THE BANC CORPORATION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR
THE TRANSITION PERIOD FROM
_________ TO _________
Commission File number 0-25033
The Banc Corporation
(Exact Name of Registrant as Specified in its Charter)
|
|
|
Delaware
|
|
63-1201350 |
|
|
|
(State or Other Jurisdiction of Incorporation)
|
|
(IRS Employer Identification No.) |
17 North 20th Street, Birmingham, Alabama 35203
(Address of Principal Executive Offices)
(205) 327-1400
(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
R No £
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
£
Accelerated Filer
R Non-Accelerated Filer £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
£ No R
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
|
|
|
Class
|
|
Outstanding as of March 31, 2006 |
|
|
|
Common stock, $.001 par value
|
|
20,084,587 |
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(UNAUDITED) |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
29,412 |
|
|
$ |
35,088 |
|
Interest-bearing deposits in other banks |
|
|
8,668 |
|
|
|
9,772 |
|
Federal funds sold |
|
|
4,905 |
|
|
|
|
|
Investment securities available for sale |
|
|
238,706 |
|
|
|
242,595 |
|
Mortgage loans held for sale |
|
|
17,711 |
|
|
|
21,355 |
|
Loans, net of unearned income |
|
|
989,576 |
|
|
|
963,253 |
|
Less: Allowance for loan losses |
|
|
(11,999 |
) |
|
|
(12,011 |
) |
|
|
|
|
|
|
|
Net loans |
|
|
977,577 |
|
|
|
951,242 |
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
56,388 |
|
|
|
56,017 |
|
Accrued interest receivable |
|
|
6,638 |
|
|
|
7,081 |
|
Stock in FHLB |
|
|
10,272 |
|
|
|
10,966 |
|
Cash surrender value of life insurance |
|
|
39,535 |
|
|
|
39,169 |
|
Goodwill and intangible assets |
|
|
12,018 |
|
|
|
12,090 |
|
Other assets |
|
|
30,137 |
|
|
|
30,094 |
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,431,967 |
|
|
$ |
1,415,469 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
Noninterest-bearing |
|
$ |
95,584 |
|
|
$ |
92,342 |
|
Interest-bearing |
|
|
982,269 |
|
|
|
951,354 |
|
|
|
|
|
|
|
|
TOTAL DEPOSITS |
|
|
1,077,853 |
|
|
|
1,043,696 |
|
Advances from FHLB |
|
|
166,090 |
|
|
|
181,090 |
|
Federal funds borrowed and security repurchase agreements |
|
|
31,006 |
|
|
|
33,406 |
|
Notes payable |
|
|
3,703 |
|
|
|
3,755 |
|
Junior subordinated debentures owed to unconsolidated subsidiary trusts |
|
|
31,959 |
|
|
|
31,959 |
|
Accrued expenses and other liabilities |
|
|
15,553 |
|
|
|
16,498 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
1,326,164 |
|
|
|
1,310,404 |
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Common stock, par value $.001 per share; authorized 35,000,000 shares;
shares issued 20,351,736 and 20,221,456, respectively;
outstanding 20,084,587 and 19,980,261, respectively |
|
|
20 |
|
|
|
20 |
|
Surplus |
|
|
88,743 |
|
|
|
87,979 |
|
Retained earnings |
|
|
22,344 |
|
|
|
21,494 |
|
Accumulated other comprehensive loss |
|
|
(3,505 |
) |
|
|
(2,544 |
) |
Treasury stock, at cost |
|
|
(310 |
) |
|
|
(341 |
) |
Unearned ESOP stock |
|
|
(1,489 |
) |
|
|
(1,543 |
) |
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY |
|
|
105,803 |
|
|
|
105,065 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
1,431,967 |
|
|
$ |
1,415,469 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
2
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
18,418 |
|
|
$ |
14,878 |
|
Interest on taxable securities |
|
|
2,760 |
|
|
|
2,925 |
|
Interest on tax exempt securities |
|
|
78 |
|
|
|
58 |
|
Interest on federal funds sold |
|
|
35 |
|
|
|
82 |
|
Interest and dividends on other investments |
|
|
358 |
|
|
|
243 |
|
|
|
|
|
|
|
|
Total interest income |
|
|
21,649 |
|
|
|
18,186 |
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
8,413 |
|
|
|
6,037 |
|
Interest on other borrowed funds |
|
|
2,471 |
|
|
|
1,844 |
|
Interest on subordinated debentures |
|
|
761 |
|
|
|
698 |
|
|
|
|
|
|
|
|
Total interest expense |
|
|
11,645 |
|
|
|
8,579 |
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
10,004 |
|
|
|
9,607 |
|
Provision for loan losses |
|
|
600 |
|
|
|
750 |
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES |
|
|
9,404 |
|
|
|
8,857 |
|
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
Service charges and fees on deposits |
|
|
1,031 |
|
|
|
1,112 |
|
Mortgage banking income |
|
|
531 |
|
|
|
446 |
|
Investment securities losses |
|
|
|
|
|
|
(909 |
) |
Change in fair value of derivatives |
|
|
70 |
|
|
|
(230 |
) |
Increase in cash surrender value of life insurance |
|
|
420 |
|
|
|
351 |
|
Other income |
|
|
450 |
|
|
|
477 |
|
|
|
|
|
|
|
|
TOTAL NONINTEREST INCOME |
|
|
2,502 |
|
|
|
1,247 |
|
NONINTEREST EXPENSES |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
5,869 |
|
|
|
5,402 |
|
Occupancy, furniture and equipment expense |
|
|
1,847 |
|
|
|
1,981 |
|
Management separation costs |
|
|
|
|
|
|
12,377 |
|
Other operating expenses |
|
|
3,090 |
|
|
|
3,562 |
|
|
|
|
|
|
|
|
TOTAL NONINTEREST EXPENSES |
|
|
10,806 |
|
|
|
23,322 |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,100 |
|
|
|
(13,218 |
) |
INCOME TAX EXPENSE (BENEFIT) |
|
|
250 |
|
|
|
(5,057 |
) |
|
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
850 |
|
|
$ |
(8,161 |
) |
|
|
|
|
|
|
|
BASIC NET INCOME (LOSS) PER COMMON SHARE |
|
$ |
0.04 |
|
|
$ |
(0.44 |
) |
|
|
|
|
|
|
|
DILUTED NET INCOME (LOSS) PER COMMON SHARE |
|
$ |
0.04 |
|
|
$ |
(0.44 |
) |
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |
|
|
20,015 |
|
|
|
18,406 |
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION |
|
|
20,673 |
|
|
|
18,406 |
|
See Notes to Condensed Consolidated Financial Statements.
