0.34
|
%
|
0.50
|
%
|
0.60
|
%
|
0.90
|
%
|
Other
|
|
6.37
|
%
|
5.12
|
%
|
2.86
|
%
|
1.27
|
%
|
1.29
|
%
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
34
Table of Contents
The following table
reflects the composition of commercial loan portfolio by sourcing program type:
|
|
As
of December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
(Dollars
in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Commercial,
financial and agricultural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
351,933
|
|
54.19
|
%
|
$
|
267,542
|
|
45.38
|
%
|
$
|
193,943
|
|
40.60
|
%
|
Indirect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
|
|
130,573
|
|
20.10
|
%
|
148,538
|
|
25.20
|
%
|
130,583
|
|
27.34
|
%
|
Small
|
|
166,969
|
|
25.71
|
%
|
173,438
|
|
29.42
|
%
|
153,140
|
|
32.06
|
%
|
Total
|
|
$
|
649,475
|
|
100.00
|
%
|
$
|
589,518
|
|
100.00
|
%
|
$
|
477,666
|
|
100.00
|
%
|
The following table
details maturities and sensitivity to interest rates changes for loans of the
Bank at December 31, 2009:
|
|
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
|
|
$
|
75,490
|
|
$
|
59,308
|
|
$
|
7,311
|
|
$
|
142,109
|
|
1 to
4 family residential
|
|
18,835
|
|
19,776
|
|
3,814
|
|
42,425
|
|
Other
|
|
64,731
|
|
172,883
|
|
21,606
|
|
259,220
|
|
Commercial,
financial and agricultural
|
|
150,692
|
|
458,325
|
|
40,458
|
|
649,475
|
|
Consumer
|
|
1,410
|
|
2,066
|
|
|
|
3,476
|
|
Other
|
|
|
|
|
|
74,596
|
|
74,596
|
|
Total
|
|
$
|
311,158
|
|
$
|
712,358
|
|
$
|
147,785
|
|
$
|
1,171,301
|
|
|
|
|
|
|
|
|
|
|
|
Less:
allowance for loan loss
|
|
|
|
|
|
|
|
(19,913
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
loans
|
|
|
|
|
|
|
|
$
|
1,151,388
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate sensitivity:
|
|
|
|
|
|
|
|
|
|
Fixed
interest rates
|
|
128,673
|
|
628,193
|
|
36,498
|
|
793,364
|
|
Floating
or adjustable rates
|
|
182,485
|
|
84,165
|
|
111,287
|
|
377,937
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
311,158
|
|
$
|
712,358
|
|
$
|
147,785
|
|
$
|
1,171,301
|
|
(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
Table
of Contents
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.
The
Corporation and the Bank are required to maintain certain capital ratios. These
include Tier I, Total Capital and Leverage Ratios. Certain ratios for the
Corporation and the Bank for 2009 and 2008 are set forth below:
|
|
Capital
Level Meeting
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
Definition of
|
|
Corporation
|
|
Bank
|
|
|
|
Well
Capitalized
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
Tier
I Capital Ratio
|
|
6.00
|
|
9.57
|
|
11.20
|
|
9.37
|
|
9.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Risk-Based Ratio
|
|
10.00
|
|
10.83
|
|
12.42
|
|
10.63
|
|
11.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
Ratio
|
|
5.00
|
|
8.93
|
|
10.62
|
|
8.74
|
|
9.26
|
|
Based
solely on analysis of federal banking regulatory categories, on December 31,
2009 the Corporation and the Bank both fell within the well capitalized
categories under the regulations.
As a
result of a recently completed routine bank examination, the Banks management
expects the examiners to recommend an informal corrective action for the Bank.
On the basis of earlier discussions with these examiners, the board of the Bank
voluntarily determined in October 2009 to adopt certain measures
proactively to reduce risk and strengthen the capital position of the Bank.
These measures addressed capital adequacy and preservation, asset growth and
funding sources. Based on these discussions and the current economic environment,
it is managements intent to take steps to increase the Banks capital ratios
and reduce credit and funding risk. Management is in the process of finalizing
the appropriate levels for these and other measures with the FDIC and the
Tennessee Department of Financial Institutions. The board of directors and
management of the Company and the Bank are committed to addressing and
resolving any issues that might be raised in an informal corrective action, if
and when issued.
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
Table
of Contents
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:
|
|
2009
|
|
2008
|
|
2007
|
|
(Dollars
in thousands)
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
Fixed
Rate
|
|
Variable
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
$
|
23,457
|
|
$
|
71,800
|
|
$
|
39,529
|
|
$
|
137,950
|
|
$
|
18,380
|
|
$
|
107,663
|
|
Standby
letters of credit and financial guarantees
|
|
|
|
9,106
|
|
|
|
16,239
|
|
|
|
11,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to make loans are generally made for periods of one year or less. The
fixed rate loan commitments have interest rates ranging from 3.25% to 11% and
maturities ranging from two months to five 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,
2009, 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
|
|
$
|
314,953
|
|
$
|
314,953
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Certificates
of deposit
|
|
927,586
|
|
521,506
|
|
369,492
|
|
36,588
|
|
|
|
Subordinated
long term debt
|
|
23,198
|
|
|
|
|
|
|
|
23,198
|
|
Short-term
debt
|
|
14,000
|
|
14,000
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
15,502
|
|
1,351
|
|
5,812
|
|
6,193
|
|
2,146
|
|
Purchase
obligations
|
|
|
|
|
|
|
|
|
|
|
|
Other
long term liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,295,239
|
|
$
|
851,810
|
|
$
|
375,304
|
|
$
|
42,781
|
|
$
|
25,344
|
|
(1)
Excludes interest.
37
Table
of Contents
Recent
Accounting Pronouncements
Accounting
Standards Codification
: Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 105 (FASB ASC 105), The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles,
a Replacement of FASB Statement No. 162, replaces SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles and establishes the
FASB Accounting Standards Codification (the Codification) as the source of
authoritative accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial statements in
conformity with generally accepted accounting principles. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative guidance for SEC registrants. All guidance
contained in the Codification carries an equal level of authority. All
non-grandfathered, non-SEC accounting literature not included in the
Codification is superseded and deemed non-authoritative. FASB ASC 105 is
effective for the Corporations financial statements for periods ending after September 15,
2009 and did not have a significant impact on the Corporations financial
statements.
Additional
accounting pronouncements are located starting on page F-12, within Note 1
to the Corporations Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K.
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative
and Qualitative Analysis of Market Risk
Like
all financial institutions, the Corporation is 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, the Corporation 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 the
Corporations balance sheet. The Corporations 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 Banks 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 the
Corporations rate sensitive position at December 31, 2009. Management
uses the one year gap as the appropriate time period for setting strategy.
38
Table
of Contents
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
|
|
$
|
15,010
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
15,010
|
|
Interest
bearing deposits in banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agencies
|
|
|
|
41,422
|
|
|
|
|
|
52,058
|
|
93,480
|
|
Mortgage-backed
and corporate debt securities
|
|
|
|
25
|
|
75
|
|
88
|
|
|
|
188
|
|
Total
securities
|
|
|
|
41,447
|
|
75
|
|
88
|
|
52,058
|
|
93,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
220,440
|
|
214,152
|
|
410,851
|
|
279,228
|
|
46,630
|
|
1,171,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest earning assets
|
|
235,450
|
|
255,599
|
|
410,926
|
|
279,316
|
|
98,688
|
|
1,279,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
103,453
|
|
103,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
235,450
|
|
255,599
|
|
410,926
|
|
279,316
|
|
202,141
|
|
1,383,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
2,313
|
|
|
|
|
|
3,619
|
|
|
|
5,932
|
|
Money
market and savings
|
|
209,961
|
|
|
|
|
|
69,987
|
|
|
|
279,948
|
|
Time
deposits
|
|
|
|
183,695
|
|
336,777
|
|
406,079
|
|
|
|
926,551
|
|
Total
deposits
|
|
212,274
|
|
183,695
|
|
336,777
|
|
479,685
|
|
|
|
1,212,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short
term borrowings
|
|
|
|
4,000
|
|
10,000
|
|
|
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
long term debt
|
|
|
|
|
|
|
|
|
|
23,198
|
|
23,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest bearing liabilities
|
|
212,274
|
|
187,695
|
|
346,777
|
|
479,685
|
|
23,198
|
|
1,249,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
|
|
|
|
|
|
|
37,511
|
|
37,511
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
|
96,292
|
|
96,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
212,274
|
|
187,695
|
|
346,777
|
|
479,685
|
|
157,001
|
|
1,383,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
sensitive gap by period
|
|
23,176
|
|
67,904
|
|
64,149
|
|
(200,369
|
)
|
75,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
gap
|
|
$
|
|
|
$
|
91,080
|
|
$
|
155,229
|
|
$
|
(45,140
|
)
|
$
|
30,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
gap as a percent of total
|
|
|
|
6.58
|
%
|
11.22
|
%
|
(3.26
|
)%
|
2.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
sensitive assets/rate sensitive liabilities (cumulative)
|
|
1.11
|
|
1.23
|
|
1.21
|
|
0.96
|
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Table
of Contents
In 2009,
the FOMC did not change short-term interest rates. As of December 31,
2009, the Corporation was positioned for an increasing rate environment with
assets repricing more rapidly than liabilities. At year-end 2009, the
Corporations one-year ratio was 1.21.
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
200 basis points rate change. At December 31, 2009, the percent change in
EVE for a plus or minus 200 basis points was well within that range at (20.9) %
and 12.8%, respectively.
The
one year gap of 1.21 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 the Corporations balance
sheet, and conducts a quarterly analysis of the rate sensitivity
position. The results of the analysis are reported to the Banks 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-32 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(T).
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
Table of Contents
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 control over financial reporting as part of this
Annual Report on Form 10-K. Managements report is included with the 2009
consolidated financial statements in Item 8 of this Annual Report on Form 10-K
under the caption entitled Managements Report on Internal Control Over
Financial Reporting.
This
annual report does not include an attestation report of the Corporations
registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by the
Corporations registered public accounting firm pursuant to temporary rules of
the SEC that permit the Corporation to provide only managements report in this
annual report.
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, 2009 that have
materially affected, or are reasonably likely to materially affect, its
internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
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 2010 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 2010 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
2010 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 2010 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 Shareholders Nomination of Directors
included in our proxy statement relating to our 2010 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 2010 annual meeting of shareholders.
ITEM 11.
EXECUTIVE COMPENSATION
Information
regarding the Executive Compensation is incorporated by reference to the
information contained under the captions Compensation Discussion and Analysis,
Executive Compensation, Director Compensation, Compensation Committee
Report and Compensation Committee Interlocks and Insider Participation
included in our proxy statement relating to our 2010 annual meeting of
shareholders.
41
Table of Contents
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 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 2010 annual meeting of
shareholders.
Equity
Compensation Plan Information
The
following table provides information as of December 31, 2009, with respect
to compensation plans under which shares of Corporation 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)
|
|
242,000
|
|
$
|
23.92
|
|
758,000
|
|
Equity
Compensation Plans Not Approved by Shareholders (incentive options for
executive officers, directors, and incorporators) (2)
|
|
623,820
|
|
$
|
9.68
|
|
|
|
Total
|
|
865,820
|
|
$
|
13.66
|
|
758,000
|
|
|
(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. For additional information
regarding the terms of these stock options, see note 13 to the Corporations
Consolidated Financial Statements included in Item 8 of this Annual Report on
Form 10-K.
|
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
This
information 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 2010 annual meeting of shareholders.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
This
information 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 2010 annual
meeting of shareholders.
42
Table of Contents
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial
Statements: See Part II, Item 8 Financial Statements and Supplementary
Data of this Annual Report on Form 10-K.
(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
|
|
Bylaws of
Tennessee Commerce Bancorp, Inc.(2)
|
3.3
|
|
Amendment to
Bylaws of Tennessee Commerce Bancorp, Inc.(3)
|
4.1
|
|
Shareholders Agreement(2)
|
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(5)
|
4.5
|
|
Guarantee
Agreement, dated as of June 20, 2008, between Tennessee Commerce
Bancorp, Inc. and Wilmington Trust Company(5)
|
4.6
|
|
Form of
Certificate of Series A Preferred Stock(6)
|
4.7
|
|
Warrant for
Purchase of Shares of Common Stock, dated December 19, 2008(6)
|
10.1
|
|
Tennessee
Commerce Bancorp, Inc. Stock Option Plan - Employees(2)
|
10.2
|
|
Form of
Tennessee Commerce Bancorp, Inc. 1999 Stock Option Directors(2)
|
10.3
|
|
Form of
Tennessee Commerce Bancorp, Inc. 1999 Stock Option - Incorporators(2)
|
10.4
|
|
Form of
Tennessee Commerce Bancorp, Inc. 2003 Stock Option - Directors(2)
|
10.5
|
|
Tennessee
Commerce Bancorp, Inc. 1999 Stock Option Agreement with Arthur F.
