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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 (I.R.S. Employer
Incorporation or Organization) Identification No.)
17 NORTH 20TH STREET 35203
BIRMINGHAM, ALABAMA (Zip Code)
(Address of Principal Executive Offices)
(205) 327-3600
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Titles of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer. Large accelerated filer [
] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act.) Yes [ ] No [X]
The aggregate market value of the voting common stock held by non-affiliates
of the registrant as of March 8, 2006, based on a closing price of $11.45 per
share of Common Stock, was $196,669,436.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: the number of shares
outstanding as of March 8, 2006, of the registrant's only issued and outstanding
class of common stock, its $.001 per share par value common stock, was
20,053,130.
DOCUMENTS INCORPORATED BY REFERENCE
The information set forth under Items 10, 11, 12, 13 and 14 of Part III of
this Report is incorporated by reference from the registrant's definitive proxy
statement for its 2006 annual meeting of stockholders that will be filed no
later than April 30, 2006.
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PART I
ITEM 1. BUSINESS.
GENERAL
We are a Delaware-chartered thrift holding company headquartered in
Birmingham, Alabama. We offer a broad range of banking and related services in
26 locations in Alabama and the Florida panhandle through Superior Bank
(formerly The Bank), our principal subsidiary. We had assets of approximately
$1.415 billion, loans of approximately $963 million, deposits of approximately
$1.044 billion and stockholders' equity of approximately $105 million at
December 31, 2005. Our principal executive offices are located at 17 North 20th
Street, Birmingham, Alabama 35203, and our telephone number is (205) 327-3600.
We were founded in 1997 and completed our initial public offering in
December 1998. Beginning in the fall of 1998, we grew through the acquisition of
various financial institutions in Alabama and Florida. Our growth activities
have most recently focused on increasing our market share in Alabama, especially
in the Birmingham- and Huntsville-area markets, and in the eastern panhandle of
Florida.
In January 2005, we began the transition from our founding management team
to a new senior management team composed of veteran bankers with a strong
operational track record and a history of enhancing stockholder value. During
the remainder of 2005, we completed that management transition. In addition, in
November 2005 we converted our principal subsidiary, now known as Superior Bank,
from an Alabama state-chartered bank to a federally chartered thrift under
regulation by the Office of Thrift Supervision ("OTS"). We believe that this
conversion will allow us greater flexibility in our operations, as well as
allowing Superior Bank to operate under a single regulatory system rather than
the dual federal/state regulatory system that had been applicable to it.
RECENTLY ANNOUNCED MERGER AGREEMENT
On March 6, 2006, we announced that we had signed a definitive agreement to
merge with Kensington Bankshares, Inc. ("Kensington"). Kensington is the holding
company for Kensington Bank, a Florida state bank with eight branches in the
Tampa Bay area. Under the terms of the merger agreement, we will issue 1.6
shares of our common stock for each share of Kensington stock. Based on recent
closing prices per share for our common stock, the transaction would be valued
at approximately $71.2 million. The actual value at consummation will be based
on our share price at that time. The Tampa Bay area would be our largest market
and has a higher projected population growth than any of our current banking
markets. Completion of the merger is subject to approval by the stockholders of
both corporations, to the receipt of required regulatory approvals, and to the
satisfaction of usual and customary closing conditions.
STRATEGY
Operations. We focus on small- to medium-sized businesses, as well as
professionals and individuals, emphasizing our local decision-making, effective
response time and personalized service. As a result, we conduct our business on
a decentralized basis with respect to deposit gathering and most credit
decisions, emphasizing local knowledge and authority to make these decisions. We
supplement this decentralized management approach with centralized loan
administration, policy oversight, credit review, audit, asset/liability
management, data processing, human resources and risk management systems. We
implement these standardized administrative and operational policies at each of
our locations while retaining local management and advisory directors to
capitalize on their knowledge of the local community.
Products and Services. Superior Bank provides a wide range of retail and
small business services, including noninterest-bearing and interest-bearing
checking, savings and money market accounts, negotiable order of withdrawal
("NOW") accounts, certificates of deposit and individual retirement accounts. In
addition, Superior Bank offers an extensive array of real estate, consumer,
small business and commercial real estate loan products. Other financial
services include annuities, automated teller machines, debit cards, credit-
related life and disability insurance, safety deposit boxes, internet banking,
bill payment and telephone
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banking. Superior Bank attracts primary banking relationships through the
customer-oriented service environment created by Superior Bank's personnel
combined with competitive financial products.
Market Areas. Currently, our primary markets are located in northern and
central Alabama and the panhandle of Florida. Upon approval of our recently
announced merger with Kensington, we will have established a presence in the
Tampa, Florida area which will be larger than any of our current markets.
We are headquartered in Birmingham, Alabama. We also have branches in:
ALABAMA FLORIDA
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Albertville Andalusia Altha
Boaz Childersburg Apalachicola
Decatur Frisco City Blountstown
Gadsden Guntersville Bristol
Huntsville Kinston Carrabelle
Madison Monroeville Mexico Beach
Mt. Olive Opp Port St. Joe
Rainbow City Samson
Sylacauga Warrior
In addition to our branches, we operate loan production offices in
Montgomery, Alabama, and Panama City and Tallahassee, Florida.
Growth. Our future growth depends primarily on the expansion of the
business of our primary wholly owned subsidiary, Superior Bank. That expansion
will depend on internal growth and the opening of new branch offices in new and
existing markets. Superior Bank also plans to engage in the strategic
acquisition of other financial institutions and branches that have relatively
high earnings and low-cost deposits or that we believe to have exceptional
growth potential, such as the Kensington transaction described above. Our
ability to increase profitability and grow internally depends primarily on our
ability to attract and retain low-cost and core deposits coupled with the
continued opportunity to generate high-yielding, quality loans. Our ability to
grow profitably through the opening or acquisition of new branches will depend
primarily on, among other things, our ability to identify profitable, growing
markets and branch locations within such markets, attract necessary deposits to
operate such branches profitably and identify lending and investment
opportunities within such markets.
We periodically evaluate business combination opportunities and conduct
discussions, due diligence activities and negotiations in connection with those
opportunities. As a result, we may pursue business combination transactions
involving cash, debt or equity securities from time to time. Any future business
combination or series of business combinations that we might undertake may be
material to our business, financial condition or results of operations in terms
of assets acquired or liabilities assumed. Any future acquisition is subject to
approval by the appropriate regulatory agencies. See "Supervision and
Regulation."
LENDING ACTIVITIES
General. We offer various lending services, including real estate,
consumer and commercial loans, primarily to individuals and businesses and other
organizations that are located in or conduct a substantial portion of their
business in our market areas. Our total loans at December 31, 2005 were $963.3
million, or 77.2% of total earning assets. The interest rates we charge on loans
vary with the risk, maturity and amount of the loan and are subject to
competitive pressures, money market rates, availability of funds and government
regulations. We do not have any foreign loans or loans for highly leveraged
transactions.
The lending activities of Superior Bank are subject to the written
underwriting standards and loan origination procedures established by Superior
Bank's Board of Directors and management. Loan originations are obtained from a
variety of sources, including referrals, existing customers, walk-in customers
and
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advertising. Loan applications are initially processed by loan officers who have
approval authority up to designated limits.
We use generally recognized loan underwriting criteria, and attempt to
minimize loan losses through various means. In particular, on larger credits, we
generally rely on the cash flow of a debtor as the primary source of repayment
and secondarily on the value of the underlying collateral. In addition, we
attempt to utilize shorter loan terms in order to reduce the risk of a decline
in the value of such collateral. As of December 31, 2005, approximately 82% of
our loan portfolio consisted of loans that had variable interest rates or
matured within one year.
We address repayment risks by adhering to internal credit policies and
procedures that include officer and customer lending limits, a multi-layered
loan approval process that includes senior management of Superior Bank and The
Banc Corporation for larger loans, periodic documentation examination and
follow-up procedures for any exceptions to credit policies. The level in our
loan approval process at which a loan is approved depends on the size of the
borrower's overall credit relationship with Superior Bank.
LOAN PORTFOLIO
Real Estate Loans. Loans secured by real estate are a significant
component of our loan portfolio, constituting $807.7 million, or 83.7% of total
loans, at December 31, 2005. At that date, $243.2 million, or 25.2% of our total
loan portfolio, consisted of single-family mortgage loans. Nonresidential
mortgage loans include commercial and industrial loans. At December 31, 2005,
$238.1 million, or 24.7% of our total loan portfolio, consisted of these loans.
Our commercial real estate loans primarily provide financing for income-
producing properties such as shopping centers, multi-family complexes and office
buildings and for owner-occupied properties (primarily light industrial
facilities and office buildings). These loans are underwritten with
loan-to-value ratios ranging, on average, from 65% to 85% based upon the type of
property being financed and the financial strength of the borrower. For
owner-occupied commercial buildings, we underwrite the financial capability of
the owner, with an 85% maximum loan-to-value ratio. For income-producing
improved real estate, we underwrite the strength of the leases, especially those
of any anchor tenants, with minimum debt service coverage of 1.2:1 and an 85%
maximum loan-to-value ratio. While evaluation of collateral is an essential part
of the underwriting process for these loans, repayment ability is determined
from analysis of the borrower's earnings and cash flow. Terms are typically
three to five years and may have payments through the date of maturity based on
a 15- to 30-year amortization schedule.
We make loans to finance the construction of and improvements to
single-family and multi-family housing and commercial structures as well as
loans for land development. At December 31, 2005, $326.4 million, or 33.8% of
our total portfolio, consisted of such loans. Our construction lending is
divided into three general categories: owner-occupied commercial buildings;
income-producing improved real estate; and single-family residential
construction. For construction loans related to income-producing properties, the
underwriting criteria are the same as outlined in the preceding paragraph. For
single-family residential construction, we underwrite the financial strength and
reputation of the builder, factoring in the general state of the economy and
interest rates and the location of the home, with an 85% maximum loan-to-value
ratio. The majority of land development loans consists of loans to convert raw
land into residential subdivisions.
Commercial and Industrial Loans. We make loans for commercial purposes in
various lines of business. These loans are typically made on terms up to five
years at fixed or variable rates and are secured by eligible accounts
receivable, inventory or equipment. We attempt to reduce our credit risk on
commercial loans by limiting the loan to value ratio to 80% on loans secured by
eligible accounts receivable, 50% on loans secured by inventory and 75% on loans
secured by equipment. Commercial and industrial loans constituted $135.5
million, or 14.0% of our loan portfolio, at December 31, 2005. We also, from
time to time, make unsecured commercial loans.
Consumer Loans. Our consumer portfolio includes installment loans to
individuals in our market areas and consists primarily of loans to purchase
automobiles, recreational vehicles, mobile homes and consumer goods. Consumer
loans constituted $21.1 million, or 2.2% of our loan portfolio, at December 31,
2005. Consumer loans are underwritten based on the borrower's income, current
debt, credit history and collateral.
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Terms generally range from one to six years on automobile loans and one to three
years on other consumer loans.
CREDIT REVIEW AND PROCEDURES
There are credit risks associated with making any loan. These include
repayment risks, risks resulting from uncertainties in the future value of
collateral, risks resulting from changes in economic and industry conditions and
risks inherent in dealing with individual borrowers. In particular, longer
maturities increase the risk that economic conditions will change and adversely
affect collectibility.
We have a loan review process designed to promote early identification of
credit quality problems. We employ a risk rating system that assigns to each
loan a rating that corresponds to the perceived credit risk. Risk ratings are
subject to independent review by a centralized loan review department and an
independent, external loan review function, which also performs ongoing,
independent review of the risk management process, including underwriting,
documentation and collateral control. Regular reports are made to senior
management and the Board of Directors regarding credit quality as measured by
assigned risk ratings and other measures, including, but not limited to, the
level of past due percentages and nonperforming assets. The loan review function
is centralized and independent of the lending function.
DEPOSITS
Core deposits are our principal source of funds, constituting approximately
66.9% of our total deposits as of December 31, 2005. Core deposits consist of
demand deposits, interest-bearing transaction accounts, savings deposits and
certificates of deposit (excluding certificates of deposits over $100,000).
Transaction accounts include checking, money market and NOW accounts that
provide Superior Bank with a source of fee income and cross-marketing
opportunities, as well as a low-cost source of funds. Time and savings accounts
also provide a relatively stable and low-cost source of funding. The largest
source of funds for Superior Bank is certificates of deposit. Certificates of
deposit in excess of $100,000 are approximately $345 million, or 33.1% of our
deposits. Approximately $145 million consist of wholesale, or "brokered",
certificates of deposits.
Our other sources of funds consist primarily of advances from the Federal
Home Loan Bank ("FHLB"). These advances are secured by FHLB stock, agency
securities and a blanket lien on certain residential and commercial real estate
loans. We also have available unused federal funds lines of credit with regional
banks, subject to certain restrictions and collateral requirements.
Deposit rates are set periodically by our internal Asset/Liability
Management Committee, which includes certain members of senior management. We
believe our rates are competitive with those offered by competing institutions
in our market areas; however, we focus on customer service, not high rates, to
attract and retain deposits.
COMPETITION
The banking industry is highly competitive, and our profitability depends
principally upon our ability to compete in our market areas. In our market
areas, we face competition from both super-regional banks and smaller community
banks, as well as non-bank financial services companies. We encounter strong
competition both in making loans and attracting deposits. Competition among
financial institutions is based upon interest rates offered on deposit accounts,
interest rates charged on loans and other credit and service charges. Customers
also consider the quality and scope of the services rendered, the convenience of
banking facilities and, in the case of loans to commercial borrowers, relative
lending limits. Customers may also take into account the fact that other banks
offer different services. Many of the large super-regional banks against which
we compete have significantly greater lending limits and may offer additional
products; however, we believe we have been able to compete effectively with
other financial institutions, regardless of their size, by emphasizing customer
service and by providing a wide array of services. In addition, most of our
non-bank competitors are not subject to the same extensive federal regulations
that govern bank holding companies and federally insured banks. See "Supervision
and Regulation." Competition may further intensify if additional financial
services companies enter markets in which we conduct business.
5
EMPLOYEES
As of December 31, 2005, we employed approximately 348 full-time equivalent
employees, primarily at Superior Bank. We believe that our employee relations
have been and continue to be good.
SUPERVISION AND REGULATION
General. The Banc Corporation, as a unitary savings and loan holding
company, and Superior Bank, as a federal savings bank, are required by federal
law to report to, and otherwise comply with the rules and regulations of, OTS.
We are subject to extensive regulation, examination and supervision by OTS, as
our primary federal regulator, and the Federal Deposit Insurance Corporation
(the "FDIC"), as the deposit insurer. We are a member of the Federal Home Loan
Bank System and, with respect to deposit insurance, of the Savings Association
Insurance Fund managed by the FDIC. We must file reports with OTS and the FDIC
concerning our activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. OTS conducts periodic
examinations to test our safety and soundness and compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a thrift can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by OTS, the FDIC or
Congress, could have a material adverse impact on us and our operations. Certain
regulatory requirements applicable to us are referred to below or elsewhere
herein. The description of statutory provisions and regulations applicable to
thrifts and their holding companies set forth below does not purport to be a
complete description of such statutes and regulations and their effects on us
and is qualified in its entirety by reference to the actual laws and
regulations.
Holding Company Regulation. We are a nondiversified unitary savings and
loan holding company within the meaning of such terms under federal law. The
Gramm-Leach-Bliley Act of 1999 provides that no company may acquire control of a
savings institution after May 4, 1999, unless it engages only in the financial
activities permitted for financial holding companies under the law or for
multiple savings and loan holding companies as described below. Further, the
Gramm-Leach-Bliley Act specifies that certain savings and loan holding companies
may only engage in such activities. Since we became a savings and loan holding
company in 2005, we are limited to such activities. Upon any non-supervisory
acquisition by us of another savings institution or savings bank that meets the
qualified thrift lender test and is deemed to be a savings institution by OTS,
we would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation. However, OTS has issued an
interpretation concluding that the multiple savings and loan holding companies
may also engage in activities permitted for financial holding companies.
A savings and loan holding company is prohibited from directly or
indirectly acquiring more than 5% of the voting stock of another financial
institution or savings and loan holding company without prior written approval
of OTS and from acquiring or retaining control of a depository institution that
is not insured by the FDIC. In evaluating applications by holding companies to
acquire other institutions, OTS considers, among other things, the financial and
managerial resources and future prospects of the institutions involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
Subject to certain exceptions, OTS may not approve any acquisition that
would result in a multiple savings and loan holding company's controlling
savings institutions in more than one state.
Although savings and loan holding companies are not currently subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations prescribe such
restrictions on subsidiary savings institutions, as described below. Superior
Bank must notify OTS
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30 days before declaring any dividend to The Banc Corporation. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by OTS, and OTS has authority to order cessation of activities
or divestiture of subsidiaries deemed to pose a threat to the safety and
soundness of the institution.
Change in Bank Control Act. Under the Federal Change in Bank Control Act,
a notice must be submitted to OTS if any person, or group acting in concert,
seeks to acquire "control" of a savings and loan holding company or a savings
association. A change of control may occur, and prior notice may be required,
upon the acquisition of more than 10% of our outstanding voting stock, unless
OTS has found that the acquisition will not result in a change of control of The
Banc Corporation. Under the Change in Bank Control Act, OTS generally has 60
days from the filing of a complete notice to act, taking into consideration
certain factors, including the financial and managerial resources of the
acquirer and the anti-trust effects of the acquisition.
Regulation of Business Activities. The activities of thrifts are governed
by federal law and regulations. These laws and regulations delineate the nature
and extent of the activities in which thrifts may engage. In particular, certain
lending authority for thrifts, e.g., commercial, non-residential real property
loans and consumer loans, is limited to a specified percentage of the
institution's capital or assets.
Capital Requirements. OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital to total assets
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the regulatory examination rating system) and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for
institutions receiving the highest examination rating), and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard.
The risk-based capital standard for savings institutions requires the
maintenance of ratios of Tier 1 (core) and total capital (which is defined as
core capital and supplementary capital) to risk-weighted assets of at least 4%
and 8%, respectively. In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet assets, recourse obligations,
residual interests and direct credit substitutes, are multiplied by a
risk-weight factor of 0% to 100%, assigned by OTS capital regulation based on
the risks believed inherent in the type of asset. Core (Tier 1) capital
includes, among other things, common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries. The
components of supplementary capital currently include, among other things,
cumulative perpetual preferred stock, mandatory convertible securities, and the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of supplementary capital included as
part of total capital cannot exceed 100% of core capital.
OTS also has authority to establish minimum capital requirements in
appropriate cases upon a determination that an institution's capital level is or
may become inadequate in light of the particular circumstances. At December 31,
2005, Superior Bank met each of its capital requirements.
Prompt Corrective Regulatory Action. OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (less than 3%
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a leverage
ratio that is less than 3% is considered to be "significantly undercapitalized",
and a savings institution that has a tangible capital to assets ratio equal to
or less than 2% is deemed to be "critically undercapitalized." Subject to a
narrow exception, OTS is required to appoint a receiver or conservator within
specified time frames for an institution that is "critically undercapitalized."
The regulation also provides that a capital restoration plan must be filed with
OTS within 45 days of the date a savings institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Compliance with the plan must be guaranteed by any parent
holding company. In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution,
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including, but not limited to, increased monitoring by regulators and
restrictions on growth, capital distributions and expansion. OTS could also take
any one of a number of discretionary supervisory actions, including the issuance
of a capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts. Superior Bank is a member of the Savings
Association Insurance Fund. (The Savings Association Insurance Fund and the Bank
Insurance Fund are scheduled to be merged by March 31, 2006.) The FDIC maintains
a risk-based assessment system by which institutions are assigned to one of
three categories based on their capitalization and one of three subcategories
based on examination ratings and other supervisory information. An institution's
assessment rate depends upon the categories to which it is assigned. Assessment
rates for Savings Association Insurance Fund member institutions are determined
semi-annually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points of assessable deposits for the
riskiest. The FDIC has authority to increase insurance assessments. A
significant increase in Savings Association Insurance Fund insurance premiums
would likely have an adverse effect on the operating expenses and results of
operations of Superior Bank. Management cannot predict what insurance assessment
rates will be in the future.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize the predecessor to the Savings Association Insurance
Fund. During fiscal 2005, Financing Corporation payments for Savings Association
Insurance Fund members approximated 1.385 basis points of assessable deposits.
Deposit insurance may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or OTS. We do not know
of any practice, condition or violation that might lead to termination of
deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. Generally, subject to certain exceptions, a savings institution may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of its unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of unimpaired capital and surplus, if secured by specified
readily-marketable collateral.
QTL Test. Federal law requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine
months out of each 12-month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of December 31, 2005, Superior Bank met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitations on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. Under the regulations, an application
to and prior approval of the OTS is required prior to any capital distribution
if the institution does not meet the criteria for "expedited treatment" of
applications under OTS regulations, the total capital distributions (including
the proposed capital distribution) for the calendar year exceed net income for
that year plus the amount of retained net income for the preceding two years,
the institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to a statute, regulation or agreement
with OTS. If an application is not required, the institution must still provide
prior notice to OTS of the capital distribution if, like Superior Bank, it is a
subsidiary of a holding company. In the event Superior Bank's capital fell below
its regulatory requirements or OTS notified it that it was in need of increased
supervision, Superior Bank's
8
ability to make capital distributions could be restricted. In addition, OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if OTS determines that such
distribution would constitute an unsafe or unsound practice.
Transactions with Related Parties. Superior Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including The Banc Corporation and its
non-savings institution subsidiaries) is limited by federal law. The aggregate
amount of covered transactions with any individual affiliate is limited to 10%
of the capital and surplus of the savings institution. The aggregate amount of
covered transactions with all affiliates is limited to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law. The purchase of low quality assets from affiliates is generally
prohibited. The transactions with affiliates must be on terms and under
circumstances that are at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies, and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits loans by The Banc
Corporation and Superior Bank to their executive officers and directors.
However, that act contains a specific exception for loans by financial
institutions, such as Superior Bank, to its executive officers and directors in
compliance with federal banking laws. Under such laws, Superior Bank's authority
to extend credit to executive officers, directors and 10% shareholders
("insiders"), as well as entities such persons control, is limited. The law
limits both the individual and aggregate amount of loans Superior Bank may make
to insiders based, in part, on Superior Bank's capital position and requires
certain board approval procedures to be followed. Such loans are required to be
made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
These guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If OTS determines that a savings
institution fails to meet any standard prescribed by the guidelines, OTS may
require the institution to submit an acceptable plan to achieve compliance with
the standard.
Enforcement. OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil money
penalties cover a wide range of violations and can amount to $5,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances. Federal law also established criminal penalties for certain
violations.
Federal Home Loan Bank System. Superior Bank is a member of the Federal
Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank System provides a central credit facility primarily
for member institutions. Superior Bank, as a member of the Federal Home Loan
Bank System, is required to acquire and hold shares of capital stock in the
applicable FHLB (Atlanta) in an amount at least equal to 1.0% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the applicable FHLB, whichever is greater. Superior Bank was in compliance
with this requirement at December 31, 2005, with an investment in FHLB stock of
$11 million.
9
Federal Reserve System. The Federal Reserve Board regulations require
savings institutions to maintain non-interest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). The
regulations generally provide that reserves be maintained against aggregate
transaction accounts as follows: a 3% reserve ratio is assessed on net
transaction accounts up to and including $48.3 million; a 10% reserve ratio is
applied above $48.3 million. The first $7.8 million of otherwise reservable
balances (subject to adjustments by the Federal Reserve Board) are exempted from
the reserve requirements. These amounts are adjusted annually. Superior Bank
complies with the foregoing requirements.
Community Reinvestment Act. Superior Bank is subject to the CRA. The CRA
and the regulations issued thereunder are intended to encourage financial
institutions to help meet the credit needs of their service area, including low
and moderate income neighborhoods, consistent with the safe and sound operations
of the financial institutions. These regulations also provide for regulatory
assessment of an institution's record in meeting the needs of its service area
when considering applications to establish branches, merger applications,
applications to engage in new activities and applications to acquire the assets
and assume the liabilities of another institution. The Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA") requires federal banking
agencies to make public a rating of an institution's performance under the CRA.
In the case of a holding company involved in a proposed transaction, the CRA
performance records of the banks involved are reviewed by federal banking
agencies in connection with the filing of an application to acquire ownership or
control of shares or assets of a bank or thrift or to merge with any other bank
holding company. An unsatisfactory record can substantially delay or block the
transaction. Superior Bank has a satisfactory CRA rating from federal banking
agencies.
Confidentiality of Customer Information. Federal laws and regulations,
including the Gramm-Leach-Bliley Act, require that financial institutions take
certain steps to protect the security and confidentiality of customers'
non-public personal information. Among other things, these regulations restrict
the ability of financial institutions to share non-public customer information
with non-affiliated third parties and require financial institutions to provide
customers with information about their privacy policies. Superior Bank has
procedures in place intended to comply with these requirements.
Bank Secrecy Act. The Banc Corporation and Superior Bank are subject to
the federal Bank Secrecy Act of 1970, as amended, which establishes requirements
for recordkeeping and reporting by banks and other financial institutions
designed to help identify the source, volume and movement of currency and
monetary instruments into and out of the United States in order to help detect
and prevent money laundering and other illegal activities. The Bank Secrecy Act
requires financial institutions to develop and maintain a program reasonably
designed to ensure and monitor compliance with its requirements, to train
employees in such program, and to test the effectiveness of such program. Any
failure to meet the requirements of the Bank Secrecy Act can involve substantial
penalties and adverse regulatory action. We have adopted policies and procedures
intended to comply with the requirements of the Bank Secrecy Act.
USA Patriot Act. On October 26, 2001, President Bush signed into law the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"), which,
among other things, amends the Bank Secrecy Act. The USA Patriot Act
strengthened the ability of the U.S. government to detect and prosecute
international money laundering and the financing of terrorism. Among its
provisions, the USA Patriot Act requires that regulated financial institutions:
(i) establish an anti-money laundering program that includes training and audit
components; (ii) comply with regulations regarding the verification of the
identity of any person seeking to open an account; (iii) take additional
required precautions with non-U.S. owned accounts; and (iv) perform certain
verification and certification of money laundering risk for any foreign
correspondent banking relationships. We have adopted policies, procedures and
controls to address compliance with the requirements of the USA Patriot Act
under the existing regulations and will continue to revise and update our
policies, procedures and controls to reflect changes required by the USA Patriot
Act and implementing regulations.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, Superior Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the
10
Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer
Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the
Fair Housing Act, the Fair Credit Reporting Act and the Real Estate Settlement
Procedures Act, among others. These laws and regulations mandate certain
disclosure requirements and regulate the manner in which financial institutions
must deal with customers when taking deposits from, making loans to, or engaging
in other types of transactions with, such customers.
INSTABILITY OF REGULATORY STRUCTURE
Various bills are routinely introduced in the United States Congress and
state legislatures with respect to the regulation of financial institutions.
Some of these proposals, if adopted, could significantly change the regulation
of banks and the financial services industry. We cannot predict whether any of
these proposals will be adopted or, if adopted, how these proposals would affect
us.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, especially the monetary policy of
the Federal Reserve Board, have a significant effect on the operating results of
savings and loan holding companies and their subsidiaries. Among the means
available to the Federal Reserve Board to affect the money supply are open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings and changes in reserve requirements against member bank
deposits. These means are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
may affect interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the
operating results of commercial banks in the past and are expected to continue
to do so in the future. The nature of future monetary policies and the effect of
such policies on our business and earnings cannot be predicted.
AVAILABLE INFORMATION
We maintain an Internet website at www.superiorbank.com. We make available
free of charge through our website various reports that we file with the
Securities and Exchange Commission, including our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
these reports. These reports are made available as soon as reasonably
practicable after these reports are filed with, or furnished to, the Securities
and Exchange Commission. From our home page at www.superiorbank.com, go to and
click on "Investor Relations" and click on "SEC Filings" to access these
reports.
CODE OF ETHICS
We have adopted a code of ethics that applies to all of our employees,
including our principal executive, financial and accounting officers. A copy of
our code of ethics is available on our website. We intend to disclose
information about any amendments to, or waivers from, our code of ethics that
are required to be disclosed under applicable Securities and Exchange Commission
regulations by providing appropriate information on our website. If at any time
our code of ethics is not available on our website, we will provide a copy of it
free of charge upon written request.
ITEM 1A. RISK FACTORS.
Our business, and an investment in our securities, involves risks. The
following summary describes factors we believe are material risks relating to
our business and to the ownership of our securities. Our discussion of these
risks contains forward-looking statements, and our actual results may differ
materially from those anticipated by such forward-looking statements. In
addition, or financial condition and results of operations, and the market price
of our common stock, may be substantially affected by other risks, including
risks we have not identified or that we may believe are immaterial or unlikely.
This summary does not purport to describe all risks that might possibly affect
our business, financial condition or results of operations or the market price
of our common stock.
11
RISKS RELATING TO OUR BUSINESS
If the interest payments we make on our deposits increase relative to our
interest income, we may be less profitable. Our profitability depends to a
large extent on Superior Bank's net interest income, which is the difference
between income from interest-earning assets, such as loans we make and
investment securities we hold, and interest we pay on deposits and our own
borrowings. Our net interest income is affected not only by actions we take, but
by changes in general interest rate levels and by other economic factors beyond
our control. Our net interest income may be reduced if (i) more interest-earning
assets than interest-bearing liabilities reprice or mature at a time when
interest rates are declining, or (ii) more interest-bearing liabilities than
interest-earning assets reprice or mature at a time when interest rates are
rising.
