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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
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(Exact Name of Registrant as Specified in its Charter)
Delaware 63-1201350
- ------------------------------ -------------------
(State or Other (IRS Employer
Jurisdiction of Incorporation) Identification No.)
17 North 20th Street, Birmingham, Alabama 35203
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(Address of Principal Executive Offices)
(205) 326-2265
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of September 30, 2004
- ----------------------------- ------------------------------------
Common stock, $.001 par value 17,743,171
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 41,513 $ 31,679
Interest-bearing deposits in other banks 12,528 11,869
Federal funds sold 33,000 --
Investment securities available for sale 225,036 141,601
Mortgage loans held for sale 2,138 6,408
Loans, net of unearned income 923,467 856,941
Less: Allowance for loan losses (12,808) (25,174)
---------- ----------
Net loans 910,659 831,767
---------- ----------
Premises and equipment, net 59,733 57,979
Accrued interest receivable 5,687 5,042
Stock in FHLB and Federal Reserve Bank 10,243 8,499
Other assets 80,756 76,782
---------- ----------
TOTAL ASSETS $1,381,293 $1,171,626
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 88,943 $ 86,100
Interest-bearing 942,669 803,835
---------- ----------
TOTAL DEPOSITS 1,031,612 889,935
Advances from FHLB 156,090 121,090
Other borrowed funds 43,802 10,829
Long-term debt 1,768 1,925
Subordinated debentures 31,959 31,959
Accrued expenses and other liabilities 14,605 15,766
---------- ----------
TOTAL LIABILITIES 1,279,836 1,071,504
Stockholders' Equity
Preferred stock, par value $.001 per share; authorized 5,000,000 shares;
shares issued 62,000 at September 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
17,743,171 and 17,694,595, respectively 18 18
Surplus - preferred 6,193 6,193
- common 68,431 68,364
Retained Earnings 30,094 28,850
Accumulated other comprehensive loss (578) (180)
Treasury stock, at cost (390) (501)
Unearned ESOP stock (1,812) (1,974)
Unearned restricted stock (499) (648)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 101,457 100,122
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,381,293 $1,171,626
========== ==========
See Notes to Condensed Consolidated Financial Statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2004 2003 2004 2003
------- ------- ------- -------
INTEREST INCOME
Interest and fees on loans $14,244 $17,796 $41,502 $57,322
Interest on investment securities
Taxable 2,270 860 6,092 2,400
Exempt from Federal income tax 47 8 88 167
Interest on federal funds sold 32 59 107 258
Interest and dividends on other investments 157 160 553 542
------- ------- ------- -------
Total interest income 16,750 18,883 48,342 60,689
INTEREST EXPENSE
Interest on deposits 4,859 5,138 13,641 18,044
Interest on other borrowed funds 1,510 2,223 4,632 6,629
Interest on subordinated debentures 653 629 1,905 1,897
------- ------- ------- -------
Total interest expense 7,022 7,990 20,178 26,570
------- ------- ------- -------
NET INTEREST INCOME 9,728 10,893 28,164 34,119
Provision for loan losses -- 9,250 -- 11,175
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,728 1,643 28,164 22,944
NONINTEREST INCOME
Service charges and fees on deposits 1,526 1,481 4,314 4,760
Mortgage banking income 463 1,427 1,250 3,487
Gain (loss) on sale of securities (4) 95 424 758
Gain on sale of branch -- 46,057 739 48,303
Other income 744 785 2,569 2,942
------- ------- ------- -------
TOTAL NONINTEREST INCOME 2,729 49,845 9,296 60,250
NONINTEREST EXPENSES
Salaries and employee benefits 5,925 10,676 17,382 23,365
Occupancy, furniture and equipment expense 1,982 1,910 6,034 6,195
Loss on sale of loans 2,260 -- 2,260 --
Other 3,605 5,103 10,409 12,000
------- ------- ------- -------
TOTAL NONINTEREST EXPENSES 13,772 17,689 36,085 41,560
------- ------- ------- -------
Income (loss) before income taxes (1,315) 33,799 1,375 41,634
INCOME TAX EXPENSE (BENEFIT) (485) 13,524 (87) 15,841
------- ------- ------- -------
NET INCOME (LOSS) $ (830) $20,275 $ 1,462 $25,793
======= ======= ======= =======
BASIC NET INCOME (LOSS) PER COMMON SHARE $ (0.05) $ 1.16 $ 0.07 $ 1.48
======= ======= ======= =======
DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (0.05) $ 1.10 $ 0.07 $ 1.41
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,590 17,507 17,576 17,476
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION 17,590 18,461 17,741 18,244
See Notes to Condensed Consolidated Financial Statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
2004 2003
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ 5,970 $ (5,692)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in other banks (659) (36,257)
Net increase in federal funds sold (33,000) (16,000)
Proceeds from sales of securities available for sale 83,613 28,285
Proceeds from maturities of investment securities available for sale 45,826 49,656
Purchases of investment securities available for sale (214,270) (124,326)
Proceeds from sale of investment securities held to maturity -- 2,070
Net increase in loans (79,779) (8,162)
Purchases of premises and equipment (3,222) (3,806)
Net cash (paid) received in branch sale (6,626) 36,741
Other investing activities (5,545) (219)
--------- ---------
Net cash used by investing activities (213,662) (72,018)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts 149,878 57,421
Net increase (decrease) in FHLB advances and other borrowed funds 67,973 (567)
Proceeds received on long term debt -- 2,100
Payments made on long term debt (157) (122)
Proceeds from sale of common stock 49 49
Proceeds from sale of preferred stock -- 6,193
Cash dividends paid (217) --
--------- ---------
Net cash provided by financing activities 217,526 65,074
--------- ---------
Net increase (decrease) in cash and due from banks 9,834 (12,636)
Cash and due from banks at beginning of period 31,679 45,365
--------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 41,513 $ 32,729
========= =========
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 the Corporation's Annual Report on
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 nine-month periods ended
September 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 March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary and Its
Application to Certain Investments. The issue applies to debt and equity
securities within the scope of SFAS No. 115, certain debt and equity securities
within the scope of SFAS No. 124, and equity securities that are not subject to
the scope of SFAS No. 115 and not accounted for under the equity method of
accounting (i.e., cost method investments). Issue 03-1 outlines a three-step
model for assessing other-than-temporary impairment. The model involves first
determining whether an investment is impaired, then evaluating whether the
impairment is other-than-temporary, and if it is, recognizing an impairment
loss equal to the difference between the investment's cost and its fair value.