Helf(2)
|
10.6
|
|
Tennessee
Commerce Bancorp, Inc. 1999 Stock Option Agreement with Michael R.
Sapp(2)
|
10.7
|
|
Tennessee
Commerce Bancorp, Inc. 1999 Stock Option Agreement with H. Lamar Cox(2)
|
10.8
|
|
Amended and
Restated Employment Agreement, dated as of May 19, 2009, between
Tennessee Commerce Bank and Michael R. Sapp(7)
|
10.9
|
|
Amended and
Restated Employment Agreement, dated as of May 19, 2009, between
Tennessee Commerce Bank and H. Lamar Cox(7)
|
10.10
|
|
Offer of
Employment, dated as of August 5, 2008, between Tennessee Commerce
Bancorp, Inc. and Frank Perez(8)
|
10.11
|
|
Tennessee
Commerce Bancorp, Inc. 2007 Equity Plan(9)
|
10.12
|
|
Letter
Agreement, dated as of December 19, 2008, between the United States
Department of the Treasury and Tennessee Commerce Bancorp, Inc.(6)
|
10.13
|
|
Tennessee
Commerce Bancorp, Inc. Form of Split Dollar Agreement(7)
|
10.14
|
|
Tennessee
Commerce Bancorp, Inc. Form of Salary Continuation Plan(7)
|
10.15
|
|
Tennessee
Commerce Bancorp, Inc. Form of Consulting and Non-Competition
Agreement(7)
|
21.1
|
|
Subsidiaries*
|
23.1
|
|
Consent 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*
|
99.1
|
|
Certification
pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act
of 2008 as amended by the American Recovery and Reinvestment Act of 2009*
|
99.2
|
|
Certification
pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act
of 2008 as amended by the American Recovery and Reinvestment Act of 2009*
|
(1)
|
|
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
November 6, 2009 and incorporated herein by reference.
|
|
|
|
(2)
|
|
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.
|
|
|
|
(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, as filed with the Securities and Exchange Commission on
December 23, 2008 and incorporated herein by reference.
|
|
|
|
(7)
|
|
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
May 26, 2009, and incorporated herein by reference.
|
|
|
|
(8)
|
|
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 August 5,
2008 and incorporated herein by reference.
|
|
|
|
(9)
|
|
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.
|
|
|
|
*
|
|
Filed herewith.
|
43
Table of Contents
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/ Michael R. Sapp
|
|
|
Michael R. Sapp,
Chairman and Chief Executive Officer
(Principal Executive Officer)
|
|
Date: March 9,
2010
|
|
|
|
|
|
|
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 the
capacities indicated.
By:
|
/s/ H. Lamar Cox
|
|
By:
|
/s/ Paul W. Dierksen
|
|
H.
Lamar Cox, Chief Operating Officer and Director
|
|
|
Paul W. Dierksen,
Director
|
Date:
|
March
9, 2010
|
|
Date:
|
March 9, 2010
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Dennis L. Grimaud
|
|
By:
|
/s/ Arthur F. Helf
|
|
Dennis
L. Grimaud, Director
|
|
|
Arthur F. Helf,
Director
|
Date:
|
March
9, 2010
|
|
Date:
|
March 9, 2010
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ William W. McInnes
|
|
By:
|
/s/ Thomas R. Miller
|
|
William
W. McInnes, Director
|
|
|
Thomas R. Miller,
Director
|
Date:
|
March
9, 2010
|
|
Date:
|
March 9, 2010
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
By:
|
/s/ Michael R. Sapp
|
|
Darrel
Reifschneider, Director
|
|
|
Michael R. Sapp,
Chairman, Chief Executive Officer and Director
|
|
|
|
Date:
|
March 9, 2010
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Dr. Paul A. Thomas
|
|
By:
|
/s/ Frank Perez
|
|
Dr.
Paul A. Thomas, Director
|
|
|
Frank Perez, Chief
Financial Officer (Principal
|
|
|
|
|
Financial and
Accounting Officer)
|
Date:
|
March
9, 2010
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Date:
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March 9, 2010
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|
|
|
|
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44
Table of Contents
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
As
of December 31, 2009 and 2008
and
for the three-year period ended December 31, 2009
CONTENTS
F-1
Table of Contents
Managements Report on Internal
Control Over Financial Reporting
Management of the
Corporation 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 Corporations
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 Corporation; (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 Corporation are being made
only in accordance with authorizations of management and directors of the
Corporation; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
Corporations 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 Corporations Chief Executive Officer and Chief Financial
Officer, conducted an assessment of the effectiveness of the Corporations
system of internal control over financial reporting as of December 31,
2009, 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 believes that the Corporation maintained effective
internal control over financial reporting as of December 31, 2009.
This annual report does
not include an attestation report of the companys registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by the Companys registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only managements report in this annual report.
F-2
Table of Contents
Report of Independent Registered
Public Accounting Firm
To the Board of Directors
and Shareholders
Tennessee Commerce
Bancorp, Inc.
We have audited the
accompanying consolidated balance sheets of Tennessee Commerce Bancorp, Inc.
and subsidiaries (collectively, the Company) as of December 31, 2009 and
2008, 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, 2009. 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, 2009 and 2008, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
We were not engaged to
examine managements assessment of the effectiveness of Tennessee Commerce
Bancorp, Inc.s internal control over financial reporting as of December 31,
2009, in accordance with the standards of the Public Company Accounting
Oversight Board, included in the accompanying Managements Report on Internal
Control Over Financial Reporting and, accordingly, we do not express an opinion
thereon.
/s/KraftCPAs PLLC
Nashville, Tennessee
March 9, 2010
F-3
Table
of Contents
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2009 and 2008
(Dollars in thousands except share data)
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
Cash
and due from financial institutions
|
|
$
|
22,864
|
|
$
|
5,260
|
|
Federal
funds sold
|
|
15,010
|
|
35,538
|
|
Cash
and cash equivalents
|
|
37,874
|
|
40,798
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
93,668
|
|
101,290
|
|
|
|
|
|
|
|
Loans
|
|
1,171,301
|
|
1,036,725
|
|
Allowance
for loan losses
|
|
(19,913
|
)
|
(13,454
|
)
|
Net
loans
|
|
1,151,388
|
|
1,023,271
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
1,967
|
|
2,330
|
|
Accrued
interest receivable
|
|
9,711
|
|
8,115
|
|
Restricted
equity securities
|
|
2,169
|
|
1,685
|
|
Income
tax receivable
|
|
68
|
|
4,430
|
|
Bank-owned
life insurance
|
|
25,673
|
|
|
|
Other
assets
|
|
60,914
|
|
36,165
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,383,432
|
|
$
|
1,218,084
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
30,111
|
|
$
|
24,217
|
|
Interest-bearing
|
|
1,212,431
|
|
1,044,926
|
|
Total
deposits
|
|
1,242,542
|
|
1,069,143
|
|
|
|
|
|
|
|
Accrued
interest payable
|
|
1,430
|
|
3,315
|
|
Accrued
dividend payable
|
|
187
|
|
|
|
Short-term
borrowings
|
|
14,000
|
|
10,000
|
|
Accrued
bonuses
|
|
|
|
917
|
|
Other
liabilities
|
|
5,783
|
|
9,764
|
|
Long-term
subordinated debt
|
|
23,198
|
|
23,198
|
|
Total
liabilities
|
|
1,287,140
|
|
1,116,337
|
|
Shareholders
equity
|
|
|
|
|
|
Preferred
stock, 1,000,000 shares authorized; 30,000 shares of $0.50 par value Fixed
Rate Cumulative Perpetual, Series A issued and outstanding at
December 31, 2009 and December 31, 2008
|
|
15,000
|
|
15,000
|
|
Common
stock, $0.50 par value; 20,000,000 shares authorized at December 31,
2009 and 10,000,000 shares authorized at December 31, 2008; 5,646,368
and 4,731,696 shares issued and outstanding at December 31, 2009 and
December 31, 2008, respectively
|
|
2,823
|
|
2,366
|
|
Common
stock warrants
|
|
453
|
|
453
|
|
Additional
paid-in capital
|
|
63,247
|
|
59,946
|
|
Retained
earnings
|
|
16,056
|
|
23,180
|
|
Accumulated
other comprehensive (loss) income
|
|
(1,287
|
)
|
802
|
|
Total
shareholders equity
|
|
96,292
|
|
101,747
|
|
|
|
|
|
|
|
Total
liabilities and shareholders equity
|
|
$
|
1,383,432
|
|
$
|
1,218,084
|
|
See accompanying
notes to consolidated financial statements.
F-4
Table
of Contents
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years
Ended December 31, 2009, 2008 and 2007
(Dollars in thousands except share data)
|
|
2009
|
|
2008
|
|
2007
|
|
Interest
income
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
75,770
|
|
$
|
71,101
|
|
$
|
58,114
|
|
Securities
|
|
5,325
|
|
4,717
|
|
3,492
|
|
Federal
funds sold
|
|
13
|
|
160
|
|
600
|
|
Total
interest income
|
|
81,108
|
|
75,978
|
|
62,206
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
Deposits
|
|
34,213
|
|
39,271
|
|
34,245
|
|
Other
|
|
1,979
|
|
1,756
|
|
689
|
|
Total
interest expense
|
|
36,192
|
|
41,027
|
|
34,934
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
44,916
|
|
34,951
|
|
27,272
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
31,039
|
|
9,111
|
|
6,350
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for loan losses
|
|
13,877
|
|
25,840
|
|
20,922
|
|
|
|
|
|
|
|
|
|
Non-interest
income
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
157
|
|
122
|
|
132
|
|
Securities
gains
|
|
1,118
|
|
447
|
|
26
|
|
(Loss)
gain on sale of loans
|
|
(1,928
|
)
|
3,750
|
|
2,687
|
|
Loss
on repossession
|
|
(1,826
|
)
|
(230
|
)
|
(167
|
)
|
Other
|
|
922
|
|
205
|
|
202
|
|
Total
non-interest (loss) income
|
|
(1,557
|
)
|
4,294
|
|
2,880
|
|
|
|
|
|
|
|
|
|
Non-interest
expense
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
9,849
|
|
9,100
|
|
7,977
|
|
Occupancy
and equipment
|
|
1,625
|
|
1,422
|
|
1,109
|
|
Data
processing fees
|
|
1,549
|
|
1,210
|
|
983
|
|
FDIC
expense
|
|
1,922
|
|
682
|
|
286
|
|
Professional
fees
|
|
1,851
|
|
2,012
|
|
779
|
|
Other
|
|
4,509
|
|
3,182
|
|
2,129
|
|
Total
non-interest expense
|
|
21,305
|
|
17,608
|
|
13,263
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income taxes
|
|
(8,985
|
)
|
12,526
|
|
10,539
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit) expense
|
|
(3,407
|
)
|
4,772
|
|
3,643
|
|
Net
(loss) income
|
|
(5,578
|
)
|
7,754
|
|
6,896
|
|
Preferred
dividends
|
|
(1,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders
|
|
$
|
(7,124
|
)
|
$
|
7,754
|
|
$
|
6,896
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share (EPS):
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
(1.50
|
)
|
$
|
1.64
|
|
$
|
1.49
|
|
Diluted
EPS
|
|
(1.50
|
)
|
1.60
|
|
1.41
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
4,738,638
|
|
4,731,204
|
|
4,613,342
|
|
Diluted
|
|
4,738,638
|
|
4,852,065
|
|
4,892,167
|
|
See accompanying
notes to consolidated financial statements.
F-5
Table of Contents
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
Years
Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
Warrants to
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
Additional
|
|
|
|
Other
|
|
Total
|
|
|
|
Preferred
|
|
Common
|
|
Common
|
|
Paid-In
|
|
Retained
|
|
Comprehensive
|
|
Shareholders
|
|
(Dollars in thousands except share data)
|
|
Stock
|
|
Stock
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Income (Loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
7,754
|
|
|
|
7,754
|
|
Other
comprehensive income, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities available for sale during the period, net of $477 in tax
|
|
|
|
|
|
|
|
|
|
|
|
770
|
|
770
|
|
Reclassification
adjustment for gains included in net income, net of $170 in tax
|
|
|
|
|
|
|
|
|
|
|
|
(277
|
)
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,247
|
|
Issuance
of preferred stock
|
|
15,000
|
|
|
|
|
|
14,547
|
|
|
|
|
|
29,547
|
|
Issuance
of common stock warrant
|
|
|
|
|
|
453
|
|
|
|
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options to purchase 7,500 common shares and related tax benefit
|
|
|
|
4
|
|
|
|
86
|
|
|
|
|
|
90
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
289
|
|
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
15,000
|
|
2,366
|
|
453
|
|
59,946
|
|
23,180
|
|
802
|
|
101,747
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
(5,578
|
)
|
|
|
(5,578
|
)
|
Other
comprehensive income, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on securities available for sale during the period, net of income tax
benefit of $825
|
|
|
|
|
|
|
|
|
|
|
|
(1,351
|
)
|
(1,351
|
)
|
Reclassification
adjustment for gains included in net income, net of $380 in tax
|
|
|
|
|
|
|
|
|
|
|
|
(738
|
)
|
(738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock warrant accretion
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
|
|
|
|
|
|
|
(1,546
|
)
|
|
|
(1,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 903,424 shares of common stock
|
|
|
|
452
|
|
|
|
2,830
|
|
|
|
|
|
3,282
|
|
Issuance
of 11,248 shares of restricted stock and related tax benefit
|
|
|
|
5
|
|
|
|
51
|
|
|
|
|
|
56
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
335
|
|
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
$
|
15,000
|
|
$
|
2,823
|
|
$
|
453
|
|
$
|
63,247
|
|
$
|
16,056
|
|
$
|
(1,287
|
)
|
$
|
96,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying
notes to consolidated financial statements.