In addition, we may be affected by changes in the difference between short-
and long-term interest rates. For example, short-term deposits may be used to
support longer-term loans. If the difference between short-and long-term
interest rates becomes smaller, the spread between the rates we pay on deposits
and borrowings and the rates we receive on loans we make could narrow
significantly, decreasing our net interest income.
Further, if market interest rates rise rapidly, interest rate adjustment
caps may limit our ability to increase interest rates on adjustable-rate
mortgage loans, but we may have to pay higher interest rates on deposits and
borrowings. This could cause our net interest income to decrease.
An increase in loan prepayments may adversely affect our
profitability. The rate at which borrowers prepay loans is dependent on a
number of factors outside our control, including changes in market interest
rates, conditions in the housing and financial markets and general economic
conditions. We cannot always accurately predict prepayment rates. If the
prepayment rates with respect to our loans are greater than we anticipate, there
may be a negative impact on our profitability because we may not be able to
reinvest prepayment proceeds at rates comparable to those we received on the
prepaid loans, particularly in a time of falling interest rates.
If our allowance for loan losses is inadequate, our profitability will be
reduced. We are exposed to the risk that our customers will be unable to repay
their loans in accordance with their terms and that any collateral securing such
loans will be insufficient to ensure full repayment. Such credit risk is
inherent in the lending business, and our failure to adequately assess such
credit risk could have material adverse effect on our financial condition and
results of operations. We evaluate the collectibility of our loan portfolio and
review our evaluation on a regular basis, and we provide an allowance for loan
losses that we believe is adequate based on various factors that we believe may
affect the credit quality of our loans. However, there can be no assurance that
actual loan losses will not exceed the allowance that we have established, as
such allowance is adjusted from time to time.
If our allowance for loan losses is inadequate for the actual losses we
experience, there could be a material adverse effect on our results of
operations. In addition, if as a result of our perception of adverse trends, we
materially increase or allowance for loan losses in the future, such increase
would also reduce our earnings.
Events in our geographic markets could adversely affect us. Our business
is concentrated in a limited number of markets in Alabama and Florida. Changes
in general economic conditions and in the values of real estate in such
geographic markets could have an adverse impact on our ability to achieve our
loan and deposit growth targets and on our customers' ability to repay existing
loans. In addition, natural disasters, such as hurricanes and tornadoes, in our
geographic markets could adversely affect our business.
We face substantial competition. There are numerous competitors in our
geographic markets, including national, regional and local banks and thrifts and
other financial services businesses, some of which have substantially greater
resources, higher brand visibility and a wider geographic presence than we have.
Some of these competitors may offer a greater range of services, more favorable
pricing and greater customer convenience than we are able to. In addition, in
some of our markets, there are a significant number of new banks and other
financial institutions that have opened in the recent past or are expected to
open in the near future, and such new competitors may also seek to exploit our
markets and customer base. If we are unable to maintain and grow our market
share in the face of such competition, our results of operations will be
adversely affected.
12
We are subject to extensive regulation. Our operations are subject to
regulation by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. We are also subject to applicable regulations of the Federal Home
Loan Bank. Regulation by these entities is intended primarily for the protection
of our depositors and the deposit insurance fund and not for the benefit of our
stockholders. We may incur substantial costs in complying with such regulations,
and our failure to comply with them may expose us to substantial penalties.
In addition, we are subject to numerous consumer protection laws and other
laws relating to the operation of financial institutions. Our failure to comply
with such laws could expose us to liability, which could have a material adverse
effect on our results of operations.
We may require additional capital to fund our growth plans. Our business
strategy includes the expansion of our business through the development of new
locations and through the acquisition of other financial institutions and, to
the extent permitted by applicable law, complementary businesses as appropriate
opportunities arise. In order to finance such growth and to maintain required
regulatory capital levels, we may require additional capital in the future.
There can be no assurance that such capital will be available upon favorable
terms, or at all.
We are dependent upon the services of our management team. Our operations
and strategy are directed by our senior management team, most of whom have
joined The Banc Corporation since January 2005. Any loss of the services of
members of our management team could have a material adverse effect on our
results of operations and our ability to implement our business strategy.
RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
Our stock price may be volatile due to limited trading volume. Our common
stock is traded on the NASDAQ National Market System. However, the average daily
trading volume in our common stock is relatively small, typically under 50,000
shares per day and sometimes significantly less than that. As a result, trades
involving a relatively small number of shares may have a significant effect on
the market price of our common stock, and it may be difficult for investors to
acquire or dispose of large blocks of stock without significantly affecting the
market price.
Our ability to pay dividends is limited. Our ability to pay dividends is
limited by regulatory requirements and the need to maintain sufficient
consolidated capital to meet the capital needs of our business, including
capital needs related to future growth. Our primary source of income is the
payment of dividends from Superior Bank to us. Superior Bank, in turn, is
likewise subject to regulatory requirements potentially limiting its ability to
pay such dividends to us and by the need to maintain sufficient capital for its
operations and obligations. Further, we are obligated, subject to regulatory
limitations, to make periodic distributions on our trust preferred securities,
which reduces the income that might otherwise be available to pay dividends on
our common stock. Thus, there can be no assurance that we will pay dividends to
our common stockholders, no assurance as to the amount or timing of any such
dividends, and no assurance that such dividends, if and when paid, will be
maintained, at the same level or at all, in future periods.
The market price of our common stock has risen significantly in a
relatively short period of time. The market price of our common stock, as
reported on the NASDAQ National Market System, increased by approximately 32%
between December 31, 2004 and December 31, 2005. We believe that this increase
resulted in part from investors' perception as to the ability of our new senior
management team to execute our business strategy and enhance stockholder value.
There can be no assurance that the market price of our common stock will remain
at or near its current level, which is substantially above historic trading
prices prior to 2005.
Use of our common stock for future acquisitions or to raise capital may be
dilutive to existing stockholders. When we determine that appropriate strategic
opportunities exist, we may acquire other financial institutions and related
businesses, subject to applicable regulatory requirements. We may use our common
stock for such acquisitions. From time to time, we may also seek to raise
capital through selling additional common stock. It is possible that the
issuance of additional common stock in such acquisition or
13
capital transactions may be dilutive to the interests of our existing
stockholders (see "Recently Announced Merger Agreement" above).
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
Our headquarters are located at 17 North 20th Street, Birmingham, Alabama.
As of December 21, 1999, The Banc Corporation and Superior Bank, who jointly
owned the building, converted the building into condominiums known as The Bank
Condominiums. The Banc Corporation and Superior Bank collectively own 15
condominium Units. This space includes a branch of Superior Bank, various
administrative offices, operations facilities and our headquarters. Four Units
are owned by third parties. We have leased or are pursuing the lease of certain
Units (or parts thereof) not currently needed for our operations.
We operate through facilities at 29 locations. We own 23 of these
facilities and lease 6 of these facilities.. Rental expense on the leased
properties totaled approximately $290,000 in 2005.
ITEM 3. LEGAL PROCEEDINGS.
While we are a party to various legal proceedings arising in the ordinary
course of our business, we believe that there are no proceedings threatened or
pending against us at this time that will individually, or in the aggregate,
materially and 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 the pending, or any future,
litigation, either individually or in the aggregate, will not have a material
adverse effect on our business, our financial condition or our results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASE OF EQUITY SECURITIES.
MARKET FOR COMMON STOCK
Our common stock trades on NASDAQ National Market System under the ticker
symbol "TBNC". As of March 8, 2006, there were approximately 849 record holders
of our common stock. The following table sets forth, for the calendar periods
indicated, the range of high and low reported sales prices:
HIGH LOW
------ ------
2004
First Quarter............................................... $ 8.77 $ 7.14
Second Quarter.............................................. 7.56 6.25
Third Quarter............................................... 7.04 6.13
Fourth Quarter.............................................. 8.74 6.93
2005
First Quarter............................................... $11.25 $ 8.00
Second Quarter.............................................. 10.85 9.25
Third Quarter............................................... 10.91 10.34
Fourth Quarter.............................................. 12.00 10.49
2006
First Quarter (through March 13, 2006)...................... $11.85 $10.70
On March 13, 2006, the last reported sale price for the common stock was
$11.62 per share.
DIVIDENDS
Holders of our common stock are entitled to receive dividends when, as and
if declared by our board of directors. We derive cash available to pay dividends
primarily, if not entirely, from dividends paid to us by our subsidiaries. There
are certain restrictions that limit Superior Bank's ability to pay dividends to
us and, in turn, our ability to pay dividends. Our ability to pay dividends to
our stockholders will depend on our earnings and financial condition, liquidity
and capital requirements, the general economic and regulatory climate, our
ability to service any equity or debt obligations senior to our common stock and
other factors deemed relevant by our board of directors.
We paid dividends on our preferred stock aggregating $4.92 per preferred
share in 2005. All of our preferred stock was converted into common stock
effective June 30, 2005. We do not currently pay dividends on our common stock,
but expect to evaluate our common stock dividend policy from time to time as
circumstances indicate, subject to applicable regulatory restrictions. The
restrictions that may limit our ability to pay dividends are discussed in this
Report in Item 1 under the heading "Supervision and Regulation -- Limitations on
Capital Distributions."
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data from our
consolidated financial statements and should be read in conjunction with our
consolidated financial statements including the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected historical financial data as of December 31, 2005 and 2004 and for each
of the three years in the period ended December 31, 2005 is derived from our
audited consolidated financial statements and related notes included in this
Form 10-K. See "Item 8. The Banc Corporation and Subsidiaries Consolidated
Financial Statements."
15
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF FINANCIAL CONDITION DATA:
Total assets............................................. $1,415,469 $1,423,128 $1,171,626 $1,406,800 $1,207,397
Loans, net of unearned income............................ 963,253 934,868 856,941 1,138,537 999,156
Allowance for loan losses................................ 12,011 12,543 25,174 27,766 12,546
Investment securities.................................... 242,595 288,308 141,601 73,125 68,847
Deposits................................................. 1,043,695 1,067,206 889,935 1,107,798 952,235
Advances from FHLB and other borrowings.................. 214,496 205,546 131,919 174,922 135,900
Notes payable............................................ 3,755 3,965 1,925 -- --
Junior subordinated debentures owed to unconsolidated
trusts.................................................. 31,959 31,959 31,959 31,959 31,959
Stockholders' Equity..................................... 105,065 100,539 100,122 76,541 76,853
SELECTED STATEMENT OF INCOME DATA:
Interest income.......................................... $ 77,280 $ 66,160 $ 76,213 $ 88,548 $ 90,418
Interest expense......................................... 38,255 28,123 33,487 40,510 50,585
---------- ---------- ---------- ---------- ----------
Net interest income..................................... 39,025 38,037 42,726 48,038 39,833
Provision for loan losses................................ 3,500 975 20,975 51,852 7,454
Noninterest income....................................... 9,583 10,527 14,592 15,123 9,773
Gain on sale of branches................................. -- 739 48,264 -- --
Insurance Proceeds....................................... 5,114 -- -- -- --
Prepayment penalty -- FHLB advances...................... -- -- 2,532 -- --
Loss on sale of loans.................................... -- 2,293 -- -- --
Management separation costs.............................. 15,467 -- -- -- --
Noninterest expense...................................... 45,153 45,644 55,398 42,669 38,497
---------- ---------- ---------- ---------- ----------
(Loss) income before income taxes(benefit).............. (10,398) 391 26,677 (31,360) 3,655
Income tax (benefit) expense............................. (4,612) (796) 9,178 (12,959) 966
---------- ---------- ---------- ---------- ----------
Net (loss) income....................................... (5,786) 1,187 17,499 (18,401) 2,689
Preferred stock dividends................................ 305 446 219 -- --
Effect of early conversion of preferred stock............ 2,006 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net (loss)income applicable to common stockholders...... $ (8,097) $ 741 $ 17,280 $ (18,401) $ 2,689
========== ========== ========== ========== ==========
PER SHARE DATA:
Net (loss) income -- basic............................... $ (0.42) $ 0.04 $ 0.99 $ (1.09) $ 0.19
-- diluted(1)............................ $ (0.42) $ 0.04 $ 0.95 $ (1.09) $ 0.19
Weighted average shares outstanding -- basic............. 19,154 17,583 17,492 16,829 14,272
Weighted average shares outstanding -- diluted(1)........ 19,154 17,815 18,137 16,829 14,302
Book value at period end................................. $ 5.26 $ 5.31 $ 5.31 $ 4.35 $ 5.41
Tangible book value per share............................ $ 4.65 $ 4.62 $ 4.59 $ 3.59 $ 4.98
Preferred shares outstanding at period end............... -- 62 62 -- --
Common shares outstanding at period end.................. 19,980 17,750 17,695 17,605 14,217
PERFORMANCE RATIOS AND OTHER DATA:
Return on average assets................................. (0.41)% 0.09% 1.29% (1.36)% 0.23%
Return on average stockholders' equity................... (5.68) 1.18 19.08 (19.89) 3.53
Net interest margin(2)(3)................................ 3.14 3.31 3.50 3.93 3.83
Net interest spread(3)(4)................................ 3.00 3.20 3.35 3.70 3.43
Noninterest income to average assets(5).................. 0.77 0.82 1.03 .99 0.73
Noninterest expense to average assets(6)................. 3.19 3.52 4.07 3.15 3.34
Efficiency ratio(7)...................................... 87.99 91.72 100.09 67.85 80.56
Average loan to average deposit ratio.................... 88.82 92.16 100.69 105.35 100.40
Average interest-earning assets to average interest
bearing liabilities..................................... 104.58 104.88 105.82 107.04 108.26
ASSETS QUALITY RATIOS:
Allowance for loan losses to nonperforming loans......... 252.76% 169.36% 78.59% 105.00% 100.99%
Allowance for loan losses to loans, net of unearned
income.................................................. 1.25 1.34 2.94 2.44 1.26
Nonperforming assets("NPA") to loans plus NPA's, net of
unearned income......................................... 0.68 1.32 4.41 2.53 1.70
Nonaccrual loans to loans, net of unearned income........ 0.47 0.68 3.46 2.17 0.79
Net loan charge-offs to average loans.................... 0.43 1.52 2.21 3.35 0.42
Net loan charge-offs as a percentage of:
Provision for loan losses............................... 115.20 1,395.49 111.87 72.69 51.88
Allowance for loan losses............................... 33.57 108.47 93.21 135.74 30.82
CAPITAL RATIOS:
Tier 1 risk-based capital ratio.......................... 10.15% 10.05% 12.60% 6.51% 9.44%
Total risk-based capital ratio........................... 11.08 11.51 14.07 8.83 11.41
Leverage ratio........................................... 8.30 7.98 9.72 3.70 7.92
---------------
(1)- Common stock equivalents of 287,000, 775,000, and 1,002,000 shares were not
included in computing diluted earnings per share for the years ended
December 31, 2002, 2004 and 2005, respectively, because their effects were
antidilutive.
(2)- Net interest income divided by average earning assets.
(3)- Calculated on a taxable equivalent basis.
(4)- Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(5)- Noninterest income has been adjusted for certain nonrecurring items such as
gain on sale of branches, insurance proceeds, change in fair value of
derivatives and investment security gains (losses).
(6)- Noninterest expense has been adjusted for certain nonrecurring items such
as loss on sale of assets and management separation costs.
(7)- Efficiency ratio is calculated by dividing noninterest expense, adjusted
for management separation costs, losses on other real estate and the loss on
sale of assets, by noninterest income, adjusted for gain on sale of
branches, insurance proceeds, changes in fair values of derivatives and
investment security gains (losses), plus net interest income on a fully
taxable equivalent basis.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
GENERAL
The following is a narrative discussion and analysis of significant changes
in our results of operations and financial condition. This discussion should be
read in conjunction with the consolidated financial statements and selected
financial data included elsewhere in this document.
OVERVIEW
Our principal subsidiary is Superior Bank (the "Bank"), which has since
November 1, 2005 been chartered as a federal savings bank. Prior to that date,
the Bank operated as "The Bank" under an Alabama state banking charter. The Bank
is headquartered in Birmingham, Alabama and operates 26 banking offices and
three loan production offices in Alabama and the 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 historical results reflect the effects of a number of acquisitions and
divestitures, which affect the comparability of our results from period to
period. During 1998 and 1999, we acquired several banking organizations, which
contributed significantly to our early development. During the fourth quarter of
1998, Commerce Bank of Alabama, Inc. and the banking subsidiaries of Commercial
Bancshares of Roanoke, Inc., City National Corporation and First Citizens
Bancorp, Inc. were merged with and into the Bank. Emerald Coast Bank became our
subsidiary in February 1999, as a result of our merger with Emerald Coast
Bancshares, Inc. C&L Bank became our subsidiary in June 1999 as a result of our
acquisitions of C&L Bank of Blountstown and C&L Banking Corporation and its bank
subsidiary, C&L Bank of Bristol. The banking subsidiary of BankersTrust of
Alabama, Inc., was merged into the Bank in July 1999. The Bank also acquired
three new branches in Southeast Alabama in November of 1999. In June 2000,
Emerald Coast Bank and C&L Bank merged into the Bank. During March 2002,
Citizens Federal Savings Bank of Port St. Joe, the banking subsidiary of CF
Bancshares, Inc., was merged into the Bank in connection with our acquisition of
CF Bancshares, Inc.
In March 2003, we sold our branch in Roanoke, Alabama, which had assets of
approximately $9.8 million and liabilities of $44.7 million. We realized a $2.3
million pre-tax gain on the sale. In August 2003, we sold seven branches of the
Bank, serving the markets from Destin to Panama City, Florida for a $46.8
million deposit premium. These branches had assets of approximately $234.0
million and liabilities of $209.0 million. We realized a $46.0 million pre-tax
gain on the sale. On February 6, 2004, we sold our Morris, Alabama branch, which
had assets of approximately $1.0 million and liabilities of $8.2 million, for a
$739,000 pre-tax gain. Because of the impact of these sales on our
interest-bearing deposits and our loan portfolio, as well as the impact of the
gains on sale on our net income, there are variations in the comparability
between 2004 and 2003 of our financial position and results of operations. Where
appropriate, we have tried to quantify these effects in the discussion that
follows.
In January 2004, we transferred the majority of our nonperforming loans and
approximately $7.0 million of other problem loans to our special assets
department. Approximately $41.0 million in loans were transferred along with the
related allowance for loan loss of $9.8 million. As of December 31, 2005, the
balance of these loans totaled only $2.3 million. In September 2004 the Bank
sold approximately $32.0 million, before allowance for loan losses, of certain
nonperforming loans and other classified performing loans resulting in a pre-tax
loss of $2.3 million. Prior to the sale, approximately $6.9 million related to
these loans was recognized as a charge-off in September 2004 against the
allowance for loan losses. The $6.9 million in allowance for loan losses
associated with these loans had been provided in previous periods. Management is
pursuing appropriate collection efforts on the remaining loans.
17
The primary source of our revenue is net interest income, which is the
difference between income earned on interest-earning assets, such as loans and
investments, and interest paid on interest-bearing liabilities, such as deposits
and borrowings. Our results of operations are also affected by the provision for
loan losses and other noninterest expenses such as salaries and benefits,
occupancy expenses and provision for income taxes. The effects of these
noninterest expenses are partially offset by noninterest sources of revenue such
as service charges and fees on deposit accounts and mortgage banking income. Our
volume of business is influenced by competition in our markets and overall
economic conditions including such factors as market interest rates, business
spending and consumer confidence.
During 2005, our net interest income increased by 2.6% primarily due to an
increase in average interest-earning assets. The increase in our
interest-earning assets resulted primarily from an overall increase in the
average volume of our loan and securities portfolios. During 2005 we also began
a strategy of realigning our loan and deposit mix and deleveraging our balance
sheet by reducing brokered certificates of deposits and repurchase agreements.
Service charges and fees were down 9.9% in 2005 from 2004 due to a decline
in deposit accounts. This trend began to reverse during the third quarter of
2005 as we increased the number of customer accounts. Mortgage banking income
increased 53.7% in 2005 due to an increase in the volume of mortgage loan
originations throughout the year.
In the second quarter of 2005, we received $5.0 million (approximately $3.2
million after-tax, or $.17 per common share) to resolve our insurance claims
relating to fraud losses which occurred in previous periods.
In the first and second quarters of 2005, we entered into a series of
agreements with certain members of executive management to cease their
employment (see Note 26 to the Consolidated Financial Statements and "Recent
Developments," below). In connection with these transactions, we recognized
pre-tax expenses of $15.5 million for the year ended December 31, 2005. At
December 31, 2005, we had $1.2 million of accrued liabilities related to these
agreements.
All other noninterest expenses including salaries and benefits and
occupancy expenses remained relatively flat in 2005 compared to 2004. Several
initiatives were implemented to control costs in 2005, such as a reduction in
force, the termination or buyout of various deferred compensation agreements and
tighter spending controls.
Management reviews the adequacy of the allowance for loan losses on a
quarterly basis. The provision for loan losses represents the amount determined
by management necessary to maintain the allowance for loan losses at a level
capable of absorbing inherent losses in the loan portfolio. (See "Critical
Accounting Estimates" below) For 2005 our provision for loan losses totaled $3.5
million and our net charge-offs totaled $4.0 million. As of December 31, 2005
our allowance for loan losses was $12.0 million, or 1.25% of loans, net of
unearned income.
In the first quarter of 2005, we announced that we had entered into a
series of executive management change agreements (see Note 26 to the
Consolidated Financial Statements and "Recent Developments," below). These
agreements set forth the employment of C. Stanley Bailey as our Chief Executive
Officer and a director and chairman of the Bank, C. Marvin Scott as our
President and President of the Bank, and Rick D. Gardner as our Chief Operating
Officer and Chief Operating Officer of the Bank. 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 or $7.3 million, net of issuance costs.
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.
18
CRITICAL ACCOUNTING ESTIMATES
In preparing financial information, management is required to make
significant estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses for the periods shown. The accounting
principles we follow and the methods of applying these principles conform to
accounting principles generally accepted in the United States and to general
banking practices. Estimates and assumptions most significant to us are related
primarily to our allowance for loan losses, income taxes and goodwill impairment
are summarized in the following discussion and in the notes to the consolidated
financial statements.
Allowance for Loan Losses
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, our regulators, 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.
Income Taxes
Deferred tax assets and liabilities are determined based on temporary
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to reverse. These
calculations are based on many complex factors, including estimates of the
timing of reversals of temporary differences, the interpretation of federal and
state income tax laws, and a determination of the differences between the tax
and the financial reporting basis of assets and liabilities. Actual results
could differ significantly from the estimates and interpretations used in
determining the current and deferred income tax assets and liabilities.
Goodwill Impairment
Goodwill represents the excess of the cost of an acquisition over the fair
value of the net assets acquired. We test goodwill on an annual basis, or more
frequently if events or circumstances indicate that there may have been
impairment. The goodwill impairment test estimates the fair value of each
reporting unit, through discounted cash flow methodology, to determine the fair
value of our reporting units, which is then compared to the carrying amount. The
goodwill impairment test requires management to make judgments in determining
the assumptions used in the fair value calculations. Management believes
goodwill is not impaired and is properly recorded in the financial statements;
however future events could cause management to adjust its assumptions regarding
a particular reporting unit.
RECENT DEVELOPMENTS
On March 6, 2006 we announced that we had signed a merger agreement with
Kensington Bankshares, Inc. (see "Recently Announced Merger Agreement" under
Item 1 above).
On June 17, 2005, the Bank 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 Bank 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
agreements setting forth
- The employment of C. Stanley Bailey as Chief Executive Officer and a
director of The Banc Corporation and chairman of the Bank, C. Marvin
Scott as President of The Banc Corporation and the Bank, and Rick D.
Gardner as Chief Operating Officer of The Banc Corporation and the Bank;
19
- The purchase by Mr. Bailey, Mr. Scott and Mr. Gardner, along with other
investors, of 925,636 shares of our common stock at $8.17 per share in a
private placement consummated simultaneously with the employment of Mr.
Bailey, Mr. Scott and Mr. Gardner; and
- Arrangements under which James A. Taylor would continue to serve as
Chairman of the Board of The Banc Corporation and James A. Taylor, Jr.
would continue to serve as a director of The Banc Corporation, but would
cease to serve as Chief Executive Officer and President, respectively, of
The Banc Corporation and as officers and directors of the Bank.
Our employment agreement with Mr. Taylor entitled him to certain payments
based on his then current compensation upon the occurrence of specified
circumstances, and gave him the option to demand the discounted present value of
such payments in a lump sum. The transactions described above would have
triggered our obligations to make such payments to Mr. Taylor. On January 24,
2005, we entered into an agreement with Mr. Taylor pursuant to which, in lieu of
the payments to which he would have been entitled under his employment
agreement, we paid to Mr. Taylor $3,940,155 on January 24, 2005 and $3,152,124
in December 2005, and will pay $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. Our obligation to provide such payments and benefits to
Mr. Taylor is absolute and will survive the death or disability of Mr. Taylor.
Our employment agreement with Mr. Taylor, Jr. entitled him to certain
payments based on his then current compensation upon the occurrence of specified
circumstances, and gave him the option to demand the discounted present value of
such payments in a lump sum. The transactions described above would have
triggered our obligations to make such payments to Mr. Taylor, Jr.. On January
24, 2005, we entered into an agreement with Mr. Taylor, Jr. pursuant to which,
in lieu of the payments to which he would have been entitled under his
employment agreement, we paid to 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. Our obligation to provide such payments
and benefits to Mr. Taylor, Jr. is absolute and will survive the death or
disability of Mr. Taylor, Jr. Mr. Taylor, Jr. resigned all positions with the
Corporation in September 2005.
Under Mr. Bailey's, Mr. Scott's and Mr. Gardner's respective employment
agreements, we are obligated to grant, and have granted as of January 24, 2005,
options to acquire 711,970 shares of common stock to Mr. Bailey, 355,985 shares
to Mr. Scott, and 355,985 shares to Mr. Gardner, for a total of 1,423,940 each
at an exercise price of $8.17 per share. Such options have a ten-year term and
are fully vested as of December 31, 2005 (see Note 11 to the Consolidated
Financial Statements).
On July 21, 2005, we announced that we 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, we 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.
We have recently amended our Form 10-Qs for the first, second and third
quarters of 2005 due to inaccuracies in the Initial Form 10-Qs related to our
accounting for certain derivative financial instruments under Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). In 2005 and prior years, we entered into
interest rate swap agreements (CD swaps) to hedge the interest rate risk
inherent in certain of our brokered certificates of deposit. From the inception
of the hedging program, we applied a method of fair value hedge accounting under
SFAS 133 to account for the CD swaps which allowed us to assume no
ineffectiveness in these transactions (the so-called "short-cut" method). We
have recently concluded that the CD swaps did not qualify for this method in
prior periods because the related CD broker placement fee was determined, in
retrospect, to have caused the swap not to have a fair value of zero at
inception (which is required under SFAS 133 to qualify for the short-cut
20
method). Therefore any gains and losses attributable to the change in fair value
are recognized in earnings during the period of change in fair value. Our
determination that such swaps did not qualify for hedge accounting under SFAS
133 did not have a material effect on our reported results of operations for the
year ending December 31, 2004 or for prior periods, and thus we have not
restated or amended such previously reported results for periods ending on or
prior to December 31, 2004.
RESULTS OF OPERATIONS
Year Ended December 31, 2005, Compared with Year Ended December 31, 2004
Our net loss for the year ended December 31, 2005 was $5.8 million,
compared to net income of $1.2 million for the year ended December 31, 2004. Net
loss available to common stockholders was $8.1 million for the year ended
December 31, 2005, compared to net income of $741,000 for the year ended
December 31, 2004. Our basic and diluted net (loss) income per common share was
$(.42) for the year ended December 31 2005, compared to $.04 per common share
for the year ended December 31, 2004. Our return on average assets was (.41)% in
2005, compared to .09% in 2004. Our return on average stockholders' equity was
(5.68)% in 2005, compared to 1.18% in 2004. Our book value per common share at
December 31, 2005 and 2004 was $5.26 and $5.31, respectively, and our tangible
book value per common share at December 31, 2005 increased to $4.65 at December
31, 2005 from $4.62 as of December 31, 2004. Average equity to average assets
decreased to 7.26% in 2005 from 7.78% in 2004.
The decrease in earnings for the year ended December 31, 2005 compared to
the year ended December 31, 2004 was primarily the result of an increase in the
provision for loan losses, as more fully discussed below, and the management
separation costs described under "Recent Developments" above.
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 increased $1.0 million, or 2.6%, to
$39.0 million for the year ended December 31, 2005 from $38.0 million for the
year ended December 31, 2004. This was due to an increase in interest income of
$11.1 million, or 16.8%, offset by a increase in total interest expense of $10.1
million, or 36.0%. This increase in total interest income was attributable to a
$7.7 million, or 13.7%, increase in interest income on loans as a result of a
$52.8 million increase in average loans, and a $2.8 million, or 31.7%, increase
in interest income on investment securities as a result of a $54.7 million
increase in average investment securities for the year.