The model was to be applied prospectively to all current and future investments
in interim or annual reporting periods beginning after June 15, 2004. However,
in September 2004 the FASB staff issued FASB Staff Position ("FSP") EITF Issue
03-1-1 which delayed the effective date for the measurement and recognition
guidance contained in Issue 03-01. The guidance for analyzing securities for
impairment will be effective with the final issuance of FSP EITF Issue 03-1-a.
The disclosure guidance of Issue 03-1 remains effective and requires
quantitative and qualitative disclosures for investments accounted for under
SFAS No. 115 and SFAS No. 124 for the first annual reporting period ending
after December 15, 2003. In addition, disclosures related to cost method
investments are effective for annual reporting periods ending after June 15,
2004. Comparative information for the periods prior to the period of initial
application is not required.
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 on or after 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 for 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 the
Corporation 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 September 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 September 30, 2004 was $18.6
million, which represents the Corporation's maximum credit risk. At September
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 as of 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 9)
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer." ("SOP 03-3") 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. 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
acquired 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 - Loan Sale
In September 2004 the Corporation's banking subsidiary sold approximately
$32,000,000, before allowance for loan losses, in certain nonperforming loans
and other classified, performing loans resulting in a pre-tax loss of
$2,260,000. Prior to the sale approximately $6,868,000 related to these loans
was recognized as a charge-off in September 2004 against the allowance for loan
losses. The $6,868,000 in allowance for loan losses associated with these loans
had been provided in previous periods.
Note 5 - 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 September 30, 2004
Net interest income $ 6,955 $ 2,773 $ 9,728
Provision for loan losses 18 (18) --
Noninterest income 2,418 311 2,729
Noninterest expense(1)(3) 12,674 1,098 13,772
Income tax (benefit) expense (1,883) 1,398 (485)
Net (loss) income (1,436) 606 (830)
Total assets 1,133,525 247,768 1,381,293
Three months ended September 30, 2003
Net interest income $ 6,044 $ 4,849 $ 10,893
Provision for loan losses 6,490 2,760 9,250
Noninterest income(1) 3,169 619 3,788
Gain on sale of branch(1) -- 46,057 46,057
Noninterest expense(2) 13,641 4,048 17,689
Income tax (benefit) expense (4,363) 17,887 13,524
Net (loss) income (6,555) 26,830 20,275
Total assets 945,440 297,306 1,242,746
Alabama Florida
Region Region Combined
----------- --------- -----------
Nine months ended September 30, 2004
Net interest income $ 20,168 $ 7,996 $ 28,164
Provision for loan losses 1,974 (1,974) --
Noninterest income(1) 8,283 1,013 9,296
Noninterest expense(2)(3) 30,086 5,999 36,085
Income tax (benefit)expense (2,364) 2,277 (87)
Net (loss) income (1,245) 2,707 1,462
Nine months ended September 30, 2003
Net interest income $ 18,869 $ 15,250 $ 34,119
Provision for loan losses 7,321 3,854 11,175
Noninterest income(1) 9,680 2,267 11,947
Gain on sale of branch(1) 2,246 46,057 48,303
Noninterest expense(2) 29,782 11,778 41,560
Income tax (benefit) expense (2,375) 18,218 15,841
Net (loss) income (3,931) 29,724 25,793
- ---------------
(1) See Note 3 concerning branch sales. Also, in January 2004, certain
loans were 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.
(3) See Note 4 concerning loan sale.
Note 6 - Net (Loss) Income per Share
The following table sets forth the computation of basic and diluted net (loss)
income per common share (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
2004 2003 2004 2003
------- ------- ------- -------
Numerator:
Net (loss) income $ (830) $20,275 1,462 $25,793
Less preferred dividends -- -- 217 --
------- ------- ------- -------
For basic and diluted, net (loss) income
applicable to common $ (830) $20,275 $ 1,245 $25,793
======= ======= ======= =======
Denominator:
For basic, weighted average common shares
outstanding 17,590 17,507 17,576 17,476
Effect of dilutive stock options,
restricted stock and convertible preferred -- 954 165 768
------- ------- ------- -------
Weighted, average common shares outstanding
assuming dilution 17,590 18,461 17,741 18,244
======= ======= ======= =======
Basic net (loss) income per common share $ (.05) $ 1.16 $ .07 $ 1.48
======= ======= ======= =======
Diluted net (loss) income per common share $ (.05) $ 1.10 $ .07 $ 1.41
======= ======= ======= =======
Diluted net income per common share takes into consideration the pro forma
dilution assuming outstanding convertible preferred stock and certain unvested
restricted stock and unexercised stock option awards were converted or exercised
into common shares. Options on 940,000 shares of common stock were not included
in computing diluted net income per share for the three-month period ended
September 30, 2004 because their effects were antidilutive.
Note 7 - Comprehensive Income
Total comprehensive income was $1,186,000 and $1,064,000, respectively, for the
three- and nine-month periods ended September 30, 2004, and $19,630,000 and
$24,953,000 respectively, for the three- and nine-month periods ended September
30, 2003. Total comprehensive income consists of net income and the unrealized
gain or loss on the Corporation's available for sale securities portfolio
arising during the period.
