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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 SEPTEMBER 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 (IRS Employer
of Incorporation) Identification No.)
17 North 20th Street, Birmingham, Alabama 35203
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(Address of Principal Executive Offices)
(205) 326-2265
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(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 September 30, 2003
- ----------------------------- ------------------------------------
Common stock, $.001 par value 17,681,413
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 32,729 $ 45,365
Interest bearing deposits in other banks 46,282 10,025
Federal funds sold 27,000 11,000
Investment securities available for sale 116,238 71,129
Investment securities held to maturity (fair value of $1,867,000 in 2002) -- 1,996
Mortgage loans held for sale 16,743 764
Loans, net of unearned income 887,396 1,138,537
Less: Allowance for loan losses (23,714) (27,766)
----------- -----------
Net loans 863,682 1,110,771
----------- -----------
Premises and equipment, net 55,408 61,849
Accrued interest receivable 5,100 6,876
Stock in FHLB and Federal Reserve Bank 11,122 10,903
Other assets 68,442 75,136
----------- -----------
TOTAL ASSETS $ 1,242,746 $ 1,405,814
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 91,459 $ 119,088
Interest-bearing 820,325 988,710
----------- -----------
TOTAL DEPOSITS 911,784 1,107,798
Advances from FHLB 173,350 173,750
Other borrowed funds 1,005 1,172
Long-term debt 1,978 --
Guaranteed preferred beneficial interests in our
subordinated debentures (trust preferred securities) 31,000 31,000
Accrued expenses and other liabilities 15,313 15,553
----------- -----------
TOTAL LIABILITIES 1,134,430 1,329,273
STOCKHOLDERS' EQUITY
Preferred stock, par value $.001 per share; authorized 5,000,000 shares;
shares issued 62,000 at September 30, 2003 -- --
Common stock, par value $.001 per share; authorized 25,000,000 shares;
shares issued 18,013,002 and 18,009,002, respectively;
outstanding 17,681,413, 17,672,949 and 17,605,124, respectively 18 18
Surplus - preferred 6,193 --
- common stock 68,372 68,315
Retained Earnings 37,363 11,571
Accumulated other comprehensive (loss) income (289) 550
Treasury stock, at cost (529) (808)
Unearned ESOP stock (2,028) (2,153)
Unearned restricted stock (784) (952)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 108,316 76,541
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,242,746 $ 1,405,814
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
2003 2002 2003 2002
------- ------- ------- --------
INTEREST INCOME
Interest and fees on loans $17,796 $21,768 $57,322 $ 64,516
Interest on investment securities
Taxable 860 742 2,400 2,157
Exempt from Federal income tax 8 104 167 308
Interest on federal funds sold 59 114 258 270
Interest and dividends on other investments 141 151 486 381
------- ------- ------- --------
Total interest income 18,864 22,879 60,633 67,632
INTEREST EXPENSE
Interest on deposits 5,138 7,460 18,044 22,281
Interest on other borrowed funds 2,223 2,171 6,629 6,452
Interest on guaranteed preferred beneficial interest in our
subordinated debentures (trust preferred securities) 609 626 1,840 1,902
------- ------- ------- --------
Total interest expense 7,970 10,257 26,513 30,635
------- ------- ------- --------
NET INTEREST INCOME 10,894 12,622 34,120 36,997
Provision for loan losses 9,250 2,969 11,175 19,082
------- ------- ------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,644 9,653 22,945 17,915
NONINTEREST INCOME
Service charges and fees on deposits 1,481 1,660 4,760 4,541
Mortgage banking income 1,428 843 3,488 2,225
Gain on sale of securities 95 503 758 527
Gain on sale of branches 46,057 -- 48,303 --
Other income 948 1,085 2,941 2,565
------- ------- ------- --------
TOTAL NONINTEREST INCOME 50,009 4,091 60,250 9,858
NONINTEREST EXPENSES
Salaries and employee benefits 10,677 6,225 23,366 17,846
Occupancy, furniture and equipment expense 2,074 1,850 6,195 5,464
Other 5,102 2,800 11,999 7,920
------- ------- ------- --------
TOTAL NONINTEREST EXPENSES 17,853 10,875 41,560 31,230
------- ------- ------- --------
Income (loss) before income taxes 33,800 2,869 41,635 (3,457)
INCOME TAX EXPENSE (BENEFIT) 13,525 796 15,842 (1,909)
------- ------- ------- --------
NET INCOME (LOSS) $20,275 $ 2,073 $25,793 $ (1,548)
======= ======= ======= ========
BASIC NET INCOME (LOSS) PER SHARE $ 1.16 $ 0.12 $ 1.48 $ (0.09)
======= ======= ======= ========
DILUTED NET INCOME (LOSS) PER SHARE $ 1.10 $ 0.12 $ 1.41 $ (0.09)
======= ======= ======= ========
AVERAGE COMMON SHARES OUTSTANDING 17,507 17,532 17,476 16,612
AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 18,461 17,861 18,244 16,612
See Notes to Condensed Consolidated Financial Statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
2003 2002
--------- ---------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES $ (5,692) $ 14,448
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest bearing deposits in other banks (36,257) (12,996)
Net increase in federal funds sold (16,000) (12,000)
Proceeds from sales of securities available for sale 28,285 13,729
Proceeds from maturities of securities available for sale 49,656 32,023
Purchases of investment securities available for sale (124,326) (33,900)
Proceeds from sale of investment securities held to maturity 2,070 --
Net increase in loans (8,162) (68,388)
Purchases of premises and equipment (3,806) (10,392)
Net cash received in branch sales 36,741 --
Net cash paid in business combination -- (8,619)
Other investing activities (219) (15,525)
--------- ---------
Net cash used by investing activities (72,018) (116,068)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 57,421 84,667
Net (decrease) increase in FHLB advances and other borrowed funds (567) 2,959
Proceeds received on long term debt 2,100 --
Payments made on long term debt (122) --
Proceeds from note payable -- 14,000
Principal payment on note payable -- (14,000)
Proceeds from sale of common stock 49 19,292
Proceeds from sale of preferred stock 6,193 --
Purchase of ESOP shares -- (1,835)
Purchase of treasury stock -- (24)
--------- ---------
Net cash provided by financing activities 65,074 105,059
--------- ---------
Net (decrease) increase in cash and due from banks (12,636) 3,439
Cash and due from banks at beginning of period 45,365 31,682
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 32,729 $ 35,121
========= =========
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 (See Note 10). Operating results for the three and nine-month periods
ended September 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.
