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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
Commission File number 0-25033
The Banc Corporation
--------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-1201350
- ---------------------------------------------- ---------------------------------
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
17 North 20th Street, Birmingham, Alabama 35203
-----------------------------------------------
(Address of Principal Executive Offices)
(205) 326-2265
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of June 30, 2003
- ----------------------------- -------------------------------
Common stock, $.001 par value 17,641,676
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
JUNE 30 DECEMBER 31
2003 2002
----------- -----------
(UNAUDITED)
ASSETS
Cash and due from banks $ 41,540 $ 45,365
Interest bearing deposits in other banks 10,836 10,025
Federal funds sold 25,000 11,000
Investment securities available for sale 93,619 71,129
Investment securities held to maturity (fair value of $2,053,000 in 2003 and
$1,867,000 in 2002) 1,996 1,996
Mortgage loans held for sale 31,187 764
Loans, net of unearned income 1,104,855 1,138,537
Less: Allowance for loan losses (22,555) (27,766)
----------- -----------
Net loans 1,082,300 1,110,771
----------- -----------
Premises and equipment, net 60,750 61,849
Accrued interest receivable 5,553 6,876
Stock in FHLB and Federal Reserve Bank 11,122 10,903
Other assets 76,266 75,136
----------- -----------
TOTAL ASSETS $ 1,440,169 $ 1,405,814
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 124,607 $ 119,088
Interest-bearing 1,010,535 988,710
----------- -----------
TOTAL DEPOSITS 1,135,142 1,107,798
Advances from FHLB 173,550 173,750
Other borrowed funds 1,183 1,172
Long-term debt 2,030 --
Guaranteed preferred beneficial interests in our
subordinated debentures (trust preferred securities) 31,000 31,000
Accrued expenses and other liabilities 8,904 15,553
----------- -----------
TOTAL LIABILITIES 1,351,809 1,329,273
Stockholders' Equity
Preferred stock, par value $.001 per share; authorized 5,000,000 shares;
shares issued 62,000 -- --
Common stock, par value $.001 per share; authorized 25,000,000 shares; shares
issued 18,013,002 in 2003 and 18,009,002 in 2002; outstanding 17,641,676
in 2003 and 17,605,124 in 2002 18 18
Surplus - preferred 6,193 --
- common 68,310 68,315
Retained Earnings 17,089 11,571
Accumulated other comprehensive income 356 550
Treasury stock, at cost (684) (808)
Unearned ESOP stock (2,082) (2,153)
Unearned restricted stock (840) (952)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 88,360 76,541
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,440,169 $ 1,405,814
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
2003 2002 2003 2002
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 19,682 $ 21,913 $ 39,526 $ 42,748
Interest on investment securities
Taxable 822 767 1,540 1,415
Exempt from Federal income tax 67 110 159 204
Interest on federal funds sold 96 69 199 156
Interest and dividends on other investments 168 113 345 230
-------- -------- -------- --------
Total interest income 20,835 22,972 41,769 44,753
INTEREST EXPENSE
Interest on deposits 6,152 7,199 12,906 14,821
Interest on other borrowed funds 2,220 2,161 4,406 4,281
Interest on guaranteed preferred beneficial interest in our
subordinated debentures (trust preferred securities) 614 629 1,231 1,276
-------- -------- -------- --------
Total interest expense 8,986 9,989 18,543 20,378
-------- -------- -------- --------
NET INTEREST INCOME 11,849 12,983 23,226 24,375
Provision for loan losses 725 14,998 1,925 16,113
-------- -------- -------- --------
NET INTEREST INCOME (LOSS) AFTER PROVISION FOR LOAN LOSSES 11,124 (2,015) 21,301 8,262
NONINTEREST INCOME
Service charges and fees on deposits 1,656 1,685 3,279 2,881
Mortgage banking income 1,185 668 2,060 1,382
Gain on sale of securities 637 24 663 24
Gain on sale of branch -- -- 2,246 --
Other income 1,202 796 2,157 1,644
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 4,680 3,173 10,405 5,931
NONINTEREST EXPENSES
Salaries and employee benefits 6,371 6,069 12,689 11,621
Occupancy, furniture and equipment expense 2,196 1,974 4,285 3,778
Other 3,793 2,679 6,897 5,120
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSES 12,360 10,722 23,871 20,519
-------- -------- -------- --------
Income (loss) before income taxes 3,444 (9,564) 7,835 (6,326)
INCOME TAX EXPENSE (BENEFIT) 940 (3,757) 2,317 (2,705)
-------- -------- -------- --------
NET INCOME (LOSS) $ 2,504 $ (5,807) $ 5,518 $ (3,621)
======== ======== ======== ========
BASIC NET INCOME (LOSS) PER SHARE $ 0.14 $ (0.33) $ 0.32 $ (0.22)
======== ======== ======== ========
DILUTED NET INCOME (LOSS) PER SHARE $ 0.14 $ (0.33) $ 0.31 $ (0.22)
======== ======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 17,472 17,684 17,461 16,144
AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 17,884 17,684 17,751 16,144
See Notes to Condensed Consolidated Financial Statements.
SIX MONTHS ENDED
JUNE 30
-------------------------
2003 2002
-------- --------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES $(21,911) $ 8,897
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest bearing deposits in other banks (811) 297
Net increase in federal funds sold (14,000) (1,000)
Proceeds from sales of securities available for sale 22,654 995
Proceeds from maturities of investment securities available for sale 28,142 20,550
Purchases of investment securities available for sale (73,572) (20,106)
Net decrease(increase) in loans 9,313 (62,165)
Purchases of premises and equipment (1,468) (8,218)
Net cash paid in branch sale (31,949) --
Net cash paid in business combination -- (8,619)
Other investing activities (219) (525)
-------- --------
Net cash used by investing activities (61,910) (78,791)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 71,937 59,311
Net (decrease) increase in FHLB advances and other borrowed funds (189) 10
Proceeds received on long term debt 2,100 --
Payments made on long term debt (70) --
Proceeds from note payable -- 14,000
Principal payment on note payable -- (14,000)
Proceeds from sale of common stock 25 19,498
Proceeds from sale of preferred stock 6,193 --
Purchase of ESOP shares -- (1,250)
Purchase of treasury stock -- (24)
-------- --------
Net cash provided by financing activities 79,996 77,545
-------- --------
Net (decrease) increase in cash and due from banks (3,825) 7,651
Cash and due from banks at beginning of period 45,365 31,682
-------- --------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 41,540 $ 39,333
======== ========
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions for Form 10-Q, and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. For a summary of significant
accounting policies that have been consistently followed, see Note 1 to the
Consolidated Financial Statements included in Form 10-K for the year ended
December 31, 2002. It is management's opinion that all adjustments, consisting
of only normal and recurring items necessary for a fair presentation, have been
included. Operating results for the three and six-month periods ended June 30,
2003, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003.
The statement of financial condition at December 31, 2002, has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
Note 2 - Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections" (Statement 145). Statement 145 rescinds Statement 4, which required
all gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax effect.
Provisions of Statement 145 that related to the rescission of Statement 4 were
effective for financial statements issued by the Corporation after January 1,
2003. The adoption of the provisions of Statement 145 did not have a material
impact on the Corporation's financial condition or results of operations.
On January 1, 2003, the Corporation adopted Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" (Statement 146). Statement 146 requires companies to recognize costs
associated with the exit or disposal of activities as they are incurred rather
than at the date a plan of disposal or commitment to exit is initiated. Types of
costs covered by Statement 146 include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, facility closing, or other exit or disposal activity. Statement 146
will apply to all exit or disposal activities initiated after December 31, 2002.
The adoption of the provisions of Statement 146 did not have a material impact
on the Corporation's financial condition or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (Interpretation 45). Interpretation 45 requires certain
guarantees to be recorded at fair value. In general, Interpretation 45 applies
to contracts or indemnification agreements that contingently require the
guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, liability, or an equity security of the
guaranteed party. The initial recognition and measurement provisions of
Interpretation 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. On January 1, 2003, the Corporation began
recording a liability and an offsetting asset for the fair value of any standby
letters of credit issued by the Corporation beginning January 1, 2003. The
impact of this new accounting standard was not material to the financial
condition or results of operations of the Corporation. Interpretation 45 also
requires new disclosures, even when the likelihood of making any payments under
the guarantee is remote. These disclosure requirements were effective for
financial statements of interim or annual periods ending after December 15,
2002.
The Corporation, as part of its ongoing business operations, issues financial
guarantees in the form of financial and performance standby letters of credit.
Standby letters of credit are contingent commitments issued by the Corporation
generally to guarantee the performance of a customer to a third party. A
financial standby letter of credit is a commitment by the Corporation to
guarantee a customer's repayment of an outstanding loan or debt instrument. In a
performance standby letter of credit, the Corporation guarantees a customer's
performance under a contractual nonfinancial obligation for which it receives a
fee. The Corporation has recourse against the customer for any amount it is
required to pay to a third party under which it receives a fee. The Corporation
has recourse against the customer for any amount it is required to pay to a
third party under a standby letter of credit. Revenues are recognized ratably
over the life of the standby letter of credit. At June 30, 2003, the Corporation
had standby letters of credit outstanding with maturities ranging from less than
one year to three years. The maximum potential amount of future payments the
Corporation could be required to make under its standby letters of credit at
June 30, 2003 was $19.8 million and represents the Corporation's maximum credit
risk. At June 30, 2003, the Corporation had no significant liabilities and
receivables associated with standby letters of credit agreements entered into
subsequent to December 31, 2002 as a result of the Corporation's adoption of
Interpretation 45 at January 1, 2003. Standby letters of credit agreements
entered into prior to January 1, 2003, have a carrying value of zero. The
Corporation holds collateral to support standby letters of credit when deemed
necessary.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (Interpretation
46). Interpretation 46 addresses whether business enterprises must consolidate
the financial statements of entities known as "variable interest entities". A
variable interest entity is defined by Interpretation 46 to be a business entity
which has one or both of the following characteristics: (1) the equity
investment at risk is not sufficient to permit the entity to finance its
activities without additional support from other parties, which is provided
through other interests that will absorb some or all of the expected losses at
the entity; and (2) the equity investors lack one or more of the following
essential characteristics of a controlling financial interest: (a) direct or
indirect ability to make decisions about the entity's activities through voting
rights or similar rights, (b) the obligation to absorb the expected losses of
the entity if they occur, which makes it possible for the entity to finance its
activities, or (c) the right to receive the expected residual returns of the
entity if they occur, which is the compensation for risk of absorbing expected
losses. Interpretation 46 does not require consolidation by transferors to
qualifying special purpose entities. Interpretation 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Corporation is
evaluating the impact of applying Interpretation 46 and has not yet completed
it's analysis.