The increases in interest income were offset by a $8.7 million, or 45.5%,
increase in interest expense on deposits and a $1.4 million, or 15.7%, increase
in interest expense on other borrowings. While average interest-bearing deposits
increased $91.1 million, or 10.3%, and average other borrowings increased $4.2
million, or 2.0%, the increase in interest expense is primarily attributable to
a 65-basis point increase in the average interest rates paid on interest-bearing
liabilities. The average rate paid on interest-bearing liabilities was 3.21% for
the year ended December 31, 2005, compared to 2.56% for the year ended December
31, 2004. This increase was due primarily to higher average rates paid on all
deposits.
Our net interest spread and net interest margin were 3.00% and 3.14%,
respectively, for the year ended December 31, 2005, compared to 3.20% and 3.31%,
respectively, for the year ended December 31, 2004.
Our average interest-earning assets for the year ended December 31, 2005
increased $96.5 million, or 8.4%, to $1.247 billion from $1.150 billion for the
year ended December 31, 2004. This increase in our average interest-earning
assets was due primarily to increased loan production and increased investment
securities. Average interest-bearing liabilities increased $95.3 million, or
8.7%, to $1.192 billion from $1.097 billion for the year ended December 31,
2004. The increase in average interest-bearing liabilities is primarily due to
an increase in interest-bearing demand accounts, which is part of our strategy
to improve our deposit mix. The ratio of our average interest-earning assets to
average interest-bearing liabilities was 104.6% and 104.9% for the years ended
December 31, 2005 and 2004, respectively. Our average interest-bearing assets
produced a taxable equivalent yield of 6.21% for the year ended December 31,
2005, compared to 5.76% for the year ended December 31, 2004. The 45-basis point
increase in the yield was offset by a 65-basis point increase in the average
rate paid on interest-bearing liabilities.
21
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 for loan losses on a quarterly basis. The
allowance for loan losses 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 loan officers 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 our internal loan review function and senior management.
Based on the assigned risk ratings, the criticized and classified loans in the
portfolio are segregated into the following regulatory classifications: Special
Mention, Substandard, Doubtful or Loss. Generally, regulatory reserve
percentages are applied to these categories to estimate the amount of loan loss
allowance, adjusted for previously mentioned risk factors. Impaired loans are
reviewed specifically and separately under Statement of Financial Accounting
Standards ("SFAS") Statement No. 114 to determine the appropriate reserve
allocation. Management compares the investment in an impaired loan with the
present value of expected future cash flow 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 $3.5 million for the year ended December
31, 2005, an increase of $2.5 million in comparison to $975,000 in 2004. This
increase can be attributed primarily to the reassessment of collateral values on
certain nonperforming commercial credits and the settlement of a disputed
collateral lien. These items accounted for approximately $2.3 million of the
total increase in provision and represented 66.0% of the total net charge-off
activity for the year. It should be noted that the provision expense for 2004
was unusually low due to the sale of approximately $32.0 million in certain
classified loans and significant recoveries of charged-off loans of $3.7
million. Also, nonperforming loans decreased significantly, to .49% of loans at
December 31, 2005 from .79% at December 31, 2004. During 2005, we had net
charged-off loans totaling $4.0 million, compared to net charged-off loans of
$13.6 million for 2004. The ratio of net charged-off loans to average loans was
..43% for 2005 compared to 1.52% for 2004. The allowance for loan losses totaled
$12.0 million, or 1.25% of loans, net of unearned income, at December 31, 2005,
compared to $12.5 million, or 1.34% of loans, net of unearned income, at
December 31, 2004. See "Financial Condition -- Allowance for Loan Losses" for
additional discussion.
Noninterest income increased $3.4 million, or 30.5%, to $14.7 million in
2005 from $11.3 million in 2004. This increase is primarily due to insurance
proceeds of $5.1 million and was partially offset by $1.3 million in losses on
the sale of available-for-sale securities and changes in the fair values of
derivatives (see Note 1 to the Consolidated Financial Statements). 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.
Income from mortgage banking operations for the year ended December 31,
2005 increased $894,000, or 53.7%, to $2.6 million in 2005 from $1.7 million in
2004. This increase is due to increased origination activity during 2005. Income
from customer service charges and fees decreased $517,000, or 9.9%, to $4.7
million in 2005 from $5.2 million in 2004. 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 $131,000, or 5.75%, in the last six-month period of 2005 over the
first six-month period of 2005. Other noninterest
22
income was $3.6 million, a decrease of $122,000, or 3.3%, from $3.7 million in
2004. This decrease is primarily the result of a decline in the amount earned on
the cash surrender value of life insurance.
Noninterest expense increased $12.7 million, or 26.4%, to $60.6 million in
2005 from $47.9 million in 2004, primarily due to the management separation
costs of $15.5 million incurred in the first six months of 2005. Salaries and
employee benefits decreased $377,000, or 1.6%, to $23.1 million in 2005 compared
to $23.5 million in 2004. This decrease is primarily the result of a reduction
in force which occurred during the second and third quarters of 2005, partially
offset by the recruitment of several new revenue-producing bankers.
All other noninterest expenses remained flat, at $22.0 million in 2005
compared to $22.2 million in 2004, as the new executive management team
implemented certain cost control measures. See Note 19 to the Consolidated
Financial Statements for more detail on the components of our noninterest
expenses.
Our income tax benefit was $4.6 million in 2005, compared to $796,000 in
2004. The primary difference in the effective tax rate and the federal statutory
rate of 34% for 2005 is due to the effect of certain tax-exempt interest and the
increase in the cash surrender value of life insurance. (See Note 13 to the
Consolidated Financial Statements)
Our federal and state income tax returns for the years 2000 through 2004
are open for review and examination by governmental authorities. In the normal
course of these examinations, we are subject to challenges from governmental
authorities regarding amounts of taxes due. We have received notices of proposed
adjustments relating to state taxes due for the years 2002 and 2003, which
include proposed adjustments relating to income apportionment of one of the
Bank's subsidiaries. We believe adequate provision for income taxes has been
recorded for all years open for review and intend to vigorously contest the
proposed adjustments. To the extent that final resolution of the proposed
adjustments results in significantly different conclusions from our current
assessment of the proposed adjustments, our effective tax rate in any given
financial reporting period may be materially different from our current
effective tax rate.
Our determination of the realization of deferred tax assets is based upon
management's judgment of various future events and uncertainties, including
future reversals of existing taxable temporary differences, the timing and
amount of future income earned by our subsidiaries and the implementation of
various tax planning strategies to maximize realization of the deferred tax
assets. A portion of the amount of the deferred tax asset that can be realized
in any year is subject to certain statutory federal income tax limitations. We
believe that our subsidiaries will be able to generate sufficient operating
earnings to realize the deferred tax benefits. We evaluate quarterly the
realizability of the deferred tax assets and, if necessary, adjust any valuation
allowance accordingly.
Year Ended December 31, 2004, Compared with Year Ended December 31, 2003
Our net income for the year ended December 31, 2004 was $1.2 million,
compared to $17.5 million for the year ended December 31, 2003. Net income
available to common stockholders was $741,000 for the year ended December 31,
2004, compared to $17.3 million for the year ended December 31, 2003. Our basic
and diluted net income per common share was $.04 for the year ended December 31,
2004, compared to $.99 (basic) and $.95 (diluted) per common share for the year
ended December 31, 2003. Our return on average assets was .09% in 2004, compared
to 1.29% in 2003. Our return on average stockholders' equity was 1.18% in 2004,
compared to 19.08% in 2003. Our book value per common share at December 31, 2004
and 2003 was $5.31 and our tangible book value per common share at December 31,
2004 increased to $4.62 from $4.59 as of December 31, 2003. Average equity to
average assets increased to 7.78% in 2004 from 6.74% in 2003.
The decrease in net income for the year ended December 31, 2004 compared to
the year ended December 31, 2003 is the result of a decline in our net interest
margin and other noninterest income offset by a decline in the provision for
loan losses and other noninterest expenses. These variations, which are
primarily the result of the sale of our Emerald Coast branches, are more fully
discussed in the following paragraphs.
Net interest income decreased $4.7 million, or 11.0%, to $38.0 million for
the year ended December 31, 2004 from $42.7 million for the year ended December
31, 2003. This was due to a decrease in interest income
23
of $10.1 million, or 13.2%, offset by a decrease in total interest expense of
$5.4 million, or 16.0%. This decrease in total interest income was primarily
attributable to a $15.2 million, or 21.2%, decrease in interest income on loans
as a result of a $169.0 million decline in the average volume of our loan
portfolio due to the sale of certain branches in 2003. This decrease was offset
by a $5.2 million, or 140.7%, increase in interest income on taxable investment
securities. Our average investment security portfolio increased $110.4 million,
or 118.1%.
The decline in total interest expense is primarily attributable to a
34-basis point decline in the average interest rates paid on interest-bearing
liabilities. The average rate paid on interest-bearing liabilities was 2.56% for
the year ended December 31, 2004, compared to 2.90% for the year ended December
31, 2003. This decline was due primarily to a decline in the average rates paid
on FHLB advances and time deposits. Our net interest spread and net interest
margin were 3.20% and 3.31%, respectively, for the year ended December 31, 2004,
compared to 3.35% and 3.50%, respectively, for the year ended December 31, 2003.
Our average interest-earning assets for the year ended December 31, 2004
decreased $71.4 million, or 5.8%, to $1.150 billion from $1.222 billion for the
year ended December 31, 2003. This decline in our average interest-earning
assets was due to the sale of our Emerald Coast branches in the third quarter of
2003. The ratio of our average interest-earning assets to average
interest-bearing liabilities was 104.9% and 105.8% for the years ended December
31, 2004 and 2003, respectively. Our average interest-bearing assets produced a
taxable equivalent yield of 5.76% for the year ended December 31, 2004 compared
to 6.25% for the year ended December 31, 2003. The 49-basis point decline in the
yield was partially offset by a 34-basis point decline in the average rate paid
on interest-bearing liabilities.
The provision for loan losses was $975,000 for the year ended December 31,
2004, compared to $21.0 million in 2003. This decline in provision is the result
of several factors, including the collection of certain classified loans
totaling approximately $6.0 million in the first quarter of 2004; significant
recoveries of charged-off loans totaling $3.7 million for 2004; adjustments to
the risk factors related to 1-4 family residential loans in the second quarter
of 2004; and a $101.3 million net increase in real estate construction loans,
which carry a lower historical loss allocation. In addition, approximately 25%
of our net loan growth for the year is related to a single credit with a very
low risk rating that was originated in the second quarter and was fully secured
by marketable securities. Also, nonperforming loans decreased significantly, to
..79% of loans at December 31, 2004 from 3.74% at December 31, 2003. During 2004,
we had net charged-off loans totaling $13.6 million, compared to net charged-off
loans of $23.5 million for 2003. Approximately $6.9 million of loans charged off
or partially charged off in the third quarter of 2004 were included as part of
the loan sale in September 2004. The net amount of charged-off loans for 2004
was covered by specific and standard allocations of allowance for loan losses
which had been provided in previous periods. The ratio of net charged-off loans
to average loans was 1.52% for 2004 compared to 2.21% for 2003. The allowance
for loan losses totaled $12.5 million, or 1.34% of loans, net of unearned
income, at December 31, 2004 compared to $25.2 million, or 2.94% of loans, net
of unearned income, at December 31, 2003. See "Financial Condition -- Allowance
for Loan Losses" for additional discussion.
Noninterest income decreased $51.6 million, or 82.1%, to $11.3 million in
2004 from $62.9 million in 2003. This decrease is primarily due to the gains on
sales of branches of $48.3 million in 2003 and was partially offset by a
$739,000 gain we realized on the sale of our Morris branch during 2004. Income
from mortgage banking operations for the year ended December 31, 2004 decreased
$2.4 million, or 58.8%, to $1.7 million in 2004 from $4.1 million in 2003.
Income from customer service charges and fees decreased $610,000, or 10.5%, to
$5.2 million in 2004 from $5.8 million in 2003. Other noninterest income was
$3.7 million, a decrease of $423,000, or 10.2%, from $4.2 million in 2003. The
decline in service charges is related to the decline in deposit accounts, which
resulted from the sale of certain branches during 2003. The decline in mortgage
banking income is the result of the lessening demand for refinancing that
occurred in 2004 and the sale of the Emerald Coast branches.
We realized net losses on the sale or write-down of investment securities
of $74,000 in 2004 compared to net gains of $588,000 in 2003. During the fourth
quarter of 2004, we realized an "other-than-temporary" non-cash, non-operating
impairment charge of $507,000 related to certain Fannie Mae ("FNMA") and Freddie
Mac ("FHLMC") preferred stock that we carry in our available-for-sale investment
portfolio. The net effect
24
of this impairment charge after tax was $320,000, or $.02 per common share.
Because any unrealized losses on securities carried in the available-for-sale
portfolio are recorded as other comprehensive losses, approximately $250,000 of
this loss, net of tax effect, had been charged to stockholders' equity in
previous periods. These securities are high-yielding investment grade securities
that are widely held by other financial institutions, but in light of certain
events at these agencies management determined that these unrealized market
losses were other-than-temporary under generally accepted accounting principles.
Noninterest expense decreased $10.0 million, or 17.3%, to $47.9 million in
2004 from $57.9 million in 2003. Salaries and employee benefits decreased $6.0
million, or 20.3%, to $23.5 million in 2004 compared to $29.5 million in 2003,
primarily due to the sale of certain branches during 2003. All other noninterest
expenses decreased $3.7 million, or 14.6%, to $22.2 million from $25.9 million
in 2003, primarily due to the sale of certain branches during 2003. During 2004,
we incurred approximately $5.9 million in certain expenses which included $2.0
million related to increased foreclosure and repossession activity, $747,000 in
valuation write-downs, $220,000 in net losses on sales of foreclosed property,
$1.2 million in legal fees, $827,000 in audit and accounting fees and $1.0
million in FDIC premiums.
Our income tax benefit was $796,000 in 2004 and our income tax expense was
$9.2 million in 2003. The primary difference in the effective tax rate and the
federal statutory rate of 34% for 2004 is due primarily to certain tax-exempt
income and the recognition of rehabilitation tax credits of $725,000 generated
from the restoration of our headquarters, the John A. Hand Building.
NET INTEREST INCOME
The largest component of our net income is net interest income, which is
the difference between the income earned on interest-earning assets and interest
paid on deposits and borrowings. Net interest income is determined by the rates
earned on our interest-earning assets, rates paid on our interest-bearing
liabilities, the relative amounts of interest-earning assets and
interest-bearing liabilities, the degree of mismatch and the maturity and
repricing characteristics of our interest-earning assets and interest-bearing
liabilities. Net interest income divided by average interest-earning assets
represents our net interest margin.
25
Average Balances, Income, Expenses and Rates. The following tables depict,
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. Such yields are derived by dividing income or
expense by the average balance of the corresponding assets or liabilities.
Average balances have been derived from daily averages.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------- ------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-earning assets:
Loans, net of unearned
income(1)............... $ 947,212 $63,895 6.75% $ 894,406 $56,184 6.28% $1,063,451 $71,335 6.71%
Investment securities
Taxable................. 255,663 11,632 4.55 203,996 8,897 4.36 93,523 3,696 3.95
Tax-exempt(2)........... 6,932 373 5.38 3,868 217 5.61 4,045 280 6.93
---------- ------- ---------- ------- ---------- -------
Total investment
securities........ 262,595 12,005 4.57 207,864 9,114 4.38 97,568 3,976 4.08
Federal funds sold...... 14,757 460 3.12 15,454 202 1.31 27,375 298 1.09
Other investments....... 22,266 1,047 4.70 32,637 734 2.25 33,373 699 2.09
---------- ------- ---------- ------- ---------- -------
Total
interest-earning
assets............ 1,246,830 77,407 6.21 1,150,361 66,234 5.76 1,221,767 76,308 6.25
Noninterest-earning assets:
Cash and due from banks... 28,227 26,238 33,508
Premises and equipment.... 56,897 58,535 58,857
Accrued interest and other
assets.................. 83,743 81,970 75,279
Allowance for loan
losses.................. (12,504) (20,530) (28,395)
---------- ---------- ----------
Total assets........ $1,403,193 $1,296,574 $1,361,016
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Demand deposits........... $ 339,842 $ 7,144 2.10% $ 262,346 $ 3,225 1.23% $ 277,326 $ 2,651 .96%
Savings deposits.......... 25,935 40 0.15 29,383 48 0.16 34,809 100 .29
Time deposits............. 607,141 20,731 3.41 590,070 15,915 2.70 638,555 19,617 3.07
Other borrowings.......... 187,297 7,493 4.00 183,052 6,356 3.47 171,948 8,597 5.00
Subordinated debentures... 31,959 2,847 8.91 31,959 2,579 8.07 31,959 2,522 7.89
---------- ------- ---------- ------- ---------- -------
Total
interest-bearing
liabilities....... 1,192,174 38,255 3.21 1,096,810 28,123 2.56 1,154,597 33,487 2.90
Noninterest-bearing
liabilities:
Demand deposits........... 93,564 88,695 105,482
Accrued interest and other
liabilities............. 15,651 10,154 9,219
---------- ---------- ----------
Total liabilities... 1,301,389 1,195,659 1,269,298
Stockholders' equity...... 101,804 100,915 91,718
---------- ---------- ----------
Total liabilities
and stockholders'
equity............ $1,403,193 $1,296,574 $1,361,016
========== ========== ==========
Net interest income/net
interest spread........... 39,152 3.00% 38,111 3.20% 42,821 3.35%
==== ==== ====
Net yield on earning
assets.................... 3.14% 3.31% 3.50%
==== ==== ====
Taxable equivalent
adjustment:
Investment
securities(2)........... 127 74 95
------- ------- -------
Net interest
income............ $39,025 $38,037 $42,726
======= ======= =======
---------------
(1) Nonaccrual loans are included in loans, net of unearned income. No
adjustment has been made for these loans in the calculation of yields.
(2) Interest income and yields are presented on a fully taxable equivalent basis
using a tax rate of 34 percent.
26
Analysis of Changes in Net Interest Income. The following table sets
forth, on a taxable equivalent basis, the effect which the varying levels of
interest-earning assets and interest-bearing liabilities and the applicable
rates have had on changes in net interest income for the years ended December
31, 2005 and 2004.
YEAR ENDED DECEMBER 31,(1)
---------------------------------------------------------------
2005 VS 2004 2004 VS 2003
----------------------------- -------------------------------
CHANGES DUE TO CHANGES DUE TO
INCREASE ---------------- INCREASE ------------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------- ------- ------ ---------- ------- --------
(DOLLARS IN THOUSANDS)
Income from earning assets:
Interest and fees on loans...... $ 7,711 $ 4,311 $3,400 $(15,151) $(4,353) $(10,798)
Interest on securities:
Taxable...................... 2,735 401 2,334 5,201 420 4,781
Tax-exempt................... 156 (10) 166 (63) (52) (11)
Interest on federal funds....... 258 268 (10) (96) 52 (148)
Interest on other investments... 313 604 (291) 35 51 (16)
------- ------- ------ -------- ------- --------
Total interest income...... 11,173 5,574 5,599 (10,074) (3,882) (6,192)
------- ------- ------ -------- ------- --------
Expense from interest-bearing
liabilities:
Interest on demand deposits..... 3,919 2,764 1,155 574 723 (149)
Interest on savings deposits.... (8) (3) (5) (52) (39) (13)
Interest on time deposits....... 4,816 4,339 477 (3,702) (2,271) (1,431)
Interest on other borrowings.... 1,137 987 150 (2,241) (2,768) 527
Interest on subordinated
debentures................... 268 268 -- 57 57 --
------- ------- ------ -------- ------- --------
Total interest
expense............... 10,132 8,355 1,777 (5,364) (4,298) (1,066)
------- ------- ------ -------- ------- --------
Net interest income..... $ 1,041 $(2,781) $3,822 $ (4,710) $ 416 $ (5,126)
======= ======= ====== ======== ======= ========
---------------
(1) The changes in net interest income due to both rate and volume have been
allocated to rate and volume changes in proportion to the relationship of
the absolute dollar amounts of the changes in each.
MARKET RISK -- INTEREST RATE SENSITIVITY
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to a change in interest rates, exchange rates
and equity prices. Our primary market risk is interest rate risk.
We evaluate interest rate sensitivity risk and then formulate guidelines
regarding asset generation and repricing, funding sources and pricing and
off-balance sheet commitments in order to moderate interest rate sensitivity
risk. We use computer simulations to measure the net interest income effect of
various interest rate scenarios. The modeling reflects interest rate changes and
the related impact on net interest income over specified periods of time.
The primary objective of asset/liability management is to manage interest
rate risk and achieve reasonable stability in net interest income throughout
interest rate cycles. This is achieved by maintaining the proper balance of
interest rate sensitive earning assets and interest rate sensitive liabilities.
In general, management's strategy is to match asset and liability balances
within maturity categories to limit our exposure to earnings variations and
variations in the value of assets and liabilities as interest rates change over
time. Our asset and liability management strategy is formulated and monitored by
our Asset/Liability Management Committee ("ALCO"), which is composed of our head
of asset/liability management and other senior officers, in accordance with
policies approved by the board of directors. The ALCO meets monthly to review,
among other things, the sensitivity of our assets and liabilities to interest
rate changes, the book and market values of assets and liabilities, unrealized
gains and losses, including those attributable to purchase and sale
27
activity, and maturities of investments and borrowings. The ALCO also approves
and establishes pricing and funding decisions with respect to overall asset and
liability composition and reports regularly to our full board of directors.
One of the primary goals of the ALCO is to effectively manage the duration
of our assets and liabilities so that the respective durations are matched as
closely as possible. These duration adjustments can be accomplished either
internally by restructuring our balance sheet, or externally by adjusting the
duration of our assets or liabilities through the use of interest rate
contracts, such as interest rate swaps, caps, and floors. During the first
quarter of 2005, as the Federal Reserve indicated its intention to continue
raising short term interest rates indefinitely, we reduced part of a securities
leverage strategy we had initiated in 2004. We sold longer term, fixed rate
securities and correspondingly reduced wholesale funding that had short term
repricing characteristics. In the fourth quarter of 2005, as it appeared the
increases in short term rates could be approaching a plateau, we generally
increased our proportion of funding with repricing less than one year, reducing
our level of asset sensitivity.
We measure our interest rate risk by analyzing the correlation of
interest-bearing assets to interest-bearing liabilities ("gap analysis"), net
interest income simulation, and economic value of equity ("EVE") modeling.
As of December 31, 2005, we had approximately $132 million more in interest
bearing liabilities than interest earning assets that can reprice to current
market rates during the next 12 months. However, shortcomings are inherent in
any gap analysis, because the rates on certain assets and liabilities may not
move proportionately as market interest rates change. For example, when national
money market rates change, interest rates on our NOW, savings, and money market
deposit accounts may not change as much as rates on commercial loans. We had
approximately $373 million of such administratively priced deposits on December
31, 2005.
Our net interest income simulation model projects that net interest income
will increase on an annual basis by 3.4%, or approximately, $1.3 million,
assuming an instantaneous and parallel increase in interest rates of 200 basis
points. Assuming an instantaneous and parallel decrease of 200 basis points, net
interest income is projected to decrease on an annual basis by 3.2%, or again
approximately $1.3 million. The net interest income produced by these scenarios
is within our asset and liability management policy.
EVE is a concept related to our longer term interest rate risk. EVE is
defined as the net present value of the balance sheet's cash flows or the
residual value of future cash flows. While EVE does not represent actual market
liquidation or replacement value, it is a useful tool for estimating our balance
sheet earnings capacity. The greater the EVE, the greater our earnings capacity.
Our EVE model projects that EVE will increase 9.5% assuming an instantaneous and
parallel increase in interest rates of 200 basis points. Assuming an
instantaneous and parallel decrease of 200 basis points, EVE is projected to
decrease 23.3%. The EVE produced by these scenarios is within our asset and
liability management policy. The following table sets forth our EVE as of
December 31, 2005:
CHANGE
------------------
CHANGE (IN BASIS POINTS) IN INTEREST RATES EVE AMOUNT PERCENT
------------------------------------------ -------- -------- -------
(DOLLARS IN THOUSANDS)
+ 200 BP................................................ $178,954 $ 15,573 9.5%
+ 100 BP................................................ 172,433 9,052 5.5
0 BP.................................................... 163,381 -- --
- 100 BP................................................ 147,395 (15,986) (9.8)
- 200 BP................................................ 125,365 (38,016) (23.3)
Both the net interest income and EVE simulations include balances, asset
prepayment speeds, and interest rate relationships among balances that
management believes to be reasonable for the various interest rate environments.
Differences in actual occurrences from these assumptions, as well as
non-parallel changes in the yield curve, may change our market risk exposure.
28
Our board has authorized the ALCO to utilize financial futures, forward
sales, options and interest rate swaps, caps and floors, and other instruments
to the extent necessary, in accordance with OTS regulations and our internal
policy. We expect that financial futures, forward sales and options will be
primarily used in hedging mortgage-banking products, and interest rate swaps,
caps and floors will be used as macro hedges against our securities, our loan
portfolios and our liabilities.
We recognize that positions for hedging purposes are primarily a function
of three main areas of risk exposure: (1) mismatches between assets and
liabilities; (2) prepayment and other option-type risks embedded in our assets,
liabilities and off-balance sheet instruments; and (3) the mismatched
commitments for mortgages and funding sources. We will engage in only the
following types of hedges: (1) those which synthetically alter the maturities or
repricing characteristics of assets or liabilities to reduce imbalances; (2)
those which enable us to transfer the interest rate risk exposure involved in
our daily business activities; and (3) those which serve to alter the market
risk inherent in our investment portfolio or liabilities and thus help us to
match the effective maturities of the assets and liabilities.
The primary derivative instrument we use is the interest rate swap. An
interest rate swap allows one party to swap a fixed rate to another party for a
floating rate or vice-versa. The amount of the swap is based on a "notional
amount." We most commonly use swap transactions in concert with issuing
long-term, fixed rate, callable certificates of deposit. The CDs' call features
allow flexibility in liquidity management.
As of December 31, 2005, we have $46.5 million in notional amount of
interest rate swap agreements that were not designated as fair value or cash
flow hedges. In 2005 and prior years, we entered into interest rate swap
agreements ("CD swaps") to hedge the interest rate risk inherent in certain of
our brokered certificates of deposit. From the inception of the hedging program,
we applied a method of fair value hedge accounting under SFAS 133 to account for
the CD swaps which allowed us to assume no ineffectiveness in these transactions
(the so-called "short-cut" method). We have recently concluded that the CD swaps
did not qualify for this method in prior periods because the related CD broker
placement fee was determined, in retrospect, to have caused the swap not to have
a fair value of zero at inception (which is required under SFAS 133 to qualify
for the short-cut method). Therefore, any gains and losses attributable to the
change in fair value are recognized in earnings during the period of change in
fair value. As of December 31, 2005, these CD swaps had a recorded negative fair
value of $992,000 and a weighted average life of 8.89 years. The weighted
average fixed rate (receiving rate) is 4.51% and the weighted average variable
rate (paying rate) is 4.22% (LIBOR based).
We have also entered into an interest rate swap agreement with a notional
amount of $15 million to hedge the variability in cash flows on $15 million of
FHLB borrowings. Under the terms of the interest rate swap, which matures in
September, 2006, we receive a floating interest rate based on LIBOR and pay a
fixed rate of 4.33%. This contract, which is accounted for as cash flow hedge,
satisfied the criteria to use the "short-cut" method of accounting for hedging
the variability in cash flow on FHLB borrowings caused by changes in the LIBOR
rate. The short-cut method allows us to assume that there is no ineffectiveness
in the hedging relationship.
LIQUIDITY
The goal of liquidity management is to provide adequate funds to meet
changes in loan demand or any potential unexpected deposit withdrawals.
Additionally, management strives to maximize our earnings by investing our
excess funds in securities and other securitized loan assets with maturities
matching our offsetting liabilities. See the "Selected Loan Maturity and
Interest Rate Sensitivity" and "Maturity Distribution of Investment Securities".
Historically, we have maintained a high loan-to-deposit ratio. To meet our
short-term liquidity needs, we maintain core deposits and have borrowing
capacity through the FHLB, repurchase agreements and federal funds lines.
Long-term liquidity needs are met primarily through these sources, the repayment
of loans, sales of loans and the maturity or sale of investment securities.
29
As shown in the Consolidated Statement of Cash Flows, operating activities
did not provide any significant levels of funds in 2005, 2004 and 2003,
primarily due to our having little or no operating income. Investing activities
were a net provider of funds in 2005 due to maturities and sale of securities
available for sale. We sold securities in 2005 as part of a strategy to
deleverage our balance sheet. Investing activities, primarily in loans and
securities, were a net user of funds in 2004 and 2003 and required a significant
amount of funds for investing activities. Funds needed for investing activities
in 2004 and 2003 were provided primarily by deposits and borrowings.
Financing activities were a net user of funds in 2005, as we decreased our
levels of brokered certificates of deposit and repurchase agreements, which
decrease was offset by an increase in interest-bearing demand deposit accounts,
advances from the FHLB and proceeds from equity transactions. Increased brokered
certificates of deposits, advances from the FHLB and repurchase agreements
provided funds in 2004. In 2003, financing activities were a net user of funds
as a result of declining deposit balances and increased payments on borrowed
funds.
