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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
Commission File number 0-25033
The Banc Corporation
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 63-1201350
-------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation)
17 North 20th Street, Birmingham, Alabama 35203
-----------------------------------------------
(Address of Principal Executive Offices)
(205) 327-3600
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of June 30, 2004
- ----------------------------- -------------------------------
Common stock, $.001 par value 17,729,062
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 26,048 $ 31,679
Interest bearing deposits in other banks 16,795 11,869
Federal funds sold 18,000 -
Investment securities available for sale 200,357 141,601
Mortgage loans held for sale 3,610 6,408
Loans, net of unearned income 889,371 856,941
Less: Allowance for loan losses (20,180) (25,174)
----------- ------------
Net loans 869,191 831,767
----------- ------------
Premises and equipment, net 58,375 57,979
Accrued interest receivable 5,454 5,042
Stock in FHLB and Federal Reserve Bank 10,243 8,499
Other assets 79,963 76,782
----------- ------------
TOTAL ASSETS $ 1,288,036 $ 1,171,626
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 89,854 $ 86,100
Interest-bearing 874,024 803,835
----------- ------------
TOTAL DEPOSITS 963,878 889,935
Advances from FHLB 156,090 121,090
Other borrowed funds 15,155 10,829
Long-term debt 1,820 1,925
Subordinated debentures 31,959 31,959
Accrued expenses and other liabilities 19,000 15,766
----------- ------------
TOTAL LIABILITIES 1,187,902 1,071,504
Stockholders' Equity
Preferred stock, par value $.001 per share; authorized 5,000,000 shares;
shares issued 62,000 at June 30, 2004 and December 31, 2003 - -
Common stock, par value $.001 per share; authorized 25,000,000 shares;
shares issued 18,025,932 and 18,018,202, respectively; outstanding
17,729,062 and 17,694,595, respectively 18 18
Surplus - preferred 6,193 6,193
- common 68,437 68,363
Retained Earnings 30,925 28,851
Accumulated other comprehensive loss (2,594) (180)
Treasury stock, at cost (430) (501)
Unearned ESOP stock (1,866) (1,974)
Unearned restricted stock (549) (648)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 100,134 100,122
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,288,036 $ 1,171,626
=========== ============
See Notes to Condensed Consolidated Financial Statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- ---------
INTEREST INCOME
Interest and fees on loans $ 13,691 $ 19,682 $ 27,258 $ 39,526
Interest on investment securities
Taxable 2,109 822 3,822 1,540
Exempt from Federal income tax 26 67 41 159
Interest on federal funds sold 41 96 75 199
Interest and dividends on other investments 231 186 396 382
-------- -------- -------- ---------
Total interest income 16,098 20,853 31,592 41,806
INTEREST EXPENSE
Interest on deposits 4,505 6,152 8,782 12,906
Interest on other borrowed funds 1,456 2,220 3,122 4,406
Interest on subordinated debentures 626 632 1,252 1,268
-------- -------- -------- ---------
Total interest expense 6,587 9,004 13,156 18,580
-------- -------- -------- ---------
NET INTEREST INCOME 9,511 11,849 18,436 23,226
Provision for loan losses - 725 - 1,925
-------- -------- -------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,511 11,124 18,436 21,301
NONINTEREST INCOME
Service charges and fees on deposits 1,397 1,656 2,788 3,279
Mortgage banking income 383 1,185 787 2,060
Gain on sale of securities 37 637 428 663
Gain on sale of branch - - 739 2,246
Other income 982 1,283 1,825 2,157
-------- -------- -------- ---------
TOTAL NONINTEREST INCOME 2,799 4,761 6,567 10,405
NONINTEREST EXPENSES
Salaries and employee benefits 5,871 6,371 11,457 12,689
Occupancy, furniture and equipment expense 2,094 2,277 4,052 4,285
Other 3,202 3,793 6,804 6,897
-------- -------- -------- ---------
TOTAL NONINTEREST EXPENSES 11,167 12,441 22,313 23,871
-------- -------- -------- ---------
Income before income taxes 1,143 3,444 2,690 7,835
INCOME TAX EXPENSE 79 940 398 2,317
-------- -------- -------- ---------
NET INCOME $ 1,064 $ 2,504 $ 2,292 $ 5,518
======== ======== ======== =========
BASIC NET INCOME PER COMMON SHARE $ 0.05 $ 0.14 $ 0.12 $ 0.32
======== ======== ======== =========
DILUTED NET INCOME PER COMMON SHARE $ 0.05 $ 0.14 $ 0.11 $ 0.31
======== ======== ======== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,578 17,472 17,569 17,461
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 18,487 17,884 18,532 17,751
See Notes to Condensed Consolidated Financial Statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------
2004 2003
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 5,028 $ (21,911)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest bearing deposits in other banks (4,926) (811)
Net increase in federal funds sold (18,000) (14,000)
Proceeds from sales of securities available for sale 71,720 22,654
Proceeds from maturities of investment securities available for sale 36,105 28,142
Purchases of investment securities available for sale (161,819) (73,572)
Net (increase) decrease in loans (39,344) 9,313
Purchases of premises and equipment (2,222) (1,468)
Net cash paid in branch sale (6,626) (31,949)
Other investing activities (6,744) (219)
--------- ---------
Net cash used by investing activities (131,856) (61,910)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 82,144 71,937
Net increase (decrease) in FHLB advances and other borrowed funds 39,326 (189)
Proceeds received on long term debt - 2,100
Payments made on long term debt (105) (70)
Proceeds from sale of common stock 49 25
Proceeds from sale of preferred stock - 6,193
Cash dividends paid (217) -
--------- ---------
Net cash provided by financing activities 121,197 79,996
--------- ---------
Net decrease in cash and due from banks (5,631) (3,825)
Cash and due from banks at beginning of period 31,679 45,365
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 26,048 $ 41,540
========= =========
See Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED 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, 2003 as filed with the Securities and Exchange Commission ("SEC").
It is management's opinion that all adjustments, consisting of only normal and
recurring items necessary for a fair presentation, have been included. Operating
results for the three and six-month periods ended June 30, 2004, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
The statement of financial condition at December 31, 2003, has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
Note 2 - Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45).
FIN 45 requires certain guarantees to be recorded at fair value. In general, FIN
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 FIN 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. FIN 45 also requires new disclosures, even
when the likelihood of making any payments under the guarantee is remote. These
disclosure requirements were effective for financial statements of interim or
annual periods ending after December 15, 2002.
The Corporation, as part of its ongoing business operations, issues financial
guarantees in the form of financial and performance standby letters of credit.
Standby letters of credit are contingent commitments issued by the Corporation
generally to guarantee the performance of a customer to a third party. A
financial standby letter of credit is a commitment by the Corporation to
guarantee a customer's repayment of an outstanding loan or debt instrument. In a
performance standby letter of credit, the Corporation guarantees a customer's
performance under a contractual nonfinancial obligation for which it receives a
fee. The Corporation has recourse against the customer for any amount it is
required to pay to a third party under a standby letter of credit. Revenues are
recognized ratably over the life of the standby letter of credit. At June 30,
2004, the Corporation had standby letters of credit outstanding with maturities
ranging from less than one year to four years. The maximum potential
amount of future payments the Corporation could be required to make under its
standby letters of credit at June 30, 2004 was $17.1 million which represents
the Corporation's maximum credit risk. At June 30, 2004, the Corporation had no
significant liabilities and receivables associated with standby letters of
credit agreements entered into subsequent to December 31, 2002 as a result of
the Corporation's adoption of FIN 45 at January 1, 2003. Standby letters of
credit agreements entered into prior to January 1, 2003, have a carrying value
of zero. The Corporation holds collateral to support standby letters of credit
when deemed necessary.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
addresses whether business enterprises must consolidate the financial statements
of entities known as "variable interest entities". A variable interest entity is
defined by FIN 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.
In previous financial statements, the Corporation had consolidated two trusts
through which it had issued trust preferred securities ("TPS") and reported the
TPS as "guaranteed preferred beneficial interests in the Corporation's
subordinated debentures" in the statements of financial condition. In December
2003, the FASB issued a revision to FIN 46 to clarify certain provisions which
affected the accounting for TPS. As a result of the provisions in revised FIN
46, the trusts have been deconsolidated, with the Corporation accounting for its
investment in the trusts as assets, its subordinated debentures as debt, and the
interest paid thereon as interest expense. The Corporation had always classified
the TPS as debt and the dividends as interest but eliminated its common stock
investment and dividends received from the trust. FIN 46 permits and encourages
restatement of prior period results, and accordingly, all financial statements
presented have been adjusted to give effect to the revised provisions of FIN 46.