Reclassification
Certain reclassifications have been made to the September 30, 2002 consolidated
financial statements to conform to the September 30, 2003 presentation.
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 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 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 through its banking subsidiary 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 and receives a fee for this guarantee. 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 September 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 September 30, 2003 was $19.6 million and represents the Corporation's
maximum credit risk. At September 30, 2003, the Corporation had no significant
liabilities or 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 letter 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 December 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 its analysis.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" (Statement 149). The statement amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133). Statement 149 is
effective for contracts entered into or modified after June 30, 2003, with
certain exceptions, and for hedging relationships designated after June 30,
2003. In addition, the provisions of the statement, with certain exceptions, are
required to be applied prospectively. The implementation of Statement 149 did
not have a material affect on the Corporation's financial condition or results
of operations.
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
(Statement 150). This statement requires certain financial instruments that
embody obligations of the issuer and have characteristics of both liabilities
and equity to be classified as liabilities. Many of these instruments previously
were classified as equity or temporary equity. Statement 150 is effective for
public companies for all financial instruments created or modified after May 31,
2003, and to other instruments at the beginning of the first interim period
beginning after June 15, 2003. The adoption of Statement 150 did not have a
material impact on the Corporation's financial condition or results of
operations.
Note 3 - Business Combination and Branch Sales
On August 29, 2003, the Corporation's banking subsidiary, The Bank, sold seven
branches, known as the Emerald Coast Division, serving the markets from Destin
to Panama City, Florida for a $46,800,000 deposit premium. These branches had
assets of approximately $234,000,000 and liabilities of $209,000,000. The
Corporation realized a $46,057,000 gain on the sale.
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. 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 from Mexico Beach to
Apalachicola. 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 CF Bancshares 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 Corporation 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 nine-month period ended September 30, 2002 include
the results of operations of CF Bancshares only for the period February 15, 2002
to September 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 nine-month
period ended
September 30, 2002
------------------
Interest income $ 68,527
Interest expense 31,062
------------
Net interest income 37,465
Provision for loan losses 19,899
Noninterest income 10,273
Noninterest expense 32,711
------------
Loss before income taxes (4,872)
Income tax benefit (2,349)
------------
Net loss $ (2,523)
============
Basic and diluted net loss per common
share $ (.15)
============
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 September 30, 2003
Net interest income $ 6,045 $ 4,849 $ 10,894
Provision for loan losses 6,490 2,760 9,250
Noninterest income 3,333 619 3,952
Gain on sale of branches -- 46,057 46,057
Noninterest expense(1) 13,805 4,048 17,853
Income tax expense (benefit) (4,362) 17,887 13,525
Net income (loss) (6,555) 26,830 20,275
Total assets 945,440 297,306 1,242,746
Three months ended September 30, 2002
Net interest income $ 7,020 $ 5,602 $ 12,622
Provision for loan losses 2,066 903 2,969
Noninterest income 3,248 843 4,091
Noninterest expense(1) 7,744 3,131 10,875
Income tax expense(benefit) 1,171 (375) 796
Net income(loss) (713) 2,786 2,073
Total assets 934,639 469,956 1,404,595
Nine months ended September 30, 2003
Net interest income $ 18,870 $ 15,250 $ 34,120
Provision for loan losses 7,321 3,854 11,175
Noninterest income 9,680 2,267 11,947
Gain on sale of branches 2,246 46,057 48,303
Noninterest expense(1) 29,782 11,778 41,560
Income tax expense(benefit) (2,376) 18,218 15,842
Net income (3,931) 29,724 25,793
Nine months ended September 30, 2002
Net interest income $ 20,833 $ 16,164 $ 36,997
Provision for loan losses 4,392 14,690 19,082
Noninterest income 7,623 2,235 9,858
Noninterest expense(1) 21,582 9,648 31,230
Income tax expense(benefit) 1,885 (3,794) (1,909)
Net income(loss) 597 (2,145) (1,548)
(1) Noninterest expense for the Alabama region includes all expenses for the
corporate 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 Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Numerator:
For basic and diluted, net income (loss) $ 20,275 $ 2,073 $ 25,793 $ (1,548)
Denominator:
For basic, weighted average common shares
outstanding 17,507 17,532 17,476 16,612
Effect of dilutive stock options,
restricted stock and convertible preferred 954 329 768 --
--------- --------- --------- ---------
Average diluted common shares outstanding 18,461 17,861 18,244 16,612
========= ========= ========= =========
Basic net income (loss) per share $ 1.16 $ .12 $ 1.48 $ (.09)
========= ========= ========= =========
Diluted net income (loss) per share $ 1.10 $ .12 $ 1.41 $ (.09)
========= ========= ========= =========
Note 6 - Comprehensive Income (Loss)
Total comprehensive income (loss) was $19,630,000 and $24,953,000, respectively,
for the three and nine-month periods ended September 30, 2003, and $2,240,000
and $(637,000) respectively, for the three and nine-month periods ended
September 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 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 September 30,
2003, the interest rate on these securities had repriced to 4.90%.
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 beginning five years after
issuance, with a premium 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
percentage 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 2000, the Corporation's board of directors approved a stock buyback
plan in an amount not to exceed $10,000,000. As of September 30, 2003, there
were 83,942 shares held in treasury at a cost of $529,000.
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 key employees and directors. 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 September 30, 2003 and 2002, the Corporation recognized $168,000 and
$112,000, respectively, in restricted stock expense.
