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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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO _________________
COMMISSION FILE NUMBER 0-25033
THE BANC CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 63-1201350
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation)
17 North 20th Street, Birmingham, Alabama 35203
(Address of Principal Executive Offices)
(205) 326-2265
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF SEPTEMBER 30, 2005
----- ------------------------------------
Common stock, $.001 par value 19,775,886
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(UNAUDITED)
ASSETS
Cash and due from banks ............................................................ $ 22,140 $ 23,489
Interest-bearing deposits in other banks ........................................... 7,341 11,411
Federal funds sold ................................................................. 25,565 11,000
Investment securities available for sale ........................................... 257,080 288,308
Mortgage loans held for sale ....................................................... 17,447 8,095
Loans, net of unearned income ...................................................... 903,398 934,868
Less: Allowance for loan losses .................................................... (12,024) (12,543)
---------- ----------
Net loans .................................................................... 891,374 922,325
---------- ----------
Premises and equipment, net ........................................................ 55,957 60,434
Accrued interest receivable ........................................................ 6,238 6,237
Stock in FHLB and Federal Reserve Bank ............................................. 11,821 11,787
Cash surrender value of life insurance ............................................. 38,804 38,369
Other assets ....................................................................... 42,492 41,673
---------- ----------
TOTAL ASSETS ................................................................. $1,376,259 $1,423,128
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing ............................................................. $ 91,265 $ 89,487
Interest-bearing ................................................................ 961,016 977,719
---------- ----------
TOTAL DEPOSITS ............................................................... 1,052,281 1,067,206
Advances from FHLB ................................................................. 146,090 156,090
Federal funds borrowed and security repurchase agreements .......................... 20,861 49,456
Notes payable ...................................................................... 3,808 3,965
Junior subordinated debentures owed to unconsolidated subsidiary trusts ............ 31,959 31,959
Accrued expenses and other liabilities ............................................. 17,983 13,913
---------- ----------
TOTAL LIABILITIES ............................................................ 1,272,982 1,322,589
Stockholders' Equity
Convertible preferred stock, par value $.001 per share; authorized 5,000,000
shares; shares issued and outstanding -0- and 62,000, respectively ........... -- --
Common stock, par value $.001 per share; authorized 35,000,000 shares; shares
issued 20,023,756 and 18,025,932, respectively; outstanding 19,775,886 and
17,749,846, respectively ..................................................... 20 18
Surplus - preferred ............................................................. -- 6,193
- common stock ............................................................... 86,446 68,428
Retained earnings ............................................................... 20,504 29,591
Accumulated other comprehensive loss ............................................ (1,755) (1,094)
Treasury stock, at cost ......................................................... (341) (390)
Unearned ESOP stock ............................................................. (1,597) (1,758)
Unearned restricted stock ....................................................... -- (449)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY ................................................... 103,277 100,539
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................... $1,376,259 $1,423,128
========== ==========
See Notes to Condensed Consolidated Financial Statements.
2
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,
------------------ ------------------
2005 2004 2005 2004
------- ------- -------- -------
INTEREST INCOME
Interest and fees on loans ...................................... $16,063 $14,244 $ 46,531 $41,502
Interest on investment securities
Taxable ...................................................... 2,919 2,270 8,789 6,092
Exempt from Federal income tax ............................... 62 47 179 88
Interest on federal funds sold .................................. 163 32 354 107
Interest and dividends on other investments ..................... 272 157 769 553
------- ------- -------- -------
Total interest income ........................................ 19,479 16,750 56,622 48,342
INTEREST EXPENSE
Interest on deposits ............................................ 7,346 4,859 19,911 13,641
Interest on other borrowed funds ................................ 1,927 1,510 5,665 4,632
Interest on subordinated debentures ............................. 732 653 2,116 1,905
------- ------- -------- -------
Total interest expense ....................................... 10,005 7,022 27,692 20,178
------- ------- -------- -------
NET INTEREST INCOME .................................... 9,474 9,728 28,930 28,164
Provision for loan losses ....................................... 500 -- 2,750 --
------- ------- -------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ....... 8,974 9,728 26,180 28,164
NONINTEREST INCOME
Service charges and fees on deposits ............................ 1,448 1,526 3,726 4,314
Mortgage banking income ......................................... 693 463 1,901 1,250
Investment security (losses) gains .............................. -- (4) (977) 424
Gain on sale of branches ........................................ -- -- -- 739
Increase in cash surrender value of life insurance .............. 389 399 1,131 1,212
Insurance proceeds .............................................. -- -- 5,000 --
Other income .................................................... 270 345 1,257 1,357
------- ------- -------- -------
TOTAL NONINTEREST INCOME .................................. 2,800 2,729 12,038 9,296
NONINTEREST EXPENSE
Salaries and employee benefits .................................. 6,048 5,925 17,377 17,382
Occupancy, furniture and equipment expense ...................... 1,898 1,982 5,938 6,034
Management separation costs ..................................... 64 -- 15,402 --
Loss on sale of loans ........................................... -- 2,260 -- 2,260
Other operating expenses ........................................ 3,028 3,605 11,126 10,409
------- ------- -------- -------
TOTAL NONINTEREST EXPENSE .................................... 11,038 13,772 49,843 36,085
------- ------- -------- -------
Income (loss) before income taxes ...................... 736 (1,315) (11,625) 1,375
INCOME TAX EXPENSE (BENEFIT) .................................... 56 (485) (4,849) (87)
------- ------- -------- -------
NET INCOME (LOSS) ...................................... 680 (830) (6,776) 1,462
PREFERRED STOCK DIVIDENDS ....................................... -- -- 305 217
EFFECT OF EARLY CONVERSION OF PREFERRED STOCK ................... -- -- 2,006 --
------- ------- -------- -------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS ............. $ 680 $ (830) $ (9,087) $ 1,245
======= ======= ======== =======
BASIC NET INCOME (LOSS) PER COMMON SHARE ........................ $ 0.03 $ (0.05) $ (0.48) $ 0.07
======= ======= ======== =======
DILUTED NET INCOME (LOSS) PER COMMON SHARE ...................... $ 0.03 $ (0.05) $ (0.48) $ 0.07
======= ======= ======== =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ...................... 19,625 17,590 18,920 17,576
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION ... 20,240 17,590 18,920 17,741
See Notes to Condensed Consolidated Financial Statements.
3
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
2005 2004
-------- ---------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES ...................... $ (6,540) $ 5,970
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits in other
banks ........................................................... 4,071 (659)
Net increase in federal funds sold ................................. (14,565) (33,000)
Proceeds from sales of securities available for sale ............... 57,150 83,613
Proceeds from maturities of investment securities available for
sale ............................................................ 26,274 45,826
Purchases of investment securities available for sale .............. (54,765) (214,270)
Net decrease (increase) in loans ................................... 30,332 (79,779)
Purchases of premises and equipment ................................ (1,654) (3,222)
Proceeds from sales of premises and equipment ...................... 3,243 --
Net cash paid in branch sale ....................................... -- (6,626)
Purchase of life insurance ......................................... -- (5,000)
Increase in other investments ...................................... (34) (545)
-------- ---------
Net cash provided (used) by investing activities ................ 50,052 (213,662)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposit accounts ........................ (14,925) 149,878
Net (decrease) increase in FHLB advances and other borrowed funds .. (38,595) 67,973
Payments made on long term debt .................................... (158) (157)
Proceeds from sale of common stock ................................. 9,122 49
Cash dividends paid ................................................ (305) (217)
-------- ---------
Net cash (used) provided by financing activities ................ (44,861) 217,526
-------- ---------
Net (decrease) increase in cash and due from banks .................... (1,349) 9,834
Cash and due from banks at beginning of period ........................ 23,489 31,679
-------- ---------
CASH AND DUE FROM BANKS AT END OF PERIOD .............................. $ 22,140 $ 41,513
======== =========
See Notes to Condensed Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1- BASIS OF PRESENTATION
The accompanying unaudited condensed 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, 2004. 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, 2005, are not necessarily indicative of
the results that may be expected for the year ending December 31, 2005.