Note 8 - 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 9 - 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:
September 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 September 30, 2004 and December 31, 2003, the interest rate on the
$16,495,000 subordinated debentures was 5.74% 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 distributions on our trust preferred securities in
January, March, July and September 2004.
Note 10 - Stockholders' Equity
In September 2000, the Corporation's board of directors approved a stock
buyback plan in an amount not to exceed $10,000,000. As of September 30, 2004,
there were 58,014 shares held in treasury at a cost of $390,000.
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 September 30, 2004 were 142,500 and the
remaining amount in the unearned restricted stock account is $499,000. 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 September 30, 2004 and 2003, the Corporation has
recognized $150,000 and $168,000, 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 September 30,
2004 the ESOP has been internally leveraged with 273,400 shares of the
Corporation's common stock purchased in the open market and classified as a
contra-equity account, "Unearned ESOP shares", in stockholders' equity.
On January 29, 2003, the 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 September 30, 2004, and 2003, was $142,000 and
$101,000, respectively. The ESOP shares as of September 30, 2004 were as
follows:
September 30, 2004
------------------
Allocated shares 28,628
Estimated shares committed to be released 20,025
Unreleased shares 224,747
----------
Total ESOP shares 273,400
==========
Fair value of unreleased shares $1,573,000
==========
The Corporation has established a stock incentive plan for directors and certain
key employees that provides for the granting of restricted stock and incentive
and nonqualified options to purchase up to 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 nine-months ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income (loss):
As reported $ (830) $20,275 $1,462 $25,793
Pro forma (1,230) 20,091 557 25,246
Earnings (loss) per common share:
As reported $ (.05) $ 1.16 $ .07 $ 1.48
Pro forma (.07) 1.15 .02 1.44
Diluted earnings (loss) per common share:
As reported $ (.05) $ 1.10 $ .07 $ 1.41
Pro forma (.07) 1.09 .02 1.38
The fair value of the options granted was based upon the Black-Scholes pricing
model. The Corporation used the following weighted average assumptions for:
September 30
------------------
2004 2003
----- -----
Risk free interest rate 4.56% 3.94%
Volatility factor .32 .33
Weighted average life of options 3.50 3.50
Dividend yield 0.00 0.00
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Basis of Presentation
The following is a discussion and analysis of our September 30, 2004
consolidated financial condition and results of operations for the three- and
nine-month periods ended September 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 $1.381 billion at September 30, 2004, an increase of $209
million, or 17.9% from $1.172 billion as of December 31, 2003. Our total loans,
net of unearned income were $923 million at September 30, 2004, an increase of
$66 million, or 7.76% from $857 million as of December 31, 2003. Our total
deposits were $1.032 billion at September 30, 2004, an increase of $142 million,
or 15.9% from $890 million as of December 31, 2003. Our total stockholders'
equity was $101.5 million at September 30, 2004, an increase of $1.4 million, or
1.3%, from $101.1 million at 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 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. As of September 30, 2004, the
balance of these loans totaled only
$5 million. In September 2004 The Bank sold approximately $32 million, before
allowance for loan losses, in certain nonperforming loans and other classified,
performing loans resulting in a pre-tax loss of $2.3 million. Prior to the sale
approximately $6.9 million related to these loans was recognized as a charge-off
in September 2004 against the allowance for loan losses. The $6.9 million in
allowance for loan losses associated with these loans had been provided in
previous periods. Management is vigorously pursuing appropriate collection
efforts on the remaining loans.
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 to be 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
We incurred a net loss for the three-month period ended September 30, 2004
(third quarter of 2004), of $(830,000) compared to net income of $20.3 million
for the three-month period ended September 30, 2003 (third quarter of 2003). Our
basic and diluted net (loss) income per share was $ (.05) for the third quarter
of 2004, which represents a $1.21 (basic) and $1.15 (diluted) decrease from
$1.16 and $1.10, respectively, per share for the third quarter of 2003.
Our net income for the nine-month period ended September 30, 2004 (first nine
months of 2004) was $1.5 million compared to $25.8 million for the nine-month
period ended September 30, 2003 (first nine months of 2003). Our basic and
diluted net income per share was $.07 for the first nine months of 2004 compared
to $1.48(basic) and $1.41(diluted) per share for the first nine months of 2003.
Return on average assets, on an annualized basis, was .15% for the first nine
months of 2004 compared to 2.44% for the first nine months of 2003. Return on
average stockholders' equity, on an annualized basis, was 1.94% for the first
nine months of 2004 compared to 40.44% for the first nine months of 2003. Book
value per common share at September 30, 2004 was $5.37 compared to $5.31 as of
December 31, 2003. Tangible book value per common share at September 30, 2004
was $4.67 compared to $4.59 as of December 31, 2003.
The decrease in net income during the third quarter and first nine months of
2004 compared to the third quarter and first nine months 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. These
variations, which are primarily the result of the sale of our Emerald Coast
branches, are more fully 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 $1.2 million, or 10.7%, to
$9.7 million for the third quarter of 2004 from $10.9 million for the third
quarter of 2003. Net interest income decreased primarily due to a $2.1 million,
or 11.3%, decrease in total interest income offset by a $1.0 million, or 12.1%,
decrease in total interest expense. The decline in total interest income is
primarily due to a $146 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 26-basis
point decline in the average interest rate paid on interest-bearing liabilities.
The average rate paid on interest-bearing liabilities was 2.52% for the third
quarter of 2004 compared to 2.78% for the third quarter of 2003. Our net
interest spread and net interest margin
were 3.22% and 3.34%, respectively, for the third quarter of 2004, compared to
3.34% and 3.53% for the third quarter of 2003.