While these changes had no effect on previously reported net interest margin,
net income or earnings per share, they increased total interest income and
interest expense, as well as total assets and total liabilities. (See Note 8)
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3 ("SOP 03-3"), "Accounting for
Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from an investor's initial investment in loans or debt
securities (loans) acquired in a transfer if those differences are attributable,
at least in part, to credit quality. It includes such loans acquired in purchase
business combinations and applies to all nongovernmental entities, including
not-for-profit organizations. SOP 03-3 does not apply to loans originated by the
entity. SOP 03-3 limits the yield that may be accepted (accretable yield) to the
excess of the investor's estimate of undiscounted expected principal, interest,
and other cash flows (cash flows expected at acquisition to be collected) over
the investor's initial investment in the loan. SOP 03-3 requires that the excess
of contractual cash flows over cash flows expected to be collected
(nonaccretable difference) not be recognized as an adjustment of yield, loss
accrual, or valuation allowance. SOP 03-3 prohibits investors from displaying
accretable yield and nonaccretable difference in the balance sheet. Subsequent
increases in cash flows expected to be collected generally should be recognized
prospectively through adjustment of the loan's yield over its remaining life.
Decreases in cash flows expected to be collected should be recognized as
impairment. SOP 03-3 prohibits "carrying over" or creation of valuation
allowances in the initial accounting of all loans ac-
quired in a transfer that are within the scope of SOP 03-3. The prohibition of
the valuation allowance carryover applies to the purchase of an individual loan,
a pool of loans, a group of loans, and loans acquired in a purchase business
combination. SOP 03-3 is effective for loans acquired in fiscal years beginning
after December 15, 2004. The changes required by SOP 03-3 are not expected to
have a material impact on results of operations, financial position, or
liquidity of the Corporation.
In March 2004, the SEC issued Staff Accounting Bulletin ("SAB") 105,
"Application of Accounting Principles to Loan Commitments", which addresses
certain issues regarding the accounting for and disclosure of loan commitments
relating to the origination of mortgage loans that will be held for resale. Such
commitments are considered derivatives under the provisions of Statement of
Financial Accounting Standard ("SFAS") No. 133, as amended by SFAS No. 149, and
are therefore required to be recorded at fair value. SAB 105 stipulates that in
recording those commitments no consideration should be given to any expected
future cash flows related to the associated servicing of the future loan. SAB
105 further stipulates that no other internally-developed intangible assets,
such as customer relationship intangibles, should be recorded as part of the
loan commitment derivative. SAB 105 requires disclosure of accounting policies
for loan commitment derivatives, including methods and assumptions used to
estimate fair value and any associated economic hedging strategies. The
provisions of SAB 105 were effective for loan commitment derivatives that were
entered into after March 31, 2004. The provisions of SAB 105 did not have a
material impact on results of operations, financial position, or liquidity of
the Corporation.
Note 3 - Branch Sales
On February 6, 2004, the Corporation's banking subsidiary sold its Morris,
Alabama branch, which had assets of approximately $1,037,000 and liabilities of
$8,217,000. The Corporation realized a $739,000 pre-tax gain on the sale.
In August 2003, the Corporation sold seven branches of The Bank, known as the
Emerald Coast branches of The Bank, 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 $46,018,000 pre-tax 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 pre-tax gain on the sale.
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 the eastern
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, 2003. All costs have been allocated to the reportable segments.
Therefore, combined amounts agree to the consolidated totals (in thousands).
Alabama Florida
Region Region Combined
---------- --------- ----------
Three months ended June 30, 2004
Net interest income $ 6,886 $ 2,625 $ 9,511
Provision for loan losses 984 (984) -
Noninterest income(1) 2,467 332 2,799
Noninterest expense(2) 8,743 2,424 11,167
Income tax (benefit) expense (377) 456 79
Net income 3 1,061 1,064
Total assets 1,063,265 224,771 1,288,036
Three months ended June 30, 2003
Net interest income $ 6,736 $ 5,113 $ 11,849
Provision for loan losses (275) 1,000 725
Noninterest income(1) 4,015 746 4,761
Noninterest expense(2) 8,563 3,878 12,441
Income tax expense 648 292 940
Net income 1,815 689 2,504
Total assets 948,506 492,595 1,441,101
Six months ended June 30, 2004
Net interest income $ 13,213 $ 5,223 $ 18,436
Provision for loan losses 1,956 (1,956) -
Noninterest income(1) 5,865 702 6,567
Noninterest expense(2) 17,412 4,901 22,313
Income tax (benefit)expense (481) 879 398
Net income 191 2,101 2,292
Six months ended June 30, 2003
Net interest income $ 12,825 $ 10,401 $ 23,226
Provision for loan losses 831 1,094 1,925
Noninterest income(1) 8,757 1,648 10,405
Noninterest expense(2) 16,141 7,730 23,871
Income tax expense 1,334 983 2,317
Net income 3,276 2,242 5,518
(1) See Note 3 concerning branch sales. Also, in January 2004, certain loans
was transferred from the Florida segment to the Corporation's special
assets department which is included in the Alabama segment.
(2) Noninterest expense for the Alabama region includes all expenses for the
holding company, which have not been prorated to the Florida region.
Note 5 - Net Income Per Share
The following table sets forth the computation of basic and diluted net income
per common share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
2004 2003 2004 2003
-------- ------- ------- --------
Numerator:
Net income $ 1,064 $ 2,504 $ 2,292 $ 5,518
Less preferred dividends 217 - 217 -
-------- ------- ------- --------
For basic and diluted, net income
applicable to common stock $ 847 $ 2,504 $ 2,075 $ 5,518
======== ======= ======= ========
Denominator:
For basic, weighted average common shares
outstanding 17,578 17,472 17,569 17,461
Effect of dilutive stock options,
restricted stock and convertible preferred 909 412 963 290
-------- ------- ------- --------
Weighted average common shares outstanding,
assuming dilution 18,487 17,884 18,532 17,751
======== ======= ======= ========
Basic net income per common share $ .05 $ .14 $ .12 $ .32
======== ======= ======= ========
Diluted net income per common share $ .05 $ .14 $ .11 $ .31
======== ======= ======= ========
Note 6 - Comprehensive Income (Loss)
Total comprehensive income (loss) was $(1,879,000) and $(122,000), respectively,
for the three and six-month periods ended June 30, 2004, and $2,474,000 and
$5,323,000 respectively, for the three and six-month periods ended June 30,
2003. 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 2004 and 2003 is due to certain tax-exempt income and rehabilitation tax
credits on the Corporation's headquarters, the John A. Hand building.
Note 8 - Junior Subordinated Debentures
The Corporation has sponsored two trusts, TBC Capital Statutory Trust II ("TBC
Capital II") and TBC Capital Statutory Trust III ("TBC Capital III"), of which
100% of the common equity is owned by the Corporation. The trusts were formed
for the purpose of issuing Corporation-obligated mandatory redeemable trust
preferred securities to third-party investors and investing the proceeds from
the sale of such trust preferred securities solely in junior subordinated debt
securities of the Corporation (the debentures). The debentures held by each
trust are the sole assets of that trust. Distributions on the trust preferred
securities issued by each trust are payable semi-annually at a rate per annum
equal to the interest rate being earned by the trust on the debentures held by
that trust. The trust preferred securities are subject to mandatory redemption,
in whole or in part, upon repayment of the debentures. The Corporation has
entered into agreements which, taken collectively, fully and unconditionally
guarantee the trust preferred securities subject to the terms of each of the
guarantees. The debentures held by the TBC Capital II and TBC Capital III
capital trusts are first redeemable, in whole or in part, by the Corporation on
September 7, 2007 and July 25, 2006, respectively.
As a result of applying the provisions of FIN 46, governing when an equity
interest should be consolidated, the Corporation was required to deconsolidate
these subsidiary trusts from its financial statements in the fourth quarter of
2003. The deconsolidation of the net assets and results of operations of the
trusts had virtually no impact on the Corporation's financial statements or
liquidity position, since the Corporation continues to be obligated to repay the
debentures held by the trusts and guarantees repayment of the trust preferred
securities issued by the trusts. The consolidated debt obligation related to the
trusts increased from $31,000,000 to $31,959,000 upon deconsolidation, with the
difference representing the Corporation's common ownership interest in the
trusts.
The trust preferred securities held by the trusts qualify as Tier 1 capital for
the Corporation under Federal Reserve Board guidelines.
Consolidated debt obligations related to subsidiary trusts holding solely
debentures of the Corporation follow:
June 30, 2004 December 31, 2003
------------- -----------------
(In thousands)
10.6% junior subordinated debentures owed to
TBC Capital Statutory Trust II due September
7, 2030 $ 15,464 $ 15,464
6-month LIBOR plus 3.75% junior subordi-
nated debentures owed to TBC Capital Statu-
tory Trust III due July 25, 2031 16,495 16,495
--------- --------
Total junior subordinated debentures owed to
unconsolidated subsidiary trusts $ 31,959 $ 31,959
========= ========
As of June 30, 2004 and December 31, 2003, the interest rate on the $16,495,000
subordinated debentures was 4.96% and 4.90%, respectively.