The condensed statement of financial condition at December 31, 2004, which has
been derived from the financial statements audited by Carr, Riggs & Ingram, LLC,
independent public accountants, as indicated in their report included in the
Corporation's Annual Report on Form 10-K, 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 December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment
(SFAS 123R), which is a revision of SFAS 123 and supersedes Accounting
Principles Board (APB) Opinion 25. On April 14, 2005, the Securities and
Exchange Commission announced the adoption of a new rule that amended the
compliance dates for SFAS No. 123R. Under SFAS 123R, registrants would have been
required to implement the standard as of the beginning of the first interim or
annual period that begins after June 15, 2005. The Commission's new rule allows
issuers to implement SFAS 123R at the beginning of their next fiscal year,
instead of the next reporting period, that begins after June 15, 2005. The
Commission's new rule does not change the accounting required by SFAS 123R; it
changes only the dates for compliance with the standard. The new standard
requires companies to recognize an expense in the statement of operations for
the grant-date fair value of stock options and other equity-based compensation
issued to employees, but expresses no preference for a type of valuation method.
This expense will be recognized over the period during which an employee is
required to provide service in exchange for the award. SFAS 123R carries forward
prior guidance on accounting for awards to non-employees. If an equity award is
modified after the grant date, incremental compensation cost will be recognized
in an amount equal to the excess of the fair value of the modified award over
the fair value of the original award immediately prior to the modification.
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, to
amend APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions, is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. The guidance in that Opinion, however, included certain exceptions to
that principle. SFAS 153 amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS 153 will be effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring in
fiscal periods beginning after the date SFAS 153 was issued. The provisions of
SFAS 153 are to be applied prospectively. The Corporation does not believe SFAS
153 will have a material impact on its financial statements.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections.
SFAS 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No.
3, Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS 154 applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition
5
provisions. SFAS 154 requires retrospective application to prior periods'
financial statements of changes in accounting principle.
SFAS 154 carries forward without change the guidance contained in Opinion 20 for
reporting the correction of an error in previously issued financial statements
and a change in accounting estimate. SFAS 154 also carries forward the guidance
in Opinion 20 requiring justification of a change in accounting principle on the
basis of preferability. SFAS 154 is effective for fiscal years beginning after
December 15, 2005. The Corporation does not believe SFAS 154 will have a
material impact on its financial statements.
NOTE 3 - RECENT DEVELOPMENTS
On July 21, 2005, the Corporation announced that it had bought out the
employment contracts of the Chief Financial Officer and the General Counsel,
effective June 30, 2005. Under these agreements, in lieu of the payments to
which they would have been entitled under their employment agreements, the
Corporation paid a total of $2,392,343 on July 22, 2005. In addition, these
officers became fully vested in stock options and restricted stock previously
granted to them and in benefits under their deferred compensation agreements
with the Corporation.
On June 17, 2005, the Corporation's banking subsidiary filed an application to
change its charter to a federal savings bank charter under the Office of Thrift
Supervision. The application was accepted and the charter conversion became
effective November 1, 2005. Through October 31, 2005, the Corporation's banking
subsidiary was regulated by the Alabama Banking Department and the Federal
Reserve.
In May 2005, the Corporation received $5,000,000 (approximately $3,200,000
after-tax, or $.17 per common share) to resolve its insurance claims relating to
fraud losses which occurred in previous periods.
On January 24, 2005, the Corporation announced that it had entered into a series
of executive management change agreements. These agreements set forth the
employment of C. Stanley Bailey as Chief Executive Officer and a director of the
Corporation and chairman of the Corporation's banking subsidiary, C. Marvin
Scott as President of the Corporation and the Corporation's banking subsidiary,
and Rick D. Gardner as Chief Operating Officer of the Corporation and the
Corporation's banking subsidiary. These agreements also provided for the
purchase by Mr. Bailey, Mr. Scott and Mr. Gardner, along with other investors,
of 925,636 shares of common stock of the Corporation at $8.17 per share. The
Corporation also entered into agreements with James A. Taylor and James A.
Taylor, Jr. under which they would continue to serve as Chairman of the Board of
the Corporation and as a director of the Corporation, respectively, but would
cease their employment as officers of the Corporation and officers and directors
of the Corporation's banking subsidiary. Mr. Taylor, Jr. subsequently resigned
as a director of the Corporation effective September 28, 2005 to pursue other
business opportunities.
Under the agreement with Mr. Taylor, in lieu of the payments to which he would
have been entitled under his employment agreement, the Corporation paid Mr.
Taylor $3,940,155 on January 24, 2005, and is scheduled to pay an additional
$3,152,124 by January 24, 2006, and $788,031 by January 24, 2007. The agreement
also provides for the provision of certain insurance benefits to Mr. Taylor, the
transfer of a "key man" life insurance policy to Mr. Taylor, and the maintenance
of such policy by the Corporation for five years (with the cost of maintaining
such policy included in the above amounts), in each case substantially as
required by his employment agreement. This obligation to provide such payments
and benefits to Mr. Taylor is absolute and will survive the death or disability
of Mr. Taylor.
Under the agreement with Mr. Taylor, Jr., in lieu of the payments to which he
would have been entitled under his employment agreement, the Corporation paid
Mr. Taylor, Jr., $1,382,872 on January 24, 2005. The agreement also provides for
the provision of certain insurance benefits to Mr. Taylor, Jr. and for the
immediate vesting of his unvested incentive awards and deferred compensation in
each case substantially as required by his employment agreement. This obligation
to provide such payments and benefits to Mr. Taylor, Jr. is absolute and will
survive the death or disability of Mr. Taylor, Jr.
In connection with the above described management separation transactions, the
Corporation recognized pre-tax expenses of $15.4 million for the nine-month
period ended September 30, 2005. At September 30, 2005, the
6
Corporation had $4.3 million of accrued liabilities related to these agreements.
See Note 24 to the Consolidated Financial Statements included in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2004
for further information.
NOTE 4 - ASSET SALES
In February 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 March 2005, the Corporation sold its corporate aircraft, realizing a $355,000
pre-tax loss.
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, 2004. 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, 2005
Net interest income................. $ 6,277 $ 3,197 $ 9,474
Provision for loan losses........... 503 (3) 500
Noninterest income (1).............. 2,780 20 2,800
Noninterest expense (2)(3).......... 9,986 1,052 11,038
Income tax (benefit) expense........ (648) 704 56
Net (loss) income................ (784) 1,464 680
Total assets........................ 1,149,376 226,883 1,376,259
Three months ended September 30, 2004
Net interest income................. $ 6,955 $ 2,773 $ 9,728
Provision for loan losses (1)....... 18 (18) --
Noninterest income (1).............. 2,418 311 2,729
Noninterest expense (2)............. 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).................... 1,133,525 247,768 1,381,293
Nine months ended September 30, 2005
Net interest income................. $ 19,812 $ 9,118 $ 28,930
Provision for loan losses........... 2,615 135 2,750
Noninterest income (1).............. 11,365 673 12,038
Noninterest expense (2)(3).......... 46,616 3,227 49,843
Income tax (benefit) expense........ (6,753) 1,904 (4,849)
Net (loss) income................ (11,301) 4,525 (6,776)
7
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)....... 1,974 (1,974) --
Noninterest income (1).............. 8,283 1,013 9,296
Noninterest expense (2)............. 30,086 5,999 36,085
Income tax (benefit) expense........ (2,364) 2,277 (87)
Net income....................... (1,245) 2,707 1,462
----------
(1) See Notes 3 and 4 concerning branch sales and insurance proceeds. 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 Notes 3 and 4 concerning the amount of management separation charges
and loss on the sale of assets.
