THE BANC CORPORATION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
Form 10-Q/A
AMENDMENT NO. 1 TO
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File number 0-25033
The Banc Corporation
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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63-1201350 |
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(State or Other Jurisdiction of Incorporation)
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(IRS Employer Identification No.) |
17 North 20th Street, Birmingham, Alabama 35203
(Address of Principal Executive Offices)
(205) 326-2265
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large
Accelerated Filer o
Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
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Class
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Outstanding as of June 30, 2005 |
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Common stock, $.001 par value
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19,551,411 |
TABLE OF CONTENTS
Introductory
Note 2005 Amendment to Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2005
This Amendment No. 1 to Form 10-Q is being filed by The Banc Corporation (the Corporation) to
amend its Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2005 filed with
the Securities and Exchange Commission (the SEC) on August 9, 2005 (the Initial Form 10-Q).
This Amendment No. 1 is required due to inaccuracies in the Initial Form 10-Q 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).
This
Amendment No. 1 contains restated unaudited Condensed Consolidated Financial Statements
for the three and six months ended June 30, 2005, which
supersede our previously
issued unaudited Condensed Consolidated Financial Statements contained in our original Quarterly
Report on Form 10-Q for the same interim period. For information regarding the amendment, see Note
1 to our unaudited Condensed Consolidated Financial Statements contained herein. This Amendment No.
1, includes amendments to Part I Items 1, 2 and 4. For the convenience of readers, we have also
included the remaining unamended Items, which are unchanged from the date of the original filing.
Except as otherwise specifically noted, all information contained herein is as of June 30,
2005 and does not reflect any events or changes that have occurred subsequent to that date. The
Corporation is not required to and has not updated any forward-looking statements previously
included in the Initial Form 10-Q.
This Amendment No. 1 includes amendments to Part 1, Item 4, Controls and Procedures,
reflecting managements revised assessment of our disclosure controls and procedures as of June 30,
2005. This revised assessment results from our determination that there was a material weakness in
our internal control over financial reporting related to our
accounting for certain 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 related certificates-of-deposit broker placement fee caused the swaps not
to 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 2005 constituted a material weakness in the Corporations 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.
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.
2
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
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(Restated) |
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June 30, |
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December 31, |
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2005 |
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2004 |
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(Unaudited) |
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ASSETS |
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Cash and due from banks |
|
$ |
29,651 |
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$ |
23,489 |
|
Interest-bearing deposits in other banks |
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|
4,769 |
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|
11,411 |
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Federal funds sold |
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7,595 |
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11,000 |
|
Investment securities available for sale |
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264,178 |
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288,308 |
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Mortgage loans held for sale |
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29,822 |
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8,095 |
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Loans, net of unearned income |
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903,456 |
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934,868 |
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Less: Allowance for loan losses |
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(12,263 |
) |
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(12,543 |
) |
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Net loans |
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891,193 |
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922,325 |
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Premises and equipment, net |
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55,782 |
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60,434 |
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Accrued interest receivable |
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6,084 |
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|
6,237 |
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Stock in FHLB and Federal Reserve Bank |
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11,821 |
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|
11,787 |
|
Cash surrender value of life insurance |
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38,614 |
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38,369 |
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Other assets |
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43,758 |
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41,673 |
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TOTAL ASSETS |
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$ |
1,383,267 |
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$ |
1,423,128 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Deposits |
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Noninterest-bearing |
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$ |
95,972 |
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$ |
89,487 |
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Interest-bearing |
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943,820 |
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977,719 |
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TOTAL DEPOSITS |
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1,039,792 |
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1,067,206 |
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Advances from FHLB |
|
|
146,090 |
|
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|
156,090 |
|
Federal funds borrowed and security repurchase agreements |
|
|
38,157 |
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|
49,456 |
|
Notes payable |
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|
3,860 |
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|
3,965 |
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Junior subordinated debentures owed to unconsolidated subsidiary trusts |
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31,959 |
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31,959 |
|
Accrued expenses and other liabilities |
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21,222 |
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13,913 |
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TOTAL LIABILITIES |
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1,281,080 |
|
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1,322,589 |
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Stockholders Equity |
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Convertible preferred stock, par value $.001 per share; authorized
5,000,000 shares; shares issued and outstanding -0- and 62,000,
respectively |
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Common stock, par value $.001 per share; authorized 35,000,000
shares; shares issued 19,805,956 and 18,025,932, respectively;
outstanding 19,551,411 and 17,749,846, respectively |
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20 |
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18 |
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Surplus preferred |
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6,193 |
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common stock |
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84,589 |
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68,428 |
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Retained earnings |
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20,267 |
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29,591 |
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Accumulated other comprehensive loss |
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(648 |
) |
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(1,094 |
) |
Treasury stock, at cost |
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(341 |
) |
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|
(390 |
) |
Unearned ESOP stock |
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(1,651 |
) |
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|
(1,758 |
) |
Unearned restricted stock |
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(49 |
) |
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|
(449 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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102,187 |
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|
100,539 |
|
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|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
1,383,267 |
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|
$ |
1,423,128 |
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|
|
|
|
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|
See Notes to Condensed Consolidated Financial Statements.
3
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2005 |
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2004 |
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2005 |
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2004 |
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(Restated) |
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(Restated) |
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INTEREST INCOME |
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|
|
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Interest and fees on loans |
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$ |
15,590 |
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|
$ |
13,691 |
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$ |
30,468 |
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|
$ |
27,258 |
|
Interest on
investment securities |
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|
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Taxable |
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|
2,945 |
|
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|
2,109 |
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|
5,870 |
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|
3,822 |
|
Exempt from Federal income tax |
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|
59 |
|
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|
26 |
|
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|
117 |
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|
41 |
|
Interest on federal funds sold |
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|
109 |
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|
41 |
|
|
|
191 |
|
|
|
75 |
|
Interest and dividends on other investments |
|
|
254 |
|
|
|
231 |
|
|
|
497 |
|
|
|
396 |
|
|
|
|
|
|
|
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|
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|
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Total interest income |
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|
18,957 |
|
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|
16,098 |
|
|
|
37,143 |
|
|
|
31,592 |
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Interest on deposits |
|
|
6,528 |
|
|
|
4,505 |
|
|
|
12,565 |
|
|
|
8,782 |
|
Interest on other borrowed funds |
|
|
1,881 |
|
|
|
1,456 |
|
|
|
3,738 |
|
|
|
3,122 |
|
Interest on subordinated debentures |
|
|
699 |
|
|
|
626 |
|
|
|
1,384 |
|
|
|
1,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
9,108 |
|
|
|
6,587 |
|
|
|
17,687 |
|
|
|
13,156 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET INTEREST INCOME |
|
|
9,849 |
|
|
|
9,511 |
|
|
|
19,456 |
|
|
|
18,436 |
|
Provision for loan losses |
|
|
1,500 |
|
|
|
|
|
|
|
2,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES |
|
|
8,349 |
|
|
|
9,511 |
|
|
|
17,206 |
|
|
|
18,436 |
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees on deposits |
|
|
1,166 |
|
|
|
1,397 |
|
|
|
2,278 |
|
|
|
2,788 |
|
Mortgage banking income |
|
|
762 |
|
|
|
383 |
|
|
|
1,208 |
|
|
|
787 |
|
Investment security (losses) gains |
|
|
(68 |
) |
|
|
37 |
|
|
|
(977 |
) |
|
|
428 |
|
Change in fair value of derivatives |
|
|
933 |
|
|
|
|
|
|
|
703 |
|
|
|
|
|
Gain on sale of branches |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
739 |
|
Increase in cash surrender value of life insurance |
|
|
391 |
|
|
|
410 |
|
|
|
742 |
|
|
|
813 |
|
Insurance proceeds |
|
|
5,000 |
|
|
|
|
|
|
|
5,000 |
|
|
|
|
|
Other income |
|
|
510 |
|
|
|
572 |
|
|
|
987 |
|
|
|
1,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NONINTEREST INCOME |
|
|
8,694 |
|
|
|
2,799 |
|
|
|
9,941 |
|
|
|
6,567 |
|
NONINTEREST EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
5,927 |
|
|
|
5,871 |
|
|
|
11,329 |
|
|
|
11,457 |
|
Occupancy, furniture and equipment expense |
|
|
2,059 |
|
|
|
2,094 |
|
|
|
4,040 |
|
|
|
4,052 |
|
Management separation costs |
|
|
2,961 |
|
|
|
|
|
|
|
15,338 |
|
|
|
|
|
Other operating expenses |
|
|
4,536 |
|
|
|
3,202 |
|
|
|
8,098 |
|
|
|
6,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NONINTEREST EXPENSES |
|
|
15,483 |
|
|
|
11,167 |
|
|
|
38,805 |
|
|
|
22,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,560 |
|
|
|
1,143 |
|
|
|
(11,658 |
) |
|
|
2,690 |
|
INCOME TAX EXPENSE (BENEFIT) |
|
|
412 |
|
|
|
79 |
|
|
|
(4,645 |
) |
|
|
398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
|
1,148 |
|
|
|
1,064 |
|
|
|
(7,013 |
) |
|
|
2,292 |
|
PREFERRED STOCK DIVIDENDS |
|
|
305 |
|
|
|
217 |
|
|
|
305 |
|
|
|
217 |
|
EFFECT OF EARLY CONVERSION OF PREFERRED STOCK |
|
|
2,006 |
|
|
|
|
|
|
|
2,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME APPLICABLE TO COMMON
STOCKHOLDERS |
|
$ |
(1,163 |
) |
|
$ |
847 |
|
|
$ |
(9,324 |
) |
|
$ |
2,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC NET (LOSS) INCOME PER COMMON SHARE |
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
$ |
(0.50 |
) |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED NET (LOSS) INCOME PER COMMON SHARE |
|
$ |
(0.06 |
) |
|
$ |
0.05 |
|
|
$ |
(0.50 |
) |
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |
|
|
18,726 |
|
|
|
17,578 |
|
|
|
18,562 |
|
|
|
17,569 |
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
ASSUMING DILUTION |
|
|
18,726 |
|
|
|
18,487 |
|
|
|
18,562 |
|
|
|
18,532 |
|
See Notes to Condensed Consolidated Financial Statements.
4
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
|
2005 |
|
|
2004 |
|
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES |
|
$ |
(20,929 |
) |
|
$ |
5,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net decrease (increase) in interest-bearing deposits in other banks |
|
|
6,642 |
|
|
|
(4,926 |
) |
Net decrease (increase) in federal funds sold |
|
|
3,405 |
|
|
|
(18,000 |
) |
Proceeds from sales of securities available for sale |
|
|
57,150 |
|
|
|
71,720 |
|
Proceeds from maturities of investment securities available for sale |
|
|
20,105 |
|
|
|
36,105 |
|
Purchases of investment securities available for sale |
|
|
(53,609 |
) |
|
|
(161,819 |
) |
Net decrease (increase) in loans |
|
|
31,603 |
|
|
|
(39,344 |
) |
Purchases of premises and equipment |
|
|
(511 |
) |
|
|
(2,801 |
) |
Proceeds from sales of premises and equipment |
|
|
3,055 |
|
|
|
579 |
|
Net cash paid in branch sale |
|
|
|
|
|
|
(6,626 |
) |
Purchase of life insurance |
|
|
|
|
|
|
(5,000 |
) |
Increase in other investments |
|
|
(34 |
) |
|
|
(1,744 |
) |
|
|
|
|
|
|
|
Net cash provided (used) by investing activities |
|
|
67,806 |
|
|
|
(131,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (decrease) increase in deposit accounts |
|
|
(26,711 |
) |
|
|
82,144 |
|
Net (decrease) increase in FHLB advances and other borrowed funds |
|
|
(21,299 |
) |
|
|
39,326 |
|
Payments made on long term debt |
|
|
(105 |
) |
|
|
(105 |
) |
Proceeds from sale of common stock |
|
|
7,705 |
|
|
|
49 |
|
Cash dividends paid |
|
|
(305 |
) |
|
|
(217 |
) |
|
|
|
|
|
|
|
Net cash (used) provided by financing activities |
|
|
(40,715 |
) |
|
|
121,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and due from banks |
|
|
6,162 |
|
|
|
(5,631 |
) |
|
|
|
|
|
|
|
|
|
Cash and due from banks at beginning of period |
|
|
23,489 |
|
|
|
31,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND DUE FROM BANKS AT END OF PERIOD |
|
$ |
29,651 |
|
|
$ |
26,048 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q, and, therefore, do not include all information and
footnotes necessary for a fair presentation of financial position, results of operations and cash
flows in conformity with generally accepted accounting principles. For a summary of significant
accounting policies that have been consistently followed, see Note 1 to the Consolidated Financial
Statements included in the Corporations Annual Report on Form 10-K for the year ended December 31,
2004. It is managements opinion that all adjustments, consisting of only normal and recurring
items necessary for a fair presentation, have been included. Operating results for the three- and
six-month periods ended June 30, 2005, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005.