Note 3 - Business Combination and Branch Sales
On June 18, 2003, the Corporation announced the execution of a definitive
purchase and assumption agreement with Trustmark National Bank pursuant to
which Trustmark National Bank will acquire seven Florida branches of the Bank,
known as the Emerald Coast Division, serving the markets from Destin to Panama
City for a $46.8 million deposit premium. The transaction is subject to
regulatory approval and is expected to close during the third quarter of 2003.
On March 13, 2003, the Corporation's banking subsidiary sold its Roanoke,
Alabama branch, which had assets of approximately $9,800,000 and liabilities of
$44,672,000, pursuant to a Branch Sale Agreement, dated as of November 19, 2002,
for approximately $3,300,000. The Corporation realized a $2,246,000 gain on the
sale.
On February 15, 2002, the Corporation acquired one-hundred percent (100%) of the
outstanding common shares of CF Bancshares, Inc. ("CF Bancshares") in a business
combination accounted for as a purchase. CF Bancshares was a unitary thrift
holding company operating in the panhandle of Florida. As a result of this
acquisition, the Corporation expanded its market in the panhandle of Florida and
increased its assets in Florida approximately $100,000,000.
The total cost of the acquisition was $15,636,000, which exceeded the fair value
of the net assets of CF Bancshares by $7,445,000. The total costs included
16,449 shares of common stock valued at $108,563. The value of common stock
issued was determined based on the average of the last sales price for the
twenty (20) consecutive trading days ending three days prior to the special
meeting of CF Bancshares shareholders held on November 28, 2001. Of this amount,
approximately $2,900,000 consisted of a core deposit intangible which is being
amortized over a ten-year period on the straight-line basis. The remaining
$4,545,000 consists of goodwill. The Corporation's consolidated financial
statements for the six-month period ended June 30, 2002 include the results of
operations of CF Bancshares only for the period February 15, 2002, to June 30,
2002.
The following unaudited summary information presents the consolidated results of
operations of the Corporation on a pro forma basis, as if CF Bancshares had been
acquired on January 1, 2002. The pro forma summary does not necessarily reflect
the results of operations that would have occurred if the acquisition had
occurred as of the beginning of the period presented, or the results that may
occur in the future (in thousands, except per share data).
For the six-month
period ended June
30, 2002
-----------------
Interest income $ 45,648
Interest expense 20,805
--------
Net interest income 24,843
Provision for loan losses 16,930
Noninterest income 6,101
Noninterest expense 21,755
--------
Loss before income taxes (7,741)
Income tax benefit (3,145)
--------
Net loss $ (4,596)
--------
Basic and diluted net loss per common
share $ (.28)
========
Note 4 - Segment Reporting
The Corporation has two reportable segments, the Alabama Region and the Florida
Region. The Alabama Region consists of operations located throughout the state
of Alabama. The Florida Region consists of operations located in or near the
panhandle region of Florida. The Corporation's reportable segments are managed
as separate business units because they are located in different geographic
areas. Both segments derive revenues from the delivery of financial services.
These services include commercial loans, mortgage loans, consumer loans, deposit
accounts and other financial services.
The Corporation evaluates performance and allocates resources based on profit or
loss from operations. There are no material intersegment sales or transfers. Net
interest revenue is used as the basis for performance evaluation rather than its
components, total interest revenue and total interest expense. The accounting
policies used by each reportable segment are the same as those discussed in Note
1 to the Consolidated Financial Statements included in the Form 10-K for the
year ended December 31, 2002. All costs have been allocated to the reportable
segments. Therefore, combined amounts agree to the consolidated totals (in
thousands).
Alabama Florida
Region Region Combined
----------- ----------- -----------
Three months ended June 30, 2003
Net interest income $ 6,736 $ 5,113 $ 11,849
Provision for loan losses (275) 1,000 725
Noninterest income 3,934 746 4,680
Noninterest expense(1) 8,482 3,878 12,360
Income tax expense 648 292 940
Net income 1,815 689 2,504
Total assets 947,574 492,595 1,440,169
Three months ended June 30, 2002
Net interest income $ 7,350 $ 5,633 $ 12,983
Provision for loan losses 1,696 13,302 14,998
Noninterest income 2,335 838 3,173
Noninterest expense(1) 7,253 3,469 10,722
Income tax expense(benefit) 256 (4,013) (3,757)
Net income(loss) 480 (6,287) (5,807)
Total assets 912,329 459,965 1,372,294
Six months ended June 30, 2003
Net interest income $ 12,825 $ 10,401 $ 23,226
Provision for loan losses 831 1,094 1,925
Noninterest income 8,757 1,648 10,405
Noninterest expense(1) 16,141 7,730 23,871
Income tax expense 1,334 983 2,317
Net income 3,276 2,242 5,518
Six months ended June 30, 2002
Net interest income $ 13,813 $ 10,562 $ 24,375
Provision for loan losses 2,326 13,787 16,113
Noninterest income 4,539 1,392 5,931
Noninterest expense(1) 14,002 6,517 20,519
Income tax expense(benefit) 714 (3,419) (2,705)
Net income(loss) 1,310 (4,931) (3,621)
(1) Noninterest expense for the Alabama region includes all expenses for the
holding company, which have not been prorated to the Florida region.
Note 5 - Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per common share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Numerator:
For basic and diluted, net income (loss) $ 2,504 $ (5,807) 5,518 $ (3,621)
======== ======== ======== ========
Denominator:
For basic, weighted average common shares
outstanding 17,472 17,684 17,461 16,144
Effect of dilutive stock options,
restricted stock and convertible preferred 412 -- 290 --
-------- -------- -------- --------
Average diluted common shares outstanding 17,884 17,684 17,751 16,144
======== ======== ======== ========
Basic net income (loss) per share $ .14 $ (.33) $ .32 $ (.22)
======== ======== ======== ========
Diluted net income (loss) per share $ .14 $ (.33) $ .31 $ (.22)
======== ======== ======== ========
Note 6 - Comprehensive Income (Loss)
Total comprehensive income (loss) was $2,474,000 and $5,323,000, respectively,
for the three and six-month periods ended June 30, 2003, and $(5,042,000) and
$(2,777,000), respectively, for the three and six-month periods ended June 30,
2002. Total comprehensive income (loss) consists of net income (loss) and the
unrealized gain or loss on the Corporation's available for sale securities
portfolio arising during the period.
Note 7 - Income Taxes
The primary difference between the effective tax rate and the federal statutory
rate in 2003 and 2002 is due to certain tax-exempt income.
Note 8 - Guaranteed Preferred Beneficial Interest in the Corporation's
Subordinated Debentures (Trust Preferred Securities)
On September 7, 2000, TBC Capital Statutory Trust II ("TBC Capital II"), a
Connecticut statutory trust established by the Corporation, received $15,000,000
in proceeds in exchange for $15,000,000 principal amount of TBC Capital II's
10.6% cumulative trust preferred securities in a pooled trust preferred private
placement. The proceeds were used to purchase an equal principal amount of 10.6%
subordinated debentures of the Corporation.
On July 16, 2001, TBC Capital Statutory Trust III ("TBC Capital III"), a
Delaware business trust established by the Corporation, received $16,000,000 in
proceeds in exchange for $16,000,000 principal amount of TBC Capital III's
variable rate cumulative trust preferred securities in a pooled trust preferred
private placement. The proceeds were used to purchase an equal principal amount
of variable rate subordinated debentures of the Corporation. The stated interest
rate is the six-month LIBOR plus 375 basis points. The interest rate on the
securities reprices every six months and has a 12% per annum ceiling for the
first ten years. As of the date of issuance, the interest rate on the
securities was 7.57%. As of June 30, 2003, the interest rate on these
securities had repriced to 5.10%.
The Corporation has fully and unconditionally guaranteed all obligations of TBC
Capital II and TBC Capital III on a subordinated basis with respect to the
preferred securities. Subject to certain limitations, the preferred securities
qualify as Tier 1 capital and are presented in the Consolidated Statement of
Financial Condition as "Guaranteed preferred beneficial interests in our
subordinated debentures." The sole assets of TBC Capital II and TBC Capital III
are the subordinated debentures issued by the Corporation. The preferred
securities of TBC Capital II and TBC Capital III and the subordinated debentures
of the Corporation each have 30-year lives. However, the Corporation and TBC
Capital II and TBC Capital III have call options, with a premium after five
years through ten years and call options at par after ten years subject to
regulatory approval, or earlier depending upon certain changes in tax or
investment company laws, or regulatory capital requirements.
Note 9 - Stockholders' Equity
In May 2003, the Corporation received $6,193,000 in proceeds, net of issuance
costs, from the sale of 62,000 shares of Series A Convertible Preferred Stock.