The Corporation adopted a leveraged employee stock ownership plan (the "ESOP")
effective May 15, 2002 that covers all eligible employees who have attained the
age of twenty-one and have completed a year of service. As of September 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 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 ratio of an employee's eligible compensation to total
compensation of all participants. 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 September 30, 2003 and 2002, was $101,000 and $21,000,
respectively. The ESOP shares as of September 30, 2003 were as follows:
September 30, 2003
------------------
Allocated shares 6,378
Estimated shares committed to be released 15,575
Unreleased shares 251,447
----------
Total ESOP shares 273,400
==========
Fair value of unreleased shares $1,888,000
==========
The Corporation has established a stock incentive plan for directors and certain
key employees that provides 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 succeeding anniversaries 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"(APB Opinion 25). 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 nine-months ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income (loss):
As reported $ 20,275 $ 2,073 $ 25,793 $ (1,548)
Pro forma 20,091 1,857 25,246 (2,092)
Earnings (loss) per common share:
As reported $ 1.16 $ .12 $ 1.48 $ (.09)
Pro forma 1.15 .11 1.44 (.13)
Diluted earnings (loss)per common share:
As reported $ 1.10 $ .12 $ 1.41 $ (.09)
Pro forma 1.09 .10 1.38 (.12)
The fair value of the options granted was based upon the Black-Scholes pricing
model. The Corporation used the following weighted average assumptions for:
September 30
2003 2002
---- ----
Risk free interest rate 3.94% 3.63%
Volatility factor .33 .31
Weighted average life of options 3.50 4.50
Dividend yield 0.00 0.00
Note 10 - Deferred Compensation and Discretionary Bonuses
In September 2003, the federal bank regulatory agencies published a formal
position regarding the accounting treatment for certain indexed retirement plans
sponsored by banks. The Corporation has such plans that were established for the
benefit of certain directors and executive officers by the Corporation in the
years 1998, 1999 and 2002. Generally, the plans provide a retirement benefit
that is divided into a primary and secondary benefit. The primary benefit
represents the cumulative amount of excess earnings over the amount of estimated
opportunity cost from a related life insurance asset through the participants'
retirement date. This amount will be paid to the participant in equal
installments ranging from 10 - 15 years. The secondary benefit results from the
continuing excess earnings on the life insurance assets, if any, over the
opportunity cost and will be paid to the participant after retirement for
periods ranging from 10 years to the duration of the participant's life.
In accordance with APB opinion No. 12, as amended by FASB Statement No. 106, the
secondary benefit represents a postretirement benefit that should be estimated
and accrued over the participant's service period until the participant reaches
full eligibility. In prior periods, the Corporation has only accrued the
estimated primary benefit liability in its financial statements. The secondary
benefit was not accrued because the benefit is not guaranteed and there is a
high degree of uncertainty regarding the ultimate health of the participant,
future performance of the insurance policies and the Corporation's opportunity
rates.
The Corporation has estimated and accrued the present value of the future
benefits that are expected to be paid. As of September 30, 2003, and for the
three-month period then ended, the Corporation accrued an additional deferred
compensation liability of approximately $1.9 million before tax and $1.2 million
after tax related to the fiscal years 1998 through 2002. This amount was
considered by management and the Corporation's audit committee to be immaterial
to the current and prior period financial statements; therefore, no restatement
of prior periods was necessary.
The Corporation accrued $1.9 million during the quarter ended September 30, 2003
related to discretionary bonuses for all employees of the Corporation and its
subsidiary. The bonuses were approved by the compensation committee of the board
of directors on September 30, 2003 in recognition of the efforts of the
Corporation's personnel in returning the Corporation to well-capitalized status.
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 September 30, 2003
consolidated financial condition and results of operations for the three and
nine-month periods ended September 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.
Financial Overview
On August 29, 2003, our banking subsidiary, The Bank, sold seven branches, known
as the Emerald Coast Division, serving the markets from Destin to Panama City,
Florida for a $46.8 million deposit premium. These branches had assets,
primarily loans, of approximately $234 million and liabilities, primarily
deposits, of $209 million. We realized a pretax gain of $46.1 million and
after-tax gain of $28 million on the sale.
Total assets were $1.243 billion at September 30, 2003, a decrease of $163
million, or 11.6% from $1.406 billion as of December 31, 2002. Total loans, net
of unearned income were $887 million at September 30, 2003, a decrease of $252
million, or 22.1% from $1.139 billion as of December 31, 2002. Total deposits
were $912 million at September 30, 2003, a decrease of $196 million, or 17.7%
from $1.108 billion as of December 31, 2002. Total stockholders' equity was $108
million at September 30, 2003, an increase of $32 million, or 41.5% from $77
million as of December 31, 2002.
Results of Operations
Our net income for the three-month period ended September 30, 2003 (third
quarter of 2003) was $20.3 million compared to net income of $2.1 million for
the three-month period ended September 30, 2002 (third quarter of 2002), an
increase of $18.2 million. Our basic and diluted net income per share was $1.16
and $1.10, respectively for the third quarter of 2003 compared to $.12 per share
for the third quarter of 2002.
Our net income for the nine-month period ended September 30, 2003 (first nine
months of 2003) was $25.8 million compared to a net loss of $1.5 million for the
nine-month period ended September 30, 2002 (first nine months of 2002). Our
basic net income per share was $1.48 and diluted net income per share was $1.41
for the first nine months of 2003 compared to a net loss per share of $(.09) per
share for the first nine months of 2002. Our return on average assets, on an
annualized basis, was 2.44% for the first nine months of 2003 compared to (.15)
% for the first nine months of 2002. Our return on average stockholders' equity,
on an annualized basis, was 40.44% for the first nine months of 2003 compared to
(2.27) % for the first nine months of 2002. Our book value per common share at
September 30, 2003 was $5.78 compared to $4.35 as of December 31, 2002, and our
tangible book value per common share at September 30, 2003 was $5.06 compared to
$3.59 as of December 31, 2002.
The growth in our net income during the third quarter of 2003 compared to the
third quarter of 2002 is the result of a $46.1 million gain on the sale of
branches offset by an increase in loan loss provision and noninterest
expenses. Provision for loan losses increased $6.3 million, or 211.6% from $3.0
million in the third quarter of 2002 to $9.3 million in the third quarter of
2003. Noninterest expense increased $7.0 million, or 64.2% from $10.9 million in
the third quarter of 2002 to $17.9 million in the third quarter of 2003.
The growth in our net income during the first nine months of 2003 compared to
the first nine months of 2002 is the result of a $48.3 million gain on the sale
of branches and a decrease in loan loss provision, which was offset by an
increase in noninterest expenses. Provision for loan losses decreased $7.9
million, or 41.4% from $19.1 million in the first nine months of 2002 to $11.2
million in the first nine months of 2003. Noninterest income, exclusive of the
branch sales, increased $2.0 million, or 21.1% from $9.9 million in the first
nine months of 2002 to $11.9 million in the first nine months of 2003.
Noninterest expense increased $10.3 million, or 33.1% from $31.2 million in the
first nine months of 2002 to $41.5 million in the first nine 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 $1.7 million, or 13.7% to
$10.9 million for the third quarter of 2003 from $12.6 million for the third
quarter of 2002. The decrease in net interest income was primarily due to a $4.0
million, or 17.5% decrease in total interest income offset by a $2.3 million, or
22.3% 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 and a high
level of nonperforming loans. Also, approximately $1.2 million is attributable
to a decline in the average volume of loans which is primarily the result of our
branch sales and charged off loans.
The decline in total interest expense is primarily attributable to a 75-basis
point decline in the average interest rate paid on interest-bearing liabilities.