Currently, the Corporation must obtain regulatory approval prior to paying any
dividends on these trust preferred securities. The Federal Reserve approved the
timely payment of our semi-annual distributions on our trust preferred
securities in January, March and July, 2004.
Note 9 - Stockholders' Equity
In September of 2000, the Corporation's board of directors approved a stock
buyback plan in an amount not to exceed $10,000,000. As of June 30, 2004, there
were 65,448 shares held in treasury at a cost of $430,000.
On April 1, 2002, the Corporation issued 157,000 shares of restricted common
stock to certain directors and key employees pursuant to the Second Amended and
Restated 1998 Stock Incentive Plan. Under the Restricted Stock Agreements, the
shares of restricted stock may not be sold or assigned in any manner for a
five-year period that began on April 1, 2002. 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
at the end of each of the third, fourth and fifth years. The restricted stock
was issued at $7.00 per share, or $1,120,000, and is classified as a
contra-equity account, "Unearned restricted stock", in stockholders' equity.
During 2003, 15,000 shares of this restricted common stock were forfeited.
Restricted shares outstanding as of June 30, 2004 were 142,500 and the remaining
amount in the unearned restricted stock account is $549,000. This balance is
being amortized as expense as the stock is earned during the restricted period.
The amounts of restricted shares are included in the diluted earnings per share
calculation, using the treasury stock method, until the shares vest. Once
vested, the shares become outstanding for basic earnings per share. For the
periods ended June 30, 2004 and 2003, the Corporation has recognized $100,000
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 that have attained
the age of twenty-one and have completed a year of service. As of June 30, 2004,
the ESOP has been internally leveraged with 273,400 shares of the Corporations'
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 ESOP trustees finalized a $2,100,000 promissory note to
reimburse the Corporation for the funds used to leverage the ESOP. The
unreleased shares and a guarantee of the Corporation secure the promissory note,
which has been 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. Principal payments on the debt are
$17,500 per month for 120 months. The interest rate is adjusted annually to the
Wall Street Journal prime rate. Released shares are allocated to eligible
employees at the end of the plan year based on the employee's eligible
compensation to total compensation. The Corporation recognizes compensation
expense during the period as the shares are earned and committed to be released.
As shares are committed to be released and compensation expense is recognized,
the shares become outstanding for basic and diluted earnings per share
computations. The amount of compensation expense reported by the Corporation is
equal to the average fair value of the shares earned and committed to be
released during the period. Compensation expense that the Corporation recognized
during the periods ended June 30, 2004, and 2003, was $98,000 and $55,000,
respectively. The ESOP shares as of June 30, 2004 were as follows:
June 30, 2004
-------------
Allocated shares 28,628
Estimated shares committed to be released 13,350
Unreleased shares 231,422
----------
Total ESOP shares 273,400
==========
Fair value of unreleased shares $1,520,000
==========
The Corporation has established a stock incentive plan for directors and certain
key employees that provide for the granting of restricted stock and incentive
and nonqualified options to purchase up to 2,500,000 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.
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement 123) which allows an entity to continue to measure
compensation costs for those plans using the intrinsic value-based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The Corporation has elected to follow APB Opinion 25 and related
interpretations in accounting for its employee stock options. Accordingly,
compensation cost for fixed and variable stock-based awards is measured by the
excess, if any, of the fair market price of the underlying stock over the amount
the individual is required to pay. Compensation cost for fixed awards is
measured at the grant date, while compensation cost for variable awards is
estimated until both the number of shares an individual is entitled to receive
and the exercise or purchase price are known (measurement date). No option-based
employee compensation cost is reflected in net income, as all options granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant. The pro forma information below was determined as if the
Corporation had accounted for its employee stock options under the fair value
method of Statement 123. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The Corporation's pro forma information follows (in thousands except
earnings per share information):
For the three-months ended For the six-months ended
---------------------------- ----------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Net income:
As reported $ 1,064 $ 2,504 $ 2,292 $ 5,518
Pro forma 666 2,321 1,787 5,156
Earnings per common share:
As reported $ .05 $ .14 $ .12 $ .32
Pro forma .03 .13 .09 .30
Diluted earnings per common share:
As reported $ .05 $ .14 $ .11 $ .31
Pro forma .02 .13 .08 .29
The fair value of the options granted was based upon the Black-Scholes pricing
model. The Corporation used the following weighted average assumptions for:
June 30
---------------
2004 2003
---- ----
Risk free interest rate 4.69% 3.33%
Volatility factor .41 .34
Weighted average life of options 7.00 7.00
Dividend yield 0.00 0.00
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Basis of Presentation
The following is a discussion and analysis of our June 30, 2004 consolidated
financial condition and results of operations for the three and six-month
periods ended June 30, 2004 and 2003. 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, 2003.
Overview
Our principal subsidiary is The Bank, an Alabama-chartered financial institution
headquartered in Birmingham, Alabama which operates 26 banking offices in
Alabama and the eastern panhandle of Florida. Other subsidiaries include TBC
Capital Statutory Trust II ("TBC Capital II"), a Connecticut statutory trust,
TBC Capital Statutory Trust III ("TBC Capital III"), a Delaware business trust,
and Morris Avenue Management Group, Inc. ("MAMG"), an Alabama corporation, all
of which are wholly owned. TBC Capital II and TBC Capital III are unconsolidated
special purpose entities formed solely to issue cumulative trust preferred
securities. MAMG is a real estate management company that manages our
headquarters, our branch facilities and certain other real estate owned by The
Bank.
Our total assets were $1.288 billion at June 30, 2004, an increase of $116.4
million, or 9.94% from $1.172 billion as of December 31, 2003. Our total loans,
net of unearned income were $889 million at June 30, 2004, an increase of $32
million, or 3.78% from $857 million as of December 31, 2003. Our total deposits
were $964 million at June 30, 2004, an increase of $74 million, or 8.31% from
$890 million as of December 31, 2003. Our total stockholders' equity remained
level at $100 million at June 30, 2004 and December 31, 2003.
In March 2003, we sold our branch in Roanoke, Alabama, which had assets of
approximately $9.8 million and liabilities of $44.7 million. We realized a $2.3
million pre-tax gain on the sale. In August 2003, we sold seven branches of The
Bank, known as the Emerald Coast branches of The Bank, serving the markets from
Destin to Panama City, Florida, for a $46.8 million deposit premium. These
branches had assets of approximately $234 million and liabilities of $209
million. We realized a $46.0 million pre-tax gain on the sale. On February 6,
2004, we sold our Morris, Alabama branch, which had assets of approximately $1.0
million and liabilities of $8.2 million, for a $739,000 pre-tax gain. Because of
the impact of these sales on our interest-bearing deposits and our loan
portfolio, as well as the impact of the gains on sale on our net income, there
are variations in the comparability between 2004 and 2003 of our financial
position and results of operations. Where appropriate, we have tried to quantify
these effects in the discussion that follows.
In January of 2004, we transferred the majority of our nonperforming loans and
approximately $7 million of other problem loans to our special assets
department. Approximately $41.0 million in loans were transferred along with the
related allowance for loan loss of $9.8 million. This department is staffed with
nine employees,
and is managed by our special assets executive, who has over 18 years of
experience in dealing with special assets. By segregating these relationships,
we believe we can better monitor and control our collection efforts. Segregating
these relationships also allows us to accurately monitor the performance of our
individual branches on an ongoing basis without the influence of these
nonperforming and problem relationships. Management is vigorously pursuing
appropriate collection efforts and expects the nonperforming and problem
relationships to decline over the next six months.
Management reviews the adequacy of the allowance for loan losses on a quarterly
basis. The 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's
determination of the adequacy of the allowance for loan losses, which is based
on the factors and risk identification procedures discussed in the following
pages, requires the use of judgments and estimates that may change in the
future. Changes in the factors used by management to determine the adequacy of
the allowance or the availability of new information could cause the allowance
for loan losses to be increased or decreased in future periods. In addition,
bank regulatory agencies, as part of their examination process, may require that
additions or reductions be made to the allowance for loan losses based on their
judgments and estimates.
Results of Operations
Our net income for the three-month period ended June 30, 2004 (second quarter of
2004), was $1.1 million compared to $2.5 million for the three-month period
ended June 30, 2003 (second quarter of 2003), a decrease of $1.4 million. Our
basic and diluted net income per share was $.05 for the second quarter of 2004,
which represents a $.09 decrease from $.14 per share for the second quarter of
2003.
Our net income for the six-month period ended June 30, 2004 (first six months of
2004) was $2.3 million compared to $5.5 million for the six-month period ended
June 30, 2003 (first six months of 2003), a decrease of $3.2 million. Basic net
income per share was $.12 and diluted net income per share was $.11 for the
first six months of 2004, which represents a $ .20 decrease from $.32 and $.31
per share for the first six months of 2003. Return on average assets, on an
annualized basis, was .37% for the first six months of 2004 compared to .78% for
the first six months of 2003. Return on average stockholders' equity, on an
annualized basis, was 4.59% for the first six months of 2004 compared to 13.97%
for the first six months of 2003. Book value per common share was $5.30 at June
30, 2004 compared to $5.31 at December 31, 2003. Tangible book value per common
share at June 30, 2004 and December 31, 2003 was $4.59.