The condensed statement of financial condition at December 31, 2004, which has been derived from
the financial statements audited by Carr, Riggs & Ingram, LLC, independent public accountants, as
indicated in their report included in the Corporations Annual Report on Form 10-K, does not
include all of the information and footnotes required by generally accepted accounting principles
for complete financial statements.
Restated Results of Operations and Financial Condition:
The Corporation is restating its previously reported financial information for the second
quarter and first six months of 2005 to correct errors in those consolidated financial statements
relating to its derivative accounting under Statement of Financial Accounting Standards 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133). In addition, the
following Notes to the Consolidated Financial Statements have been restated: 5, 6, 7 and 10. These
restated consolidated financial statements supercede the Corporations previously issued condensed
consolidated financial statements reported in the Corporations Initial Form 10-Q filed with the SEC
on August 9, 2005.
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
(brokered CDs). From the inception of the hedging program, the Corporation applied a method of fair
value hedge accounting under SFAS 133 to account for the CD swaps that allowed the Corporation to
assume no ineffectiveness in these transactions (the so-called short-cut method). The Corporation
has 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).
Fair value hedge accounting allows a company to record the effective portion of the change in
fair value of the hedged item (in this case, the brokered CDs) as an adjustment to income that
offsets the fair value adjustment on the related interest rate swaps. Eliminating the application
of fair value hedge accounting reverses the fair value adjustments that were made to the brokered
CDs. Therefore, while the interest rate swap is recorded on the consolidated statement of condition
at its fair value, the related hedged item, the brokered CDs, are required to be carried at par,
net of the unamortized balance of the CD broker placement fee. In addition, the CD broker placement
fee, which was incorporated into the swap, is now separately recorded as an adjustment to the par
amount of the brokered CDs and amortized through the maturity date of the related CDs.
The net cumulative pre-tax effect of eliminating the fair value adjustment to the
brokered CDs at June 30, 2005 is $703,000 (representing an $8,000 elimination of the fair value
adjustment to the brokered CDs less a $711,000 adjustment to record the unamortized CD broker
placement fees). The cumulative after-tax impact was a $443,000 increase to retained earnings.
6
The following tables summarize the effects of the amendment on the condensed consolidated statement
of financial condition at June 30, 2005 and condensed
consolidated statements of operations for the
three and six months ended June 30, 2005. The restatement did not affect previously reported cash
flows from operating activities, investing activities or financing activities.
|
|
|
|
|
|
|
|
|
Condensed Consolidated |
|
|
|
|
|
|
Statement of Condition |
|
June 30, 2005 |
|
(In thousands) |
|
As previously Reported |
|
|
Restated |
|
Other assets |
|
$ |
44,018 |
|
|
$ |
43,758 |
|
Interest-bearing deposits |
|
|
944,523 |
|
|
|
943,820 |
|
Retained earnings |
|
|
19,824 |
|
|
|
20,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2005 |
|
Condensed Consolidated Statement of Operations |
|
As previously |
|
|
|
|
|
|
As previously |
|
|
|
|
(In thousands, except per share data) |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Change in fair value of derivatives |
|
$ |
|
|
|
$ |
933 |
|
|
$ |
|
|
|
$ |
703 |
|
Income (loss) before income tax expense (benefit) |
|
|
627 |
|
|
|
1,560 |
|
|
|
(12,361 |
) |
|
|
(11,658 |
) |
Income tax expense (benefit) |
|
|
67 |
|
|
|
412 |
|
|
|
(4,905 |
) |
|
|
(4,645 |
) |
Net income (loss) |
|
|
560 |
|
|
|
1,148 |
|
|
|
(7,456 |
) |
|
|
(7,013 |
) |
Net loss applicable to common
stockholders |
|
|
(1,751 |
) |
|
|
(1,163 |
) |
|
|
(9,767 |
) |
|
|
(9,324 |
) |
Basic and
diluted net loss per common
share |
|
$ |
(0.09 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.53 |
) |
|
$ |
(0.50 |
) |
As of June 30, 2005 the notional amount of these CD swaps totaled $46,500,000 with a recorded
negative fair value of $8,000. The weighted average life as of June 30, 2005 is 9.40 years; the
weighted average fixed rate (receiving rate) is 4.48%, which matches the brokered CD rate, and the
weighted average variable rate (paying rate) is 3.25% (LIBOR based).
Note 2 RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R), which is a revision of SFAS
123 and supersedes Accounting Principles Board (APB) Opinion 25. On April 14, 2005, the Securities
and Exchange Commission announced the adoption of a new rule that amended the compliance dates for
SFAS No. 123R. Under SFAS 123R, registrants would have been required to implement the standard as
of the beginning of the first interim or annual period that begins after June 15, 2005. The
Commissions new rule allows issuers to implement SFAS 123R at the beginning of their next fiscal
year, instead of the next reporting period, that begins after June 15, 2005. The Commissions new
rule does not change the accounting required by SFAS 123R; it changes only the dates for compliance
with the standard. The new standard requires companies to recognize an expense in the statement of
operations for the grant-date fair value of stock options and other equity-based compensation
issued to employees, but expresses no preference for a type of valuation method. This expense will
be recognized over the period during which an employee is required to provide service in exchange
for the award. SFAS 123R carries forward prior guidance on accounting for awards to non-employees.
If an equity award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified award over the fair
value of the original award immediately prior to the modification. The Corporation is evaluating
7
the impact on its results of operations from adopting SFAS 123R, but expects it to be comparable to
the pro forma effects of applying the original SFAS 123 (see Note 10).
In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, to amend APB Opinion
No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on
the principle that exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that
principle. SFAS 153 amends Opinion 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and re-places it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a result of the
exchange. The provisions of SFAS 153 will be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary
asset exchanges occurring in fiscal periods beginning after the date SFAS 153 was issued. The
provisions of SFAS 153 are to be applied prospectively. The Corporation does not believe SFAS 153
will have a material impact on its financial statements.
In May of 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. SFAS 154
replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements, and changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition 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. This Statement also carries forward the guidance in Opinion 20 requiring justification of
a change in accounting principle on the basis of preferability. SFAS 154 is effective for fiscal
years beginning after December 15, 2005. The Corporation does not believe SFAS 154 will have a
material impact on its financial statements.
Note 3 RECENT DEVELOPMENTS
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 July 21, 2005, the Corporation announced that it had bought out the employment contracts of the
Chief Financial Officer and the General Counsel, effective June 30, 2005. Under these agreements,
in lieu of the payments to which they would have been entitled under their employment agreements,
the Corporation paid a total of $2,392,343 on July 22, 2005. In addition, these officers became
fully vested in stock options and restricted stock previously granted to them and in benefits under
their deferred compensation agreements with the Corporation.
On June 17, 2005, the Corporations banking subsidiary filed an application to change its charter
to a federal savings bank charter under the Office of Thrift Supervision. The Corporations banking
subsidiary is currently regulated by the Alabama Banking Department and the Federal Reserve.
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 Corporations banking
subsidiary, C. Marvin Scott as President of the Corporation and the Corporations banking
subsidiary, and Rick D. Gardner as Chief Operating Officer of the Corporation and the Corporations
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 will 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 Corporations banking subsidiary.
Under the agreement with Mr. Taylor, in lieu of the payments to which he would have been entitled
under his employment agreement, the Corporation paid Mr. Taylor $3,940,155 on January 24, 2005, and
is scheduled to pay an additional $3,152,124 on January 24, 2006, and $788,031 on 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.
8
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 $3.0 million and $15.3 million for the three- and six-months periods
ended June 30, 2005. At June 30, 2005, the Corporation had $6.7 million of accrued liabilities
related to these agreements. See Note 24 to the Consolidated Financial Statements included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2004 for further
information.
Note 4 ASSET SALES
In February 2004, the Corporations banking subsidiary sold its Morris, Alabama branch, which had
assets of approximately $1,037,000 and liabilities of $8,217,000. The Corporation realized a
$739,000 pre-tax gain on the sale.
In March 2005, the Corporation sold its corporate aircraft, realizing a $355,000 pre-tax loss.
Note 5 SEGMENT REPORTING
The Corporation has two reportable segments, the Alabama Region and the Florida Region. The Alabama
Region consists of operations located throughout the state of Alabama. The Florida Region consists
of operations located in the eastern panhandle region of Florida. The Corporations reportable
segments are managed as separate business units because they are located in different geographic
areas. Both segments derive revenues from the delivery of financial services. These services
include commercial loans, mortgage loans, consumer loans, deposit accounts and other financial
services.
The Corporation evaluates performance and allocates resources based on profit or loss from
operations. There are no material intersegment sales or transfers. Net interest revenue is used as
the basis for performance evaluation rather than its components, total interest revenue and total
interest expense. The accounting policies used by each reportable segment are the same as those
discussed in Note 1 to the Consolidated Financial Statements included in the Form 10-K for the year
ended December 31, 2004. All costs have been allocated to the reportable segments. Therefore,
combined amounts agree to the consolidated totals (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama |
|
|
Florida |
|
|
|
|
|
|
Region |
|
|
Region |
|
|
Combined |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
Three months ended June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
6,757 |
|
|
$ |
3,092 |
|
|
$ |
9,849 |
|
Provision for loan losses |
|
|
1,379 |
|
|
|
121 |
|
|
|
1,500 |
|
Noninterest income (1) |
|
|
8,365 |
|
|
|
329 |
|
|
|
8,694 |
|
Noninterest expense (2)(3) |
|
|
14,456 |
|
|
|
1,027 |
|
|
|
15,483 |
|
Income tax (benefit) expense |
|
|
(206 |
) |
|
|
618 |
|
|
|
412 |
|
Net (loss) income |
|
|
(507 |
) |
|
|
1,655 |
|
|
|
1,148 |
|
Total assets |
|
|
1,108,062 |
|
|
|
275,205 |
|
|
|
1,383,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
6,886 |
|
|
$ |
2,625 |
|
|
$ |
9,511 |
|
Provision for loan losses (1) |
|
|
984 |
|
|
|
(984 |
) |
|
|
|
|
Noninterest income (1) |
|
|
2,467 |
|
|
|
332 |
|
|
|
2,799 |
|
Noninterest expense (2) |
|
|
8,743 |
|
|
|
2,424 |
|
|
|
11,167 |
|
Income tax (benefit) expense |
|
|
(377 |
) |
|
|
456 |
|
|
|
79 |
|
Net income |
|
|
3 |
|
|
|
1,061 |
|
|
|
1,064 |
|
Total assets (1) |
|
|
1,063,265 |
|
|
|
224,771 |
|
|
|
1,288,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
13,535 |
|
|
$ |
5,921 |
|
|
$ |
19,456 |
|
Provision for loan losses |
|
|
2,112 |
|
|
|
138 |
|
|
|
2,250 |
|
Noninterest income (1) |
|
|
9,288 |
|
|
|
653 |
|
|
|
9,941 |
|
Noninterest expense (2)(3) |
|
|
36,630 |
|
|
|
2,175 |
|
|
|
38,805 |
|
Income tax (benefit) expense |
|
|
(5,845 |
) |
|
|
1,200 |
|
|
|
(4,645 |
) |
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama |
|
|
Florida |
|
|
|
|
|
|
Region |
|
|
Region |
|
|
Combined |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
Net (loss) income |
|
|
(10,074 |
) |
|
|
3,061 |
|
|
|
(7,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
13,213 |
|
|
$ |
5,223 |
|
|
$ |
18,436 |
|
Provision for loan losses (1) |
|
|
1,956 |
|
|
|
(1,956 |
) |
|
|
|
|
Noninterest income (1) |
|
|
5,865 |
|
|
|
702 |
|
|
|
6,567 |
|
Noninterest expense (2) |
|
|
17,412 |
|
|
|
4,901 |
|
|
|
22,313 |
|
Income tax (benefit) expense |
|
|
(481 |
) |
|
|
879 |
|
|
|
398 |
|
Net income |
|
|
191 |
|
|
|
2,101 |
|
|
|
2,292 |
|
|
|
|
(1) |
|
See Notes 3 and 4 concerning branch sales and insurance proceeds. Also, in January 2004,
certain loans were transferred from the Florida segment to the Corporations special assets
department, which is included in the Alabama segment. |
|
(2) |
|
Noninterest expense for the Alabama region includes all expenses for the holding company,
which have not been prorated to the Florida region. |
|
(3) |
|
See Notes 3 and 4 concerning the amount of management separation charges and loss on the sale
of assets. |
Note 6 NET (LOSS) INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net (loss) income per common
share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30 |
|
|
June 30 |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,148 |
|
|
$ |
1,064 |
|
|
|
(7,013 |
) |
|
|
2,292 |
|
Less preferred dividends |
|
|
305 |
|
|
|
217 |
|
|
|
305 |
|
|
|
217 |
|
Less effect of preferred stock conversion |
|
|
2,006 |
|
|
|
|
|
|
|
2,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For basic and diluted, net (loss) income applicable to
common stockholders |
|
$ |
(1,163 |
) |
|
$ |
847 |
|
|
$ |
(9,324 |
) |
|
$ |
2,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For basic, weighted average common shares outstanding |
|
|
18,726 |
|
|
|
17,578 |
|
|
|
18,562 |
|
|
|
17,569 |
|
Effect of dilutive stock options, restricted stock and
convertible preferred |
|
|
|
|
|
|
909 |
|
|
|
|
|
|
|
963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, assuming dilution |
|
|
18,726 |
|
|
|
18,487 |
|
|
|
18,562 |
|
|
|
18,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per common share |
|
$ |
(.06 |
) |
|
$ |
.05 |
|
|
$ |
(.50 |
) |
|
$ |
.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per common share |
|
$ |
(.06 |
) |
|
$ |
.05 |
|
|
$ |
(.50 |
) |
|
$ |
.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common stockholders and net (loss) income per common share reflect
the effects of the early conversion of 62,000 shares of the Corporations convertible preferred
stock into 775,000 shares of common stock at a conversion price of $8.00 per share. Such conversion
was effective as of June 30, 2005. As a result of such conversion, the excess of the market value
of the common stock issued at the date of conversion over the aggregate issue price is reflected as
a reduction in retained earnings with a corresponding increase in surplus, thereby reducing net
income applicable to common stockholders for purposes of calculating earnings per common share.