NOTE 6 - NET INCOME (LOSS) PER COMMON 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,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
Numerator:
Net income (loss) ............................................. $ 680 $ (830) $(6,776) $ 1,462
Less preferred dividends ...................................... -- -- 305 217
Less effect of preferred stock conversion ..................... -- -- 2,006 --
------- ------- ------- -------
For basic and diluted, net income (loss) applicable to common
stockholders .................................................. $ 680 $ (830) $(9,087) $ 1,245
======= ======= ======= =======
Denominator:
For basic, weighted average common shares outstanding ......... 19,625 17,590 18,920 17,576
Effect of dilutive stock options, restricted stock and
convertible preferred ...................................... 615 -- -- 165
------- ------- ------- -------
Weighted average common shares outstanding, assuming dilution .... 20,240 17,590 18,920 17,741
======= ======= ======= =======
Basic net income (loss) per common share ......................... $ .03 $ (.05) $ (.48) $ .07
======= ======= ======= =======
Diluted net income (loss) per common share ...................... $ .03 $ (.05) $ (.48) $ .07
======= ======= ======= =======
Net income (loss) applicable to common stockholders and net income (loss) per
common share reflect the effects of the early conversion of 62,000 shares of the
Corporation's convertible preferred stock into 775,000 shares of common stock at
a conversion price of $8.00 per share. Such conversion was effective as of June
30, 2005. As a result of such conversion, the excess of the market value of the
common stock issued at the date of conversion over the aggregate issue price is
reflected as a reduction in retained earnings with a corresponding increase in
surplus, thereby reducing net income applicable to common stockholders for
purposes of calculating earnings per common share. This non-cash charge did not
affect total stockholders' equity.
Common stock equivalents ("CSEs") of 1,109,341 were not included in computing
diluted net loss per common share for the nine-month period ended September 30,
2005 and CSEs of 939,444 and 775,000 were not included for the three- and
nine-month periods ended September 30, 2004, respectively, because their effects
were anti-dilutive in each case.
8
NOTE 7 - COMPREHENSIVE (LOSS) INCOME
Total comprehensive (loss) income was $(427,000) and $(7,437,000), respectively,
for the three- and nine-month periods ended September 30, 2005, and $1,186,000
and $1,064,000 respectively, for the three- and nine-month periods ended
September 30, 2004. Total comprehensive (loss) income consists of net (loss)
income and the unrealized gain or loss on the Corporation's available-for-sale
securities portfolio arising during the period.
During the first quarter of 2005, the Corporation realized a $909,000 pre-tax
loss as a result of a $50 million sale of bonds in the investment portfolio
which closed in April 2005. The Corporation reinvested the proceeds in bonds
intended to enhance the yield and cash flows of its investment securities
portfolio. The new investment securities are classified as available for sale.
NOTE 8 - INCOME TAXES
The difference between the effective tax rate and the federal statutory rate in
2005 and 2004 is primarily due to certain tax-exempt income.
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, 2010 and July 25, 2006, respectively.
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 (in thousands):
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
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, 2005 and December 31, 2004, the interest rate on the
$16,495,000 subordinated debentures was 7.67% and 5.74%, respectively.
Prior to the conversion of its subsidiary's charter to a federal savings bank
charter, the Corporation was required to obtain regulatory approval prior to
paying any dividends on these trust preferred securities. The Federal Reserve
approved the timely payment of the Corporation's semi-annual distributions on
its trust preferred securities in January, March, July and September, 2005.
9
NOTE 10 - STOCKHOLDERS' EQUITY
During the first quarter of 2005, the Corporation issued 925,636 shares of its
common stock at $8.17 per share, the then-current market price, to the new
members of the management team and other investors, in a private placement. The
Corporation received proceeds, net of issuance cost, of $7,328,000. The
Corporation also has received $1,791,000 in proceeds from the exercise of
276,984 stock options primarily during the second and third quarters of 2005.
Effective June 30, 2005, 62,000 shares of the Corporation's convertible
preferred stock were converted into 775,000 shares of common stock at a
conversion price of $8.00 per share. As a result of such conversion, the excess
of the market value of the common stock issued at the date of conversion over
the aggregate issue price is reflected as a reduction in retained earnings with
a corresponding increase in surplus, thereby reducing net income applicable to
common stockholders for purposes of calculating earnings per common share. This
non-cash charge did not affect total stockholders' equity.
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.
During the second quarter of 2005, an additional 29,171 shares of this
restricted stock were forfeited. On January 24, 2005 the Corporation issued
49,375 additional shares of restricted common stock to certain key employees.
Under the terms of the employment contract buyouts during the second quarter of
2005 and the management separation agreement entered into during the first
quarter of 2005 (see Note 3), vesting was accelerated on 25,000 and 99,375
shares of restricted stock, respectively.
Unvested restricted shares outstanding as of September 30, 2005 were 13,334. 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, 2005 and 2004, the Corporation has recognized
$599,000 and $150,000, respectively, in restricted stock expense. The current
year expense is primarily related to the accelerated vesting from the management
separation agreements and employment contract buyouts and is included in the
amount of management separation cost.
The Corporation adopted a leveraged employee stock ownership plan (the "ESOP")
effective May 15, 2002, that covers all eligible employees who are at least age
21 and have completed a year of service. As of June 30, 2005 the ESOP has been
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 a note payable 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 nine-month periods ended September 30, 2005, and 2004, was $135,000
and $142,000, respectively. The ESOP shares as of September 30, 2005 were as
follows:
10
SEPTEMBER 30, 2005
------------------
Allocated shares............................ 55,328
Estimated shares committed to be released... 20,025
Unreleased shares........................... 198,047
----------
Total ESOP shares........................... 273,400
==========
Fair value of unreleased shares............. $2,953,000
==========
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. Most options
granted under this plan vest 20% on the grant date and an additional 20%
annually on the next four anniversaries of the grant date.
In addition, the Corporation granted 1,423,940 options to the new management
team. These options have an exercise price of $8.17 per share. These options
have a ten-year term and a tiered vesting schedule as discussed in Note 24 to
the Consolidated Financial Statements included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2004.
As described in Note 2 above, SFAS 123R will require the Corporation to begin
recognizing an expense in the amount of the grant-date fair value of outstanding
and subsequently granted stock options beginning in 2006. The expense is
required to be recognized over the vesting period of the options. The
Corporation's Board of Directors has approved the full vesting as of November
15, 2005 of all unvested stock options outstanding at that date. Management
estimates that this immediate vesting will eliminate approximately $2.0 million
of non-cash expense, net of taxes, that would otherwise be incurred in future
periods. In conjunction with the Board's approval of the full vesting, members
of the Corporation's senior management executive team announced that they will
not accept any performance bonus for which they might have been eligible at
year-end 2005. The number of shares represented by unvested options that will be
vested effective November 15, 2005 is 803,342, of which 665,942 are held by
directors and executive officers of the Corporation. Pro forma information
relating to such options will continue to be presented under SFAS 123 and APB
Opinion 25, as described below.
The Corporation has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 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 SFAS 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,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income (loss):
As reported.............................. $680 $ (830) $ (6,776) $1,462
Pro forma................................ 343 (1,230) (13,140) 557
Earnings (loss) per common share:
As reported.............................. $.03 $ (.05) $ (.48) $ .07
Pro forma................................ .02 (.07) (.67) .02
Diluted earnings (loss) per common share:
As reported.............................. $.03 $ (.05) $ (.48) $ .07
Pro forma................................ .02 (.07) (.67) .02
The fair value of the options granted was based upon the Black-Scholes pricing
model. The Corporation used the following weighted average assumptions for:
11
SEPTEMBER 30
------------
2005 2004
----- ----
Risk-free interest rate............ 4.33% 4.56%
Volatility factor.................. .44 .32
Weighted average life of options... 7.00 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, 2005
consolidated financial condition and results of operations for the three- and
nine-month periods ended September 30, 2005 and 2004. 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 condensed
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, 2004.
OVERVIEW
Our principal subsidiary is The Bank (which was an Alabama-chartered financial
institution until November 1, 2005, when it converted to a federal savings bank,
as described below). The Bank is headquartered in Birmingham, Alabama and
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 $1.376 billion at September 30, 2005, a decrease of $47
million, or 3.29%, from $1.423 billion as of December 31, 2004. Our total loans,
net of unearned income, were $903 million at September 30, 2005, a decrease of
$32 million, or 3.37%, from $935 million as of December 31, 2004. Our total
deposits were $1.052 billion at September 30, 2005, a decrease of $15 million,
or 1.40%, from $1.067 billion as of December 31, 2004. These declines reflect
our strategy of deleveraging the balance sheet and focusing on deposit and loan
mix realignment which management expects will improve net interest margin. Our
total stockholders' equity was $103.2 million at September 30, 2005, an increase
of $2.7 million, or 2.72%, from $100.5 million as of December 31, 2004.