F-6
Table of Contents
TENNESSEE
COMMERCE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years
Ended December 31, 2009, 2008 and 2007
(Dollars in thousands except share data)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(5,578
|
)
|
$
|
7,754
|
|
$
|
6,896
|
|
Adjustments
to reconcile net (loss) income to net cash provided by operating activities
|
|
|
|
|
|
|
|
Depreciation
|
|
498
|
|
423
|
|
333
|
|
Deferred
loan fees
|
|
320
|
|
(210
|
)
|
919
|
|
Provision
for loan losses
|
|
31,039
|
|
9,111
|
|
6,350
|
|
Stock-based
compensation expense
|
|
335
|
|
289
|
|
259
|
|
Deferred
income tax
|
|
(3,053
|
)
|
8,255
|
|
408
|
|
Net
amortization of investment securities
|
|
182
|
|
(52
|
)
|
11
|
|
Gain
on sales of securities
|
|
(1,118
|
)
|
(447
|
)
|
(26
|
)
|
Change
in:
|
|
|
|
|
|
|
|
Accrued
interest receivable
|
|
(1,596
|
)
|
(2,214
|
)
|
(1,785
|
)
|
Accrued
interest payable
|
|
(1,885
|
)
|
1,023
|
|
564
|
|
Income
tax receivable
|
|
4,362
|
|
(2,544
|
)
|
(1,886
|
)
|
Other
assets
|
|
34,928
|
|
(18,263
|
)
|
(10,442
|
)
|
Other
liabilities
|
|
(1,354
|
)
|
(314
|
)
|
549
|
|
Net
cash provided by operating activities
|
|
57,080
|
|
2,811
|
|
2,150
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Purchases
of securities available for sale
|
|
(162,533
|
)
|
(101,560
|
)
|
(43,898
|
)
|
Proceeds
from sales of securities available for sale
|
|
97,466
|
|
46,603
|
|
25,850
|
|
Proceeds
from maturities, prepayments and calls of securities available for sale
|
|
70,255
|
|
28,713
|
|
2,216
|
|
Net
change in loans
|
|
(218,363
|
)
|
(248,171
|
)
|
(252,720
|
)
|
Purchase
of bank owned life insurance investment
|
|
(25,673
|
)
|
|
|
|
|
Purchases
of FHLB stock
|
|
(484
|
)
|
(747
|
)
|
(305
|
)
|
Net
purchases of premises and equipment
|
|
(135
|
)
|
(1,340
|
)
|
(113
|
)
|
Net
cash used by investing activities
|
|
(239,467
|
)
|
(276,502
|
)
|
(268,970
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Net
change in deposits
|
|
173,399
|
|
254,090
|
|
254,486
|
|
Net
change in federal funds purchased and repurchase agreements
|
|
|
|
(2,000
|
)
|
2,000
|
|
Payments
on short-term debt
|
|
|
|
(7,000
|
)
|
|
|
Proceeds
from long-term subordinated debt
|
|
|
|
14,950
|
|
|
|
Purchase
of capital securities of unconsolidated subsidiary
|
|
|
|
(450
|
)
|
|
|
Proceeds
from issuance of preferred stock and common stock warrant
|
|
|
|
30,000
|
|
|
|
Preferred
stock dividends
|
|
(1,359
|
)
|
|
|
|
|
Warrant
accretion expense
|
|
85
|
|
|
|
|
|
Issuance
of common stock
|
|
3,338
|
|
|
|
|
|
Proceeds
from exercise of common stock options
|
|
|
|
38
|
|
2,152
|
|
Proceeds
from issuance of short-term debt
|
|
4,000
|
|
10,000
|
|
7,000
|
|
Excess
tax benefit from option exercises
|
|
|
|
52
|
|
1,979
|
|
Section 16
profit reimbursement
|
|
|
|
|
|
15
|
|
Net
cash provided by financing activities
|
|
179,463
|
|
299,680
|
|
267,632
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(2,924
|
)
|
25,989
|
|
812
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
40,798
|
|
14,809
|
|
13,997
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
37,874
|
|
$
|
40,798
|
|
$
|
14,809
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during period for interest
|
|
$
|
38,077
|
|
$
|
40,004
|
|
$
|
34,370
|
|
Cash
paid during period for income taxes
|
|
77
|
|
1,125
|
|
4,745
|
|
|
|
|
|
|
|
|
|
Loans
foreclosed upon with repossessions
|
|
58,887
|
|
35,641
|
|
12,772
|
|
See accompanying
notes to consolidated financial statements.
F-7
Table of Contents
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 subsidiaries, Tennessee Commerce Bank (the Bank) and TCB
Commercial Asset Services, Inc. (TCB). Tennessee Commerce Statutory Trust I
and Tennessee Commerce Statutory Trust II are not consolidated and are
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. In July 2008, the
Corporation formed a wholly owned subsidiary, TCB. This subsidiary purchases,
at fair market value, and then sells assets for the Bank.
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.
Accounting
Standards Codification
: Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 105 (FASB ASC 105), The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a
Replacement of FASB Statement No. 162, replaces SFAS No. 162, The Hierarchy
of Generally Accepted Accounting Principles and establishes the FASB ASC (the Codification)
as the source of authoritative accounting principles recognized by the FASB to
be applied by non-governmental entities in the preparation of financial
statements in conformity with generally accepted accounting principles. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative guidance for SEC registrants. All guidance
contained in the Codification carries an equal level of authority. All
non-grandfathered, non-SEC accounting literature not included in the
Codification is superseded and deemed non-authoritative. FASB ASC 105 is
effective for the Corporations financial statements for periods ending after September
15, 2009 and did not have a significant impact on the Corporations financial
statements.
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.
Concentrations and Restrictions on Cash and Cash Equivalents
: The Corporation maintains deposits with
other financial institutions in amounts that exceed federal deposit insurance
coverage. Furthermore, federal funds sold are essentially uncollateralized
loans to other financial institutions. Management regularly evaluates the
credit risk associated with the counterparties to these transactions and
believes that the Corporation is not exposed to any significant credit risks on
cash and cash equivalents.
Cash on hand or on
deposit with other banks of approximately $468,000 and $294,000 was required to
meet regulatory reserve and clearing requirements at year-end 2009 and 2008,
respectively. These balances do not earn interest.
Securities
: Certain debt securities that management has
the positive intent and ability to hold to maturity are classified as held to
maturity and recorded at amortized cost.
Trading securities are recorded at fair value with changes in fair value
included in earnings. Securities not
classified as held to maturity or trading, including equity securities with
readily determinable fair values, are classified as available for sale and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income. At December 31, 2009 and 2008, all
securities were classified as available for sale. The Bank had no trading
securities or held to maturity securities as of December 31, 2009 and 2008.
Purchase premiums and
discounts are recognized in interest income using the interest method over the
terms of the securities. Declines in the
fair value of held-to-maturity and available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses. In determining whether
other-than-temporary impairment exists, management considers many factors,
including (i) the length of time and the extent to which the fair value has
been less than cost, (ii) the financial condition and near-term prospects of
the issuer, and (iii) the intent and ability of the Corporation to retain its
investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
Gains and losses on the sale of securities are recorded on the trade
date and are determined using the specific identification method.
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.
F-8
Table of Contents
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.
The accrual of interest
on mortgage and commercial loans is discontinued at the time the loan is 90
days past due unless the credit is well-secured and in process of
collection. Credit card loans and other
personal loans are typically charged off no later than 180 days past due. Past due status is based on the contractual
terms of the loan. In all cases, loans
are placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful. All interest accrued but not
collected for loans that are placed on nonaccrual or charged off is reversed
against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans
are returned to accrual status when all the principal and interest amounts contractually
due are brought current and future payments are reasonably assured.
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.
Tax Leases
: Tax leases comprised approximately
$74,596,000 and $53,025,000 of loans on the consolidated balance sheets at December
31, 2009 and 2008, respectively. In accordance with FASB ASC 860, Accounting
For Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, (FASB ASC 860), 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
consolidated balance sheets and as Tax leases on the Summary of Loans in Note
3.
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. The general component covers
non-classified loans and is based on historical loss experience and adjusted
for current factors including the economic environment. The allowance also
includes an unallocated component. Management believes that the unallocated
amount is warranted for inherent factors that cannot be practically assigned to
individual loan categories. An example is the imprecision in the overall
measurement process, in particular the volatility of the national and global
economy.
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.
Other Real Estate
and Repossessed Assets
: 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 costs are
expensed as they occur after any re-acquisitions. Other real estate owned is
included in other assets on the balance sheet, with a carrying value of
approximately $814,000 and $5,764,000 in 2009 and 2008, respectively.
Repossessed assets acquired by foreclosure are carried at the lower of the
recorded investment in the asset or its estimated fair value. Declines in value
indicated by reappraisals as well as losses resulting from disposition are
charged to operations. These repossessed assets are either disposed of by the
Bank or sold to TCB. Subsequent costs are expensed as they occur after any
re-acquisitions. Repossessions are included in other assets on the balance
sheet, with a carrying value of approximately $27,169,000 and $10,694,000 in
2009 and 2008, respectively. If a repossession of the Bank is not resold within
the six month holding period allowed by Tennessee law, it is purchased by TCB
at fair market value. The sole purpose
of TCB is the resale of assets repossessed by the Bank. At December 31, 2009
and 2008, TCB carried approximately $9,782,000 and $4,701,000, respectively,
and nothing in prior years on its balance sheet. TCB carries these purchases as
inventory.
F-9
Table of Contents
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 control 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.
When the Bank sells loans
to others, it may hold interest-only strips, which is an interest that
continues to be held by the transferor in the securitized receivable. It may also obtain servicing assets or assume
servicing liabilities that are initially measured at fair value. Gain or loss on sale of the receivables
depends in part on both (a) the previous carrying amount of the financial
assets involved in the transfer, allocated between the assets sold and the
interests that continue to be held by the transferor based on their relative
fair value at the date of transfer, and (b) the proceeds received. To obtain fair values, quoted market prices
are used if available. If quotes are not available for interests that continue
to be held by the transferor, the Bank estimates fair value based on the future
expected cash flows estimated using managements best estimates of the key
assumptions credit losses and discount rates commensurate with the risks
involved.
Servicing Assets
: 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. The Corporation values
its servicing assets by allocating the carrying value 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. Capitalized servicing rights are
reported in other assets and are amortized over the life of the loan being
serviced. Servicing assets totaled approximately $80,000 and $216,000 as of December
31, 2009 and 2008, respectively. Servicing assets are included on the balance
sheet with other assets.
The Corporation initially
measures all separately recognized servicing assets and servicing liabilities
at fair value. The Corporation subsequently measures such assets and
liabilities using either the amortization method, where it amortizes servicing
assets or servicing liabilities in proportion to and over the period of
estimated net servicing income or net servicing loss, or the fair value method,
where it measures servicing assets or servicing liabilities at fair value at
each reporting date. The Corporation reports fair value changes in its earnings
during the period in which they occur. Because of the nature of our servicing
assets, quoted market prices may not be available, prohibiting the Corporation
from using the fair value method. Therefore, if no quoted market prices are
available, the Corporation uses the amortization method. The Corporation
assesses servicing assets or servicing liabilities for impairment or increased
obligation based on the fair value at each reporting date. After considering
costs to service, the Corporation generally values the servicing assets at
approximately 0.20% of the assets fair value. The adoption of FASB ASC 860, Accounting
for Servicing of Financial Assets (FASB ASC 860), did not have a material
effect on the valuation of the Corporations servicing assets or servicing
liabilities for the year ended December 31, 2009.