The decrease in net income during the first and second quarters of 2004 compared
to the first and second quarters of 2003 is the result of a decline in our net
interest margin and other noninterest income offset by a decline in the
provision for loan losses and other noninterest expenses. The reasons underlying
these declines are discussed in the following paragraphs.
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 $2.3 million, or 19.7% to
$9.5 million for the second quarter of 2004 from $11.8 million for the second
quarter of 2003. Net interest income decreased primarily due to a $4.8 million
or 22.8% decrease in total interest income offset by a $2.4 million, or 26.8%
decrease in total interest expense. The decline in total interest income is
primarily due to a $275 million decline in the average volume of loans, which is
primarily the result of the sale of certain branches during 2003.
The decline in total interest expense is primarily attributable to a 45-basis
point decline in the average interest rate paid on interest-bearing liabilities
and a $164 million decline in the volume of average interest-bearing
liabilities. The decline in the average interest-bearing liabilities is due to
the decline in deposit volume related to the sale of certain branches during
2003. The average rate paid on interest-bearing liabilities was 2.47% for the
second quarter of 2004 compared to 2.92% for the second quarter of 2003. Our net
interest spread and net interest margin were 3.31% and 3.42%, respectively, for
the second quarter of 2004, compared to 3.53% and 3.67% for the second quarter
of 2003.
Average interest-earning assets for the second quarter of 2004 decreased $178
million, or 13.7% to $1.121 billion from $1.299 billion in the second quarter of
2003. This decrease in average interest-earning assets was offset by a $164
million, or 13.3%, decrease in average interest-bearing liabilities to $1.071
billion for the second quarter of 2004 from $1.235 billion for the second
quarter of 2003. Average interest-earning assets and liabilities decreased due
to the sale of certain branches during 2003. The ratio of average
interest-earning assets to average interest-bearing liabilities was 104.7% and
105.2% for the second quarters of 2004 and 2003, respectively. Average
interest-bearing assets produced a taxable equivalent yield of 5.78% for the
second quarter of 2004 compared to 6.45% for the second quarter of 2003. The
67-basis point decline in the yield was partially offset by a 45-basis point
decline in the average rate paid on interest-bearing liabilities.
Net interest income decreased $4.8 million, or 20.6% to $18.4 million for the
first six months of 2004 from $23.2 million for the first six months of 2003.
The decrease in net interest income was primarily due to a $10.2 million, or
24.4% decrease in total interest income offset by a $5.4 million, or 29.2%
decrease in total interest expense. The decline in total interest income is
primarily due to a $287 million decline in the average volume of loans, which is
primarily the result of the sale of certain branches during 2003.
The decline in total interest expense is primarily attributable to a 50-basis
point decline in the average interest rate paid on interest-bearing liabilities
and a $194 million decline in the volume of average interest-bearing
liabilities. The decline in the average interest-bearing liabilities is
primarily due to the decline in deposit volume related to the sale of certain
branches during 2003. The average rate paid on interest-bearing liabilities was
2.53% for the first six months of 2004 compared to 3.03% for the first six
months of 2003. Our net interest spread and net interest margin were 3.28% and
3.39%, respectively, for the first six months of 2004, compared to 3.46% and
3.61%, respectively, for the first six months of 2003.
Average interest-earning assets for the first six months of 2004 decreased $206
million, or 15.8% to $1.095 billion from $1.301 billion in the first six months
of 2003. This decrease in average interest-earning assets was offset by a $194
million, or 15.7%, decrease in average interest-bearing liabilities to $1.044
billion for the first six months of 2004 from $1.238 billion for the first six
months of 2003. Average interest-earning assets and liabilities decreased due to
the sale of certain branches during 2003. The ratio of average interest-earning
assets to average interest-bearing liabilities was 104.9% and 105.1% for the
first six months of 2004 and 2003, respectively. Average interest-bearing assets
produced a taxable equivalent yield of 5.81% for the first six months of 2004
compared to 6.49% for the first six months of 2003. The 68-basis point decline
in the yield was offset by a 50-basis point decline in the average rate paid on
interest-bearing liabilities.
Average Balances, Income, Expense and Rates. The following table depicts, on a
taxable equivalent basis for the periods indicated, certain information related
to our average balance sheet and our average yields on assets and average costs
of liabilities. Average yields are calculated by dividing income or expense by
the average balance of the corresponding assets or liabilities. Average balances
have been calculated on a daily basis.
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------
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)......... $ 869,376 $ 13,691 6.33% $ 1,144,563 $ 19,682 6.90%
Investment securities
Taxable................................ 183,643 2,109 4.62 60,363 822 5.46
Tax-exempt(2).......................... 2,744 39 5.72 6,162 102 6.61
----------- ----------- ----------- ---------
Total investment securities........ 186,387 2,148 4.64 66,525 924 5.57
Federal funds sold..................... 17,670 41 0.93 32,253 96 1.19
Other investments...................... 47,945 231 1.94 55,973 186 1.33
----------- ----------- ----------- ---------
Total interest-earning assets...... 1,121,378 16,111 5.78 1,299,314 20,888 6.45
Noninterest-earning assets:
Cash and due from banks.................. 30,783 34,214
Premises and equipment................... 58,129 61,151
Accrued interest and other assets........ 83,443 71,499
Allowance for loan losses................ (23,308) (28,761)
----------- -----------
Total assets....................... $ 1,270,425 $ 1,437,417
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits.......................... $ 258,926 813 1.26 $ 298,865 713 0.96
Savings deposits......................... 28,987 11 0.15 35,523 28 0.32
Time deposits............................ 578,039 3,681 2.56 693,702 5,411 3.13
Other borrowings......................... 173,170 1,456 3.38 174,748 2,220 5.10
Subordinated debentures.................. 31,959 626 7.88 31,959 632 7.93
----------- ----------- ----------- ---------
Total interest-bearing
liabilities...................... 1,071,081 6,587 2.47 1,234,797 9,004 2.92
Noninterest-bearing liabilities:
Demand deposits.......................... 87,153 114,695
Accrued interest and other
liabilities............................. 11,643 6,245
Stockholders' equity..................... 100,548 81,677
----------- -----------
Total liabilities and
stockholders' equity.............. $ 1,270,425 $ 1,437,417
=========== ===========
Net interest income/net interest
spread................................... 9,524 3.31% 11,884 3.53%
==== ====
Net yield on earning assets................ 3.42% 3.67%
==== ====
Taxable equivalent adjustment:
Investment securities(2)................. 13 35
----------- ---------
Net interest income................ $ 9,511 $ 11,849
=========== =========
(1) Nonaccrual loans are included in loans, net of unearned income. No
adjustment has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on a fully taxable equivalent
basis using a tax rate of 34 percent.
The following table sets forth, on a taxable equivalent basis, the effect
that the varying levels of our interest-earning assets and interest-bearing
liabilities and the applicable rates have had on the changes in net interest
income for the three months ended June 30, 2004 and 2003.
THREE MONTHS ENDED JUNE 30 (1)
2004 VS 2003
-----------------------------------
CHANGES DUE TO
INCREASE ---------------------
(DECREASE) RATE VOLUME
--------- ------- --------
(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans................. $ (5,991) $(1,532) $ (4,459)
Interest on securities:
Taxable............................... 1,287 (144) 1,431
Tax-exempt............................ (63) (12) (51)
Interest on federal funds.................. (55) (18) (37)
Interest on other investments.............. 45 75 (30)
--------- ------- --------
Total interest income................. (4,777) (1,631) (3,146)
--------- ------- --------
Expense from interest-bearing liabilities:
Interest on demand deposits................... 100 204 (104)
Interest on savings deposits.................. (17) (13) (4)
Interest on time deposits..................... (1,730) (903) (827)
Interest on other borrowings.................. (764) (744) (20)
Interest subordinated debentures.............. (6) (6) -
--------- ------- --------
Total interest expense................ (2,417) (1,462) (955)
--------- ------- --------
Net interest income................... $ (2,360) $ (169) $ (2,191)
========= ======= ========
- ---------------
(1) The change in interest income and interest expense due to both rate and
volume has been allocated to rate and volume changes in proportion to the
relationship of the absolute dollar amounts of the changes in each.
The following table depicts, on a taxable equivalent basis for the periods
indicated, certain information related to our average balance sheet and our
average yields on assets and average costs of liabilities. Average yields are
calculated by dividing income or expense by the average balance of the
corresponding assets or liabilities. Average balances have been calculated on a
daily basis.