This non-cash charge did not affect total stockholders equity.
Common stock equivalents of 1,387,000 and 1,357,000 were not included in computing diluted net loss
per common share for the three- and six-month periods ended June 30, 2005, respectively, because
their effects were anti-dilutive.
Note 7
COMPREHENSIVE INCOME (LOSS) (Restated)
Total comprehensive income (loss) was $3,059,000 and $(6,567,000), respectively, for the three
and six-month periods ended June 30, 2005, and $(1,879,000) and $(122,000) respectively, for the
three- and six-month periods ended June 30, 2004. Total comprehensive (loss) income consists of net
(loss) income and the unrealized gain or loss on the Corporations available-for-sale securities
portfolio arising during the period.
10
During the first quarter of 2005, the Corporation realized a $909,000 pre-tax loss as a result of a
$50 million sale of bonds in the investment portfolio which closed in April 2005. The Corporation
reinvested the proceeds in bonds intended to enhance the yield and cash flows of its investment
securities portfolio. The new investment securities are classified as available for sale.
Note 8 INCOME TAXES
The difference between the effective tax rate and the federal statutory rate in 2005 and 2004 is
primarily due to certain tax-exempt income.
Note 9 JUNIOR SUBORDINATED DEBENTURES
The Corporation has sponsored two trusts, TBC Capital Statutory Trust II (TBC Capital II) and TBC
Capital Statutory Trust III (TBC Capital III), of which 100% of the common equity is owned by the
Corporation. The trusts were formed for the purpose of issuing Corporation-obligated mandatory
redeemable trust preferred securities to third-party investors and investing the proceeds from the
sale of such trust preferred securities solely in junior subordinated debt securities of the
Corporation (the debentures). The debentures held by each trust are the sole assets of that trust.
Distributions on the trust preferred securities issued by each trust are payable semi-annually at a
rate per annum equal to the interest rate being earned by the trust on the debentures held by that
trust. The trust preferred securities are subject to mandatory redemption, in whole or in part,
upon repayment of the debentures. The Corporation has entered into agreements which, taken
collectively, fully and unconditionally guarantee the trust preferred securities subject to the
terms of each of the guarantees. The debentures held by the TBC Capital II and TBC Capital III
capital trusts are first redeemable, in whole or in part, by the Corporation on September 7, 2010
and July 25, 2006, respectively.
The trust preferred securities held by the trusts qualify as Tier 1 capital for the Corporation
under Federal Reserve Board guidelines.
Consolidated debt obligations related to subsidiary trusts holding solely debentures of the
Corporation follow (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
December 31, 2004 |
|
10.6% junior subordinated debentures owed to TBC Capital Statutory
Trust II due September 7, 2030 |
|
$ |
15,464 |
|
|
$ |
15,464 |
|
6-month LIBOR plus 3.75% junior subordinated debentures owed to TBC Capital
Statutory Trust III due July 25, 2031 |
|
|
16,495 |
|
|
|
16,495 |
|
|
|
|
|
|
|
|
Total junior subordinated debentures owed to unconsolidated subsidiary trusts |
|
$ |
31,959 |
|
|
$ |
31,959 |
|
|
|
|
|
|
|
|
As of June 30, 2005 and December 31, 2004, the interest rate on the $16,495,000 subordinated
debentures was 6.71% and 5.74%, respectively.
Currently, the Corporation must obtain regulatory approval prior to paying any dividends on these
trust preferred securities. The Federal Reserve approved the timely payment of the Corporations
semi-annual distributions on our trust preferred securities in January, March and July, 2005.
Note 10 STOCKHOLDERS EQUITY
During the first quarter of 2005, the Corporation issued 925,636 shares of its common stock at
$8.17 per share, the then-current market price, to the new members of the management team and other
investors, in a private placement. The Corporation received proceeds, net of issuance cost, of
$7,328,000.
Effective June 30, 2005, 62,000 shares of the Corporations convertible preferred stock were
converted into 775,000 shares of common stock at a conversion price of $8.00 per share. As a result
of such conversion, the excess of the market value of the common stock issued at the date of
conversion over the aggregate issue price is reflected as a reduction in retained earnings with a
corresponding increase in surplus, thereby reducing net income applicable to common stockholders
for purposes of calculating earnings per common share. This non-cash charge did not affect total
stockholders equity.
On April 1, 2002, the Corporation issued 157,000 shares of restricted common stock to certain
directors and key employees pursuant to the Second Amended and Restated 1998 Stock Incentive Plan.
Under the Restricted Stock Agreements, the shares of restricted stock may not be sold or assigned
in any manner for a five-year period that began on April 1, 2002. During this restricted period,
the participant is eligible to receive dividends and exercise voting privileges. The restricted
stock also has a corresponding vesting period with one-third vesting at the end of
11
each of the third, fourth and fifth years. The restricted stock was issued at $7.00 per share, or
$1,120,000, and is classified as a contra-equity account, Unearned restricted stock, in
stockholders equity. During 2003, 15,000 shares of this restricted common stock were forfeited.
During the second quarter of 2005, an additional 29,171 shares of this restricted stock were
forfeited. On January 24, 2005 the Corporation issued 49,375 additional shares of restricted common
stock to certain key employees. Under the terms of the employment contract buyouts during the
second quarter of 2005 and the management separation agreement entered into during the first
quarter of 2005 (see Note 3), vesting was accelerated on 25,000 and 99,375 shares of restricted
stock, respectively.
Unvested restricted shares outstanding as of June 30, 2005 were 13,334 and the remaining amount in
the unearned restricted stock account is $49,000. This balance is being amortized as expense as the
stock is earned during the restricted period. The amounts of restricted shares are included in the
diluted earnings per share calculation, using the treasury stock method, until the shares vest.
Once vested, the shares become outstanding for basic earnings per share. For the periods ended June
30, 2005 and 2004, the Corporation has recognized $599,000 and $100,000, respectively, in
restricted stock expense. The current year expense is primarily related to the accelerated vesting
from the management separation agreements and employment contract buyouts and is included in the
amount of management separation cost.
The Corporation adopted a leveraged employee stock ownership plan (the ESOP) effective May 15,
2002, that covers all eligible employees who are at least age 21 and have completed a year of
service. As of June 30, 2005 the ESOP has been leveraged with 273,400 shares of the Corporations
common stock purchased in the open market and classified as a contra-equity account, Unearned ESOP
shares, in stockholders equity.
On January 29, 2003, the ESOP trustees finalized a $2,100,000 promissory note to reimburse the
Corporation for the funds used to leverage the ESOP. The unreleased shares and a guarantee of the
Corporation secure the promissory note, which has been classified as a note payable on the
Corporations statement of financial condition. As the debt is repaid, shares are released from
collateral based on the proportion of debt service. Principal payments on the debt are $17,500 per
month for 120 months. The interest rate is adjusted annually to the Wall Street Journal prime rate.
Released shares are allocated to eligible employees at the end of the plan year based on the
employees 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 six month periods ended June 30, 2005, and 2004, was $135,000 and $98,000, respectively.
The ESOP shares as of June 30, 2005 were as follows:
|
|
|
|
|
|
|
June 30, 2005 |
|
Allocated shares |
|
|
55,328 |
|
Estimated shares committed to be released |
|
|
13,350 |
|
Unreleased shares |
|
|
204,722 |
|
|
|
|
|
Total ESOP shares |
|
|
273,400 |
|
|
|
|
|
Fair value of unreleased shares |
|
$ |
2,166,000 |
|
|
|
|
|
The Corporation has established a stock incentive plan for directors and certain key employees that
provides for the granting of restricted stock and incentive and nonqualified options to purchase up
to 2,500,000 shares of the Corporations common stock. The compensation committee of the Board
determines the terms of the restricted stock and options granted.
All options granted have a maximum term of ten years from the grant date, and the option price per
share of options granted cannot be less than the fair market value of the Corporations common
stock on the grant date. Most options granted under this plan vest 20% on the grant date and an
additional 20% annually on the next four anniversaries of the grant date. Other options granted
under this plan vest based on the Corporations achievement of certain stock price levels or five
years from the grant date, whichever occurs first.
In addition, the Corporation granted 1,423,940 options to the new management team. These options
have an exercise price of $8.17 per share. These options have a ten-year term and a tiered vesting
schedule as discussed in Note 24 to the Consolidated Financial Statements included in the
Corporations Annual Report on Form 10-K for the year ended December 31, 2004.
The Corporation has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), which allows an entity to
continue to measure compensation costs for those plans using the intrinsic value-based method of
accounting prescribed by APB Opinion
12
No. 25, Accounting for Stock Issued to Employees. The Corporation has elected to follow APB Opinion
25 and related interpretations in accounting for its employee stock options. Accordingly,
compensation cost for fixed and variable stock-based awards is measured by the excess, if any, of
the fair market price of the underlying stock over the amount the individual is required to pay.
Compensation cost for fixed awards is measured at the grant date, while compensation cost for
variable awards is estimated until both the number of shares an individual is entitled to receive
and the exercise or purchase price are known (measurement date). No option-based employee
compensation cost is reflected in net income, as all options granted had an exercise price equal to
the market value of the underlying common stock on the date of grant. The pro forma information
below was determined as if the Corporation had accounted for its employee stock options under the
fair value method of SFAS 123. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options vesting period. The Corporations pro forma
information follows (in thousands except earnings per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, 2005 |
|
|
June 30, 2004 |
|
|
June 30, 2005 |
|
|
June 30, 2004 |
|
|
|
(Restated) |
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
Net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
1,148 |
|
|
$ |
1,064 |
|
|
$ |
(7,013 |
) |
|
$ |
2,292 |
|
Pro forma |
|
|
(407 |
) |
|
|
666 |
|
|
|
(10,729 |
) |
|
|
1,787 |
|
(Loss) earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(.06 |
) |
|
$ |
.05 |
|
|
$ |
(.50 |
) |
|
$ |
.12 |
|
Pro forma |
|
|
(.15 |
) |
|
|
.03 |
|
|
|
(.70 |
) |
|
|
.09 |
|
Diluted (loss) earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(.06 |
) |
|
$ |
.05 |
|
|
$ |
(.50 |
) |
|
$ |
.11 |
|
Pro forma |
|
|
(.15 |
) |
|
|
.02 |
|
|
|
(.70 |
) |
|
|
.08 |
|
The fair value of the options granted was based upon the Black-Scholes pricing model. The
Corporation used the following weighted average assumptions for:
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
|
2005 |
|
2004 |
Risk-free interest rate |
|
|
4.34 |
% |
|
|
4.69 |
% |
Volatility factor |
|
|
.41 |
|
|
|
.41 |
|
Weighted average life of options |
|
|
7.00 |
|
|
|
7.00 |
|
Dividend yield |
|
|
0.00 |
|
|
|
0.00 |
|
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Basis of Presentation
The following is a discussion and analysis of our June 30, 2005 consolidated financial condition
and results of operations for the three- and six-month periods ended June 30, 2005 and 2004. All
significant intercompany accounts and transactions have been eliminated. Our accounting and
reporting policies conform to generally accepted accounting principles.