3
THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES |
|
$ |
6,043 |
|
|
$ |
(20,000 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net decrease in interest-bearing deposits in other banks |
|
|
1,104 |
|
|
|
2,831 |
|
Net (increase) decrease in federal funds sold |
|
|
(4,905 |
) |
|
|
4,000 |
|
Proceeds from maturities of investment securities available for sale |
|
|
3,193 |
|
|
|
15,489 |
|
Purchases of investment securities available for sale |
|
|
(877 |
) |
|
|
(5,040 |
) |
Net increase in loans |
|
|
(26,323 |
) |
|
|
(5,690 |
) |
Proceeds
from sales of premises and equipment |
|
|
|
|
|
|
2,243 |
|
Purchases of
premises and equipment |
|
|
(1,145 |
) |
|
|
(150 |
) |
Increase in other investments |
|
|
(192 |
) |
|
|
(43 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
(29,145 |
) |
|
|
13,640 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net increase in deposit accounts |
|
|
34,157 |
|
|
|
12,130 |
|
Net decrease in FHLB advances and other borrowed funds |
|
|
(17,400 |
) |
|
|
(11,643 |
) |
Payments made on notes payable |
|
|
(52 |
) |
|
|
(53 |
) |
Proceeds from sale of common stock |
|
|
721 |
|
|
|
7,455 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
17,426 |
|
|
|
7,889 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and due from banks |
|
|
(5,676 |
) |
|
|
1,529 |
|
Cash and due from banks at beginning of period |
|
|
35,088 |
|
|
|
23,489 |
|
|
|
|
|
|
|
|
CASH AND DUE FROM BANKS AT END OF PERIOD |
|
$ |
29,412 |
|
|
$ |
25,018 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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,
2005. 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-month
period ended March 31, 2006, are not necessarily indicative of the results that may be expected for
the year ending December 31, 2006.
The condensed statement of financial condition at December 31, 2005, 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.
The Corporation recently amended its reports on Form 10-Q for the first, second and third quarters
of 2005 due to inaccuracies in the original Form 10-Qs related to the Corporations accounting for
certain derivative financial instruments under Statement of Financial
Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133). In 2005 and prior years,
the Corporation entered into interest rate swap agreements (CD
swaps) to hedge the interest rate
risk inherent in certain of its brokered certificates of deposit. From the inception of the hedging
program, the Corporation applied a method of fair value hedge accounting under SFAS 133 to account
for the CD swaps which allowed it 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).
Therefore, any gains and losses
attributable to the change in fair value are recognized in earnings during the period of change in
fair value. The Corporations determination that such swaps did not qualify for hedge accounting
under SFAS 133 did not have a material effect on its reported results of operations for the year
ended December 31, 2004 or for prior periods, and thus the Corporation has not restated or amended
such previously reported results for periods ended on or prior to December 31, 2004. (See Note 11)
NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 155
In
February 2006, the FASB issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments (SFAS 155), which: (1) permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require bifurcation, (2)
clarifies which interest-only strips and principal-only strips are not subject to the requirements
SFAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit
in the form of subordination are not embedded derivatives, and
(5) amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities a replacement of FASB Statement
No. 125, to eliminate the
prohibition of a qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155
will be applicable to the Corporation beginning on or after January 1, 2007. The provisions of SFAS
155 are not expected to have a material impact on the Corporation.
Statement of Financial Accounting Standards No. 156
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets (SFAS
156), which: (1) provides revised guidance on when a servicing asset and servicing liability
should be recognized, (2) requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable, (3) permits an entity to elect
to measure servicing assets and servicing liabilities at fair value each reporting date and report
changes in fair value in earnings in the period in which the changes occur, (4) upon initial
adoption, permits a one-time reclassification of available-for-sale securities to trading
securities for securities which are identified as offsetting the entitys exposure to changes in
the fair value of servicing assets or
5
liabilities that a servicer elects to subsequently measure at fair value, and 5) requires separate
presentation of servicing assets and servicing liabilities subsequently measured at fair value in
the statement of financial position and additional footnote disclosures. SFAS 156 will be
applicable to the Corporation beginning January 1, 2007 with the effects of initial adoption being
reported as a cumulative-effect adjustment to retained earnings. The provisions of SFAS 156 are not
expected to have a material impact on the Corporation.
NOTE 3 RECENT DEVELOPMENTS
On March 6, 2006, the Corporation announced that it had signed a definitive agreement to merge with
Kensington Bankshares, Inc. (Kensington). Kensington is the holding company for Kensington Bank,
a Florida state bank with eight branches in the Tampa Bay area. Under the terms of the merger
agreement, the Corporation will issue 1.6 shares of its common stock for each share of Kensington
stock and will pay cash for certain outstanding Kensington stock options. Based on closing prices
per share for the Corporations common stock for a period shortly before the merger agreement was
executed, the transaction would be valued at approximately $71.2 million. The actual value at
consummation will be based on the Corporations share price at that time. The Tampa Bay area would
be the Corporations largest market and has a higher projected population growth than any of its
current banking markets. The merger is currently expected to occur during the third quarter of
2006. Completion of the merger is subject to approval by the stockholders of both corporations, to
the receipt of required regulatory approvals, and to the satisfaction of usual and customary
closing conditions.
On May 1, 2006, the Corporation announced that it had signed a definitive agreement to merge with
Community Bancshares, Inc. (Community). Community is the holding company for Community Bank, an
Alabama state bank with 18 branches located primarily in northeast Alabama. Under the terms of the
merger agreement, the Corporation will issue 0.8974 shares of its common stock for each share of
Community stock and will pay cash for certain outstanding Community
stock options and warrants. Based on closing prices per share for the Corporations common stock for a period shortly before
the merger agreement was executed, the transaction would be valued at approximately $98.0 million.
The actual value at consummation will be based on the Corporations share price at that time. The
merger is currently expected to occur by year-end 2006. Completion of the merger is
subject to approval by the stockholders of both corporations, to the receipt of required regulatory
approvals, and to the satisfaction of usual and customary closing conditions.
NOTE 4 ASSET SALES
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 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.
6
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 Corporations Form
10-K for the year ended December 31, 2005. All costs have been allocated to the reportable
segments. Therefore, combined amounts agree to the consolidated totals (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama |
|
|
Florida |
|
|
|
|
|
|
Region |
|
|
Region |
|
|
Combined |
|
Three months ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
6,360 |
|
|
$ |
3,644 |
|
|
$ |
10,004 |
|
Provision for loan losses |
|
|
789 |
|
|
|
(189 |
) |
|
|
600 |
|
Noninterest income |
|
|
2,256 |
|
|
|
246 |
|
|
|
2,502 |
|
Noninterest expense (1) |
|
|
9,714 |
|
|
|
1,092 |
|
|
|
10,806 |
|
Income (benefit) tax expense |
|
|
(706 |
) |
|
|
956 |
|
|
|
250 |
|
Net (loss) income |
|
|
(1,181 |
) |
|
|
2,031 |
|
|
|
850 |
|
Total assets |
|
|
1,129,776 |
|
|
|
302,191 |
|
|
|
1,431,967 |
|
Three months ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
6,778 |
|
|
$ |
2,829 |
|
|
$ |
9,607 |
|
Provision for loan losses |
|
|
733 |
|
|
|
17 |
|
|
|
750 |
|
Noninterest income |
|
|
923 |
|
|
|
324 |
|
|
|
1,247 |
|
Noninterest expense (1) (2) |
|
|
22,174 |
|
|
|
1,148 |
|
|
|
23,322 |
|
Income (benefit) tax expense |
|
|
(5,639 |
) |
|
|
582 |
|
|
|
(5,057 |
) |
Net (loss) income |
|
|
(9,567 |
) |
|
|
1,406 |
|
|
|
(8,161 |
) |
Total assets |
|
|
1,151,859 |
|
|
|
275,075 |
|
|
|
1,426,934 |
|
|
|
|
(1) |
|
Noninterest expense for the Alabama region includes all expenses for the holding company,
which have not been prorated to the Florida region. |
|
(2) |
|
See Notes 4 and 12 concerning the amount of management
separation costs and loss on the
sale of assets. |
7
NOTE 6 NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income (loss) per common
share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
For basic and diluted, net income (loss) |
|
$ |
850 |
|
|
$ |
(8,161 |
) |
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
For basic, weighted average common shares outstanding |
|
|
20,015 |
|
|
|
18,406 |
|
Effect of dilutive stock options |
|
|
658 |
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted common shares outstanding |
|
|
20,673 |
|
|
|
18,406 |
|
|
|
|
|
|
|
|
Basic and diluted net income (loss) per common share |
|
$ |
.04 |
|
|
$ |
(.44 |
) |
|
|
|
|
|
|
|
NOTE 7 COMPREHENSIVE LOSS
Total comprehensive loss was $(111,000) and $(9,626,000) for the three-month periods ended March
31, 2006 and 2005, respectively. Total comprehensive loss consists of net income (loss) and the
unrealized gain or loss on the Corporations available-for-sale investment securities portfolio
arising during the period.