Income Per Common
Share
: Basic income
per share available to common stockholders (EPS) is computed by dividing net
income available to common stockholders by the weighted average common shares
outstanding for the period. Diluted EPS reflects the dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted. The difference between basic and diluted weighted average shares
outstanding was attributable to common stock options, common stock appreciation
rights, warrants and restricted shares. The dilutive effect of outstanding
options, common stock appreciation rights, warrants and restricted shares is
reflected in diluted EPS by application of the treasury stock method.
Stock-Based Compensation
: Compensation expense for stock options and non-vested
stock awards is based on the fair value of the award on the measurement date,
which, for the Corporation, is the date of the grant and is recognized ratably
over the service period of the award. The fair value of stock options is
estimated using the Black-Scholes option-pricing model. The fair value of
non-vested stock awards and deferred stock units is generally the market price
of the Corporations stock on the date of grant. Some amounts have been
reclassified to be comparable to current year presentation.
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.
F-10
Table of Contents
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. Realization of deferred tax assets is dependent upon the generation
of a sufficient level of future taxable income and recoverable taxes paid in
prior years.
The Corporation
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 approximately $100,000, $107,000
and $73,000 for the years ended December 31, 2009, 2008 and 2007, respectively.
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.
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. In addition, the Fixed Rate Cumulative Perpetual Preferred Stock,
Series A, of the Corporation (Series A Preferred Stock) includes certain
restrictions regarding the payment of dividends on the Corporations common
stock. For more information regarding these restrictions, see Note 16.
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 14. 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.
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.
Recently Issued
Accounting Standards
:
FASB ASC 810, Noncontrolling Interest in Consolidated Financial Statements (FASB
ASC 810) amends prior guidance to establish accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary. FASB ASC 810 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
things, FASB ASC 810 requires consolidated net income to be reported at amounts
that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the consolidated
income statement, of the amounts of consolidated net income attributable to the
parent and to the non-controlling interest. The new authoritative guidance
became effective for the Corporation on January 1, 2009 and did not have a
significant impact on the Corporations financial statements.
Further new authoritative
accounting guidance under FASB ASC 810 amends prior guidance to change how a
company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a company is required to consolidate an entity is
based on, among other things, an entitys purpose and design and a companys
ability to direct the activities of the entity that most significantly impact
the entitys economic performance. The new authoritative accounting guidance
requires additional disclosures about the reporting entitys involvement with
variable-interest entities and any significant changes in risk exposure due to
that involvement as well as its effect on the entitys financial statements.
The new authoritative accounting guidance under FASB ASC 810 will be effective January
1, 2010 and is not expected to have a significant impact on the Corporations
financial statements
FASB ASC 260, Earnings Per Share (FASB ASC 260).
On January 1, 2009, the Corporation
adopted new authoritative accounting guidance under ASC 260, Earnings Per
Share, which provides that unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation
of earnings per share pursuant to the two-class method.
F-11
Table of Contents
FASB
ASC 855, Subsequent Events (FASB ASC 855), establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or available to be issued. FASB ASC 855 defines (i) the period after the
balance sheet date during which a reporting entitys management should evaluate
events or transactions that may occur for potential recognition or disclosure
in the financial statements, (ii) the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and (iii) the disclosures an entity should make
about events or transactions that occurred after the balance sheet date. FASB
ASC 855 became effective for the Corporations financial statements for periods
ending after June 15, 2009 and did not have a significant impact on the
Corporations financial statements. Management evaluated all events or
transactions that occurred after December 31, 2009 through March 9, 2010, the
date the Corporation issued the accompanying financial statements. During this period, the Corporation did not
have any material recognizable subsequent events that required recognition in
its disclosures with respect to the accompanying financial statements.
FASB
ASC 860 amends prior accounting guidance to enhance reporting about transfers
of financial assets, including securitizations, and where companies have
continuing exposure to the risks related to transferred financial assets. FASB
ASC 860 eliminates the concept of a qualifying special-purpose entity and
changes the requirements for derecognizing financial assets. FASB ASC 860 also requires
additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from
transfers during the period. FASB ASC 860 will be effective January 1, 2010 and
is not expected to have a significant impact on the Corporations financial
statements
FASB
ASC 820, Fair Value Measurements and Disclosures (
FASB ASC 820), defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. The provisions of FASB
ASC 820 became effective for the Corporation on January 1, 2008 for financial
assets and financial liabilities and on January 1, 2009 for non-financial
assets and non-financial liabilities. For more information about fair value
measurements, see Note 14.
Additional new
authoritative accounting guidance under FASB ASC 820 affirms that the objective
of fair value when the market for an asset is not active is the price that
would be received to sell the asset in an orderly transaction, and clarifies
and includes additional factors for determining whether there has been a
significant decrease in market activity for an asset when the market for that
asset is not active. FASB ASC 820 requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the evidence. The
new accounting guidance amended prior guidance to expand certain disclosure
requirements. The Corporation adopted the new authoritative accounting guidance
under FASB ASC 820 during the first quarter of 2009. Adoption of the new
guidance did not significantly impact the Corporations financial statements.
Further new authoritative
accounting guidance (Accounting Standards Update No. 2009-5) under FASB ASC 820
provides guidance for measuring the fair value of a liability in circumstances
in which a quoted price in an active market for the identical liability is not
available. In such instances, a reporting entity is required to measure fair
value utilizing a valuation technique that uses (i) the quoted price of the
identical liability when traded as an asset, (ii) quoted prices for similar
liabilities or similar liabilities when traded as assets, or (iii) another
valuation technique that is consistent with the existing principles of FASB ASC
820, such as an income approach or market approach. The new authoritative
accounting guidance also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. The foregoing new authoritative
accounting guidance under FASB ASC 820 became effective for the Corporations
financial statements for periods ending after October 1, 2009 and did not have
a significant impact on the Corporations financial statements.
New
authoritative accounting guidance under FASB ASC 320, InvestmentsDebt and
Equity Securities (FASB ASC 320), (i) changes existing guidance for
determining whether an impairment is other than temporary to debt securities
and (ii) replaces the existing requirement that the entitys management assert
it has both the intent and ability to hold an impaired security until recovery
with a requirement that management assert: (a) it does not have the intent to
sell the security; and (b) it is more likely than not it will not have to sell
the security before recovery of its cost basis. Under FASB ASC 320, declines in
the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses to the extent the impairment is related to credit losses.
The amount of the impairment related to other factors is recognized in other
comprehensive income. The Corporation adopted the provisions of the new
authoritative accounting guidance under FASB ASC 320 during the first quarter
of 2009. Adoption of the new guidance did not significantly impact the
Corporations financial statements.
F-12
Table of Contents
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 at December
31, 2009 and 2008:
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Fair
|
|
Unrealized
|
|
Unrealized
|
|
Amortized
|
|
(Dollars
in thousands)
|
|
Value
|
|
Gains
|
|
Losses
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
82,843
|
|
$
|
57
|
|
$
|
(2,138
|
)
|
$
|
84,924
|
|
Corporate
debt securities
|
|
188
|
|
6
|
|
|
|
182
|
|
Other
|
|
10,637
|
|
|
|
|
|
10,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,668
|
|
$
|
63
|
|
$
|
(2,138
|
)
|
$
|
95,743
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
95,195
|
|
$
|
1,197
|
|
$
|
(51
|
)
|
$
|
94,049
|
|
Corporate
debt securities
|
|
239
|
|
2
|
|
|
|
237
|
|
Corporate
bonds
|
|
411
|
|
|
|
(82
|
)
|
493
|
|
Other
|
|
5,445
|
|
228
|
|
|
|
5,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,290
|
|
$
|
1,427
|
|
$
|
(133
|
)
|
$
|
99,996
|
|
Contractual maturities of
debt securities at December 31, 2009 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
|
|
188
|
|
Due
after five through ten years
|
|
21,706
|
|
Due
after ten years
|
|
71,774
|
|
|
|
|
|
|
|
$
|
93,668
|
|
Gross gains of
approximately $1,231,000, $611,000 and $212,000 on sales of securities were
recognized in 2009, 2008 and 2007, respectively. Gross losses of approximately
$113,000, $164,000 and $187,000 on sales of securities were recognized in 2009,
2008 and 2007, respectively. Securities carried at approximately $70,878,000
and $74,979,000 at December 31, 2009 and 2008, 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.
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Federal
Home Loan Bank stock
|
|
$
|
2,169
|
|
$
|
1,685
|
|
|
|
|
|
|
|
|
|
F-13
Table of Contents
Securities with
unrealized losses at year-end 2009 and 2008, and the length of time they have
been in continuous loss positions were 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
54,552
|
|
$
|
1,882
|
|
$
|
14,737
|
|
$
|
256
|
|
$
|
69,289
|
|
$
|
2,138
|
|
Corporate
bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,552
|
|
$
|
1,882
|
|
$
|
14,737
|
|
$
|
256
|
|
$
|
69,289
|
|
$
|
2,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies
|
|
$
|
|
|
$
|
|
|
$
|
8,048
|
|
$
|
51
|
|
$
|
8,048
|
|
$
|
51
|
|
Corporate
bonds
|
|
|
|
|
|
411
|
|
82
|
|
411
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
8,459
|
|
$
|
133
|
|
$
|
8,459
|
|
$
|
133
|
|
Unrealized
losses on U.S. government agency securities have not been recognized in 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 was largely a result of increases in market interest
rates. Furthermore, as of December 31, 2009, management did not have the intent
to sell any of the securities classified as available for sale in the table
above and believe that it is more likely than not that the Corporation will not
have to sell any such securities before a recovery of cost. The fair value of
the securities above is expected to recover as the securities approach their
maturity dates and/or market rates decline.
There were six and five
securities with continued unrealized losses lasting 12 months or more at December
31, 2009 and 2008, respectfully. There were 16 securities with continued
unrealized losses lasting less than 12 months at December 31, 2009 and none at December
31, 2008.
NOTE
3 - LOANS
The following is a
summary of loans outstanding by category at December 31:
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
Real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
142,109
|
|
$
|
181,638
|
|
1 to
4 family residential
|
|
42,425
|
|
37,822
|
|
Other
|
|
259,220
|
|
171,150
|
|
Commercial,
financial and agricultural
|
|
649,475
|
|
589,518
|
|
Consumer
|
|
3,476
|
|
3,572
|
|
Tax
leases
|
|
74,596
|
|
53,025
|
|
|
|
1,171,301
|
|
1,036,725
|
|
Less:
Allowance for loan losses
|
|
(19,913
|
)
|
(13,454
|
)
|
|
|
|
|
|
|
Net
loans
|
|
$
|
1,151,388
|
|
$
|
1,023,271
|
|
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 maximum extent of the
Corporations recourse obligations on loans transferred during the three-year
period ended December 31, 2009 was 10% of the amount transferred, adjusted for
any early payoffs or terminations. The amount of the proceeds for loans that
were transferred with recourse, that were recorded as a sale for each period
was as follows.
F-14
Table of Contents
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Proceeds
from loans transferred with recourse
|
|
$
|
19,160
|
|
$
|
27,045
|
|
$
|
40,590
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Amount
of loans being serviced
|
|
$
|
81,704
|
|
$
|
105,177
|
|
$
|
86,489
|
|
|
|
|
|
|
|
|
|
|
|
|
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 were as follows:
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
16,425
|
|
$
|
6,804
|
|
New
loans
|
|
6,400
|
|
11,888
|
|
Repayments
|
|
(987
|
)
|
(2,267
|
)
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
21,838
|
|
$
|
16,425
|
|
NOTE
4 ALLOWANCE FOR LOAN LOSSES
Changes in the allowance
for loan losses were as follows:
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
13,454
|
|
$
|
10,321
|
|
$
|
6,968
|
|
Provision
charged to operating expenses
|
|
31,039
|
|
9,111
|
|
6,350
|
|
Loans
charged-off
|
|
(26,085
|
)
|
(6,099
|
)
|
(3,310
|
)
|
Recoveries
|
|
1,505
|
|
121
|
|
313
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
19,913
|
|
$
|
13,454
|
|
$
|
10,321
|
|
Impaired loans were as
follows:
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Balance
of impaired loans with no allocated allowance
|
|
$
|
14,993
|
|
$
|
|
|
Balance
of impaired loans with an allocated allowance
|
|
26,100
|
|
11,603
|
|
|
|
|
|
|
|
Total
recorded impaired loans
|
|
41,093
|
|
11,603
|
|
|
|
|
|
|
|
Amount
of the allowance allocated to impaired loans
|
|
$
|
5,580
|
|
$
|
3,203
|
|
F-15
Table of Contents
|
|
December
31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Average
of impaired loans during the year
|
|
$
|
34,592
|
|
$
|
7,875
|
|
$
|
3,783
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of interest
income recognized for the time that these loans were impaired during 2009, 2008
and 2007 was not material to the financial statements.