12
On July 21, 2005, we announced we had bought out the employment contracts of our
Chief Financial Officer and our General Counsel, effective June 30, 2005. Under
these agreements, in lieu of the payments to which they would have been entitled
under their employment agreements we paid these officers a total of $2,392,343
on July 22, 2005. In addition, these officers became fully vested in stock
options and restricted stock previously granted to them and in benefits under
their deferred compensation agreements with us.
On June 17, 2005, our banking subsidiary filed an application to change its
charter to a federal savings bank charter under regulation by the Office of
Thrift Supervision. The application was accepted and the charter conversion
became effective November 1, 2005. Through October 31, 2005, our banking
subsidiary was regulated by the Alabama Banking Department and the Federal
Reserve.
On January 24, 2005, we announced that we had entered into a series of executive
management change agreements. These agreements set forth the employment of C.
Stanley Bailey as Chief Executive Officer and a director of the corporation and
chairman of our banking subsidiary, C. Marvin Scott as President of the
corporation and our banking subsidiary, and Rick D. Gardner as Chief Operating
Officer of the corporation and our banking subsidiary. These agreements also
provided for the purchase by Mr. Bailey, Mr. Scott and Mr. Gardner, along with
other investors, of 925,636 shares of common stock of the corporation at $8.17
per share. We also entered into agreements with James A. Taylor and James A.
Taylor, Jr. under which they would continue to serve as Chairman of the Board
of the Corporation and as a director of the Corporation, respectively, but would
cease their employment as officers of the Corporation and officers and directors
of our banking subsidiary. Mr. Taylor, Jr. subsequently resigned as a director
of the Corporation effective September 28, 2005 to pursue other business
opportunities.
Under the agreement with Mr. Taylor, in lieu of the payments to which he would
have been entitled under his employment agreement, we paid Mr. Taylor $3,940,155
on January 24, 2005, and are scheduled to pay an additional $3,152,124 by
January 24, 2006, and $788,031 by January 24, 2007. The agreement also provides
for the provision of certain insurance benefits to Mr. Taylor, the transfer of a
"key man" life insurance policy to Mr. Taylor, and the maintenance of such
policy by us for five years (with the cost of maintaining such policy included
in the above amounts), in each case substantially as required by his employment
agreement. This obligation to provide such payments and benefits to Mr. Taylor
is absolute and will survive the death or disability of Mr. Taylor.
Under the agreement with Mr. Taylor, Jr., in lieu of the payments to which he
would have been entitled under his employment agreement, we paid Mr. Taylor,
Jr., $1,382,872 on January 24, 2005. The agreement also provides for the
provision of certain insurance benefits to Mr. Taylor, Jr. and for the immediate
vesting of his unvested incentive awards and deferred compensation in each case
substantially as required by his employment agreement. This obligation to
provide such payments and benefits to Mr. Taylor, Jr. is absolute and will
survive the death or disability of Mr. Taylor, Jr.
In connection with the above described employment contract buyouts and
management separation transaction, we recognized pre-tax expenses of $15.4
million for the nine-month period ended September 30, 2005. At September 30,
2005, we had $4.3 million of accrued liabilities related to these agreements.
See Note 24 to the Consolidated Financial Statements included in our Annual
Report on Form 10-K for the year ended December 31, 2004 for further
information.
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.
13
RESULTS OF OPERATIONS
Our net income for the three-month period ended September 30, 2005 (third
quarter of 2005) was $680,000, compared to a net loss of $(830,000) for the
three-month period ended September 30, 2004 (third quarter of 2004). Basic and
diluted net income (loss) per common share was $.03 and $(.05), respectively,
for the third quarters of 2005 and 2004, based on weighted average common shares
outstanding for the respective periods. Return on average assets, on an
annualized basis, was .19% for the third quarter of 2005 compared to (.25)% for
the third quarter of 2004. Return on average stockholders' equity, on an
annualized basis, was 2.66% for the third quarter of 2005 compared to (3.26)%
for the third quarter of 2004.
The increase in our net income during the third quarter of 2005 compared to the
third quarter of 2004 is the result of the $2.3 million loss on sale of loans
recorded in the third quarter of 2004, partially offset by an increase in the
provision for loan losses during the third quarter of 2005.
We incurred a $(6.8) million net loss for the nine-month period ended September
30, 2005 (first nine months of 2005), compared to $1.5 million in net income for
the nine-month period ended September 30, 2004 (first nine months of 2004). Net
(loss) income per common share was $(.48) for the first nine months of 2005
compared to $.07 per common share for the first nine months of 2004. Return on
average assets, on an annualized basis, was (.64)% for the first nine months of
2005 compared to .15% for the first nine months of 2004. Return on average
stockholders' equity, on an annualized basis, was (8.96)% for the first nine
months of 2005 compared to 1.94% for the first nine months of 2004. Book value
per share at September 30, 2005 was $5.22, compared to $5.31 as of December 31,
2004. Tangible book value per share at September 30, 2005 was $4.61, compared to
$4.62 as of December 31, 2004.
The decrease in our net income during the first nine months of 2005 compared to
the first nine months of 2004 is the result of certain nonoperating charges
related to the management changes which occurred in the first and second
quarters of 2005, the recognition of losses in the bond portfolio, losses on
other real estate, losses from the sale of certain assets and an increase in the
provision for loan losses.
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 $254,000, or 2.61%, to
$9.5 million for the third quarter of 2005 compared to $9.7 million for the
third quarter of 2004. Net interest income decreased primarily due to a $2.7
million increase in total interest income offset by a $3.0 increase in total
interest expense. The increase in total interest income is primarily due to a 67
basis point (bp) increase in the average rate on loans and a $47 million
increase in the average volume of investment securities. The increase in the
interest expense is primarily due to an 85 bp increase in interest-bearing
liabilities, which comprise, for the most part, demand and time deposits.
Average interest-earning assets for the third quarter of 2005 increased $71
million, or 6.1%, to $1.234 billion from $1.163 billion in the third quarter of
2004. This increase in average interest-earning assets was offset by a $72
million, or 6.5%, increase in average interest-bearing liabilities, to $1.179
billion for the third quarter of 2005 from $1.107 billion for the third quarter
of 2004. The ratio of average interest-earning assets to average
interest-bearing liabilities was 104.7% and 105.1% for the third quarters of
2005 and 2004, respectively. Average interest-bearing assets produced a taxable
equivalent yield of 6.27% for the third quarter of 2005 compared to 5.74% for
the third quarter of 2004.
For the third quarter of 2005 as compared to the third quarter of 2004, the
increase in total interest expense is attributable to an 85 bp increase in the
average interest rate paid on interest-bearing liabilities and a $72 million
increase in the volume of average interest-bearing liabilities. The average rate
paid on interest-bearing liabilities was 3.37% for the third quarter of 2005,
compared to 2.52% for the third quarter of 2004. Our net interest spread and net
interest margin were 2.90% and 3.06%, respectively, for the third quarter of
2005, compared to 3.22% and 3.34% for the third quarter of 2004.
Net interest income increased $0.8 million, or 2.8%, to $29.0 million for the
first nine months of 2005 compared to $28.2 million for the first nine months of
2004. Net interest income increased primarily due to an $8.3 million increase in
total interest income offset by a $7.5 million increase in total interest
expense. The increase in total interest income is primarily due to a $61.5
million increase in the average volume of loans and a $80.9 million increase in
the average volume of investment securities.
14
Average interest-earning assets for the first nine months of 2005 increased $132
million, or 11.8%, to $1.251 billion from $1.119 billion in the first nine
months of 2004. This increase in average interest-earning assets was offset by a
$133 million, or 12.5%, increase in average interest-bearing liabilities, to
$1.198 billion for the first nine months of 2005 from $1.065 billion for the
first nine months of 2004. The ratio of average interest-earning assets to
average interest-bearing liabilities was 104.4% and 105.1% for the first nine
months of 2005 and 2004, respectively. Average interest-bearing assets produced
a taxable equivalent yield of 6.06% for the first nine months of 2005 compared
to 5.78% for the first nine months of 2004.