During the first quarter of 2005, the Corporation realized a $909,000 pre-tax loss as a result of a
$50 million sale of bonds in the investment portfolio, which closed in April 2005. The Corporation
reinvested the proceeds in bonds intended to enhance the yield and cash flows of its investment
securities portfolio. The new investment securities are classified as available for sale.
NOTE 8 INCOME TAXES
The difference between the effective tax rate and the federal statutory rate in 2006 and 2005 is
primarily due to certain tax-exempt income.
The Corporations federal and state income tax returns for the years 2000 through 2004 are open for
review and examination by governmental authorities. In the normal course of these examinations, the
Corporation is subject to challenges from governmental authorities regarding amounts of taxes due.
The Corporation has received notices of proposed adjustments relating to state taxes due for the
years 2002 and 2003, which include proposed adjustments relating to income apportionment of a
subsidiary. Management believes adequate provision for income taxes has been recorded for all years
open for review and intends to vigorously contest the proposed adjustments. To the extent that
final resolution of the proposed adjustments results in significantly different conclusions from
managements current assessment of the proposed adjustments, the effective tax rate in any given
financial reporting period may be materially different from the current effective tax rate.
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 regulatory guidelines.
Consolidated debt obligations related to subsidiary trusts holding solely debentures of the
Corporation follow:
8
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(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 July 25, 2031 |
|
|
16,495 |
|
|
|
16,495 |
|
|
|
|
|
|
|
|
Total junior subordinated debentures owed to unconsolidated subsidiary trusts |
|
$ |
31,959 |
|
|
$ |
31,959 |
|
|
|
|
|
|
|
|
As of March 31, 2006 and December 31, 2005, the interest rate on the $16,495,000 subordinated
debentures was 8.53% and 7.67%, respectively.
Prior to the conversion of its subsidiarys charter to a federal savings bank charter, the
Corporation was required to obtain regulatory approval prior to paying any dividends on these trust
preferred securities. The Federal Reserve approved the timely payment of the Corporations
semi-annual distribution on its trust preferred securities in January, March, July and September
2005.
NOTE 10 STOCKHOLDERS EQUITY
On April 1, 2002, the Corporation issued 157,500 shares of restricted common stock to certain
directors and key employees pursuant to the Second Amended and Restated 1998 Stock Incentive Plan.
Under the Restricted Stock Agreements, the stock may not be sold or assigned in any manner for a
five-year period that began on April 1, 2002. During this restricted period, the participant is
eligible to receive dividends and exercise voting privileges. The restricted stock also has a
corresponding vesting period, with one-third vesting at the end of each of the third, fourth and
fifth years. The restricted stock was issued at $7.00 per share, or $1,120,000, and classified as a
contra-equity account, Unearned restricted stock, in stockholders equity. During 2003, 15,000
shares of this restricted common stock were forfeited. During the second quarter of 2005, an
additional 29,171 shares of this restricted stock were forfeited. On January 24, 2005, the
Corporation issued 49,375 additional shares of restricted common stock to certain key employees.
Under the terms of the management separation agreement entered into during 2005 (see Note 12),
vesting was accelerated on 124,375 shares of restricted stock. As of
March 31, 2006, 13,330 shares
of unvested restricted stock issued to continuing directors remained outstanding. The outstanding
shares of restricted stock are included in the diluted earnings per share calculation, using the
treasury stock method, until the shares vest. Once vested, the shares become outstanding for basic
earnings per share. For the year ended December 31, 2005, the Corporation recognized $648,000 in
restricted stock expense, primarily related to the accelerated vesting from the management
separation agreements included in the amount of management separation costs. No restricted stock
expense was recognized for the period ended March 31, 2006. For the period ended March 31, 2005,
the Corporation recognized $519,000, in restricted stock expense, of which $486,000 was related to
the accelerated vesting from the management separation agreements and was included in the amount of
management separation costs.
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 March 31, 2006, 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.
9
Compensation expense that the Corporation recognized during the periods ended March 31, 2006 and
2005 was $76,000 and $66,000, respectively. The ESOP shares as of March 31, 2006 were as follows:
|
|
|
|
|
|
|
March 31, 2006 |
|
Allocated shares |
|
|
82,028 |
|
Estimated shares committed to be released |
|
|
6,675 |
|
Unreleased shares |
|
|
184,697 |
|
|
|
|
|
Total ESOP shares |
|
|
273,400 |
|
|
|
|
|
Fair value of unreleased shares |
|
$ |
3,239,790 |
|
|
|
|
|
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS 123R), which is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion
25). The new standard, which became effective for the Corporation in the first quarter of 2006,
requires companies to recognize an expense in the statement of operations for the grant-date fair
value of stock options and other equity-based compensation issued to employees, but expresses no
preference for a type of valuation method. This expense will be recognized over the period during
which an employee is required to provide service in exchange for the award. SFAS 123R carries
forward prior guidance on accounting for awards to non-employees. If an equity award is modified
after the grant date, incremental compensation cost will be recognized in an amount equal to the
excess of the fair value of the modified award over the fair value of the original award
immediately prior to the modification. The Corporation expects to recognize compensation expense
for any stock awards granted after December 31, 2005. Since all of the Corporations stock option
awards granted prior to December 31, 2005 have vested in full, no future compensation expense will
be recognized on these awards. During the first quarter of 2005, the Corporation granted 1,690,937
options to the new management team. These options have exercise prices ranging from $8.17 to $9.63
per share and were granted outside of the stock incentive plan as part of the inducement package
for new management. These shares are included in the tables below.
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 of Directors determines the terms of the restricted stock and options granted. All
options granted have a maximum term of ten years from the grant date, and the option price per
share of options granted cannot be less than the fair market value of the Corporations common
stock on the grant date.. Some of the options granted under the plan in the past vested over a
five-year period, while others vested based on certain benchmarks relating to the trading price of
the Corporations common stock, with an outside vesting date of five years from the date of grant.