The average rate paid on interest-bearing liabilities was 2.78% for the third
quarter of 2003 compared to 2.93% for the third quarter of 2002. Our net
interest spread and net interest margin were 3.34% and 3.53%, respectively, for
the third quarter of 2003, compared to 3.80% and 4.00% for the third quarter of
2002.
Our average interest-earning assets for the third quarter of 2003 decreased $34
million, or 2.7% to $1.223 billion from $1.257 billion in the third quarter of
2002. This decline in our average interest-earning assets was primarily
attributable to an $80 million, or 7.0% decrease in our average loans which were
offset by an average increase in investments of $46 million during the third
quarter of 2003. The increase in investments was funded primarily by proceeds
from the sale of branches. Our ratio of average interest-earning assets to
average interest-bearing liabilities was 107.4% and 106.2% for the third
quarters of 2003 and 2002, respectively. Our average interest-bearing assets
produced a tax equivalent yield of 6.12% for the third quarter of 2003 compared
to 7.24% for the third quarter of 2002. The 112-basis point decline in the yield
was partially offset by a 66-basis point decline in the average rate paid on
interest-bearing liabilities.
Net interest income decreased $2.9 million, or 7.8% to $34.1 million for the
first nine months of 2003 from $37.0 million for the first nine months of 2002.
The decrease in net interest income was primarily due to a $7.0 million, or
10.4% decrease in total interest income offset by a $4.1 million, or 13.5%
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 and a high level
of nonperforming loans.
The decline in total interest expense is primarily attributable to a 65-basis
point decline in the average interest rate paid on interest-bearing liabilities.
The average rate paid on interest-bearing liabilities was 2.94% for the first
nine months of 2003 compared to 3.62% for the first nine months of 2002. Our net
interest spread and net
interest margin were 3.43% and 3.59%, respectively, for the first nine months of
2003, compared to 3.85% and 4.09%, respectively, for the first nine months of
2002.
Our average interest-earning assets for the first nine months of 2003 increased
$61 million, or 5.0% to $1.275 billion from $1.214 billion in the first nine
months of 2002. This growth in our average interest-earning assets was funded by
a $72 million, or 6.4% increase in our average interest-bearing liabilities to
$1.205 billion for the first nine months of 2003 from $1.133 million for the
first nine months of 2002. The ratio of our average interest-earning assets to
average interest-bearing liabilities was 105.8% and 107.2% for the first nine
months of 2003 and 2002, respectively. Our average interest-bearing assets
produced a tax equivalent yield of 6.37% for the first nine months of 2003
compared to 7.47% for the first nine months of 2002. The 110-basis point decline
in the yield was offset by a 68-basis point decline in the average rate paid on
interest-bearing liabilities.
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 SEPTEMBER 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) .............. $1,063,686 $17,796 6.64% $1,144,101 $21,768 7.55%
Investment securities
Taxable ..................................... 74,248 860 4.60 56,819 742 5.18
Tax-exempt(2) ............................... 841 12 5.72 8,646 158 7.23
---------- ------- ---------- -------
Total investment securities ............. 75,089 872 4.61 65,465 900 5.45
Federal funds sold .......................... 24,576 59 0.95 26,223 114 1.72
Other investments ........................... 59,964 141 0.93 21,399 151 2.80
---------- ------- ---------- -------
Total interest-earning assets ........... 1,223,315 18,868 6.12 1,257,188 22,933 7.24
Noninterest-earning assets:
Cash and due from banks ....................... 35,743 30,540
Premises and equipment ........................ 58,646 58,412
Accrued interest and other assets ............. 70,159 65,745
Allowance for loan losses ..................... (23,303) (16,215)
---------- ----------
Total assets ............................ $1,364,560 $1,395,670
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits ............................... $ 288,251 653 0.90 $ 275,506 780 1.12
Savings deposits .............................. 34,943 18 0.20 35,978 68 0.75
Time deposits ................................. 609,983 4,466 2.90 688,281 6,612 3.81
Other borrowings .............................. 174,630 2,223 5.05 152,766 2,171 5.64
Guaranteed preferred beneficial
interest in our subordinated debentures ...... 31,000 610 7.81 31,000 626 8.10
---------- ------- ---------- -------
Total interest-bearing liabilities ...... 1,138,807 7,970 2.78 1,183,531 10,257 3.44
Noninterest-bearing liabilities:
Demand deposits ............................... 113,203 110,274
Accrued interest and other liabilities ........ 15,509 7,972
Stockholders' equity .......................... 97,041 93,893
---------- ----------
Total liabilities and
stockholders' equity .................. $1,364,560 $1,395,670
========== ==========
Net interest income/net interest
spread ........................................ 10,898 3.34% 12,676 3.80%
===== =====
Net yield on earning assets ..................... 3.53% 4.00%
===== =====
Taxable equivalent adjustment:
Investment securities(2) ...................... 4 54
------- -------
Net interest income ..................... $10,894 $12,622
======= =======
(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 September 30, 2003 and 2002.
THREE MONTHS ENDED SEPTEMBER 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 ................................ $ (3,972) $ (2,509) $ (1,463)
Interest on securities:
Taxable .............................................. 118 (89) 207
Tax-exempt ........................................... (146) (28) (118)
Interest on federal funds ................................. (55) (48) (7)
Interest on other investments ............................. (10) (148) 138
-------- -------- --------
Total interest income ................................ (4,065) (2,822) (1,243)
-------- -------- --------
Expense from interest-bearing liabilities:
Interest on demand deposits .................................. (127) (160) 33
Interest on savings deposits ................................. (50) (48) (2)
Interest on time deposits .................................... (2,146) (1,454) (692)
Interest on other borrowings ................................. 52 (238) 290
Interest on guaranteed preferred beneficial interest
in our subordinated debentures .............................. (16) (16) --
-------- -------- --------
Total interest expense ............................... (2,287) (1,916) (371)
-------- -------- --------
Net interest income .................................. $ (1,778) $ (906) $ (872)
======== ======== ========
- ---------------
(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.