Nonperforming loans were
as follows:
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Loans
past due over 90 days still on accrual
|
|
$
|
1,328
|
|
$
|
18,788
|
|
$
|
1,992
|
|
Nonaccrual
loans
|
|
19,151
|
|
11,603
|
|
6,465
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans
include both smaller balance homogeneous loans that are collectively evaluated
for impairment and individually classified impaired loans.
NOTE
5 PREMISES AND EQUIPMENT
Below is a summary of
premises and equipment as of December 31, 2009 and 2008. Depreciation expense
for 2009, 2008 and 2007 was approximately $498,000, $423,000 and $333,000,
respectively.
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
$
|
1,321
|
|
$
|
1,319
|
|
Furniture
and equipment
|
|
2,813
|
|
2,680
|
|
|
|
4,134
|
|
3,999
|
|
Less:
Allowance for depreciation
|
|
2,167
|
|
1,669
|
|
|
|
|
|
|
|
|
|
$
|
1,967
|
|
$
|
2,330
|
|
The Bank leases office
space, furniture and equipment under operating leases. Rent expense recognized
in 2009, 2008 and 2007 amounted to approximately $744,000, $660,000 and
$390,000, respectively. The remaining minimum lease payments related to the
leases at December 31, 2009 were as follows, before considering renewal options
that generally are present:
(Dollars
in thousands)
|
|
|
|
2010
|
|
$
|
1,351
|
|
2011
|
|
1,896
|
|
2012
|
|
1,939
|
|
2013
|
|
1,977
|
|
2014
|
|
2,021
|
|
2015-2017
|
|
6,318
|
|
|
|
|
|
|
|
$
|
15,502
|
|
F-16
Table of Contents
NOTE
6 - DEPOSITS
Time deposits greater
than $100,000 amounted to approximately $486,321,000 in 2009 and approximately
$566,084,000 in 2008.
At December 31, 2009, scheduled
maturities of time deposits were as follows:
(Dollars
in thousands)
|
|
|
|
|
|
|
|
2010
|
|
$
|
521,506
|
|
2011
|
|
236,748
|
|
2012
|
|
96,932
|
|
2013
|
|
35,812
|
|
2014
|
|
36,588
|
|
|
|
|
|
|
Deposits held at the Bank
by directors, executive officers and their related interests were approximately
$1,608,000 and $14,706,000 at December 31, 2009 and 2008, 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). At December 31,
2009, the Bank had an available line of $55,494,000 with the FHLB. To
participate in this program, the Bank is required to be a member of the FHLB
and own stock in the FHLB. The Bank had $2,168,900 of such stock at December 31,
2009 to satisfy this requirement.
At December
31, 2009, the Bank had received no advances from the FHLB and, therefore, had
pledged no securities or qualifying loans to the FHLB.
At December
31, 2009, the Bank had approximately $38,700,000 in available federal funds
lines (or the equivalent thereof) with correspondent banks. At December 31, 2009, the Bank had no federal
funds purchased.
In December
2009, TCB entered into a short-term revolving line of credit with a qualified
investor, pursuant to which the qualified investor agreed to loan TCB up to
$5,000,000 at an interest rate of prime plus 1% with a floor of 6.25%. The qualified investors obligation to make
advances to TCB under this line of credit terminates on March 31, 2010. At December 31, 2009, TCB had outstanding
borrowings of $4,000,000 under this line of credit.
The Corporation had a $15,000,000 line of credit with First Tennessee
Bank, National Association during 2009. The outstanding principal balance on
this line of credit at December 31, 2009 was $0, as this line of credit was
paid on the maturity date of April 30, 2009.
In May
2009, the Corporation entered into a short-term revolving line of credit with a
qualified investor, pursuant to which the qualified investor agreed to loan the
Corporation up to $10,000,000 at an interest rate of 5.0%. The qualified investors obligation to make
advances to the Corporation under this line of credit has been extended through
February 4, 2011 in the principal balance of $8,750,000. The Corporation agreed with a qualified
investor that, until the note, together with interest, and all other
indebtedness of the Corporation to the lender are paid in full, the Corporation
will (i) make all financial information available, (ii) pay all taxes and
claims prior to date of penalty, (iii) preserve its corporate status, (iv) give
notice of adverse events, (v) maintain capital ratios and (vi) give notice of
changes in management.
Both
outstanding lines of credit are secured by all inventories at TCB and 100% of
all outstanding bank stock.
NOTE 8 -
DEFERRED COMPENSATION PLANS
During 2009, the Bank paid
$25,000,000 to purchase single premium bank-owned life insurance policies (BOLIs)
for three key executives of the Bank. The Bank is the owner and beneficiary of
the BOLIs, which serve as investment vehicles that partially offsets costs
associated with the Banks other employee benefit plans. The aggregate cash surrender values of the
BOLIs increased by approximately $673,000 in 2009, which was recognized as
noninterest income. Income from the BOLIs is tax exempt.
The Banks deferred
compensation arrangements for its executive officer include split dollar life
insurance plans, non-competitions agreements and supplemental executive
retirements plans (SERPs). The estimated present value of future benefits to
be paid under the SERP and non-competition agreements is being accrued over the
period from the effective date of the agreements through the expected
retirement dates of the participants. The expense incurred and amount accrued
for these plans for the year ended December 31, 2009 was approximately $84,000.
F-17
Table of Contents
|
|
Split Dollar
Life Insurance Plan
|
|
Non-Competition Agreement
|
|
SERP
|
|
|
|
|
|
|
|
Retired
Chairman and Chief Executive Officer
|
|
Lesser
of Net Amount at Risk(1) and two times the sum of the annual salary for the
most recent full year of employment plus the greatest bonus amount paid in
any of the last three full years of employment. If death occurs prior to separation
from the Bank, any amounts owed under the SERP and the Non-Competition
Agreement are deducted from this amount.
|
|
Term
of two years following separation from service. Pays 120 monthly payments,
each in an amount equal to the greatest annual cash compensation (including
base salary and bonus) paid in any of the last three calendar years of
employment preceding separation from service, divided by 48.
|
|
N/A
|
|
|
|
|
|
|
|
Chief
Operating Officer
|
|
Lesser
of Net Amount at Risk(1) and two times the sum of the annual salary for the
most recent full year of employment plus the greatest bonus amount paid in
any of the last three full years of employment. If death occurs prior to
separation from the Bank, any amounts owed under the SERP and the
Non-Competition Agreement are deducted from this amount.
|
|
Term
of two years following separation from service. Pays 120 monthly payments,
each in an amount equal to the greatest annual cash compensation (including
base salary and bonus) paid in any of the last three calendar years of
employment preceding separation from service, divided by 48.
|
|
96
monthly payments equal to the greater of $4,166.67 or the executives average
annual base salary for the highest three-year period ending at his normal
retirement date divided by 48.(2)
|
|
|
|
|
|
|
|
Chairman
and Chief Executive Officer
|
|
Lesser
of Net Amount at Risk(1) and two times the sum of the annual salary for the
most recent full year of employment plus the greatest bonus amount paid in
any of the last three full years of employment. If death occurs prior to
separation from the Bank, any amounts owed under the SERP and the
Non-Competition Agreement are deducted from this amount.
|
|
N/A
|
|
180
monthly payments equal to the executives average annual base salary for the
highest three-year period ending at his normal retirement date divided by
48.(3)
|
(1)
Net Amount at
Risk is the difference between the cash surrender value of the insurance policy
and the death benefit payable under the policy at the time of death.
(2)
The amount shown
assumes termination of employment on or after normal retirement date for a
reason other than death. This SERP arrangement also contains (i) an early
retirement benefit that vests after ten years of service and pays an amount
equal to the accrued benefit at the time of retirement divided by 96, (ii) a
disability benefit which pays an amount equal to the accrued balance at the
time of disability divided by 96, and (iii) a change in control benefit which
pays the greater of the present value of the normal retirement benefit or the
accrued benefit preceding the change in control. The early retirement and disability benefits
are payable over eight years. The change in control payment is to be made in
one lump sum within 30 days of the later of termination of employment or change
in control.
(3)
The amount shown
assumes termination of employment on or after normal retirement date for a
reason other than death. This SERP arrangement also contains (i) an early
retirement benefit that vests after ten years of service and pays an amount
equal to the accrued benefit at the time of retirement, (ii) a disability
benefit which pays an amount equal to the accrued balance at the time of
disability, and (iii) a change in control benefit which pays the greater of the
present value of the normal retirement benefit or the accrued benefit preceding
the change in control. The early
retirement and disability benefits are payable over 15 years. The change in control payment is to be made
in one lump sum within 30 days of the later of termination of employment or
change in control.
The Bank also provides
split dollar life insurance plans for its top 30 paid employees. These plans
generally provide a death benefit of up to 1.5 times annual base salary. The Bank owns the cash surrender value of
each policy and, by way of a split dollar arrangement, has agreed to endorse a
portion of the death benefit over to the name beneficiary. Since the Bank has
no direct benefit obligation to these officers, no such accruals have been made
in the Corporations financial statements.
F-18
Table of Contents
NOTE
9 INCOME TAXES
Income tax expense
(benefit) recognized in the years ended December 31, 2009, 2008 and 2007 was
made up of current and deferred federal and state tax amounts as shown below:
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Current
federal
|
|
$
|
(372
|
)
|
$
|
(3,466
|
)
|
$
|
2,897
|
|
Current
state
|
|
18
|
|
(14
|
)
|
338
|
|
Deferred
federal
|
|
(2,354
|
)
|
7,789
|
|
369
|
|
Deferred
state
|
|
(730
|
)
|
463
|
|
39
|
|
Change
in valuation allowance
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,407
|
)
|
$
|
4,772
|
|
$
|
3,643
|
|
The tax effect of each
type of temporary difference that results in net deferred tax assets and liabilities
is as follows:
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
Assets
|
|
|
|
|
|
Allowance
for loan losses
|
|
$
|
7,624
|
|
$
|
4,852
|
|
Nonaccrual
loan interest
|
|
1,013
|
|
337
|
|
Net
deferred loan fees
|
|
434
|
|
556
|
|
Federal
net operating loss carryforward
|
|
7,472
|
|
778
|
|
State
net operating loss carryforward
|
|
343
|
|
|
|
Depreciation
|
|
827
|
|
418
|
|
AMT
credit carryforward
|
|
294
|
|
428
|
|
Unrealized
loss on securities
|
|
795
|
|
|
|
Other
|
|
592
|
|
280
|
|
Total
deferred tax assets
|
|
19,394
|
|
7,649
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Tax
leases
|
|
(22,133
|
)
|
(13,176
|
)
|
Unrealized
(gain) loss on securities
|
|
|
|
(495
|
)
|
FASB
ASC 860 income adjustments
|
|
(1,229
|
)
|
(2,243
|
)
|
Other
|
|
(353
|
)
|
(430
|
)
|
Total
deferred tax asset (liability)
|
|
(23,715
|
)
|
(16,344
|
)
|
|
|
|
|
|
|
Valuation
allowance
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
Net
deferred tax asset (liability)
|
|
$
|
(4,352
|
)
|
$
|
(8,695
|
)
|
F-19
Table of Contents
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)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Tax
expense at statutory rate
|
|
$
|
(3,055
|
)
|
$
|
4,259
|
|
$
|
3,583
|
|
State
income tax effect
|
|
(470
|
)
|
296
|
|
249
|
|
Other
|
|
87
|
|
217
|
|
(189
|
)
|
Valuation
allowance
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$
|
(3,407
|
)
|
$
|
4,772
|
|
$
|
3,643
|
|
The Corporation had no
unrecognized tax benefits as of December 31, 2009, 2008, and 2007. No significant increase is 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
December 31, 2009, 2008, and 2007.
The Corporation and its
subsidiaries 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
2006.
The Corporation has a
federal net operating loss carryforward of $22.0 million that will begin to
expire in 2028, if not previously utilized.
The Corporation has a
state net operating loss carryforward of approximately $7.9 million, which is
comprised of (i) a Tennessee NOL of approximately $6.6 million, which will
expire in 2024, if not previously utilized, (ii) a Minnesota NOL of
approximately $371,000, which will expire in 2024, if not previously utilized, (iii)
an Alabama NOL of approximately $136,000, which will expire in 2017, if not
previously utilized, and (iv) a Georgia NOL of approximately $740,000, which
will expire in 2029, if not previously utilized.
The Corporation has a
federal alternative minimum tax credit carryforward of approximately $294,000
that will not expire, and a federal general business tax credit of approximately
$47,000 that will begin to expire in 2026, if not previously utilized.
The Bank has a Georgia Form
900 credit carryforward of approximately $12,000 that will expire in 2014, if
not previously utilized.
NOTE 10 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.