Dividends will accrue on the liquidation value of $100 per share at the rate of
LIBOR plus 5.75 not to exceed 12.5%. Dividends are noncumulative and reset
semi-annually on June 1 and December 1. Each Series A Convertible Preferred
Stock is convertible at any time beginning June 1, 2008. Such shares shall be
convertible into the number of shares of common stock which result from
dividing the conversion price at the time of conversion into the liquidation
value. The initial conversion price is $8.00 per share. From the date of
issuance the Corporation can redeem the preferred stock at the following
prices stated as a percent of the liquidation value: 2003 - 105%; 2004 - 104%;
2005 - 103%; 2006 - 102%; 2007 - 101%; 2008 and thereafter - 100%. In the event
of a merger prior to June 1, 2004, the Series A Convertible Preferred Stock may
be redeemed by the Corporation at a redemption price of 106%.
In September of 2000, the Corporation's board of directors approved a stock
buyback plan in an amount not to exceed $10,000,000. As of June 30, 2003, there
were 113,204 shares held in treasury at a cost of $684,000.
During March 2002, the Corporation received $19.3 million in proceeds, net of
$1.8 million underwriting discount and other costs, from the sale of 3,450,000
shares of common stock in a secondary offering priced at $6.125 per share. The
Corporation used $14.0 million of these proceeds to repay debt incurred in the
acquisition of CF Bancshares.
On April 24, 2002, the Corporation issued 157,000 shares of restricted common
stock to certain directors and key employees. Under the restricted stock
agreements, the shares of restricted stock may not be sold or assigned in any
manner until such shares have vested. During this restricted period, the
participant is eligible to receive dividends and exercise voting privileges. The
restricted stock also has a corresponding vesting period with one-third vesting
in the third, fourth and fifth years. The restricted stock was issued at a cost
of $1,120,000, and is classified as a contra-equity account, "Unearned
restricted stock", in stockholders' equity. The $1,120,000 is being amortized as
expense as the stock is earned during the restricted period. For the periods
ended June 30, 2003 and 2002, the Corporation has recognized $112,000 and
$56,000 in restricted stock expense, respectively.
The Corporation adopted a leveraged employee stock ownership plan (the "ESOP")
effective May 15, 2002, that covers all eligible employees that have attained
the age of twenty-one and have completed a year of service. As of June 30, 2003
the ESOP has been internally leveraged with 273,400 shares of the Corporation's
common stock purchased in the open market and classified as a contra-equity
account, "Unearned ESOP shares", in stockholders' equity.
On January 29, 2003, the Corporation completed a $2.1 million promissory note to
reimburse the Corporation for the funds used to leverage the ESOP. The
unreleased shares and a guarantee of the Corporation secure the promissory note,
which is classified as long-term debt on the Corporation's statement of
financial condition. As the debt is repaid, shares are released from collateral
based on the proportion of debt service. Released shares are allocated to
eligible employees at the end of the plan year based on the employee's eligible
compensation to total compensation. The Corporation recognizes compensation
expense during the period as the shares are earned and committed to be released.
As shares are committed to be released and compensation expense is recognized,
the shares become outstanding for basic and diluted earnings per share
computations. The amount of compensation expense reported by the Corporation is
equal to the average fair value of the shares earned and committed to be
released during the period. Compensation expense that the Corporation recognized
during the periods ended June 30, 2003, and 2002, was $55,000 and $13,000,
respectively. The ESOP shares as of June 30, 2003 were as follows:
June 30, 2003
-------------
Allocated shares ........................... 6,378
Estimated shares committed to be released .. 8,900
Unreleased shares .......................... 258,122
-----------
Total ESOP shares .......................... 273,400
-----------
Fair value of unreleased shares ............ $ 1,796,000
===========
The Corporation has established a stock incentive plan for directors and certain
key employees that provide for the granting of restricted stock and incentive
and nonqualified options to purchase up to 1,500,000 shares of the Corporation's
common stock. The compensation committee of the Board determines the terms of
the restricted stock and options granted.
All options granted have a maximum term of ten years from the grant date, and
the option price per share of options granted cannot be less than the fair
market value of the Corporation's common stock on the grant date. All options
granted under this plan vest 20% on the grant date and an additional 20%
annually on the anniversary of the grant date.
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement 123) which allows an entity to continue to measure
compensation costs for those plans using the intrinsic value-based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The Corporation has elected to follow APB Opinion 25 and related
interpretations in accounting for its employee stock options. Accordingly,
compensation cost for fixed and variable stock-based awards is measured by the
excess, if any, of the fair market price of the underlying stock over the amount
the individual is required to pay. Compensation cost for fixed awards is
measured at the grant date, while compensation cost for variable awards is
estimated until both the number of shares an individual is entitled to receive
and the exercise or purchase price are known (measurement date). No option-based
employee compensation cost is reflected in net income, as all options granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant. The pro forma information below was determined as if the
Corporation had accounted for its employee stock options under the fair value
method of Statement 123. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The Corporation's pro forma information follows (in thousands except
earnings per share information):
For the three-months ended For the six-months ended
-------------------------- ------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
------------- ------------- ------------- -------------
Net income (loss):
As reported ........................... $ 2,504 $ (5,807) $ 5,518 $ (3,621)
Pro forma ............................. 2,321 (6,007) 5,156 (4,016)
Earnings (loss) per common share:
As reported ........................... $ .14 $ (.33) $ .32 $ (.22)
Pro forma ............................. .13 (.34) .30 (.25)
Diluted earnings (loss)per common share:
As reported ........................... $ .14 $ (.33) $ .31 $ (.22)
Pro forma ............................. .13 (.34) .29 (.25)
The fair value of the options granted was based upon the Black-Scholes pricing
model. The Corporation used the following weighted average assumptions for:
June 30,
--------
2003 2002
---- ----
Risk free interest rate ............... 3.33% 4.93%
Volatility factor ..................... .34 .33
Weighted average life of options ...... 3.50 4.50
Dividend yield ........................ 0.00 0.00
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Basis of Presentation
The following is a discussion and analysis of our June 30, 2003 consolidated
financial condition and results of operations for the three and six-month
periods ended June 30, 2003 and 2002. All significant intercompany accounts and
transactions have been eliminated. Our accounting and reporting policies conform
to generally accepted accounting principles.
This information should be read in conjunction with our unaudited consolidated
financial statements and related notes appearing elsewhere in this report and
the audited consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", appearing in our Annual Report on Form 10-K for the year ended
December 31, 2002.
Recent Developments
On June 18, 2003, the Corporation announced the execution of a definitive
purchase and assumption agreement with Trustmark National Bank pursuant to which
Trustmark National Bank will acquire seven Florida branches of The Bank, known
as the Emerald Coast Division, serving the markets from Destin to Panama City
for a $46.8 million deposit premium. The transaction is subject to regulatory
approval and is expected to close during the third quarter of 2003.
Financial Overview
Total assets were $1.440 billion at June 30, 2003, an increase of $34 million,
or 2.4% from $1.406 billion as of December 31, 2002. Total loans, net of
unearned income were $1.105 billion at June 30, 2003, a decrease of $34 million,
or 2.96% from $1.139 billion as of December 31, 2002. Total deposits were $1.135
billion at June 30, 2003, an increase of $27.3 million, or 2.47% from $1.108
billion as of December 31, 2002. Total stockholders' equity was $88 million at
June 30, 2003, an increase of $11 million, or 15.4% from $77 million as of
December 31, 2002.
Results of Operations
Our net income for the three-month period ended June 30, 2003 (second quarter of
2003), was $2.5 million compared to a net loss of $5.8 million for the
three-month period ended June 30, 2002 (second quarter of 2002), an increase of
$8.3 million. Our basic and diluted net income per share was $.14 for the second
quarter of 2003 which represents a $.47 increase from $(.33) per share for the
second quarter of 2002.
Our net income for the six-month period ended June 30, 2003 (first six months of
2003) was $5.5 million compared to a net loss of $3.6 million for the six-month
period ended June 30, 2002 (first six months of 2002), an increase of $9.1
million. Our basic net income per share was $.32 and diluted net income per
share was $.31 for the first six months of 2003 which represents a $.54 and $.53
increase, respectively, from $(.22) per share for the first six months of 2002.
Our return on average assets, on an annualized basis, was .70% for the first six
months of 2003 compared to (.56)% for the first six months of 2002. Our return
on average stockholders' equity, on an annualized basis, was 13.97% for the
first six months of 2003 compared to (8.15)% for the first six months of 2002.
Our book value per common share at June 30, 2003 was $4.66 compared to $4.35 as
of December 31, 2002 and our tangible book value per common share at June 30,
2003 was $3.93 compared to $3.59 as of December 31, 2002.
The growth in our net income during the first six months of 2003 compared with
the first six months of 2002 is primarily the result of a decrease in loan loss
provision and an increase in noninterest income which was partially offset by an
increase in noninterest expenses. Provision for loan losses decreased $14.2
million, or 88.1%, from $16.1 million in the first six months of 2002 to $1.9
million in the first six months of 2003. Noninterest income increased $4.5
million, or 75.4%, from $5.9 million in the first six months of 2002 to $10.4
million in the first six months of 2003. Noninterest expense increased $3.4
million, or 16.3%, from $20.5 million in the first six months of 2002 to $23.9
million in the first six months of 2003.
Net interest income is the difference between the income earned on
interest-earning assets and interest paid on interest-bearing liabilities used
to support such assets. Net interest income decreased $1.1 million, or 8.7% to
$11.8 million for the second quarter of 2003 from $12.9 million for the second
quarter of 2002. The decrease in net interest income was primarily due to a $2.1
million or 9.3% decrease in total interest income offset by a $1.0 million, or
10.0% decrease in total interest expense. The decline in total interest income
is primarily attributable to a decline in our yield on loans which is the result
of declining market interest rates, significant charged off loans in 2002 and an
increase in nonperforming loans.
The decline in total interest expense is primarily attributable to a 64-basis
point decline in the average interest rate paid on interest-bearing liabilities.
The average rate paid on interest-bearing liabilities was 2.92% for the second
quarter of 2003 compared to 3.56% for the second quarter of 2002. Our net
interest spread and net interest margin were 3.52% and 3.67%, respectively, for
the second quarter of 2003, compared to 4.00% and 4.28% for the second quarter
of 2002.