Average interest-earning assets for the third quarter of 2004 decreased $61.6
million, or 5.04%, to $1.163 billion from $1.224 billion in the third quarter of
2003. This decrease in average interest-earning assets was offset by a $33.0
million, or 2.90%, decrease in average interest-bearing liabilities to $1.107
billion for the third quarter of 2004 from $1.140 billion for the third 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 105.1% and 107.4% for the
third quarters of 2004 and 2003, respectively. Average interest-bearing assets
produced a taxable equivalent yield of 5.74% for the third quarter of 2004
compared to 6.12% for the third quarter of 2003. The 38-basis point decline in
the yield was partially offset by a 26-basis point decline in the average rate
paid on interest-bearing liabilities.
Net interest income decreased $6.0 million, or 17.5%, to $28.2 million for the
first nine months of 2004 from $34.1 million for the first nine months of 2003.
The decrease in net interest income was primarily due to a $12.3 million, or
20.3%, decrease in total interest income offset by a $6.4 million, or 24.1%
decrease in total interest expense. The decline in total interest income is
primarily due to a $239 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 42-basis
point decline in the average interest rate paid on interest-bearing liabilities
and a $141 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 nine months of 2004 compared to 2.95% for the first nine
months of 2003. Our net interest spread and net interest margin were 3.25% and
3.37%, respectively, for the first nine months of 2004, compared to 3.42% and
3.59%, respectively, for the first nine months of 2003.
Average interest-earning assets for the first nine months of 2004 decreased $157
million, or 12.3%, to $1.119 billion from $1.276 billion in the first nine
months of 2003. This decrease in average interest-earning assets was offset by a
$141 million, or 11.7%, decrease in average interest-bearing liabilities, to
$1.065 billion for the first nine months of 2004 from $1.206 billion for the
first nine 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 105.1% and
105.8% for the first nine months of 2004 and 2003, respectively. Average
interest-bearing assets produced a taxable equivalent yield of 5.78% for the
first nine months of 2004 compared to 6.37% for the first nine months of 2003.
The 59-basis point decline in the yield was partially offset by a 42-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 SEPTEMBER 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) $ 918,093 $14,244 6.17% $1,063,686 $17,796 6.64%
Investment securities
Taxable 206,422 2,270 4.37 74,248 860 4.60
Tax-exempt(2) 5,201 71 5.43 841 12 5.66
---------- ------- ---------- -------
Total investment securities 211,623 2,341 4.40 75,089 872 4.61
Federal funds sold 9,435 32 1.35 24,576 59 0.95
Other investments 23,480 157 2.66 60,923 160 1.04
---------- ------- ---------- -------
Total interest-earning assets 1,162,631 16,774 5.74 1,224,274 18,887 6.12
Noninterest-earning assets:
Cash and due from banks.................. 26,906 35,743
Premises and equipment................... 58,309 58,646
Accrued interest and other assets........ 83,046 70,167
Allowance for loan losses................ (20,433) (23,303)
---------- ----------
Total assets......................... $1,310,459 $1,365,527
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits $ 276,490 $ 860 1.24 $ 288,251 $ 653 0.90
Savings deposits 29,081 10 0.14 34,943 18 0.20
Time deposits 588,166 3,989 2.70 609,983 4,466 2.90
Other borrowings 181,055 1,510 3.32 174,630 2,223 5.05
Subordinated debentures 31,959 653 8.13 31,959 629 7.81
---------- ------- ---------- -------
Total interest-bearing liabilities 1,106,751 7,022 2.52 1,139,766 7,989 2.78
Noninterest-bearing liabilities:
Demand deposits.......................... 90,803 113,203
Accrued interest and other liabilities... 11,661 15,517
Stockholders' equity..................... 101,244 97,041
---------- ----------
Total liabilities and
stockholders' equity............... $1,310,459 $1,365,527
========== ==========
Net interest income/net interest
spread................................... 9,752 3.22% 10,898 3.34%
==== ====
Net yield on earning assets................ 3.34% 3.53%
==== ====
Taxable equivalent adjustment:
Investment securities(2)................. 24 4
------- -------
Net interest income................ $ 9,728 $10,894
======= =======
(1) Nonaccrual loans are included in loans, net of unearned income. No
adjustment has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on a fully taxable equivalent
basis using a tax rate of 34 percent.
The following table sets forth, on a taxable equivalent basis, the effect
that the varying levels of our interest-earning assets and interest-bearing
liabilities and the applicable rates have had on the changes in net interest
income for the three months ended September 30, 2004 and 2003.
THREE MONTHS ENDED SEPTEMBER 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 .................. $(3,552) $(1,211) $(2,341)
Interest on securities:
Taxable ................................ 1,410 (45) 1,455
Tax-exempt ............................. 59 (1) 60
Interest on federal funds ................... (27) 18 (45)
Interest on other investments ............... (3) 138 (141)
------- ------- -------
Total interest income .................. (2,113) (1,101) (1,012)
------- ------- -------
Expense from interest-bearing liabilities:
Interest on demand deposits .................... 207 235 (28)
Interest on savings deposits ................... (8) (5) (3)
Interest on time deposits ...................... (477) (314) (163)
Interest on other borrowings ................... (713) (791) 78
Interest subordinated debentures ............... 24 24 --
------- ------- -------
Total interest expense ................. (967) (851) (116)
------- ------- -------
Net interest income .................... $(1,146) $ (250) $ (896)
======= ======= =======
- ---------------
(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.