This information should be read in conjunction with our unaudited condensed consolidated financial
statements and related notes appearing elsewhere in this report and the audited consolidated
financial statements and related notes and Managements Discussion and Analysis of Financial
Condition and Results of Operations, appearing in our Annual Report on Form 10-K for the year
ended December 31, 2004.
Restated Results of Operations and Financial Condition:
We are restating our previously reported financial information for the second quarter and
first six months of 2005 to correct errors in those consolidated financial statements relating to
its derivative accounting under Statement of Financial Accounting Standards 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 (brokered
CDs). 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 that 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).
Fair value hedge accounting allows a company to record the effective portion of the change in
fair value of the hedged item (in this case, the brokered CDs) as an adjustment to income that
offsets the fair value adjustment on the related interest rate swaps. Eliminating the application
of fair value hedge accounting reverses the fair value adjustments that were made to the brokered
CDs. Therefore, while the interest rate swap is recorded on the consolidated statement of condition
at its fair value, the related hedged item, the brokered CDs, are required to be carried at par,
net of the unamortized balance of the CD broker placement fee. In addition, the CD broker placement
fee, which was incorporated into the swap, is now separately recorded as an adjustment to the par
amount of the brokered CDs and amortized through the maturity date of the related CDs.
The net cumulative pre-tax effect of eliminating the fair value adjustment to the brokered CDs
at June 30, 2005 is $703,000 (representing a $8,000 elimination of the fair value adjustment to the
brokered CDs less a $711,000 adjustment to record the unamortized CD broker placement fees). The
cumulative after-tax impact was a $443,000 increase to retained earnings. Although these CD swaps
cannot retrospectively qualify for hedge accounting under SFAS 133, there is no effect on cash
flows for these changes, and the effectiveness of the CD swaps as economic hedge transactions has
not been affected by these changes in accounting treatment.
Overview
Our principal subsidiary is The Bank, an Alabama-chartered financial institution headquartered in
Birmingham, Alabama which operates 26 banking offices in Alabama and the eastern panhandle of
Florida. Other subsidiaries include TBC Capital Statutory Trust II (TBC Capital II), a
Connecticut statutory trust, TBC Capital Statutory Trust III (TBC Capital III), a Delaware
business trust, and Morris Avenue Management Group, Inc. (MAMG), an Alabama corporation, all of
which are wholly owned. TBC Capital II and TBC Capital III are unconsolidated special purpose
entities formed solely to issue cumulative trust preferred securities. MAMG is a real estate
management company that manages our headquarters, our branch facilities and certain other real
estate owned by The Bank.
Our total assets were $1.383 billion at June 30, 2005, a decrease of $40 million, or 2.80%, from
$1.423 billion as of December 31, 2004. Our total loans, net of unearned income, were $903 million
at June 30, 2005, a decrease of $32 million, or 3.36%, from $935 million as of December 31, 2004.
Our total deposits were $1.040 billion at June 30, 2005, a decrease of $27 million, or 2.50%, from
$1.067 billion as of December 31, 2004. These declines reflect our strategy of deleveraging the
balance sheet and focusing on deposit and loan mix realignment which
management
14
expects will improve net interest margin. Our total stockholders equity was $102.2 million at June
30, 2005, an increase of $1.7 million, or 1.64%, from $100.5 million as of December 31, 2004.
On July 21, 2005, we announced we had bought out the employment contracts of our Chief Financial
Officer and our General Counsel, effective June 30, 2005. Under these agreements, in lieu of the
payments to which they would have been entitled under their employment agreements we paid these
officers a total of $2,392,343 on July 22, 2005. In addition, these officers became fully vested in
stock options and restricted stock previously granted to them and in benefits under their deferred
compensation agreements with us.
On June 17, 2005, our banking subsidiary filed an application to change its charter to a federal
savings bank charter under the Office of Thrift Supervision. Our banking subsidiary is currently
regulated by the Alabama Banking Department and the Federal Reserve.
On January 24, 2005, we announced that we had entered into a series of executive management change
agreements. These agreements set forth the employment of C. Stanley Bailey as Chief Executive
Officer and a director of the corporation and chairman of our banking subsidiary, C. Marvin Scott
as President of the corporation and our banking subsidiary, and Rick D. Gardner as Chief Operating
Officer of the corporation and our banking subsidiary. These agreements also provided for the
purchase by Mr. Bailey, Mr. Scott and Mr. Gardner, along with other investors, of 925,636 shares of
common stock of the corporation at $8.17 per share. We also entered into agreements with James A.
Taylor and James A. Taylor, Jr. under which they will continue to serve as Chairman of the Board of
the Corporation and as a director of the Corporation, respectively, but would cease their
employment as officers of the Corporation and officers and directors of our banking subsidiary.
Under the agreement with Mr. Taylor, in lieu of the payments to which he would have been entitled
under his employment agreement, we paid Mr. Taylor $3,940,155 on January 24, 2005, and are
scheduled to pay an additional $3,152,124 on January 24, 2006, and $788,031 on January 24, 2007.
The agreement also provides for the provision of certain insurance benefits to Mr. Taylor, the
transfer of a key man life insurance policy to Mr. Taylor, and the maintenance of such policy by
us for five years (with the cost of maintaining such policy included in the above amounts), in each
case substantially as required by his employment agreement. This obligation to provide such
payments and benefits to Mr. Taylor is absolute and will survive the death or disability of Mr.
Taylor.
Under the agreement with Mr. Taylor, Jr., in lieu of the payments to which he would have been
entitled under his employment agreement, we paid Mr. Taylor, Jr., $1,382,872 on January 24, 2005.
The agreement also provides for the provision of certain insurance benefits to Mr. Taylor, Jr. and
for the immediate vesting of his unvested incentive awards and deferred compensation in each case
substantially as required by his employment agreement. This obligation to provide such payments and
benefits to Mr. Taylor, Jr. is absolute and will survive the death or disability of Mr. Taylor, Jr.
In connection with the above described employment contract buyouts and management separation
transaction, we recognized pre-tax expenses of $3.0 million and $15.3 million for the three- and
six-month periods ended June 30, 2005. At June 30, 2005, we had $6.7 million of accrued liabilities
related to these agreements. See Note 24 to the Consolidated Financial Statements included in our
Annual Report on Form 10-K for the year ended December 31, 2004 for further information.
Management reviews the adequacy of the allowance for loan losses on a quarterly basis. The
provision for loan losses represents the amount determined by management to be necessary to
maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan
portfolio. Managements determination of the adequacy of the allowance for loan losses, which is
based on the factors and risk identification procedures discussed in the following pages, requires
the use of judgments and estimates that may change in the future. Changes in the factors used by
management to determine the adequacy of the allowance or the availability of new information could
cause the allowance for loan losses to be increased or decreased in future periods. In addition,
bank regulatory agencies, as part of their examination process, may require that additions or
reductions be made to the allowance for loan losses based on their judgments and estimates.
Results of Operations
Our net income for the three-month period ended June 30, 2005 (second quarter of 2005) was $1.2,
compared to $1.1 million for the three-month period ended June 30, 2004 (second quarter of 2004).
Basic and diluted net (loss) income per common share was $(.06) and $.05, respectively, for the
second quarter of 2005 and 2004, based on weighted average common shares outstanding for the
respective periods. Net loss per common share reflects a $2.0 million effect from the early
conversion of our convertible preferred stock (see Note 6 in the condensed consolidated financial
statements). Return on average assets, on an annualized basis, was ..33% for the second quarter of
2005
15
compared to .34% for the second quarter of 2004. Return on average stockholders equity, on an
annualized basis, was 4.56% for the second quarter of 2005 compared to 4.26% for the second quarter
of 2004.
During the
second quarter of 2005, we incurred certain nonoperating charges related to management
changes, in addition to the recognition of losses on other real estate and an increase in the
provision for loan losses.
We incurred a $7.01 million net loss for the six-month period ended June 30, 2005 (first six months
of 2005), compared to $2.29 million in net income for the six-month period ended June 30, 2004
(first six months of 2004). Net (loss) income per common share was $(.50) for the first six months
of 2005 compared to $.11 per common share for the first six months of 2004. Return on average
assets, on an annualized basis, was (1.00)% for the first six months of 2005 compared to .37% for
the first six months of 2004. Return on average stockholders equity, on an annualized basis, was
(14.00)% for the first six months of 2005 compared to 4.59% for the first six months of 2004. Book
value per share at June 30, 2005 was $5.23, compared to $5.31 as of December 31, 2004. Tangible
book value per share at June 30, 2005 was $4.60, compared to $4.62 as of December 31, 2004.
The decrease in our net income during the first six months of 2005 compared to the first six months
of 2004 is the result of certain nonoperating charges related to the management changes which
occurred in the first and second quarters of 2005, the recognition of losses in the bond portfolio,
losses on other real estate, losses from the sale of certain assets and an increase in the
provision for loan losses.
Net interest income is the difference between the income earned on interest-earning assets and
interest paid on interest-bearing liabilities used to support such assets. Net interest income
increased $338,000, or 3.55%, to $9.8 million for the second quarter of 2005 compared to $9.5
million for the second quarter of 2004. Net interest income increased primarily due to a $2.8
million increase in total interest income offset by a $2.5 increase in total interest expense. The
increase in total interest income is primarily due to a $76 million increase in the average volume
of loans and a $72 million increase in the average volume of investment securities.
Average interest-earning assets for the second quarter of 2005 increased $120 million, or 10.7%, to
$1.241 billion from $1.121 billion in the second quarter of 2004. This increase in average
interest-earning assets was offset by a $120 million, or 11.2%, increase in average
interest-bearing liabilities to $1.191 billion for the second quarter of 2005 from $1.071 billion
for the second quarter of 2004. The ratio of average interest-earning assets to average
interest-bearing liabilities was 104.3% and 104.7% for the second quarters of 2005 and 2004,
respectively. Average interest-bearing assets produced a taxable equivalent yield of 6.14% for the
second quarter of 2005 compared to 5.78% for the second quarter of 2004.
For the second quarter of 2005 as compared to the second quarter of 2004, the increase in total
interest expense is attributable to a 60 basis point increase in the average interest rate paid on
interest-bearing liabilities and a $120 million increase in the volume of average interest-bearing
liabilities. The average rate paid on interest-bearing liabilities was 3.07% for the second quarter
of 2005, compared to 2.47% for the second quarter of 2004. Our net interest spread and net interest
margin were 3.07% and 3.19%, respectively, for the second quarter of 2005, compared to 3.31% and
3.42% for the second quarter of 2004.
Net interest income increased $1.0 million, or 5.53%, to $19.4 million for the first six months of
2005 compared to $18.4 million for the first six months of 2004. Net interest income increased
primarily due to a $5.5 million increase in total interest income offset by a $4.5 increase in
total interest expense. The increase in total interest income is primarily due to a $85.8 million
increase in the average volume of loans and a $98.1 million increase in the average volume of
investment securities.
Average interest-earning assets for the first six months of 2005 increased $164 million, or 15.0%,
to $1.259 billion from $1.095 billion in the first six months of 2004. This increase in average
interest-earning assets was offset by a $163 million, or 15.7%, increase in average
interest-bearing liabilities, to $1.207 billion for the first six months of 2005 from $1.044
billion for the first six months of 2004. The ratio of average interest-earning assets to average
interest-bearing liabilities was 104.3% and 104.9% for the first six months of 2005 and 2004,
respectively. Average interest-bearing assets produced a taxable equivalent yield of 5.96% for the
first six months of 2005 compared to 5.81% for the first six months of 2004.
For the six-month period ended June 30, 2005 as compared to the six-month period ended June 30,
2004, the increase in total interest expense is attributable to a 42 basis point increase in the
average interest rate paid on interest-bearing liabilities and a $163 million increase in the
volume of average interest-bearing liabilities. The average rate paid on interest-bearing
liabilities was 2.95% for the first six months of 2005, compared to 2.53% for the first six months
of 2004. Our net interest spread and net interest margin were 3.01% and 3.13%, respectively, for
the first six months of 2005, compared to 3.28% and 3.39% for the first six months of 2004.