More recent grants have followed this benchmark-vesting formula
The
fair value of each option award is estimated on the date of grant based upon the
Black-Scholes pricing model that uses the assumptions noted in the following table. Expected
volatility has been estimated based on historical data. The expected term has been estimated based
on the five-year vesting and ten-year term of the awards. The Corporation does not have adequate
historical data to estimate option exercise and employee termination, thus no estimate of the
forfeiture rate has been made.. During the first quarter of 2006 no significant amounts of stock
options were awarded. The Corporation used the following weighted-average assumptions for the
three-month period ended March 31, 2006:
|
|
|
|
|
Risk-free interest rate |
|
|
4.85 |
% |
Volatility factor |
|
|
.48 |
% |
Weighted average life of options (in years) |
|
|
7.00 |
|
Dividend yield |
|
|
0.00 |
% |
A summary of stock option activity as of March 31, 2006 and changes during the three-month
period then ended is set forth below:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Aggregate |
|
|
|
Number |
|
|
Price |
|
|
Term |
|
|
Intrinsic Value |
|
Under option,
beginning of period |
|
|
3,031,946 |
|
|
$ |
7.81 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
25,000 |
|
|
|
11.35 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(110,985 |
) |
|
|
6.15 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(4,043 |
) |
|
|
9.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under option, end of period |
|
|
2,941,918 |
|
|
$ |
7.90 |
|
|
|
7.96 |
|
|
$ |
11,622,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
2,921,918 |
|
|
$ |
7.88 |
|
|
|
7.95 |
|
|
$ |
11,612,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value
per option of options
granted during the period |
|
$ |
6.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the three-month period ended March 31, 2006
was $617,000. As of March 31, 2006, there was $121,000 of total unrecognized compensation expense
related to the unvested awards. This expense will be recognized over a five-year period unless the
shares vest earlier based on achievement of benchmark trading price
levels. During the first quarter of 2006, the Corporation reorganized
approximately $38,000 in compensation expense related to options
granted during the quarter.
Prior to January 1, 2006 the Corporation applied the disclosure-only provisions of 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 25. The Corporation 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 for the period prior to the adoption of SFAS 123R follows
(in thousands, except earnings per share information):
|
|
|
|
|
|
|
For the three- |
|
|
|
month period |
|
|
|
ended |
|
|
|
March 31, |
|
|
|
2005 |
|
Net loss: |
|
|
|
|
As reported |
|
$ |
(8,161 |
) |
Pro forma |
|
|
(10,322 |
) |
Loss per common share: |
|
|
|
|
As reported |
|
$ |
(.44 |
) |
Pro forma |
|
|
(.56 |
) |
Diluted loss per common share: |
|
|
|
|
As reported |
|
$ |
(.44 |
) |
Pro forma |
|
|
(.56 |
) |
11
The fair value of the options granted was based upon the Black-Scholes pricing model. The
Corporation used the following weighted average assumptions for the quarter ended:
|
|
|
|
|
|
|
March 31, |
|
|
|
2005 |
|
Risk-free interest rate |
|
|
4.34 |
% |
Volatility factor |
|
|
.41 |
|
Weighted average life of options |
|
|
7.0 |
|
Dividend yield |
|
|
0.00 |
|
NOTE 11 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation uses derivative financial instruments to assist in its interest rate risk
management process. The Corporations derivative financial instruments include interest rate
exchange contracts (swaps).
An interest rate swap is an agreement in which two parties agree to exchange, at specified
intervals, interest payment streams calculated on an agreed-upon notional principal amount with at
least one stream based on a specified floating-rate index. The notional amount does not represent
the direct credit exposure. The Corporation is exposed to credit-related losses in the event of
non-performance by the counterparty on the interest rate exchange, but does not anticipate that any
counterparty will fail to meet its payment obligation.
As of March 31, 2006 and December 31, 2005, the Corporation had entered into $46,500,000
notional amount of swaps (CD swaps) to hedge the interest rate risk inherent in certain of its
brokered certificates of deposits (brokered CDs). The CD swaps are used to convert the fixed rate
paid on the brokered CDs to a variable rate based upon three-month LIBOR. Prior to the first
quarter of 2006, these transactions did not qualify for fair value hedge accounting under SFAS 133
(See Note 1). During the first quarter of 2006, the Corporation designated these CD swaps as fair
value hedges. As fair value hedges, the net cash settlements from the designated swaps are reported
as part of net interest income. In addition, the Corporation will recognize in current earnings the
change in fair value of both the interest rate swap and related hedged brokered CDs, with the
ineffective portion of the hedge relationship reported in noninterest income. The fair value of the
CD swaps is reported on the Condensed Consolidated Statements of Financial Condition in other
liabilities and the change in fair value of the related hedged brokered CD is reported as an
adjustment to the carrying value of the brokered CDs. As of March 31, 2006, the amount of CD swaps
designated as fair value hedges totaled $46,210,000.
Prior to the first quarter of 2006 and for the portion of CD swaps that are not designated as
fair value hedges, the Corporation reported the change in the fair value of these CD swaps as a
separate component of noninterest income. The fair value of the CD swaps is reported on the
Condensed Consolidated Statement of Financial Condition in other liabilities.
As of March 31, 2006 and December 31, 2005, these CD swaps had a recorded negative fair value of
$1,669,000 and $992,000 and a weighted average life of 8.65 and 8.89 years, respectively. The
weighted average fixed rate (receiving rate) was 4.51% and the weighted average variable rate
(paying rate) is 4.75% and 4.22% (LIBOR based), respectively.
The Corporation also has entered into an interest rate swap agreement with a notional amount of
$15,000,000 to hedge the variability in cash flows on $15,000,000 million of FHLB borrowings. Under
the terms of the interest rate swap, which matures in September 2006, the Corporation receives a
floating interest rate based on LIBOR and pays a fixed rate of 4.33%. This contract, which is
accounted for as a cash flow hedge, satisfies the criteria to use the short-cut method of
accounting for hedging the variability in cash flow on FHLB borrowings due to changes in the LIBOR
rate. The short-cut method allows the Corporation to assume that there is no ineffectiveness in the
hedging relationship.
NOTE 12
MANAGEMENT SEPARATION COSTS
On January 24, 2005, the Corporation entered into agreements with James A. Taylor and James A.
Taylor, Jr. under which they would continue to serve as Chairman of the Board of the Corporation
and as a director of the Corporation, respectively, but would cease their employment as officers
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
$3,152,124 in December 2005, and will pay $788,031 by January 24, 2007. The agreement also provides
for the provision of certain insurance benefits to Mr. Taylor, the transfer of a key
12
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 prior employment agreement. This obligation to provide such
payments and benefits to Mr. Taylor is absolute and will survive the death or disability of Mr.
Taylor.
Under the agreement with Mr. Taylor, Jr., in lieu of the payments to which he would have been
entitled under his employment agreement, the Corporation paid to Mr. Taylor, Jr., $1,382,872 on
January 24, 2005. The agreement also provides for the provision of certain insurance benefits to
Mr. Taylor, Jr. and for the immediate vesting of his unvested incentive awards and deferred
compensation in each case substantially as required by his prior 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 management separation transaction, the Corporation recognized pre-tax
expenses of $12.4 million in the first quarter of 2005. At March 31, 2006 and 2005, the Corporation
had $1.2 million and $4.2 million, respectively, of accrued liabilities related to these
agreements.
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 March 31, 2006 consolidated financial condition
and results of operations for the three-month periods ended March 31, 2006 (first quarter of 2006)
and 2005 (first quarter of 2005). 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, 2005.
Recent Developments
On March 6, 2006, we announced that we had signed a definitive agreement to merge with Kensington
Bankshares, Inc. (Kensington). Kensington is the holding company for Kensington Bank, a Florida
state bank with eight branches in the Tampa Bay area. Under the terms
of the merger agreement, we
will issue 1.6 shares of our common stock for each share of Kensington stock and will pay cash for
certain outstanding Kensington stock options. Based on closing prices per share for our common
stock for a period shortly before the merger agreement was executed, the transaction would be
valued at approximately $71.2 million. The actual value at consummation will be based on our share
price at that time. The Tampa Bay area would be our largest market and has a higher projected
population growth than any of our current banking markets. The merger is expected to be accretive
to our earnings per share immediately upon completion, and is currently expected to occur in the
third quarter of 2006. Completion of the merger is subject to approval by the stockholders of both
corporations, to the receipt of required regulatory approvals, and to the satisfaction of usual and
customary closing conditions.