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------------
2004 2003
---------------------------------------- ---------------------------------------
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)....................... $ 863,800 $ 27,258 6.35% $1,150,899 $ 39,526 6.93%
Investment securities
Taxable......................... 170,639 3,822 4.50 54,081 1,540 5.74
Tax-exempt(2)................... 2,030 62 6.14 7,158 241 6.79
---------- --------- ---------- ---------
Total investment
securities................ 172,669 3,884 4.52 61,239 1,781 5.86
Federal funds sold.............. 16,055 75 0.94 33,895 199 1.18
Other investments............... 42,257 396 1.88 54,655 382 1.41
---------- --------- ---------- ---------
Total interest-earning
assets.................... 1,094,781 31,613 5.81 1,300,688 41,888 6.49
Noninterest-earning assets:
Cash and due from banks........... 29,002 33,650
Premises and equipment............ 58,076 61,108
Accrued interest and other
assets.......................... 82,192 72,267
Allowance for loan losses......... (24,396) (33,278)
---------- ----------
Total assets................ $1,239,655 $1,434,435
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits................... $ 248,361 1,494 1.21 $ 293,391 1,407 0.97
Savings deposits.................. 29,692 24 0.16 35,725 69 0.39
Time deposits..................... 561,091 7,264 2.60 702,254 11,430 3.28
Other borrowings.................. 172,606 3,122 3.64 174,777 4,406 5.08
Subordinated debentures........... 31,959 1,252 7.88 31,959 1,268 8.00
---------- --------- ---------- ---------
Total interest-bearing
liabilities............... 1,043,709 13,156 2.53 1,238,106 18,580 3.03
Noninterest-bearing liabilities:
Demand deposits................... 84,200 110,180
Accrued interest and other
liabilities..................... 11,419 6,508
Stockholders' equity.............. 100,327 79,641
---------- ----------
Total liabilities and
stockholders' equity ..... $1,239,655 $1,434,435
========== ==========
Net interest income/net
interest spread................... 18,457 3.28% 23,308 3.46%
==== ====
Net yield on earning assets......... 3.39% 3.61%
==== ====
Taxable equivalent adjustment:
Investment securities(2).......... 21 82
--------- ---------
Net interest income......... $ 18,436 $ 23,226
========= =========
(1) Nonaccrual loans are included in loans, net of unearned income. No
adjustment has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on a fully taxable equivalent
basis using a tax rate of 34 percent.
The following table sets forth, on a taxable equivalent basis, the effect
that the varying levels of our interest-earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
for the six months ended June 30, 2004 and 2003.
SIX MONTHS ENDED JUNE 30 (1)
2004 VS 2003
-----------------------------------
CHANGES DUE TO
INCREASE --------------------
(DECREASE) RATE VOLUME
---------- ------- --------
(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans................. $ (12,268) $(3,082) $ (9,186)
Interest on securities:
Taxable............................... 2,282 (95) 2,377
Tax-exempt............................ (179) (22) (157)
Interest on federal funds.................. (124) (35) (89)
Interest on other investments.............. 14 60 (46)
---------- ------- --------
Total interest income................. (10,275) (3,174) (7,101)
---------- ------- --------
Expense from interest-bearing liabilities:
Interest on demand deposits................... 87 188 (101)
Interest on savings deposits.................. (45) (35) (10)
Interest on time deposits..................... (4,166) (2,115) (2,051)
Interest on other borrowings.................. (1,284) (1,230) (54)
Interest subordinated debentures.............. (16) (16) -
---------- ------- --------
Total interest expense................ (5,424) (3,208) (2,216)
---------- ------- --------
Net interest income................... $ (4,851) $ 34 $ (4,885)
========== ======= ========
- --------------
(1) The change in interest income and interest expense due to both rate and
volume has been allocated to rate and volume changes in proportion to the
relationship of the absolute dollar amounts of the changes in each.
Noninterest income. Noninterest income decreased $1.9 million or 41.2% to $2.8
million for the second quarter of 2004 from $4.7 million for the second quarter
of 2003, primarily due to a decrease in mortgage banking income and gains on
sales of securities. Mortgage banking income decreased $802,000, or 67.7% to
$383,000 in the second quarter of 2004 from $1.2 million in the second quarter
of 2003. The decline in mortgage banking income is the result of the lessening
demand for refinancing that has occurred in 2004 and the sale of the Emerald
Coast branches. Gains on sales of securities decreased $600,000 to $37,000, in
the second quarter of 2004 from $637,000 in the second quarter of 2003.
Noninterest income decreased $3.8 million, or 36.9% to $6.6 million for the
first six months of 2004 from $10.4 million for the first six months of 2003,
primarily due to the $2.2 million gain we realized in 2003 on the sale of our
Roanoke branch. This decrease was partially offset by a $739,000 gain we
realized on the sale of our Morris branch during 2004. Service charges on
deposits decreased $491,000, or 15.0%, to $2.8 million in the first six months
of 2004 from $3.3 million in the first six months of 2003. Mortgage banking
income decreased $1.3 million, or 61.8% to $787,000 in the first six months of
2004 from $2.1 million in the first six months of 2003. Gains on sales of
securities decreased $235,000, to $428,000 in the first six months of 2004 from
$663,000 in the first six months of 2003. The decline in service charges is
related to the decline in deposit accounts, which resulted from the sale of
certain branches during 2003. The decline in mortgage banking income is the
result of the lessening demand for refinancing that has occurred in 2004 and the
sale of the Emerald Coast branches.
Noninterest expense. Noninterest expense decreased $1.2 million, or 10.2% to
$11.2 million for second quarter of 2004 from $12.4 million for the second
quarter of 2003. Salaries and benefits decreased $500,000, or 7.85% to $5.9
million for the second quarter of 2004 from $6.4 million for the second quarter
of 2003. Occupancy and furniture and equipment expenses decreased $183,000, or
8.04% to $2.1 million for the second quarter of 2004
from $2.3 million for the second quarter of 2003. All other noninterest expenses
decreased $591,000, or 15.6% to $3.2 million for the second quarter of 2004 from
$3.8 million for the second quarter of 2003.
Noninterest expense decreased $1.6 million, or 6.53% to $22.3 million for first
six months of 2004 from $23.9 million for the first six months of 2003. Salaries
and benefits decreased $1.2 million, or 9.7% to $11.5 million for the first six
months of 2004 from $12.7 million for the first six months of 2003. Occupancy
and furniture and equipment expenses decreased $233,000, or 5.44% to $4.1
million for the first six months of 2004 from $4.3 million for the first six
months of 2003. All other noninterest expenses decreased $93,000, or 1.35% to
$6.8 million for the first six months of 2004 from $6.9 million for the first
six months of 2003. During the first six months of 2004, we incurred
approximately $2.8 million in certain expenses, including $913,000 for the
special asset department related to increased foreclosure and repossession
activity, $301,000 in valuation write-downs, $626,000 in legal fees, $437,000 in
audit and accounting fees and $825,000 in FDIC premiums. Management does not
expect these expenses to be at these levels in the future. FDIC premiums for the
same period last year were $91,000. Our FDIC premiums for the remaining
six-month period ending December 31, 2004 are expected to be approximately
$210,000. The expenses incurred by the special assets department reflect the
increased activity in this area, which has produced significant recoveries in
the first six months of 2004.
Income tax expense. Our income tax expense was $79,000 for the second quarter of
2004, compared to $940,000 for the second quarter of 2003 and $398,000 for the
first six months of 2004, compared to $2.3 million for the first six months of
2003. The primary difference in the effective rate and the federal statutory
rate (34%) for the three and six-month periods ended June 30, 2004 is due to
certain tax-exempt income from investments and insurance policies and
rehabilitation tax credits on our headquarters, the John A. Hand building.
Provision for Loan Losses. The 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 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 is a loan in which management perceives there is a minimal risk of loss.
Loans are rated using an eight-point scale, with loan officers having the
primary responsibility for assigning the 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 our internal loan review function and senior
management. Based on the assigned risk ratings, the criticized and classified
loans in the portfolio are 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 allowance, adjusted for previously mentioned risk factors.
Impaired loans are reviewed specifically and separately under Statement of
Financial Accounting Standards ("SFAS") No. 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 specific
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.
As a result of the collection of certain classified loans of approximately $6.0
million in the first quarter of 2004, increased recoveries of charged-off loans
of $2.03 million for the first six months of 2004 and an adjustment to the risk
factors related to 1-4 family residential loans in the second quarter of 2004,
no provision for loan losses was posted for the second quarter or first six
months of 2004, a $1.9 million provision for loan losses was posted for the
first six months of 2003. In addition, over one-half of our loan growth during
the first six-months is related to a single credit with a very low risk rating
that was originated in the second quarter and is fully secured by marketable
securities. During the first six months of 2004, we had net charged-off loans
totaling $5.0 million compared to net charged-off loans of $7.0 million in the
first six months of 2003. The net amount of charged-off loans during the first
six months of 2004 was covered by specific and standard allocations of allowance
for loan losses which had been provided in previous periods. The annualized
ratio of net charged-off loans to average loans was 1.16% in the first six
months of 2004 compared to 1.23% for the first six months of 2003 and 2.21% for
the year 2003. The allowance for loan losses totaled $20.2 million, or 2.27% of
loans, net of unearned income at June 30, 2004 compared to $25.2 million, or
2.94% of loans, net of unearned income at December 31, 2003. See "Financial
Condition - Allowance for Loan Losses" for additional discussion.