NINE MONTHS ENDED SEPTEMBER 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) .............. $1,121,508 $57,322 6.83% $1,116,288 $64,516 7.73%
Investment securities
Taxable ..................................... 60,877 2,400 5.27 53,972 2,157 5.34
Tax-exempt(2) ............................... 5,029 253 6.73 8,353 467 7.47
---------- ------- ---------- -------
Total investment securities ............. 65,906 2,653 5.38 62,325 2,624 5.63
Federal funds sold .......................... 30,755 258 1.12 20,949 270 1.72
Other investments ........................... 56,444 486 1.15 14,405 381 3.54
---------- ------- ---------- -------
Total interest-earning assets ........... 1,274,613 60,719 6.37 1,213,967 67,791 7.47
Noninterest-earning assets:
Cash and due from banks ....................... 35,793 30,852
Premises and equipment ........................ 60,945 54,381
Accrued interest and other assets ............. 72,085 51,839
Allowance for loan losses ..................... (29,916) (14,320)
---------- ----------
Total assets ............................ $1,413,520 $1,336,719
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits ............................... $ 292,725 2,060 0.94 $ 277,248 2,638 1.27
Savings deposits .............................. 35,461 87 0.33 36,870 193 0.70
Time deposits ................................. 671,159 15,896 3.17 636,115 19,450 4.09
Other borrowings .............................. 174,728 6,629 5.07 151,607 6,452 5.69
Guaranteed preferred beneficial
interest in our subordinated debentures ..... 31,000 1,841 7.94 31,000 1,902 8.20
---------- ------- ---------- -------
Total interest-bearing liabilities ...... 1,205,073 26,513 2.94 1,132,840 30,635 3.62
Noninterest-bearing liabilities:
Demand deposits ............................... 111,247 105,352
Accrued interest and other liabilities ....... 11,924 7,515
Stockholders' equity .......................... 85,276 91,012
---------- ----------
Total liabilities and
stockholders' equity .................. $1,413,520 $1,336,719
========== ==========
Net interest income/net interest
spread ........................................ 34,206 3.43% 37,156 3.85%
===== =====
Net yield on earning assets ..................... 3.59% 4.09%
===== =====
Taxable equivalent adjustment:
Investment securities(2) ...................... 86 159
------- -------
Net interest income ..................... $34,120 $36,997
======= =======
(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 nine months ended September 30, 2003 and 2002.
NINE MONTHS ENDED SEPTEMBER 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 ................................ $(7,194) $(7,301) $ 107
Interest on securities:
Taxable .............................................. 243 (11) 254
Tax-exempt ........................................... (214) (44) (171)
Interest on federal funds ................................. (12) (77) 65
Interest on other investments ............................. 105 (258) 363
------- ------- -------
Total interest income ................................ (7,072) (7,691) 618
------- ------- -------
Expense from interest-bearing liabilities:
Interest on demand deposits .................................. (578) (636) 58
Interest on savings deposits ................................. (106) (99) (7)
Interest on time deposits .................................... (3,554) (3,997) 443
Interest on other borrowings ................................. 177 (470) 647
Interest on guaranteed preferred beneficial interest
in our subordinated debentures .............................. (61) (61) --
------- ------- -------
Total interest expense ............................... (4,122) (5,263) 1,141
------- ------- -------
Net interest income .................................. $(2,950) $(2,428) $ (523)
======= ======= =======
- ----------
(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 decreased $139,000, or 3.4% to $4.0
million, exclusive of a $46.1 million gain on the sale of branches, for the
third quarter of 2003 from $4.1 million for the third quarter of 2002, primarily
due to a decline in gains on sales of securities. Our service charges on
deposits decreased $179,000, or 10.8% to $1.5 million in the third quarter of
2003 from $1.7 million in the third quarter of 2002 primarily due to the sale of
the Emerald Coast branches. Our mortgage banking income increased $585,000, or
69.4% to $1.4 million in the third quarter of 2003 from $843,000 in the third
quarter of 2002. Our gains on sales of securities decreased $408,000 to $95,000
in the third quarter of 2003 from $503,000 in the third quarter of 2002.
Our noninterest income increased $2.1 million, or 21.2% to $11.9 million,
exclusive of a $48.3 million gain on branch sales, for the first nine months of
2003 from $9.8 million for the first nine months of 2002. Our mortgage banking
income increased $1.3 million, or 56.8% to $3.5 million in the first nine months
of 2003 from $2.2 million in the first nine months of 2002. Our gains on sales
of securities increased $231,000 to $758,000 in the first nine months of 2003
from $527,000 in the first nine months of 2002.
Noninterest expense. Our noninterest expense increased $7.0 million, or 64.2% to
$17.9 million for third quarter of 2003 from $10.9 million for the third quarter
of 2002. Salaries and benefits increased $4.5 million, or 71.5% to $10.7 million
for the third quarter of 2003 from $6.2 million for the third quarter of 2002.
In addition to normal merit raises, the increase in salaries and benefits
relates primarily to the accrual of employee bonuses of $1.9 million and a $1.9
million liability adjustment related to certain deferred compensation plans (See
Note 10 to the consolidated financial statements). All other noninterest
expenses increased $2.5 million, or 54.3% to $7.0 million for the third quarter
of 2003 from $4.5 million for the third quarter of 2002. Other noninterest
expenses increased during the third quarter of 2003 primarily as a result of an
increase in our FDIC premiums, a
loss on the sale of our Huntsville branch building, an increase in professional
fees and losses on other real estate.
Our bank subsidiary was assessed a $750,000 quarterly FDIC deposit insurance
premium for the third quarter of 2003 which increased to $880,000 for the fourth
quarter of 2003. We appealed this assessment and are awaiting word from the FDIC
in Washington, D.C. about that appeal. We believe that this increased premium
will not be assessed in the future, beginning with the first quarter of 2004,
regardless of the outcome of the appeal of the assessment for the third and
fourth quarters of 2003. Our premium for the first and second quarters of 2003
was $45,000 per quarter.
In connection with the sale of our Emerald Coast branches our employee count was
reduced by approximately 70. We instituted other staff reductions of
approximately 37 employees that were completed in October, reducing the overall
staff from 473 employees to 366 employees as of October 31, 2003. The staff
reductions were in the areas of tellers, processors and other administrative
support. During this same period, we increased staff in the centralized risk
management areas of Loan Administration Services, Internal Audit, Special
Assets, Compliance and Security. We expect the reductions in staff will reduce
our salary and benefit expenses approximately $1.0 million to $1.5 million in
2004.
Our noninterest expense increased $10.3 million, or 33.1% to $41.6 million for
first nine months of 2003 from $31.2 million for the first nine months of 2002.
Salaries and benefits increased $5.5 million, or 30.9% to $23.4 million for the
first nine months of 2003 from $17.9 million for the first nine months of 2002.