Our average interest-earning assets for the second quarter of 2003 increased $77
million, or 6.3% to $1.299 billion from $1.222 billion in the second quarter of
2002. This growth in our average interest-earning assets was primarily funded by
a $107 million, or 9.5% increase in our average interest-bearing liabilities to
$1.234 billion for the second quarter of 2003 from $1.127 billion for the second
quarter of 2002. Our ratio of average interest-earning assets to average
interest-bearing liabilities was 105.3% and 108.5% for the second quarters of
2003 and 2002, respectively. Our average interest-bearing assets produced a tax
equivalent yield of 6.44% for the second quarter of 2003 compared to 7.56% for
the second quarter of 2002. The 112-basis point decline in the yield was
partially offset by a 64-basis point decline in the average rate paid on
interest-bearing liabilities.
Net interest income decreased $1.2 million, or 4.71% to $23.2 million for the
first six months of 2003 from $24.4 million for the first six months of 2002.
The decrease in net interest income was primarily due to a $3.0 million, or 6.7%
decrease in total interest income offset by a $1.8 million, or 9.0% decrease in
total interest expense. The decline in total interest expense is primarily
attributable to a 207-basis point decline in the average interest rate paid on
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities was 3.02% for the first six months of 2003 compared to 3.71% for the
first six months of 2002. Our net interest spread and net interest margin were
3.47% and 3.61%, respectively, for the first six months of 2003, compared to
3.89% and 4.15%, respectively, for the first six months of 2002.
Our average interest-earning assets for the first six months of 2003 increased
$110 million, or 9.2% to $1.301 billion from $1.191 billion in the first six
months of 2002. This growth in our average interest-earning assets was primarily
funded by a $131 million, or 11.8% increase in our average interest-bearing
liabilities to $1.237 billion for the first six months of 2003 from $1.106
million for the first six months of 2002. The ratio of our average
interest-earning assets to average interest-bearing liabilities was 105.1% and
107.6% for the first six months of 2003 and 2002, respectively. Our average
interest-bearing assets produced a tax equivalent yield of 6.49% for the first
six months of 2003 compared to 7.60% for the first six months of 2002. The
111-basis point decline in the yield was offset by both a 69-basis point decline
in the average rate paid on interest-bearing liabilities and a $50 million, or
4.5 % increase in the average volume of loans from $1.101 billion in the first
six months of 2002 to $1.151 billion in the first six months of 2003.
Average Balances, Income, Expense and Rates. The following table depicts, on a
tax-equivalent basis for the periods indicated, certain information related to
our average balance sheet and our average yields on assets and average costs of
liabilities. Average yields are calculated by dividing income or expense by the
average balance of the corresponding assets or liabilities. Average balances
have been calculated on a daily basis.
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2002
---- ----
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ---- ------- ------- ----
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income(1)....... $ 1,144,563 $ 19,682 6.90% $ 1,129,680 $ 21,913 7.78%
Investment securities
Taxable.............................. 60,363 822 5.46 52,294 767 5.88
Tax-exempt(2)........................ 6,162 102 6.61 8,983 167 7.46
----------- --------- ----------- ---------
Total investment securities...... 66,525 924 5.57 61,277 934 6.11
Federal funds sold................... 32,253 96 1.19 20,567 69 1.35
Other investments.................... 55,973 168 1.20 10,375 113 4.37
----------- --------- ----------- ---------
Total interest-earning assets.... 1,299,314 20,870 6.44 1,221,899 23,029 7.56
Noninterest-earning assets:
Cash and due from banks................ 34,214 32,028
Premises and equipment................. 61,151 54,123
Accrued interest and other assets...... 70,567 48,789
Allowance for loan losses.............. (28,761) (13,855)
----------- -----------
Total assets..................... $ 1,436,485 $ 1,342,984
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits........................ $ 298,865 713 0.96 $ 282,990 912 1.29
Savings deposits....................... 35,523 28 0.32 38,304 68 0.71
Time deposits.......................... 693,702 5,411 3.13 619,612 6,219 4.03
Other borrowings....................... 174,748 2,220 5.10 154,817 2,161 5.60
Guaranteed preferred beneficial
interest in our subordinated debentures 31,000 614 7.94 31,000 629 8.14
----------- --------- ----------- ---------
Total interest-bearing liabilities 1,233,838 8,986 2.92 1,126,723 9,989 3.56
Noninterest-bearing liabilities:
Demand deposits........................ 114,695 106,887
Accrued interest and other liabilities. 6,275 9,312
Stockholders' equity................... 81,677 100,062
----------- -----------
Total liabilities and
stockholders' equity........... $ 1,436,485 $ 1,342,984
=========== ===========
Net interest income/net interest
spread................................. 11,884 3.52% 13,040 4.00%
===== =====
Net yield on earning assets.............. 3.67% 4.28%
===== =====
Taxable equivalent adjustment:
Investment securities(2)............... 35 57
--------- ---------
Net interest income.............. $ 11,849 $ 12,983
========= =========
(1) Nonaccrual loans are included in loans, net of unearned income. No
adjustment has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on a fully taxable equivalent
basis using a tax rate of 34 percent.
The following table sets forth, on a taxable equivalent basis, the effect
that the varying levels of our interest-earning assets and interest-bearing
liabilities and the applicable rates have had on the changes in net interest
income for the three months ended June 30, 2003 and 2002.
THREE MONTHS ENDED JUNE 30, (1)
2003 VS 2002
------------
CHANGES DUE TO
INCREASE --------------
(DECREASE) RATE VOLUME
---------- ---- ------
(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans .......................... $(2,231) $(2,515) $ 284
Interest on securities:
Taxable ........................................ 55 (57) 112
Tax-exempt ..................................... (65) (17) (48)
Interest on federal funds ........................... 27 (9) 36
Interest on other investments ....................... 55 (133) 188
------- ------- -----
Total interest income .......................... (2,159) (2,731) 572
------- ------- -----
Expense from interest-bearing liabilities:
Interest on demand deposits ............................ (199) (247) 48
Interest on savings deposits ........................... (40) (35) (5)
Interest on time deposits .............................. (808) (1,496) 688
Interest on other borrowings ........................... 59 (204) 263
Interest on guaranteed preferred beneficial interest
in our subordinated debentures (15) (15) --
------- ------- -----
Total interest expense ......................... (1,003) (1,997) 994
------- ------- -----
Net interest income ............................ $(1,156) $ (734) $(422)
======= ======= =====
- -------------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
The following table depicts, on a tax-equivalent basis for the periods
indicated, certain information related to our average balance sheet and our
average yields on assets and average costs of liabilities. Average yields are
calculated by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been calculated on a
daily basis.
SIX MONTHS ENDED JUNE 30,
-------------------------
2003 2002
---- ----
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ---- ------- ------- ----
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income(1)....... $ 1,150,899 $ 39,526 6.93% $ 1,101,111 $ 42,748 7.83%
Investment securities
Taxable.............................. 54,081 1,540 5.74 52,115 1,415 5.48
Tax-exempt(2)........................ 7,158 241 6.79 8,302 309 7.51
----------- -------- ----------- --------
Total investment securities...... 61,239 1,781 5.86 60,417 1,724 5.75
Federal funds sold................... 33,895 199 1.18 18,268 156 1.72
Other investments.................... 54,655 345 1.27 10,886 230 4.26
----------- -------- ----------- --------
Total interest-earning assets.... 1,300,688 41,851 6.49 1,190,682 44,858 7.60
Noninterest-earning assets:
Cash and due from banks................ 33,650 30,110
Premises and equipment................. 61,108 52,337
Accrued interest and other assets...... 71,335 48,110
Allowance for loan losses.............. (33,278) (13,592)
----------- -----------
Total assets..................... $ 1,433,503 $ 1,307,647
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits........................ $ 293,391 1,407 0.97 $ 277,437 1,858 1.35
Savings deposits....................... 35,725 69 0.39 37,324 125 0.68
Time deposits.......................... 702,254 11,430 3.28 609,600 12,838 4.25
Other borrowings....................... 174,777 4,406 5.08 151,018 4,281 5.72
Guaranteed preferred beneficial
interest in our subordinated debentures 31,000 1,231 8.01 31,000 1,276 8.30
----------- -------- ----------- --------
Total interest-bearing liabilities 1,237,147 18,543 3.02 1,106,379 20,378 3.71
Noninterest-bearing liabilities:
Demand deposits........................ 110,180 102,706
Accrued interest and other liabilities. 6,535 9,016
Stockholders' equity................... 79,641 89,546
----------- -----------
Total liabilities and
stockholders' equity........... $ 1,433,503 $ 1,307,647
=========== ===========
Net interest income/net interest
spread................................. 23,308 3.47% 24,480 3.89%
===== =====
Net yield on earning assets.............. 3.61% 4.15%
===== =====
Taxable equivalent adjustment:
Investment securities(2)............... 82 105
-------- --------
Net interest income.............. $ 23,226 $ 24,375
======== ========
(1) Nonaccrual loans are included in loans, net of unearned income. No
adjustment has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on a fully taxable equivalent
basis using a tax rate of 34 percent.
The following table sets forth, on a taxable equivalent basis, the effect
that the varying levels of our interest-earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
for the six months ended June 30, 2003 and 2002.