For the nine-month period ended September 30, 2005 compared to the nine-month
period ended September 30, 2004, the increase in total interest expense is
attributable to a 56 bp increase in the average interest rate paid on
interest-bearing liabilities and a $133 million increase in the volume of
average interest-bearing liabilities. The average rate paid on interest-bearing
liabilities was 3.09% for the first nine months of 2005, compared to 2.53% for
the first nine months of 2004. Our net interest spread and net interest margin
were 2.97% and 3.10%, respectively, for the first nine months of 2005, compared
to 3.25% and 3.37% for the first nine months of 2004.
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 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,
-------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
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) ............ $ 931,598 $16,063 6.84% $ 918,093 $14,244 6.17%
Investment securities
Taxable .................................. 253,960 2,919 4.56 206,422 2,270 4.37
Tax-exempt(2) ............................ 6,897 94 5.40 5,201 71 5.43
---------- ------- ---------- -------
Total investment securities ........... 260,857 3,013 4.58 211,623 2,341 4.40
Federal funds sold ....................... 18,904 163 3.42 9,435 32 1.35
Other investments ........................ 22,743 272 4.74 23,480 157 2.66
---------- ------- ---------- -------
Total interest-earning assets ......... 1,234,102 19,511 6.27 1,162,631 16,774 5.74
Noninterest-earning assets:
Cash and due from banks ..................... 34,991 26,906
Premises and equipment ...................... 55,849 58,309
Accrued interest and other assets ........... 84,175 83,046
Allowance for loan losses ................... (12,368) (20,433)
---------- ----------
Total assets .......................... $1,396,749 $1,310,459
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits ............................. $ 362,520 2,094 2.29 $ 276,490 860 1.24
Savings deposits ............................ 25,178 9 0.14 29,081 10 0.14
Time deposits ............................... 579,977 5,243 3.59 588,166 3,989 2.70
Other borrowings ............................ 179,306 1,927 4.26 181,055 1,510 3.32
Subordinated debentures ..................... 31,959 732 9.09 31,959 653 8.13
---------- ------- ---------- -------
Total interest-bearing liabilities .... 1,178,940 10,005 3.37 1,106,751 7,022 2.52
Noninterest-bearing liabilities:
Demand deposits ............................. 94,219 90,803
Accrued interest and other liabilities ...... 22,112 11,661
Stockholders' equity ........................ 101,478 101,244
---------- ----------
Total liabilities and stockholders'
equity ............................. $1,396,749 $1,310,459
========== ==========
Net interest income/net interest spread ........ 9,506 2.90% 9,752 3.22%
==== ====
Net yield on earning assets .................... 3.06% 3.34%
==== ====
Taxable equivalent adjustment:
Investment securities(2) .................... 32 24
------- -------
Net interest income ................... $ 9,474 $ 9,728
======= =======
15
----------
(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%.
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, 2005 and 2004.
16
THREE MONTHS ENDED SEPTEMBER 30,
2005 VS 2004 (1)
------------------------------------
CHANGES DUE TO
INCREASE ---------------
(DECREASE) RATE VOLUME
---------- ------ ------
(DOLLARS IN THOUSANDS)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans ............. $1,819 $1,602 $217
Interest on securities:
Taxable ............................. 649 103 546
Tax-exempt .......................... 23 -- 23
Interest on federal funds .............. 131 79 52
Interest on other investments .......... 115 120 (5)
------ ------ ----
Total interest income ............... 2,737 1,904 833
------ ------ ----
Expense from interest-bearing liabilities:
Interest on demand deposits ............... 1,234 902 332
Interest on savings deposits .............. (1) -- (1)
Interest on time deposits ................. 1,254 1,310 (56)
Interest on other borrowings .............. 417 432 (15)
Interest subordinated debentures .......... 79 79 --
------ ------ ----
Total interest expense .............. 2,983 2,723 260
------ ------ ----
Net interest income ................. $ (246) $ (819) $573
====== ====== ====
----------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
The following table depicts, on a 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,
-------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
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) ...... $ 943,550 $46,531 6.59% $ 882,030 $41,502 6.29%
Investment securities:
Taxable ............................ 260,734 8,789 4.51 183,468 6,092 4.44
Tax-exempt(2) ...................... 6,716 271 5.39 3,109 133 5.71
---------- ------- ---------- -------
Total investment securities ..... 267,450 9,060 4.53 186,577 6,225 4.46
Federal funds sold ................. 16,134 354 2.93 13,832 107 1.03
Other investments .................. 23,551 769 4.37 36,534 553 2.02
---------- ------- ---------- -------
Total interest-earning assets ... 1,250,685 56,714 6.06 1,118,973 48,387 5.78
Noninterest-earning assets:
Cash and due from banks ............... 32,212 27,716
Premises and equipment ................ 57,325 58,154
Accrued interest and other assets ..... 83,712 81,650
Allowance for loan losses ............. (12,649) (23,064)
---------- ----------
Total assets .................... $1,411,285 $1,263,429
========== ==========
17
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------
2005 2004
----------------------------- -----------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- ------- ------ ---------- ------- ------
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits................................ $ 333,912 4,849 1.94 $ 257,805 2,354 1.22
Savings deposits............................... 26,812 30 0.15 29,487 34 0.15
Time deposits.................................. 614,288 15,032 3.27 570,182 11,253 2.64
Other borrowings............................... 190,589 5,665 3.97 175,443 4,632 3.53
Subordinated debentures........................ 31,959 2,116 8.85 31,959 1,905 7.96
---------- ------- ---------- -------
Total interest-bearing liabilities.......... 1,197,560 27,692 3.09 1,064,876 20,178 2.53
Noninterest-bearing liabilities:
Demand deposits................................ 93,936 86,417
Accrued interest and other liabilities......... 18,636 11,500
Stockholders' equity........................... 101,153 100,636
---------- ----------
Total liabilities and stockholders' equity.. $1,411,285 $1,263,429
========== ==========
Net interest income/net interest spread........... 29,022 2.97% 28,209 3.25%
==== ====
Net yield on earning assets....................... 3.10% 3.37%
==== ====
Taxable equivalent adjustment:
Investment securities(2)....................... 92 45
------- -------
Net interest income......................... $28,930 $28,164
======= =======
----------
(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%.
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, 2005 and 2004.
NINE MONTHS ENDED SEPTEMBER 30,
2005 VS 2004 (1)
-----------------------------------
CHANGES DUE TO
INCREASE ----------------
(DECREASE) RATE VOLUME
---------- ------- ------
(DOLLARS IN THOUSANDS)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans ......... $5,029 $ 2,042 $2,987
Interest on securities:
Taxable ......................... 2,697 97 2,600
Tax-exempt ...................... 138 (9) 147
Interest on federal funds .......... 247 227 20
Interest on other investments ...... 216 466 (250)
------ ------- ------
Total interest income ........... 8,327 2,823 5,504
------ ------- ------
Expense from interest-bearing liabilities:
Interest on demand deposits ........... 2,495 1,663 832
Interest on savings deposits .......... (4) -- (4)
Interest on time deposits ............. 3,779 2,854 925
Interest on other borrowings .......... 1,033 610 423
Interest subordinated debentures ...... 211 211 --
------ ------- ------
Total interest expense .......... 7,514 5,338 2,176
------ ------- ------
Net interest income ............. $ 813 $(2,515) $3,328
====== ======= ======
18
----------
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the changes in each.
Noninterest income. Noninterest income increased $100,000, or 3.6%, to $2.8
million for the third quarter of 2005 from $2.7 million for the third quarter of
2004. Mortgage banking income increased $230,000, or 49.7%, to $693,000 in the
third quarter of 2005 from $463,000 in the third quarter of 2004. This increase
in mortgage banking income was offset by a decrease in service charges on
deposits of $78,000 in the third quarter of 2005. This decrease is primarily due
to a loss of transaction accounts from 2004 to 2005. Management is currently
pursuing new accounts and customers through direct marketing and other
promotional efforts to increase this source of revenue. Service charges on
deposit accounts increased $282,000, or 24.2%, in the third quarter of 2005 over
second quarter of 2005.