In addition to normal merit raises, the increase in salaries and benefits
relates primarily to the accrual in the third quarter of employee bonuses of
$1.9 million and a $1.9 million liability adjustment related to certain deferred
compensation plans (See Note 10 to the consolidated financial statements). All
other noninterest expenses increased $4.8 million, or 35.9% to $18.2 million for
the first nine months of 2003 from $13.4 million for the first nine months of
2002. Other noninterest expenses increased for the first nine months of 2003
primarily due to the expenses referred to in the previous paragraph plus
one-time expenses related to the relocation of our data processing center to our
corporate headquarters, the sale of our branch office building in Port St. Joe
and costs associated with increased mortgage activity.
Income tax expense. Our income tax expense was $13.5 million for the third
quarter of 2003, compared to $796,000 for the third quarter of 2002 and $15.8
million for the first nine months of 2003, compared to an income tax benefit of
$1.9 million for the first nine months of 2002. There was no significant
difference in our effective tax rate and the federal statutory rate (35%) and
state tax rates (5% to 6.5%) for the three and nine-month periods ended
September 30, 2003.
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 $9.3 million for the third quarter of 2003
compared to $3.0 million for the third quarter of 2002 and $11.2 million for the
first nine months of 2003 compared to $19.1 million for the first nine months of
2002. During the first nine months of 2003, we had net charged-off loans
totaling $15.1 million compared to net charged-off loans of $15.5 million in the
first nine months of 2002. The ratio of net charged-off loans to the provision
for loan losses was 135.4% in the first nine months of 2003 compared to 81.0%
for the first nine months of 2002 and 72.7% for the year 2002. The annualized
ratio of net charged-off loans to average loans was 1.80% in the first nine
months of 2003 compared to 1.85% for the first nine months of 2002 and 3.35% for
the year 2002. The allowance for loan losses totaled $23.7 million, or 2.67% of
loans, net of unearned income at September 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 $1.243 billion at September 30, 2003, a decrease of $163
million, or 11.6% from $1.406 billion as of December 31, 2002. Our average total
assets for the first nine months of 2003 were $1.414 billion, which was
supported by average total liabilities of $1.328 billion and average total
stockholders' equity of $86 million. On August 29, 2003, our banking subsidiary,
The Bank, sold seven branches, known as the Emerald Coast Division, serving the
markets from Destin to Panama City, Florida for a $46.8 million deposit premium.
These branches had assets, primarily loans, of approximately $234 million and
liabilities, primarily deposits, of $209 million; we realized a pretax gain of
$46 million and after-tax gain of $28 million on the sale.
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 $39.6
million, or 59.7% to $106.0 million at September 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 are attributable to proceeds we received from
the sale of branches in the third quarter. These funds were invested in
short-term liquid assets to improve our liquidity position and may be used to
fund future loan growth. At September 30, 2003, our short-term liquid assets
comprised 8.5% 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 $45.1 million,
or 63.4% to $116.2 million at September 30, 2003, from $73.1 million at December
31, 2002. Mortgage-backed securities, which comprised 24.4% of the total
investment portfolio at September 30, 2003, decreased $4.8 million, or 14.5% to
$28.4 million from $33.2 million at December 31, 2002. Investments in U.S.
Treasury and agency securities, which comprised 55.5% of the total investment
portfolio at September 30, 2003, increased $46.4 million, or 274.6% to $64.5
million from $16.9 million at December 31, 2002. The total investment portfolio
at September 30, 2003 comprised 10.5% of all interest-earning assets compared to
5.8% at December 31, 2002 producing an average tax equivalent yield of 4.6% for
the third quarter of 2003 compared to 5.5% for the third quarter of 2002 and
5.4% for the first nine months of 2003 compared to 5.6% for the first nine
months of 2002.
Loans, net of unearned income. Our loans, net of unearned income, totaled $887
million at September 30, 2003, a decrease of 22.1%, or $252 million from $1.139
billion at December 31, 2002. This decrease is due primarily to the sale of the
Emerald Coast branches in the third quarter. Mortgage loans held for sale
totaled $16.7 million at September 30, 2003, an increase of $16.0 million from
$764,000 at December 31, 2002. Average loans, including mortgage loans held for
sale, totaled $1.121 billion for the first nine months of 2003 compared to
$1.116 billion for the first nine months of 2002. Average loans, including
mortgage loans held for sale, totaled $1.064 billion for the third quarter of
2003 compared to $1.144 billion for the third quarter of 2002. Loans, net of
unearned income, comprised 80.3% of interest-earning assets at September 30,
2003, compared to 91.5% at December 31, 2002. Mortgage loans held for sale
comprised 1.5% of interest-earning assets at September 30, 2003, compared to .1%
at December 31, 2002. The loan portfolio produced an average yield of 6.6% and
6.8% for the third quarter and first nine months of 2003, respectively, compared
to 7.6% and 7.7% for the third quarter and first nine months of 2002,
respectively. This decline in yield was offset by basis point declines of 66 and
68 in the average cost of funds for the third quarter and first nine months of
2003, respectively. The following table details the distribution of our loan
portfolio by category as of September 30, 2003 and December 31, 2002:
DISTRIBUTION OF LOANS BY CATEGORY
SEPTEMBER 30, 2003 DECEMBER 31, 2002
--------------------- ---------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
--------- ------- ---------- -------
Commercial and industrial ............................... $ 161,546 18.2% $ 213,210 18.7%
Real estate -- construction and land development ........ 142,083 16.0 212,818 18.7
Real estate -- mortgage
Single-family ........................................ 229,930 25.9 272,899 23.9
Commercial ........................................... 259,748 29.3 317,359 27.8
Other ................................................ 34,655 3.9 38,220 3.4
Consumer ................................................ 51,602 5.8 79,398 7.0
Other ................................................... 8,614 .9 5,931 .5
--------- ------ ---------- ------
Total loans ................................... 888,178 100.0% 1,139,835 100.0%
====== ======
Unearned income ......................................... (782) (1,298)
Allowance for loan losses ............................... (23,714) (27,766)
--------- ----------
Net loans ..................................... $ 863,682 $1,110,771
========= ==========
Deposits. Noninterest-bearing deposits totaled $91.5 million at September 30,
2003, a decrease of 23.2%, or $27.6 million from $119.1 million at December 31,
2002. Exclusive of the sale of the Emerald Coast branches, noninterest-bearing
deposits decreased $711,000. Noninterest-bearing deposits comprised 10.0% of
total deposits at September 30, 2003, compared to 10.8% at December 31, 2002.
$69.1 million, or 75.5% of total noninterest-bearing deposits were in our
Alabama branches while $22.4 million, or 24.5% were in our Florida branches.