Financial Condition
Total assets were $1.288 billion at June 30, 2004, an increase of $116 million,
or 9.94% from $1.172 billion as of December 31, 2003. Average total assets for
the first six months of 2004 totaled $1.240 billion, which was supported by
average total liabilities of $1.140 billion and average total stockholders'
equity of $100 million.
Short-term liquid assets. Our short-term liquid assets (cash and due from banks,
interest-bearing deposits in other banks and federal funds sold) increased $17.3
million, or 39.7%, to $60.8 million at June 30, 2004 from $43.5 million at
December 31, 2003. This increase resulted primarily from excess funds invested
in federal funds sold and interest-bearing deposits at the Federal Home Loan
Bank ("FHLB"). These excess funds were attributable primarily to an increase in
deposits. These deposits were invested in short-term liquid assets primarily to
improve our liquidity position and position us for future investment and loan
growth. At June 30, 2004, our short-term liquid assets comprised 4.7% of total
assets, compared to 3.7% at December 31, 2003. We continually monitor our
liquidity position and will increase or decrease our short-term liquid assets as
necessary.
Investment Securities. Total investment securities increased $58.8 million, or
41.5% to $200.4 million at June 30, 2004, from $141.6 million at December 31,
2003. Mortgage-backed securities, which comprised 15.6% of the total investment
portfolio at June 30, 2004, decreased $11.1 million, or 26.2%, to $31.2 million
from $42.3 million at December 31, 2003. Investments in U.S. Treasury and agency
securities, which comprised 66.2% of the total investment portfolio at June 30,
2004, increased $60.2 million, or 83.0%, to $132.7 million from $72.5 million at
December 31, 2003. The increase in our agency securities improved our liquidity,
and we expect that our investment in these securities will provide reasonable
returns over a five- to six-year period. The total investment portfolio at June
30, 2004 comprised 17.6% of all interest-earning assets compared to 13.8% at
December 31, 2003 and produced an average taxable equivalent yield of 4.6% for
the second quarter of 2004 compared to 5.6% for the second quarter of 2003 and
4.5% for the first six months of 2004 compared to 5.9% for the first six months
of 2003.
Loans. Loans, net of unearned income, totaled $889.4 million at June 30, 2004,
an increase of 3.8%, or $32.5 million from $856.9 million at December 31, 2003.
Mortgage loans held for sale totaled $3.6 million at June 30, 2004, a decrease
of $2.8 million from $6.4 million at December 31, 2003. Average loans, including
mortgage loans held for sale, totaled $863.8 million for the first six months of
2004 compared to $1.151 billion for the
first six months of 2003. Average loans, including mortgage loans held for sale,
totaled $869.4 million for the second quarter of 2004 compared to $1.145 billion
for the second quarter of 2003. Loans, net of unearned income, comprised 78.1%
of interest-earning assets at June 30, 2004, compared to 83.6% at December 31,
2003. Mortgage loans held for sale comprised .3% of interest-earning assets at
June 30, 2004, compared to .6% at December 31, 2003. The loan portfolio produced
an average yield of 6.3% for the second quarter and first six months of 2004
compared to 6.9% for the second quarter and first six months of 2003. This
decline in yield was substantially offset by basis point declines of 45 and 50
in the average cost of the funds for the second quarter and first six months of
2004, respectively, that support our loan portfolio. The following table details
the distribution of our loan portfolio by category as of June 30, 2004 and
December 31, 2003:
DISTRIBUTION OF LOANS BY CATEGORY
JUNE 30,2004 DECEMBER 31,2003
-------------------- ------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
---------- ------ -------- ------
Commercial and industrial......................... $ 147,411 16.5% $142,072 16.6%
Real estate-- construction and land development... 163,666 18.4 147,917 17.2
Real estate -- mortgage
Single-family.................................. 250,020 28.1 231,064 27.0
Commercial..................................... 255,398 28.7 250,032 29.1
Other.......................................... 28,740 3.2 31,645 3.7
Consumer.......................................... 38,088 4.3 46,201 5.4
Other............................................. 7,154 .8 8,923 1.0
---------- ----- -------- -----
Total loans............................. 890,477 100.0% 857,854 100.0%
===== =====
Unearned income................................... (1,106) (913)
Allowance for loan losses......................... (20,180) (25,174)
---------- --------
Net loans............................... $ 869,191 $831,767
========== ========
Deposits. Noninterest-bearing deposits totaled $89.9 million at June 30, 2004,
an increase of 4.4%, or $3.8 million from $86.1 million at December 31, 2003.
Noninterest-bearing deposits comprised 9.3% of total deposits at June 30, 2004,
compared to 9.7% at December 31, 2003. Of total noninterest-bearing deposits
$66.5 million, or 74% were in our Alabama branches while $23.3 million, or 26%
were in our Florida branches.
Interest-bearing deposits totaled $874.0 million at June 30, 2004, an increase
of 8.7%, or $70.2 million from $803.8 million at December 31, 2003.
Interest-bearing deposits averaged $839.1 million for the first six months of
2004 compared to $1.031 billion for the first six months of 2003, a decrease of
$192.2 million, or 18.6%. Our average interest-bearing deposits for the second
quarter of 2004 totaled $866.0 million compared to $1.028 billion for the second
quarter of 2003, a decrease of $162.1 million, or 15.8%.
The average rate paid on all interest-bearing deposits during the first six
months of 2004 was 2.1% compared to 2.5% for the first six months of 2003 and
2.1% for the second quarter of 2004 compared to 2.4% for the second quarter of
2003. Of total interest-bearing deposits $650.3 million, or 74.4% were in the
Alabama branches while $223.7 million, or 25.6% were in the Florida branches.
Borrowings. Advances from the Federal Home Loan Bank ("FHLB") totaled $156.1
million at June 30, 2004 and $121.1 million at December 31, 2003. Borrowings
from the FHLB were used primarily to fund growth in the loan portfolio and have
a weighted average rate of approximately 3.35% at June 30, 2004, which has
decreased from 4.60% at December 31, 2003. The advances are secured by FHLB
stock, agency securities and a blanket lien on certain residential real estate
loans and commercial loans.
Junior Subordinated Debentures. We have sponsored two trusts, TBC Capital
Statutory Trust II ("TBC Capital II") and TBC Capital Statutory Trust III ("TBC
Capital III"), of which we own 100% of the common securities. The trusts were
formed for the purpose of issuing mandatory redeemable trust preferred
securities to third-party investors and investing the proceeds from the sale of
such trust preferred securities solely in our junior subordinated debt
securities (the debentures). The debentures held by each trust are the sole
assets of that trust. Distributions on the trust preferred securities issued by
each trust are payable semi-annually at a rate per annum equal to the interest
rate being earned by the trust on the debentures held by that trust. The trust
preferred securities are subject to mandatory redemption, in whole or in part,
upon repayment of the debentures. We have entered into agreements which, taken
collectively, fully and unconditionally guarantee the trust preferred securities
subject to
the terms of each of the guarantees. The debentures held by the TBC Capital II
and TBC Capital III capital trusts are first redeemable, in whole or in part, by
us on September 7, 2007 and July 25, 2006, respectively.
As a result of applying the provisions of FIN 46, governing when an equity
interest should be consolidated, we were required to deconsolidate these
subsidiary trusts from our financial statements in the fourth quarter of 2003.
The deconsolidation of the net assets and results of operations of the trusts
had virtually no impact on our financial statements or liquidity position, since
we continue to be obligated to repay the debentures held by the trusts and
guarantee repayment of the trust preferred securities issued by the trusts. The
consolidated debt obligation related to the trusts increased from $31,000,000 to
$31,959,000 upon deconsolidation, with the difference representing our common
ownership interest in the trusts.
The trust preferred securities held by the trusts qualify as Tier 1 capital
under Federal Reserve Board guidelines.
Consolidated debt obligations related to subsidiary trusts holding solely our
debentures follow:
June 30, 2004 December 31, 2003
------------ -----------------
(In thousands)
10.6% junior subordinated debentures owed to TBC Capital
Statutory Trust II due September 7, 2030 $ 15,464 $ 15,464
6-month LIBOR plus 3.75% junior subordinated
debentures owed to TBC Capital Statutory Trust
III due July 25, 2031 16,495 16,495
----------- --------
Total junior subordinated debentures owed to
unconsolidated subsidiary trusts $ 31,959 $ 31,959
=========== ========
As of June 30, 2004 and December 31, 2003, the interest rate on the $16,495,000
subordinated debentures was 4.96% and 4.90%, respectively.