16
Average Balances, Income, Expense and Rates. The following table depicts, on a taxable equivalent
basis for the periods indicated, certain information related to our average balance sheet and
average yields on assets and average costs of liabilities. Average yields are calculated by
dividing income or expense by the average balance of the corresponding assets or liabilities.
Average balances have been calculated on a daily basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income(1) |
|
$ |
945,407 |
|
|
$ |
15,590 |
|
|
|
6.61 |
% |
|
$ |
869,376 |
|
|
$ |
13,691 |
|
|
|
6.33 |
% |
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
251,876 |
|
|
|
2,945 |
|
|
|
4.69 |
|
|
|
183,643 |
|
|
|
2,109 |
|
|
|
4.62 |
|
Tax-exempt(2) |
|
|
6,616 |
|
|
|
89 |
|
|
|
5.40 |
|
|
|
2,744 |
|
|
|
39 |
|
|
|
5.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
258,492 |
|
|
|
3,034 |
|
|
|
4.71 |
|
|
|
186,387 |
|
|
|
2,148 |
|
|
|
4.64 |
|
Federal funds sold |
|
|
15,851 |
|
|
|
109 |
|
|
|
2.76 |
|
|
|
17,670 |
|
|
|
41 |
|
|
|
.93 |
|
Other investments |
|
|
21,571 |
|
|
|
254 |
|
|
|
4.72 |
|
|
|
47,945 |
|
|
|
231 |
|
|
|
1.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,241,321 |
|
|
|
18,987 |
|
|
|
6.14 |
|
|
|
1,121,378 |
|
|
|
16,111 |
|
|
|
5.78 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
29,032 |
|
|
|
|
|
|
|
|
|
|
|
30,783 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
57,211 |
|
|
|
|
|
|
|
|
|
|
|
58,129 |
|
|
|
|
|
|
|
|
|
Accrued interest and other assets |
|
|
87,290 |
|
|
|
|
|
|
|
|
|
|
|
83,443 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(12,783 |
) |
|
|
|
|
|
|
|
|
|
|
(23,308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,402,071 |
|
|
|
|
|
|
|
|
|
|
$ |
1,270,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
335,803 |
|
|
|
1,645 |
|
|
|
1.96 |
|
|
$ |
258,926 |
|
|
|
813 |
|
|
|
1.26 |
|
Savings deposits |
|
|
27,078 |
|
|
|
10 |
|
|
|
0.15 |
|
|
|
28,987 |
|
|
|
11 |
|
|
|
0.15 |
|
Time deposits |
|
|
605,584 |
|
|
|
4,873 |
|
|
|
3.23 |
|
|
|
578,039 |
|
|
|
3,681 |
|
|
|
2.56 |
|
Other borrowings |
|
|
190,113 |
|
|
|
1,881 |
|
|
|
3.97 |
|
|
|
173,170 |
|
|
|
1,456 |
|
|
|
3.38 |
|
Subordinated debentures |
|
|
31,959 |
|
|
|
699 |
|
|
|
8.77 |
|
|
|
31,959 |
|
|
|
626 |
|
|
|
7.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,190,537 |
|
|
|
9,108 |
|
|
|
3.07 |
|
|
|
1,071,081 |
|
|
|
6,587 |
|
|
|
2.47 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
92,120 |
|
|
|
|
|
|
|
|
|
|
|
87,153 |
|
|
|
|
|
|
|
|
|
Accrued interest and other liabilities |
|
|
18,356 |
|
|
|
|
|
|
|
|
|
|
|
11,643 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
101,058 |
|
|
|
|
|
|
|
|
|
|
|
100,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
1,402,071 |
|
|
|
|
|
|
|
|
|
|
$ |
1,270,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest spread |
|
|
|
|
|
|
9,879 |
|
|
|
3.07 |
% |
|
|
|
|
|
|
9,524 |
|
|
|
3.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets |
|
|
|
|
|
|
|
|
|
|
3.19 |
% |
|
|
|
|
|
|
|
|
|
|
3.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities(2) |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
9,849 |
|
|
|
|
|
|
|
|
|
|
$ |
9,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonaccrual loans are included in loans, net of unearned income. No adjustment has been
made for these loans in the calculation of yields. |
|
(2) |
|
Interest income and yields are presented on a fully taxable equivalent basis using a tax rate
of 34%. |
The following table sets forth, on a taxable equivalent basis, the effect that the varying
levels of our interest-earning assets and interest-bearing liabilities and the applicable rates
have had on the changes in net interest income for the three months ended June 30, 2005 and 2004.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 (1) |
|
|
|
2005 Vs 2004 |
|
|
|
Increase |
|
|
Changes Due To |
|
|
|
(Decrease) |
|
|
Rate |
|
|
Volume |
|
|
|
(Dollars in thousands) |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
1,899 |
|
|
$ |
638 |
|
|
$ |
1,261 |
|
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
836 |
|
|
|
33 |
|
|
|
803 |
|
Tax-exempt |
|
|
50 |
|
|
|
(2 |
) |
|
|
52 |
|
Interest on federal funds |
|
|
68 |
|
|
|
73 |
|
|
|
(5 |
) |
Interest on other investments |
|
|
23 |
|
|
|
201 |
|
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
2,876 |
|
|
|
943 |
|
|
|
1,933 |
|
|
|
|
|
|
|
|
|
|
|
Expense from interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
832 |
|
|
|
542 |
|
|
|
290 |
|
Interest on savings deposits |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Interest on time deposits |
|
|
1,192 |
|
|
|
1,008 |
|
|
|
184 |
|
Interest on other borrowings |
|
|
425 |
|
|
|
272 |
|
|
|
153 |
|
Interest subordinated debentures |
|
|
73 |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
2,521 |
|
|
|
1,895 |
|
|
|
626 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
355 |
|
|
$ |
(952 |
) |
|
$ |
1,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The change in interest due to both rate and volume has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the changes in
each. |
18
The following table depicts, on a taxable equivalent basis for the periods indicated, certain
information related to our average balance sheet and our average yields on assets and average costs
of liabilities. Average yields are calculated by dividing income or expense by the average balance
of the corresponding assets or liabilities. Average balances have been calculated on a daily basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
Average |
|
|
Income/ |
|
|
Yield/ |
|
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
Balance |
|
|
Expense |
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned income(1) |
|
$ |
949,626 |
|
|
$ |
30,468 |
|
|
|
6.47 |
% |
|
$ |
863,800 |
|
|
$ |
27,258 |
|
|
|
6.35 |
% |
Investment securities Taxable |
|
|
264,178 |
|
|
|
5,870 |
|
|
|
4.48 |
|
|
|
170,639 |
|
|
|
3,822 |
|
|
|
4.50 |
|
Tax-exempt(2) |
|
|
6,624 |
|
|
|
177 |
|
|
|
5.39 |
|
|
|
2,030 |
|
|
|
62 |
|
|
|
6.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
270,802 |
|
|
|
6,047 |
|
|
|
4.50 |
|
|
|
172,669 |
|
|
|
3,884 |
|
|
|
4.52 |
|
Federal funds sold |
|
|
14,726 |
|
|
|
191 |
|
|
|
2.62 |
|
|
|
16,055 |
|
|
|
75 |
|
|
|
0.94 |
|
Other investments |
|
|
23,962 |
|
|
|
497 |
|
|
|
4.18 |
|
|
|
42,257 |
|
|
|
396 |
|
|
|
1.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,259,116 |
|
|
|
37,203 |
|
|
|
5.96 |
|
|
|
1,094,781 |
|
|
|
31,613 |
|
|
|
5.81 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
30,748 |
|
|
|
|
|
|
|
|
|
|
|
29,002 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
58,076 |
|
|
|
|
|
|
|
|
|
|
|
58,076 |
|
|
|
|
|
|
|
|
|
Accrued interest and other assets |
|
|
83,525 |
|
|
|
|
|
|
|
|
|
|
|
82,192 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(12,792 |
) |
|
|
|
|
|
|
|
|
|
|
(24,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,418,673 |
|
|
|
|
|
|
|
|
|
|
$ |
1,239,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
319,371 |
|
|
|
2,755 |
|
|
|
1.74 |
|
|
$ |
248,361 |
|
|
|
1,494 |
|
|
|
1.21 |
|
Savings deposits |
|
|
27,643 |
|
|
|
21 |
|
|
|
0.15 |
|
|
|
29,692 |
|
|
|
24 |
|
|
|
0.16 |
|
Time deposits |
|
|
631,728 |
|
|
|
9,789 |
|
|
|
3.12 |
|
|
|
561,091 |
|
|
|
7,264 |
|
|
|
2.60 |
|
Other borrowings |
|
|
196,323 |
|
|
|
3,738 |
|
|
|
3.84 |
|
|
|
172,606 |
|
|
|
3,122 |
|
|
|
3.64 |
|
Subordinated debentures |
|
|
31,959 |
|
|
|
1,384 |
|
|
|
8.73 |
|
|
|
31,959 |
|
|
|
1,252 |
|
|
|
7.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,207,024 |
|
|
|
17,687 |
|
|
|
2.95 |
|
|
|
1,043,709 |
|
|
|
13,156 |
|
|
|
2.53 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
93,792 |
|
|
|
|
|
|
|
|
|
|
|
84,200 |
|
|
|
|
|
|
|
|
|
Accrued interest and other liabilities |
|
|
16,870 |
|
|
|
|
|
|
|
|
|
|
|
11,419 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
100,987 |
|
|
|
|
|
|
|
|
|
|
|
100,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,418,673 |
|
|
|
|
|
|
|
|
|
|
$ |
1,239,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest spread |
|
|
|
|
|
|
19,516 |
|
|
|
3.01 |
% |
|
|
|
|
|
|
18,457 |
|
|
|
3.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets |
|
|
|
|
|
|
|
|
|
|
3.13 |
% |
|
|
|
|
|
|
|
|
|
|
3.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities(2) |
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
19,456 |
|
|
|
|
|
|
|
|
|
|
$ |
18,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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%. |
19
The following table sets forth, on a taxable equivalent basis, the effect that the varying levels
of our interest-earning assets and interest-bearing liabilities and the applicable rates have had
on changes in net interest income for the six months ended June 30, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 (1) |
|
|
|
2005 vs 2004 |
|
|
|
Increase |
|
|
Changes Due To |
|
|
|
(Decrease) |
|
|
Rate |
|
|
Volume |
|
|
|
(Dollars in thousands) |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
3,210 |
|
|
$ |
513 |
|
|
$ |
2,697 |
|
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
2,048 |
|
|
|
|
|
|
|
2,048 |
|
Tax-exempt |
|
|
115 |
|
|
|
(2 |
) |
|
|
117 |
|
Interest on federal funds |
|
|
116 |
|
|
|
117 |
|
|
|
(1 |
) |
Interest on other investments |
|
|
101 |
|
|
|
201 |
|
|
|
(100 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
5,590 |
|
|
|
829 |
|
|
|
4,761 |
|
|
|
|
|
|
|
|
|
|
|
Expense from interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
1,261 |
|
|
|
763 |
|
|
|
498 |
|
Interest on savings deposits |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Interest on time deposits |
|
|
2,525 |
|
|
|
1,550 |
|
|
|
975 |
|
Interest on other borrowings |
|
|
616 |
|
|
|
176 |
|
|
|
440 |
|
Interest subordinated debentures |
|
|
132 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
4,531 |
|
|
|
2,620 |
|
|
|
1,911 |
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
1,059 |
|
|
$ |
(1,791 |
) |
|
$ |
2,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The change in interest due to both rate and volume has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the changes in each. |
Noninterest income. Noninterest income increased $5.9 million, or 210.6%, to $8.7 million for the
second quarter of 2005 from $2.8 million for the second quarter of 2004, primarily due to $5.0
million in insurance proceeds received in the second quarter of 2005 which resolved our claims
arising from fraud losses which occurred in previous periods and a $933,000 change in the fair
value of derivatives. Mortgage banking income increased $379,000, or 99.0%, to $762,000 in the
second quarter of 2005 from $383,000 in the second quarter of 2004. This increase in mortgage
banking income was offset by a decrease in gains on securities of $105,000 and a decrease in
service charges on deposits of $231,000 in the second quarter of 2005. This decrease is primarily
due to a loss of transaction accounts from 2004 to 2005. Management is currently pursuing new
accounts and customers through direct marketing and other promotional efforts to increase this
source of revenue. Service charges on deposit accounts increased $54,000, or 4.9%, in the second
quarter of 2005 over first quarter of 2005.