We have entered into certain contractual obligations and commercial
commitments in the normal course of business that involve elements of credit
risk, interest rate risk and liquidity risk.
The following tables summarize these relationships by contractual cash
obligations and commercial commitments:
PAYMENTS DUE BY PERIOD
------------------------------------------------------------
LESS THAN ONE TO FOUR TO AFTER FIVE
TOTAL ONE YEAR THREE YEARS FIVE YEARS YEARS
-------- --------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
CONTRACTUAL OBLIGATIONS
Advances from FHLB(1)........... $181,090 $ 85,250 $ 5,500 $32,000 $ 58,340
Operating leases(2)............. 1,826 474 627 312 413
Notes payable(3)................ 3,755 2,460 420 420 455
Repurchase agreements(4)........ 30,406 23,406 7,000 -- --
Junior subordinated debentures
owed to unconsolidated
trusts(5)..................... 31,959 -- -- -- 31,959
Deferred compensation
agreements(6)................. 14,880 484 1,251 897 12,248
Employment separation
agreements(6)................. 1,578 62 974 44 498
-------- -------- ------- ------- --------
Total Contractual Cash
Obligations......... $265,494 $112,136 $15,772 $33,673 $103,913
======== ======== ======= ======= ========
---------------
(1) See Note 7 to the Consolidated Financial Statements.
(2) See Note 5 to the Consolidated Financial Statements.
(3) See Note 9 to the Consolidated Financial Statements.
(4) See Note 8 to the Consolidated Financial Statements
(5) See Note 10 to the Consolidated Financial Statements.
(6) See Note 26 to the Consolidated Financial Statements.
30
PAYMENTS DUE BY PERIOD
------------------------------------------------------------
LESS THAN ONE TO FOUR TO AFTER FIVE
TOTAL ONE YEAR THREE YEARS FIVE YEARS YEARS
-------- --------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
COMMERCIAL COMMITMENTS
Commitments to extend
credit(1)..................... $215,950 $ 90,689 $104,742 $1,946 $18,573
Standby letters of credit(1).... 23,591 18,657 4,934 -- --
-------- -------- -------- ------ -------
Total Commercial
Commitments......... $239,541 $109,346 $109,676 $1,946 $18,573
======== ======== ======== ====== =======
---------------
(1) See Note 15 to the Consolidated Financial Statements.
In addition, the FHLB has issued for the Bank's benefit 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 expires January 6, 2007 upon sixty days' prior notice of non-renewal;
otherwise, it automatically extends for a successive one-year term.
FINANCIAL CONDITION
Our total assets were $1.415 billion at December 31, 2005, a decrease of
$7.7 million, or 0.5%, from $1.423 billion as of December 31, 2004. Our average
total assets for 2005 were $1.403 billion, which was supported by average total
liabilities of $1.301 billion and average total stockholders' equity of $101.8
million.
Loans, net of unearned income. Our loans, net of unearned income, totaled
$963.3 million at December 31, 2005, an increase of 3.0%, or $28.5 million, from
$934.8 million at December 31, 2004. Mortgage loans held for sale totaled $21.4
million at December 31, 2005, an increase of $13.3 million from $8.1 million at
December 31, 2004. Average loans, including mortgage loans held for sale,
totaled $947.2 million for 2005, compared to $894.4 million for 2004. The
increase in average loan volume from 2005 to 2004 is attributable to increased
production of loans. Loans, net of unearned income, comprised 77.2% of
interest-earning assets at December 31, 2005, compared to 73.4% at December 31,
2004. Mortgage loans held for sale comprised 1.7% of interest-earning assets at
December 31, 2005, compared to .64% at December 31, 2004. The average yield of
the loan portfolio was 6.75%, 6.28% and 6.71% for the years ended December 31,
2005, 2004 and 2003, respectively. The increase in average yield is primarily
the result of a general increase in market rates.
31
The following table details the distribution of our loan portfolio by
category for the periods presented:
DISTRIBUTION OF LOANS BY CATEGORY
DECEMBER 31,
--------------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Commercial and industrial........ $135,454 $134,688 $142,072 $ 213,210 $ 194,609
Real estate -- construction and
land development............... 326,418 249,715 147,917 212,818 225,654
Real estate -- mortgages
Single-family.................. 243,183 250,758 231,064 272,899 241,517
Commercial..................... 210,611 242,884 250,032 340,998 210,644
Other.......................... 27,503 25,764 31,645 14,581 32,427
Consumer......................... 21,122 32,009 46,201 79,398 92,655
Other(1)......................... 498 567 8,923 5,931 2,556
-------- -------- -------- ---------- ----------
Total loans............ 964,789 936,385 857,854 1,139,835 1,000,062
Unearned income.................. (1,536) (1,517) (913) (1,298) (906)
Allowance for loan losses........ (12,011) (12,543) (25,174) (27,766) (12,546)
-------- -------- -------- ---------- ----------
Net loans.............. $951,242 $922,325 $831,767 $1,110,771 $ 986,610
======== ======== ======== ========== ==========
---------------
(1) Certain reclassifications were made to the 2004 amounts to conform to the
2005 presentation. This information was not available for periods prior to
2004.
The repayment of loans as they mature is a source of liquidity for us. The
following table sets forth our loans by category maturing within specified
intervals at December 31, 2005. The information presented is based on the
contractual maturities of the individual loans, including loans which may be
subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon
their maturity. Consequently, management believes this treatment presents fairly
the maturity and repricing of the loan portfolio.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
RATE STRUCTURE FOR LOANS
MATURING OVER ONE YEAR
OVER ONE YEAR -------------------------------
ONE YEAR THROUGH FIVE OVER FIVE PREDETERMINED FLOATING OR
OR LESS YEARS YEARS TOTAL INTEREST RATE ADJUSTABLE RATE
-------- ------------- --------- -------- ------------- ---------------
(DOLLARS IN THOUSANDS)
Commercial and
industrial.............. $103,220 $ 29,565 $ 2,669 $135,454 $ 18,281 $ 13,954
Real
estate -- construction
and land development.... 180,501 139,778 6,139 326,418 28,034 117,883
Real estate -- mortgages
Single-family........... 32,222 43,782 167,179 243,183 46,824 164,136
Commercial.............. 62,583 107,204 40,824 210,611 60,926 87,102
Other................... 6,802 18,004 2,697 27,503 9,201 11,501
Consumer.................. 10,421 10,266 435 21,122 10,535 165
Other..................... 498 -- -- 498 -- --
-------- -------- -------- -------- -------- --------
Total loans..... $396,247 $348,599 $219,943 $964,789 $173,801 $394,741
======== ======== ======== ======== ======== ========
Percent to total loans.... 41.1% 36.1% 22.8% 100.0% 18.0% 40.9%
======== ======== ======== ======== ======== ========
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
32
experience based on volume and types of loans, trends in classifications, volume
and trends in delinquencies and non-accruals, economic conditions and other
pertinent information. The level of allowance for loan losses to net loans will
vary depending on the quarterly analysis.
We manage and control risk in the loan portfolio through adherence to
credit standards established by the board of directors and implemented by senior
management. These standards are set forth in a formal loan policy, which
establishes loan underwriting and approval procedures, sets limits on credit
concentration and enforces regulatory requirements. In addition, we have engaged
Credit Risk Management, LLC, an independent loan review firm, to supplement our
existing independent loan review function.
Loan portfolio concentration risk is reduced through concentration limits
for borrowers, collateral types and geographic 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 where 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 our internal loan review function and senior
management. Based on the assigned risk ratings, the criticized and classified
loans in the portfolio are segregated into the following regulatory
classifications: Special Mention, Substandard, Doubtful or Loss. Generally,
regulatory reserve percentages (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.
Pursuant to Statement of Financial Accounting Standards No. 114 ("SFAS
114"), impaired loans are specifically reviewed loans for which it is probable
that we will be unable to collect all amounts due according to the terms of the
loan agreement. Impairment is measured by comparing the recorded investment in
the loan with the present value of expected future cash flows discounted at the
loan's effective interest rate, at the 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 our loan
review function, which also performs ongoing, independent review of the risk
management process. The risk management process includes underwriting,
documentation and collateral control. Loan review is centralized and independent
of the lending function. The loan review results are reported to the Audit
Committee of the board of directors and senior management. We have also
established a centralized loan administration services department to serve our
entire bank. This department provides standardized oversight for compliance with
loan approval authorities and bank lending policies and procedures, as well as
centralized supervision, monitoring and accessibility.
We historically have allocated our allowance for loan losses to specific
loan categories. Although the allowance is allocated, it is available to absorb
losses in the entire loan portfolio. This allocation is made for estimation
purposes only and is not necessarily indicative of the allocation between
categories in which future losses may occur.
33
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Commercial and
industrial......... $ 3,805 14.0% $ 3,736 14.1% $10,110 16.6% $10,056 18.7% $ 6,536 19.5%
Real estate --
construction and
land development... 1,275 33.8 1,009 26.6 1,099 17.2 1,317 18.7 919 22.5
Real estate --
mortgages
Single-family...... 1,395 25.2 1,582 26.8 4,538 26.9 3,636 23.9 1,273 24.2
Commercial......... 4,194 21.8 4,594 25.9 7,613 29.1 10,174 29.9 1,315 21.1
Other.............. 215 2.9 257 2.7 320 3.7 396 1.3 333 3.2
Consumer............. 1,127 2.2 1,336 3.0 1,374 5.4 2,075 6.9 2,129 9.2
Other................ -- .1 29 .9 120 1.1 112 .6 41 .3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$12,011 100.0% $12,543 100.0% $25,174 100.0% $27,766 100.0% $12,546 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
The allowance as a percentage of loans, net of unearned income, at December
31, 2005 was 1.25%, compared to 1.34% as of December 31, 2004. The allowance for
loan losses as a percentage of loans, net of unearned income, declined primarily
due to continued improvements in asset quality coupled with steady growth in the
overall volume of new, lower-risk loans. Net charge-offs decreased $9.6 million,
from $13.6 million in 2004 to $4.0 million in 2005. Net charge-offs of
commercial loans decreased $4.5 million, from $6.2 million in 2004 to $1.7
million in 2005. Net charge-offs of real estate loans decreased $4.7 million,
from $6.4 million in 2004 to $1.7 million in 2005. Net charge-offs of consumer
loans decreased $1.0 million, to $350,000 in 2005 from $1.3 million in 2004. Net
charge-offs as a percentage of the allowance for loan losses were 33.57% in
2005, down from 108.47% in 2004.
The allowance for loan losses as a percentage of nonperforming loans
increased to 252.76% at December 31, 2005 from 169.36% at December 31, 2004 due
to a decrease in nonperforming loans of $2.7 million. Approximately $1.5 million
in allowance for loan losses has been allocated to nonperforming loans as of
December 31, 2005. As of December 31, 2005, nonperforming loans totaled $4.8
million, which $3.6 million, or 75.8%, was loans secured by real estate compared
to $4.7 million, or 63.5%, as of December 31, 2004. Of the $1.5 million in
allowance for loan losses allocated to nonperforming loans, $992,000 is
attributable to these real estate loans, with the remaining $508,000 allocated
to remaining nonperforming loans, which consist primarily of commercial loans.
(See "Nonperforming Assets").
34
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
YEAR
--------------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Allowance for loan losses at beginning of
year................................... $ 12,543 $ 25,174 $ 27,766 $ 12,546 $ 8,959
Allowance of (branches sold) acquired
bank................................... -- -- (102) 1,059 --
Charge-offs:
Commercial and industrial.............. 2,097 7,690 10,823 25,162 2,415
Real estate -- construction and land
development......................... 358 765 630 1,704 48
Real estate -- mortgages
Single-family....................... 795 1,012 1,505 2,608 184
Commercial.......................... 1,432 5,820 6,696 6,140 130
Other............................... 85 86 1,187 141 20
Consumer............................... 630 1,881 3,092 2,343 1,517
Other.................................. 345 87 517 -- --
-------- -------- ---------- ---------- --------
Total charge-offs.............. 5,742 17,341 24,450 38,098 4,314
Recoveries:
Commercial and industrial.............. 413 1,468 554 93 65
Real estate -- construction and land
development......................... 37 4 23 14 65
Real estate -- mortgages
Single-family....................... 335 470 23 23 --
Commercial.......................... 526 737 49 -- 27
Other............................... 118 97 48 38 --
Consumer............................... 280 549 282 239 290
Other.................................. 1 410 6 -- --
-------- -------- ---------- ---------- --------
Total recoveries............... 1,710 3,735 985 407 447
-------- -------- ---------- ---------- --------
Net charge-offs.......................... 4,032 13,606 23,465 37,691 3,867
Provision for loan losses................ 3,500 975 20,975 51,852 7,454
-------- -------- ---------- ---------- --------
Allowance for loan losses at end of
year................................... $ 12,011 $ 12,543 $ 25,174 $ 27,766 $ 12,546
======== ======== ========== ========== ========
Loans at end of period, net of unearned
income................................. $963,253 $934,868 $ 856,941 $1,138,537 $999,156
Average loans, net of unearned income.... 947,212 894,406 1,063,451 1,124,977 914,006
Ratio of ending allowance to ending
loans.................................. 1.25% 1.34% 2.94% 2.44% 1.26%
Ratio of net charge-offs to average
loans.................................. 0.43 1.52 2.21 3.35 0.42
Net charge-offs as a percentage of:
Provision for loan losses.............. 115.20 1,395.49 111.87 72.69 51.88
Allowance for loan losses.............. 33.57 108.47 93.21 135.74 30.82
Allowance for loan losses as a percentage
of nonperforming loans................. 252.76 169.36 78.59 105.00 100.99
Nonperforming Assets. Nonperforming assets decreased $5.8 million, to $6.6
million as of December 31, 2005 from $12.4 million as of December 31, 2004,
primarily due to the disposition of foreclosed other real estate and a reduction
of nonaccruing loans either through collection or charge-off. As a percentage of
net loans plus nonperforming assets, nonperforming assets decreased to .68% at
December 31, 2005 from 1.32% at December 31, 2004. The following table
represents our nonperforming assets for the dates shown.
35
NONPERFORMING ASSETS
DECEMBER 31,
----------------------------------------------
2005 2004 2003 2002 2001
------ ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual.................................... $4,550 $ 6,344 $29,630 $24,715 $ 7,941
Accruing loans 90 days or more delinquent..... 49 431 1,438 1,729 4,482
Restructured.................................. 153 631 966 -- --
------ ------- ------- ------- -------
Total nonperforming loans........... 4,752 7,406 32,034 26,444 12,423
Other real estate owned....................... 1,842 4,906 5,806 2,360 4,264
Repossessed assets............................ -- 103 219 102 382
------ ------- ------- ------- -------
Total nonperforming assets.......... $6,594 $12,415 $38,059 $28,906 $17,069
====== ======= ======= ======= =======
Nonperforming loans as a percentage of
loans....................................... .49% .79% 3.74% 2.32% 1.24%
====== ======= ======= ======= =======
Nonperforming assets as a percentage of loans
plus nonperforming assets................... .68% 1.32% 4.41% 2.53% 1.70%
====== ======= ======= ======= =======
Nonperforming assets as a percentage of total
assets...................................... .47% .87% 3.25% 2.05% 1.41%
====== ======= ======= ======= =======
The following is a summary of nonperforming loans by category for the dates
shown:
DECEMBER 31,
---------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------- ------- -------
(DOLLARS IN THOUSANDS)
Commercial and industrial...................... $ 988 $2,445 $11,621 $ 9,661 $ 3,078
Real estate -- construction and land
development.................................. 469 187 1,735 2,226 2,895
Real estate -- mortgages
Single-family................................ 2,448 2,060 5,472 3,672 3,089
Commercial................................... 675 2,273 12,378 8,434 2,400
Other........................................ 11 183 162 888 145
Consumer....................................... 161 250 465 1,548 669
Other.......................................... -- 8 201 15 147
------ ------ ------- ------- -------
Total nonperforming loans............ $4,752 $7,406 $32,034 $26,444 $12,423
====== ====== ======= ======= =======
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 non-
accrual 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 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.
In January 2004, we transferred the majority of our nonperforming loans and
approximately $7.0 million of other problem loans to our special assets
department. Approximately $41.0 million in loans were transferred with the
related allowance for loan losses of $9.8 million. As of December 31, 2005 and
2004, the balance of these loans totaled only $2.3 million and $4.2 million,
respectively. In September 2004 the Bank sold approximately $32 million, before
allowance for loan losses, in certain nonperforming loans and other classified,
performing loans, resulting in a pre-tax loss of $2.3 million. Prior to the
sale, approximately $6.9 million related to these loans was recognized as a
charge-off in September 2004 against the allowance for loan losses. The $6.9
million in allowance for loan losses associated with these loans had been
provided in previous periods.
Impaired Loans. At December 31, 2005, our recorded investment in impaired
loans under SFAS 114 totaled $3.5 million, a decrease of $1.6 million from $5.1
million at December 31, 2004. Approximately $869,000, or 24.9% of our impaired
loans, are in the special assets group along with $435,000 in allocated
36
allowance for loan losses. Approximately 68.9% of the remaining $2.6 million is
concentrated in four of our banking groups (Albertville -- $280,000,
Bristol -- $889,000, Gadsden -- $322,000, and Sylacauga -- $312,000), with
approximately $602,000 specifically allocated to these loans, providing 33.3%
coverage. Additionally, $1.7 million, or 48.2%, of the $3.5 million in impaired
loans is secured by real estate.
The following is a summary of impaired loans and the specifically allocated
allowance for loan losses by category as of December 31, 2005 and 2004:
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------------- -----------------------
OUTSTANDING SPECIFIC OUTSTANDING SPECIFIC
BALANCE ALLOWANCE BALANCE ALLOWANCE
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Commercial and industrial......................... $1,794 $ 871 $2,338 $1,077
Real estate -- construction and land
development..................................... 73 26 217 81
Real estate -- mortgages
Single-family................................... 169 25 -- --
Commercial...................................... 1,437 498 2,413 813
Other........................................... 10 5 162 24
------ ------ ------ ------
Total........................................ $3,483 $1,425 $5,130 $1,995
====== ====== ====== ======
Potential Problem Loans. In addition to nonperforming loans, management
has identified $1.1 million in potential problem loans as of December 31, 2005.
Potential problem loans are loans where known information about possible credit
problems of the borrowers causes management to have doubts as to the ability of
such borrowers to comply with the present repayment terms and may result in
disclosure of such loans as nonperforming in future periods. Considering that
approximately 73% of the potential problem loans are secured by low-risk real
estate, management does not expect to incur any significant losses.
Investment Securities. The investment securities portfolio comprised 19.3%
of our total interest-earning assets as of December 31, 2005. Total securities
averaged $262.6 million in 2005, compared to $207.9 million in 2004 and $97.6
million in 2003. The investment securities portfolio produced average taxable
equivalent yields of 4.57%, 4.38% and 4.08% for the years ended December 31,
2005, 2004 and 2003, respectively. At December 31, 2005, our investment
securities portfolio had an amortized cost of $246.9 million and an estimated
fair value of $242.6 million and weighted average yield of 4.63%. 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 following table sets forth the amortized costs of the securities we
held at the dates indicated.
INVESTMENT PORTFOLIO
DECEMBER 31,
------------------------------
AVAILABLE FOR SALE
------------------------------
2005 2004 2003
-------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury and agencies.................................. $ 99,365 $180,717 $ 72,261
State and political subdivisions............................ 8,729 7,195 1,947
Mortgage-backed securities.................................. 93,689 61,241 42,452
Corporate debt.............................................. 38,064 34,176 14,716
Other securities............................................ 7,028 6,802 10,524
-------- -------- --------
Total investment securities....................... $246,875 $290,131 $141,900
======== ======== ========
37
The following table shows the scheduled maturities and average yields of
investment securities held at December 31, 2005.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
MATURING
---------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE WITHIN FIVE WITHIN TEN AFTER
YEAR YEARS YEARS TEN YEARS TOTAL
-------------- --------------- --------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------- ----- ------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Securities available for sale:
U.S. Treasury and agencies..... $ -- --% $39,386 4.14% $39,294 4.26% $20,685 5.03% $ 99,365 4.37%
State and political
subdivision.................. -- -- 1,989 2.70 4,151 4.22 2,589 4.18 8,729 3.86
Mortgage-backed securities..... 38 5.54 8,883 3.43 30,790 4.13 53,978 4.75 93,689 4.42
Other securities............... 6,572 5.86 7,686 4.32 16,274 6.01 14,560 6.25 45,092 5.78
------ ---- ------- ---- ------- ---- ------- ---- -------- ----
Total.................... $6,610 5.86% $57,944 4.00% $90,509 4.53% $91,812 5.04% $246,875 4.63%
====== ==== ======= ==== ======= ==== ======= ==== ======== ====
Short-term liquid assets. Our short-term liquid assets (cash and due from
banks, interest-bearing deposits in other banks and federal funds sold)
decreased $1.0 million, or 2.3%, to $44.9 million at December 31, 2005 from
$45.9 million at December 31, 2004. At both December 31, 2005 and December 31,
2004, our short-term liquid assets comprised 3.2% of total assets. We
continually monitor our liquidity position and will increase or decrease our
short-term liquid assets as necessary.
Deposits. Noninterest-bearing deposits totaled $92.3 million at December
31, 2005, an increase of 3.2%, or $2.8 million, from $89.5 million at December
31, 2004. Noninterest-bearing deposits comprised 8.8% of total deposits at
December 31, 2005, compared to 8.4% at December 31, 2004. $72.1 million, or
78.1% of total noninterest-bearing deposits, were in our Alabama branches, while
$20.3 million, or 21.9%, were in our Florida branches.
Interest-bearing deposits totaled $951.4 million at December 31, 2005, a
decrease of 2.7%, or $26.3 million, from $977.7 million at December 31, 2004.
Interest-bearing deposits averaged $972.9 million in 2005 compared to $881.8
million in 2004, an increase of $91.1 million, or 10.3%. The increase in average
interest-bearing deposits consisted primarily of an increase in interest-bearing
demand deposits which is the result of a strategy implemented during 2005 to
realign our deposit mix and deleverage our balance sheet. As a result, brokered
certificates of deposit declined $60.4 million, to $143.5 million at December
31, 2005 from $203.9 million at December 31, 2004.
At December 31, 2005 and 2004, we had deposits from related parties of
approximately $32.1 million and $7.1 million, respectively. Approximately $26.2
million of these deposit relationships at December 31, 2005 were with two
directors. Certificates of deposit comprised $16.2 million of the $26.2 million,
with $15.2 million maturing in April, 2006. We believe that all of the deposit
transactions were made on terms and conditions reflective of arms' length
transactions.
The average rate paid on all interest-bearing deposits during 2005 was
2.87%, compared to 2.18% in 2004. Of total interest-bearing deposits, $708.6
million, or 74.5%, were in the Alabama branches, while $242.8 million, or 25.5%,
were in the Florida branches.
38
The following table sets forth our average deposits by category for the
periods indicated.
AVERAGE DEPOSITS
AVERAGE FOR THE YEAR
---------------------------------------------------------------------------
2005 2004 2003
----------------------- ----------------------- -----------------------
AVERAGE AVERAGE AVERAGE
AMOUNT AVERAGE AMOUNT AVERAGE AMOUNT AVERAGE
OUTSTANDING RATE PAID OUTSTANDING RATE PAID OUTSTANDING RATE PAID
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Noninterest-bearing demand
deposits.................. $ 93,564 --% $ 88,695 --% $ 105,482 --%
Interest-bearing demand
deposits.................. 339,842 2.10 262,346 1.23 277,326 .96
Savings deposits............ 25,935 .15 29,383 .16 34,809 .29
Time deposits............... 607,141 3.41 590,070 2.70 638,555 3.07
---------- ---- -------- ---- ---------- ----
Total average
deposits........ $1,066,482 2.62% $970,494 1.98% $1,056,172 2.12%
========== ==== ======== ==== ========== ====
Deposits, particularly core deposits, have historically been our primary
source of funding and have enabled us to meet successfully both our short-term
and long-term liquidity needs. Our core deposits, which exclude our time
deposits greater than $100,000, represent 66.9% of our total deposits at
December 31, 2005 compared to 62.4% at December 31, 2004. We anticipate that
such deposits will continue to be our primary source of funding in the future.
Our loan-to-deposit ratio was 92.2% at December 31, 2005, compared to 87.6% at
December 31, 2004. The maturity distribution of our time deposits over $100,000
at December 31, 2005 is shown in the following table.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
AT DECEMBER 31, 2005
--------------------------------------------------------
UNDER 3-6 6-12 OVER
3 MONTHS MONTHS MONTHS 12 MONTHS TOTAL
-------- ------- -------- --------- --------
(DOLLARS IN THOUSANDS)
$45,510 $89,429 $120,040 $89,757 $344,736
======= ======= ======== ======= ========
Approximately 13.2% of our time deposits over $100,000 had scheduled
maturities within three months of December 31, 2005. We believe customers who
hold a large denomination certificate of deposit tend to be extremely sensitive
to interest rate levels, making these deposits a less reliable source of funding
for liquidity planning purposes than core deposits.
Borrowed Funds. During 2005, average borrowed funds increased $4.2
million, or 2.3%, to $187.3 million, from $183.1 million during 2004, which
increased $11.2 million, or 6.5%, from $171.9 million during 2003. The average
rate paid on borrowed funds during 2005, 2004 and 2003 was 4.00%, 3.47%, and
5.00%, respectively. Because of a relatively high loan-to-deposit ratio, the
existence and stability of these funding sources are important to our
maintenance of short-term and long-term liquidity.
39
Borrowed funds as of December 31, 2005 consist primarily of advances from
the FHLB. The following is a summary, by year of contractual maturity, of
advances from the FHLB as of December 31, 2005 and 2004:
2005 2004
----------------------- -----------------------
WEIGHTED WEIGHTED
YEAR AVERAGE RATE BALANCE AVERAGE RATE BALANCE
---- ------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
2005............................................ --% $ -- 2.47% $ 25,000
2006............................................ 4.40 85,250 2.13 25,250
2007............................................ -- -- 1.44 10,000
2008............................................ 5.74 5,500 5.74 5,500
2009............................................ 2.32 27,000 2.32 27,000
2010............................................ 6.41 5,000 6.22 31,340
2011............................................ -- -- 4.97 32,000
2015............................................ 4.45 26,340 -- --
2020............................................ 4.28 32,000 -- --
-------- --------
Total........................................... 4.17% $181,090 3.70% $156,090
==== ======== ==== ========
Certain advances are subject to call by the FHLB as follows: 2006 -- $42.0
million, 2008 -- $32.0 million and 2010 -- $11.3 million. The $42.0 million in
FHLB advances subject to call during 2006 carry a weighted average interest rate
of 2.92%. The actual interest rates range from 2.09% to 5.62% and are both fixed
and variable.
The advances are secured by FHLB stock, agency securities and a blanket
lien on certain residential and commercial real estate loans, all with a
carrying value of approximately $245.6 million at December 31, 2005. We have
remaining approximately $60.6 million in unused lines of credit with the FHLB
subject to the availability of qualified collateral.
During the third quarter of 2005, $58 million in advances from the FHLB
were restructured. In conjunction with this restructuring, we entered into a $15
million one-year interest rate swap, under which we 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.
As of December 31, 2005, we had borrowed $2.3 million under a $10 million
line of credit with a regional bank. The note is secured by real estate and
stock of the Bank. The note is due June 7, 2006 and interest is payable at
30-day LIBOR plus 2.50%.
As of December 31, 2005, we had entered into security repurchase agreements
totaling $30.4 million, a decrease of $19.1 million from $49.5 million at
December 31, 2004. This decrease is part of the deleveraging strategy
implemented during 2005. The average volume of repurchase agreements during 2005
was $35.1 million and carried an average interest rate of 3.02%. The average
rate on outstanding repurchase agreements as of December 31, 2005 is 4.12%.
We have available approximately $27.0 million in unused federal funds lines
of credit with regional banks, subject to certain restrictions and collateral
requirements.
Junior subordinated debentures. We have sponsored two trusts, TBC Capital
Statutory Trust II ("TBC Capital II") and TBC Capital Statutory Trust III ("TBC
Capital III"), of which we own 100% of the common securities. The trusts were
formed for the purpose of issuing mandatory redeemable trust preferred
securities to third-party investors and investing the proceeds from the sale of
such trust preferred securities solely in our junior subordinated debt
securities (the debentures). The debentures held by each trust are the sole
assets of that trust. Distributions on the trust preferred securities issued by
each trust are payable semi-annually at a rate per annum equal to the interest
rate being earned by the trust on the debentures held by that trust. The trust
preferred securities are subject to mandatory redemption, in whole or in part,
upon repayment of the debentures. We have entered into agreements which, taken
collectively, fully and unconditionally guarantee the trust preferred securities
subject to the terms of each of the guarantees. The debentures held by
40
the TBC Capital II and TBC Capital III capital trusts are first redeemable, at a
premium, in whole or in part, by us on September 7, 2010 and July 25, 2006,
respectively.