Noninterest income increased $2.7 million, or 29.0%, to $12.0 million for the
first nine months of 2005 from $9.3 million for the first nine months of 2004,
primarily due to $5.0 million in insurance proceeds received in the second
quarter of 2005, offset by losses we realized in 2005 on our investment
portfolio compared to gains on the sale of investments and our Morris branch in
2004. The investment portfolio losses were realized primarily in the first
quarter of 2005 as a result of a $50 million sale of bonds in the investment
portfolio. We reinvested the proceeds in bonds intended to enhance the yield and
cash flows of our investment securities portfolio. The new investment securities
were classified as available for sale. Service charges on deposits decreased
$588,000, or 13.7%, to $3.7 million in the first nine months of 2005 from $4.3
million in the first nine months of 2004. As discussed above, this decrease is
primarily due to a loss of transaction accounts from 2004 to 2005. Mortgage
banking income increased $651,000, or 50.1%, to $1.9 million in the first nine
months of 2005 from $1.3 million in the first nine months of 2004.
Noninterest expense. Noninterest expense decreased $2.7 million, or 19.9%, to
$11.0 million for third quarter of 2005 from $13.8 million for the third quarter
of 2004. This decrease is primarily due to the loss that was incurred on sale of
loans in the third quarter of 2004.
Noninterest expense increased $13.7 million, or 38.2%, to $49.8 million for
first nine months of 2005 from $36.1 million for the first nine months of 2004.
This increase is primarily due to the management separation costs of $15.4
million incurred in the first six months of 2005. The management separation
charges primarily include severance payments, accelerated vesting of restricted
stock and deferred compensation agreements, employment contract buy-outs and
professional fees (see Note 3 to the condensed consolidated financial
statements). This is partially offset by the decrease in loss on the sales of
loans from third quarter 2004. All other noninterest expense increased
$717,000, or 6.9%, to $11.1 million for the first nine months of 2005 from $10.4
million for the first nine months of 2004, primarily due to the $355,000 loss on
the sale of our corporate aircraft in the first quarter of 2005 and the
additional $1.0 million of other real estate losses in the second quarter of
2005.
Income tax expense. Our income tax expense was $56,000 for the third quarter of
2005, compared to an income tax benefit of $485,000 for the third quarter of
2004. We recognized an income tax benefit of $4.8 million for the first nine
months of 2005, compared to $87,000 for the first nine months of 2004. The
primary difference in the effective rate and the federal statutory rate (34%)
for the three- and nine-month periods ended September 30, 2005 and 2004 is due
to certain tax-exempt income from investments and insurance policies.
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,
19
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 No. 114 (SFAS 114) to determine the appropriate
reserve allocation. Management compares the investment in an impaired loan
against the present value of expected future 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 non-accruals, economic conditions and other pertinent
information. Based on future evaluations, additional provisions for loan losses
may be necessary to maintain the allowance for loan losses at an appropriate
level. See "Financial Condition - Allowance for Loan Losses" for additional
discussion.
The provision for loan losses was $500,000 for the third quarter of 2005 and
$2.75 million for the first nine months of 2005. The third quarter 2005
provision was less than the second quarter 2005 provision primarily due to the
payoff of two classified loans which had approximately $750,000 in allocated
allowance. We did not record a provision for loan loss in the first nine months
of 2004. During the first nine months of 2005, we had net charged-off loans
totaling $3.3 million, compared to net charged-off loans of $12.4 million in the
first nine months of 2004. The annualized ratio of net charged-off loans to
average loans was .46% in the first nine months of 2005 compared to 1.87% for
the first nine months of 2004. The allowance for loan losses totaled $12.0
million, or 1.33% of loans, net of unearned income, at September 30, 2005
compared to $12.5 million, or 1.34% of loans, net of unearned income, at
December 31, 2004. See "Allowance for Loan Losses" for additional discussion.
FINANCIAL CONDITION
Total assets were $1.376 billion at September 30, 2005, a decrease of $47
million, or 3.29%, from $1.423 billion as of December 31, 2004. Average total
assets for the first nine months of 2005 totaled $1.411 billion, which was
supported by average total liabilities of $1.310 billion and average total
stockholders' equity of $101 million.
Short-term liquid assets. Short-term liquid assets (cash and due from banks,
interest-bearing deposits in other banks and federal funds sold) increased $9.1
million, or 19.8%, to $55.0 million at September 30, 2005 from $45.9 million at
December 31, 2004. At September 30, 2005, short-term liquid assets comprised
4.0% of total assets, compared to 3.2% at December 31, 2004. We continually
monitor our liquidity position and will increase or decrease our short-term
liquid assets as we deem necessary.
Investment Securities. Total investment securities decreased $31.2 million, or
10.8%, to $257.1 million at September 30, 2005, from $288.3 million at December
31, 2004. Mortgage-backed securities, which comprised 37.7% of the total
investment portfolio at September 30, 2005, increased $36.2 million, or 59.8%,
to $96.8 million from $60.6 million at December 31, 2004. Investments in U.S.
agency securities, which comprised 42.1% of the total investment portfolio at
September 30, 2005, decreased $71.7 million, or 39.9%, to $108.1 million from
$179.8 million at December 31, 2004. During the second quarter of 2005, we
closed on the sale of $50 million in bonds and reinvested the proceeds in bonds
intended to enhance the yield and cash flows of our investment securities
portfolio. The new investment securities were classified as available for sale.
The total investment portfolio at September 30, 2005 comprised 21.0% of all
interest-earning assets, compared to 22.8% at December 31, 2004, and produced an
average taxable equivalent yield of 4.56% for the third quarter of 2005,
compared to 4.37% for the third quarter of 2004 and 4.51% for the first nine
months of 2005 and 4.44% for the first nine months of 2004.
Loans. Loans, net of unearned income, totaled $903.4 million at September 30,
2005, a decrease of 3.5%, or $31.5 million, from $934.9 million at December 31,
2004. Mortgage loans held for sale totaled $17.5 million at September 30, 2005,
an increase of $9.4 million from $8.1 million at December 31, 2004. Average
loans, including mortgage loans held for sale, totaled $931.6 million for the
third quarter of 2005 compared to $918.1 million for the third quarter of 2004.
Average loans, including mortgage loans held for sale, totaled $943.6 million
for the first nine months of 2005 compared to $882.0 million for the first nine
months of 2004. Loans, net of unearned income, comprised 73.89% of
interest-earning assets at September 30, 2005, compared to 73.88% at December
31, 2004. Mortgage loans held for sale comprised 1.4% of interest-earning assets
at September 30, 2005, compared to .6% at December 31, 2004. The loan portfolio
produced an average yield of 6.84% for the third quarter of 2005 and 6.59% for
20
the first nine months of 2005, compared to 6.17% for the third quarter and 6.29%
for the first nine months of 2004. The following table details the distribution
of our loan portfolio by category as of September 30, 2005 and December 31, 2004
(in thousands):
DISTRIBUTION OF LOANS BY CATEGORY
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ ------------------
PERCENT PERCENT
OF OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ------- -------- -------
Commercial and industrial......................... $124,997 13.8% $131,979 14.1%
Real estate - construction and land development... 259,843 28.7 249,188 26.6
Real estate - mortgage
Single-family.................................. 235,233 26.0 250,718 26.8
Commercial..................................... 229,882 25.4 242,279 25.9
Other.......................................... 28,164 3.1 25,745 2.7
Consumer.......................................... 19,970 2.2 28,431 3.0
Other............................................. 6,604 .8 8,045 .9
-------- ----- -------- -----
Total loans................................. 904,693 100.0% 936,385 100.0%
===== =====
Unearned income................................... (1,295) (1,517)
Allowance for loan losses......................... (12,024) (12,543)
-------- --------
Net loans................................... $891,374 $922,325
======== ========
Deposits. Noninterest-bearing deposits totaled $91.3 million at September 30,
2005, an increase of 2.0%, or $1.8 million, from $89.5 million at December 31,
2004. Noninterest-bearing deposits comprised 8.7% of total deposits at September
30, 2005, compared to 8.4% at December 31, 2004. Of total noninterest-bearing
deposits $66.4 million, or 73%, were in our Alabama branches while $24.9
million, or 27%, were in our Florida branches.