SIX MONTHS ENDED JUNE 30, (1)
2003 VS 2002
------------
CHANGES DUE TO
INCREASE -------------------
(DECREASE) RATE VOLUME
---------- ---- ------
(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans........................... $(3,222) $(5,087) $ 1,865
Interest on securities:
Taxable......................................... 125 70 55
Tax-exempt...................................... (68) (29) (40)
Interest on federal funds............................ 43 (60) 103
Interest on other investments........................ 115 (258) 373
------- ------- -------
Total interest income........................... (3,007) (5,364) 2,356
------- ------- -------
Expense from interest-bearing liabilities:
Interest on demand deposits............................. (451) (552) 101
Interest on savings deposits............................ (56) (51) (5)
Interest on time deposits............................... (1,408) (3,189) 1,781
Interest on other borrowings............................ 125 (508) 633
Interest on guaranteed preferred beneficial interest
in our subordinated debentures......................... (45) (45) --
------- ------- -------
Total interest expense.......................... (1,835) (4,345) 2,510
------- ------- -------
Net interest income............................. $(1,172) $(1,019) $ (154)
======= ======= =======
- ----------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
Noninterest income. Our noninterest income increased $1.5 million or 47.5% to
$4.7 million for the second quarter of 2003 from $3.2 million for the second
quarter of 2002, primarily due to an increase in mortgage banking income and
gains on sales of securities. Our mortgage banking income increased $517,000, or
77.4% to $1.2 million in the second quarter of 2003 from $668,000 in the second
quarter of 2002. Our gains on sales of securities increased $613,000 to $637,000
in the second quarter of 2003 from $24,000 in the second quarter of 2002.
Our noninterest income increased $4.5 million, or 75.4% to $10.4 million for the
first six months of 2003 from $5.9 million for the first six months of 2002,
primarily due to a gain on the sale of our Roanoke branch of $2.2 million. Our
mortgage banking income increased $678,000, or 49.06% to $2.1 million in the
first six months of 2003 from $1.4 million in the first six months of 2002. Our
gains on sales of securities increased $639,000 to $663,000 in the first six
months of 2003 from $24,000 in the first six months of 2002.
Noninterest expense. Our noninterest expense increased $1.6 million, or 15.3% to
$12.3 million for second quarter of 2003 from $10.7 million for the second
quarter of 2002. As a percentage of our net interest income, noninterest
expenses increased from 82.5% during the second quarter of 2002 to 104.3% during
the second quarter of 2003. This increase in noninterest expenses increased our
efficiency ratio to 74.6% during the second quarter of 2003 compared to 66.1%
during the second quarter of 2002 and 67.3% for the year 2002. Salaries and
benefits increased $302,000, or 4.98% to $6.4 million for the second quarter of
2003 from $6.1 million for the second quarter of 2002. All other noninterest
expenses increased $1.3 million, or 28.3% to $5.9 million for the second quarter
of 2003 from $4.6 million for the second quarter of 2002. Other noninterest
expenses increased during the second quarter of 2003 primarily as a result of
expenses related to the relocation of our data processing center to
our corporate headquarters, which will be completed in the fourth quarter of
2003, the sale of our branch office building in Port St.
Joe and losses on other real estate.
Our noninterest expense increased $3.4 million, or 16.3% to $23.9 million for
first six months of 2003 from $20.5 million for the first six months of 2002. As
a percentage of our net interest income, noninterest expenses increased from
84.2% during the first six months of 2002 to 102.8% during the first six months
of 2003. This increase in noninterest expenses increased our efficiency ratio to
70.8% during the first six months of 2003 compared to 67.5% during the first six
months of 2002 and 67.3% for the year 2002. Salaries and benefits increased $1.1
million, or 9.2% to $12.7 million for the first six months of 2003 from $11.6
million for the first six months of 2002. All other noninterest expenses
increased $2.3 million, or 25.8% to $11.2 million for the first six months of
2003 from $8.9 million for the first six months of 2002. Other noninterest
expenses increased for the first six months of 2003 primarily due to the
one-time expenses referred to in the previous paragraph plus increases in
professional fees and costs associated with increased mortgage activity.
Income tax expense. Our income tax expense was $940,000 for the second quarter
of 2003, compared to income tax benefit of $3.8 million for the second quarter
of 2002 and $2.3 million tax expense for the first six months of 2003, compared
to income tax benefit of $2.7 million for the first six months of 2002. The
primary difference in the effective rate and the federal statutory rate (34%)
for the three and six-month periods ended June 30, 2003 is due to certain
tax-exempt income from investments and insurance policies.
Provision for Loan Losses. Our provision for loan losses represents the amount
determined by management necessary to maintain the allowance for loan losses at
a level capable of absorbing inherent losses in the loan portfolio. Management
reviews the adequacy of the allowance on a quarterly basis. The allowance for
loan losses is established using an eight-point scale, with the loan officers
having the primary responsibility for assigning the risk ratings and for the
timely reporting of changes in the risk ratings. This process and the assigned
risk ratings are subject to review by our internal Loan Review Department. Based
on the assigned risk ratings, the loan portfolio is segregated into the
following regulatory classifications: Special Mention, Substandard, Doubtful or
Loss. Generally, recommended regulatory reserve percentages are applied to these
categories to estimate the amount of loan loss allowance required. Impaired
loans are reviewed specifically and separately under Statement of Financial
Accounting Standards Statement No. 114 ("Statement 114") to determine the
appropriate reserve allocation. Management compares the investment in an
impaired loan against the present value of expected cash flows discounted at the
loan's effective interest rate, the loan's observable market price or the fair
value of the collateral, if the loan is collateral dependent, to determine the
appropriate reserve allowance. Reserve percentages assigned to non-rated loans
are based on historical charge-off experience adjusted for other risk factors.
To evaluate the overall adequacy of the allowance to absorb losses inherent in
our loan portfolio, management considers historical loss experience based on
volume and types of loans, trends in classifications, volume and trends in
delinquencies and nonaccruals, economic conditions, and other pertinent
information. Based on future evaluations, additional provision for loan losses
may be necessary to maintain the allowance for loan losses at an appropriate
level. See "Financial Condition - Allowance for Loan Losses" for additional
discussion.
The provision for loan losses was $725,000 for the second quarter of 2003
compared to $15.0 million for the second quarter of 2002 and $1.9 million for
the first six months of 2003 compared to $16.1 million for the first six months
of 2002. During the first six months of 2003, the Corporation had net-charged
off loans totaling $7.0 million compared to net charged-off loans of $14.5
million in the first six months of 2002. The ratio of net charged-off loans to
the provision for loan losses was 365.9% in the first six months of 2003
compared to 90.1% for the first six months of 2002 and 72.7% for the year 2002.
The annualized ratio of net charged-off loans to average loans was 1.23% in the
first six months of 2003 compared to 2.66% for the first six months of 2002 and
4.12% for the year 2002. The allowance for loan losses totaled $22.6 million, or
2.04% of loans, net of unearned income at June 30, 2003 compared to $27.8
million, or 2.44% of loans, net of unearned income at December 31, 2002. See
"Allowance for Loan Losses" section for additional discussion.
Financial Condition
Our total assets were $1.440 billion at June 30, 2003, an increase of $34.4
million, or 2.44% from $1.406 billion as of December 31, 2002. Our average total
assets for the first six months of 2003 totaled $1.434 billion, which was
supported by average total liabilities of $1.354 billion and average total
stockholders' equity of $80 million.
Short-term liquid assets. Our short-term liquid assets (cash and due from banks,
interest-bearing deposits in other banks and federal funds sold) increased $11.0
million, or 16.57%, to $77.4 million at June 30, 2003 from $66.4 million at
December 31, 2002. This increase resulted primarily from excess funds invested
in federal funds sold and interest-bearing deposits at the Federal Home Loan
Bank ("FHLB"). These excess funds were attributable primarily to an increase in
deposits. These deposits were invested in short-term liquid assets primarily to
improve our liquidity position. At June 30, 2003, our short-term liquid assets
comprised 5.4% of total assets compared to 4.7% at December 31, 2002. We
continually monitor our liquidity position and will increase or decrease our
short-term liquid assets as necessary.
Investment Securities. Our total investment securities increased $22.5 million,
or 31.6% to $95.6 million at June 30, 2003, from $73.1 million at December 31,
2002. Mortgage-backed securities, which comprised 38.2% of the total investment
portfolio at June 30, 2003, increased $3.3 million, or 9.9%, to $36.5 million
from $33.2 million at December 31, 2002. Investments in U.S. Treasury and agency
securities, which comprised 36.6% of the total investment portfolio at June 30,
2003, increased $18.1 million, or 107.1%, to $35.0 million from $16.9 million at
December 31, 2002. The total investment portfolio at June 30, 2003 comprised
7.5% of all interest-earning assets compared to 5.8% at December 31, 2002
producing an average tax equivalent yield of 5.6% for the second quarter of 2003
compared to 6.1% for the second quarter of 2002 and 5.9% for the first six
months of 2003 compared to 5.8% for the first six months of 2002.
Loans, net of unearned income. Our loans, net of unearned income, totaled $1.105
billion at June 30, 2003, a decrease of 3.0%, or $34 million from $1.139 billion
at December 31, 2002. Mortgage loans held for sale totaled $31.2 million at June
30, 2003, an increase of $30.4 million from $764,000 at December 31, 2002.
Average loans, including mortgage loans held for sale, totaled $1.151 billion
for the first six months of 2003 compared to $1.101 million for the first six
months of 2002. Average loans, including mortgage loans held for sale, totaled
$1.145 billion for the second quarter of 2003 compared to $1.130 billion for the
second quarter of 2002. Loans, net of unearned income, comprised 86.4% of
interest-earning assets at June 30, 2003, compared to 91.5% at December 31,
2002. Mortgage loans held for sale comprised 2.4% of interest-earning assets at
June 30, 2003, compared to .1% at December 31, 2002. The loan portfolio produced
an average yield of 6.9% for the second quarter and first six months of 2003
compared to 7.8% for the second quarter and first six months of 2002. This
decline in yield was offset by basis point declines of 64 and 69 in the average
cost of the funds for the second quarter and first six months of 2003,
respectively, that support our loan portfolio. The following table details the
distribution of our loan portfolio by category as of June 30, 2003 and December
31, 2002:
DISTRIBUTION OF LOANS BY CATEGORY
JUNE 30, 2003 DECEMBER 31, 2002
----------------------------- ----------------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
----------- ------------ ----------- ------------
Commercial and industrial ........................ $ 197,092 17.8% $ 213,210 18.7%
Real estate -- construction and land development . 208,187 18.8 212,818 18.7
Real estate -- mortgage
Single-family ................................. 257,029 23.2 272,899 23.9
Commercial .................................... 329,532 29.8 317,359 27.8
Other ......................................... 40,264 3.7 38,220 3.4
Consumer ......................................... 65,025 5.9 79,398 7.0
Other ............................................ 8,864 .8 5,931 .5
----------- ------------ ----------- ------------
Total loans ............................ 1,105,993 100.0% 1,139,835 100.0%
============ ============
Unearned income .................................. (1,138) (1,298)
Allowance for loan losses ........................ (22,555) (27,766)
----------- -----------
Net loans .............................. $ 1,082,300 $ 1,110,771
=========== ===========
Deposits. Noninterest-bearing deposits totaled $124.6 million at June 30, 2003,
an increase of 4.6%, or $5.5 million from $119.1 million at December 31, 2002.