NINE MONTHS ENDED SEPTEMBER 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) ........ $ 882,030 $41,502 6.29% $1,121,508 $57,322 6.83%
Investment securities
Taxable ............................... 183,468 6,092 4.44 60,877 2,400 5.27
Tax-exempt(2) ......................... 3,109 133 5.71 5,029 253 6.73
---------- ------- ---------- -------
Total investment securities ....... 186,577 6,225 4.46 65,906 2,653 5.38
Federal funds sold .................... 13,832 107 1.03 30,755 258 1.12
Other investments ..................... 36,534 553 2.02 57,403 542 1.26
---------- ------- ---------- -------
Total interest-earning assets ..... 1,118,973 48,387 5.78 1,275,572 60,775 6.37
Noninterest-earning assets:
Cash and due from banks ................. 27,716 35,793
Premises and equipment .................. 58,154 60,945
Accrued interest and other assets ....... 81,650 72,093
Allowance for loan losses ............... (23,064) (29,916)
---------- ----------
Total assets ...................... $1,263,429 $1,414,487
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits ......................... $ 257,805 2,354 1.22 $ 292,725 2,060 0.94
Savings deposits ........................ 29,487 34 0.15 35,461 87 0.33
Time deposits ........................... 570,182 11,253 2.64 671,159 15,896 3.17
Other borrowings ........................ 175,443 4,632 3.53 174,728 6,629 5.07
Subordinated debentures ................. 31,959 1,905 7.96 31,959 1,897 7.94
---------- ------- ---------- -------
Total interest-bearing liabilities 1,064,876 20,178 2.53 1,206,032 26,569 2.95
Noninterest-bearing liabilities:
Demand deposits ......................... 86,417 111,247
Accrued interest and other liabilities .. 11,500 11,932
Stockholders' equity .................... 100,636 85,276
---------- ----------
Total liabilities and
stockholders' equity ............ $1,263,429 $1,414,487
========== ==========
Net interest income/net interest
spread................................... 28,209 3.25% 34,206 3.42%
==== ====
Net yield on earning assets................ 3.37% 3.59%
==== ====
Taxable equivalent adjustment:
Investment securities(2)................. 45 86
------- -------
Net interest income................ $28,164 $34,120
======= =======
- ---------------
(1) Nonaccrual loans are included in loans, net of unearned income. No
adjustment has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on a fully taxable equivalent
basis using a tax rate of 34 percent.
The following table sets forth, on a taxable equivalent basis, the effect
that the varying levels of our interest-earning assets and interest-bearing
liabilities and the applicable rates have had on changes in net interest income
for the nine months ended September 30, 2004 and 2003.
NINE MONTHS ENDED SEPTEMBER 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 .................. $(15,820) $(4,275) $(11,545)
Interest on securities:
Taxable ................................ 3,692 35 3,657
Tax-exempt ............................. (120) (35) (85)
Interest on federal funds ................... (151) (19) (132)
Interest on other investments ............... 11 88 (77)
-------- ------- --------
Total interest income .................. (12,388) (4,206) (8,182)
-------- ------- --------
Expense from interest-bearing liabilities:
Interest on demand deposits .................... 294 326 (32)
Interest on savings deposits ................... (53) (40) (13)
Interest on time deposits ...................... (4,643) (2,444) (2,199)
Interest on other borrowings ................... (1,997) (1,988) (9)
Interest subordinated debentures ............... 8 8 --
-------- ------- --------
Total interest expense ................. (6,391) (4,138) (2,253)
-------- ------- --------
Net interest income .................... $ (5,997) $ (68) $ (5,929)
======== ======= ========
- ---------------
(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 $47.1 million or 94.5%, to $2.7
million for the third quarter of 2004 from $49.8 million for the third quarter
of 2003, primarily due to the $46.1 million gain we realized in 2003 on the sale
of our Emerald Coast branches. Mortgage banking income decreased $964,000, or
67.6% to $463,000 in the third quarter of 2004 from $1.4 million in the third
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.
Noninterest income decreased $51.0 million, or 84.6%, to $9.3 million for the
first nine months of 2004 from $60.3 million for the first nine months of 2003,
primarily due to the $48.3 million gain we realized in 2003 on the sale of our
Roanoke and Emerald Coast branches. 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 $446,000, or 9.4%, to $4.3 million in the first
nine months of 2004 from $4.8 million in the first nine months of 2003. Mortgage
banking income decreased $2.2 million, or 64.2%, to $1.3 million in the first
nine months of 2004 from $3.5 million in the first nine months of 2003. Gains on
sales of securities decreased $334,000 to $424,000 in the first nine months of
2004 from $758,000 in the first nine 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 $3.9 million or 22.1%, to
$13.8 million for third quarter of 2004 from $17.7 million for the third quarter
of 2003. This decrease in noninterest expense was partially offset by the $2.3
million loss on sale of loans in the third quarter of 2004. Salaries and
benefits decreased $4.8 million, or 44.5%, to $5.9 million for the third quarter
of 2004 from $10.7 million for the third quarter of 2003. The decrease in
salaries and benefits relates primarily to the accrual in the third quarter of
2003 of employee bonuses of $1.9 million and a $1.9 million liability adjustment
related to certain deferred compensation plans. Occupancy and furniture and
equipment expenses increased $72,000, or 3.8%, to $2.0 million for the third
quarter of 2004 from $1.9 million for
the third quarter of 2003. All other noninterest expenses decreased $1.5
million, or 29.4%, to $3.6 million for the third quarter of 2004 from $5.1
million for the third quarter of 2003. This decrease was offset by approximately
$570,000 in other real estate and repossessed asset losses realized in the third
quarter of 2004.
Noninterest expense decreased $5.5 million, or 13.2%, to $36.1 million for first
nine months of 2004 from $41.6 million for the first nine months of 2003.
Salaries and benefits decreased $6.0 million, or 25.6%, to $17.4 million for the
first nine months of 2004 from $23.4 million for the first nine months of 2003.
Occupancy and furniture and equipment expenses decreased $161,000, or 2.6%, to
$6.0 million for the first nine months of 2004 from $6.2 million for the first
nine months of 2003. These decreases were partially offset by the $2.3 million
loss on sale of loans in the third quarter of 2004. All other noninterest
expenses decreased $1.6 million, or 13.3%, to $10.4 million for the first nine
months of 2004 from $12.0 million for the first nine months of 2003. During the
first nine months of 2004, we incurred approximately $5.2 million in certain
expenses, including $1.6 million for the special assets department related to
increased foreclosure and repossession activity, $591,000 in valuation
write-downs, $256,000 in net losses in sales of foreclosed property, $1.2
million in legal fees, $593,000 in audit and accounting fees and $928,000 in
FDIC premiums. Management does not expect these expenses to be at these levels
in the future. Our FDIC premiums for the remaining three-month period ending
December 31, 2004 are expected to be approximately $106,000. The expenses
incurred by the special assets department reflect the increased activity in this
area, which has produced significant recoveries in the first nine months of
2004.