As a result of applying the provisions of FASB Interpretation No. 46 ("FIN
46"), governing when an equity interest should be consolidated, we were required
to deconsolidate these subsidiary trusts from our financial statements in the
fourth quarter of 2003. The deconsolidation of the net assets and results of
operations of the trusts had virtually no impact on our financial statements or
liquidity position, since we continue to be obligated to repay the debentures
held by the trusts and guarantee repayment of the trust preferred securities
issued by the trusts. The consolidated debt obligation related to the trusts
increased from $31,000,000 to $31,959,000 upon deconsolidation, with the
difference representing our common ownership interest in the trusts.
The trust preferred securities held by the trusts qualify as Tier 1 capital
under regulatory guidelines.
Consolidated debt obligations related to the trusts follow:
DECEMBER 31, DECEMBER 31,
2005 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 December 31, 2005 and December 31, 2004, the interest rate on the
$16,495,000 subordinated debentures was 7.67% and 5.74%, respectively.
Stockholders' Equity. Stockholders' equity increased $4.6 million during
2005, to $105.1 million at December 31, 2005 from $100.5 million at December 31,
2004. The increase in stockholders' equity resulted primarily from the issuance
of 925,636 shares of common stock to the new executive management and certain
other investors in a private placement in January 2005, which increased equity
by $7.3 million, and the exercise of $3.7 million in stock options offset by a
net loss of $5.8 million for the year ended December 31, 2005, and an increase
in accumulated other comprehensive loss of $1.5 million, which includes the
unrealized loss on the change in market value of available-for-sale investment
securities and derivatives. As of December 31, 2005, we had 20,221,456 shares of
common stock issued and 19,980,261 shares outstanding. As of December 31, 2005,
there were 49,823 shares held in treasury at a total cost of $341,000. We had no
shares of preferred stock issued at December 31, 2005.
We have 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 our common stock. The
compensation committee of the board of directors 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 our common stock on the grant date.
During the first quarter of 2005 we granted 1,690,937 options to the new
management team. These options have an exercise price ranging from $8.17 to
$9.63 per share and were granted outside of the stock incentive plan as part of
the inducement package for new management. Total stock options outstanding as of
December 31, 2005 were 3,301,948 and had a weighted average exercise price of
$7.81 (see Note 11 in the Consolidated Financial Statements). As of December 31,
2005 there were approximately 504,000 shares of our common stock available for
future grants.
As described in Note 1 -- Recent Accounting Pronouncements in the
Consolidated Financial Statements, Statement of Financial Accounting Standards
No. 123R will require us to begin recognizing an expense in the amount of the
grant-date fair value of unvested and subsequently granted stock options
beginning in 2006. The
41
expense is required to be recognized over the period during which an employee is
required to provide service in exchange for the award.
Our board of directors approved the full vesting as of November 15, 2005 of
all unvested stock options outstanding at that date. The effect of this
accelerated vesting is reflected in the pro forma net loss and pro forma loss
per share figures in Note 11 to the Consolidated Financial Statements. During
the fourth quarter of 2005, the pro forma after-tax effect of compensation costs
for stock-based employee compensation awards totaled $2.1 million, or $0.10 per
share. In conjunction with the Board's approval of the full vesting, members of
the our senior management team announced that they would 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 were vested effective
November 15, 2005 is approximately 800,000, of which approximately 665,000 were
held by our directors and executive officers.
On April 1, 2002, we issued 157,500 shares of restricted common stock to
certain directors and key employees pursuant to the Second Amended and Restated
1998 Stock Incentive Plan. Under the restricted stock agreements, the stock may
not be sold or assigned in any manner for a five-year period that began on April
1, 2002. During this restricted period, the participant is eligible to receive
dividends and exercise voting privileges. The restricted stock also has a
corresponding vesting period with one-third vesting in the third, fourth and
fifth years. The restricted stock was issued at $7.00 per share, or $1.1
million, and classified as a contra-equity account, "Unearned restricted stock",
in stockholders' equity. During 2003, 15,000 shares of this restricted stock
were forfeited. During the second quarter of 2005, an additional 29,171 shares
of this restricted stock were forfeited. On January 24, 2005 we issued 49,375
additional shares of restricted common stock to certain key employees. Under the
terms of the management separation agreements entered into during 2005, vesting
was accelerated on 124,375 shares of restricted stock. As of December 31, 2005
13,330 shares of unvested restricted stock to continuing directors remained
outstanding. The outstanding shares of restricted stock 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 years ended December 31, 2005, 2004 and 2003, we recognized
$648,000, $199,000 and $181,000, respectively, in restricted stock expense. The
current year expense is primarily related to the accelerated vesting from the
management separation agreements and is included in the amount of management
separation cost.
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 December 31, 2005, the ESOP has been
leveraged with 273,400 shares of our common stock purchased in the open market
and classified as a contra-equity account, "Unearned ESOP stock," in
stockholders' equity.
On January 29, 2003, the ESOP trustees finalized a $2.1 million promissory
note to reimburse us for the funds used to leverage the ESOP. The unreleased
shares and our guarantee secure the promissory note, which has been classified
as notes payable 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 to the Wall Street Journal prime rate. Released shares
are allocated to each eligible employee at the end of a plan year based on the
ratio of the employee's eligible compensation to total compensation. We
recognize compensation expense during a 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
42
periods ended December 31, 2005, 2004 and 2003 was $281,000, $189,000 and
$152,000, respectively. The ESOP shares as of December 31, 2005 were as follows:
DECEMBER 31,
2005
------------
Allocated shares............................................ 55,328
Estimated shares committed to be released................... 26,700
Unreleased shares........................................... 191,372
----------
Total ESOP shares........................................... 273,400
==========
Fair value of unreleased shares............................. $2,184,000
==========
Regulatory Capital. During the fourth quarter of 2005 we became a unitary
thrift holding company and, as such, we are subject to regulation, examination
and supervision by OTS.
Simultaneously, the Bank's charter was changed to a federal savings bank
charter, and the Bank is also subject to various regulatory requirements
administered by the OTS. Prior to November 1, 2005 the Bank was regulated by the
Alabama Banking Department and the Federal Reserve. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on our financial position and results of operations. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of its assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require us and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of tangible and core capital (as defined in the regulations) to
adjusted total assets (as defined), and of total capital (as defined) and Tier 1
capital to risk weighted assets (as defined). Management believes, as of
December 31, 2005 and 2004, that we and the Bank meet all applicable capital
adequacy requirements.
The table below represents our and the Bank's actual regulatory and minimum
regulatory capital requirements at December 31, 2005 (dollars in thousands):
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION
---------------- --------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- --------- ------
AS OF DECEMBER 31, 2005
Tier 1 Core Capital (to Adjusted
Total Assets)................. $115,852 8.30% $55,810 4.00% $ 69,763 5.00%
Corporation Superior Bank..... 110,929 8.02 55,332 4.00 69,165 5.00
Total Capital (to Risk Weighted
Assets)....................... 126,444 11.08 91,295 8.00 114,119 10.00
Corporation Superior Bank..... 121,521 10.76 90,347 8.00 112,934 10.00
Tier 1 Capital (to Risk Weighted
Assets)....................... 115,852 10.15 N/A N/A 68,471 6.00
Corporation Superior Bank..... 110,929 9.82 N/A N/A 67,760 6.00
Tangible Capital (to Adjusted
Total Assets)................. 115,852 8.30 20,929 1.50 N/A N/A
Corporation Superior Bank..... 110,929 8.02 20,749 1.50 N/A N/A
IMPACT OF INFLATION
Unlike most industrial companies, our assets and liabilities are primarily
monetary in nature. Therefore, interest rates have a more significant effect on
our performance than do the effects of changes in the general
43
rate of inflation and changes in prices. In addition, interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services. We seek to manage the relationships between interest
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
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 Annual Report on Form 10-K, 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 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 laws, regulations and policies 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; (11) the effect of natural
disasters, such as hurricanes, in our geographic markets; and (12) 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 annual 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Please refer to "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Market Risk -- Interest Rate
Sensitivity," which is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of The Banc Corporation meeting the
requirements of Regulation S-X are filed on the succeeding pages of this Item 8
of this Annual Report on Form 10-K.
44
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
CONTENTS
Report of Independent Registered Public Accounting Firm as
of December 31, 2005 and 2004 and for each of the two
years in the period ended December 31, 2005............... 46
Report of Independent Registered Public Accounting Firm as
of and for the year ended December 31, 2003............... 47
Consolidated Statements of Financial Condition.............. 48
Consolidated Statements of Operations....................... 49
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 50
Consolidated Statements of Cash Flows....................... 51
Notes to Consolidated Financial Statements.................. 52
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of The Banc Corporation
We have audited the accompanying consolidated statements of financial
condition of The Banc Corporation and subsidiaries (the Corporation), as of
December 31, 2005 and 2004, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the two
years in the period ended December 31, 2005. Theses financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinions.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Corporation as of December 31, 2005 and 2004, and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of The
Banc Corporation and subsidiaries' internal control over financial reporting as
of December 31, 2005, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Our report dated March 16,
2006, expressed an unqualified opinion on management's assessment of the
effectiveness of The Banc Corporation and subsidiaries' internal control over
financial reporting and an opinion that The Banc Corporation and subsidiaries'
had not maintained effective internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
/s/ Carr, Riggs & Ingram, LLC
Montgomery, Alabama
March 16, 2006
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
The Banc Corporation
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of The Banc Corporation and
subsidiaries (the Corporation) for the year ended December 31, 2003. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the Corporation's consolidated results of operations
and cash flows for the year ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Birmingham, Alabama
March 15, 2004
47
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks..................................... $ 35,088 $ 23,489
Interest-bearing deposits in other banks.................... 9,772 11,411
Federal funds sold.......................................... -- 11,000
Investment securities available for sale.................... 242,595 288,308
Mortgage loans held for sale................................ 21,355 8,095
Loans....................................................... 964,789 936,385
Unearned income............................................. (1,536) (1,517)
---------- ----------
Loans, net of unearned income............................... 963,253 934,868
Allowance for loan losses................................... (12,011) (12,543)
---------- ----------
Net loans................................................... 951,242 922,325
Premises and equipment, net................................. 56,017 60,434
Accrued interest receivable................................. 7,081 6,237
Stock in FHLB and Federal Reserve Bank...................... 10,966 11,787
Cash surrender value of life insurance...................... 39,169 38,369
Goodwill and intangible assets.............................. 12,090 12,376
Other assets................................................ 30,094 29,297
---------- ----------
Total assets....................................... $1,415,469 $1,423,128
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand................................ $ 92,342 $ 89,487
Interest-bearing demand................................... 349,271 295,214
Savings................................................... 21,705 28,381
Time deposits $100,000 and over........................... 344,736 401,270
Other time deposits....................................... 235,642 252,854
---------- ----------
Total deposits..................................... 1,043,696 1,067,206
Advances from FHLB.......................................... 181,090 156,090
Federal funds borrowed and security repurchase agreements... 33,406 49,456
Notes payable............................................... 3,755 3,965
Junior subordinated debentures owed to unconsolidated
subsidiary trusts......................................... 31,959 31,959
Accrued expenses and other liabilities...................... 16,498 13,913
---------- ----------
Total liabilities.................................. 1,310,404 1,322,589
Stockholders' equity:
Convertible preferred stock, par value $.001 per share;
shares authorized 5,000,000; shares issued and
outstanding -0- in 2005 and 62,000 in 2004.............. -- --
Common stock, par value $.001 per share; shares authorized
35,000,000; shares issued 20,221,456 in 2005 and
18,025,932 in 2004; outstanding 19,980,261 in 2005 and
17,749,846 in 2004...................................... 20 18
Surplus -- preferred...................................... -- 6,193
-- common stock.................................... 87,979 68,428
Retained earnings......................................... 21,494 29,591
Accumulated other comprehensive loss...................... (2,544) (1,094)
Treasury stock, at cost -- 49,823 and 58,014 shares,
respectively............................................ (341) (390)
Unearned ESOP stock....................................... (1,543) (1,758)
Unearned restricted stock................................. -- (449)
---------- ----------
Total stockholders' equity......................... 105,065 100,539
---------- ----------
Total liabilities and stockholders' equity......... $1,415,469 $1,423,128
========== ==========
See accompanying notes
48
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------
2005 2004 2003
--------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Interest income:
Interest and fees on loans................................ $ 63,895 $56,184 $71,335
Interest on taxable securities............................ 11,632 8,897 3,696
Interest on tax exempt securities......................... 246 143 185
Interest on federal funds sold............................ 460 202 298
Interest and dividends on other investments............... 1,047 734 699
-------- ------- -------
Total interest income..................................... 77,280 66,160 76,213
Interest expense:
Interest on deposits...................................... 27,915 19,188 22,368
Interest expense on advances from FHLB and other borrowed
funds.................................................. 7,493 6,356 8,597
Interest on subordinated debentures....................... 2,847 2,579 2,522
-------- ------- -------
Total interest expense.................................... 38,255 28,123 33,487
-------- ------- -------
Net interest income......................................... 39,025 38,037 42,726
Provision for loan losses................................... 3,500 975 20,975
-------- ------- -------
Net interest income after provision for loan losses......... 35,525 37,062 21,751
Noninterest income:
Service charges and fees.................................. 4,687 5,204 5,814
Mortgage banking income................................... 2,558 1,664 4,034
Investment securities (losses) gains...................... (948) (74) 588
Change in fair value of derivatives....................... (325) -- --
Gain on sale of branches.................................. -- 739 48,264
Increase in cash surrender value of life insurance........ 1,544 1,643 1,641
Insurance proceeds........................................ 5,114 -- --
Other..................................................... 2,067 2,090 2,515
-------- ------- -------
Total noninterest income.................................. 14,697 11,266 62,856
Noninterest expenses:
Salaries and employee benefits............................ 23,104 23,481 29,461
Occupancy and equipment................................... 7,680 8,047 8,115
Prepayment penalty on FHLB advances....................... -- -- 2,532
Management separation costs............................... 15,467 -- --
Loss on sale of loans..................................... -- 2,293 --
Other..................................................... 14,369 14,116 17,822
-------- ------- -------
Total noninterest expenses................................ 60,620 47,937 57,930
-------- ------- -------
(Loss) income before income taxes........................... (10,398) 391 26,677
Income tax (benefit) expense................................ (4,612) (796) 9,178
-------- ------- -------
Net (loss) income........................................... (5,786) 1,187 17,499
Preferred stock dividends................................... 305 446 219
Preferred stock conversion.................................. 2,006 -- --
-------- ------- -------
Net (loss) income applicable to common
stockholders.................................... $ (8,097) $ 741 $17,280
======== ======= =======
Weighted average common shares outstanding.................. 19,154 17,583 17,492
Weighted average common shares outstanding, assuming
dilution.................................................. 19,154 17,815 18,137
Basic net (loss) income per common share.................... $ (.42) $ 0.04 $ .99
Diluted net (loss) income per common share.................. (.42) 0.04 .95
See accompanying notes
49
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
SURPLUS COMPREHENSIVE
COMMON ------------------- RETAINED (LOSS) TREASURY
STOCK COMMON PREFERRED EARNINGS INCOME STOCK
------ ------- --------- -------- ------------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at January 1, 2003.......... $18 $68,315 $ -- $11,571 $ 550 $(808)
Comprehensive income:
Net income...................... -- -- -- 17,499 -- --
Other comprehensive loss, net of
tax benefit of $487,
unrealized loss on securities
available for sale, arising
during the period, net of
reclassification adjustment... -- -- -- -- (730) --
Comprehensive income..............
Issuance of 58,021 shares of
treasury stock.................. -- 42 -- -- -- 307
Preferred dividends declared...... -- -- -- (219) -- --
Issuance of 62,000 shares of
preferred stock, net of direct
costs........................... -- -- 6,193 -- -- --
Stock options exercised........... -- 156 -- -- -- --
Forfeiture of unearned restricted
stock........................... -- (123) -- -- -- --
Amortization of unearned
restricted stock................ -- -- -- -- -- --
Release of 22,250 shares by
ESOP............................ -- (27) -- -- -- --
--- ------- ------- ------- ------- -----
Balance at December 31, 2003........ 18 68,363 6,193 28,851 (180) (501)
Comprehensive income:
Net income...................... -- -- -- 1,187 -- --
Other comprehensive loss, net of
tax benefit of $609,
unrealized loss on securities
available for sale, arising
during the period, net of
reclassification adjustment... -- -- -- -- (914) --
Comprehensive income..............
Issuance of 20,821 shares of
treasury stock.................. -- 43 -- -- -- 111
Preferred dividends declared...... -- -- -- (446) -- --
Stock options exercised........... -- 49 -- (1) -- --
Amortization of unearned
restricted stock................ -- -- -- -- -- --
Release of 26,700 shares by
ESOP............................ -- (27) -- -- -- --
--- ------- ------- ------- ------- -----
Balance at December 31, 2004........ 18 68,428 6,193 29,591 (1,094) (390)
Comprehensive income:
Net loss........................ -- -- -- (5,786) -- --
Other comprehensive loss, net of
tax benefit of $984,
unrealized loss on securities
available for sale, arising
during the period, net of
reclassification adjustment... -- -- -- -- (1,473) --
Change in accumulated gain on
cash flow hedging instrument,
net of tax expense of $16..... -- -- -- -- 23 --
--- ------- ------- ------- ------- -----
Comprehensive loss................
Issuance of 925,636 shares to new
executive management and others
in a private placement.......... 1 7,328 -- -- -- --
Issuance of 8,191 shares of
treasury stock.................. -- 34 -- -- -- 49
Issuance of 49,375 shares of
restricted stock................ -- 403 -- -- -- --
Preferred dividends declared...... -- -- -- (305) -- --
Preferred stock conversion --
775,000 shares.................. 1 8,198 (6,193) (2,006) -- --
Stock options exercised --
474,684 shares.................... -- 3,727 -- -- -- --
Forfeiture of unearned restricted
stock........................... -- (204) -- -- -- --
Amortization of unearned
restricted stock................ -- -- -- -- -- --
Release of 26,700 shares by
ESOP............................ -- 65 -- -- -- --
--- ------- ------- ------- ------- -----
Balance at December 31, 2005........ $20 $87,979 $ -- $21,494 $(2,544) $(341)
=== ======= ======= ======= ======= =====
UNEARNED UNEARNED TOTAL
ESOP RESTRICTED STOCKHOLDERS'
STOCK STOCK EQUITY
-------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance at January 1, 2003.......... $(2,153) $(952) $ 76,541
Comprehensive income:
Net income...................... -- -- 17,499
Other comprehensive loss, net of
tax benefit of $487,
unrealized loss on securities
available for sale, arising
during the period, net of
reclassification adjustment... -- -- (730)
--------
Comprehensive income.............. 16,769
Issuance of 58,021 shares of
treasury stock.................. -- -- 349
Preferred dividends declared...... -- -- (219)
Issuance of 62,000 shares of
preferred stock, net of direct
costs........................... -- -- 6,193
Stock options exercised........... -- -- 156
Forfeiture of unearned restricted
stock........................... -- 123 --
Amortization of unearned
restricted stock................ -- 181 181
Release of 22,250 shares by
ESOP............................ 179 -- 152
------- ----- --------
Balance at December 31, 2003........ (1,974) (648) 100,122
Comprehensive income:
Net income...................... -- -- 1,187
Other comprehensive loss, net of
tax benefit of $609,
unrealized loss on securities
available for sale, arising
during the period, net of
reclassification adjustment... -- -- (914)
--------
Comprehensive income.............. 273
Issuance of 20,821 shares of
treasury stock.................. -- -- 154
Preferred dividends declared...... -- -- (446)
Stock options exercised........... -- -- 48
Amortization of unearned
restricted stock................ -- 199 199
Release of 26,700 shares by
ESOP............................ 216 -- 189
------- ----- --------
Balance at December 31, 2004........ (1,758) (449) 100,539
Comprehensive income:
Net loss........................ -- -- (5,786)
Other comprehensive loss, net of
tax benefit of $984,
unrealized loss on securities
available for sale, arising
during the period, net of
reclassification adjustment... -- -- (1,473)
Change in accumulated gain on
cash flow hedging instrument,
net of tax expense of $16..... -- -- 23
------- ----- --------
Comprehensive loss................ (7,236)
Issuance of 925,636 shares to new
executive management and others
in a private placement.......... -- -- 7,329
Issuance of 8,191 shares of
treasury stock.................. -- -- 83
Issuance of 49,375 shares of
restricted stock................ -- (122) 281
Preferred dividends declared...... -- -- (305)
Preferred stock conversion --
775,000 shares.................. -- -- --
Stock options exercised -- --
474,684 shares.................... -- -- 3,727
Forfeiture of unearned restricted
stock........................... -- 204 --
Amortization of unearned
restricted stock................ -- 367 367
Release of 26,700 shares by
ESOP............................ 215 -- 280
------- ----- --------
Balance at December 31, 2005........ $(1,543) $ -- $105,065
======= ===== ========
See accompanying notes
50
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
2005 2004 2003
-------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net (loss) income........................................... $ (5,786) $ 1,187 $ 17,499
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operations:
Depreciation............................................ 3,275 3,374 3,519
Net premium amortization on securities.................. 531 653 1,021
Loss (gain) on sale of investment securities............ 948 74 (588)
Loss on foreclosed assets............................... 818 969 1,064
Loss on sale of loans................................... -- 2,293 --
Change in fair value of derivatives..................... 325 -- --
Provision for loan losses............................... 3,500 975 20,975
(Increase) decrease in accrued interest receivable...... (844) (1,199) 1,087
Deferred income tax (benefit) expense................... (3,168) 1,634 2,936
Gain on sale of branches................................ -- (739) (48,264)
Net increase in mortgage loans held for sale............ (13,260) (1,687) (5,570)
Other operating activities, net......................... 3,877 (708) 6,325
-------- --------- ---------
Net cash (used in) provided by operating activities......... (9,784) 6,826 4
INVESTING ACTIVITIES
Decrease (increase) in interest bearing deposits in other
banks..................................................... 1,639 458 (1,844)
Decrease (increase) in federal funds sold................... 11,000 (11,000) 11,000
Proceeds from sales of investment securities available for
sale...................................................... 57,372 84,485 40,902
Proceeds from maturities of investment securities available
for sale.................................................. 40,642 65,560 68,692
Proceeds from sales of investment securities held to
maturity.................................................. -- -- 2,070
Purchase of investment securities available for sale........ (56,233) (306,400) (174,484)
Proceeds from sale of loans................................. -- 23,883 --
Net (increase) decrease in loans............................ (34,225) (126,059) 8,775
Net cash (paid) received in business combinations........... -- (6,626) 36,703
Purchase of premises and equipment.......................... (2,665) (6,457) (7,165)
Proceeds from sale of premises and equipment................ 3,343 497 --
Proceeds from sale of foreclosed assets..................... 4,155 7,689 5,642
Purchase of life insurance.................................. -- (5,000) --
Other investing activities, net............................. 974 (3,788) 2,394
-------- --------- ---------
Net cash provided by (used in) investing activities......... 26,002 (282,758) (7,315)
FINANCING ACTIVITIES
Net increase in demand and savings deposits................. 50,236 59,338 92,998
Net (decrease) increase in time deposits.................... (73,747) 126,134 (57,425)
Increase (decrease) in FHLB advances........................ 25,000 35,000 (52,660)
Proceeds from note payable.................................. -- 2,250 2,100
Principal payment on note payable........................... (210) (210) (175)
Net (decrease) increase in other borrowed funds............. (16,050) 45,627 2,657
Proceeds from issuance of preferred stock................... -- -- 6,193
Proceeds from issuance of common stock...................... 10,457 49 156
Cash dividends paid......................................... (305) (446) (219)
-------- --------- ---------
Net cash (used in) provided by financing activities......... (4,619) 267,742 (6,375)
-------- --------- ---------
Increase (decrease) in cash and due from banks.............. 11,599 (8,190) (13,686)
Cash and due from banks at beginning of year.............. 23,489 31,679 45,365
-------- --------- ---------
Cash and due from banks at end of year.................... $ 35,088 $ 23,489 $ 31,679
======== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest.................................................... $ 37,790 $ 27,322 $ 35,963
Income taxes................................................ (3,066) (2,708) 2,059
Trade date purchase of debt securities not yet settled...... -- -- 10,429
Trade date sale of debt securities not yet settled.......... -- -- 3,067
Transfer of foreclosed assets............................... 1,804 7,637 10,272
See accompanying notes
51
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Banc Corporation ("Corporation"), through its subsidiaries, provides a
full range of banking and bank-related services to individual and corporate
customers in Alabama and the panhandle of Florida. The accounting and reporting
policies of the Corporation conform with accounting principles generally
accepted in the United States of America and to general practice within the
banking industry. The following summarizes the most significant of these
policies.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements and notes to
consolidated financial statements include the accounts of the Corporation and
its consolidated subsidiaries. (See Recent Accounting Pronouncements concerning
FIN 46.) All significant intercompany transactions or balances have been
eliminated in consolidation.
Certain amounts in prior year financial statements have been reclassified
to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purpose of presentation in the statements of cash flows, cash and
cash equivalents are defined as those amounts included in the statements of
financial condition caption "Cash and Due from Banks."
The Corporation's banking subsidiary is required to maintain minimum
average reserve balances by the Federal Reserve Bank, which is based on a
percentage of deposits. The amount of the reserves at December 31, 2005 was
approximately $1,045,000.
Investment Securities
Investment securities are classified as either held to maturity, available
for sale or trading at the time of purchase. The Corporation defines held to
maturity securities as debt securities which management has the positive intent
and ability to hold to maturity.
Held to maturity securities are reported at cost, adjusted for amortization
of premiums and accretion of discounts that are recognized in interest income
using the effective yield method.
Securities available for sale are reported at fair value and consist of
bonds, notes, debentures, and certain equity securities not classified as
trading securities nor as securities to be held to maturity. Unrealized holding
gains and losses, net of deferred taxes, on securities available for sale are
excluded from earnings and reported in accumulated other comprehensive (loss)
income within stockholders' equity.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
52
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned
income and an allowance for loan losses. The Corporation defers certain
nonrefundable loan origination and commitment fees and the direct costs of
originating or acquiring loans. The net deferred amount is amortized over the
estimated lives of the related loans as an adjustment to yield. Interest income
with respect to loans is accrued on the principal amount outstanding, except for
loans classified nonaccrual.
Accrual of interest is discontinued on loans which are more than ninety
days past due unless the loan is well secured and in the process of collection.
"Well secured" means that the debt must be secured by collateral having
sufficient realizable value to discharge the debt, including accrued interest,
in full. "In the process of collection" means that collection of the debt is
proceeding in due course either through legal action or other collection effort
that is reasonably expected to result in repayment of the debt in full within a
reasonable period of time, usually within one hundred eighty days of the date
the loan became past due. Any unpaid interest previously accrued on these loans
is reversed from income. Interest payments received on these loans are applied
as a reduction of the loan principal balance.
Under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 114, Accounting for Creditors for Impairment of a Loan, impaired
loans are specifically reviewed loans for which it is probable that the
Corporation will be unable to collect all amounts due according to the terms of
the loan agreement. Impairment is measured by comparing the recorded investment
in the loan with the present value of expected future cash flows discounted at
the loan's effective interest rate, at the loans observable market price, or the
fair value of the collateral if the loan is collateral dependent. A valuation
allowance is provided to the extent that the measure of the impaired loans is
less than the recorded investment. A loan is not considered impaired during a
period of delay in payment if the ultimate collectibility of all amounts due is
expected. Larger groups of homogenous loans such as consumer installment and
residential real estate mortgage loans are collectively evaluated for
impairment. Payments received on impaired loans for which the ultimate
collectibility of principal is uncertain are generally applied first as
principal reductions. Impaired loans and other nonaccrual loans are returned to
accrual status if the loan is brought contractually current as to both principal
and interest and repayment ability is demonstrated, or if the loan is in the
process of collection and no loss is anticipated.
The allowance for loan loss is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collectibility of principal is unlikely. The
allowance is the amount that management believes will be adequate to absorb
possible losses on existing loans.
Management reviews the adequacy of the allowance on a quarterly basis. The
allowance for classified loans is established based on risk ratings assigned by
loan officers. Loans are risk rated using an eight-point scale, and loan
officers are responsible for the timely reporting of changes in the risk
ratings. This process, and the assigned risk ratings, is subject to review by
the Corporation's internal loan review function. Based on the assigned risk
ratings, the loan portfolio is segregated into the regulatory classifications
of: Special Mention, Substandard, Doubtful or Loss. Generally, recommended
regulatory reserve percentages are applied to these categories to estimate the
amount of loan loss unless the loan has been specifically reviewed for
impairment. Reserve percentages assigned to homogeneous and non-rated loans are
based on historical charge-off experience adjusted for other risk factors.
Significant problem credits are individually reviewed by management.
Generally, these loans are commercial or real estate construction loans selected
for review based on their balance, assigned risk rating, payment history, and
other risk factors at the time of management's review. Losses are estimated on
each loan based on management's review. These individually reviewed credits are
excluded from the classified loan loss calculation discussed above.
53
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
To evaluate the overall adequacy of the allowance to absorb losses inherent
in the Corporation's loan portfolio, the Corporation considers general economic
conditions, geographic concentrations, and changes in the nature and volume of
the loan portfolio.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market,
determined on a net aggregate basis. The carrying value of these loans is
adjusted for any origination fees and cost incurred to originate these loans.