Noninterest-bearing deposits comprised 11.0% of total deposits at June 30, 2003,
compared to 10.8% at December 31, 2002. Of total noninterest-bearing deposits
$72.0 million, or 57.8% were in our Alabama branches while $52.6 million, or
42.2% were in our Florida branches.
Interest-bearing deposits totaled $1.011 billion at June 30, 2003, an increase
of 2.2%, or $21.8 million from $989 million at December 31, 2002.
Interest-bearing deposits averaged $1.031 billion for the first six months of
2003 compared to $924.4 million for the first six months of 2002, an increase of
$106.6 million, or 11.5%. Our average interest-bearing deposits for the second
quarter of 2003 totaled $1.028 billion compared to $940.9 million for the second
quarter of 2002, an increase of $87.1 million, or 9.3%.
The average rate paid on all interest-bearing deposits during the first six
months of 2003 was 2.5% compared to 3.3% for the first six months of 2002 and
2.4% for the second quarter of 2003 compared to 3.1% for the second quarter of
2002. Of total interest-bearing deposits $610.1 million, or 60.3% were in the
Alabama branches while $400.4 million, or 39.7% were in the Florida branches.
Borrowings. Advances from the FHLB totaled $174.0 million at June 30, 2003 and
December 31, 2002. Borrowings from the FHLB were used primarily to fund growth
in the loan portfolio and have a weighted average rate of approximately 5.1%.
These advances are secured by FHLB stock, agency securities and a blanket lien
on certain residential real estate loans and commercial loans.
Guaranteed Preferred Beneficial Interests in Our Subordinated Debentures. On
September 7, 2000, TBC Capital Statutory Trust II ("TBC Capital II"), a
Connecticut statutory trust established by us, received $15,000,000 in proceeds
in exchange for $15,000,000 principal amount of TBC Capital II's 10.6%
cumulative trust preferred securities in a pooled trust preferred private
placement. TBC Capital II used the proceeds to purchase an equal principal
amount of our 10.6% subordinated debentures.
On July 16, 2001, TBC Capital Statutory Trust III ("TBC Capital III"), a
Delaware business trust established by us, received $16,000,000 in proceeds in
exchange for $16,000,000 principal amount of TBC Capital III's variable rate
cumulative trust preferred securities in a pooled trust preferred private
placement. TBC Capital III
used the proceeds to purchase an equal principal amount of our variable rate
subordinated debentures. The stated interest rate is the six-month LIBOR plus
375 basis points. The interest rate on the securities reprices every six months
and has a 12% per annum ceiling for the first ten years. As of the date of
issuance, the interest rate on the securities was 7.57%. As of June 30, 2003,
the interest rate was 5.10%.
We have fully and unconditionally guaranteed all obligations of TBC Capital II
and TBC Capital III on a subordinated basis with respect to the preferred
securities. Subject to certain limitations, the preferred securities qualify as
Tier 1 capital and are presented in the Consolidated Statement of Financial
Condition as "Guaranteed preferred beneficial interests in our subordinated
debentures." The sole assets of TBC Capital II and TBC Capital III are our
subordinated debentures. The preferred securities of TBC Capital II and TBC
Capital III and our subordinated debentures each have 30-year lives. However, we
and TBC Capital II and TBC Capital III have call options, with a premium after
five years through ten years and call options at par after ten years, subject to
regulatory approval, or earlier depending upon certain changes in tax or
investment company laws, or regulatory capital requirements.
Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities
decreased $6.7 million from $15.6 million at December 31, 2002, to $8.9 million
at June 30, 2003. This $6.7 million decline is primarily due to the repurchase
of $5.3 million in loans sold with recourse during 2002.
Allowance for Loan Losses. We maintain an allowance for loan losses within a
range that we believe is adequate to absorb estimated losses inherent in the
loan portfolio. We prepare a quarterly analysis to assess the risk in the loan
portfolio and to determine the adequacy of the allowance for loan losses.
Generally, we estimate the allowance using specific reserves for impaired loans,
and other factors, such as historical loss experience based on volume and types
of loans, trends in classifications, volume and trends in delinquencies and
non-accruals, economic conditions and other pertinent information. The level of
allowance for loan losses to net loans will vary depending on the quarterly
analysis.
We manage and control risk in the loan portfolio through adherence to credit
standards established by the board of directors and implemented by senior
management. These standards are set forth in a formal loan policy, which
establishes loan underwriting/approval procedures, sets limits on credit
concentration and enforces regulatory requirements. In addition, we have
implemented a peer review system to supplement our existing independent loan
review functions. We believe that this system will help us to improve our timely
review of the loan portfolio.
Loan portfolio concentration risk is reduced through concentration limits for
borrowers and collateral types and through geographical diversification.
Concentration risk is measured and reported to senior management and the board
of directors on a regular basis.
The quarterly allowance for loan loss calculation is segregated into various
segments that include classified loans, loans with specific allocations and pass
rated loans. A pass rated loan is generally characterized by a very low to
average risk of default and in which management perceives there is a minimal
risk of loss. Loans are rated using an eight point scale with the loan officer
having the primary responsibility for assigning risk ratings and for the timely
reporting of changes in the risk ratings. These processes, and the assigned risk
ratings, are subject to review by the internal loan review function and senior
management. Based on the assigned risk ratings, the loan portfolio is segregated
into the following regulatory classifications: Special Mention, Substandard,
Doubtful or Loss. Generally, regulatory reserve percentages are applied to these
categories to estimate the amount of loan loss, adjusted for previously
mentioned risk factors.
Pursuant to Statement 114, impaired loans are specifically reviewed loans for
which it is probable that we will be unable to collect all amounts due according
to the terms of the loan agreement. Impairment is measured by comparing the
recorded investment in the loan with the present value of expected future cash
flows discounted at the loan's effective interest rate, at the loans observable
market price or at the fair value of the collateral if the loan is collateral
dependent. A valuation allowance is provided to the extent that the measure of
the impaired loans is less than the recorded investment. A loan is not
considered impaired during a period of delay in payment if the ultimate
collectibility of all amounts due is expected. Larger groups of homogenous loans
such as consumer installment and residential real estate mortgage loans are
collectively evaluated for impairment.
Reserve percentages assigned to pass rated homogeneous loans are based on
historical charge-off experience adjusted for current trends in the portfolio
and other risk factors.
As stated above, risk ratings are subject to independent review by the Loan
Review Department, which also performs ongoing, independent review of the risk
management process, which includes underwriting, documentation and collateral
control. The Loan Review Department is centralized and independent of the
lending function. The loan review results are reported to the Audit Committee of
the board of directors and senior management. We have also established a
centralized loan administration services department to serve all of our bank
locations, thereby providing standardized oversight for compliance, approval
authorities, and bank lending policies and procedures, as well as centralized
supervision, monitoring and accessibility.
The following table summarizes certain information with respect to our allowance
for loan losses and the composition of charge-offs and recoveries for the
periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
SIX-MONTH
PERIOD
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2003 2002
----------- -----------
(Dollars in thousands)
Allowance for loan losses at beginning of period....... $ 27,766 $ 12,546
Allowance of (branch sold) acquired bank .............. (92) 1,058
Charge-offs:
Commercial and industrial ........................... 3,071 25,162
Real estate -- construction and land development..... 71 1,704
Real estate -- mortgage
Single-family ................................... 38 2,608
Commercial ...................................... 3,255 6,140
Other ........................................... 215 141
Consumer ............................................ 874 2,343
----------- -----------
Total charge-offs ........................... 7,524 38,098
Recoveries:
Commercial and industrial ........................... 382 94
Real estate -- construction and land development..... 3 14
Real estate -- mortgage
Single-family ................................... 19 23
Commercial ................................ -- --
Other ........................................... 15 38
Consumer ............................................ 61 239
----------- -----------
Total recoveries ............................ 480 408
----------- -----------
Net charge-offs ....................................... 7,044 37,690
Provision for loan losses ............................. 1,925 51,852
----------- -----------
Allowance for loan losses at end of period ............ $ 22,555 $ 27,766
=========== ===========
Loans at end of period, net of unearned income ........ $ 1,104,855 $ 1,138,537
Average loans, net of unearned income ................. 1,150,899 1,124,977
Ratio of ending allowance to ending loans ............. 2.04% 2.44%
Ratio of net charge-offs to average loans (1) ......... 1.23% 3.35%
Net charge-offs as a percentage of:
Provision for loan losses ........................... 365.92% 72.69%
Allowance for loan losses (1) ....................... 62.98% 135.74%
Allowance for loan losses as a percentage
of nonperforming loans .............................. 62.84% 105.00%
(1)Annualized.