The following table
reflects financial instruments for which contract amounts represented credit
risk as of December 31, for the following years:
|
|
2009
|
|
2008
|
|
|
|
Fixed
|
|
Variable
|
|
Fixed
|
|
Variable
|
|
(Dollars
in thousands)
|
|
Rate
|
|
Rate
|
|
Rate
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
$
|
23,457
|
|
$
|
71,800
|
|
$
|
39,529
|
|
$
|
137,950
|
|
Standby
letters of credit and financial guarantees
|
|
|
|
9,106
|
|
|
|
12,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
Table of Contents
Commitments to make loans
are generally made for periods of one year or less. The fixed rate loan
commitments had interest rates ranging from 3.25% to 11% and maturities ranging
from two months to five years at December 31, 2009.
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.
Because 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 guarantees a
lease for a commercial airline company. The value of the guarantee is
$4,427,000 at December 31, 2009 and 2008, respectively, and is included in the
table above.
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 above in Note 3.
The Corporation is party
to proceedings arising from the 2008 termination of its former Chief Financial
Officer (the Plaintiff). Those proceedings include a complaint with the
United States Department of Labor (the SOX complaint) filed by the Plaintiff
under the Sarbanes-Oxley Act of 2002 (SOX), and a lawsuit in the United
States District Court for the Middle District of Tennessee. The Corporation has brought a counter-claim
against the Plaintiff that he engaged in misfeasance and malfeasance as the
Corporations Chief Financial Officer, in breach of his fiduciary duty as an
officer of the Corporation under Tennessee law.
In 2009, the Department
of Labor (the DOL) indicated that it will likely issue a preliminary order on
the SOX Complaint finding probable cause that the Corporation placed the
Plaintiff on administrative leave and subsequently discharged him in retaliation
for engaging in protected activity under SOX. The Corporation has objected to
the issuance of a preliminary order and the DOL has not opined with respect to
those objections. If the DOL issues an
adverse preliminary order, then the Corporation intends to appeal any such
finding through the DOLs administrative review process.
The Corporation denies
any liability to the Plaintiff or violation of any law, contract or otherwise
and intends to contest all matters brought by the Plaintiff vigorously. It is
not possible at this time to determine the ultimate amount of liability
incurred, if any. Therefore, no accrual has been made in the financial
statements.
NOTE
11 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 2009, 2008 or 2007.
NOTE
12 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. Based solely on analysis of
federal banking regulatory categories, on December 31, 2009 and 2008 the
Corporation and the Bank both fall within the well capitalized categories
under the regulations.
F-21
Table of Contents
As a result of a recently
completed routine bank examination, the Banks management expects the examiners
to recommend an informal corrective action for the Bank. On the basis of
earlier discussions with these examiners, the board of the Bank voluntarily
determined in October 2009 to adopt certain measures proactively to reduce risk
and strengthen the capital position of the Bank. These measures addressed
capital adequacy and preservation, asset growth and funding sources. Based on
these discussions and the current economic environment, it is managements
intent to take steps to increase the Banks capital ratios and reduce credit
and funding risk. Management is in the process of finalizing the appropriate
levels for these and other measures with the FDIC and the Tennessee Department
of Financial Institutions. The board of directors and management of the Company
and the Bank are committed to addressing and resolving any issues that might be
raised in an informal corrective action, if and when issued.
The Bank and the
Corporations capital amounts and ratios at December 31, 2009 and 2008 were 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
132,580
|
|
10.63
|
%
|
$
|
99,778
|
|
8.0
|
%
|
$
|
124,723
|
|
10.0
|
%
|
Corporation
|
|
$
|
135,809
|
|
10.83
|
%
|
$
|
100,320
|
|
8.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 to risk-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
116,934
|
|
9.37
|
%
|
$
|
49,918
|
|
4.0
|
%
|
$
|
74,878
|
|
6.0
|
%
|
Corporation
|
|
$
|
120,078
|
|
9.57
|
%
|
$
|
50,269
|
|
4.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 leverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
116,934
|
|
8.74
|
%
|
$
|
53,517
|
|
4.0
|
%
|
$
|
66,896
|
|
5.0
|
%
|
Corporation
|
|
$
|
120,078
|
|
8.93
|
%
|
$
|
53,186
|
|
4.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
120,746
|
|
11.01
|
%
|
$
|
87,716
|
|
8.0
|
%
|
$
|
109,645
|
|
10.0
|
%
|
Corporation
|
|
$
|
136,900
|
|
12.42
|
%
|
$
|
88,207
|
|
8.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 to risk-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
107,292
|
|
9.79
|
%
|
$
|
43,858
|
|
4.0
|
%
|
$
|
65,787
|
|
6.0
|
%
|
Corporation
|
|
$
|
123,446
|
|
11.20
|
%
|
$
|
44,103
|
|
4.0
|
%
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 leverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
$
|
107,292
|
|
9.26
|
%
|
$
|
46,359
|
|
4.0
|
%
|
$
|
57,949
|
|
5.0
|
%
|
Corporation
|
|
$
|
123,446
|
|
10.62
|
%
|
$
|
46,473
|
|
4.0
|
%
|
n/a
|
|
|
|
NOTE
13 STOCK COMPENSATION
The purpose of the
Corporations 2007 Equity Plan (the Plan) is to provide financial incentives
for selected employees and non-employee directors, thereby promoting the
long-term growth and financial success of the Corporation by (a) attracting and
retaining employees and non-employee directors of outstanding ability, (b) strengthening
the Corporations capability to develop, maintain, and direct a competent
management team, (c) providing an effective means for selected employees and
non-employee directors to acquire and maintain ownership of the Corporations
common stock, (d) motivating employees to achieve long-range performance goals
and objectives, and (e) providing incentive compensation opportunities
competitive with peer financial institution holding companies. Unless earlier
terminated by the Board, the Plan will terminate on the tenth anniversary of
its effective date, or June 8, 2017.
F-22
Table of Contents
The
weighted-average fair value of stock options granted during 2009, 2008 and 2007
estimated using the Black-Scholes valuation model, was $2.57, $4.45 and $5.75.
The historical volatility is annualized standard deviation of the differences
in the natural logarithms of the possible future stock price. The assumptions
used to determine the fair value of options granted are detailed in the table
below.
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
0.30
|
%
|
3.27
|
%
|
4.94
|
%
|
Expected
option life
|
|
10 years
|
|
3.5 years
|
|
3.5 years
|
|
Dividend
yield
|
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
Volatility
|
|
45.0
|
%
|
20.0
|
%
|
20.0
|
%
|
A summary of the activity
related to stock options is as follows:
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
|
833,070
|
|
$
|
13.49
|
|
798,570
|
|
$
|
13.14
|
|
871,092
|
|
$
|
8.78
|
|
Options
granted
|
|
200,000
|
|
6.01
|
|
150,000
|
|
22.15
|
|
200,000
|
|
25.00
|
|
Options
exercised
|
|
|
|
|
|
(7,500
|
)
|
5.00
|
|
(272,522
|
)
|
7.91
|
|
Options
forfeited or expired
|
|
(167,250
|
)
|
6.90
|
|
(108,000
|
)
|
23.47
|
|
|
|
|
|
Outstanding
at end of year
|
|
865,820
|
|
$
|
13.66
|
|
833,070
|
|
$
|
13.49
|
|
798,570
|
|
$
|
13.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
|
700,620
|
|
|
|
669,470
|
|
|
|
638,570
|
|
|
|
At December 31, 2009,
options outstanding had a weighted average remaining contractual term of 4.50
years and an aggregate intrinsic value of $(8,043,000). At December 31, 2008,
options exercisable had a weighted average remaining contractual term of 3.64
years and an aggregate intrinsic value of $(5,743,000). During the years ended December
31, 2009, 2008 and 2007, the aggregate intrinsic value of options exercised
under the Corporations stock option plans was $0, $136,275 and $5,404,895,
respectively. Of the options to purchase 200,000 shares of common stock granted
in 2009, 150,000 were forfeited, and none vested, leaving 50,000 shares
unvested as of December 31, 2009. The
fair value of shares vested during 2009, 2008 and 2007 were approximately
$254,000, $351,000 and $117,000, respectively.
Stock-based compensation
expense totaled $335,000 in 2009, $289,000 in 2008 and $259,000 in 2007.
Stock-based compensation expense is recognized ratably over the requisite
service period for all awards. Unrecognized stock-based compensation expense
related to non-vested stock options totaled $427,197 at December 31, 2009. At
such date, the weighted-average period over which this unrecognized expense was
expected to be recognized was 1.43 years.
A summary of the weighted
average grant date fair value of options vested during 2009 is as follows:
|
|
|
|
Outstanding
at
|
|
|
|
|
|
|
|
Outstanding
at
|
|
|
|
|
|
Exercise
|
|
January
1,
|
|
|
|
|
|
|
|
December
31,
|
|
Fair
Value
|
|
|
|
Price
|
|
2009
|
|
Granted
|
|
Forfeited
|
|
Vested
|
|
2009
|
|
Price
|
|
|
|
$
|
25.00
|
|
90.000
|
|
|
|
|
|
30,000
|
|
60,000
|
|
$
|
5.75
|
|
|
|
$
|
22.15
|
|
73,600
|
|
|
|
|
|
18,400
|
|
55,200
|
|
$
|
4.45
|
|
|
|
$
|
6.50
|
|
|
|
50,000
|
|
|
|
|
|
50,000
|
|
$
|
3.45
|
|
|
|
$
|
5.85
|
|
|
|
150,000
|
|
(150,000
|
)
|
|
|
|
|
$
|
2.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,600
|
|
200,000
|
|
(150,000
|
)
|
48,400
|
|
165,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value
|
|
|
|
$
|
5.17
|
|
$
|
2.57
|
|
$
|
2.28
|
|
$
|
5.26
|
|
$
|
4.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
Table of Contents
Options outstanding at
year-end 2009 were as follows:
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
|
|
Average
|
|
Exercise
|
|
|
|
Contractual
|
|
|
|
Exercise
|
|
Prices
|
|
Number
|
|
Life
|
|
Number
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
$5.00
|
|
163,820
|
|
0.04 years
|
|
163,820
|
|
$
|
5.00
|
|
$7.50
|
|
95,000
|
|
3.14 years
|
|
95,000
|
|
$
|
7.50
|
|
$10.50
|
|
211,000
|
|
3.67 years
|
|
211,000
|
|
$
|
10.50
|
|
$16.00
|
|
44,000
|
|
5.50 years
|
|
44,000
|
|
$
|
16.00
|
|
$25.00
|
|
150,000
|
|
7.46 years
|
|
90,000
|
|
$
|
25.00
|
|
$21.00
|
|
60,000
|
|
4.06 years
|
|
60,000
|
|
$
|
21.00
|
|
$22.15
|
|
92,000
|
|
8.03 years
|
|
36,800
|
|
$
|
22.15
|
|
$6.50
|
|
50,000
|
|
9.42 years
|
|
|
|
$
|
|
|
Outstanding
at year-end
|
|
865,820
|
|
4.50 years
|
|
700,620
|
|
$
|
12.53
|
|
A summary of the
activity related to restricted stock is as follows:
|
|
Number
|
|
Shares
of restricted stock outstanding at December 31, 2008
|
|
10,079
|
|
Shares
of restricted stock issued
|
|
9,232
|
|
Restrictions
lapsed and shares released
|
|
(11,248
|
)
|
Shares
of restricted stock forfeited or expired
|
|
|
|
Restricted
stock-based awards outstanding at December 31, 2009
|
|
8,063
|
|
|
|
|
|
Restricted
stock-based awards outstanding and expected to vest at December 31, 2009
|
|
8,063
|
|
In June of 2009, four
members of the board of directors who were also executive officers received an
aggregate of 9,232 shares of restricted stock that were expensed as if subject
to a six-month vesting period; each of the remaining five directors received
options to purchase 10,000 shares of commons stock, with an exercise price of
$6.50.
NOTE
14 FAIR VALUES OF FINANCIAL INSTRUMENTS
The methods and
assumptions used to estimate fair value are described as follows:
FASB
ASC 820 requires disclosure of the fair value of financial assets and financial
liabilities, including those financial assets and financial liabilities that
are not measured and reported at fair value on a recurring basis or
nonrecurring basis. A detailed description of the valuation methodologies used
in estimating the fair value of financial instruments is set forth in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2009.
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.