Income tax expense. Our income tax benefit was $485,000 for the third quarter of
2004, compared to income tax expense of $13.5 million for the third quarter of
2003. Our income tax benefit was $87,000 for the first nine months of 2004,
compared to income tax expense of $15.8 million for the first nine months of
2003. The primary difference in the effective rate and the federal statutory
rate (34%) for the three- and nine-month periods ended September 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 to be 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.
No provision for loan losses was posted for the third quarter or first nine
months of 2004. This is the result of several factors, including: the collection
of certain classified loans of approximately $6.0 million in the first quarter
of 2004; increased recoveries of charged-off loans of $2.8 million for the first
nine months of 2004; adjustments to the risk factors related to 1-4 family
residential loans in the second quarter of 2004; and a $62 million net increase
in real estate construction loans, which carry a lower historical loss
allocation, during the third quarter in conjunction with a $27 million net
reduction in other higher risk loan categories or classified loans. In addition,
approximately one-third of our net loan growth during the first nine-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. An $11.2
million provision for loan losses was posted for the first nine months of 2003.
During the first nine months of 2004, we had net charged-off loans totaling
$12.4 million compared to net charged-off loans of $15.1 million in the first
nine months of 2003. Approximately $6.9 million of loans charged off or
partially charged off in the third quarter of 2004 were included as part of the
loan sale in September 2004. The net amount of charged-off loans during the
first nine 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 1.87% in the
first nine months of 2004 compared to 1.80% for the first nine months of 2003
and 2.21% for the year 2003. The allowance for loan losses totaled $12.8
million, or 1.39% of loans, net of unearned income at September 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 $1.381 billion at September 30, 2004, an increase of $210
million, or 17.9%, from $1.172 billion at December 31, 2003. Average total
assets for the first nine months of 2004 totaled $1.263 billion, which was
supported by average total liabilities of $1.162 billion and average total
stockholders' equity of $101 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 $43.5
million, or 99.9%, to $87.0 million at September 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 and proceeds from the loan sale in September 2004. These excess funds
were invested in short-term liquid assets primarily to improve our liquidity
position and position us for future investment and loan growth. At September 30,
2004, our short-term liquid assets comprised 6.3% 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 $83.4 million, or
58.9%, to $225.0 million at September 30, 2004, from $141.6 million at December
31, 2003. Mortgage-backed securities, which comprised 16.9% of the total
investment portfolio at September 30, 2004, decreased $4.3 million, or 10.3%, to
$38.0 million from $42.3 million at December 31, 2003. Investments in U.S.
Treasury and agency securities, which comprised 62.9% of the total investment
portfolio at September 30, 2004, increased $69.1 million, or 95.2%, to $141.6
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 September 30, 2004 comprised 18.7% of all
interest-earning assets compared to 13.8% at December 31, 2003 and produced an
average taxable equivalent yield of 4.4% for the third quarter of 2004 compared
to 4.6% for the third quarter of 2003 and 4.5% for the first nine months of 2004
compared to 5.4% for the first nine months of 2003.
Loans. Loans, net of unearned income, totaled $923.5 million at September 30,
2004, an increase of 7.8%, or $66.5 million, from $856.9 million at December 31,
2003. Mortgage loans held for sale totaled $2.1 million at September 30, 2004, a
decrease of $4.3 million from $6.4 million at December 31, 2003. Average loans,
including mortgage loans held for sale, totaled $882.0 million for the first
nine months of 2004 compared to $1.122 billion for the first nine months of
2003. Average loans, including mortgage loans held for sale, totaled $918.1
million for the third quarter of 2004 compared to $1.064 billion for the third
quarter of 2003. Loans, net of unearned income, comprised 76.6% of
interest-earning assets at September 30, 2004, compared to 83.6% at December 31,
2003. Mortgage loans held for sale comprised .2% of interest-earning assets at
September 30, 2004, compared to .6% at December 31, 2003. The loan portfolio
produced an average yield of 6.2% for the third quarter of 2004 and 6.3% for the
first nine months of 2004 compared to 6.6% for the third quarter of 2003 and
6.8% for the first nine months of 2003. This decline in yield was substantially
offset by declines of 26 and 42 basis points for the third quarter and first
nine months of 2004, respectively, in the average cost of the funds that support
our loan portfolio. The following table details the distribution of our loan
portfolio by category as of September 30, 2004 and December 31, 2003:
DISTRIBUTION OF LOANS BY CATEGORY
SEPTEMBER 30, 2004 DECEMBER 31, 2003
--------------------- ---------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ----- -------- -----
Commercial and industrial .................................. $131,349 14.2% $142,072 16.6%
Real estate -- construction and land development ........... 226,475 24.5 147,917 17.2
Real estate -- mortgage
Single-family ........................................... 257,349 27.8 231,064 27.0
Commercial .............................................. 242,896 26.2 250,032 29.1
Other ................................................... 26,487 2.9 31,645 3.7
Consumer ................................................... 33,076 3.6 46,201 5.4
Other ...................................................... 7,179 .8 8,923 1.0
-------- ----- -------- -----
Total loans ...................................... 924,811 100.0% 857,854 100.0%
===== =====
Unearned income............................................. (1,344) (913)
Allowance for loan losses................................... (12,808) (25,174)
-------- --------
Net loans......................................... $910,659 $831,767
======== ========
Deposits. Noninterest-bearing deposits totaled $88.9 million at September 30,
2004, an increase of 3.3%, or $2.8 million from $86.1 million at December 31,
2003. Noninterest-bearing deposits comprised 8.6% of total deposits at
September 30, 2004, compared to 9.7% at December 31, 2003. Of total noninterest-
bearing deposits, $66.2 million, or 74.5%, were in our Alabama branches while
$22.7 million, or 25.5%, were in our Florida branches.
