8-K/A 1 f8k.txt CURRENT REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) December 27, 2006 ----------------- Transnational Financial Network, Inc. ------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) California 1-14219 94-2964195 ------------------------------------------------------------------------------- (State or other jurisdiction (Commission File (I.R.S.Employer of incorporation) Number) Identification No.) 401 Taraval Street, San Francisco, CA 94116 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code: (415) 242-7800 ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrantunder any of the following provisions: [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 9.01 Financial Statements and Exhibits (a) On October 18, 2006, the registrant issued a press release announcing it had entered into an agreement on October 10, 2006, to acquire the assets of the residential mortgage lending division of Texas Capital Bank, N.A. That acquisition was disclosed under Item 1.01 on Form 8-K dated October 18, 2006. Although the acquisition is not complete, financial statements of the entity to be acquired follow. (d) Exhibits Exhibit 23. Consent of Bedinger & Company TEXAS CAPITAL BANK, N.A. RESIDENTIAL MORTGAGE LENDING DIVISION REPORT ON AUDIT OF FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005 CONTENTS Contents Page ------------------------------------------------------------------------- Report of Independent Registered Public Accounting Firm 1 Balance Sheet 2 Statements of Operations 3 Statements of Cash Flows 4 Statements of Equity 5 Notes to Financial Statements F-1 - F-4 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors/Audit Committee Transnational Financial Network, Inc. We have audited the accompanying balance sheet of Texas Capital Bank, NA., Residential Mortgage Loan Division, as of September 30, 2006, and the related statements of operations, equity, and cash flows for the years ended September 30, 2006 and 2005, respectively. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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, based on our audit, the financial statements referred to above present fairly, in all material respects, the financial position of Texas Capital Bank, N.A., Residential Mortgage Loan Division as of September 30, 2006 and the related statements of operations, equity, and cash flows for the years ended September 30, 2006 and 2005, respectively in conformity with accounting principles generally accepted in the United States of America. Certified Public Accountants Concord, California December 21, 2006 TEXAS CAPITAL BANK, N.A. RESIDENTIAL MORTGAGE LENDING DIVISION BALANCE SHEET AS OF SEPTEMBER 30, 2006

See accompanying Notes to these financial statements. 2 TEXAS CAPITAL BANK, N.A. RESIDENTIAL MORTGAGE LENDING DIVISION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005

See accompanying Notes to these financial statements. 3 TEXAS CAPITAL BANK, N.A. RESIDENTIAL MORTGAGE LENDING DIVISION STATEMENT OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2006

See accompanying Notes to these financial statements. 4 TEXAS CAPITAL BANK, N.A. RESIDENTIAL MORTGAGE LENDING DIVISION STATEMENTS OF EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 2006