On May 1, 2006, we announced that we had signed a definitive agreement to merge with Community
Bancshares, Inc. (Community). Community is the holding company for Community Bank, an Alabama
state bank with 18 branches located primarily in northeast Alabama. Under the terms of the merger
agreement, we will issue 0.8974 shares of its common stock for each share of Community stock and
will pay cash for certain outstanding Community stock options and warrants. Based on closing prices
per share for our common stock for a period shortly before the merger agreement was executed, the
transaction would be valued at approximately $98.0 million. The actual value at consummation will
be based on our share price at that time. The merger is expected to be accretive to our earnings
per share immediately upon completion, currently expected to occur by year-end 2006. Completion of
the merger is subject to approval by the stockholders of both corporations, to the receipt of
required regulatory approvals, and to the satisfaction of usual and customary closing conditions.
Overview
Our principal subsidiary is Superior Bank, a federal savings bank headquartered in Birmingham,
Alabama, which operates 26 banking offices in Alabama and the panhandle of Florida. Other
subsidiaries include TBC Capital Statutory Trust II (TBC Capital II), a Connecticut statutory
trust, TBC Capital Statutory Trust III (TBC Capital III), a Delaware business trust, and Morris
Avenue Management Group, Inc. (MAMG), an Alabama corporation, all of which are wholly owned. TBC
Capital II and TBC Capital III are unconsolidated special purpose entities formed solely to issue
cumulative trust preferred securities. MAMG is a real estate management company that manages our
headquarters, our branch facilities and certain other real estate owned by Superior Bank.
Our total
assets were $1.432 billion at March 31, 2006, an increase of $17 million, or 1.2%, from
$1.415 billion as of December 31, 2005. Our total loans, net of unearned income, were $989.6
million at March 31, 2006, an increase of $26.3 million, or 2.7%, from $963.3 million as of
December 31, 2005. Our total deposits were $1.078 billion
at March 31, 2006, an increase of $34 million, or 3.3%, from $1.044 billion as of December 31, 2005. Our total stockholders equity was
$105.8 million at March 31, 2006, an increase of $738,000, or 0.7%, from $105.1 million as of
December 31, 2005.
The primary source of our revenue is net interest income, which is the difference between income
earned on interest-earning assets, such as loans and investments, and interest paid on
interest-bearing liabilities, such as deposits and borrowings. Our results of operations are also
affected by the provision for loan losses and other noninterest expenses such as salaries and
benefits, occupancy expenses and provision for income taxes. The effects of these noninterest
expenses are partially offset by noninterest sources of
14
revenue such as service charges and fees on deposit accounts and mortgage banking income. Our
volume of business is influenced by competition in our markets and
overall economic conditions,
including such factors as market interest rates, business spending and consumer confidence.
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, our
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
Net income was $850,000 for the first quarter of 2006, compared to an $8.2 million net loss for the
first quarter of 2005. Basic and diluted net income (loss) per common share was $.04 and $(.44),
respectively, for the first quarters of 2006 and 2005, based on weighted average common shares
outstanding for the respective periods. Return on average assets, on an annualized basis, was .24%
for the first quarter of 2006 compared to (2.31)% for the first quarter of 2005. Return on average
stockholders equity, on an annualized basis, was 3.27% for the first quarter of 2006 compared to
(32.80)% for the first quarter of 2005. Book value per share at March 31, 2006 was $5.27, compared
to $5.26 as of December 31, 2005. Tangible book value per share at March 31, 2006 was $4.67,
compared to $4.65 as of December 31, 2005.
The increase in our net income during the first quarter of 2006 compared to the first quarter of
2005 is the result of certain expenses related to the management changes which occurred in the
first quarter of 2005 and the recognition of losses in the bond portfolio and losses from the sale
of certain assets during 2005 (see notes 4 and 12 in the condensed consolidated financial
statements and the information under the captions Noninterest income and Noninterest expenses
below).
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 $397,000, or 4.1%, to $10.0 million for the first quarter of 2006 compared to $9.6
million for the first quarter of 2005. Net interest income increased primarily due to a $3.5
million increase in total interest income offset by a $3.1 million increase in total interest
expense. The increase in total interest income is primarily due to a 116-basis point increase in
the average interest rate on loans and a $42.9 million increase in the average volume of loans.
The increase in total interest expense is attributable to a 107-basis point increase in the average
interest rate paid on interest-bearing liabilities offset slightly by a $14.5 million decrease in
the volume of average interest-bearing liabilities. The average rate paid on interest-bearing
liabilities was 3.91% for the first quarter of 2006, compared to 2.84% for the first quarter of
2005. Our net interest spread and net interest margin were 3.01% and 3.21%, respectively, for the
first quarter of 2006, compared to 2.94% and 3.06% for the first quarter of 2005
Average
interest-earning assets for the first quarter of 2006 decreased $7.0 million, or 0.6%, to
$1.270 billion from $1.277 billion in the first quarter of 2005. There was also a $15 million, or
1.2%, decrease in average interest-bearing liabilities, to $1.209 billion for the first quarter of
2006 from $1.224 billion for the first quarter of 2005. The ratio of average interest-earning
assets to average interest-bearing liabilities was 105.0% and 104.4% for the first quarters of 2006
and 2005, respectively. Average interest-bearing assets produced a taxable equivalent yield of
6.92% for the first quarter of 2006 compared to 5.78% for the first quarter of 2005.
Average Balances Income, Expense and Rates. The following table depicts, on a taxable equivalent
basis for the periods indicated, certain information related to our average balance sheet and our-
average yields on assets and average costs of liabilities. Average yields are calculated by
dividing income or expense by the average balance of the corresponding assets or liabilities.