Differences between the carrying amount of mortgage loans held for sale and the
amounts received upon sale are credited or charged to income at the time the
proceeds of the sale are collected. The fair values are based on quoted market
prices of similar loans, adjusted for differences in loan characteristics.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed over the estimated service lives of the
assets using straight-line and accelerated methods, generally using five to
forty years for premises and five to ten years for furniture and equipment.
Expenditures for maintenance and repairs are charged to operations as
incurred; expenditures for renewals and betterments are capitalized and written
off by depreciation charges. Property retired or sold is removed from the asset
and related accumulated depreciation accounts and any gain or loss resulting
there from is reflected in the statement of operations.
The Corporation reviews any long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.
Intangible Assets
At both December 31, 2005 and 2004, goodwill, net of accumulated
amortization, totaled $10,336,000. The Corporation adopted SFAS No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"), on January 1, 2002. SFAS 142
requires goodwill and intangible assets with indefinite useful lives to no
longer be amortized but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142.
The Corporation has determined that its reporting units for purposes of
this testing are the operating branches which are included as part of its
reportable segments: the Alabama Region and the Florida Region. Goodwill was
allocated to each reporting unit based on locations of past acquisitions.
The first step in testing requires that the fair value of each reporting
unit be determined. If the carrying amount of any reporting unit exceeds its
fair value, goodwill impairment may be indicated.
The Corporation performed a transitional impairment test of goodwill as of
January 1, 2002 using discounted cash flow methodology to determine the fair
value of its reporting units which was compared to the carrying amount. The fair
value exceeded the carrying amount and no impairment existed.
The Corporation performs the annual impairment test as of December 31. As
of December 31, 2005 and 2004, it was determined no impairment existed.
At December 31, 2005 and 2004, the Corporation also had $1,754,000 and
$2,040,000, respectively, of core deposit intangibles from the CF Bancshares
acquisition, which is being amortized over ten years. Amortization expense was
$286,000 for each of the three years ended December 31, 2005, 2004 and 2003.
Aggregate amortization expense for the years ending December 31, 2006 through
December 31, 2010 is estimated to be $1,430,000, or $286,000 per year.
54
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Other Real Estate
Other real estate, acquired through partial or total satisfaction of loans,
is carried at the lower of cost or fair value, less estimated selling expenses,
in other assets. At the date of acquisition, any difference between the fair
value and book value of the asset is charged to the allowance for loan losses.
Subsequent gains or losses on the sale or losses from the valuation of and the
cost of maintaining and operating other real estate are included in other
expense. Other real estate totaled $1,842,000 and $4,906,000 at December 31,
2005 and 2004, respectively.
Security Repurchase Agreements
Securities sold under agreements to repurchase are generally accounted for
as collateralized financing transactions and are recorded at the amounts at
which the securities were sold plus accrued interest. Securities, generally U.S.
government and Federal agency securities, pledged as collateral under these
financing arrangements cannot be sold or repledged by the secured party.
Income Taxes
The consolidated financial statements are prepared on the accrual basis.
The Corporation accounts for income taxes using the liability method pursuant to
SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse.
Off-Balance Sheet Financial Instruments
In the ordinary course of business the Corporation has entered into
off-balance sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements and commercial letters of
credit and standby letters of credit. Such financial instruments are recorded in
the financial statements when they become payable.
Per Share Amounts
Earnings per common share computations are based on the weighted average
number of common shares outstanding during the periods presented.
Diluted earnings per common share computations are based on the weighted
average number of common shares outstanding during the period, plus the dilutive
effect of stock options, convertible preferred stock and restricted stock
awards.
Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"),
establishes a "fair value" based method of accounting for stock-based
compensation plans and allows entities to adopt that method of accounting for
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by the Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). The
Corporation has elected to follow Opinion 25 and related interpretations in
accounting for its employee stock options. Under Opinion 25, because the
exercise price of the Corporation's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
55
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
SFAS 123 requires the disclosure of pro forma net income or loss and pro
forma net income or loss per share (see Note 11) determined as if the
Corporation had accounted for its employee stock options under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option-pricing model. Option valuation
models require the input of subjective assumptions. See Recent Accounting
Pronouncements regarding SFAS No. 123R, Share-Based Payment.
Derivative Financial Instruments and Hedging Activities
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), requires companies to recognize all of their derivative
instruments as either assets or liabilities in the statement of financial
position at fair value.
Derivative financial instruments that qualify under SFAS 133 in a hedging
relationship are designated, based on the exposure being hedged, as either fair
value or cash flow hedges. Fair value hedge relationships mitigate exposure to
the change in fair value of an asset, liability or firm commitment. Under the
fair value hedging model, gains or losses attributable to the change in fair
value of the derivative instrument, as well as the gains and losses attributable
to the change in fair value of the hedged item, are recognized in earnings in
the period in which the change in fair value occurs.
Cash flow hedge relationships mitigate exposure to the variability of
future cash flows or other forecasted transactions. Under the cash flow hedging
model, the effective portion of the gain or loss related to the derivative
instrument, if any, is recognized as a component of other comprehensive income.
For derivative financial instruments not designated as a fair value or cash flow
hedges, gains and losses related to the change in fair value are recognized in
earnings during the period of change in fair value.
The Corporation formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivative instruments that are designated as fair-value or
cash-flow hedges to specific assets and liabilities on the balance sheet or to
specific firm commitments or forecasted transactions. The Corporation also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivative instruments that are used in hedging transactions are
highly effective in offsetting changes in fair values or cash flows of hedged
items. When it is determined that a derivative instrument is not highly
effective as a hedge or that it has ceased to be a highly effective hedge, the
Corporation discontinues hedge accounting prospectively, as discussed below.
The Corporation discontinues hedge accounting prospectively when: (1) it is
determined that the derivative instrument is no longer effective in offsetting
changes in the fair value or cash flows of a hedged item (including firm
commitments or forecasted transactions); (2) the derivative instrument expires
or is sold, terminated or exercised; (3) the derivative instrument is
de-designated as a hedge instrument, because it is unlikely that a forecasted
transaction will occur; (4) a hedged firm commitment no longer meets the
definition of a firm commitment; or (5) management determines that designation
of the derivative instrument as a hedge instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined that the
derivative instrument no longer qualifies as an effective fair-value hedge, the
derivative instrument will continue to be carried on the balance sheet at its
fair value and the hedged asset or liability will no longer be adjusted for
changes in fair value. When hedge accounting is discontinued because the hedged
item no longer meets the definition of a firm commitment, the derivative
instrument will continue to be carried on the balance sheet at its fair value
and any asset or liability that was recorded pursuant to recognition of the firm
commitment will be removed from the balance sheet and recognized as a gain or
loss in the then-current-period earnings. When hedge accounting is discontinued
because it is probable that a forecasted transaction will not occur, the
derivative instrument
56
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
will continue to be carried on the balance sheet at its fair value, and gains
and losses that were accumulated in other comprehensive income will be
recognized immediately in earnings. When the derivative instrument is
de-designated, terminated or sold, any gain or loss will remain in accumulated
other comprehensive income and will be reclassified into earnings over the same
period during which the underlying hedged item affects earnings. In all other
situations in which hedge accounting is discontinued, the derivative instrument
will be carried at its fair value on the balance sheet, with changes in its fair
value recognized in the then-current-period earnings.
The Corporation has entered into an interest rate swap agreement with a
notional amount of $15,000,000 to hedge the variability in cash flows on
$15,000,000 million of FHLB borrowings. Under the terms of the interest rate
swap, which matures in September 2006, the Corporation receives a floating
interest rate based on LIBOR and pays a fixed rate of 4.33%. This contract,
which is accounted for as cash flow hedge, satisfied the criteria to use the
"short-cut" method of accounting for hedging the variability in cash flow on
FHLB borrowings due to changes in the LIBOR rate. The short-cut method allows
the Corporation to assume that there is no ineffectiveness in the hedging
relationship.
As of December 31, 2005, the Corporation has $46,500,000 in notional amount
of interest rate swap agreements that were not designated as fair value or cash
flow hedges. In 2005 and prior years, the Corporation entered into interest rate
swap agreements (CD swaps) to hedge the interest rate risk inherent in certain
of its brokered certificates of deposit. From the inception of the hedging
program, the Corporation applied the short-cut method to account for the swaps.
The Corporation has recently concluded that the CD swaps did not qualify for
this method in prior periods because the swap did not to have a fair value of
zero at inception, which is required under SFAS 133 to qualify for the short-cut
method. Therefore any gains and losses attributable to the change in fair value
are recognized in earnings during the period of change in fair value. The
Corporation filed amendments on Form 10-Q/A restating its previously reported
results for the first three quarters of 2005 to reflect the effects of such
swaps not qualifying for hedge accounting under SFAS 133. Management and the
Audit Committee determined that this did not have a material effect on the
Corporation's reported results of operations for the year ending December 31,
2004 or for prior periods, and thus the Corporation has not restated or amended
such previously reported results for periods ending on or prior to December 31,
2004.
As of December 31, 2005, these CD swaps had a recorded negative fair value
of $992,000 and a weighted average life of 8.89 years. The weighted average
fixed rate (receiving rate) is 4.51% and the weighted average variable rate
(paying rate) is 4.22% (LIBOR based).
Recent Accounting Pronouncements
On December 15, 2005, the FASB issued Staff Position "SOP 94-6-1 -- Terms
of Loan Products That May Give Rise to a Concentration of Credit Risk" ("FSP"),
which addresses the disclosure requirements for certain nontraditional mortgage
and other loan products the aggregation of which may constitute a concentration
of credit risk under existing accounting literature. Pursuant to this FSP, the
FASB's intentions were to reemphasize the adequacy of such disclosures and noted
that the recent popularity of certain loan products such as negative
amortization loans, high loan-to-value loans, interest only loans, teaser rate
loans, option adjusted rate mortgage loans and other loan product types may
aggregate to the point of being a concentration of credit risk to an issuer and
thus may require enhanced disclosures under existing guidance. This FSP was
effective immediately. The Corporation has evaluated the impact of this FSP and
has concluded that its disclosures are consistent with the objectives of the
FSP.
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
57
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 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.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment ("SFAS
123R"), which is a revision of SFAS 123 and supersedes Opinion 25. The new
standard, which will be effective for the Corporation in the first quarter of
2006, 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. The Corporation expects to recognize compensation expense in
future periods for any stock awards granted after December 31, 2005. Since all
of the Corporation's current stock option grants vested prior to December 31,
2005 no future compensation expense will be recognized on these awards (see Note
11).
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments. The EITF reached a consensus on an
other-than-temporary impairment model for debt and equity securities accounted
for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and cost method investments. In September 2004, the FASB issued
Staff Position ("FSP") No. EITF 03-01-1, Effective Date of Paragraphs 10-20 of
EITF 03-01. This FSP delayed the effective date of the measurement and
recognition guidance contained in paragraphs 10-20 of Issue 03-01. In November
2005, the FASB issued FSP FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. This
FSP nullifies certain requirements of Issue 03-1 and supersedes EITF Abstracts,
Topic No. D-44, Recognition of Other-Than-Temporary Impairment upon the Planned
Sale of a Security Whose Cost Exceeds Fair Value. Based on the clarification
provided in FSP FAS 115-1 and FAS 124-1, the amount of any other-than-temporary
impairment that needs to be recognized will continue to be dependent on market
conditions, the occurrence of certain events or changes in circumstances
relative to an investee and an entity's intent and ability to hold the impaired
investment at the time of the valuation. FSP FAS 115-1 and FAS 124-1 are
effective for reporting periods beginning after December 15, 2005. Adoption of
this FSP is not expected to have a material effect on results of operations,
financial position or liquidity of the Corporation.
In December 2003, the American Institute of Certified Public Accountants
issued Statement of Position 03-3 ("SOP 03-3"), Accounting for Certain Loans or
Debt Securities Acquired in a Transfer. SOP 03-3 addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
(loans) acquired in a transfer if those differences are attributable, at least
in part, to credit quality. It includes such loans acquired in purchase business
combinations and applies to all nongovernmental entities. SOP 03-3 does not
apply to loans originated by the entity. SOP 03-3 limits the yield that may be
accepted (accretable yield) to the excess of the investor's estimate of
undiscounted expected principal, interest, and other cash flows (cash flows
expected at
58
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
acquisition to be collected) over the investor's initial investment in the loan.
SOP 03-3 requires that the excess of contractual cash flows over cash flows
expected to be collected (nonaccretable difference) not be recognized as an
adjustment of yield, loss accrual, or valuation allowance. SOP 03-3 prohibits
investors from displaying accretable yield and nonaccretable difference in the
statement of condition. Subsequent increases in cash flows expected to be
collected generally should be recognized prospectively through adjustment of the
loan's yield over its remaining life.
Decreases in cash flows expected to be collected should be recognized as
impairment. SOP 03-3 prohibits "carrying over" or creation of valuation
allowances in the initial accounting of all loans acquired in a transfer that
are within the scope of SOP 03-3. The prohibition of the valuation allowance
carryover applies to the purchase of an individual loan, a pool of loans, a
group of loans, and loans acquired in a purchase business combination. SOP 03-3
is effective for loans acquired in fiscal years beginning after December 15,
2004. The changes required by SOP 03-3 are not expected to have a material
impact on results of operations, financial position or liquidity of the
Corporation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46
addresses whether business enterprises must consolidate the financial statements
of entities known as "variable interest entities". A variable interest entity is
defined by FIN 46 to be a business entity which has one or both of the following
characteristics: (1) the equity investment at risk is not sufficient to permit
the entity to finance its activities without additional support from other
parties, which is provided through other interests that will absorb some or all
of the expected losses at the entity; and (2) the equity investors lack one or
more of the following essential characteristics of a controlling financial
interest: (a) direct or indirect ability to make decisions about the entity's
activities through voting rights or similar rights, (b) the obligation to absorb
the expected losses of the entity if they occur, which makes it possible for the
entity to finance its activities, or (c) the right to receive the expected
residual returns of the entity if they occur, which is the compensation for risk
of absorbing expected losses.
In previous financial statements, the Corporation had consolidated two
trusts through which it had issued trust preferred securities ("TPS") and
reported the TPS as "guaranteed preferred beneficial interests in the
Corporation's subordinated debentures" in the statements of financial condition.
In December 2003, the FASB issued a revision to FIN 46 to clarify certain
provisions, which affected the accounting for TPS. As a result of the provisions
in revised FIN 46, the trusts have been deconsolidated, with the Corporation
accounting for its investment in the trusts as assets, its subordinated
debentures as debt, and the interest paid thereon as interest expense. The
Corporation had always classified the TPS as debt and the dividends as interest
but eliminated its common stock investment and dividends received from the
trust. FIN 46 permits and encourages restatement of prior period results, and
accordingly, all financial statements presented have been adjusted to give
effect to the revised provisions of FIN 46. While these changes had no effect on
previously reported net interest margin, net income or earnings per share, they
increased total interest income and interest expense, as well as total assets
and total liabilities. (See Note 10)
In March 2004, the Securities and Exchange Commission issued Staff
Accounting Bulletin 105, "Application of Accounting Principles to Loan
Commitments" ("SAB 105"), which addresses certain issues regarding the
accounting for and disclosure of loan commitments relating to the origination of
mortgage loans that will be held for resale. Such commitments are considered
derivatives under the provisions of SFAS No. 133, as amended by SFAS No. 149,
Amendment to Statement 133 on Derivatives Instruments and Hedging Activities,
and are therefore required to be recorded at fair value. SAB 105 stipulates that
in recording those commitments no consideration should be given to any expected
future cash flows related to the associated servicing of the future loan. SAB
105 further stipulates that no other internally-developed intangible assets,
such as customer relationship intangibles, should be recorded as part of the
loan commitment derivative. SAB 105 requires disclosure of accounting policies
for loan commitment derivatives,
59
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
including methods and assumptions used to estimate fair value and any associated
economic hedging strategies. The provisions of SAB 105 were effective for loan
commitment derivatives that were entered into after March 31, 2004. The
Corporation enters into such commitments with customers in connection with
residential mortgage loan applications. The amount of these mortgage loan
origination commitments were $15,593,000 at December 31, 2005. The net
unrealized gain of the origination commitments were $8,400 at December 31, 2005.
The fair values are calculated based on changes in market interest rates after
the commitment date. The provisions of SAB 105 did not have a material impact on
results of operations, financial position, or liquidity of the Corporation.
2. INVESTMENT SECURITIES
The amounts at which investment securities are carried and their
approximate fair values at December 31, 2005 are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
Investment securities available for sale:
U.S. agency securities...................... $ 99,365 $ -- $1,892 $ 97,473
State, county and municipal securities...... 8,729 28 111 8,646
Mortgage-backed securities.................. 93,689 10 1,937 91,762
Corporate debt.............................. 38,064 75 411 37,728
Other securities............................ 7,028 -- 42 6,986
-------- ---- ------ --------
Total.................................... $246,875 $113 $4,393 $242,595
======== ==== ====== ========
The amounts at which investment securities are carried and their
approximate fair values at December 31, 2004 are as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
Investment securities available for sale:
U.S. agency securities...................... $180,717 $ 42 $ 922 $179,837
State, county and municipal securities...... 7,195 49 54 7,190
Mortgage-backed securities.................. 61,241 22 655 60,608
Corporate debt.............................. 34,176 4 312 33,868
Other securities............................ 6,802 3 -- 6,805
-------- ---- ------ --------
Total.................................... $290,131 $120 $1,943 $288,308
======== ==== ====== ========
Investment securities with an amortized cost of $144,565,000 and
$131,090,000 at December 31, 2005 and 2004, respectively, were pledged to secure
United States government deposits and other public funds and for other purposes
as required or permitted by law.
60
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENT SECURITIES -- (CONTINUED)
The following table presents the age of gross unrealized losses and fair
value by investment category.
DECEMBER 31, 2005
---------------------------------------------------------------------------
LESS THAN 12 MONTHS MORE THAN 12 MONTHS TOTAL
----------------------- ----------------------- -----------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. agency securities..... $29,428 $349 $ 68,045 $1,543 $ 97,473 $1,892
State, county and municipal
securities............... 3,523 43 1,975 68 5,498 111
Mortgage-backed
securities............... 43,255 384 47,991 1,553 91,246 1,937
Corporate debt and other
securities............... 15,488 187 8,638 266 24,126 453
------- ---- -------- ------ -------- ------
Total.................... $91,694 $963 $126,649 $3,430 $218,343 $4,393
======= ==== ======== ====== ======== ======
Management does not believe any of the above individual unrealized loss as
of December 31, 2005 represents an other-than-temporary impairment. The
unrealized losses relate primarily to securities issued by the Federal Home Loan
Bank ("FHLB"), Fannie Mae ("FNMA") and Freddie Mac ("FHLMC"), and ten corporate
securities consisting primarily of corporate bonds and trust preferred
securities. These unrealized losses are primarily attributable to changes in
interest rates. The Corporation has both the intent and the ability to hold the
securities contained in the previous table for a time necessary to recover the
amortized cost.
During the fourth quarter of 2004, the Corporation realized an
other-than-temporary non-cash, non-operating impairment charge of $507,000
related to certain FNMA and FHLMC preferred stock that is carried in the
Corporation's available-for-sale investment portfolio. The net effect of this
impairment charge after tax was $320,000, or $.02 per common share. These
securities are high-yielding investment grade securities that are widely held by
other financial institutions but in light of certain events at these agencies,
management determined that these unrealized market losses were
other-than-temporary under generally accepted accounting principles.
The amortized cost and estimated fair values of investment securities at
December 31, 2005, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
SECURITIES AVAILABLE FOR
SALE
------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- -----------
(IN THOUSANDS)
Due in one year or less..................................... $ 7,711 $ 7,661
Due after one year through five years....................... 47,922 46,961
Due after five years through ten years...................... 59,719 58,852
Due after ten years......................................... 37,834 37,359
Mortgage-backed securities.................................. 93,689 91,762
-------- --------
$246,875 $242,595
======== ========
Gross realized gains on sales of investment securities available for sale
in 2005, 2004 and 2003 were $34,000, $598,000 and $791,000, respectively, and
gross realized losses for the same periods were $982,000, $672,000 and $277,000,
respectively.
61
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENT SECURITIES -- (CONTINUED)
The components of other comprehensive income (loss) for the years ended
December 31, 2005, 2004 and 2003 are as follows:
PRE-TAX INCOME TAX NET OF
AMOUNT EXPENSE INCOME TAX
------- ---------- ----------
(IN THOUSANDS)
2005
Unrealized gain on derivatives......................... $ 39 $ 16 $ 23
Unrealized loss on available for sale securities....... (3,405) (1,335) (2,070)
Less reclassification adjustment for losses realized in
net income........................................... (948) (351) (597)
------- ------- -------
Net unrealized loss.......................... $(2,418) $ (968) $(1,450)
======= ======= =======
2004
Unrealized loss on available for sale securities....... $(1,597) $ (636) $ (961)
Less reclassification adjustment for losses realized in
net income........................................... (74) (27) (47)
------- ------- -------
Net unrealized loss.......................... $(1,523) $ (609) $ (914)
======= ======= =======
2003
Unrealized loss on available for sale securities....... $ (704) $ (297) $ (407)
Less reclassification adjustment for gains realized in
net income........................................... 513 190 323
------- ------- -------
Net unrealized loss.......................... $(1,217) $ (487) $ (730)
======= ======= =======
3. LOANS
At December 31, 2005 and 2004, the composition of the loan portfolio was as
follows:
2005 2004
-------- --------
Commercial and industrial................................... $135,454 $134,688
Real estate -- construction and land development............ 326,418 249,715
Real estate -- mortgages Single-family...................... 243,183 250,758
Commercial................................................ 210,611 242,884
Other..................................................... 27,503 25,764
Consumer.................................................... 21,122 32,009
All other loans............................................. 498 567
-------- --------
Total loans....................................... $964,789 $936,385
======== ========
At December 31, 2005 and 2004, the Corporation's recorded investment in
loans considered to be impaired under SFAS No. 114 was $3,483,000 and
$5,130,000, respectively. At December 31, 2005 and 2004, there was approximately
$1,425,000 and $1,995,000, respectively in the allowance for loan losses
specifically allocated to impaired loans. The average recorded investment in
impaired loans during 2005, 2004 and 2003 was approximately $4,687,000,
$17,752,000 and $28,318,000, respectively. Interest income recognized on loans
considered impaired totaled approximately $65,000, $66,000 and $87,000 for the
years ended December 31, 2005, 2004 and 2003, respectively.
At December 31, 2005, nonaccrual loans totaled $4,550,000 compared to
$6,344,000 at December 31, 2004. Loans past due ninety days or more and still
accruing totaled $49,000 compared to $431,000 at December 31, 2004.
In September 2004 the Corporation's banking subsidiary sold approximately
$32,000,000, before allowance for loan losses, in certain nonperforming loans
and other classified, performing loans, resulting in a
62
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LOANS -- (CONTINUED)
pre-tax loss of $2,293,000. Prior to the sale, approximately $6,868,000 related
to these loans was recognized as a charge-off in September 2004 against the
allowance for loan losses. The $6,868,000 in allowance for loan losses
associated with these loans had been provided in previous periods.
4. ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses for the years ended December 31,
2005, 2004 and 2003 follows:
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year............................ $12,543 $25,174 $27,766
Allowance of sold branches............................ -- -- (102)
Provision for loan losses............................. 3,500 975 20,975
Loan charge-offs...................................... (5,742) (17,341) (24,450)
Recoveries............................................ 1,710 3,735 985
------- ------- -------
Balance at end of year.................................. $12,011 $12,543 $25,174
======= ======= =======
5. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 2005 and 2004 are as
follows:
2005 2004
-------- --------
(IN THOUSANDS)
Land........................................................ $ 7,202 $ 7,002
Premises.................................................... 53,003 52,746
Furniture and equipment..................................... 12,818 15,563
-------- --------
73,023 75,311
Less accumulated depreciation and amortization.............. (17,235) (15,303)
-------- --------
Net book value of premises and equipment in service......... 55,788 60,008
Construction in process..................................... 229 426
-------- --------
Total............................................. $ 56,017 $ 60,434
======== ========
Depreciation expense for the years ended December 31, 2005, 2004 and 2003
was $3,275,000, $3,374,000 and $3,519,000, respectively.
In March 2005, the Corporation sold its corporate aircraft, realizing a
$355,000 pre-tax loss.
Future minimum lease payments under the operating leases are summarized as
follows:
PROPERTY EQUIPMENT TOTAL
-------- --------- ------
(IN THOUSANDS)
Year ending December 31 2006............................... $ 283 $191 $ 474
2007..................................................... 219 135 354
2008..................................................... 167 106 273
2009..................................................... 152 3 155
2010..................................................... 157 -- 157
2011 and thereafter...................................... 413 -- 413
------ ---- ------
Total minimum lease payments..................... $1,391 $435 $1,826
====== ==== ======
63
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PREMISES AND EQUIPMENT -- (CONTINUED)
Rental expense relating to operating leases amounted to approximately
$810,000, $947,000 and $715,000 for the years ended December 31, 2005, 2004 and
2003, respectively.
6. DEPOSITS
The following schedule details interest expense on deposits:
YEAR ENDED DECEMBER 31
---------------------------
2005 2004 2003
------- ------- -------
(IN THOUSANDS)
Interest-bearing demand................................. $ 7,144 $ 3,225 $ 2,651
Savings................................................. 40 48 100
Time deposits $100,000 and over......................... 7,111 8,876 10,151
Other time deposits..................................... 13,620 7,039 9,466
------- ------- -------
Total......................................... $27,915 $19,188 $22,368
======= ======= =======
At December 31, 2005, the scheduled maturities of time deposits are as
follows (in thousands):
2006........................................................ $437,414
2007........................................................ 81,712
2008........................................................ 13,255
2009........................................................ 13,087
2010........................................................ 3,716
2011 and thereafter......................................... 31,194
--------
$580,378
========
7. ADVANCES FROM FEDERAL HOME LOAN BANK
The following is a summary, by year of maturity, of advances from the FHLB
as of December 31, 2005 and 2004 (in thousands):
2005 2004
----------------------- -----------------------
WEIGHTED WEIGHTED
YEAR AVERAGE RATE BALANCE AVERAGE RATE BALANCE
---- ------------ -------- ------------ --------
2005.................................... --% $ -- 2.47% $ 25,000
2006.................................... 4.40 85,250 2.13 25,250
2007.................................... -- -- 1.44 10,000
2008.................................... 5.74 5,500 5.74 5,500
2009.................................... 2.32 27,000 2.32 27,000
2010.................................... 6.41 5,000 6.22 31,340
2011.................................... -- -- 4.97 32,000
2015.................................... 4.45 26,340 -- --
2020.................................... 4.28 32,000 -- --
-------- --------
Total................................. 4.17% $181,090 3.70% $156,090
==== ======== ==== ========
The above schedule is by contractual maturity. Call dates for the above are
as follows: 2006, $42,000,000; 2008, $32,000,000 and 2010, $11,340,000.
During the third quarter of 2005, $58 million in advances from the FHLB
were restructured. In conjunction with this restructuring, the Corporation
entered a $15,000,000 one-year interest rate swap, under
64
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ADVANCES FROM FEDERAL HOME LOAN BANK -- (CONTINUED)
which it pays a 4.33% fixed amount on the 28th day of March, June, September and
December beginning December 28, 2005 and receives a floating amount equal to the
three-month LIBOR rate.
The advances are secured by a blanket lien on certain residential and
commercial real estate loans all with a carrying value of approximately
$245,580,000 at December 31, 2005. The Corporation has available approximately
$61,000,000 in unused advances under the blanket lien subject to the
availability of qualifying collateral.
The FHLB has issued for the benefit of the Corporation's 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 expires January 4, 2007 upon sixty days' prior
notice of non-renewal; otherwise, it shall automatically extend for a successive
one-year term.
8. FEDERAL FUNDS BORROWED AND SECURITY REPURCHASE AGREEMENTS
Detail of Federal funds borrowed and security repurchase agreements follows
(in thousands):
2005 2004
------- -------
Balance at December 31:
Federal funds borrowed.................................... $ 3,000 $ --
Security repurchase agreements............................ 30,406 49,456
Maximum outstanding at any month end:
Federal funds borrowed.................................... 11,000 10,000
Security repurchase agreements............................ 49,521 53,556
Daily average amount outstanding:
Federal funds borrowed.................................... 488 418
Security repurchase agreements............................ 35,064 24,808
Weighted daily average interest rate:
Federal funds borrowed.................................... 4.18% 1.69%
Security repurchase agreements............................ 3.02 2.11
Weighted daily interest rate for amounts outstanding at
December 31:
Federal funds borrowed.................................... 4.40% --%
Security repurchase agreements............................ 4.12 2.49
The carrying value of securities sold under repurchase agreements is
$37,047,000 and $55,536,000 as of December 31, 2005 and 2004, respectively.