Interest-bearing deposits totaled $961.0 million at September 30, 2005, a
decrease of 1.7%, or $16.7 million, from $977.7 million at December 31, 2004.
Our average interest-bearing deposits for the third quarter of 2005 totaled
$967.7 million compared to $893.7 million for the third quarter of 2004, an
increase of $73.9 million, or 8.3%. Interest-bearing deposits averaged $975.0
million for the first nine months of 2005 compared to $857.5 million for the
first nine months of 2004, an increase of $117.5 million, or 13.7%.
The average rate paid on all interest-bearing deposits was 3.01% during the
third quarter of 2005 compared to 2.16% for the third quarter of 2004 and 2.73%
during the first nine months of 2005 compared to 2.12% for the first nine months
of 2004. Of total interest-bearing deposits $690.6 million, or 72%, were in the
Alabama branches while $270.4 million, or 28%, were in the Florida branches.
Borrowings. Advances from the Federal Home Loan Bank ("FHLB") totaled $146.1
million at September 30, 2005 and $156.1 million at December 31, 2004.
Borrowings from the FHLB were used primarily to fund growth in the loan
portfolio and have a weighted average rate of approximately 3.88% at September
30, 2005. The advances are secured by FHLB stock, agency securities and a
blanket lien on certain residential real estate loans and commercial loans. The
FHLB has issued for the benefit of our banking subsidiary a $20,000,000
irrevocable letter of credit in favor of the Chief Financial Officer of the
State of Florida to secure certain deposits of the State of Florida. The letter
of credit may be terminated January 6, 2006 upon sixty days' prior notice;
otherwise, it will automatically extend for a successive one-year term.
During the third quarter of 2005, $58 million in advances from the FHLB were
restructured. This restructuring is expected to reduce interest expense
approximately $620,000 during the first twelve-month period and then $426,000
per year thereafter. In conjunction with this restructuring, we entered a $15
million one-year interest rate swap, under which we will pay a 4.33% fixed
amount on the 28th day of March, June, September and December beginning December
28, 2005 and receive a floating amount equal to the three-month LIBOR rate.
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 equity. The trusts were formed
for the purpose of issuing mandatory redeemable trust preferred securities to
third-party investors and
21
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,
2010 and July 25, 2006, respectively.
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, 2005 DECEMBER 31, 2004
------------------ -----------------
(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, 2005 and December 31, 2004, the interest rate on the
$16,495,000 subordinated debentures was 7.67% and 5.74%, respectively.
Prior to the conversion of our subsidiary's charter to a federal savings bank
charter, we were required to obtain regulatory approval prior to paying any
dividends on these trust preferred securities. The Federal Reserve approved the
timely payment of our semi-annual distributions on our trust preferred
securities in January, March, July and September 2005.
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, Credit Risk
Management, LLC, an independent loan review firm, supplements our existing
internal 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 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 (5%, Special Mention; 15%, Substandard; 50%, Doubtful; 100%, Loss)
are applied to these categories to estimate the amount of loan loss allowance
required, adjusted for previously mentioned risk factors.
22
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 loan's observable market price or 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 the internal
loan review, which also performs ongoing, independent review of the risk
management process. The risk management process includes underwriting,
documentation and collateral control. Loan review is centralized and independent
of the lending function. The loan review results are reported to the Audit
Committee of the board of directors and senior management. We have also
established a centralized loan administration services department to serve our
entire bank. This department will provide standardized oversight for compliance
with loan approval authorities and bank lending policies and procedures, as well
as centralized supervision, monitoring and accessibility.
The following table summarizes certain information with respect to our allowance
for loan losses and the composition of charge-offs and recoveries for the
periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
NINE-MONTH
PERIOD ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses at beginning of period ................... $ 12,543 $ 25,174
Charge-offs:
Commercial and industrial ....................................... 1,417 7,690
Real estate - construction and land development ................. 354 765
Real estate - mortgage
Single-family ................................................ 601 1,012
Commercial ................................................... 1,131 5,820
Other ........................................................ 26 86
Consumer ........................................................ 631 1,881
Other ........................................................... 255 87
-------- --------
Total charge-offs ......................................... 4,415 17,341
Recoveries:
Commercial and industrial ....................................... 285 1,468
Real estate - construction and land development ................. 36 4
Real estate - mortgage
Single-family ................................................ 329 470
Commercial ................................................... 135 737
Other ........................................................ 97 97
Consumer ........................................................ 211 549
Other ........................................................... 53 410
-------- --------
Total recoveries .......................................... 1,146 3,735
-------- --------
Net charge-offs .................................................... 3,269 13,606
Provision for loan losses .......................................... 2,750 975
-------- --------
Allowance for loan losses at end of period ......................... $ 12,024 $ 12,543
======== ========
Loans at end of period, net of unearned income ..................... $903,398 $934,868
Average loans, net of unearned income .............................. 943,550 894,406
Ratio of ending allowance to ending loans .......................... 1.33% 1.34%
Ratio of net charge-offs to average loans (1) ...................... .46% 1.52%
Net charge-offs as a percentage of:
Provision for loan losses ....................................... 118.87% 1395.49%
Allowance for loan losses (1) ................................... 36.35% 108.47%
Allowance for loan losses as a percentage of nonperforming loans ... 196.21% 169.36%
23
----------
(1) Annualized.
The allowance for loan losses as a percentage of loans, net of unearned income,
at September 30, 2005 was 1.33%, compared to 1.34% as of December 31, 2004. The
allowance for loan losses as a percentage of nonperforming loans increased to
196.21% at September 30, 2005 from 169.36% at December 31, 2004.
Net charge-offs were $3.3 million for the first nine months of 2005. Net
charge-offs to average loans on an annualized basis totaled 0.46% for the first
nine months of 2005. Net commercial loan charge-offs totaled $1,132,000, or
34.6% of total net charge-off loans, for the first nine months of 2005, compared
to 45.7% of total net charge-off loans for the year 2004. Net commercial real
estate loan charge-offs totaled $996,000, or 30.5% of total net charge-off
loans, for the first nine months of 2005 compared to 37.4% of total net
charge-off loans for the year 2004. Net single family real estate loan
charge-offs totaled $272,000, or 8.3% of total net charge-off loans, for the
first nine months of 2005 compared to 4.0% of total net charge-off loans for the
year 2004. Net consumer loan charge-offs totaled $420,000, or 12.8% of total net
charge-off loans, for the first nine months of 2005 compared to 9.8% of total
net charge-off loans for the year 2004.
Nonperforming Assets. Nonperforming assets decreased $4.1 million, to $8.3
million as of September 30, 2005 from $12.4 million as of December 31, 2004. As
a percentage of net loans plus nonperforming assets, nonperforming assets
decreased from 1.32% at December 31, 2004 to 0.91% at September 30, 2005. The
following table represents our nonperforming assets for the dates indicated.
NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(DOLLARS IN THOUSANDS)
Nonaccrual ............................................................. $6,022 $ 6,344
Accruing loans 90 days or more delinquent .............................. 34 431
Restructured ........................................................... 72 631
------ -------
Total nonperforming loans ........................................... 6,128 7,406
Other real estate owned ................................................ 2,156 4,906
Repossessed assets ..................................................... -- 103
------ -------
Total nonperforming assets .......................................... $8,284 $12,415
====== =======
Nonperforming loans as a percent of loans .............................. .68% .79%
====== =======
Nonperforming assets as a percent of loans plus nonperforming assets ... 0.91% 1.32%
====== =======
Loans past due 30 days or more, net of non-accruals, improved to .41% at
September 30, 2005 from .88% at December 31, 2004.