Average balances have been calculated on a daily basis.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
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) |
|
$ |
996,773 |
|
|
$ |
18,418 |
|
|
|
7.49 |
% |
|
$ |
953,891 |
|
|
$ |
14,878 |
|
|
|
6.33 |
% |
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
243,907 |
|
|
|
2,760 |
|
|
|
4.59 |
|
|
|
276,595 |
|
|
|
2,925 |
|
|
|
4.29 |
|
Tax-exempt(2) |
|
|
8,452 |
|
|
|
118 |
|
|
|
5.67 |
|
|
|
6,632 |
|
|
|
88 |
|
|
|
5.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
252,359 |
|
|
|
2,878 |
|
|
|
4.63 |
|
|
|
283,227 |
|
|
|
3,013 |
|
|
|
4.31 |
|
Federal funds sold |
|
|
3,005 |
|
|
|
35 |
|
|
|
4.72 |
|
|
|
13,589 |
|
|
|
82 |
|
|
|
2.45 |
|
Other investments |
|
|
18,309 |
|
|
|
358 |
|
|
|
7.93 |
|
|
|
26,380 |
|
|
|
243 |
|
|
|
3.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,270,446 |
|
|
|
21,689 |
|
|
|
6.92 |
|
|
|
1,277,087 |
|
|
|
18,216 |
|
|
|
5.78 |
|
Noninterest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
28,607 |
|
|
|
|
|
|
|
|
|
|
|
27,483 |
|
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
56,229 |
|
|
|
|
|
|
|
|
|
|
|
59,959 |
|
|
|
|
|
|
|
|
|
Accrued interest and other assets |
|
|
76,835 |
|
|
|
|
|
|
|
|
|
|
|
79,797 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(12,105 |
) |
|
|
|
|
|
|
|
|
|
|
(12,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,420,012 |
|
|
|
|
|
|
|
|
|
|
$ |
1,431,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
328,886 |
|
|
$ |
2,150 |
|
|
|
2.65 |
|
|
$ |
302,756 |
|
|
$ |
1,110 |
|
|
|
1.49 |
|
Savings deposits |
|
|
21,068 |
|
|
|
8 |
|
|
|
0.15 |
|
|
|
28,214 |
|
|
|
11 |
|
|
|
0.16 |
|
Time deposits |
|
|
615,253 |
|
|
|
6,255 |
|
|
|
4.12 |
|
|
|
658,162 |
|
|
|
4,916 |
|
|
|
3.03 |
|
Other borrowings |
|
|
211,993 |
|
|
|
2,471 |
|
|
|
4.73 |
|
|
|
202,603 |
|
|
|
1,857 |
|
|
|
3.72 |
|
Subordinated debentures |
|
|
31,959 |
|
|
|
761 |
|
|
|
9.66 |
|
|
|
31,959 |
|
|
|
685 |
|
|
|
8.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,209,159 |
|
|
|
11,645 |
|
|
|
3.91 |
|
|
|
1,223,694 |
|
|
|
8,579 |
|
|
|
2.84 |
|
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
91,027 |
|
|
|
|
|
|
|
|
|
|
|
95,483 |
|
|
|
|
|
|
|
|
|
Accrued interest and other liabilities |
|
|
14,466 |
|
|
|
|
|
|
|
|
|
|
|
11,429 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
105,359 |
|
|
|
|
|
|
|
|
|
|
|
100,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,420,011 |
|
|
|
|
|
|
|
|
|
|
$ |
1,431,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income/net interest spread |
|
|
|
|
|
|
10,044 |
|
|
|
3.01 |
% |
|
|
|
|
|
|
9,637 |
|
|
|
2.94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on earning assets |
|
|
|
|
|
|
|
|
|
|
3.21 |
% |
|
|
|
|
|
|
|
|
|
|
3.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities(2) |
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
10,004 |
|
|
|
|
|
|
|
|
|
|
$ |
9,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Nonaccrual loans are included in loans, net of unearned income. No adjustment has been
made for these loans in the calculation of yields. |
|
(2) |
|
Interest income and yields are presented on a fully taxable equivalent basis using a tax rate
of 34 percent. |
16
The following table sets forth, on a taxable equivalent basis, the effect which the varying levels
of interest-earning assets and interest-bearing liabilities and the applicable rates have had on
changes in net interest income for the three months ended March 31, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 (1) |
|
|
|
2006 vs. 2005 |
|
|
|
Increase |
|
|
Changes Due To |
|
|
|
(Decrease) |
|
|
Rate |
|
|
Volume |
|
|
|
(Dollars in thousands) |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
3,540 |
|
|
$ |
2,843 |
|
|
$ |
697 |
|
Interest on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(165 |
) |
|
|
196 |
|
|
|
(361 |
) |
Tax-exempt |
|
|
30 |
|
|
|
5 |
|
|
|
25 |
|
Interest on federal funds |
|
|
(47 |
) |
|
|
44 |
|
|
|
(91 |
) |
Interest on other investments |
|
|
115 |
|
|
|
207 |
|
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
3,473 |
|
|
|
3,295 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
Expense from interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest on demand deposits |
|
|
1,040 |
|
|
|
936 |
|
|
|
104 |
|
Interest on savings deposits |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Interest on time deposits |
|
|
1,339 |
|
|
|
1,676 |
|
|
|
(337 |
) |
Interest on other borrowings |
|
|
614 |
|
|
|
524 |
|
|
|
90 |
|
Interest on subordinated debentures |
|
|
76 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
3,066 |
|
|
|
3,211 |
|
|
|
(145 |
) |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
407 |
|
|
$ |
84 |
|
|
$ |
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $1.3 million, or 100.6%, to $2.5 million for the
first quarter of 2006 from $1.2 million for the first quarter of 2005, primarily due to the
$909,000 loss we realized in 2005 in our investment securities portfolio and the $230,000 decline
in the fair value of our interest rate swaps, also in 2005. The investment portfolio losses were
realized as a result of a $50 million sale of bonds in the investment portfolio that closed in
April 2005. 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 and fees on deposits decreased $81,000, or 7.3%, to $1.03 million in the
first quarter of 2006 from $1.11 million in the first quarter of 2005. Management is currently
pursuing new accounts and customers through direct marketing and other promotional efforts to
increase this source of revenue. Mortgage banking income increased $85,000, or 19.1%, to $531,000
in the first quarter of 2006 from $446,000 in the first quarter of 2005 primarily due to increased
volume.
Noninterest expenses. Noninterest expenses decreased $12.5 million, or 53.7%, to $10.8 million for
the first quarter of 2006 from $23.3 million for the first quarter of 2005. This decrease is
primarily due to the management separation costs of $12.4 million incurred in the first quarter of
2005. The management separation costs primarily included severance payments, accelerated vesting of
restricted stock and professional fees (see note 12 to the condensed consolidated financial
statements). Salaries and benefits increased $467,000, or 8.6%, to $5.9 million for the first
quarter of 2006 from $5.4 million for the first quarter of 2005. Occupancy expenses decreased
$134,000, or 6.8%, to $1.9 million for the first quarter of 2006 from $2.0 million for the first
quarter of 2005. Other operating expenses decreased $472,000 due to a $355,000 loss on the sale of
our corporate aircraft and $78,000 in correspondent analysis charges in the first quarter of 2005.
Income tax expense. We recognized income tax expense of $250,000 for the first quarter of 2006,
compared to income tax benefit of $5.1 million for the first quarter of 2005. The difference in the
effective tax rate and the federal statutory rate of 34% for 2006 and 2005 is due primarily to
certain tax-exempt income.
Our federal and state income tax returns for the years 2000 through 2004 are open for review and
examination by governmental authorities. In the normal course of these examinations, we are subject
to challenges from governmental authorities regarding amounts of taxes due. We have received
notices of proposed adjustments relating to state taxes due for the years 2002 and 2003, which
include
17
proposed adjustments relating to income apportionment of a subsidiary. Management believes adequate
provision for income taxes has been recorded for all years open for review and intends to
vigorously contest the proposed adjustments. To the extent that final resolution of the proposed
adjustments results in significantly different conclusions from managements current assessment of
the proposed adjustments, the effective tax rate in any given financial reporting period may be
materially different from the current effective tax rate.