65
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. NOTES PAYABLE
The following is a summary of notes payable as of December 31, 2005 and
2004 (in thousands):
2005 2004
---------------- ----------------
BALANCE AT DECEMBER 31: PRINCIPAL RATE PRINCIPAL RATE
----------------------- --------- ---- --------- ----
Note Payable to Compass Bank, borrowed under
$10,000,000 line of credit, due June 7, 2006, plus
interest payable monthly at 30 day LIBOR plus
2.50%, secured by real estate owned by the
Corporation and 100% of Superior Bank stock........ $2,250 6.89% $2,250 4.60%
ESOP Note Payable to Exchange Bank, due February 1,
2013, plus interest payable monthly at the Wall
Street Prime rate, secured by Corporation stock;
see discussion in Note 11.......................... 1,505 7.25 1,715 5.25
------ ---- ------ ----
Total notes payable.................................. $3,755 $3,965
====== ======
Maturities of notes payable for the five years subsequent to December 31,
2005 are as follows (in thousands):
2006........................................................ $2,460
2007........................................................ 210
2008........................................................ 210
2009........................................................ 210
2010........................................................ 210
Thereafter.................................................. 455
--- ------
Total..................................................... $3,755
=== ======
10. JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED SUBSIDIARY TRUSTS
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 mandatorily 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.
In the fourth quarter of 2003, as a result of applying the provisions of
FIN 46, governing when an equity interest should be consolidated, the
Corporation was required to deconsolidate these subsidiary trusts from its
financial statements. The deconsolidation of the net assets and results of
operations of the trusts had virtually no impact on the Corporation's financial
statements or liquidity position since the Corporation continues to be obligated
to repay the debentures held by the trusts and guarantees repayment of the trust
preferred securities issued by the trusts. The consolidated debt obligation
related to the trusts increased from $31,000,000 to
66
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED SUBSIDIARY
TRUSTS -- (CONTINUED)
$31,959,000 upon deconsolidation, with the difference representing the
Corporation's common ownership interest in the trusts.
The trust preferred securities held by the trusts qualify as Tier 1 capital
for the Corporation under regulatory guidelines.
Consolidated debt obligations related to these subsidiary trusts are as
follows (in thousands):
DECEMBER 31,
-------------------------
2005 2004
----------- -----------
10.6% junior subordinated debentures owed to TBC Capital
Statutory Trust II due September 7, 2030................. $15,464,000 $15,464,000
6-month LIBOR plus 3.75% junior subordinated debentures
owed to TBC
Capital Statutory Trust III due July 25, 2031.............. 16,495,000 16,495,000
----------- -----------
Total junior subordinated debentures owed to unconsolidated
subsidiary trusts........................................ $31,959,000 $31,959,000
=========== ===========
As of December 31, 2005 and 2004, the interest rate on the $16,495,000
subordinated debenture 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 distribution on its
trust preferred securities in January, March, July and September 2005.
11. CASH AND STOCK INCENTIVE PLANS
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 of Directors
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. During the first quarter of
2005 the Corporation granted 1,690,937 options to the new management team. These
options have an exercise price
67
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CASH AND STOCK INCENTIVE PLANS -- (CONTINUED)
ranging from $8.17 to $9.63 per share and were granted outside of the stock
incentive plan as part of the inducement package for new management.
DECEMBER 31,
------------------------------------------------------------------------
2005 2004 2003
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
---------- --------- ---------- --------- ---------- ---------
Under option, beginning of
year......................... 1,654,509 $6.63 1,196,509 $6.76 1,408,009 $6.76
Granted...................... 1,914,437 8.53 506,000 6.28 33,500 6.99
Exercised.................... (474,684) 6.59 (13,600) 6.44 (24,200) 6.50
Forfeited.................... (62,316) 7.73 (34,400) 6.83 (220,800) 6.75
---------- ---------- ----------
Under option, end of year...... 3,031,946 7.81 1,654,509 6.63 1,196,509 6.76
========== ========== ==========
Exercisable at end of year..... 3,031,946 1,378,809 695,909
========== ========== ==========
Weighted-average fair value per
option of options granted
during the year.............. $ 4.91 $ 3.16 $ 2.75
========== ========== ==========
A further summary about options outstanding at December 31, 2005 is as
follows:
OPTIONS OUTSTANDING
------------------------------------------------------------
WEIGHTED-
AVERAGE
NUMBER CONTRACTUAL NUMBER WEIGHTED AVERAGE
EXERCISE PRICE RANGE OUTSTANDING LIFE IN YEARS EXERCISABLE EXERCISE PRICE
-------------------- ----------- ------------- ----------- ----------------
$ 4.87 - 5.98............................. 55,000 5.22 55,000 $5.71
6.00 - 6.71............................. 858,509 6.31 858,509 6.42
7.00 - 7.76............................. 216,500 6.65 216,500 7.65
8.17 - 9.96............................. 1,735,937 9.08 1,735,937 8.29
10.68 - 11.15............................. 166,000 9.62 166,000 10.84
--------- ---------
3,031,946 3,031,946
========= =========
As of December 31, 2005, there were approximately 504,000 shares of the
Corporation's common stock available for future grants.
As described in Note 1 -- Recent Accounting Pronouncements, SFAS 123R will
require the Corporation to begin recognizing an expense in the amount of the
grant-date fair value of unvested and subsequently granted stock options
beginning in the first quarter of 2006. The expense is required to be recognized
over the period during which an employee is required to provide service in
exchange for the award.
The Corporation's Board of Directors approved the full vesting as of
November 15, 2005 of all unvested stock options outstanding at that date. The
effect of this accelerated vesting is reflected in the pro forma net loss and
pro forma loss per share figures below. During the fourth quarter of 2005 the
pro forma after-tax effect of compensation costs for stock-based employee
compensation awards totaled $2,067,000, or $0.10 per share. In conjunction with
the Board's approval of the full vesting, members of the Corporation's senior
management executive team announced that they would 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 were
68
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CASH AND STOCK INCENTIVE PLANS -- (CONTINUED)
vested effective November 15, 2005 is approximately 800,000, of which
approximately 665,000 were held by directors and executive officers of the
Corporation.
The Corporation recognizes compensation cost for stock-based employee
compensation awards in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees. The Corporation recognized no compensation cost for
stock-based employee compensation awards for the years ended December 31, 2005,
2004 and 2003. If the Corporation had recognized compensation cost in accordance
with SFAS No. 123, net income (loss) and net income (loss) per share would have
been affected as follows (amounts in thousands, except per share data):
DECEMBER 31,
--------------------------
2005 2004 2003
-------- ----- -------
Net (loss) income applicable to common stockholders:
As reported.............................................. $ (8,097) $ 741 $17,280
Pro forma................................................ (14,217) (567) 16,191
Basic net (loss) income per common share:
As reported.............................................. $ (.42) $ .04 $ .99
Pro forma................................................ (.74) (.03) .93
Diluted net (loss) income per common share:
As reported.............................................. (.42) .04 .95
Pro forma................................................ (.74) (.03) .89
The fair value of the options granted was based upon the Black-Scholes
pricing model. The Corporation used the following weighted-average assumptions
for the years indicated:
2005 2004 2003
---- ---- ----
Risk free interest rate..................................... 4.34% 4.56% 4.15%
Volatility factory.......................................... .43% .32% .33%
Weighted average life of options (in years)................. 7.00 7.00 6.00
Dividend yield.............................................. 0.00% 0.00% 0.00%
On April 1, 2002, the Corporation issued 157,500 shares of restricted
common stock to certain directors and key employees pursuant to the Second
Amended and Restated 1998 Stock Incentive Plan. Under the restricted stock
agreements, the stock may not be sold or assigned in any manner for a five-year
period that began on April 1, 2002. During this restricted period, the
participant is eligible to receive dividends and exercise voting privileges. The
restricted stock also has a corresponding vesting period with one-third vesting
in the third, fourth and fifth years. The restricted stock was issued at $7.00
per share, or $1,120,000, and classified as a contra-equity account, "Unearned
restricted stock", in stockholders' equity. During 2003, 15,000 shares of this
restricted 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 management separation
agreements (Note 26) entered into during 2005, vesting was accelerated on
124,375 shares of restricted stock. As of December 31, 2005 13,330 shares of
unvested restricted stock to continuing directors remained outstanding. The
outstanding shares of restricted stock 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
years ended December 31, 2005, 2004 and 2003, the Corporation has recognized
$648,000, $199,000 and $181,000, respectively, in restricted stock expense. The
current year expense is primarily related to the accelerated vesting from the
management separation agreements included in the amount of management separation
cost.
69
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CASH AND STOCK INCENTIVE PLANS -- (CONTINUED)
The Corporation 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 December 31,
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 notes 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 to the Wall
Street Journal prime rate. Interest expense incurred on the debt in 2005 and
2004 totaled $98,000 and $74,000, respectively. Total contributions to the plan
during 2005, 2004 and 2003 totaled $313,000, $300,000 and $254,000,
respectively. 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 period ended
December 31, 2005, 2004 and 2003 was $289,000, $189,000 and $152,000. The ESOP
shares as of December 31, 2005, 2004 and 2003 were as follows:
DECEMBER 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Allocated shares................................... 55,328 28,628 6,378
Estimated shares committed to be released.......... 26,700 26,700 22,250
Unreleased shares.................................. 191,372 218,072 244,772
---------- ---------- ----------
Total ESOP shares........................ 273,400 273,400 273,400
========== ========== ==========
Fair value of unreleased shares.......... $2,184,000 $1,795,000 $2,080,000
========== ========== ==========
12. RETIREMENT PLANS
The Corporation sponsors a profit-sharing plan that permits participants to
make contributions by salary reduction pursuant to Section 401(k) of the
Internal Revenue Code. This plan covers substantially all employees who meet
certain age and length of service requirements. The Corporation matches
contributions at its discretion. The Corporation's contributions to the plan
were $448,000, $298,000 and $347,000 in 2005, 2004 and 2003, respectively.
The Corporation has various nonqualified retirement agreements with certain
current and former directors and former executive officers. Generally, the plans
provide a fixed retirement benefit that will be paid in installments ranging
from 10 -- 20 years. As of December 31, 2005 substantially all of the benefits
due under these plans were vested (Note 26). All of the Corporations
nonqualified retirement agreements had an unfunded projected benefit of
approximately $14,880,000 as of December 31, 2005. The accrued liability
associated with these benefits totaled $6,560,000 and $5,793,000 at December 31,
2005 and 2004, respectively, which represents the present value of the future
benefits. Compensation expense related to these plans totaled $1,178,000,
$687,000 and $3,502,000 for 2005, 2004 and 2003.
In September 2003 the federal bank regulatory agencies published a formal
position regarding the accounting treatment for certain indexed retirement plans
sponsored by banks. The Corporation had such
70
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RETIREMENT PLANS -- (CONTINUED)
nonqualified plans that were established for the benefit of certain directors
and executive officers by the Corporation in the years 1998, 1999 and 2002.
Generally, the plans provide a retirement benefit that was divided into a
primary and secondary benefit. The primary benefit represented a cumulative
amount of excess earnings over the amount of estimated opportunity cost from a
related life insurance asset through the participants' retirement date. The
secondary benefit resulted from the continuing excess earnings on the life
insurance assets, if any, over the opportunity cost and will be paid to the
participant after retirement for periods ranging from 10 years to life.
In accordance with APB Opinion No. 12, as amended by FASB Statement No.
106, the secondary benefit represented a postretirement benefit that should have
been estimated and accrued over the participant's service period until the
participant reaches full eligibility. In periods prior to September 30, 2003,
the Corporation had only accrued the estimated primary benefit liability in its
financial statements. The secondary benefit was not accrued because the benefit
was not guaranteed and there was a high degree of uncertainty regarding the
ultimate health of the participant, future performance of the insurance policies
and the Corporation's opportunity rates.
The Corporation estimated and accrued the present value of the future
benefits expected to be paid. As of September 30, 2003, and for the three-month
period then ended, the Corporation accrued an additional deferred compensation
liability of approximately $1.9 million before tax and $1.2 million after tax
related to the fiscal years 1998 through 2002. This amount was considered by
management and the Corporation's audit committee to be immaterial to the current
and prior period financial statements; therefore, no restatement of prior
periods was necessary.
13. INCOME TAXES
The components of the consolidated income tax (benefit) expense are as
follows (in thousands):
2005 2004 2003
------- ------- ------
Current:
Federal.................................................. $(1,439) $(2,350) $6,039
State.................................................... (5) (80) 203
------- ------- ------
Total current (benefit) expense............................ (1,444) (2,430) 6,242
Deferred:
Federal.................................................. (2,096) 1,381 2,031
State.................................................... (1,072) 253 905
------- ------- ------
Deferred income tax (benefit) expense............ (3,168) 1,634 2,936
------- ------- ------
Total income tax (benefit) expense............... $(4,612) $ (796) $9,178
======= ======= ======
71
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES -- (CONTINUED)
Significant components of the Corporation's deferred income tax assets and
liabilities as of December 31, 2005 and 2004 are as follows (in thousands):
2005 2004
------- -------
Deferred income tax assets:
Rehabilitation tax credit................................. $ 6,324 $ 4,888
Provision for loan losses................................. 4,444 4,641
Deferred compensation..................................... 2,858 2,144
Interest on nonaccruing loans............................. 142 309
Net state operating loss carryforward..................... 972 750
Alternative minimum tax credit carryover.................. 646 405
Unrealized loss on securities............................. 1,696 729
Other..................................................... 1,569 1,351
------- -------
Total deferred income tax assets.................. 18,651 15,217
Deferred income tax liabilities:
Difference in book and tax basis of premises and
equipment.............................................. 2,990 2,981
Depreciation.............................................. 56 905
Other..................................................... 766 627
------- -------
Total deferred income tax liabilities............. 3,812 4,513
------- -------
Net deferred income tax asset..................... $14,839 $10,704
======= =======
The effective tax rate differs from the expected tax using the statutory
rate. Reconciliation between the expected tax and the actual income tax
(benefit) expense follows (in thousands):
2005 2004 2003
------- ----- ------
Expected (benefit) tax expense at statutory rate of income
(loss) before taxes....................................... $(3,535) $ 133 $9,337
Add (deduct):
Rehabilitation tax credit................................. -- (725) (960)
State income taxes, net of federal tax benefit............ (711) 114 720
Effect of interest income exempt from Federal income
taxes.................................................. (191) (178) (149)
Basis reduction........................................... -- 247 336
Increase in cash surrender value of life insurance........ (493) (559) (574)
Amortization.............................................. 97 97 100
Travel and entertainment.................................. 28 85 54
Other items -- net........................................ 193 (10) 314
------- ----- ------
Income tax (benefit) expense................................ $(4,612) $(796) $9,178
======= ===== ======
Federal statutory rate...................................... 34% 34% 35%
======= ===== ======
The Corporation has net operating loss carryforwards of approximately
$2,410,000 in Florida and $20,574,000 in Alabama. Unused carryforwards and
expiration dates are as follows (in thousands):
YEAR OF EXPIRATION: FLORIDA ALABAMA
------------------- ------- -------
2009................................................. $ -- $ 8,855
2010................................................. -- 11,719
2024................................................. 2,410 --
------ -------
$2,410 $20,574
====== =======
72
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES -- (CONTINUED)
The Corporation has available at December 31, 2005 unused rehabilitation
tax credits that can be carried forward and utilized against future Federal
income tax liability. Unused credits and expiration dates are as follows (in
thousands):
Year of expiration:
2018...................................................... $1,734
2019...................................................... 738
2020...................................................... 1,261
2021...................................................... 522
2022...................................................... 384
2023...................................................... 960
2024...................................................... 725
------
$6,324
======
This credit was established as a result of the restoration and enhancement
of the John A. Hand Building, which is designated as an historical structure and
serves as the corporate headquarters for the Corporation. This credit is equal
to 20% of certain qualified expenditures incurred by the Corporation prior to
December 31, 2005. The Corporation is required to reduce its tax basis in the
John A. Hand Building by the amount of the credit.
Applicable income tax (benefit) expense of $(351,000), $(27,000) and
$217,000 on investment securities (losses) gains for the years ended December
31, 2005, 2004 and 2003, respectively, is included in income taxes.
The Corporation recognized a $600,000 tax benefit in 2005 related to the
exercise of nonqualified stock options. This benefit was recognized as a credit
to stockholder's equity as additional surplus.
The Corporation's federal and state income tax returns for the years 2000
through 2004 are open for review and examination by governmental authorities. In
the normal course of these examinations, the Corporation is subject to
challenges from governmental authorities regarding amounts of taxes due. The
Corporation has received notices of proposed adjustments relating to state taxes
due for the years 2002 and 2003, which include proposed adjustments relating to
income apportionment of a subsidiary. Management believes adequate provision for
income taxes has been recorded for all years open for review and intends to
vigorously contest the proposed adjustments. To the extent that final resolution
of the proposed adjustments results in significantly different conclusions from
management's current assessment of the proposed adjustments, the effective tax
rate in any given financial reporting period may be materially different from
the current effective tax rate.
14. RELATED PARTY TRANSACTIONS
The Corporation has entered into transactions with its directors, executive
officers, significant stockholders and their affiliates (related parties). Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. The aggregate amount of loans to
73
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. RELATED PARTY TRANSACTIONS -- (CONTINUED)
such related parties at December 31, 2005 and 2004 were $6,805,000 and
$14,500,000, respectively. Activity during the year ended December 31, 2005 is
summarized as follows (in thousands):
BALANCE BALANCE
DECEMBER 31, OTHER DECEMBER 31,
2004 ADVANCES REPAYMENTS CHANGES 2005
------------ -------- ---------- ------- ------------
$14,500 $4,826 $(4,515) $(8,006) $6,805
======= ====== ======= ======= ======
The reduction in the balance of related party loans during 2005 is
primarily attributable to the retirement of directors during the year.
At December 31, 2005 and 2004, the deposits of such related parties in the
subsidiary bank amounted to approximately $32,084,000 and $7,141,000.
Approximately $26,244,000 of these deposits relationships at December 31, 2005
were with two directors. Certificates of deposit comprise $16,152,000 of the
$26,244,000 with $15,152,000 of these maturing in April, 2006.
During 2005, 2004 and 2003, the Corporation received from an affiliated
company $140,000, $180,000 and $180,000, respectively in rental income and,
through its real estate management subsidiary, $77,000, $124,000 and $128,000,
respectively, in personnel and management related fees. As of December 31, 2005
and 2004, approximately $52,000 and $44,000, respectively, in receivables were
due from the affiliated company.
An insurance agency owned by one of the Corporation's directors received
commissions of approximately $180,567, $180,400, and $138,981 from the sale of
insurance to the Corporation during 2005, 2004 and 2003, respectively.
The Corporation believes that all of the foregoing transactions were made
on terms and conditions reflective of arms' length transactions
15. COMMITMENTS AND CONTINGENCIES
The consolidated financial statements do not reflect the Corporation's
various commitments and contingent liabilities which arise in the normal course
of business and which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are commitments to
extend credit and standby letters of credit. The following is a summary of the
Corporation's maximum exposure to credit loss for loan commitments and standby
letters of credit (in thousands):
DECEMBER 31
-------------------
2005 2004
-------- --------
Commitments to extend credit................................ $215,951 $135,347
Standby letters of credit................................... 23,591 24,407
Commitments to extend credit and standby letters of credit all include
exposure to some credit loss in the event of nonperformance by the customer. The
Corporation's credit policies and procedures for credit commitments and
financial guarantees are the same as those for extension of credit that are
recorded in the consolidated statement of financial condition. Because these
instruments have fixed maturity dates, and because many of them expire without
being drawn upon, they do not generally present any significant liquidity risk
to the Corporation.
During 2005, 2004 and 2003, the Corporation settled various litigation
matters. The Corporation is also a defendant or co-defendant in various lawsuits
incidental to the banking business. Management, after consultation with legal
counsel, believes that liabilities, if any, arising from such litigation and
claims will not result in a material adverse effect on the consolidated
financial statements of the Corporation.
74
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. BRANCH SALES
On February 6, 2004, the Corporation's banking subsidiary sold its Morris,
Alabama branch, which had assets of approximately $1,037,000 and liabilities of
$8,217,000. The Corporation realized a $739,000 pre-tax gain on the sale.
On August 29, 2003, the Corporation's banking subsidiary sold seven
branches of the Bank, known as the Emerald Coast branches of the Bank, serving
the markets from Destin to Panama City, Florida for a $46,800,000 deposit
premium. These branches had assets of approximately $234,000,000 and liabilities
of $209,000,000. The Corporation realized a $46,018,000 pre-tax gain on the
sale.
On March 13, 2003, the Corporation's banking subsidiary sold its Roanoke,
Alabama branch, which had assets of approximately $9,800,000 and liabilities of
$44,672,000. The Corporation realized a $2,246,000 pre-tax gain on the sale.
17. REGULATORY RESTRICTIONS
A source of funds available to the Corporation is the payment of dividends
by its subsidiary. Regulations limit the amount of dividends that may be paid
without prior approval of the subsidiary's regulatory agency. Approximately
$25,000,000 in retained earnings are available to be paid as dividends by the
subsidiary at December 31, 2005.
During the forth quarter of 2005 the Corporation became a unitary thrift
holding company and, as such, is subject to regulation, examination and
supervision by the OTS.
Simultaneously, the Corporation's subsidiary bank's charter was changed to
a federal savings bank charter and is also subject to various regulatory
requirements administered by the OTS. Prior to November 1, 2005 the
Corporation's banking subsidiary was regulated by the Alabama Banking Department
and the Federal Reserve. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's and its subsidiaries financial condition and results of
operations. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the subsidiary bank must meet specific capital
guidelines that involve quantitative measures of the its assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. The subsidiary bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of tangible and core capital (as defined
in the regulations) to adjusted total assets (as defined), and of total capital
(as defined) and Tier 1 capital to risk weighted assets (as defined). Management
believes, as of December 31, 2005 and 2004, that the Corporation and its
subsidiary meet all capital adequacy requirements to which it is subject.
As of December 31, 2005 and 2004, the most recent notification from the
subsidiary's primary regulators categorized the subsidiary as "well capitalized"
under the regulatory framework for prompt corrective action.
75
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. REGULATORY RESTRICTIONS -- (CONTINUED)
The table below represents the Corporation's and the subsidiary's regulatory and
minimum regulatory capital requirements at December 31, 2005 and 2004 (dollars
in thousands):
TO BE WELL
FOR CAPITAL CAPITALIZED
ADEQUACY UNDER PROMPT
ACTUAL PURPOSES CORRECTIVE ACTION
---------------- --------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- --------- ------
AS OF DECEMBER 31, 2005
Tier 1 Core Capital (to Adjusted Total
Assets)
Corporation................................ $115,852 8.30% $55,810 4.00% $ 69,763 5.00%
Superior Bank.............................. 110,929 8.02 55,332 4.00 69,165 5.00
Total Capital (to Risk Weighted Assets)
Corporation................................ $126,444 11.08 $91,295 8.00 $114,119 10.00
Superior Bank.............................. 121,521 10.76 90,347 8.00 112,934 10.00
Tier 1 Capital (to Risk Weighted Assets)
Corporation................................ 115,852 10.15 N/A N/A 68,471 6.00
Superior Bank.............................. 110,929 9.82 N/A N/A 67,760 6.00
Tangible Capital (to Adjusted Total Assets)
Corporation................................ 115,852 8.30 20,929 1.50 N/A N/A
Superior Bank.............................. 110,929 8.02 20,749 1.50 N/A N/A
AS OF DECEMBER 31, 2004
Total Capital (to Risk Weighted Assets)
Corporation................................ $126,288 11.51% $87,788 8.00% $109,735 10.00%
Superior Bank.............................. 123,074 11.37 86,614 8.00 108,268 10.00
Tier 1 Capital (to Risk Weighted Assets)
Corporation................................ 110,326 10.05 43,894 4.00 65,841 6.00
Superior Bank.............................. 110,531 10.21 43,307 4.00 64,961 6.00
Tier 1 Capital (to Average Assets)
Corporation................................ 110,326 7.98 55,292 4.00 69,115 5.00
Superior Bank.............................. 110,531 8.05 54,915 4.00 68,644 5.00
18. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Corporation in
estimating fair values of financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and
short-term instruments, including interest-bearing deposits in other banks,
federal funds sold and short-term commercial paper, approximate their fair
value.
Investment securities available for sale. Fair values for investment
securities are based on quoted market prices. The carrying values of stock in
FHLB and Federal Reserve Bank approximate fair values.
Mortgage loans held for sale. The carrying amounts of mortgage loans held
for sale approximate their fair value.
Net loans. Fair values for variable-rate loans that reprice frequently and
have no significant change in credit risk are based on carrying values. Fair
values for all other loans are estimated using discounted cash flow analyses
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit
76
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
quality. Fair values for impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
Accrued interest receivable. The carrying amounts of accrued interest
receivable approximate their fair values.
Deposits. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit ("CDs") approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Advances from FHLB. Rates currently available to the Corporation for debt
with similar terms and remaining maturities are used to estimate fair value of
existing debt.
Federal funds borrowed and security repurchase agreements. The carrying
amount of federal funds borrowed and security repurchase agreements approximate
their fair values.
Notes payable. The carrying amount of notes payable approximates its fair
values.
Subordinated debentures. Rates currently available to the Corporation for
preferred offerings with similar terms and maturities are used to estimate fair
value.
Interest rate swaps. Fair values for interest rate swaps are based on
quoted market prices.
Limitations. Fair value estimates are made at a specific point of time and
are based on relevant market information, which is continuously changing.
Because no quoted market prices exist for a significant portion of the
Corporation's financial instruments, fair values for such instruments are based
on management's assumptions with respect to future economic conditions,
estimated discount rates, estimates of the amount and timing of future cash
flows, expected loss experience, and other factors. These estimates are
subjective in nature involving uncertainties and matters of significant
judgment; therefore, they cannot be determined with precision. Changes in the
assumptions could significantly affect the estimates.
77
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The estimated fair values of the Corporation's financial instruments are as
follows:
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------------- -----------------------
CARRYING FAIR CARRYING
AMOUNT VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Financial assets:
Cash and due from banks............ $ 35,088 $ 35,088 $ 23,489 $ 23,489
Interest-bearing deposits in other
banks........................... 9,772 9,772 11,411 11,411
Federal funds sold................. -- -- 11,000 11,000
Securities available for sale...... 242,595 242,595 288,308 288,308
Mortgage loans held for sale....... 21,355 21,355 8,095 8,095
Net loans.......................... 951,242 949,177 922,325 920,746
Stock in FHLB and Federal Reserve
Bank............................ 10,966 10,966 11,787 11,787
Accrued interest receivable........ 7,081 7,081 6,237 6,237
Financial liabilities:
Deposits........................... 1,043,696 1,041,177 1,067,206 1,066,102
Advances from FHLB................. 181,090 184,188 156,090 161,961
Federal funds borrowed and security
repurchase agreements........... 33,406 33,286 49,456 49,456
Notes payable...................... 3,755 3,755 3,965 3,965
Junior subordinated debentures owed
to unconsolidated subsidiary
trusts.......................... 31,959 33,980 31,959 33,050
Interest rate swaps................ 953 953 218 218
19. OTHER NONINTEREST EXPENSE
Other noninterest expense consisted of the following (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
Professional fees....................................... $ 2,745 $ 3,344 $ 4,147
Directors fees.......................................... 380 191 387
Insurance and assessments............................... 2,344 2,410 2,631
Postage, stationery and supplies........................ 997 1,013 751
Advertising............................................. 857 657 1,112
Foreclosure losses...................................... 796 967 1,054
Other operating expense................................. 6,250 5,534 7,740
------- ------- -------
Total................................................... $14,369 $14,116 $17,822
======= ======= =======
20. CONCENTRATIONS OF CREDIT RISK
All of the Corporation's loans, commitments and standby letters of credit
have been granted to customers in the Corporation's market area. The
concentrations of credit by type of loan or commitment are set forth in Notes 3
and 15, respectively.
The Corporation maintains cash balances and federal funds sold at several
financial institutions. Cash balances at each institution are insured by the
Federal Deposit Insurance Corporation (the "FDIC") up to $100,000. At various
times throughout the year, cash balances held at these institutions will exceed
federally
78
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. CONCENTRATIONS OF CREDIT RISK -- (CONTINUED)
insured limits. Superior Bank's management monitors these institutions on a
quarterly basis in order to determine that the institutions meet
"well-capitalized" guidelines as established by the FDIC.
21. NET (LOSS) INCOME PER COMMON SHARE
The following table sets forth the computation of basic net (loss) income
per common share and diluted net (loss) income per common share (in thousands,
except per share amounts):
2005 2004 2003
------- ------- -------
Numerator:
Net (loss) income..................................... $(5,786) $ 1,187 $17,499
Less preferred dividends.............................. (305) (446) (219)
Less conversion of preferred stock.................... (2,006) -- --
------- ------- -------
For basic and diluted, net (loss) income applicable to
common stockholders................................ $(8,097) $ 741 $17,280
======= ======= =======
Denominator:
For basic, weighted average common shares
outstanding........................................ 19,154 17,583 17,492
Effect of dilutive stock options...................... -- 232 193
Effect of convertible preferred stock................. -- -- 452
------- ------- -------
Average common shares outstanding, assuming
dilution........................................... 19,154 17,815 18,137
======= ======= =======
Basic net (loss) income per common share................ $ (.42) $ .04 $ .99
======= ======= =======
Diluted net (loss) income per common share.............. $ (.42) $ .04 $ .95
======= ======= =======
Basic net (loss) income per common share is calculated by dividing net
(loss) income, less dividend requirements on outstanding convertible preferred
stock, by the weighted-average number of common shares outstanding for the
period.