Interest-bearing deposits totaled $942.7 million at September 30, 2004, an
increase of 17.3%, or $138.9 million, from $803.8 million at December 31, 2003.
Interest-bearing deposits averaged $857.5 million for the first nine months of
2004 compared to $999.3 million for the first nine months of 2003, a decrease of
$141.8 million, or 14.2%. Our average interest-bearing deposits for the third
quarter of 2004 totaled $893.7 million compared to $933.2 million for the third
quarter of 2003, a decrease of $39.5 million, or 4.2%.
The average rate paid on all interest-bearing deposits during the first nine
months of 2004 was 2.12% compared to 2.41% for the first nine months of 2003 and
2.16% for the third quarter of 2004 compared to 2.18% for the third quarter of
2003. Of total interest-bearing deposits, $719.8 million, or 76.4%, were in the
Alabama branches while $222.9 million, or 23.6%, were in the Florida branches.
Borrowings. Advances from the Federal Home Loan Bank ("FHLB") totaled $156.1
million at September 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 3.41% at
September 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.
Other Borrowed Funds. Other borrowed funds increased to $44 million at September
30, 2004 from $11 million at December 31, 2003. Other borrowed funds at
September 30, 2004 consisted primarily of repurchase agreements of $34 million
and federal funds purchased of $10 million. Other borrowed funds averaged $18
million for the nine months ended September 30, 2004 and had a weighted average
interest rate of 2.0%.
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:
September 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 September 30, 2004 and December 31, 2003, the interest rate on the
$16,495,000 subordinated debentures was 5.74% 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 distributions on our trust preferred securities in January,
March, July and September 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 we continue to expect
that all amounts due will ultimately be collected. 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 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 the
board of directors and senior management. We have also established a centralized
loan administration services department to serve our entire bank. This
department provides 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
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(Dollars in thousands)
Allowance for loan losses at beginning of period ........... $ 25,174 $ 27,766
Allowance of (branch sold) acquired bank ................... -- (102)
Charge-offs:
Commercial and industrial ................................ 6,550 10,823
Real estate -- construction and land development ......... 651 630
Real estate -- mortgage
Single-family ........................................ 735 1.505
Commercial ........................................... 5,528 6,696
Other ................................................ 86 1,187
Consumer ................................................. 1,526 3,092
Other .................................................... 67 517
-------- ----------
Total charge-offs ................................ 15,143 24,450
Recoveries:
Commercial and industrial ................................ 773 554
Real estate -- construction and land development ......... 1 23
Real estate -- mortgage
Single-family ........................................ 362 23
Commercial ........................................... 726 49
Other ................................................ 94 48
Consumer ................................................. 419 282
Other .................................................... 402 6
-------- ----------
Total recoveries ................................. 2,777 985
-------- ----------
Net charge-offs ............................................ 12,366 23,465
Provision for loan losses .................................. -- 20,975
-------- ----------
Allowance for loan losses at end of period ................. $ 12,808 $ 25,174
======== ==========
Loans at end of period, net of unearned income ............. $923,467 $ 856,941
Average loans, net of unearned income ...................... 882,030 1,063,451
Ratio of ending allowance to ending loans .................. 1.39% 2.94%
Ratio of net charge-offs to average loans(1) ............... 1.87% 2.21%
Net charge-offs as a percentage of:
Provision for loan losses ................................ -- 111.87%
Allowance for loan losses(1) ............................. 128.97% 93.21%
Allowance for loan losses as a percentage
of nonperforming loans ................................... 161.25% 78.59%
- ---------------
(1) Annualized.
The allowance for loan losses as a percentage of loans, net of unearned income,
at September 30, 2004 was 1.39% compared to 2.94% as of December 31, 2003. The
allowance for loan losses as a percentage of loans, net of unearned income
declined primarily due to $6.9 million of loans charged off or partially charged
off in the third quarter of 2004 that were included as part of the loan sale.
The allowance related to these loans had been provided for in previous periods.
The allowance for loan losses as a percentage of nonperforming loans increased
to 161.25% at September 30, 2004 from 78.59% at December 31, 2003 due to a
decrease in nonperforming loans of $24.1 million which is primarily due to the
third quarter loan sale. (See "Nonperforming Loans" below).
Net charge-offs were $12.4 million for the first nine months of 2004 of which
$6.9 million were related to loans included in the loan sale. Net charge-offs to
average loans on an annualized basis totaled 1.87% for the first nine months of
2004. Net commercial loan charge-offs totaled $5.8 million, or 46.7% of total
net charge-off loans, for the first nine 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 $4.8 million, or 38.8% of total net charge-off loans for the
first nine months of 2004 compared to 28.3% of total net charge-off loans for
the year 2003. Net consumer loan charge-offs totaled $1.1 million, or 9% of
total net charge-off loans for the first nine months of 2004 compared to 12% of
total net charge-off loans for the year 2003.
Nonperforming Loans. In January 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. As of September 30,
2004 the balance of these loans totaled only $5 million. In September 2004 The
Bank sold approximately $32 million, before allowance for loan losses, in
certain nonperforming loans and other classified, performing loans, resulting in
a pre-tax loss of $2.3 million. Prior to the sale approximately $6.9 million
related to these loans was recognized as a charge-off in September 2004 against
the allowance for loan losses. The $6.9 million in allowance for loan losses
associated with these loans had been provided in previous periods. Management is
vigorously pursuing appropriate collection efforts on the remaining loans.