Noninterest income increased $3.3 million, or 51.4%, to $9.9 million for the first six months of
2005 from $6.6 million for the first six months of 2004, primarily due to $5.0 million in insurance
proceeds received in the second quarter of 2005 and a $933,000 change in the fair value of
derivatives, offset by losses we realized in 2005 on our investment portfolio compared to gains on
the sale of investments and our Morris branch in 2004. The investment portfolio losses were
realized primarily in the first quarter of 2005 as a result of a $50 million sale of bonds in the
investment portfolio. We reinvested the proceeds in bonds intended to enhance the yield and cash
flows of our investment securities portfolio. The new investment securities were classified as
available for sale. Service charges on deposits decreased $510,000, or 18.3%, to $2.3 million in
the first six months of 2005 from $2.8 million in the first six months of 2004. As discussed above,
this decrease is primarily due to a loss of transaction accounts from 2004 to 2005. Mortgage
banking income increased $421,000, or 53.5%, to $1.2 million in the first six months of 2005 from
$787,000 in the first six months of 2004.
Noninterest expense. Noninterest expense increased $4.3 million, or 38.7%, to $15.5 million for
second quarter of 2005 from $11.2 million for the second quarter of 2004. This increase is
primarily due to the employment contract buyouts of $3.0 million in the second quarter of 2005 (see
Note 3 to the condensed consolidated financial statements). We also incurred $1.0 million of
write-downs and losses on other real estate in the second quarter of 2005, primarily related to a
single property on which an updated appraised value was obtained.
Noninterest expense increased $16.5 million, or 73.9%, to $38.8 million for first six months of
2005 from $22.3 million for the first six months of 2004. This increase is primarily due to the
management separation costs of $15.3 million incurred in the first six months of 2005. The
management separation charges primarily include severance
20
payments, accelerated vesting of restricted stock and deferred compensation agreements, employment
contract buy-outs and professional fees (see Note 3 to the condensed consolidated financial
statements). Salaries and benefits decreased $128,000, or 1.1%, to $11.3 million for the first six
months of 2005 from $11.4 million for the first six months of 2004. All other noninterest expenses
increased $1.3 million, or 19.2%, to $8.1 million for the first six months of 2005 from $6.8
million for the first six months of 2004, primarily due to the $355,000 loss on the sale of our
corporate aircraft in the first quarter of 2005 and the additional $1.0 million of other real
estate losses in the second quarter of 2005.
Income tax expense. Our income tax expense was $412,000 for the second quarter of 2005, compared to
$79,000 for the second quarter of 2004. We recognized an income tax benefit of $4.6 million for the
first six months of 2005, compared to income tax expense of $398,000 for the first six months of
2004. The primary difference in the effective rate and the federal statutory rate (34%) for the
three- and six-month periods ended June 30, 2005 and 2004 is due to certain tax-exempt income from
investments and insurance policies.
Provision for Loan Losses. The provision for loan losses represents the amount determined by
management to be necessary to maintain the allowance for loan losses at a level capable of
absorbing inherent losses in the loan portfolio. Management reviews the adequacy of the allowance
on a quarterly basis. The allowance for loan loss calculation is segregated into various segments
that include classified loans, loans with specific allocations and pass rated loans. A pass rated
loan is generally characterized by a very low to average risk of default and is a loan in which
management perceives there is a minimal risk of loss. Loans are rated using an eight-point scale,
with loan officers having the primary responsibility for assigning the risk ratings and for the
timely reporting of changes in the risk ratings. These processes, and the assigned risk ratings,
are subject to review by our internal loan review function and senior management. Based on the
assigned risk ratings, the criticized and classified loans in the portfolio are segregated into the
following regulatory classifications: Special Mention, Substandard, Doubtful or Loss. Generally,
regulatory reserve percentages are applied to these categories to estimate the amount of loan loss
allowance, adjusted for previously mentioned risk factors. Impaired loans are reviewed specifically
and separately under Statement of Financial Accounting Standards No. 114 (SFAS 114) to determine
the appropriate reserve allocation. Management compares the investment in an impaired loan against
the present value of expected future cash flows discounted at the loans effective interest rate,
the loans 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 $1.5 million for the second quarter of 2005 and $2.25 million for
the first six months of 2005. Our provision for loan losses increased during the second quarter of
2005 primarily as a result of an increase in classified loans of $3.2 million identified during the
second quarter. In addition, we incurred charge-offs during the second quarter of 2005 related to
the reassessment of collateral values on certain nonperforming commercial credits and the
settlement of a disputed collateral lien. We did not record a provision for loan loss in the first
six months of 2004. During the first six months of 2005, we had net charged-off loans totaling $2.5
million, compared to net charged-off loans of $5.0 million in the first six months of 2004. The
annualized ratio of net charged-off loans to average loans was .54% in the first six months of 2005
compared to 1.16% for the first six months of 2004 and 1.52% for the year 2004. The allowance for
loan losses totaled $12.3 million, or 1.36% of loans, net of unearned income, at June 30, 2005
compared to $12.5 million, or 1.34% of loans, net of unearned income, at December 31, 2004. See
Allowance for Loan Losses for additional discussion.
Financial Condition
Total assets were $1.383 billion at June 30, 2005, a decrease of $40 million, or 2.80%, from $1.423
billion as of December 31, 2004. Average total assets for the first six months of 2005 totaled
$1.419 billion, which was supported by average total liabilities of $1.318 billion and average
total stockholders equity of $101 million.
Short-term liquid assets. Short-term liquid assets (cash and due from banks, interest-bearing
deposits in other banks and federal funds sold) decreased $3.9 million, or 8.5%, to $42.0 million
at June 30, 2005 from $45.9 million at December 31, 2004. At June 30, 2005, short-term liquid
assets comprised 3.0% of total assets, compared to 3.2% at December 31, 2004. We continually
monitor our liquidity position and will increase or decrease our short-term liquid assets as we
deem necessary.
Investment Securities. Total investment securities decreased $24.1 million, or 8.4%, to $264.2
million at June 30, 2005, from $288.3 million at December 31, 2004. Mortgage-backed securities,
which comprised 38.9% of the total
21
investment portfolio at June 30, 2005, increased $42.3 million, or 69.7%, to $102.9 million from
$60.6 million at December 31, 2004. Investments in U.S. agency securities, which comprised 41.3% of
the total investment portfolio at June 30, 2005, decreased $70.6 million, or 39.3%, to $109.2
million from $179.8 million at December 31, 2004. During the second quarter of 2005, we closed on
the sale of $50 million in bonds and reinvested the proceeds in bonds intended to enhance the yield
and cash flows of our investment securities portfolio. The new investment securities were
classified as available for sale. The total investment portfolio at June 30, 2005 comprised 21.6%
of all interest-earning assets, compared to 22.8% at December 31, 2004, and produced an average
taxable equivalent yield of 4.7% for the second quarter of 2005, compared to 4.6% for the second
quarter of 2004 and 4.5% for the first six months of 2005 and 2004.
Loans. Loans, net of unearned income, totaled $903.5 million at June 30, 2005, a decrease of 3.4%,
or $31.4 million, from $934.9 million at December 31, 2004. Mortgage loans held for sale totaled
$29.8 million at June 30, 2005, an increase of $21.7 million from $8.1 million at December 31,
2004. Average loans, including mortgage loans held for sale, totaled $945.4 million for the second
quarter of 2005 compared to $869.4 million for the second quarter of 2004. Average loans, including
mortgage loans held for sale, totaled $949.6 million for the first six months of 2005 compared to
$863.8 million for the first six months of 2004. Loans, net of unearned income, comprised 73.95% of
interest-earning assets at June 30, 2005, compared to 73.88% at December 31, 2004. Mortgage loans
held for sale comprised 2.4% of interest-earning assets at June 30, 2005, compared to .6% at
December 31, 2004. The loan portfolio produced an average yield of 6.6% for the second quarter of
2005 and 6.5% for the first six months of 2005, compared to 6.3% for the second quarter and first
six months of 2004. The following table details the distribution of our loan portfolio by category
as of June 30, 2005 and December 31, 2004 (in thousands):
Distribution of Loans by Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
December 31, 2004 |
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
of |
|
|
|
|
|
|
of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
Commercial and industrial |
|
$ |
115,775 |
|
|
|
12.8 |
% |
|
$ |
131,979 |
|
|
|
14.1 |
% |
Real estate
construction and land development |
|
|
259,054 |
|
|
|
28.6 |
|
|
|
249,188 |
|
|
|
26.6 |
|
Real estate
mortgage Single-family |
|
|
238,903 |
|
|
|
26.4 |
|
|
|
250,718 |
|
|
|
26.8 |
|
Commercial |
|
|
236,275 |
|
|
|
26.1 |
|
|
|
242,279 |
|
|
|
25.9 |
|
Other |
|
|
26,634 |
|
|
|
2.9 |
|
|
|
25,745 |
|
|
|
2.7 |
|
Consumer |
|
|
21,481 |
|
|
|
2.4 |
|
|
|
28,431 |
|
|
|
3.0 |
|
Other |
|
|
6,699 |
|
|
|
.8 |
|
|
|
8,045 |
|
|
|
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
904,821 |
|
|
|
100.0 |
% |
|
|
936,385 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned income |
|
|
(1,365 |
) |
|
|
|
|
|
|
(1,517 |
) |
|
|
|
|
Allowance for loan losses |
|
|
(12,263 |
) |
|
|
|
|
|
|
(12,543 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
891,193 |
|
|
|
|
|
|
$ |
922,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits. Noninterest-bearing deposits totaled $96.0 million at June 30, 2005, an increase of 7.3%,
or $6.5 million, from $89.5 million at December 31, 2004. Noninterest-bearing deposits comprised
9.2% of total deposits at June 30, 2005, compared to 8.4% at December 31, 2004. Of total
noninterest-bearing deposits $69.5 million, or 72% were in our Alabama branches while $26.5
million, or 28% were in our Florida branches.
Interest-bearing
deposits totaled $943.8 million at June 30, 2005, a
decrease of 3.5%, or $33.9
million, from $977.7 million at December 31, 2004. Our average interest-bearing deposits for the
second quarter of 2005 totaled $968.5 million compared to $866.0 million for the second quarter of
2004, an increase of $102.5 million, or 11.8%. Interest-bearing deposits averaged $978.7 million
for the first six months of 2005 compared to $839.1 million for the first six months of 2004, an
increase of $139.6 million, or 16.6%.
The average rate paid on all interest-bearing deposits was 2.7% during the second quarter of 2005
compared to 2.1% for the second quarter of 2004 and 2.6% during the first six months of 2005
compared to 2.0% for the first six months of 2004. Of total
interest-bearing deposits $698.0
million, or 74%, were in the Alabama branches while $245.8 million, or 26%, were in the Florida
branches.
Borrowings. Advances from the Federal Home Loan Bank (FHLB) totaled $146.1 million at June 30,
2005 and $156.1 million at December 31, 2004. Borrowings from the FHLB were used primarily to fund
growth in the loan portfolio and have a weighted average rate of approximately 4.20% at June 30,
2005. The advances are secured by FHLB stock, agency securities and a blanket lien on certain
residential real estate loans and commercial loans. The FHLB has issued for the benefit of our
banking subsidiary a $20,000,000 irrevocable letter of credit in favor of the Chief Financial
Officer of the State of Florida to secure certain deposits of the State of Florida. The letter of
credit may be terminated January 6, 2006 upon sixty days prior notice; otherwise, it will
automatically extend for a successive one-year term.
22
Junior Subordinated Debentures. We have sponsored two trusts, TBC Capital Statutory Trust II (TBC
Capital II) and TBC Capital Statutory Trust III (TBC Capital III), of which we own 100% of the
common equity. The trusts were formed for the purpose of issuing mandatory redeemable trust
preferred securities to third-party investors and investing the proceeds from the sale of such
trust preferred securities solely in our junior subordinated debt securities (the debentures). The
debentures held by each trust are the sole assets of that trust. Distributions on the trust
preferred securities issued by each trust are payable semi-annually at a rate per annum equal to
the interest rate being earned by the trust on the debentures held by that trust. The trust
preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of
the debentures. We have entered into agreements which, taken collectively, fully and
unconditionally guarantee the trust preferred securities subject to the terms of each of the
guarantees. The debentures held by the TBC Capital II and TBC Capital III capital trusts are first
redeemable, in whole or in part, by us on September 7, 2010 and July 25, 2006, respectively.
The trust preferred securities held by the trusts qualify as Tier 1 capital under Federal Reserve
Board guidelines.