See accompanying Notes to these financial statements. 5 TEXAS CAPITAL BANK, N.A., RESIDENTIAL MORTGAGE LENDING DIVISION NOTES TO FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 2006 AND 2005 ------------------------------------------------------------------------------ NOTE 1- DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------------------- Nature of Operations Residential Mortgage Lending ("RML", and/ or the "Division") was formed in July 2003 as a division of Texas Capital Bank, N.A.. The Division conducts real estate mortgage banking activities through retail branches primarily located in Texas. The Division's revenues are derived primarily from the origination and sale of conforming and nonconforming residential real estate loans for placement in the secondary market. The Division reports its revenue and expenses in accordance with its parent company's calendar year, which is December 31. Cash and cash equivalents RML operates as a division of its parent, Texas Capital Bank, all cash accounts are maintained at the parent level. Accounts Receivable Accounts receivable represent outstanding payments associated with loan transactions. Interest is not accrued on overdue accounts receivable. These items usually turn over in less than 30 days of close of the loan, accordingly, the fair value is estimated to approximate the carrying value. The Division evaluates receivables on a regular basis for potential reserve. Mortgage Loans Held for Sale All mortgage loans originated are intended for sale in the secondary market and are carried at the lower of cost or estimated fair value. Fair values for mortgage loans covered by investor commitments are based on commitment prices. All loans are sold servicing released. The real property of the borrower is pledged as collateral for mortgage loans. Gains or losses realized from mortgage loan sales are recognized at time of settlement with investors based upon the difference between the proceeds from sale and the carrying value of the mortgage loan sold, net of commitment fees paid to the investors and commissions paid to independent mortgage loan brokers. The Division enters into commitments to purchase or originate loans whereby the interest rate on these loans is determined prior to funding (rate lock commitments). Similar to loans held for sale, the fair value of rate lock commitments is subject to change primarily due to changes in interest rates. To protect against interest rate changes on mortgage loans that are warehouse (mortgage loans that have been funded, but not sold) and committed pipeline loans (loans which are not yet funded, but which carry rate lock commitments) the Division undertakes certain activities to protect our mortgage position. The Division follows the practice of entering into forward delivery commitments for the sale of whole mortgage loans to mitigate its exposure to interest rate risk. All forward delivery commitments are on a "best efforts" basis. The Division has not designated its practice of entering into forward delivery commitments as hedging activity within the definition of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. F-1 Property and Equipment Property and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to ten years. Leasehold improvements are amortized over the useful lives of the assets or the term of the respective lease, whichever is shorter. Long-lived assets Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may not be recovered. The Division assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value. Shipping and handling costs The Division's policy is to classify shipping and handling costs as part of general and administrative expense in the statement of operations. Advertising The Division expenses all advertising as incurred. For the year ended September 30, 2006 and 2005, the Division incurred approximately $406,304 and $336,768, respectively in general and administrative expense. Disclosure about Fair Value of Financial Instruments The Divison estimates that the fair value of all financial instruments at September 30, 2006, as defined in FASB 107, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Division using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Division could realize in a current market exchange. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions, including the depreciable lives of assets, financial derivatives and contributed capital, that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-2 Revenue Recognition Revenues are generated in three ways: Interest Income. We generate interest income on loans held for sale from the time we originate the loan until the time we sell the loan. This interest income is partially offset by our borrowing costs under our credit facilities used to finance these loans. We recognize interest income when the loan is funded and accrue interest on a monthly basis for all outstanding loans on the credit facility as well as loan payments due us. Gain on Sale of Loans. We generate gain on sale of loans by selling the loans we originate for a premium. Revenue is recognized at the time the loan is purchased from the investor. Branch Revenue. We generate revenue from our branches by charging various per loan fees and from providing accounting services. Revenue generated by per loan fees is recognized when the loan is funded and accounting services are assessed on a monthly basis. Income taxes The Division's income or loss is included in the consolidated corporate return of Texas Capital Bank, N.A., therefore no provisions for income taxes have been addressed in these financial statements. Best Efforts Forward Delivery Commitments The Company enters into Best Efforts Forward Delivery commitments with secondary market investors with respect to mortgages upon their origination. Conceptually, and in practicality, these commitments from investors function as Puts that the company receives, i.e., the right, but not the obligation, to put a mortgage loan to a secondary market buyer. NOTE 2 - MORTGAGE-RELATED RECEIVABLES These receivables consist primarily of various types of income earned from retail loan transactions where the income has been recognized as of September 30, 2006, but where the cash payment has yet to be received. These items usually turn over in less than 30 days after the end of the month, accordingly, the fair value is estimated to approximate the carrying value. NOTE 3 - MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale are carried at the lower of amortized cost or fair value. We estimate fair value by evaluating a variety of market indicators including recent trades, outstanding commitments or current investor yield requirements. 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 the assets have been isolated from RML and the transferee has the right to pledge or exchange the transferred assets Gains or losses resulting from loan sales are recognized at the time of sale, based on the difference between the net sales proceeds and the carrying value of the loans sold. During the years ended September 30, 2006 and 2005, RML sold approximately $600 million and $480 million, respectively, of loans with mortgage servicing rights released. F-3 NOTE 4 - PROPERTY AND EQUIPMENT Major classifications of property and equipment at September 30, 2006 are summarized as follows: Furniture & Equipment $ 477,873 Leasehold Improvements 82,954 ------ Total $ 560,827 Less: accumulated depreciation and amortization (266,463) --------- Property and Equipment - Net $ 294,364 ======== Depreciation and amortization expense for the years ended September 30, 2006 and 2005 is $168,291 and $150,561, respectively. NOTE 5 - LOANS PAYABLE Texas Capital Bank, N.A. provides the financing required to fund the loans originated through the RML division. Loan interest expense is calculated based on the number of days the loan remains outstanding. The current interest rate charged to the division is the federal cost of funds rate, which ranged from 3.69% to 4.63 % during the twelve months ended September 2006. The federal cost funds rate at September 30, 2006 and 2005 is 4.63% and 3.59%, respectively. NOTE 6 - EMPLOYEE BENEFIT PLANS The division is eligible to participate in the parent company's 401(k) and Profit Sharing Plan. Eligible employees must be at least 21 years of age and have completed one month of service with the company. The parent company contributes a maximum of 2% of the employee's gross salary limited based upon years of service. The parent Company contributed $17,014 for the year ended September 30, 2006 and $-0-for September 30, 2005. NOTE 7 - BRANCH RESERVES Branch reserves represent undistributed profits held in reserve for non-compliance to the branch agreements. In general, the branch is responsible for generating a profit on a monthly basis and in return is provided 100% of the profit derived from their operations. At the end of any month in which the branch has a profit shortfall, the branch reserve account will be used to offset the shortfall in profits. As of September 30, 2006 and 2005, the balance in the reserve account is $336,245 and $84,166 respectively. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf, thereby duly authorized. Date: December 27, 2006 Transnational Financial Corporation /s/ Joseph Kristul ------------------------------------------ Joseph Kristul, Chief Executive Officer

TRANSNATIONAL FINANCIAL NETWORK INC 8-K/A