Nonperforming loans decreased $24.1 million to $7.9 million as of September 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 0.86% at
September 30, 2004. The decrease in nonperforming loans resulted primarily from
the sale of certain loans as previously mentioned, collections and
charge-offs. The following table represents our nonperforming loans as of the
dates indicated.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
SEPTEMBER 30, 2004 DECEMBER 31, 2003
---------------------------------------- ------------------
OPERATING SPECIAL
BRANCHES ASSETS TOTAL TOTAL
--------- ------- -------- ------
(Dollars in Thousands)
Nonaccrual ................................................. $ 3,983 $2,925 $ 6,908 $29,630
Past due (contractually past due 90 days or more) .......... 963 9 972 1,438
Restructured ............................................... 63 -- 63 966
-------- ------ -------- ------
$ 5,009 $2,934 $ 7,943 $32,034
======== ====== ======== ======
Loans, net of unearned ..................................... $918,609 $4,858 $923,467 $856,941
======== ====== ======== ======
Nonperforming loans as a percent of loans .................. .55% 60.40% 0.86% 3.74%
======== ====== ======== ======
Loans, past due 30 days or more, net of non-accruals, improved to .55% at
September 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 .51%.
The following is a summary of nonperforming loans by category as of the dates
shown:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(Dollars in thousands)
Commercial and industrial .................................. $2,387 $11,621
Real estate -- construction and land development ........... 569 1,735
Real estate -- mortgages
Single-family ......................................... 2,173 5,472
Commercial ............................................ 2,435 12,378
Other ................................................. 169 162
Consumer ................................................... 210 465
Other ...................................................... -- 201
------ -------
Total nonperforming loans ........................ $7,943 $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 September 30, 2004, the recorded investment in impaired loans
totaled $6.1 million, with approximately $1.9 million in allowance for loan
losses specifically allocated to impaired loans. This represents a decrease of
$19.3 million from $25.4 million at December 31, 2003. A significant portion of
our impaired loans were sold during the third quarter as part of the loan sale
previously mentioned. The following is a summary of impaired loans and the
specifically allocated allowance for loan losses by category as of September 30,
2004:
OPERATING BRANCHES SPECIAL ASSETS TOTAL
----------------------- ----------------------- ------------------------
OUTSTANDING SPECIFIC OUTSTANDING SPECIFIC OUTSTANDING SPECIFIC
BALANCE ALLOWANCE BALANCE ALLOWANCE BALANCE ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
Commercial and industrial $2,089 $ 894 $ 940 $189 $3,029 $1,083
Real estate -- construction and land development 294 51 103 48 397 99
Real estate -- mortgages
Single-family -- -- 154 77 154 77
Commercial 1,146 349 1,284 298 2,430 647
Other 108 16 -- -- 108 16
------ ------ ------ ---- ------ ------
Total $3,637 $1,310 $2,481 $612 $6,118 $1,922
====== ====== ====== ==== ====== ======
Potential Problem Loans. In addition to nonperforming loans, management has
identified $1.9 million in potential problem loans as of September 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 $312,000 or 17% of the
potential problem loans are part of the portfolio that was transferred to our
special assets department in January 2004. Overall, $1.5 million, or 82%, of our
potential problem loans are secured by real estate. Management has allocated in
allowance for loan losses approximately $198,000 to absorb any losses that may
result from these loans.
Stockholders Equity. At September 30, 2004 our total stockholders' equity was
$101.5 million, an increase of $1.4 million from $100.1 million at December 31,
2003. The increase in stockholders' equity resulted primarily from net income of
$1.5 million for the first nine months of 2004. As of September 30, 2004 we had
18,025,932 shares of
common stock issued and 17,743,171 outstanding. In September 2000, our board of
directors approved a stock buyback plan in an amount not to exceed $10,000,000.
As of September 30, 2004, there were 58,014 shares held in treasury at a cost of
$390,000.
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
September 30, 2004 were 142,500 and the remaining amount in the unearned
restricted stock account is $499,000. 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 September 30,
2004 and 2003, we recognized $150,000 and $168,000, 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 September 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
September 30, 2004 and 2003 was $142,000 and $101,000, respectively. The ESOP
shares as of September 30, 2004, were as follows:
September 30, 2004
------------------
Allocated shares 28,628
Estimated shares committed to be released 20,025
Unreleased shares 224,747
----------
Total ESOP shares 273,400
==========
Fair value of unreleased shares $1,573,000
==========
Regulatory Capital. The table below represents our and our subsidiary's
regulatory and minimum regulatory capital requirements at September 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 $132,980 12.75% $83,416 8.00% $104,270 10.00%
The Bank 126,822 12.32 82,325 8.00 102,907 10.00
Tier 1 Risk-Based Capital
Corporation 118,967 11.41 41,708 4.00 62,562 6.00
The Bank 114,014 11.08 41,163 4.00 61,744 6.00
Leverage Capital
Corporation 118,967 9.17 51,920 4.00 64,901 5.00
The Bank 114,014 8.86 51,492 4.00 64,365 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 FHLB 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 assumptions underlying our forward-looking
statements are reasonable, these statements involve risks and uncertainties
which that subject to change based on various important factors (some of which
are beyond our control). The following factors, among others, could cause our
financial performance to differ materially from what is reflected in our
forward-looking statements: the strength of the United States economy in general
and the strength of the regional and local economies in which we conduct
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; inflation, interest rate, market and monetary
fluctuations; our ability to successfully integrate the assets, liabilities,
customers, systems and management we acquire or merge into our operations; our
timely development of new products and services 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 changes. All forward-looking statements
attributable to us are expressly qualified by these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our quantitative or qualitative
disclosures about market risk as of September 30, 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 under 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Banc Corporation
(Registrant)
Date: November 9, 2004 By: /s/ James A. Taylor, Jr.
----------------------------------------
James A. Taylor, Jr.
President and Chief Operating Officer
Date: November 9, 2004 By: /s/ David R. Carter
----------------------------------------
David R. Carter
Executive Vice President and Chief
Financial Officer (Principal
Accounting Officer)