Currently, we must obtain regulatory approval prior to paying any dividends on
these trust preferred securities. The Federal Reserve approved the timely
payment of our semi-annual distributions on our trust preferred securities in
January, March and July, 2004.
Allowance for Loan Losses. We maintain an allowance for loan losses within a
range 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 engaged
Credit Risk Management, LLC, an independent loan review firm, to supplement our
existing independent loan review function.
Loan portfolio concentration risk is reduced through concentration limits for
borrowers, collateral types and geographical diversification. Concentration risk
is measured and reported to senior management and the board of directors on a
regular basis.
The 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 is a loan in which management perceives there is a minimal risk of
loss. Loans are rated using an eight-point scale with the loan officer having
the primary responsibility for assigning risk ratings and for the timely
reporting of changes in the risk ratings. These processes, and the assigned risk
ratings, are subject to review by the internal loan review function and senior
management. Based on the assigned risk ratings, the criticized and classified
loans in the portfolio are 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 allowance required, adjusted for previously mentioned risk
factors.
Pursuant to SFAS No. 114, impaired loans are specifically reviewed loans for
which it is probable that we will be unable to collect all amounts due according
to the terms of the loan agreement. Impairment is measured by comparing the
recorded investment in the loan with the present value of expected future cash
flows discounted at the loan's effective interest rate, at the loans observable
market price or at the fair value of the collateral if the loan is collateral
dependent. A valuation allowance is provided to the extent that the measure of
the impaired loans is less than the recorded investment. A loan is not
considered impaired during a period of delay in payment if the ultimate
collectibility of all amounts due is expected. Larger groups of homogenous loans
such as consumer installment and residential real estate mortgage loans are
collectively evaluated for impairment.
Reserve percentages assigned to pass rated homogeneous loans are based on
historical charge-off experience adjusted for current trends in the portfolio
and other risk factors.
As stated above, risk ratings are subject to independent review by the internal
loan review, which also performs ongoing, independent review of the risk
management process. The risk management process 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 our board of directors and senior management. We have also
established a centralized loan administration services department to serve our
entire bank. This department will provide standardized oversight for compliance
with loan approval authorities and bank lending policies and procedures, as well
as centralized supervision, monitoring and accessibility.
The following table summarizes certain information with respect to our allowance
for loan losses and the composition of charge-offs and recoveries for the
periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
SIX-MONTH
PERIOD ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2004 2003
------------ -----------
(Dollars in thousands)
Allowance for loan losses at beginning of period . $ 25,174 $ 27,266
Allowance of (branch sold) acquired bank .......... - (102)
Charge-offs:
Commercial and industrial ....................... 2,252 10,823
Real estate -- construction and land development 241 630
Real estate -- mortgage
Single-family ............................... 287 1.505
Commercial .................................. 3,015 6,696
Other ....................................... 40 1,187
Consumer ........................................ 1,154 3,092
Other ........................................... 32 517
----------- -----------
Total charge-offs ....................... 7,021 24,450
Recoveries:
Commercial and industrial ....................... 556 554
Real estate -- construction and land development . 1 23
Real estate -- mortgage
Single-family ............................... 337 23
Commercial .................................. 381 49
Other ....................................... 52 48
Consumer ........................................ 320 282
Other ........................................... 380 6
----------- -----------
Total recoveries ........................ 2,027 985
----------- -----------
Net charge-offs ................................... 4,994 23,465
Provision for loan losses ......................... - 20,975
----------- -----------
Allowance for loan losses at end of period ........ $ 20,180 $ 25,174
=========== ===========
Loans at end of period, net of unearned income .... $ 889,371 $ 856,941
Average loans, net of unearned income ............. 863,800 1,063,451
Ratio of ending allowance to ending loans ......... 2.27% 2.94%
Ratio of net charge-offs to average loans (1) ..... 1.16% 2.21%
Net charge-offs as a percentage of:
Provision for loan losses ....................... - 111.87%
Allowance for loan losses (1) ................... 49.77% 93.21%
Allowance for loan losses as a percentage
of nonperforming loans .......................... 86.32% 78.59%
(1)Annualized.
At June 30, 2004, the allowance for loan losses as a percentage of loans, net of
unearned income was 2.27% compared to 2.94% as of December 31, 2003. The
allowance for loan losses as a percentage of nonperforming loans increased to
86.32% at June 30, 2004 from 78.59% at December 31, 2003 due to a decrease in
nonperforming loans of $8.6 million (See "Financial Condition - Nonperforming
loans" below).
Net charge-offs were $5.0 million for the first six months of 2004. Net
charge-offs to average loans on an annualized basis totaled 1.16% for the first
six months of 2004. Net commercial loan charge-offs totaled $1.7 million, or
34.0% of total net charge-off loans for the first six months of 2004 compared to
43.8% of total net charge-off loans for the year 2003. Net commercial real
estate loan charge-offs totaled $2.6 million, or 52.7% of total net charge-off
loans for the first six months of 2004 compared to 28.3% of total net charge-off
loans for the year 2003. Net consumer loan charge-offs totaled $834,000, or
16.7% of total net charge-off loans for the first six months of 2004 compared to
12% of total net charge-off loans for the year 2003. Net commercial real estate
loan charge-offs as a percentage of total net charge-offs were higher in the
first six months of 2004 because of continued foreclosure activity on certain
commercial real estate loans on which estimated losses had been provided to the
allowance for loan losses during 2003.
Nonperforming Loans. In January of 2004, we transferred the majority of our
nonperforming loans and approximately $7.0 million of other problem loans to our
special assets department. Approximately $41.0 million in loans were transferred
with the related allowance for loan loss of $9.8 million. This department is
staffed with nine employees and is managed by our special assets executive, who
has over 18 years of experience in dealing with special assets. By segregating
these relationships, we believe we can better monitor and control our collection
efforts. Segregating these relationships also allows us to accurately monitor
the performance of our individual branches on an ongoing basis without the
influence of these nonperforming and problem relationships. Management is
vigorously pursuing appropriate collection efforts and expects the nonperforming
and problem relationships to decline over the next six months.
Nonperforming loans decreased $8.6 million to $23.4 million as of June 30, 2004
from $32.0 million as of December 31, 2003. As a percentage of net loans,
nonperforming loans decreased from 3.74% at December 31, 2003 to 2.63% at June
30, 2004. The decrease in nonperforming loans resulted primarily from
collections, charge-offs and the transfer of certain loans to other real estate
and foreclosed assets. Other real estate and foreclosed assets increased $1.0
million to $7.0 million at June 30, 2004 from $6.0 million at December 31, 2003.
The following table represents our nonperforming loans for the dates indicated.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
JUNE 30, 2004 DECEMBER 31, 2003
--------------------------------- ------------------
OPERATING SPECIAL
BRANCHES ASSETS TOTAL TOTAL
-------- -------- --------- ------------------
(Dollars in Thousands)
Nonaccrual.............................................. $ 4,746 $ 17,101 $ 21,847 $ 29,630
Past due (contractually past due 90 days or more)........... 1,338 131 1,469 1,438
Restructured .................................................... 63 -- 63 966
-------- -------- --------- ------------------
$ 6,147 $ 17,232 $ 23,379 $ 32,034
======== ======== ========= ==================
Loans, net of unearned .......................................... $863,183 $ 26,188 $ 889,371 $ 856,941
======== ======== ========= ==================
Nonperforming loans as a percent of loans .71% 65.80% 2.63% 3.74%
======== ======== ========= ==================
Loans past due 30 days or more, net of non-accruals, improved to .84% at June
30, 2004 from 2.28% at December 31, 2003. Exclusive of the loans in the special
assets portfolio, loans past due more than 30 days, net of non-accruals, were
..75%.
The following is a summary of nonperforming loans by category for the dates
shown:
JUNE 30 DECEMBER 31,
2004 2003
---- ----
(Dollars in thousands)
Commercial and industrial ..................... $ 6,105 $11,621
Real estate -- construction and land
development................................... 1,635 1,735
Real estate -- mortgages.......................
Single-family ............................ 4,744 5,472
Commercial ............................... 12,378 10,238
Other .................................... 262 162
Consumer ...................................... 395 465
Other ......................................... -- 201
------- -------
Total nonperforming loans .......... $23,379 $32,034
======= =======
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 during the
current period but remains unpaid is reversed and deducted from earnings as a
reduction of reported interest income; any prior period accrued and unpaid
interest is reversed and charged against the allowance for loan losses. No
additional interest income is accrued on the loan balance until the collection
of both principal and interest becomes reasonably certain. When a problem loan
is finally resolved, there may ultimately be an actual write-down or charge-off
of the principal balance of the loan to the allowance for loan losses, which may
necessitate additional charges to earnings.