The allowance for loan losses as a percentage of loans, net of unearned income,
at June 30, 2003 was 2.04% compared to 2.44% as of December 31, 2002. The
allowance for loan losses as a percentage of nonperforming loans decreased to
62.8% at June 30, 2003 from 105.0% at December 31, 2002 due to the $7.04 million
in net charge-off loans during the first six months 2003 on which an allowance
had been previously provided. In addition, the amount of nonperforming loans
increased as well. The increase in nonperforming loans primarily resulted from
the amount of potential problem loans (See "Potential Problem Loans") migrating
to a nonperforming status during the first six months of 2003. This migration of
potential problem loans did not have a significant effect on the allowance for
loan losses at June 30, 2003 because approximately $774,000 and $1.2 million of
the allowance had been allocated to these loans at March 31, 2003 and December
31, 2002, respectively.
Net charge-offs were $7.04 million for the first six months of 2003. Net
charge-offs to average loans on an annualized basis totaled 1.23% for the first
six months of 2003. Net commercial loan charge-offs totaled $2.7 million, or
38.2% of total net charge-off loans for the first six months of 2003 compared to
66.5% of total net charge-off loans for the year 2002. Net commercial real
estate loan charge-offs totaled $3.2 million, or 46.2% of total net charge-off
loans for the first six months of 2003 compared to 16.3% of total net charge-off
loans for the year 2002. Net consumer loan charge-offs totaled $685,000, or 9.7%
of total net charge-off loans for the first six months of 2003 compared to 5.6%
of total net charge-off loans for the year 2002.
The amount of past due loans 30 days or more ("past due loans"), net of
nonaccrual loans, improved during the second quarter of 2003. Past due loans at
June 30, 2003 totaled $13.4 million, or 1.21% of total loans, a decrease from
$50.9 million, or 4.48% at March 31, 2003.
Nonperforming Loans. Nonperforming loans increased $9.5 million to $35.9 million
as of June 30, 2003 from $26.4 million as of December 31, 2002. As a percentage
of net loans, nonperforming loans increased from 2.32% at December 31, 2002 to
3.25% at June 30, 2003. The increase in nonperforming loans resulted primarily
from the amount of potential problem loans (See "Potential Problem Loans")
reported at March 31, 2003 and December 31, 2002 migrating to a nonperforming
status. The following table represents our nonperforming loans for the dates
indicated.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
JUNE 30, DECEMBER 31,
2003 2002
------- -------
(Dollars in thousands)
Nonaccrual ......................................... $32,906 $24,715
Past due (contractually past due 90 days or more) .. 2,246 1,729
Restructured ....................................... 743 --
------- -------
$35,895 $26,444
======= =======
Nonperforming loans as a percent of loans........... 3.25% 2.32%
======= =======
The following is a summary of nonperforming loans by category for the dates
shown:
JUNE 30 DECEMBER 31,
2003 2002
------- -------
(Dollars in thousands)
Commercial and industrial ........................ $11,955 $ 9,661
Real estate -- construction and land development.. 2,688 2,226
Real estate -- mortgages
Single-family ............................... 5,536 3,672
Commercial .................................. 13,707 8,434
Other ....................................... 723 888
Consumer ......................................... 1,232 1,548
Other ............................................ 54 15
------- -------
Total nonperforming loans .............. $35,895 $26,444
======= =======
A delinquent loan is placed on nonaccrual status when it becomes 90 days or more
past due and management believes, after considering economic and business
conditions and collection efforts, that the borrower's financial condition is
such that the collection of interest is doubtful. When a loan is placed on
nonaccrual status, all interest which has been accrued on the loan but remains
unpaid is reversed and deducted from earnings as a reduction of reported
interest income; any prior period accrued and unpaid interest is reversed and
charged against the allowance for loan losses. No additional interest income is
accrued on the loan balance until the collection of both principal and interest
becomes reasonably certain. When a problem loan is finally resolved,
there may ultimately be an actual write-down or charge-off of the principal
balance of the loan to the allowance for loan losses, which may necessitate
additional charges to earnings.
Impaired Loans. At June 30, 2003, the recorded investment in impaired loans
totaled $28.3 million with approximately $6.4 million in allowance for loan
losses specifically allocated to impaired loans. This represents an increase of
$1.9 million from $26.4 million at December 31, 2002. A significant portion of
our impaired loans are centered in three of our bank groups; Bristol bank group
- - $16.0 million, Albertville bank group - $3.1 million and Huntsville bank group
- - $4.4 million. We have approximately $339,000 in commitments to lend additional
funds to the borrowers whose loans are impaired.
The following is a summary of impaired loans and the specifically allocated
allowance for loan losses by category as of June 30, 2003:
OUTSTANDING SPECIFIC
BALANCE ALLOWANCE
------- -------
(Dollars in thousands)
Commercial and industrial ........................ $11,211 $ 3,166
Real estate -- construction and land development.. 2,719 558
Real estate -- mortgages
Commercial .................................. 13,795 2,610
Other ....................................... 572 93
------- -------
Total .................................. $28,297 $ 6,427
======= =======
In addition to impaired loans, management has identified $4.0 million in
potential problem loans as of June 30, 2003. Potential problem loans are loans
where known information about possible credit problems of the borrowers causes
management to have doubts as to the ability of such borrowers to comply with the
present repayment terms and may result in disclosure of such loans as
nonperforming in future periods. Of the $4.0 million in potential problem loans
at June 30, 2003, $1.8 million or 44% are attributable to the Bristol, Florida
group. Of the $1.8 million attributable to the Bristol Florida group, $1.4
million or 36% is concentrated in a single credit to a commercial customer.
Overall, 20% of these potential problem loans are secured by 1-4 family
residential real estate, and 40% of these potential problem loans are secured by
commercial real estate and raw land. Management will work closely with these
customers in an attempt to prevent these loans from migrating into nonperforming
status. The bank has allocated $472,000 in loan loss reserve to absorb potential
losses on these accounts.
Stockholders Equity. At June 30, 2003, total stockholders' equity was $88.4
million, an increase of $11.9 million from $76.5 million at December 31, 2002.
The increase in stockholders' equity resulted primarily from net income of $5.5
million for the first six months of 2003 and $6.2 million in proceeds from the
issuance of our Series A Convertible Preferred Stock. As of June 30, 2003 we had
18,013,002 shares of common stock issued and 17,641,676 outstanding. In
September of 2000, our board of directors approved a stock buyback plan in an
amount not to exceed $10,000,000. As of June 30, 2003, there were 113,204 shares
held in treasury at a cost of $684,000.
In May 2003, the Corporation received $6.2 million in proceeds, net of issuance
costs, from the sale of 62,000 shares of Series A Convertible Preferred Stock.
Dividends will accrue on the liquidation value of $100 per share at the rate of
LIBOR plus 5.75 not to exceed 12.5%. Dividends are noncumulative and reset
semi-annually on June 1 and December 1. Each Series A Convertible Preferred
Stock is convertible at any time beginning June 1, 2008. Such shares shall be
convertible into the number of shares of common stock which result from dividing
the conversion price at the time of conversion into the liquidation value. The
initial conversion price is $8.00 per share. From the date of issuance the
Corporation can redeem the preferred stock at the following prices stated as a
percent of the liquidation value: 2003 -
105%; 2004 - 104%; 2005 - 103%; 2006 - 102%; 2007 - 101%; 2008 and thereafter -
100%. In the event of a merger prior to June 1, 2004, the Series A Convertible
Preferred Stock can be redeemed by us at a redemption price of 106%.
On April 24, 2002, we issued 157,500 shares of restricted common stock to
certain directors and key employees. Under the restricted stock agreements, the
shares of restricted stock may not be sold or assigned in any manner until such
shares have vested. During this restricted period, the participant is eligible
to receive dividends and exercise voting privileges. The restricted stock also
has a corresponding vesting period with one-third vesting in the third, fourth
and fifth years. The restricted stock was issued at a cost of $1,120,000, and is
classified as a contra-equity account, "Unearned restricted stock", in
stockholders' equity. The $1,120,000 is being amortized as expense as the stock
is earned during the restricted period. For the periods ended June 30, 2003 and
2002, we recognized $112,000 and $56,000 in restricted stock expense,
respectively.
We adopted a leveraged employee stock ownership plan (the "ESOP") effective May
15, 2002, that covers all eligible employees that have attained the age of
twenty-one and have completed a year of service. As of June 30, 2003, the ESOP
has been internally leveraged with 273,400 shares of our common stock purchased
in the open market and classified as a contra-equity account, "Unearned ESOP
shares", in stockholders' equity.
On January 29, 2003, we issued a $2.1 million promissory note to reimburse us
for the funds used to leverage the ESOP. The unreleased shares and our guarantee
secure the promissory note, which has been classified as long-term debt on our
consolidated statement of financial condition. As the debt is repaid, shares are
released from collateral based on the proportion of debt service. Released
shares are allocated to eligible employees at the end of the plan year based on
the employee's eligible compensation to total compensation. We recognize
compensation expense as the shares are earned and committed to be released. As
shares are committed to be released and compensation expense is recognized, the
shares become outstanding for basic and diluted earnings per share computations.