Interest-bearing deposits totaled $820 million at September 30, 2003, a decrease
of 17.0%, or $169 million from $989 million at December 31, 2002. Exclusive of
the sale of our Emerald Coast branches, interest-bearing deposits increased
$11,000. Interest-bearing deposits averaged $999 million for the first nine
months of 2003 compared to $950 million for the first nine months of 2002, an
increase of $49 million, or 5.2%. Our average interest-bearing deposits for the
third quarter of 2003 totaled $933 million compared to $999 million for the
third quarter of 2002, a decrease of $66 million, or 6.6%.
The average rate paid on all interest-bearing deposits during the first nine
months of 2003 was 2.4% compared to 3.1% for the first nine months of 2002 and
2.2% for the third quarter of 2003 compared to 2.9% for the third quarter of
2002. Of total interest-bearing deposits, $602 million, or 73.4% were in the
Alabama branches while $218 million, or 26.6% were in the Florida branches.
Borrowings. Advances from the FHLB totaled $173.40 million at September 30, 2003
and $173.8 million at 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 September 30, 2003, the interest rate is 4.90%.
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 beginning five years
after issuance, with a premium 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.
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 and approval procedures, sets limits on credit
concentration and enforces regulatory requirements. In addition, we have hired
Credit Risk Management, LLC, an independent loan review
firm to supplement our existing independent loan review functions. We believe
that this group will help us to timely and comprehensively review our 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, criticized and classified loans
in 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 loan
review, which also performs ongoing, independent review of the risk management
process, which includes underwriting, documentation and collateral control. Loan
review 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
NINE-MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- -----------
(Dollars in thousands)
Allowance for loan losses at beginning of period ........... $ 27,766 $ 12,546
Allowance of (branches sold) acquired bank ................. (102) 1,058
Charge-offs:
Commercial and industrial ................................ 7,291 25,162
Real estate -- construction and land development ......... 352 1,704
Real estate -- mortgage
Single-family......................................... 1,409 2,608
Commercial ........................................... 4,480 6,140
Other ................................................ 277 141
Consumer ................................................. 2,044 2,343
----------- -----------
Total charge-offs ................................ 15,853 38,098
Recoveries:
Commercial and industrial ................................ 430 94
Real estate -- construction and land development ......... 23 14
Real estate -- mortgage
Single-family ........................................ 32 23
Commercial ........................................... -- --
Other ................................................ 17 38
Consumer ................................................. 226 239
----------- -----------
Total recoveries ................................. 728 408
----------- -----------
Net charge-offs ............................................ 15,125 37,690
Provision for loan losses .................................. 11,175 51,852
----------- -----------
Allowance for loan losses at end of period ................. $ 23,714 $ 27,766
=========== ===========
Loans at end of period, net of unearned income ............. $ 887,389 $ 1,138,537
Average loans, net of unearned income ...................... 1,121,508 1,124,977
Ratio of ending allowance to ending loans .................. 2.67% 2.44%
Ratio of net charge-offs to average loans (1) .............. 1.80% 3.35%
Net charge-offs as a percentage of:
Provision for loan losses ................................ 135.35% 72.69%
Allowance for loan losses (1) ............................ 85.27% 135.74%
Allowance for loan losses as a percentage
of nonperforming loans ................................... 67.86% 105.00%
(1) Annualized.
The allowance for loan losses as a percentage of loans, net of unearned income,
at September 30, 2003, was 2.67% compared to 2.44% as of December 31, 2002. Net
charged-offs were $15.1 million for the first nine months of 2003 and net
charged-offs to average loans on an annualized basis totaled 1.80%. Net
commercial loan charged-offs totaled $6.9 million, or 45.4% of total net
charged-off loans for the first nine months of 2003 compared to 66.5% of total
net charged-off loans for the year 2002. Net commercial real estate loan
charged-offs totaled $4.5 million, or 29.6% of total net charged-offs for the
first nine months of 2003 compared to 16.3% of total net charged-offs for the
year 2002. Net consumer loan charged-offs totaled $1.8 million, or 12.0% of
total net charged-offs for the first nine months of 2003 compared to 5.6% of
total net charged-offs for the year 2002.
The allowance for loan losses as a percentage of nonperforming loans decreased
to 67.9% at September 30, 2003 from 105.0% at December 31, 2002. This decrease
is due to $7.04 million in net charged-off loans incurred during the six month
period ended June 30, 2003 on which an allowance had been previously provided.
In addition, the amount of nonperforming loans increased during this period 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 charged-off loans for the third quarter of 2003 were $8.1 million and total
charged-off loans were $8.3 million. Of the $8.3 million, $2.2 million was
located in the Bristol group which, as discussed below, had approximately $13.0
million in loan relationships file Chapter 11 bankruptcy in the third quarter of
2003. In addition, the $8.3 million was comprised of $6.2 million which had been
reported as nonperforming at June 30, 2003. Of the $6.2 million, $4.6 million
had been specifically identified as impaired as of June 30, 2003 and the
remaining $1.6 million was comprised of homogeneous consumer and 1-4 family
loans. We also charged-off an additional $2.2 million that was reported as
performing as of June 30, 2003. Of this $2.2 million, $1.2 million was
classified as of June 30, 2003 and $445,000 of the remaining $1.0 million was
past due. These loans were charged off or partially charged off, primarily due
to increased bankruptcy filings during the third quarter and revised estimates
of collateral values. Management expects net charge-offs to decrease in future
periods.