Impaired Loans. At June 30, 2004, the recorded investment in impaired loans
totaled $21.1 million with approximately $7.3 million in allowance for loan
losses specifically allocated to impaired loans. This represents a decrease of
$4.3 million from $25.4 million at December 31, 2003. A significant portion of
our impaired loans have been transferred to our special assets department. The
following is a summary of impaired loans and the specifically allocated
allowance for loan losses by category as of June 30, 2004:
OPERATING BRANCHES SPECIAL ASSETS TOTAL
----------------------- ------------------------ -------------------------
OUTSTANDING SPECIFIC OUTSTANDING SPECIFIC OUTSTANDING SPECIFIC
BALANCE ALLOWANCE BALANCE ALLOWANCE BALANCE ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
Commercial and industrial ..................... $ 2,825 $ 1,719 $ 4,099 $ 1,432 $ 6,924 $ 3,151
Real estate -- construction and land
development................................... 392 67 1,037 222 1,429 289
Real estate -- mortgages.......................
Single-family ............................ 611 55 1,271 400 1,882 455
Commercial ............................... 1,904 454 8,719 2,931 10,623 3,385
Other .................................... 143 24 78 31 221 55
------- ------- ------- ------- ------- -------
Total ............................... $ 5,875 $ 2,319 $15,204 $ 5,016 $21,079 $ 7,335
======= ======= ======= ======= ======= =======
Potential Problem Loans. In addition to nonperforming loans, management has
identified $1.4 million in potential problem loans as of June 30, 2004.
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. Approximately $325,000 or 22% of the
potential problem loans are part of the portfolio that was transferred to our
special assets department in January, 2004. Overall, $907,000 or 63% of our
potential problem loans are secured by real estate. Management has allocated in
allowance for loan losses approximately $322,000 to absorb any losses that may
result from these loans.
Stockholders Equity. Our total stockholders' equity remained level at $100
million at June 30, 2004 and December 31, 2003. Net income of $2.3 million
increased stockholders' equity during the first six months of 2004 but was
offset by a $2.4 million unrealized loss on available for sale investment
securities. As of June 30, 2004 we had 18,025,932 shares of common stock issued
and 17,729,062 outstanding. In September of 2000, our board of directors
approved a stock buyback plan in an amount not to exceed $10,000,000. As of June
30, 2004, there were 65,448 shares held in treasury at a cost of $430,000.
On April 1, 2002, we issued 157,500 shares of restricted common stock to certain
directors and key employees pursuant to the Second Amended and Restated 1998
Stock Incentive Plan. Under the Restricted Stock Agreements, the stock may not
be sold or assigned in any manner for a five-year period that began on April 1,
2002. 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 at the end of each of the
third, fourth and fifth years. The restricted stock was issued at $7.00 per
share, or $1,120,000, and classified as a contra-equity account, "Unearned
restricted stock", in stockholders' equity. During 2003, 15,000 shares of this
restricted common stock were forfeited. Restricted shares outstanding as of June
30, 2004 were 142,500 and the remaining amount in the unearned restricted stock
account is $549,000. This balance is being amortized as expense as the stock is
earned during the restricted period. The amounts of restricted shares are
included in the diluted earnings per share calculation, using the treasury stock
method, until the shares vest. Once vested, the shares become outstanding for
basic earnings per share. For the periods ended June 30, 2004 and 2003, we
recognized $100,000 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 are at least 21 years old and
have completed a year of service. As of June 30, 2004, 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, the ESOP trustees finalized a $2,100,000 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 statement of financial condition. As the debt is repaid, shares are
released from collateral based on the proportion of debt service. Principal
payments on the debt are $17,500 per month for 120 months. The interest rate is
adjusted annually to the Wall Street Journal prime rate. Released shares are
allocated to eligible employees at the end of the plan year based on the
employee's eligible compensation to total compensation. We recognize
compensation expense 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 we report is equal to the
average fair value of the shares earned and committed to be released during the
period. Compensation expense that we recognized during the periods ended June
30, 2004 and 2003 was $98,000 and $55,000, respectively. The ESOP shares as of
June 30, 2004, were as follows:
June 30, 2004
--------------
Allocated shares 28,628
Estimated shares committed to be released 13,350
Unreleased shares 231,422
--------------
Total ESOP shares 273,400
==============
Fair value of unreleased shares $ 1,520,000
==============
Regulatory Capital. The table below represents our and our subsidiary's
regulatory and minimum regulatory capital requirements at June 30, 2004 (dollars
in thousands):
FOR CAPITAL
ADEQUACY TO BE WELL
ACTUAL PURPOSES CAPITALIZED
------------------- ---------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------ ----- ------- -----
Total Risk-Based Capital
Corporation $133,251 13.46% $79,214 8.00% $ 99,017 10.00%
The Bank 126,716 12.95 78,279 8.00 97,848 10.00
Tier 1 Risk-Based Capital
Corporation 119,704 12.09 39,607 4.00 59,410 6.00
The Bank 114,387 11.69 39,139 4.00 58,709 6.00
Leverage Capital
Corporation 119,704 9.51 50,325 4.00 62,906 5.00
The Bank 114,387 9.16 49,929 4.00 62,411 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 from the Federal Home Loan Bank
under a blanket floating lien on certain commercial loans and residential real
estate loans. Also, we have established certain repurchase agreements with a
large financial institution. 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.
Management believes it has established sufficient sources of funds to meet its
anticipated liquidity needs.
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 expectations 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 in 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 the factors affecting our forward-looking information and
statements proves incorrect, then our actual results, performance or
achievements could differ materially from those expressed in, or implied by,
forward-looking information and 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 information and statements,
whether written or oral, to reflect change. All forward-looking information and
statements attributable to us are expressly qualified by these cautionary
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative
disclosures about market risk as of June 30, 2004 from those presented in our
Annual Report on Form 10-K for the year ended December 31, 2003.
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, 2003, 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.
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 CEO and CFO have concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures are
effective to ensure that material information relating to The Banc Corporation
and its subsidiaries is made known to management, including the CEO and CFO,
particularly during the period when our periodic reports are being prepared.
There have not been any changes in our internal control over financial reporting
(as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as
amended) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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
On June 15, 2004, our Annual Meeting of Stockholders was held at which shares of
common stock represented at the Annual Meeting were voted in favor of the
directors listed below as follows:
Broker
Director For Against Withheld Nonvotes
-------- --- ------- -------- --------
1. James R. Andrews, M.D. 13,453,708 - 171,818 -
2. David R. Carter 13,342,256 - 283,270 -
3. James Mailon Kent, Jr. 13,325,460 - 300,066 -
4. Ronald W. Orso, M.D. 13,453,908 - 171,618 -
5. Larry D. Striplin, Jr. 13,217,181 - 408,345 -
6. James A. Taylor 13,341,960 - 283,566 -
In addition to the directors elected at the meeting, the following individuals
will continue to serve as directors until the end of their respective terms:
Jerry M. Smith Michael E. Stephens
Marie Swift W. T. Campbell, Jr.
K. Earl Durden Roger Barker
Thomas E. Jernigan, Jr. James A. Taylor, Jr.
Randall E. Jones Harold Ripps
In addition, shares of common stock represented at the Annual Meeting were voted
in favor of the amendment to the Second Amended and Restated 1998 Stock
Incentive Plan of The Banc Corporation to increase the number of shares reserved
for awards under the Plan as follows:
Broker
For Against Abstain Nonvotes Withheld
- --- ------- ------- --------- --------
7,062,070 770,700 87,751 5,705,005 -
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
31.01 Certification of principal executive officer pursuant to Rule
13a-14(a).
31.02 Certification of principal financial officer pursuant to
13a-14(a).
32.01 Certification of principal executive officer pursuant to 18
U.S.C. Section 1350.
32.02 Certification of principal financial officer pursuant to 18
U.S.C. Section 1350.
(b) Reports on Form 8-K:
We furnished a Current Report on Form 8-K dated June 14, 2004 under
Items 4 and 7 of Form 8-K containing the following Exhibits:
Exhibit (16) - 1 Letter, dated June 14, 2004, from
Ernst & Young LLP to the Securities
and Exchange Commission.
Exhibit (16) - 2 Letter, dated June 14, 2004, from Ernst
& Young LLP to David R. Carter, Chief
Financial Officer, The Banc Corporation
We furnished a Current Report on Form 8-K dated August 2, 2004 under
Items 7 and 12 of Form 8-K containing as an Exhibit a press release
dated August 2, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Banc Corporation
(Registrant)
Date: August 9, 2004 By: /s/ James A. Taylor, Jr.
--------------------------------------------
James A. Taylor, Jr.
President and Chief Operating Officer
Date: August 9, 2004 By: /s/ David R. Carter
--------------------------------------------
David R. Carter
Executive Vice President and Chief Financial
Officer
(Principal Accounting Officer)