The amount of compensation expense we report is equal to the average fair value
of the shares earned and committed to be released during the period. We
recognized compensation expense during the period ended June 30, 2003 of
$55,000. The ESOP shares as of June 30, 2003, were as follows:
June 30, 2003
----------
Allocated shares ........................ 6,378
Estimated shares committed to be released 8,900
Unreleased shares ....................... 258,122
----------
Total ESOP shares ....................... 273,400
==========
Fair value of unreleased shares ......... $1,796,000
==========
Regulatory Capital.The table below represents our and our subsidiary's
regulatory and minimum regulatory capital requirements at June 30, 2003 (dollars
in thousands):
FOR CAPITAL
ADEQUACY TO BE WELL
ACTUAL PURPOSES CAPITALIZED
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ---- -------- -----
Total Risk-Based Capital
Corporation $116,409 10.09% $ 92,267 8.00% $115,334 10.00%
The Bank 109,159 9.55 91,458 8.00 114,322 10.00
Tier 1 Risk-Based Capital
Corporation 94,360 8.18 46,134 4.00 69,200 6.00
The Bank 94,645 8.28 45,729 4.00 68,593 6.00
Leverage Capital
Corporation 94,360 6.65 56,770 4.00 70,963 5.00
The Bank 94,645 6.71 56,436 4.00 70,545 5.00
Liquidity
Our principal sources of funds are deposits, principal and interest payments on
loans, federal funds sold and maturities and sales of investment securities. In
addition to these sources of liquidity, we have access to purchased funds from
several regional financial institutions and may borrow from a regional financial
institution under a line of credit, and from the FHLB under a blanket floating
lien on certain commercial loans and residential real estate loans. While
scheduled loan repayments and maturing investments are relatively predictable,
interest rates, general economic conditions and competition primarily influence
deposit flows and early loan payments. Management places constant emphasis on
the maintenance of adequate liquidity to meet conditions that might reasonably
be expected to occur.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by us or on our behalf. Some of the disclosures
in this Quarterly Report on Form 10-Q, including, among others, any statements
preceded by, followed by, or which include, the words "may," "could," "should,"
"will," "would," "hope," "might," "believe," "expect," "anticipate," "estimate,"
"intend," "plan," "assume" or similar expressions constitute forward-looking
statements.
These forward-looking statements are based upon and include, implicitly and
explicitly, our assumptions with respect to our beliefs, plans, objectives,
goals, expectations, anticipations, estimates, intentions, financial condition,
results of operations, future performance and business, including our
expectations and estimates with respect to our revenues, expenses, earnings,
return on equity, return on assets, efficiency ratio, asset quality and other
financial data and capital and performance ratios.
Although we believe that the assumptions underlying our forward-looking
statements are reasonable, these statements involve risks and uncertainties
which that subject to change based on various important factors (some of which
are beyond our control). The following factors, among others, could cause our
financial performance to differ materially from what is reflected in our
forward-looking statements: the strength of the United States economy in general
and the strength of the regional and local economies in which we conduct
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; inflation, interest rate, market and monetary
fluctuations; our ability to successfully integrate the assets, liabilities,
customers, systems and management we acquire or merge into our operations; our
timely development of new products and services to a changing environment,
including the features, pricing and quality compared to the products and
services of our competitors; the willingness of users to substitute competitors'
products and services for our products and services; the impact of changes in
financial services policies, laws and regulations, including laws, regulations
and policies concerning taxes, banking, securities and insurance, and the
application thereof by regulatory bodies; our ability to resolve any legal
proceeding on acceptable terms and its effect on our financial condition or
results of operations; technological changes; changes in consumer spending and
savings habits; and regulatory, legal or judicial proceedings.
If one or more of our assumptions proves incorrect or there are unanticipated
changes in the factors affecting our financial performance, then our actual
results, performance or achievements could differ materially from those
expressed in, or implied by, forward-looking statements contained in this
report. Therefore, we caution you not to place undue reliance on our
forward-looking statements.
We do not intend to update our forward-looking statements, whether written or
oral, to reflect change. All forward-looking statements attributable to us are
expressly qualified by these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information set forth under the caption "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations-Market Risk-Interest
Rate Sensitivity" included in our Annual Report on Form 10-K for the year ended
December 31, 2002, is hereby incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
CEO AND CFO CERTIFICATIONS
Appearing as exhibits to this report are Certifications of our Chief Executive
Officer ("CEO") and our Chief Financial Officer ("CFO"). The Certifications are
required to be made by Rule 13a - 14 of the Securities Exchange Act of 1934, as
amended. This Item contains the information about the evaluation that is
referred to in the Certifications, and the information set forth below in this
Item 4 should be read in conjunction with the Certifications for a more complete
understanding of the Certifications.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
As of June 30, 2003, we conducted an evaluation (the "Evaluation") of the
effectiveness of the design and operation of our disclosure controls and
procedures under the supervision and with the participation of our management,
including our CEO and CFO. Based upon that Evaluation, our management, including
our CEO and CFO have concluded that, (subject to the limitations noted below),
our disclosure controls and procedures were effective as of June 30, 2003. There
have been no changes in our internal controls, (other than those discussed
below), over financial reporting that occurred during the fiscal quarter ended
June 30, 2003, that have materially affected or are reasonably likely to
materially affect our internal controls over financial reporting.
CHANGES IN INTERNAL CONTROLS
Prior to the discovery of the Bristol, Florida bank group situation (that was
disclosed and described in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2002) which ultimately caused us to restate
our financial statements for the second and third quarters of 2002, we were in
the process of enhancing our internal controls for financial reporting. In the
fourth quarter of 2002, we instituted a peer review system to supplement our
existing independent loan review function; we increased our loan review
staffing; and we also established a centralized loan administration services
department to serve all of our bank locations, thereby providing standardized
oversight for compliance with approval authorities and bank lending policies and
procedures. We also hired additional personnel for our credit risk management
department.
Although the Bristol, Florida bank group loan problems resulted from a former
employee's intentional circumvention of our existing internal controls, and
although we discovered these problems as a result of the peer review system we
implemented in the fourth quarter of 2002, we and our independent auditors are
nonetheless treating those circumstances as reflecting material weaknesses in
our internal controls with respect to the monitoring of loan risk ratings, the
timely review of the loan portfolio by our loan review function, the monitoring
of past due loans and the monitoring of loan approval and a loan officer's
ability to originate loans in excess of authorized lending limits.
These concerns are being addressed in part by the actions we instituted during
the fourth quarter of 2002. Going forward, we intend to centralize the loan
operations of all of our branch groups in order to provide an enhanced degree of
centralized supervision, monitoring and accountability. We believe that we will
have this centralization completed within the next twelve months.
We have disclosed and discussed these issues and responses with our Audit
Committee and independent auditors.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
While we are a party to various legal proceedings arising in the ordinary course
of business, we believe that there are no proceedings threatened or pending
against us at this time that will individually, or in the aggregate, materially
adversely effect our business, financial condition or results of operations. We
believe that we have strong claims and defenses in each lawsuit in which we are
involved. While we believe that we should prevail in each lawsuit, there can be
no assurance that the outcome of any pending or future litigation, either
individually or in the aggregate, will not have a material adverse effect on our
financial condition or our results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 2003, we received $6,193,000 in proceeds, net of issuance costs, from the
sale of 62,000 shares of Series A Convertible Preferred Stock. Dividends will
accrue on the liquidation value of $100 per share at the rate of LIBOR plus 5.75
not to exceed 12.5%. Dividends are noncumulative and reset semi-annually on
June 1 and December 1. Each Series A Convertible Preferred Stock is convertible
at any time beginning June 1, 2008. Such shares shall be convertible into the
number of shares of common stock which result from dividing the conversion price
at the time of conversion into the liquidation value. The initial conversion
price is $8.00 per share. From the date of issuance, we can redeem the preferred
stock at the following prices stated as a percent of the liquidation value:
2003, 105%; 2004, 104%; 2005, 103%; 2006, 102%; 2007, 101%; 2008 and thereafter
100%. In the event of a merger prior to June 1, 2004, the Series A Convertible
Preferred Stock can be redeemed by us at a redemption price of 106%.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 18, 2003, our Annual Meeting of Stockholders was held at which shares of
common stock represented at the Annual Meeting were voted in favor of the
directors listed below as follows:
Director For Against Withheld Broker Nonvotes
- -------- --- ------- -------- ---------------
1. Peter N. DiChiara 11,781,484 - 366,215 -
2. Steven C. Hays 11,779,484 - 368,215 -
3. Randell E. Jones 11,799,984 - 367,715 -
4. Jerry M. Smith. 11,321,594 - 826,105 -
5. Michael E. Stephens 11,781,484 - 366,215 -
6. Marie Swift 11,323,094 - 824,605 -
7. Johnny Wallis 11,323,094 - 824,605 -
In addition to the directors elected at the meeting, the following individuals
will continue to serve as directors until the end of their respective terms:
James R. Andrews, M.D. Neal R. Berte, Ed. D.
David R.Carter W. T. Campbell, Jr.
K. Earl Durden John F. Gittings
Thomas E. Jernigan,Jr. Mayer Mitchell
James Mailon Kent, Jr. Ronald Orso, M.D.
Harold Ripps Larry D. Striplin, Jr.
James A. Taylor James A. Taylor, Jr.
T. Mandell Tillman
In addition, shares of common stock represented at the Annual Meeting were voted
in favor of the ratification of Ernst & Young LLP as independent auditors as
follows:
For Against Abstain Broker Nonvotes Withheld
- --- ------- ------- --------------- --------
11,925,924 167,979 53,796 - -
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3 Certificate of Designation of Preferences and Rights of Series A
Convertible Preferred Stock of The Banc Corporation.
31.01 Certification of principal executive officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.02 Certification of principal financial officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.01 Certification of principal executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.02 Certification of principal financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K:
We furnished a Current Report on Form 8-K dated April 15, 2003 under Item
9 Regulation FD Disclosure of Form 8-K containing as an Exhibit a press
release dated April 14, 2003.
We furnished a Current Report on Form 8-K dated April 25, 2003 under Item
9 Regulation FD Disclosure of Form 8-K containing as an Exhibit a press
release dated April 24, 2003.
We filed a Current Report on Form 8-K dated May 23, 2003 under Item 5 of
Form 8-K containing as an Exhibit a press release dated May 22, 2003.
We filed a Current Report on Form 8-K dated June 18, 2003 under Item 5 of
Form 8-K containing as an Exhibit a press release dated June 18, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Banc Corporation
(Registrant)
Date: August 14, 2003 By:/s/ James A. Taylor, Jr.
----------------------------------------
James A. Taylor, Jr.
President and Chief Operating Officer
(Duly authorized officer of the registrant)
Date: August 14, 2003 By:/s/ David R. Carter
----------------------------------------
David R. Carter
Executive Vice President and Chief Financial Officer
(Principal accounting officer of the registrant)