F-24
Table of Contents
The estimated fair values
of the Banks financial instruments at December 31, 2009 and 2008 were as
follows:
|
|
2009
|
|
2008
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
(Dollars
in thousands)
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Financial
assets
|
|
|
|
|
|
|
|
|
|
Cash
and due from financial institutions
|
|
$
|
22,864
|
|
$
|
22,864
|
|
$
|
5,260
|
|
$
|
5,260
|
|
Federal
funds sold
|
|
15,010
|
|
15,010
|
|
35,538
|
|
35,538
|
|
Securities
available for sale
|
|
93,668
|
|
93,668
|
|
101,290
|
|
101,290
|
|
Loans,
net
|
|
1,151,388
|
|
1,250,425
|
|
1,023,271
|
|
1,114,151
|
|
Accrued
interest receivable
|
|
9,711
|
|
9,711
|
|
8,115
|
|
8,115
|
|
Income
tax receivable
|
|
68
|
|
68
|
|
4,430
|
|
4,430
|
|
Bank-owned
life insurance
|
|
25,673
|
|
25,673
|
|
|
|
|
|
Restricted
equity securities
|
|
2,169
|
|
2,169
|
|
1,685
|
|
1,685
|
|
Financial
liabilities
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,242,542
|
|
$
|
1,263,535
|
|
$
|
1,069,143
|
|
$
|
1,106,907
|
|
Accrued
interest payable
|
|
1,430
|
|
1,430
|
|
3,315
|
|
3,315
|
|
Accrued
dividends payable
|
|
187
|
|
187
|
|
|
|
|
|
Short
term borrowings
|
|
14,000
|
|
14,000
|
|
10,000
|
|
10,000
|
|
Subordinated
long-term debt
|
|
23,198
|
|
23,175
|
|
23,198
|
|
24,897
|
|
The Bank has an
established process for determining fair values of the financial instruments,
in accordance with FASB ASC 820. 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; and
·
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
management 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.
F-25
Table of Contents
Valuation
Hierarchy
FASB ASC 820 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, and
·
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.
Assets
Securities
Available for Sale -
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 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 12 months ended December 31, 2009, all of the Banks available-for-sale
securities were valued using matrix pricing and were classified within Level 2
of the valuation hierarchy.
Servicing
Assets -
All
separately recognized servicing assets and servicing liabilities are initially
measured at fair value. Subsequent measurement methods include the amortization
method, whereby servicing assets or servicing liabilities are amortized over
the period of estimated net servicing income or net servicing loss, or the fair
value method, whereby servicing assets or servicing liabilities are measured at
fair value at each reporting date and changes in fair value are reported in
earnings in the period in which they occur. Because of the unique nature of the
Banks servicing assets, quoted market prices may not be available. If no quoted market prices are available, the
amortization method is used. The Bank
assesses servicing assets or servicing liabilities for impairment or increased
obligation based on the fair value at each reporting date. At December 31, 2009, the Bank had servicing
assets measured at fair value on a recurring basis classified within Level 3 of
the valuation hierarchy.
Interest-Only
Strips -
When the
Bank sells loans to others, it may hold interest-only strips, which is an
interest that continues to be held by the transferor in the securitized
receivable. It may also retain servicing
assets or assume servicing liabilities that are initially measured at fair
value. Gain or loss on sale of the
receivables depends in part on both (a) the previous carrying amount of the
financial assets involved in the transfer, allocated between the assets sold
and the interests that continue to be held by the transferor based on their
relative fair value at the date of transfer, and (b) the proceeds received. To obtain fair values, quoted market prices
are used if available. Quotes are generally
not available for interests that continue to be held by the transferor, so the
Bank generally estimates fair value based on the future expected cash flows
estimated using managements best estimates of the key assumptions credit
losses and discount rates commensurate with the risks involved. At December 31,
2009, the Bank had interest-only strips measured at fair value on a recurring
basis classified within Level 3 of the valuation hierarchy.
F-26
Table of Contents
Impaired
Loans
A loan is
considered to be impaired when it is probable the Bank will be unable to
collect all principal and interest payments due in accordance with the
contractual terms of the loan agreement. Individually identified impaired loans
are measured based on the present value of expected payments using the loans
original effective rate as the discount rate, the loans observable market
price, or the fair value of the collateral if the loan is collateral dependent.
If the recorded investment in the
impaired loan exceeds the measure of fair value, a valuation allowance may be
established as a component of the allowance for loan losses. At December 31, 2009, the Bank had impaired
loans measured on a nonrecurring basis classified within Level 3 of the
valuation hierarchy.
Inventory
Repossessed
assets are resold at retail prices as soon as practicable. If a repossession of the Bank is not resold
within the six month holding period allowed by Tennessee law, it is purchased
by TCB, held as inventory and carried at fair market value. The sole purpose of TCB is the resale of
assets repossessed by the Bank. At December 31, 2009, TCB had inventory
measured at fair value on a nonrecurring basis classified within Level 3 of the
valuation hierarchy.
Other
Assets
Included
in other assets are certain assets carried at fair value, including
repossessions and other real estate owned (OREO). The carrying amount is
based on an observable market price or appraisal value. The Bank reflects these
assets within Level 3 of the valuation hierarchy. At December 31, 2009, the
Bank had repossessions and OREO measured at fair value on a nonrecurring basis
classified within Level 3 of the valuation hierarchy.
Bank-Owned
Life Insurance
The Bank also includes bank owned life insurance (BOLI) within other assets,
carried at book value. At December 31, 2009, the Bank had BOLI measured at fair
value on a recurring basis classified within Level 3 of the valuation
hierarchy.
Liabilities
Recourse
Obligations
The
maximum extent of the Banks recourse obligations on loans transferred is 10%
of the amount transferred adjusted for any early payoffs or terminations, based
on the Banks payment history on loans of the type transferred. At December 31,
2009, the Bank had recourse obligations measured at fair value on a recurring
basis classified within Level 3 of the valuation hierarchy.
The following table
presents the financial instruments carried at fair value as of December 31,
2009, by caption on the consolidated balance sheets and by FASB ASC 820
valuation hierarchy (as described above) (dollars in thousands):
Assets
and liabilities measured at fair value on a recurring basis as of December 31,
2009
|
|
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)
|
|
Securities
available for sale
|
|
$
|
93,668
|
|
$
|
|
|
$
|
93,668
|
|
$
|
|
|
Servicing
assets
|
|
80
|
|
|
|
|
|
80
|
|
Interest-only
strips
|
|
2,796
|
|
|
|
|
|
2,796
|
|
BOLI
|
|
25,673
|
|
|
|
|
|
25,673
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
122,217
|
|
$
|
|
|
$
|
93,668
|
|
$
|
28,549
|
|
|
|
|
|
|
|
|
|
|
|
Recourse
obligations
|
|
317
|
|
|
|
|
|
317
|
|
Total liabilities at fair value
|
|
$
|
317
|
|
$
|
|
|
$
|
|
|
$
|
317
|
|
F-27
Table of Contents
The Corporation may be
required, from time to time, to measure certain assets at fair value on a
nonrecurring basis in accordance with generally accepted accounting principles.
These include assets that are measured at the lower of cost or market that were
recognized at fair value below the cost at the end of the period. The following
table presents the financial instruments carried at fair value as of December 31,
2009, by caption on the consolidated balance sheets and by FASB ASC 820
valuation hierarchy (as described above) (dollars in thousands):
Assets
and liabilities measured at fair value on a nonrecurring basis as of December 31,
2009
|
|
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)
|
|
Impaired
loans
|
|
$
|
41,093
|
|
$
|
|
|
$
|
|
|
$
|
41,093
|
|
Inventory
|
|
9,782
|
|
|
|
|
|
9,782
|
|
Other
Assets
|
|
27,983
|
|
|
|
|
|
27,983
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
78,858
|
|
$
|
|
|
$
|
|
|
$
|
78,858
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Changes
in Level 3 Fair Value Measurements
The table below includes
a roll-forward of the balance sheet amounts for 2009 (including the change in
fair value) for financial instruments classified by the Bank within Level 3 of
the valuation hierarchy for assets and liabilities measured at fair value on a
recurring basis. When a determination is made to classify a financial
instrument within Level 3 of the valuation hierarchy, the determination is
based upon the significance of the unobservable factors to the overall fair
value measurement. Because, Level 3 financial instruments typically include, in
addition to the unobservable or Level 3 components, observable components (that
is, components that are actively quoted and can be validated to external sources),
the gains and losses in the table below include changes in fair value due in
part to observable factors that are part of the valuation methodology.
Twelve months
ended December 31, 2009 (in thousands)
|
|
Assets
|
|
Liabilities
|
|
Fair
value, January 1, 2009
|
|
$
|
5,460
|
|
$
|
444
|
|
Total
realized and unrealized (gains) losses included in income
|
|
(3,865
|
)
|
121
|
|
Purchases,
issuances and settlements, net
|
|
26,954
|
|
(248
|
)
|
Transfers
in and/or out of level 3
|
|
|
|
|
|
Fair
value, December 31, 2009
|
|
$
|
28,549
|
|
$
|
317
|
|
Total
unrealized gains included in income related to financial assets and
liabilities still on the consolidated balance sheet at December 31, 2009
|
|
$
|
|
|
$
|
|
|
NOTE
15 EMPLOYMENT AGREEMENTS
The Bank has entered into
employment agreements with three executive officers that have a term of two
years and are automatically renewable each day during their term for one
additional day so that the term of each is always two years, unless and until
either the Bank or the executive provides notice of its intent not to renew. In the event of a change in control of the
Bank, each executive would be entitled to receive a lump sum payment equal to
one dollar ($1) less than the amount that would constitute an excess parachute
payment, as defined in Section 280G of the Internal Revenue Code.
F-28
Table of Contents
NOTE 16 CAPITAL STOCK
The
Corporations charter authorizes 1,000,000 shares of preferred stock. 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.
Series A Preferred Stock and
Warrants
On October
3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted. On October
14, 2008, the U.S. Department of the Treasury (Treasury) announced its
intention to inject capital into nine large U.S. financial institutions under
the Troubled Asset Relief Program Capital Purchase Program (CPP) and since has injected capital into many other
financial institutions. On December 19, 2008, the Corporation entered into a
Letter Agreement with Treasury pursuant to which, among other things, the
Corporation sold to Treasury for an aggregate purchase price of $30 million,
30,000 shares of Series A Preferred Stock, par value $0.50, and a warrant to
purchase up to 461,538 shares of common stock (the Warrant), of the
Corporation. As a condition under the CPP, the Corporations share repurchases
are currently limited to purchases in connection with the administration of any
employee benefit plan, consistent with past practices, including purchases to
offset share dilution in connection with any such plans. This restriction is
effective until December 19, 2011, or until Treasury no longer owns any of the Series
A Preferred Stock.
The Series
A Preferred Stock ranks senior to the Corporations common shares. The Series A
Preferred Stock pays a compounding cumulative dividend, in cash, at a rate of
5% per annum for the first five years, and 9% per annum thereafter on the
liquidation preference of $1,000 per share. The Corporation is prohibited from
paying any dividend with respect to shares of common stock, other junior
securities or preferred stock ranking
pari passu
with the Series A Preferred Stock or repurchasing or redeeming any shares of
the Corporations common shares, other junior securities or preferred stock
ranking
pari passu
with the Series
A Preferred Stock in any quarter unless all accrued and unpaid dividends are
paid on the Series A Preferred Stock for all past dividend periods (including
the latest completed dividend period), subject to certain limited exceptions.
The Series A Preferred Stock is non-voting, other than class voting rights on
matters that could adversely affect the Series A Preferred Stock. The Series A
Preferred Stock is callable at par after three years. Prior to the end of three
years, the Series A Preferred Stock may be redeemed with the proceeds from one
or more qualified equity offerings of any Tier 1 perpetual preferred or common
stock (each a Qualified Equity Offering). Treasury may also transfer the Series
A Preferred Stock to a third party at any time.
In
addition, the terms of the Series A Preferred Stock include a restriction
against increasing the Corporations common stock dividends from levels at the
time of the initial investment by Treasury and prevent the Corporation from
redeeming, purchasing or otherwise acquiring its common stock other than for
certain stated exceptions. Historically, the Corporation has paid no dividends
on its common stock. Therefore, the Corporation would have to seek Treasurys
consent to pay any dividends on shares of Corporation common stock. These
restrictions will terminate on the earlier of the third anniversary of the date
of issuance of the Series A Preferred Stock to Treasury and the date on which
the Series A Preferred Stock issued to Treasury has been redeemed in whole or
Treasury has transferred all of its Series A Preferred Stock to third parties. In addition, the Corporation will be unable to
declare or pay dividends or distributions on, or repurchase, redeem or
otherwise acquire for consideration, shares of its common stock or other stock
ranking junior to, or in parity with, the Series A Preferred Stock if the
Corporation fails to declare and pay full dividends (or declare and set aside a
sum sufficient for payment thereof) on its Series A Preferred Stock.
The Series
A Preferred Stock qualifies as Tier 1 capital in accordance with regulatory
capital requirements.
Warrant
The Warrant has a term of ten years and
is exercisable at any time, in whole or in part, at an exercise price of $9.75
per share (subject to certain anti-dilution adjustments). Based on the Black
Scholes options pricing model, the Warrant has been assigned a fair value of
$1.2 million in the aggregate, as of December 19, 2008. Treasury may not
exercise the Warrant for, or transfer the Warrant with respect to, more than
half of the initial shares of common stock underlying the Warrant prior to the
earlier of (i) the date on which the Corporation receives aggregate gross
proceeds of not less than $30 million from one or more Qualified Equity
Offerings and (ii) December 31, 2009. The number of shares of common stock to
be delivered upon settlement of the Warrant will be reduced by 50% if the
Corporation receives aggregate gross proceeds of at least 100% of the aggregate
liquidation preference of the Series A Preferred Stock ($30 million) from one
or more Qualified Equity Offerings prior to December 31, 2009.