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
for loan losses 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 in
which management perceives there is a minimal risk of loss. Loans are rated using an eight-point
scale, with loan officers having the primary responsibility for assigning risk ratings and for the
timely reporting of changes in the risk ratings. These processes, and the assigned risk ratings,
are subject to review by our internal loan review function and chief
credit officer. Based on the
assigned risk ratings, the criticized and classified loans in the portfolio are segregated into the
following regulatory classifications: Special Mention, Substandard, Doubtful or Loss. Generally,
regulatory reserve percentages are applied to these categories to estimate the amount of loan loss
allowance, adjusted for previously mentioned risk factors. Impaired loans are reviewed specifically
and separately under Statement of Financial Accounting Standards (SFAS) No. 114 to
determine the appropriate reserve allocation. Management compares the investment in an impaired
loan with 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 $600,000 for the first quarter of 2006, a decrease of $150,000,
or 20.0%, from $750,000 in the first quarter of 2005. During the first quarter of 2006, we had net
charged-off loans totaling $612,000, compared to net charged-off loans of $336,000 in the first
quarter of 2005. The annualized ratio of net charged-off loans to average loans was 0.25% in the
first quarter of 2006, compared to 0.14% for the first quarter of 2005 and 0.43% for the year 2005.
The allowance for loan losses totaled $12.0 million, or 1.21% of loans, net of unearned income at
March 31, 2006, compared to $12.0 million, or 1.25% of loans, net of unearned income, at December
31, 2005. See Financial Condition Allowance for Loan Losses for additional discussion.
Financial Condition
Total
assets were $1.432 billion at March 31, 2006, an increase of $17 million, or .26%, from
$1.415 billion as of December 31, 2005. Average total assets for the first quarter of 2006 were
$1.420 billion, which was supported by average total liabilities of $1.315 billion and average
total stockholders equity of $105 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 $1.9 million, or 4.2%, to $43.0 million
at March 31, 2006 from $44.9 million at December 31, 2005. At March 31, 2006, short-term liquid
assets comprised 3.0% of total assets, compared to 3.2% at December 31, 2005. 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 $3.9 million, or 1.6%, to $238.7
million at March 31, 2006, from $242.6 million at December 31, 2005. Mortgage-backed securities,
which comprised 36.9% of the total investment portfolio at March 31, 2006, decreased $3.8 million,
or 4.1%, to $88.0 million from $91.8 million at December 31, 2005. Investments in U.S. agency
securities, which comprised 40.5% of the total investment portfolio at March 31, 2006, decreased
$855,000, or 0.9 %, to $96.6 million from $97.5 million at December 31, 2005. During the first
quarter of 2005, we had a $50 million sale of bonds in the investment portfolio that closed in
April 2005. 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. The total investment portfolio at March 31, 2006 comprised 19.0% of all interest-earning
assets compared to 19.6% at December 31, 2005, and produced an average taxable equivalent yield of
4.63 % for the first quarter of 2006 and 4.31% for the first quarter of 2005.
Loans. Loans, net of unearned income, totaled $989.6 million at March 31, 2006, an increase of
2.7%, or $26.3 million, from $963.3 million at December 31, 2005. Mortgage loans held for sale
totaled $17.7 million at March 31, 2006, a decrease of $3.6 million from $21.4 million at December
31, 2005. Average loans, including mortgage loans held for sale, totaled $996.8 million for the
first quarter
18
of 2006 compared to $953.9 million for the first quarter of 2005. Loans, net of unearned income,
comprised 80.0% of interest-earning assets at March 31, 2006, compared to 79.6% at December 31,
2005. Mortgage loans held for sale comprised 1.4% of interest-earning assets at March 31, 2006,
compared to 1.7% at December 31, 2005. The loan portfolio produced an average yield of 7.49% for
the first quarter of 2006, compared to 6.33% for the first quarter of 2005. The following table
details the distribution of the loan portfolio by category as of March 31, 2006 and December 31,
2005:
DISTRIBUTION OF LOANS BY CATEGORY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
Amount |
|
|
Total |
|
|
Amount |
|
|
Total |
|
Commercial and industrial |
|
$ |
127,040 |
|
|
|
12.8 |
% |
|
$ |
135,454 |
|
|
|
14.0 |
% |
Real estate construction and land development |
|
|
366,087 |
|
|
|
36.9 |
|
|
|
326,418 |
|
|
|
33.8 |
|
Real estate mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
253,292 |
|
|
|
25.6 |
|
|
|
243,183 |
|
|
|
25.2 |
|
Commercial |
|
|
197,904 |
|
|
|
20.0 |
|
|
|
210,611 |
|
|
|
21.8 |
|
Other |
|
|
27,256 |
|
|
|
2.8 |
|
|
|
27,503 |
|
|
|
2.9 |
|
Consumer |
|
|
19,182 |
|
|
|
1.9 |
|
|
|
21,122 |
|
|
|
2.2 |
|
Other |
|
|
364 |
|
|
|
.0 |
|
|
|
498 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
991,125 |
|
|
|
100.0 |
% |
|
|
964,789 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned income |
|
|
(1,549 |
) |
|
|
|
|
|
|
(1,536 |
) |
|
|
|
|
Allowance for loan losses |
|
|
(11,999 |
) |
|
|
|
|
|
|
(12,011 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
$ |
977,577 |
|
|
|
|
|
|
$ |
951,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits. Noninterest-bearing deposits totaled $95.6 million at March 31, 2006, an increase of
3.5%, or $3.3 million, from $92.3 million at December 31, 2005. Noninterest-bearing deposits
comprised 8.9% of total deposits at March 31, 2006, compared to 8.8% at December 31, 2005. Of total
noninterest-bearing deposits, $74.4 million, or 77.8%, were in the Alabama branches, while $21.2
million, or 22.2%, were in the Florida branches.
Interest-bearing deposits totaled $982.3 million at March 31, 2006, an increase of 3.3%, or $30.9
million, from $951.4 million at December 31, 2005. Interest-bearing deposits averaged $965.2
million for the first quarter of 2006 compared to $989.1 million for the first quarter of 2005. The
average rate paid on all interest-bearing deposits during the first quarter of 2006 was 3.53%,
compared to 2.48% for the first quarter of 2005. Of total interest-bearing deposits, $756.1
million, or 77.0%, were in the Alabama branches, while $226.2 million, or 23.0%, were in the
Florida branches.
Borrowings. Advances from the Federal Home Loan Bank (FHLB) totaled $166.1 million at March 31,
2006 and $181.1 million at December 31, 2005. Borrowings from the FHLB were used primarily to fund
growth in the loan portfolio and have a weighted average interest rate of approximately 4.99% at
March 31, 2006. The advances are secured by FHLB stock, agency securities and a blanket lien on
certain residential real estate loans and commercial loans.
Junior Subordinated Debentures. We have sponsored two trusts, TBC Capital Statutory Trust II (TBC
Capital II) and TBC Capital Statutory Trust III (TBC Capital III), of which we own 100% of the
common stock. 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 regulatory
guidelines.
19
Consolidated debt obligations related to subsidiary trusts holding solely our debentures follow:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
December 31, 2005 |
|
|
|
(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 March 31, 2006 and December 31, 2005, the interest rate on the $16,495,000 subordinated
debentures was 8.53% and 7.67%, respectively.
Prior to the conversion of its subsidiarys charter to a federal savings bank charter, the
Corporation was required to obtain regulatory approval prior to paying any dividends on these trust
preferred securities. The Federal Reserve approved the timely payment of the Corporations
semi-annual distribution on its trust preferred securities in January, March, July and September
2005.
Derivatives. We use derivative financial instruments to assist in its interest rate risk
management process. Our derivative financial instruments include interest rate exchange contracts
(swaps).
An interest rate swap is an agreement in which two parties agree to exchange, at specified
intervals, interest payment streams calculated on an agreed-upon notional principal amount with at
least one stream based on a specified floating-rate index. The notional amount does not represent
the direct credit exposure. We are exposed to credit-related losses in the event of non-performance
by the counterparty on the interest rate exchange, but does not anticipate that any counterparty
will fail to meet its payment obligation.