Diluted net income (loss) per common share takes into consideration the pro
forma dilution assuming outstanding convertible preferred stock and certain
unvested restricted stock and unexercised stock option awards were converted or
exercised into common shares. Options on 620,301 shares of common stock and the
weighted average effect of 382,192 shares of convertible preferred stock prior
to conversion were not included in computing diluted net (loss) per share for
the year ended December 31, 2005, and for the year ended December 31, 2004, the
effect of 775,000 shares of convertible preferred stock was not included because
their effects were anti-dilutive. No shares of convertible preferred stock
remained outstanding at December 31, 2005.
79
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. PARENT COMPANY
The condensed financial information (unaudited) for The Banc Corporation
(Parent Company only) is presented as follows (in thousands):
DECEMBER 31,
-------------------
2005 2004
-------- --------
STATEMENTS OF FINANCIAL CONDITION
Assets:
Cash...................................................... $ 2,070 $ 135
Investment in subsidiaries................................ 127,361 127,098
Intangibles, net.......................................... 214 214
Premises and equipment -- net............................. 7,763 8,040
Other assets.............................................. 8,964 5,315
-------- --------
$146,372 $140,802
======== ========
Liabilities:
Accrued expenses and other liabilities.................... $ 5,593 $ 4,339
Notes payable............................................. 3,755 3,965
Subordinated debentures................................... 31,959 31,959
Stockholders' equity........................................ 105,065 100,539
-------- --------
$146,372 $140,802
======== ========
YEAR ENDED DECEMBER 31,
-----------------------------
2005 2004 2003
-------- ------- --------
STATEMENTS OF OPERATIONS
Income:
Dividends from subsidiaries......................... $ 2,585 $ 2,576 $ 75
Interest............................................ 15 13 19
Other income........................................ 852 3,397 3,315
-------- ------- --------
3,452 5,986 3,409
Expense:
Directors' fees..................................... 270 74 45
Salaries and benefits............................... 10,831 3,219 6,792
Occupancy expense................................... 897 615 654
Interest expense.................................... 3,142 2,653 2,600
Other............................................... 2,257 937 1,240
-------- ------- --------
17,397 7,498 11,331
-------- ------- --------
Loss before income taxes and equity in undistributed
earnings of subsidiaries............................ (13,945) (1,512) (7,922)
Income tax benefit.................................... 6,445 1,822 2,618
-------- ------- --------
(Loss) income before equity in undistributed earnings
of subsidiaries..................................... (7,500) 310 (5,304)
Equity in undistributed earnings of subsidiaries...... 1,714 877 22,803
-------- ------- --------
Net (loss) income..................................... $ (5,786) $ 1,187 $ 17,499
======== ======= ========
80
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. PARENT COMPANY -- (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------
2005 2004 2003
-------- ------- --------
STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Net (loss) income..................................... $ (5,786) $ 1,187 $ 17,499
Adjustments to reconcile net (loss) income to net cash
used by operating activities:
Amortization and depreciation expense............... 257 213 228
Equity in undistributed earnings of subsidiaries.... (1,714) (877) (22,803)
Increase (decrease) in other liabilities............ 1,063 (1,815) 4,061
Increase in other assets............................ (1,931) (461) (1,037)
-------- ------- --------
Net cash used by operating activities....... (8,111) (1,753) (2,052)
INVESTING ACTIVITIES
Proceeds from sale of premises and equipment.......... 19 -- --
Purchases of premises and equipment................... -- (2,117) (37)
Capital contribution to subsidiaries.................. -- -- (5,000)
-------- ------- --------
Net cash used in investing activities....... 19 (2,117) (5,037)
FINANCING ACTIVITIES
Proceeds from issuance of common stock................ 10,542 203 506
Proceeds from issuance of preferred stock............. -- -- 6,193
Proceeds from note payable............................ -- 2,250 2,100
Principal payment on note payable..................... (210) (210) (175)
Cash dividends paid................................... (305) (447) (219)
-------- ------- --------
Net cash provided by financing activities... 10,027 1,796 8,405
Net increase (decrease) in cash............. 1,935 (2,074) 1,316
Cash at beginning of year................... 135 2,209 893
-------- ------- --------
Cash at end of year......................... $ 2,070 $ 135 $ 2,209
======== ======= ========
23. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 2005
and 2004 follows (in thousands, except per share data):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- -------
2005 (AS RESTATED)(1)
Total interest income....................... $ 18,186 $18,957 $19,479 $20,658
Total interest expense...................... 8,579 9,108 10,005 10,563
Net interest income......................... 9,607 9,849 9,474 10,095
Provision for loan losses................... 750 1,500 500 750
Securities (losses) gains................... (909) (68) -- 29
Changes in fair value of derivatives........ (230) 933 (863) (165)
(Loss) income before income taxes........... (13,218) 1,560 (127) 1,387
Net (loss) income........................... (8,161) 1,148 137 1,090
Basic net (loss) income per common share.... (.44) (.06) .01 .06
Diluted net (loss) income per common
share.................................... (.44) (.06) .01 .05
81
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
23. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) -- (CONTINUED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- ------- ------- -------
2004
Total interest income....................... $ 15,494 $16,098 $16,750 $17,818
Total interest expense...................... 6,569 6,587 7,022 7,945
Net interest income......................... 8,925 9,511 9,728 9,873
Provision for loan losses................... -- -- -- 975
Securities gains (losses)................... 391 37 (4) (498)
Gain on sale of branches.................... 739 -- -- --
Income (loss) before income taxes........... 1,547 1,143 (1,315) (984)
Net income (loss)........................... 1,228 1,064 (830) (275)
Basic net income (loss) per common share.... .07 .05 (.05) (.03)
Diluted net income (loss) per common
share.................................... .07 .05 (.05) (.03)
---------------
(1) The Corporation filed amendments on Form 10Q/A restating its previously
reported results for the first three quarters of 2005. See Note
1 -- Derivative Financial Instruments and Hedging Activities.
24. 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
panhandle 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. All costs have been allocated to the reportable segments.
Therefore, combined segment amounts agree to the consolidated totals.
ALABAMA FLORIDA
REGION REGION COMBINED
---------- -------- ----------
(IN THOUSANDS)
2005
Net interest income......................................... $ 27,272 $ 11,753 $ 39,025
Provision for loan losses................................... 3,455 45 3,500
Noninterest income(1)....................................... 13,426 1,271 14,697
Noninterest expense(2)(3)................................... 56,462 4,158 60,620
Income tax (benefit) expense................................ (7,144) 2,532 (4,612)
Net (loss) income........................................... (12,075) 6,289 (5,786)
Total assets................................................ 1,112,700 302,769 1,415,469
2004
Net interest income......................................... $ 27,362 $ 10,675 $ 38,037
Provision for loan losses................................... 3,223 (2,248) 975
Noninterest income.......................................... 9,922 1,344 11,266
Noninterest expense(2)...................................... 40,876 7,061 47,937
Income tax (benefit) expense................................ (3,739) 2,943 (796)
Net (loss) income........................................... (3,076) 4,263 1,187
Total assets................................................ 1,160,747 262,381 1,423,128
82
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24. SEGMENT REPORTING -- (CONTINUED)
ALABAMA FLORIDA
REGION REGION COMBINED
---------- -------- ----------
(IN THOUSANDS)
2003
Net interest income......................................... $ 24,995 $ 17,731 $ 42,726
Provision for loan losses................................... 12,190 8,785 20,975
Noninterest income.......................................... 60,195 2,661 62,856
Noninterest expense(2)...................................... 42,989 14,941 57,930
Income tax expense (benefit)................................ 10,133 (955) 9,178
Net income (loss)........................................... 19,878 (2,379) 17,499
Total assets................................................ 930,887 240,739 1,171,626
---------------
(1) Alabama Region includes proceeds from insurance settlement of $5,114,000.
(2) Noninterest expense for the Alabama Region includes all expenses for the
holding company, which have not been prorated to the Florida region.
(3) Alabama Region includes management separation costs of $15,467,000.
25. PREFERRED STOCK
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.
26. MANAGEMENT SEPARATION COSTS AND INSURANCE SETTLEMENT
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.
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.
83
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
26. MANAGEMENT SEPARATION COSTS AND INSURANCE SETTLEMENT -- (CONTINUED)
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 $3,152,124 in December 2005, and
will pay $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 $15,467,000 for the year ended
December 31, 2005. At December 31, 2005, the Corporation had $1,164,000 of
accrued liabilities related to these agreements.
27. SUBSEQUENT EVENT
On March 6, 2006, the Corporation announced that it had signed a definitive
agreement to merge with Kensington Bankshares, Inc. ("Kensington"). Kensington
is the holding company for Kensington Bank, a Florida state bank with eight
branches in the Tampa Bay area. Under the terms of the merger agreement, the
Corporation will issue 1.6 shares of our common stock for each share of
Kensington stock. Based on recent closing prices per share for the Corporation's
common stock, the transaction would be valued at approximately $71.2 million.
The actual value at consummation will be based on the Corporation's share price
at that time. The Tampa Bay area would be the Corporation's largest market and
has a higher projected population growth than any of its current banking
markets. Completion of the merger is subject to approval by the stockholders of
both corporations, to the receipt of required regulatory approvals, and to the
satisfaction of usual and customary closing conditions.
84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Our audit committee engaged Carr, Riggs & Ingram, LLC, to serve as
independent auditors with respect to our fiscal years ended December 31, 2004
and 2005. Carr, Riggs & Ingram, LLC, replaced Ernst & Young LLP, which had
previously served as our independent auditors in June 2004. See Item 4.01 in our
Current Report on Form 8-K/A, dated June 14, 2004, which is incorporated herein
by reference. This change in independent auditors did not involve any
disagreement of a type described in Item 304(a)(1)(iv) or any reportable event
of a type described in Item 304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES.
CEO AND PFO CERTIFICATION
Appearing immediately following the Signatures section of this report are
Certifications of our Chief Executive Officer ("CEO") and our Chief Accounting
Officer, who is currently our principal financial officer ("PFO") within the
meaning of such term under the federal securities laws. 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 9A 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 PFO, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
We conducted an evaluation (the "Evaluation") as of the end of the period
covered by this annual report 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 PFO. Based upon the
Evaluation, our CEO and PFO concluded that, except as noted below, our
disclosure controls and procedures were effective to ensure that material
information relating to The Banc Corporation and its subsidiaries was made known
to management, including the CEO and PFO, particularly during the period when
our periodic reports are being prepared.
As described below, in January 2006, our CEO and PFO advised the Audit
Committee of our Board of Directors that they had reevaluated our disclosure
controls and procedures as of December 31, 2004 and 2005 in light of subsequent
interpretations of Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended ("SFAS
133") and that, as a result of such reevaluation, management had identified the
following material weakness in our internal control over financial reporting
with respect to accounting for hedge transactions: a failure to ensure the
correct application of generally accepted accounting principles, including SFAS
133 and its related interpretations, with respect to certain interest rate swap
transactions, and a failure to correct that error subsequently. The Audit
Committee, after consultation with our independent registered public
accountants, concurred in such reevaluation.
Solely as a result of such material weakness, we concluded, upon
reevaluation, that our internal control over financial reporting and our
disclosure controls and procedures were not effective as of December 31, 2004.
We further concluded that our internal control and our disclosure controls and
procedures remained not effective as of the year ended December 31, 2005 for the
same reason.
85
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Section 404 of the Sarbanes-Oxley Act of 2002 requires public companies, in
their annual reports on Form 10-K, to provide reports on their management's
assessment of such companies' internal control over financial reporting and for
such companies' independent registered public accountants to attest to such
reports by management. Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles, and includes those policies and procedures that
- Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our
assets;
- Provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with GAAP,
and that our receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and
- Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could
have a material effect on the financial statements.
Our management has implemented a process to monitor and assess both the
design and operating effectiveness of our internal control over financial
reporting. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness as to future financial reporting periods are subject
to the risk that controls may become inadequate because of changes in conditions
or that the degree of compliance with the policies and procedures may
deteriorate.
Under the supervision of and with the participation of our CEO and PFO,
management conducted a review, evaluation and assessment of the effectiveness of
our internal control over financial reporting as of December 31, 2005, using the
criteria set forth for effective internal control over financial reporting as
described in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on such review,
evaluation and assessment, our management initially believed that we maintained
effective internal control over financial reporting as of December 31, 2005.
However, in January 2006, our CEO and PFO advised the Audit Committee of
our Board of Directors that they had reevaluated our internal control over
financial reporting as of December 31, 2004 and 2005 in light of subsequent
interpretations of SFAS 133. In connection with such reevaluation, management
determined that there had recently been considerable discussion within the
accounting profession of the proper way to account for certain derivative
instruments under SFAS 133, including interest rate swaps commonly used by
financial institutions to hedge their interest rate exposure with respect to
brokered certificates of deposit. We have entered into such swap arrangements
from time to time, and have historically accounted for these swaps using an
abbreviated method of fair value hedge accounting under SFAS 133, known as the
"short-cut" method, which assumes that the hedging transactions are effective.
However, in light of recent informal technical interpretations of
accounting for these instruments, we determined that these swaps did not qualify
for the short-cut method in prior periods because the swaps did not have a fair
value of zero at inception, which is a requirement for use of the short-cut
method under SFAS 133. Therefore, after discussions with our independent
registered public accounting firm, we concluded that any fluctuations in the
market value of these interest rate swaps should have been recorded through our
income statement. Accordingly, while we believe that the swaps have been and
will continue to be highly effective hedges, we determined that the use of the
short-cut method in 2004 and in the first three quarters of 2005 constituted a
material weakness in our internal control over financial reporting in light of
our subsequent determination that such treatment did not comply with generally
accepted accounting principles. Solely as a result of such material weakness, we
concluded, upon reevaluation, that our internal control over financial reporting
was not effective as of December 31, 2004 or during the year ended December 31,
2005.
86
Our determination that such swaps did not qualify for hedge accounting
under SFAS 133 did not have a material effect on our reported results of
operations for the year ended December 31, 2004 or for prior periods, and thus
we have not restated or amended such previously reported results for periods
ended on or prior to December 31, 2004. We have filed amendments on Form 10-Q/A
restating our previously reported results for the first three quarters of 2005
to reflect the effects of such determination. The cumulative impact of this
revised treatment reduced earnings by $204,000, or $.01 per share, for the year
ended December 31, 2005, as reflected in the financial statements included in
this Annual Report on Form 10-K. The change had no impact on our cash flows.
Our independent registered public accounting firm, Carr, Riggs & Ingram
LLC, has issued an attestation report on such management's assessment, which is
set forth below.
87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of The Banc Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that The Banc
Corporation and subsidiaries (the Corporation) did not maintain effective
internal control over financial reporting as of December 31, 2005, because of
the effect of a material weakness over the accounting for interest rate swaps
and the related hedged brokered certificates of deposit, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Corporation's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. As of December 31, 2005, the Corporation did not
maintain effective controls to ensure the appropriate accounting for certain
interest rate swaps and the related hedged brokered certificates of deposit.
Specifically, the Corporation failed to correctly document, measure and record
hedge ineffectiveness on certain interest rate swaps. This control deficiency
could result in a misstatement to the interest rate swap derivative accounts and
the brokered certificate of deposit accounts that would cause a material
misstatement of the annual or interim financial statements that would not be
prevented or detected. This control deficiency resulted in the restatement of
the Corporation's first, second and third quarter interim consolidated financial
statements for 2005. Accordingly, management has concluded that this control
deficiency constitutes a material weakness as of December 31, 2005.
This material weakness was considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2005 financial statements,
and this report does not affect our report dated March 16, 2006 on those
financial statements.
88
In our opinion, management's assessment that the Corporation did not
maintain effective internal control over financial reporting as of December 31,
2005, is fairly stated, in all material respects, based on criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Corporation has not
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated statements
of financial condition of the Corporation as of December 31, 2005 and 2004, and
the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 2005, and our report dated March 16, 2006, expressed an unqualified opinion
thereon.
/s/ Carr, Riggs & Ingram, LLC
Montgomery, Alabama
March 16, 2006
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended December 31, 2005, there were no changes in our
internal control over financial reporting identified in connection with
management's evaluation of internal control over financial reporting as of
December 31, 2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. However, as
described above, in January 2006 we identified a material weakness in our
internal control over financial reporting as of December 31, 2005 relating to
our accounting for certain interest rate swaps. We are in the process of
remediating such material weakness. We have hired an outside service firm to
provide support and technical expertise regarding the documentation, initial and
ongoing testing and valuations of our interest rate swaps and hedge accounting.
Our accounting personnel will also be required to receive annual training
regarding the application of SFAS 133.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEMS 10, 11, 12, 13 AND 14. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT; EXECUTIVE COMPENSATION; SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS;
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS;
AND PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information set forth under the captions "Security Ownership of Certain
Beneficial Owners and Management," "Nominees for Director," "Executive
Officers," "Certain Information Concerning the Board of Directors and Its
Committees," "Director Compensation," "Section 16(a) Beneficial Ownership
Reporting Compliance," "Executive Compensation and Other Information," "Certain
Transactions and Relationships" and "Proposal Number Five -- Ratification of
Appointment of Independent Auditors -- Audit Fees," "-- Audit Related Fees,"
"-- Tax Fees," and "-- All Other Fees" included in The Banc Corporation's
definitive proxy statement to be filed no later than April 30, 2006, in
connection with The Banc Corporation's 2006 Annual Meeting of Stockholders is
incorporated herein by reference.
89
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Financial Statements and Financial Schedules.
(l) The consolidated financial statements of The Banc Corporation and its
subsidiaries filed as a part of this Annual Report on Form l0-K are
listed in Item 8 of this Annual Report on Form l0-K, which is hereby
incorporated by reference herein.
(2) All schedules to the consolidated financial statements of The Banc
Corporation and its subsidiaries have been omitted because they are not
required under the related instructions or are inapplicable, or because
the required information has been provided in the consolidated
financial statements or the notes thereto.
(b) Exhibits.
The exhibits required by Regulation S-K are set forth in the following list
and are filed either by incorporation by reference from previous filings with
the Securities and Exchange Commission or by attachment to this Annual Report on
Form 10-K as indicated below.
(3)-l -- Restated Certificate of Incorporation of The Banc
Corporation, filed as Exhibit 3 to the Corporation's Current
Report on Form 8-K dated June 15, 2005, is hereby
incorporated herein by reference.
(3)-2 -- Bylaws of The Banc Corporation, filed as Exhibit(3)-2 to The
Banc Corporation's Registration Statement on Form S-4
(Registration No. 333-58493), is hereby incorporated herein
by reference.
(4)-1 -- Amended and Restated Declaration of Trust, dated as of
September 7, 2000, by and among State Street Bank and Trust
Company of Connecticut, National Association, as
Institutional Trustee, The Banc Corporation, as Sponsor,
David R. Carter and James A. Taylor, Jr., as Administrators,
filed as Exhibit(4)-l to The Banc Corporation's Annual
Report on Form l0-K for the year ended December 3l, 2000, is
hereby incorporated herein by reference.
(4)-2 -- Guarantee Agreement, dated as of September 7, 2000, by and
between The Banc Corporation and State Street Bank and Trust
Company of Connecticut, National Association, filed as
Exhibit(4)-2 to The Banc Corporation's Annual Report on Form
10-K for the year ended December 31, 2000, is hereby
incorporated herein by reference.
(4)-3 -- Indenture, dated as of September 7, 2000, by and among The
Banc Corporation as issuer and State Street Bank and Trust
Company of Connecticut, National Association, as Trustee,
filed as Exhibit(4)-3 to The Banc Corporation's Annual
Report on Form 10-K for the year ended December 31, 2000, is
hereby incorporated herein by reference.
(4)-4 -- Placement Agreement, dated as of August 31, 2000, by and
among The Banc Corporation, TBC Capital Statutory Trust II,
Keefe Bruyette & Woods, Inc., and First Tennessee Capital
Markets, filed as Exhibit(4)-4 to The Banc Corporation's
Annual Report on Form 10-K for the year ended December 31,
2000, is hereby incorporated herein by reference.
(4)-5 -- Amended and Restated Declaration of Trust, dated as of July
16, 2001, by and among The Banc Corporation, The Bank of New
York, David R. Carter, and James A. Taylor, Jr. filed as
Exhibit(4)-5 to The Banc Corporation's Registration
Statement on Form S-4 (Registration No. 333-69734) is hereby
incorporated herein by reference.
(4)-6 -- Guarantee Agreement, dated as of July 16, 2001, by The Banc
Corporation and The Bank of New York filed as Exhibit(4)-6
to The Banc Corporation's Registration Statement on Form S-4
(Registration No. 333-69734) is hereby incorporated herein
by reference.
(4)-7 -- Indenture, dated as of July 16, 2001, by The Banc
Corporation and The Bank of New York filed as Exhibit(4)-7
to The Banc Corporation's Registration Statement on Form S-4
(Registration No. 333-69734) is hereby incorporated herein
by reference.
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(4)-8 -- Placement Agreement, dated as of June 28, 2001, among TBC
Capital Statutory Trust III, and The Banc Corporation and
Sandler O'Neill & Partners, L.P. filed as Exhibit(4)-8 to
The Banc Corporation's Registration Statement on Form S-4
(Registration No. 333-69734) is hereby incorporated herein
by reference.
(4)-9 -- Stock Purchase Agreement, dated January 24, 2005, between
The Banc Corporation and the investors named therein, filed
as Exhibit 4-1 to The Banc Corporation's Current Report on
Form 8-K dated January 24, 2005, is hereby incorporated
herein by reference.
(4)-10 -- Registration Rights Agreement, dated January 24, 2005,
between The Banc corporation and the investors named
therein, filed as Exhibit 4-2 to The Banc Corporation's
Current Report on Form 8-K dated January 24, 2005, is hereby
incorporated herein by reference.
(10)-1 -- Third Amended and Restated 1998 Stock Incentive Plan of The
Banc Corporation, filed as Exhibit (10)-1 to The Banc
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 2004, is hereby incorporated herein by
reference.
(10)-2 -- Commerce Bank of Alabama Incentive Stock Compensation Plan,
filed as Exhibit(4)-3 to The Banc Corporation's Registration
Statement on Form S-8, dated February 22, 1999 (Registration
No. 333-72747), is hereby incorporated herein by reference.
(10)-3 -- The Banc Corporation 401(k) Plan, filed as Exhibit(4)-2 to
The Banc Corporation's Registration Statement on Form S-8,
dated January 21, 1999 (Registration No. 333-7953), is
hereby incorporated herein by reference.
(10)-4 -- Employment Agreement by and between The Banc Corporation and
James A. Taylor, filed as Exhibit (10)-1 to The Banc
Corporation's Quarterly Report on Form 10-Q for quarter
ended March 31, 2002 is hereby incorporated herein by
reference.
(10)-5 -- Deferred Compensation Agreement by and between The Banc
Corporation and James A. Taylor, filed as Exhibit (10)-2 to
The Banc Corporation's Registration Statement on Form S-l
(Registration No. 333-67011), is hereby incorporated herein
by reference.
(10)-6 -- Employment Agreement, dated as of September 19, 2000, by and
between The Banc Corporation and James A. Taylor, Jr., filed
as Exhibit (10)-8 to The Banc Corporation's Annual Report on
Form 10-K for the year ended December 31, 2001, is hereby
incorporated herein by reference.
(10)-7 -- Form of Deferred Compensation Agreement by and between The
Banc Corporation and the individuals listed on Schedule A
attached thereto filed as Exhibit (10)-11 to The Banc
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1999, is hereby incorporated herein by
reference.
(10)-8 -- Form of Deferred Compensation Agreement by and between The
Bank and the individuals listed on Schedule A attached
thereto filed as Exhibit (10)-11 to The Banc Corporation's
Annual Report on Form 10-K for the year ended December 31,
1999, is hereby incorporated herein by reference.
(10)-9 -- Agreement dated as of June 30, 2005, by and between The Banc
Corporation and David R. Carter, filed as Exhibit 10-3 to
The Banc Corporation's Current Report on Form 10-K dated
July 21, 2005, is hereby incorporated herein by reference.
(10)-10 -- Agreement, dated as of June 30, 2005, by and between The
Banc Corporation and F. Hampton McFadden, Jr., filed as
Exhibit 10-4 to The Banc Corporation's Current Report on
Form 8-K dated July 21, 2005, is hereby incorporated herein
by reference.
(10)-11 -- The Banc Corporation and Subsidiaries Employee Stock
Ownership Plan, filed as Exhibit (10)-13 to The Banc
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2002, is hereby incorporated herein by
reference.
(10)-12 -- Agreement, dated January 24, 2005, between The Banc
Corporation and James A. Taylor, Sr., filed as Exhibit 10-3
to The Banc Corporation's Current Report on Form 8-K dated
January 24, 2005, is hereby incorporated herein by
reference.
(10)-13 -- Agreement, dated January 24, 2005, between The Banc
Corporation and James A. Taylor, Jr., filed as Exhibit 10-4
to The Banc Corporation's Current Report on Form 8-K dated
January 24, 2005, is hereby incorporated herein by
reference.
91
(10)-14 -- Employment Agreement, dated January 24, 2005, by and between
The Banc Corporation, The Bank and C. Stanley Bailey, filed
as Exhibit 10-5 to The Banc Corporation's Current Report on
Form 8-K dated January 24, 2005, is hereby incorporated
herein by reference.
(10)-15 -- Employment Agreement, dated January 24, 2005, by and between
The Banc Corporation, The Bank and C. Marvin Scott, filed as
Exhibit 10-6 to The Banc Corporation's Current Report on
Form 8-K dated January 24, 2005, is hereby incorporated
herein by reference.
(10)-16 -- Employment Agreement, dated January 24, 2005, by and between
The Banc Corporation, The Bank and Rick D. Gardner, filed as
Exhibit 10-7 to The Banc Corporation's Current Report on
Form 8-K dated January 24, 2005, is hereby incorporated
herein by reference.
(10)-17 -- Agreement and Plan of Merger between Kensington Bankshares,
Inc. and The Banc Corporation, dated March 6, 2006, filed as
Exhibit 10 to the Banc Corporation's Current Report on Form
8-K dated March 6, 2006, is hereby incorporated herein by
reference.
(16) -- Letter from Ernst & Young LLP dated September 21, 2004,
filed as Exhibit (16)-1 to The Banc Corporation's Current
Report on Form 8-K/A dated June 14, 2004, is hereby
incorporated herein by reference.
(21) -- Subsidiaries of The Banc Corporation.
(23)-1 -- Consent of Carr, Riggs & Ingram, LLC
(23)-2 -- Consent of Ernst & Young LLP
(31) -- Certifications of Chief Executive Officer and Principal
Financial Officer pursuant to Rule 13a-14(a).
(32) -- Certifications of Chief Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350.
(c) Financial Statement Schedules.
The Financial Statement Schedules required to be filed with this Annual
Report on Form 10-K are listed under "Financial Statement Schedules" in Part IV,
Item 15(a)(2) of this Annual Report on Form 10-K, and are incorporated herein by
reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ C. Stanley Bailey
------------------------------------
C. Stanley Bailey
Chief Executive Officer
March 16, 2006
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints C. Stanley Bailey and James C. Gossett, and each
of them, the true and lawful agents and his attorneys-in-fact with full power
and authority in either of said agents and attorneys-in-fact, acting singly, to
sign for the undersigned as Director or an officer of the Corporation, or as
both, the Corporation's 2005 Annual Report on Form 10-K to be filed with the
Securities and Exchange Commission, Washington, D.C. under the Securities
Exchange Act of 1934, and to sign any amendment or amendments to such Annual
Report, including an Annual Report pursuant to 11-K to be filed as an amendment
to the Form 10-K; hereby ratifying and confirming all acts taken by such agents
and attorneys-in-fact as herein authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ C. Stanley Bailey Chief Executive Officer March 16, 2006
----------------------------------------------------- (Principal Executive Officer)
C. Stanley Bailey and Director
/s/ James C. Gossett Chief Accounting Officer March 16, 2006
----------------------------------------------------- (Principal Financial and
James C. Gossett Accounting Officer)
/s/ James A. Taylor Chairman of the Board March 16, 2006
-----------------------------------------------------
James A. Taylor
/s/ Roger Barker Director March 16, 2006
-----------------------------------------------------
Roger Barker
/s/ K. Earl Durden Director March 16, 2006
-----------------------------------------------------
K. Earl Durden
/s/ Rick D. Gardner Director March 16, 2006
-----------------------------------------------------
Rick D. Gardner
/s/ Thomas E. Jernigan, Jr. Director March 16, 2005
-----------------------------------------------------
Thomas E. Jernigan, Jr.
/s/ James Mailon Kent, Jr. Director March 16, 2006
-----------------------------------------------------
James Mailon Kent, Jr.
/s/ James M. Link Director March 16, 2006
-----------------------------------------------------
James M. Link
93
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Barry Morton Director March 16, 2006
-----------------------------------------------------
Barry Morton
/s/ Robert R. Parrish, Jr. Director March 16, 2006
-----------------------------------------------------
Robert R. Parrish, Jr.
/s/ C. Marvin Scott Director March 16, 2006
-----------------------------------------------------
C. Marvin Scott
/s/ Michael E. Stephens Director March 16, 2006
-----------------------------------------------------
Michael E. Stephens
/s/ James C. White Director March 16, 2006
-----------------------------------------------------
James C. White, Sr.
94