Nonperforming Loans. Nonperforming loans increased $8.5 million to $34.9 million
as of September 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 3.93% at September 30, 2003. The increase in the percentage to net
loans is partially the result of a decline in net loans due to the sale of the
Emerald Coast Branches. The increase in the amount of nonperforming loans
resulted primarily from certain potential problem loans (See "Potential Problem
Loans") reported in prior quarters migrating to a nonperforming status. In
addition, a $3.3 million loan relationship in Bristol was placed on nonaccrual
status during the third quarter because of a bankruptcy filing which increased
the amount of nonaccrual loans in the Bristol group to approximately $18.2
million as of September 30, 2003. Of the $18.2 million, approximately $13.0
million entered Chapter 11 bankruptcy during the third quarter. Management
believes that these loans have been charged down to their estimated net
collateral values as of September 30, 2003 and that bankruptcy proceedings are
expected to conclude in 2004. The following table represents our nonperforming
loans for the dates indicated.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(Dollars in thousands)
Nonaccrual ........................................ $ 30,847 $ 24,715
Past due (contractually past due 90 days or more) 3,386 1,729
Restructured ...................................... 714 --
-------- --------
$ 34,947 $ 26,444
======== ========
Nonperforming loans as a percent of loans ......... 3.93% 2.32%
======== ========
The following is a summary of nonperforming loans by category for the dates
shown:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
(Dollars in thousands)
Commercial and industrial ............................... $ 11,707 $ 9,661
Real estate -- construction and land development ........ 2,246 2,226
Real estate -- mortgages
Single-family ...................................... 5,453 3,672
Commercial ......................................... 14,032 8,434
Other .............................................. 703 888
Consumer ................................................ 785 1,548
Other ................................................... 21 15
-------- --------
Total nonperforming loans ..................... $ 34,947 $ 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 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 September 30, 2003, the recorded investment in impaired loans
totaled $25.8 million with approximately $5.8 million in allowance for loan
losses specifically allocated to impaired loans. This represents a decrease of
$560,000 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 -
$16.6 million, Albertville bank group - $2.5
million and Huntsville bank group - $3.3 million. We have approximately $245,000
in commitments to lend additional funds to the borrowers whose loans are
impaired.
Of the impaired loans, $7.1 million have been partially charged down to their
estimated collateral values as of September 30, 2003. Of this amount, $2.1
million have no specific allocation; $5.0 million have a specific allocation
of $1.4 million and the remaining specific allocation of $4.4 million is on
$18.7 million of the impaired loan portfolio.
The following is a summary of impaired loans and the specifically allocated
allowance for loan losses by category as of September 30, 2003:
OUTSTANDING SPECIFIC
BALANCE ALLOWANCE
----------- ---------
(Dollars in thousands)
Commercial and industrial ............................... $ 9,652 $ 2,571
Real estate -- construction and land development ........ 2,218 490
Real estate -- mortgages
Commercial ......................................... 13,383 2,607
Other .............................................. 549 89
-------- --------
Total ......................................... $ 25,802 $ 5,757
======== ========
In addition to impaired loans, management has identified $2.3 million in
potential problem loans as of September 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 $2.3 million in potential problem loans
at September 30, 2003, $810,000, or 35% is attributable to certain loans
retained in the sale of the Emerald Coast branches, $625,000 or 27% is
attributable to the Andalusia group, $279,000 or 12% is attributable to the
Albertville group and $249,000 or 11% is attributable to the Bristol group.
Overall, 19% of these loans are secured by 1-4 family residential real estate
and 53% of these loans are secured by commercial real estate. These loans will
be turned over to our Special Assets department for resolution if they become
nonperforming. Until such time, management will work closely with these
customers in an attempt to prevent these loans from migrating into nonperforming
status. The bank has allocated $338,000 in loan loss reserve to absorb potential
losses on these accounts.
Stockholders' Equity. At September 30, 2003, total stockholders' equity was
$108.3 million, an increase of $31.8 million from $76.5 million at December 31,
2002. The increase in stockholders' equity resulted primarily from net income of
$25.8 million for the first nine months of 2003 and $6.2 million in proceeds
from the issuance of our Series A Convertible Preferred Stock. As of September
30, 2003, we had 18,013,002 shares of common stock issued and 17,681,413
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 September 30, 2003,
there were 83,942 shares held in treasury at a cost of $529,000.
In May 2003, we 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, 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%.
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 on each of
the third, fourth and fifth anniversary date of the date of issuance. 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 September 30, 2003 and 2002, we
recognized $168,000 and $112,000, respectively, in restricted stock expense.
We adopted a leveraged employee stock ownership plan (the "ESOP") effective May
15, 2002, that covers all eligible employees who have attained the age of
twenty-one and have completed a year of service. As of September 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 ratio of an employee's eligible compensation to total compensation of all
participants. 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
periods ended September 30, 2003 and 2002, of $101,000 and $21,000,
respectively. The ESOP shares as of September 30, 2003, were as follows:
September 30, 2003
------------------
Allocated shares 6,378
Estimated shares committed to be released 15,575
Unreleased shares 251,447
----------
Total ESOP shares 273,400
==========
Fair value of unreleased shares $1,888,000
==========
Regulatory Capital. At September 30, 2003, we and our banking subsidiary
exceeded the minimum standards to be considered "well capitalized" under
regulatory guidelines. The table below represents our and our subsidiary's
regulatory and minimum regulatory capital requirements at September 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 $138,922 14.59% $76,175 8.00% $95,219 10.00%
The Bank 132,908 14.10 75,433 8.00 94,292 10.00
Tier 1 Risk-Based Capital
Corporation 126,874 13.32 38,088 4.00 57,131 6.00
The Bank 120,974 12.83 37,717 4.00 56,575 6.00
Leverage Capital
Corporation 126,874 9.38 54,082 4.00 67,602 5.00
The Bank 120,974 9.02 53,666 4.00 67,082 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 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 that
are 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 September 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 September 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
September 30, 2003, that have materially affected or are reasonably likely to
materially affect our internal controls over financial reporting.
CHANGES IN INTERNAL CONTROLS
As previously reported, we are continuing with the centralization of 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 by December 31, 2003.
We conducted an independent loan review during the third quarter to supplement
our existing internal loan review. Credit Risk Management, LLC of Raleigh, North
Carolina reviewed approximately $290 million in commercial loans that had not
been previously reviewed during the Federal Reserve Bank of Atlanta's and the
Alabama Banking Department's examination in the first quarter of 2003. The
combined coverage of our loan portfolio from these reviews was 71% and included
90% of the loans in the Bristol, Florida portfolio. We have entered into a
contractual relationship with Credit Risk Management to conduct ongoing
supplemental loan reviews in the future. Credit Risk Management conducts
independent loan reviews and provides other loan review services throughout the
southeast. Management has also implemented revised credit standards, a new
online credit manual and developed a new loan platform system all to further
enhance credit quality.
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 affect 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
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 July 22, 2003
under Item 9 Regulation FD Disclosure of Form 8-K containing
as an Exhibit a press release dated July 22, 2003.
We filed a Current Report on Form 8-K dated September 2, 2003
under Item 5 of Form 8-K containing as an Exhibit a press
release dated September 2, 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: November 14, 2003 By:/s/ James A. Taylor, Jr.
--------------------------------------------
James A. Taylor, Jr.
President and Chief Operating Officer
(Duly authorized officer of the registrant)
Date: November 14, 2003 By:/s/ David R. Carter
--------------------------------------------
David R. Carter
Executive Vice President and Chief
Financial Officer
(Principal accounting officer of the registrant)