The following is a summary of nonperforming loans by category for the dates
shown:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(DOLLARS IN THOUSANDS)
Commercial and industrial .......................... $1,799 $2,445
Real estate - construction and land development .... 64 187
Real estate - mortgages
Single-family ................................... 2,070 2,060
Commercial ...................................... 1,858 2,273
Other ........................................... 107 183
Consumer ........................................... 230 250
Other .............................................. -- 8
------ ------
Total nonperforming loans .................... $6,128 $7,406
====== ======
24
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, 2005, the recorded investment in impaired loans
totaled $4.7 million, with approximately $1.6 million in allowance for loan
losses specifically allocated to impaired loans. This represents a decrease of
$400,000 from $5.1 million at December 31, 2004. The following is a summary of
impaired loans and the specifically allocated allowance for loan losses by
category as of September 30, 2005:
OUTSTANDING SPECIFIC
BALANCE ALLOWANCE
----------- ---------
Commercial and industrial .......................... $1,845 $ 658
Real estate - construction and land development .... 64 25
Real estate - mortgages
Commercial ...................................... 2,687 868
Other ........................................... 107 53
------ ------
Total ........................................ $4,703 $1,604
====== ======
Potential Problem Loans. In addition to nonperforming loans, management has
identified $1.0 million in potential problem loans as of September 30, 2005
compared to $2.4 million as of December 31, 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.
Stockholders' Equity. At September 30, 2005, total stockholders' equity was
$103.3 million, an increase of $2.8 million from $100.5 million at December 31,
2004. The increase in stockholders' equity during the first nine months of 2005
resulted primarily from a net loss of $6.8 million and other comprehensive loss
of $661,000 offset by issuance, vesting and forfeitures of restricted stock
totaling $737,000 and additional net proceeds of $7.3 million resulting from the
sale in January 2005 of 925,636 shares of our common stock at $8.17 per share,
the then-current market price, to the new members of the management team and
other investors in a private placement. Also, 276,984 stock options have been
exercised for a total of $1.8 million in proceeds. As of September 30, 2005, we
had 20,023,756 shares of common stock issued and 19,775,886 outstanding. As of
September 30, 2005, there were 49,823 shares held in treasury at a cost of
$341,000.
Effective June 30, 2005, 62,000 shares of our convertible preferred stock were
converted into 775,000 shares of common stock at a conversion price of $8.00 per
share. As a result of such conversion, the excess of the market value of the
common stock issued at the date of conversion over the aggregate issue price is
reflected as a reduction in retained earnings with a corresponding increase in
surplus, thereby reducing net income applicable to common stockholders for
purposes of calculating earnings per common share. This non-cash charge did not
affect total stockholders' equity.
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, 2005, 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
25
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, 2005 and 2004 was $135,000 and $142,000,
respectively. The ESOP shares as of September 30, 2005, were as follows:
SEPTEMBER 30,
2005
-------------
Allocated shares ............................ 55,328
Estimated shares committed to be released ... 20,025
Unreleased shares ........................... 198,047
----------
Total ESOP shares ........................... 273,400
==========
Fair value of unreleased shares ............. $2,953,000
==========
Regulatory Capital. The table below represents our and our subsidiary's
regulatory and minimum regulatory capital requirements at September 30, 2005
(dollars in thousands):
FOR CAPITAL
ADEQUACY TO BE WELL
ACTUAL PURPOSES CAPITALIZED
---------------- --------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- -----
Total Risk-Based Capital
Corporation............................... $126,788 11.82% $85,803 8.00% $107,254 10.00%
The Bank.................................. 124,273 11.77 84,432 8.00 105,540 10.00
Tier 1 Risk-Based Capital
Corporation............................... 114,704 10.69 42,902 4.00 64,352 6.00
The Bank.................................. 112,249 10.64 42,216 4.00 63,324 6.00
Leverage Capital
Corporation............................... 114,704 8.34 55,021 4.00 68,777 5.00
The Bank.................................. 112,249 8.23 54,556 4.00 68,196 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, brokered and internet deposits, and may
borrow from the Federal Home Loan Bank under a blanket floating lien on certain
commercial loans and residential real estate loans. Also, we have established
certain repurchase agreements with a large financial institution. While
scheduled loan repayments and maturing investments are relatively predictable,
interest rates, general economic conditions and competition primarily influence
deposit flows and early loan payments. Management places constant emphasis on
the maintenance of adequate liquidity to meet conditions that might reasonably
be expected to occur. Management believes it has established sufficient sources
of funds to meet its anticipated liquidity needs.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by us or on our behalf. Some of the disclosures
in this Quarterly Report on Form 10-Q, including 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 implicitly and explicitly include the
assumptions underlying the statements and other information with respect to our
beliefs, plans, objectives, goals, expectations, anticipations, estimates,
intentions, financial condition, results of operations, future performance and
business, including our expectations
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and estimates with respect to our revenues, expenses, earnings, return on
equity, return on assets, efficiency ratio, asset quality, the adequacy of our
allowance for loan losses and other financial data and capital and performance
ratios.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, these statements involve risks and uncertainties
which are subject to change based on various important factors (some of which
are beyond our control). The following factors, among others, could cause our
financial performance to differ materially from our goals, plans, objectives,
intentions, expectations and other forward-looking statements: (1) the strength
of the United States economy in general and the strength of the regional and
local economies in which we conduct operations; (2) 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; (3) inflation,
interest rate, market and monetary fluctuations; (4) our ability to successfully
integrate the assets, liabilities, customers, systems and management we acquire
or merge into our operations; (5) 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; (6) the willingness of
users to substitute competitors' products and services for our products and
services; (7) the impact of changes in financial services policies, laws and
regulations, including policies, laws and regulations concerning taxes, banking,
securities and insurance, and the application thereof by regulatory bodies; (8)
our ability to resolve any legal proceeding on acceptable terms and its effect
on our financial condition or results of operations; (9) technological changes;
(10) changes in consumer spending and savings habits; and (11) 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 information
and statements.
We do not intend to update our forward-looking information and statements,
whether written or oral, to reflect change. All forward-looking statements
attributable to us are expressly qualified by these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative
disclosures about market risk as of September 30, 2005 from those presented in
our annual report on Form 10-K for the year ended December 31, 2004.
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, 2004, is hereby incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
CEO AND CFO CERTIFICATION
Appearing as exhibits to this report are Certifications of our Chief Executive
Officer ("CEO") and our Chief Financial Officer ("CFO"). The Certifications are
required to be made by Rule 13a-14 of the Securities Exchange Act of 1934, as
amended. This Item contains the information about the evaluation that is
referred to in the Certifications, and the information set forth below in this
Item 4 should be read in conjunction with the Certifications for a more complete
understanding of the Certifications.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no
27
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, as of
September 30, 2005. Based upon the Evaluation, our CEO and CFO have concluded
that, as of September 30, 2005, 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 will prevail in each lawsuit, there can be no
assurance that the outcome of any pending, or any 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
As previously disclosed by the Corporation, the Corporation offered those of its
continuing directors who had previously entered into Deferred Compensation
Agreements with the Corporation the opportunity to receive shares of the
Corporation's common stock in full satisfaction of all benefits otherwise
payable under such Deferred Compensation Agreements and in exchange for the
termination of such Deferred Compensation Agreements. In that connection, the
Corporation has agreed to issue to those continuing directors who elected to
accept the Corporation's offer an aggregate of 34,995 shares of common stock, to
be issued as of July 30, 2005 and to be valued at $10.61 per share, the closing
price per share of the Corporation's common stock as reported on the NASDAQ
National Market System on that date. The shares are being issued in reliance on
the exemption provided by Section 4(2) of the Securities Act of 1933 as an
issuance of securities not involving any public offering. The shares issued to
each participating director were based on the value of such director's Deferral
Account balance under the applicable Deferred Compensation Agreement. The
termination of such agreements relieves the Corporation of an ongoing obligation
to provide a variable deferred compensation benefit to such directors. The
Corporation will receive no cash proceeds from the issuance of such shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(a) Exhibit:
31.01 Certification of principal executive officer pursuant to Rule 13a-14(a).
31.02 Certification of principal financial officer pursuant to 13a-14(a).
32.01 Certification of principal executive officer pursuant to 18 U.S.C.
Section 1350.
32.02 Certification of principal financial officer pursuant to 18 U.S.C.
Section 1350.
29
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, 2005 By: /s/ C. Stanley Bailey
------------------------------------
C. Stanley Bailey
Chief Executive Officer
Date: November 9, 2005 By: /s/ David R. Carter
------------------------------------
David R. Carter
Executive Vice President and
Chief Financial Officer
30