Consolidated debt obligations related to subsidiary trusts holding solely our debentures follow:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
December 31, 2004 |
|
|
|
(In thousands) |
|
10.6% junior subordinated debentures owed to TBC Capital Statutory
Trust II due September 7, 2030 |
|
$ |
15,464 |
|
|
$ |
15,464 |
|
6-month LIBOR plus 3.75% junior subordinated debentures owed to TBC Capital
Statutory Trust III due July 25, 2031 |
|
|
16,495 |
|
|
|
16,495 |
|
|
|
|
|
|
|
|
Total junior subordinated debentures owed to unconsolidated subsidiary trusts |
|
$ |
31,959 |
|
|
$ |
31,959 |
|
|
|
|
|
|
|
|
As of June 30, 2005 and December 31, 2004, the interest rate on the $16,495,000 subordinated
debentures was 6.71% and 5.74%, respectively.
Currently, we must obtain regulatory approval prior to paying any dividends on these trust
preferred securities. The Federal Reserve approved the timely payment of our semi-annual
distributions on our trust preferred securities in January, March and July, 2005.
Allowance for Loan Losses. We maintain an allowance for loan losses within a range we believe is
adequate to absorb estimated losses inherent in the loan portfolio. We prepare a quarterly analysis
to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan
losses. Generally, we estimate the allowance using specific reserves for impaired loans, and other
factors, such as historical loss experience based on volume and types of loans, trends in
classifications, volume and trends in delinquencies and non-accruals, economic conditions and other
pertinent information. The level of allowance for loan losses to net loans will vary depending on
the quarterly analysis.
We manage and control risk in the loan portfolio through adherence to credit standards established
by the board of directors and implemented by senior management. These standards are set forth in a
formal loan policy, which establishes loan underwriting and approval procedures, sets limits on
credit concentration and enforces regulatory requirements. In addition, Credit Risk Management,
LLC, an independent loan review firm, supplements our existing independent loan review function.
Loan portfolio concentration risk is reduced through concentration limits for borrowers, collateral
types and geographical diversification. Concentration risk is measured and reported to senior
management and the board of directors on a regular basis.
The allowance for loan loss calculation is segregated into various segments that include classified
loans, loans with specific allocations and pass rated loans. A pass rated loan is generally
characterized by a very low to average risk of default and in which management perceives there is a
minimal risk of loss. Loans are rated using an eight-point scale with the loan officer having the
primary responsibility for assigning risk ratings and for the timely reporting of changes in the
risk ratings. These processes, and the assigned risk ratings, are subject to review by the internal
loan review function and senior management. Based on the assigned risk ratings, the criticized and
classified loans in the portfolio are segregated into the following regulatory classifications:
Special Mention, Substandard, Doubtful or Loss. Generally, regulatory reserve percentages (5%,
Special Mention; 15%, Substandard; 50%, Doubtful; 100%, Loss) are applied to these categories to
estimate the amount of loan loss allowance required, adjusted for previously mentioned risk
factors.
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
23
the loan with the present value of expected future cash flows discounted at the loans 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 we continue to expect that all amounts due will ultimately be
collected. Larger groups of homogenous loans such as consumer installment and residential real
estate mortgage loans are collectively evaluated for impairment.
Reserve percentages assigned to pass rated homogeneous loans are based on historical charge-off
experience adjusted for current trends in the portfolio and other risk factors.
As stated above, risk ratings are subject to independent review by the internal loan review, which
also performs ongoing, independent review of the risk management process. The risk management
process includes underwriting, documentation and collateral control. Loan review is centralized and
independent of the lending function. The loan review results are reported to the Audit Committee of
the board of directors and senior management. We have also established a centralized loan
administration services department to serve our entire bank. This department will provide
standardized oversight for compliance with loan approval authorities and bank lending policies and
procedures, as well as centralized supervision, monitoring and accessibility.
The following table summarizes certain information with respect to our allowance for loan losses
and the composition of charge-offs and recoveries for the periods indicated.
Summary of Loan Loss Experience
|
|
|
|
|
|
|
|
|
|
|
Six-Month |
|
|
|
|
|
|
Period Ended |
|
|
Year Ended |
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands) |
|
Allowance for loan losses at beginning of period |
|
$ |
12,543 |
|
|
$ |
25,174 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
1,161 |
|
|
|
7,690 |
|
Real estate
construction and land development |
|
|
74 |
|
|
|
765 |
|
Real estate
mortgage Single-family |
|
|
499 |
|
|
|
1,012 |
|
Commercial |
|
|
995 |
|
|
|
5,820 |
|
Other |
|
|
20 |
|
|
|
86 |
|
Consumer |
|
|
380 |
|
|
|
1,881 |
|
Other |
|
|
254 |
|
|
|
87 |
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
3,383 |
|
|
|
17,341 |
|
Recoveries: |
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
210 |
|
|
|
1,468 |
|
Real estate
construction and land development |
|
|
25 |
|
|
|
4 |
|
Real estate
mortgage Single-family |
|
|
282 |
|
|
|
470 |
|
Commercial |
|
|
124 |
|
|
|
737 |
|
Other |
|
|
73 |
|
|
|
97 |
|
Consumer |
|
|
97 |
|
|
|
549 |
|
Other |
|
|
42 |
|
|
|
410 |
|
|
|
|
|
|
|
|
Total recoveries |
|
|
853 |
|
|
|
3,735 |
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
2,530 |
|
|
|
13,606 |
|
Provision for loan losses |
|
|
2,250 |
|
|
|
975 |
|
|
|
|
|
|
|
|
Allowance for loan losses at end of period |
|
$ |
12,263 |
|
|
$ |
12,543 |
|
|
|
|
|
|
|
|
Loans at end of period, net of unearned income |
|
$ |
903,456 |
|
|
$ |
934,868 |
|
Average loans, net of unearned income |
|
|
949,626 |
|
|
|
894,406 |
|
Ratio of ending allowance to ending loans |
|
|
1.36 |
% |
|
|
1.34 |
% |
Ratio of net charge-offs to average loans (1) |
|
|
.54 |
% |
|
|
1.52 |
% |
Net charge-offs as a percentage of: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
112.44 |
% |
|
|
1395.49 |
% |
Allowance for loan losses (1) |
|
|
41.60 |
% |
|
|
108.47 |
% |
Allowance for loan losses as a percentage of nonperforming loans |
|
|
195.08 |
% |
|
|
169.36 |
% |
The allowance for loan losses as a percentage of loans, net of unearned income, at June 30, 2005
was 1.36%, compared to 1.34% as of December 31, 2004. The allowance for loan losses as a percentage
of nonperforming loans increased to 195.08% at June 30, 2005 from 169.36% at December 31, 2004.
24
Net charge-offs were $2.5 million for the first six months of 2005. Net charge-offs to average
loans on an annualized basis totaled 0.54% for the first six months of 2005. Net commercial loan
charge-offs totaled $951,000, or 37.6% of total net charge-off loans, for the first six months of
2005, compared to 45.7% of total net charge-off loans for the year 2004. Net commercial real estate
loan charge-offs totaled $871,000, or 34.4% of total net charge-off loans, for the first six months
of 2005 compared to 37.4% of total net charge-off loans for the year 2004. Net single family real
estate loan charge-offs totaled $217,000, or 8.6% of total net charge-off loans, for the first six
months of 2005 compared to 4.0% of total net charge-off loans for the year 2004. Net consumer loan
charge-offs totaled $283,000, or 11.2% of total net charge-off loans, for the first six months of
2005 compared to 9.8% of total net charge-off loans for the year 2004.
Nonperforming Assets. Nonperforming assets decreased $4.6 million, to $7.8 million as of June 30,
2005 from $12.4 million as of December 31, 2004. As a percentage of net loans plus nonperforming
assets, nonperforming assets decreased from 1.32% at December 31, 2004 to 0.86% at June 30, 2005.
The following table represents our nonperforming assets for the dates indicated.
Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
December 31, 2004 |
|
|
|
Total |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Nonaccrual |
|
$ |
6,073 |
|
|
$ |
6,344 |
|
Accruing loans 90 days or more delinquent |
|
|
123 |
|
|
|
431 |
|
Restructured |
|
|
90 |
|
|
|
631 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
6,286 |
|
|
|
7,406 |
|
Other real estate owned |
|
|
1,484 |
|
|
|
4,906 |
|
Repossessed assets |
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
7,770 |
|
|
$ |
12,415 |
|
|
|
|
|
|
|
|
Nonperforming loans as a percent of loans |
|
|
.70 |
% |
|
|
.79 |
% |
|
|
|
|
|
|
|
Nonperforming assets as a percent of loans plus nonperforming assets |
|
|
0.86 |
% |
|
|
1.32 |
% |
|
|
|
|
|
|
|
Loans past due 30 days or more, net of non-accruals, improved to .62% at June 30, 2005 from .88% at
December 31, 2004.
The following is a summary of nonperforming loans by category for the dates shown:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
1,413 |
|
|
$ |
2,445 |
|
Real estate
construction and land development |
|
|
155 |
|
|
|
187 |
|
Real estate
mortgages |
|
|
|
|
|
|
|
|
Single-family |
|
|
2,499 |
|
|
|
2,060 |
|
Commercial |
|
|
1,847 |
|
|
|
2,273 |
|
Other |
|
|
114 |
|
|
|
183 |
|
Consumer |
|
|
258 |
|
|
|
250 |
|
Other |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
6,286 |
|
|
$ |
7,406 |
|
|
|
|
|
|
|
|
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 borrowers financial condition is such that the collection of interest is doubtful. When a
loan is placed on nonaccrual status, all interest which has been accrued on the loan during the
current period but remains unpaid is reversed and deducted from earnings as a reduction of reported
interest income; any prior period accrued and unpaid interest is reversed and charged against the
allowance for loan losses. No additional interest income is accrued on the loan balance until the
collection of both principal and interest becomes reasonably certain. When a problem loan is
finally resolved, there may ultimately be an actual write-down or charge-off of the principal
balance of the loan to the allowance for loan losses, which may necessitate additional charges to
earnings.
25
Impaired Loans. At June 30, 2005, the recorded investment in impaired loans totaled $4.8 million,
with approximately $1.4 million in allowance for loan losses specifically allocated to impaired
loans. This represents a decrease of $300,000 from $5.1 million at December 31, 2004. The following
is a summary of impaired loans and the specifically allocated allowance for loan losses by category
as of June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Specific |
|
|
|
Balance |
|
|
Allowance |
|
Commercial and industrial |
|
$ |
1,511 |
|
|
$ |
621 |
|
Real estate
construction and land development |
|
|
155 |
|
|
|
38 |
|
Real estate
mortgages |
|
|
|
|
|
|
|
|
Commercial |
|
|
2,984 |
|
|
|
701 |
|
Other |
|
|
113 |
|
|
|
57 |
|
|
|
|
|
|
|
|
Total |
|
$ |
4,763 |
|
|
$ |
1,417 |
|
|
|
|
|
|
|
|
Potential Problem Loans. In addition to nonperforming loans, management has identified $1.5 million
in potential problem loans as of June 30, 2005 compared to $2.4 million as of December 31, 2004.
Potential problem loans are loans where known information about possible credit problems of the
borrowers causes management to have doubts as to the ability of such borrowers to comply with the
present repayment terms and may result in disclosure of such loans as nonperforming.
Stockholders Equity. At June 30, 2005, total stockholders equity was $102.2 million, an increase
of $1.7 million from $100.5 million at December 31, 2004. The increase in stockholders equity
during the first six months of 2005 resulted primarily from a net loss of $7.0 million offset by
issuance, vesting and forfeitures of restricted stock totaling $737,000, other comprehensive income
of $446,000 and additional net proceeds of $7.3 million resulting from the sale in January 2005 of
925,636 shares of our common stock at $8.17 per share, the then-current market price, to the new
members of the management team and other investors in a private placement. As of June 30, 2005, we
had 19,805,956 shares of common stock issued and 19,551,411 outstanding. As of June 30, 2005, there
were 49,823 shares held in treasury at a cost of $341,000.
Effective June 30, 2005, 62,000 shares of our convertible preferred stock were converted into
775,000 shares of common stock at a conversion price of $8.00 per share. As a result of such
conversion, the excess of the market value of the common stock issued at the date of conversion
over the aggregate issue price is reflected as a reduction in retained earnings with a
corresponding increase in surplus, thereby reducing net income applicable to common stockholders
for purposes of calculating earnings per common share. This non-cash charge did not affect total
stockholders equity.
We adopted a leveraged employee stock ownership plan (the ESOP) effective May 15, 2002, that
covers all eligible employees who are at least 21 years old and have completed a year of service.