Stock Issuance:
Effective as of December 18, 2009, in
connection with the Corporations Registration Statement on Form S-3
(Registration No. 333-160712), the Corporation sold 788,924 shares of
Corporation common stock to non-affiliates of the Corporation at a price of
$3.63
per share and 114,500
shares of Corporation common stock to affiliates of the
Corporation at a price of $3.65
per
share. The common stock was offered without a placement agent, underwriter, broker
or dealer. The net proceeds of the offering to the Corporation were
approximately $3.3 million. The Corporation intends to use the net proceeds
from the offering for general corporate purposes.
F-29
Table of Contents
NOTE
17 PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial
information of the Corporation follows:
CONDENSED
BALANCE SHEETS
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,873
|
|
$
|
17,427
|
|
Investment
in banking subsidiary
|
|
122,279
|
|
115,010
|
|
Other
|
|
3,591
|
|
2,782
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
129,743
|
|
$
|
135,219
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
Interest
payable
|
|
$
|
66
|
|
$
|
24
|
|
Dividend
payable
|
|
187
|
|
|
|
Other
short term payables
|
|
10,000
|
|
10,250
|
|
Subordinated
long term debt
|
|
23,198
|
|
23,198
|
|
Shareholders
equity
|
|
96,292
|
|
101,747
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
129,743
|
|
$
|
135,219
|
|
CONDENSED
STATEMENTS OF INCOME
|
|
For
Years ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Dividend
and interest income
|
|
$
|
43
|
|
$
|
69
|
|
$
|
17
|
|
Management
fee
|
|
698
|
|
|
|
|
|
Interest
expense
|
|
(1,890
|
)
|
(1,487
|
)
|
(632
|
)
|
Non-interest
expense
|
|
(1,998
|
)
|
(2,508
|
)
|
(1,261
|
)
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
(3,147
|
)
|
(3,926
|
)
|
(1,876
|
)
|
Income
tax expense
|
|
1,212
|
|
1,388
|
|
696
|
|
Equity
in undistributed subsidiary (loss) income
|
|
(3,643
|
)
|
10,292
|
|
8,076
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
(5,578
|
)
|
7,754
|
|
6,896
|
|
|
|
|
|
|
|
|
|
CPP
Preferred dividends
|
|
(1,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders
|
|
$
|
(7,124
|
)
|
$
|
7,754
|
|
$
|
6,896
|
|
F-30
Table of Contents
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
For
Years ended December 31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net(loss)
income
|
|
$
|
(5,578
|
)
|
$
|
7,754
|
|
$
|
6,896
|
|
Adjustments:
|
|
|
|
|
|
|
|
Change
in other assets and liabilities
|
|
(1,018
|
)
|
(8,677
|
)
|
(25
|
)
|
Equity
in undistributed subsidiary income
|
|
3,643
|
|
(10,292
|
)
|
(8,076
|
)
|
Stock
option expense
|
|
335
|
|
289
|
|
259
|
|
Proceeds
from dividend paid by subsidiary
|
|
1,000
|
|
|
|
|
|
Net
cash used by operating activities
|
|
(1,618
|
)
|
(10,926
|
)
|
(946
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Investments
in subsidiaries
|
|
(14,000
|
)
|
(20,303
|
)
|
(15,990
|
)
|
|
|
|
|
|
|
|
|
Net
cash used by investing activities
|
|
(14,000
|
)
|
(20,303
|
)
|
(15,990
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from long-term subordinated debt
|
|
|
|
14,950
|
|
|
|
Proceeds
from issuance of common stock
|
|
3,338
|
|
|
|
|
|
Preferred
stock dividend
|
|
(1,359
|
)
|
|
|
|
|
Warrant
accretion expense
|
|
85
|
|
|
|
|
|
Purchase
of capital securities of unconsolidated subsidiary
|
|
|
|
(450
|
)
|
|
|
Proceeds
from issuance of preferred stock and common stock warrant
|
|
|
|
30,000
|
|
|
|
Proceeds
from exercise of stock options and excess tax benefit
|
|
|
|
379
|
|
4,405
|
|
Proceeds
from issuance of short-term debt
|
|
|
|
3,000
|
|
7,000
|
|
Net
cash provided by financing activities
|
|
2,064
|
|
47,879
|
|
11,405
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
(13,554
|
)
|
16,650
|
|
(5,531
|
)
|
|
|
|
|
|
|
|
|
Beginning
cash and cash equivalents
|
|
17,427
|
|
777
|
|
6,308
|
|
|
|
|
|
|
|
|
|
Ending
cash and cash equivalents
|
|
$
|
3,873
|
|
$
|
17,427
|
|
$
|
777
|
|
NOTE
18 EARNINGS PER SHARE
The factors used in the
earnings per share computation follow:
(Dollars
in thousands except share data)
|
|
2009
|
|
2008
|
|
2007
|
|
Basic
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(7,124
|
)
|
$
|
7,754
|
|
$
|
6,896
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
4,738,638
|
|
4,731,204
|
|
4,613,342
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
$
|
(1.50
|
)
|
$
|
1.64
|
|
$
|
1.49
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(7,124
|
)
|
$
|
7,754
|
|
$
|
6,896
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding for basic earnings per common share
|
|
4,738,638
|
|
4,731,204
|
|
4,613,342
|
|
Add:
Dilutive effects of assumed exercises of stock options
|
|
|
|
120,861
|
|
278,825
|
|
|
|
|
|
|
|
|
|
Average
shares and dilutive potential common shares
|
|
4,738,638
|
|
4,852,065
|
|
4,892,167
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per common share
|
|
$
|
(1.50
|
)
|
$
|
1.60
|
|
$
|
1.41
|
|
For 2007, vested options
to purchase 40,000 shares at a strike price of $25.00 were anti-dilutive and
were excluded from the calculation of diluted earnings per share. For 2008,
vested options to purchase 439,250 shares and 461,538 warrants were
anti-dilutive. For 2009, all vested options and all warrants were anti-dilutive
because the exercise prices thereof exceeded the fair market value of the
Corporations common stock at December 31, 2009.
F-31
Table of Contents
NOTE 19 TRUST PREFERRED SECURITIES
In March
2005, the Corporation formed a financing subsidiary, Tennessee Commerce
Statutory Trust I, a Delaware statutory trust (Trust I). In March 2005, Trust
I issued and sold 8,000 of Trust Is 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
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 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 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 Trust I.
In June
2008, Tennessee Commerce Statutory Trust II, a Delaware statutory trust (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 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 Trust II.
NOTE
20 QUARTERLY FINANCIAL RESULTS (UNAUDITED)
A summary of selected
consolidated quarterly financial data for the years ended December 31, 2009 and
2008 follows:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
(In thousands
except share data)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
2009
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
19,456
|
|
$
|
19,907
|
|
$
|
20,642
|
|
$
|
21,103
|
|
Net
interest income
|
|
9,840
|
|
10,451
|
|
11,424
|
|
13,201
|
|
Provision
for loan losses
|
|
8,514
|
|
13,125
|
|
5,250
|
|
4,150
|
|
Income
(loss) before taxes
|
|
(3,580
|
)
|
(10,620
|
)
|
2,508
|
|
2,707
|
|
Net
(loss) income
|
|
(2,216
|
)
|
(6,549
|
)
|
1,536
|
|
1,651
|
|
CPP
preferred dividends
|
|
(444
|
)
|
(352
|
)
|
(375
|
)
|
(375
|
)
|
Net
(loss) income available to common shareholders
|
|
(2,660
|
)
|
(6,901
|
)
|
1,161
|
|
1,276
|
|
Basic
earnings per share
|
|
$
|
(0.56
|
)
|
$
|
(1.46
|
)
|
$
|
0.25
|
|
$
|
0.27
|
|
Diluted
earnings per share
|
|
$
|
(0.56
|
)
|
$
|
(1.46
|
)
|
$
|
0.25
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
17,486
|
|
$
|
18,429
|
|
$
|
19,756
|
|
$
|
20,307
|
|
Net
interest income
|
|
7,462
|
|
8,396
|
|
9,274
|
|
9,819
|
|
Provision
for loan losses
|
|
1,600
|
|
2,340
|
|
1,850
|
|
3,321
|
|
Income
before taxes
|
|
2,245
|
|
3,009
|
|
3,076
|
|
4,196
|
|
Net
income
|
|
1,375
|
|
1,846
|
|
1,886
|
|
2,647
|
|
Basic
earnings per share
|
|
$
|
0.29
|
|
$
|
0.39
|
|
$
|
0.40
|
|
$
|
0.56
|
|
Diluted
earnings per share
|
|
$
|
0.28
|
|
$
|
0.38
|
|
$
|
0.39
|
|
$
|
0.55
|
|
F-32
Table of Contents
INDEX
TO EXHIBITS
Exhibit
No.
|
|
Description
|
|
|
|
3.1
|
|
Charter of
Tennessee Commerce Bancorp, Inc., as amended(1)
|
3.2
|
|
Bylaws of
Tennessee Commerce Bancorp, Inc.(2)
|
3.3
|
|
Amendment to
Bylaws of Tennessee Commerce Bancorp, Inc.(3)
|
4.1
|
|
Shareholders
Agreement(2)
|
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(5)
|
4.5
|
|
Guarantee
Agreement, dated as of June 20, 2008, between Tennessee Commerce Bancorp, Inc.
and Wilmington Trust Company(5)
|
4.6
|
|
Form of
Certificate of Series A Preferred Stock(6)
|
4.7
|
|
Warrant for
Purchase of Shares of Common Stock, dated December 19, 2008(6)
|
10.1
|
|
Tennessee
Commerce Bancorp, Inc. Stock Option Plan - Employees(2)
|
10.2
|
|
Form of
Tennessee Commerce Bancorp, Inc. 1999 Stock Option Directors(2)
|
10.3
|
|
Form of
Tennessee Commerce Bancorp, Inc. 1999 Stock Option - Incorporators(2)
|
10.4
|
|
Form of
Tennessee Commerce Bancorp, Inc. 2003 Stock Option - Directors(2)
|
10.5
|
|
Tennessee
Commerce Bancorp, Inc. 1999 Stock Option Agreement with Arthur F. Helf(2)
|
10.6
|
|
Tennessee
Commerce Bancorp, Inc. 1999 Stock Option Agreement with Michael R. Sapp(2)
|
10.7
|
|
Tennessee
Commerce Bancorp, Inc. 1999 Stock Option Agreement with H. Lamar Cox(2)
|
10.8
|
|
Amended and
Restated Employment Agreement, dated as of May 19, 2009, between Tennessee
Commerce Bank and Michael R. Sapp(7)
|
10.9
|
|
Amended and
Restated Employment Agreement, dated as of May 19, 2009, between Tennessee
Commerce Bank and H. Lamar Cox(7)
|
10.10
|
|
Offer of
Employment, dated as of August 5, 2008, between Tennessee Commerce Bancorp, Inc.
and Frank Perez(8)
|
10.11
|
|
Tennessee
Commerce Bancorp, Inc. 2007 Equity Plan(9)
|
10.12
|
|
Letter
Agreement, dated as of December 19, 2008, between the United States
Department of the Treasury and Tennessee Commerce Bancorp, Inc.(6)
|
10.13
|
|
Tennessee
Commerce Bancorp, Inc. Form of Split Dollar Agreement(7)
|
10.14
|
|
Tennessee
Commerce Bancorp, Inc. Form of Salary Continuation Plan(7)
|
10.15
|
|
Tennessee
Commerce Bancorp, Inc. Form of Consulting and Non-Competition Agreement(7)
|
21.1
|
|
Subsidiaries*
|
23.1
|
|
Consent 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*
|
99.1
|
|
Certification
pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act
of 2008 as amended by the American Recovery and Reinvestment Act of 2009*
|
99.2
|
|
Certification
pursuant to Section 111 (b) (4) of the Emergency Economic Stabilization Act
of 2008 as amended by the American Recovery and Reinvestment Act of 2009*
|
|
(1)
|
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 November 6, 2009 and
incorporated herein by reference.
|
|
|
|
|
(2)
|
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.
|
|
|
|
|
(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.
|
Table of Contents
|
(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,
as filed with the Securities and Exchange Commission on December 23, 2008 and
incorporated herein by reference.
|
|
|
|
|
(7)
|
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 May 26, 2009, and
incorporated herein by reference.
|
|
|
|
|
(8)
|
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 August 5, 2008 and
incorporated herein by reference.
|
|
|
|
|
(9)
|
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.
|
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