As of June 30, 2005, the ESOP has been internally leveraged with 273,400 shares of our common stock
purchased in the open market and classified as a contra-equity account, Unearned ESOP shares, in
stockholders equity.
On January 29, 2003, the ESOP trustees finalized a $2,100,000 promissory note to reimburse us for
the funds used to leverage the ESOP. The unreleased shares and our guarantee secure the promissory
note, which has been classified as long-term debt on our statement of financial condition. As the
debt is repaid, shares are released from collateral based on the proportion of debt service.
Principal payments on the debt are $17,500 per month for 120 months. The interest rate is adjusted
annually to the Wall Street Journal prime rate. Released shares are allocated to eligible employees
at the end of the plan year based on the employees eligible compensation to total compensation. We
recognize compensation expense during the period as the shares are earned and committed to be
released. As shares are committed to be released and compensation expense is recognized, the
committed to be released. As shares are committed to be released and compensation expense is the
shares become outstanding for basic and diluted earnings per share computations. The amount of
compensation expense we report is equal to the average fair value of the shares earned and
committed to be released during the period. Compensation expense that we recognized during the
periods ended June 30, 2005 and 2004 was $135,000 and $98,000, respectively. The ESOP shares as of
June 30, 2005, were as follows:
|
|
|
|
|
|
|
June 30, 2005 |
|
Allocated shares |
|
|
55,328 |
|
Estimated shares committed to be released |
|
|
13,350 |
|
Unreleased shares |
|
|
204,722 |
|
|
|
|
|
Total ESOP shares |
|
|
273,400 |
|
|
|
|
|
Fair value of unreleased shares |
|
$ |
2,166,000 |
|
|
|
|
|
26
Regulatory Capital. The table below represents our and our subsidiarys regulatory and minimum
regulatory capital requirements at June 30, 2005 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
|
|
|
|
|
|
|
|
Adequacy |
|
To Be Well |
|
|
Actual |
|
Purposes |
|
Capitalized |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
Total Risk-Based Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
125,250 |
|
|
|
11.70 |
% |
|
$ |
85,657 |
|
|
|
8.00 |
% |
|
$ |
107,072 |
|
|
|
10.00 |
% |
The Bank |
|
|
123,376 |
|
|
|
11.73 |
|
|
|
84,112 |
|
|
|
8.00 |
|
|
|
105,141 |
|
|
|
10.00 |
|
Tier 1 Risk-Based Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
112,171 |
|
|
|
10.48 |
|
|
|
42,829 |
|
|
|
4.00 |
|
|
|
64,243 |
|
|
|
6.00 |
|
The Bank |
|
|
111,113 |
|
|
|
10.57 |
|
|
|
42,056 |
|
|
|
4.00 |
|
|
|
63,084 |
|
|
|
6.00 |
|
Leverage Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
112,171 |
|
|
|
8.12 |
|
|
|
55,241 |
|
|
|
4.00 |
|
|
|
69,051 |
|
|
|
5.00 |
|
The Bank |
|
|
111,113 |
|
|
|
8.11 |
|
|
|
54,796 |
|
|
|
4.00 |
|
|
|
68,494 |
|
|
|
5.00 |
|
Liquidity
Our principal sources of funds are deposits, principal and interest payments on loans, federal
funds sold and maturities and sales of investment securities. In addition to these sources of
liquidity, we have access to purchased funds from several regional financial institutions, brokered
and internet deposits, and may borrow from the Federal Home Loan Bank under a blanket floating lien
on certain commercial loans and residential real estate loans. Also, we have established certain
repurchase agreements with a large financial institution. While scheduled loan repayments and
maturing investments are relatively predictable, interest rates, general economic conditions and
competition primarily influence deposit flows and early loan payments. Management places constant
emphasis on the maintenance of adequate liquidity to meet conditions that might reasonably be
expected to occur. Management believes it has established sufficient sources of funds to meet its
anticipated liquidity needs.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements made by us or on our behalf. Some of the disclosures in this Quarterly Report on Form
10-Q, including any statements preceded by, followed by or which include the words may, could,
should, will, would, hope, might, believe, expect, anticipate, estimate,
intend, plan, assume or similar expressions constitute forward-looking statements.
These forward-looking statements implicitly and explicitly include the assumptions underlying the
statements and other information with respect to our beliefs, plans, objectives, goals,
expectations, anticipations, estimates, intentions, financial condition, results of operations,
future performance and business, including our expectations and estimates with respect to our
revenues, expenses, earnings, return on equity, return on assets, efficiency ratio, asset quality,
the adequacy of our allowance for loan losses and other financial data and capital and performance
ratios.
Although we believe that the expectations reflected in our forward-looking statements are
reasonable, these statements involve risks and uncertainties which are subject to change based on
various important factors (some of which are beyond our control). The following factors, among
others, could cause our financial performance to differ materially from our goals, plans,
objectives, intentions, expectations and other forward-looking statements: (1) the strength of the
United States economy in general and the strength of the regional and local economies in which we
conduct operations; (2) the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (3)
inflation, interest rate, market and monetary fluctuations; (4) our ability to successfully
integrate the assets, liabilities, customers, systems and management we acquire or merge into our
operations; (5) our timely development of new products and services in a changing environment,
including the features, pricing and quality compared to the products and services of our
competitors; (6) the willingness of users to substitute competitors products and services for our
products and services; (7) the impact of changes in financial services policies, laws and
regulations, including policies, laws and regulations concerning taxes, banking, securities and
insurance, and the application thereof by regulatory bodies; (8) our ability to resolve any legal
proceeding on acceptable terms and its effect on our financial condition or results of operations;
(9) technological changes; (10) changes in consumer spending and savings habits; and (11)
regulatory, legal or judicial proceedings.
If one or more of the factors affecting our forward-looking information and statements proves
incorrect, then our actual results, performance or achievements could differ materially from those
expressed in, or implied by, forward-
27
looking information and statements contained in this report. Therefore, we caution you not to place
undue reliance on our forward-looking information and statements.
We do not intend to update our forward-looking information and statements, whether written or oral,
to reflect change. All forward-looking statements attributable to us are expressly qualified by
these cautionary statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative disclosures about market
risk as of June 30, 2005 from those presented in our annual report on Form 10-K for the year ended
December 31, 2004.
The information set forth under the caption Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations-Market Risk-Interest Rate Sensitivity included in
our Annual Report on Form 10-K for the year ended December 31, 2004, is hereby incorporated herein
by reference.
Item 4. CONTROLS AND PROCEDURES
CEO AND
PFO CERTIFICATION
Appearing as exhibits to this report are Certifications of our Chief Executive Officer (CEO) and
our Principal Financial Officer (PFO). The Certifications are required to be made by Rule 13a14
of the Securities Exchange Act of 1934, as amended. This Item contains the information about the
evaluation that is referred to in the Certifications, and the information set forth below in this
Item 4 should be read in conjunction with the Certifications for a more complete understanding of
the Certifications.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control
objectives.
We originally conducted an evaluation (the Evaluation) of the effectiveness of the design and
operation of our disclosure controls and procedures under the supervision and with the
participation of our management, including our CEO and our then-serving Chief Financial Officer
(CFO), as of June 30, 2005. Based upon the Evaluation, our CEO and CFO concluded that, as of June
30, 2005, our disclosure controls and procedures were effective to ensure that material information
relating to The Banc Corporation and its subsidiaries is made known to management, including the
CEO and PFO, particularly during the period when our periodic reports are being prepared.
In connection with the amendment to our financial statements described in the Introductory Note and
Items 1 and 2 of this Amendment No. 1, we re-evaluated our disclosure controls and procedures as of
June 30, 2005 and, in connection therewith, we 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 for certain derivative
transactions, as described in the Introductory Note, and failure to correct that error subsequently. Solely as a result of this material
weakness, we concluded that our disclosure controls and procedures were not effective as of June
30, 2005.
Simultaneously with the filing of this Amendment No. 1, we filed an amendment on Form 10-K/A to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2004, as previously amended,
reflecting the same material weakness as of that date and, for that reason, concluding that our
internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2004. Other than as set
forth in that amendment and this Amendment no. 1, there have not been any changes in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the Securities and Exchange
Act of 1934, as amended) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
28
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
While we are a party to various legal proceedings arising in the ordinary course of business, we
believe that there are no proceedings threatened or pending against us at this time that will
individually, or in the aggregate, materially adversely affect our business, financial condition or
results of operations. We believe that we have strong claims and defenses in each lawsuit in which
we are involved. While we believe that we will prevail in each lawsuit, there can be no assurance
that the outcome of any pending, or any future, litigation, either individually or in the
aggregate, will not have a material adverse effect on our financial condition or our results of
operations.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Effective June 30, 2005, we issued 775,000 shares of our common stock upon the conversion of 62,000
shares of our Series A Convertible Preferred Stock at a conversion price of $8.00 per share. The
convertible preferred stock was originally issued in May 2003 in a transaction exempt from
registration under the Securities Act of 1933 pursuant to the exemption contained in Section 4(2)
thereof. The issuance of common stock upon conversion of the preferred stock was exempt from
registration pursuant to the exemption from registration contained in Section 3(a)(9) of the
Securities Act of 1933. We did not derive any proceeds from the issuance of common stock upon
conversion of the preferred stock. See Part I, Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 15, 2005, we held our annual meeting of stockholders, at which the following actions
were taken:
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|
|
The stockholders voted to approve an amendment to our Restated Certificate of
Incorporation increasing the number of authorized shares of common stock from 25 million to
35 million. The votes on this proposal were as follows: |
|
|
|
|
|
For |
|
Against |
|
Abstain |
14,633,306 |
|
540,556 |
|
2,131 |
|
|
|
The stockholders voted to approve an amendment to our Restated Certificate of
Incorporation to declassify the Board of Directors and require all directors to stand for
election annually. The votes on this proposal were as follows: |
|
|
|
|
|
For |
|
Against |
|
Abstain |
15,143,604 |
|
29,030 |
|
3,359 |
29
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|
The stockholders voted to elect the following persons as directors, each to serve a
one-year term: |
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|
|
|
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Name |
|
For |
|
Withheld |
C. Stanley Bailey |
|
|
15,146,819 |
|
|
|
29,174 |
|
Roger Barker |
|
|
14,990,544 |
|
|
|
185,449 |
|
K. Earl Durden |
|
|
15,088,419 |
|
|
|
87,574 |
|
Rick D. Gardner |
|
|
15,146,819 |
|
|
|
29,174 |
|
Thomas E. Jernigan, Jr. |
|
|
14,987,785 |
|
|
|
188,208 |
|
James Mailon Kent, Jr. |
|
|
15,032,160 |
|
|
|
143,833 |
|
James M. Link |
|
|
15,029,044 |
|
|
|
146,949 |
|
Barry Morton |
|
|
15,108,319 |
|
|
|
67,674 |
|
C. Marvin Scott |
|
|
15,146,819 |
|
|
|
29,174 |
|
Michael E. Stephens |
|
|
15,088,419 |
|
|
|
87,574 |
|
James A. Taylor |
|
|
14,656,212 |
|
|
|
519,781 |
|
James A. Taylor, Jr. |
|
|
14,610,453 |
|
|
|
565,540 |
|
James C. White, Sr. |
|
|
14,987,785 |
|
|
|
188,208 |
|
|
|
|
The stockholders voted to ratify the appointment of Carr, Riggs & Ingram, LLC as the
independent registered public accounting firm to audit the Corporations financial
statements for the year ending December 31, 2005. The votes on this proposal were as
follows: |
|
|
|
|
|
For |
|
Against |
|
Abstain |
15,144,786 |
|
10,828 |
|
50,379 |
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
(a) Exhibit:
31.01 Certification of principal executive officer pursuant to Rule 13a-14(a).
31.02 Certification of principal financial officer pursuant to 13a-14(a).
32.01 Certification of principal executive officer pursuant to 18 U.S.C. Section 1350.
32.02 Certification of principal financial officer pursuant to 18 U.S.C. Section 1350.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
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|
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The Banc Corporation
(Registrant) |
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Date: February 17, 2006
|
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By:
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/s/ C. Stanley Bailey |
|
|
|
|
|
|
|
|
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C. Stanley Bailey |
|
|
|
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Chief Executive Officer |
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|
|
|
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Date: February 17, 2006
|
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By:
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/s/ James C. Gossett |
|
|
|
|
|
|
|
|
|
James C. Gossett |
|
|
|
|
Chief Accounting Officer |
|
|
|
|
(Principal Financial and Accounting Officer) |
31