As of March 31, 2006 and December 31, 2005, we had entered into $46,500,000 notional amount of
swaps (CD swaps) to hedge the interest rate risk inherent in certain of its brokered certificates
of deposits (brokered CDs). The CD swaps are used to convert the fixed rate paid on the brokered
CDs to a variable rate based upon three-month LIBOR. Prior to the first quarter of 2006, these
transactions did not qualify for fair value hedge accounting under SFAS 133 (See Note 1). During
the first quarter of 2006, we designated these CD swaps as fair value hedges. As fair value hedges,
the net cash settlements from the designated swaps are reported as part of net interest income. In
addition, we will recognize in current earnings the change in fair value of both the interest rate
swap and related hedged brokered CDs, with the ineffective portion of the hedge relationship
reported in noninterest income. The fair value of the CD swaps is reported on the Condensed
Consolidated Statement of Financial Condition in other liabilities and the change in fair value of
the related hedged brokered CD is reported as an adjustment to the carrying value of the brokered
CDs. As of March 31, 2006, the amount of CD swaps designated as fair value hedges totaled
$46,210,000.
Prior to the first quarter of 2006 and for the portion of CD swaps that are not designated as
fair value hedges, we reported the change in the fair value of these CD swaps as a separate
component of noninterest income. The fair value of the CD swaps is reported on the Condensed
Consolidated Statement of Financial Condition in other liabilities.
As of March 31, 2006 and December 31, 2005, these CD swaps had a recorded negative fair value of
$1,669,000 and $992,000 and a weighted average life of 8.65 and 8.89 years, respectively. The
weighted average fixed rate (receiving rate) was 4.51% and the weighted average variable rate
(paying rate) is 4.75% and 4.22% (LIBOR based), respectively.
We have also entered into an interest rate swap agreement with a notional amount of $15,000,000 to
hedge the variability in cash flows on $15,000,000 million of FHLB borrowings. Under the terms of
the interest rate swap, which matures in September 2006, we receive a floating interest rate
based on LIBOR and pay a fixed rate of 4.33%. This contract, which is accounted for as cash flow
hedge, satisfies the criteria to use the short-cut method of accounting for hedging the
variability in cash flow on FHLB borrowings due to changes in the LIBOR rate. The short-cut method
allows us to assume that there is no ineffectiveness in the hedging relationship.
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.
20
We manage and control risk in the loan portfolio through adherence to credit standards established
by the board of directors and implemented by senior management. These standards are set forth in a
formal loan policy, which establishes loan underwriting and approval procedures, sets limits on
credit concentration and enforces regulatory requirements. In addition, we have engaged Credit Risk
Management, LLC, an independent loan review firm, to supplement our existing independent loan
review function.
Loan portfolio concentration risk is reduced through concentration limits for borrowers, collateral
types and geographic diversification. Concentration risk is measured and reported to senior
management and the board of directors on a regular basis.
The allowance for loan loss calculation is segregated into various segments that include classified
loans, loans with specific allocations and pass rated loans. A pass rated loan is generally
characterized by a very low to average risk of default 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 our internal
loan review function and senior management. Based on the assigned risk ratings, the criticized and
classified loans in the portfolio are segregated into the following regulatory classifications:
Special Mention, Substandard, Doubtful or Loss. Generally, regulatory reserve percentages (5%,
Special Mention; 15%, Substandard; 50%, Doubtful; 100%, Loss) are applied to these categories to
estimate the amount of loan loss allowance required, adjusted for previously mentioned risk
factors.
Pursuant to SFAS No. 114, impaired loans are specifically reviewed loans for which it is probable
that we will be unable to collect all amounts due according to the terms of the loan agreement.
Impairment is measured by comparing the recorded investment in the loan with the present value of
expected future cash flows discounted at the 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 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 a centralized loan
administration services department to serve our entire bank. This department provides standardized oversight for compliance with loan approval authorities and bank lending policies and
procedures, as well as centralized supervision, monitoring and accessibility.
21
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month |
|
|
Three-Month |
|
|
|
|
|
|
Period Ended |
|
|
Period Ended |
|
|
Year Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
Allowance for loan losses at beginning of period |
|
$ |
12,011 |
|
|
$ |
12,543 |
|
|
$ |
12,543 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
281 |
|
|
|
41 |
|
|
|
2,097 |
|
Real estate construction and land development |
|
|
43 |
|
|
|
1 |
|
|
|
358 |
|
Real estate mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
275 |
|
|
|
87 |
|
|
|
795 |
|
Commercial |
|
|
14 |
|
|
|
210 |
|
|
|
1,432 |
|
Other |
|
|
11 |
|
|
|
|
|
|
|
85 |
|
Consumer |
|
|
220 |
|
|
|
125 |
|
|
|
630 |
|
Other |
|
|
|
|
|
|
91 |
|
|
|
345 |
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
844 |
|
|
|
555 |
|
|
|
5,742 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
|
81 |
|
|
|
82 |
|
|
|
413 |
|
Real estate construction and land development |
|
|
1 |
|
|
|
10 |
|
|
|
37 |
|
Real estate mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
Single-family |
|
|
32 |
|
|
|
29 |
|
|
|
335 |
|
Commercial |
|
|
24 |
|
|
|
1 |
|
|
|
526 |
|
Other |
|
|
32 |
|
|
|
10 |
|
|
|
118 |
|
Consumer |
|
|
62 |
|
|
|
48 |
|
|
|
280 |
|
Other |
|
|
|
|
|
|
39 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
232 |
|
|
|
219 |
|
|
|
1,710 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
612 |
|
|
|
336 |
|
|
|
4,032 |
|
Provision for loan losses |
|
|
600 |
|
|
|
750 |
|
|
|
3,500 |
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of period |
|
$ |
11,999 |
|
|
$ |
12,957 |
|
|
$ |
12,011 |
|
|
|
|
|
|
|
|
|
|
|
Loans at end of period, net of unearned income |
|
$ |
989,576 |
|
|
$ |
942,391 |
|
|
$ |
963,253 |
|
Average loans, net of unearned income |
|
|
996,773 |
|
|
|
953,891 |
|
|
|
947,212 |
|
Ratio of ending allowance to ending loans |
|
|
1.21 |
% |
|
|
1.37 |
% |
|
|
1.25 |
% |
Ratio of net charge-offs to average loans (1) |
|
|
0.25 |
% |
|
|
.14 |
% |
|
|
0.43 |
% |
Net charge-offs as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
102.00 |
% |
|
|
44.80 |
% |
|
|
115.20 |
% |
Allowance for loan losses (1) |
|
|
20.69 |
% |
|
|
10.52 |
% |
|
|
33.57 |
% |
Allowance for loan losses as a percentage of nonperforming loans |
|
|
290.53 |
% |
|
|
183.97 |
% |
|
|
252.76 |
% |
The allowance for loan losses as a percentage of loans, net of unearned income, at March 31, 2006
was 1.21%, compared to 1.25% as of December 31, 2005. The allowance for loan losses as a percentage
of nonperforming loans increased to 290.53% at March 31, 2006 from 252.76% at December 31, 2005.
Net charge-offs were $612,000 for the first quarter of 2006. Net charge-offs to average loans on an
annualized basis totaled 0.25% for the first quarter of 2006. Net commercial charge-offs totaled
$200,000, or 32.7% of total net charge-off loans, for the first quarter of 2006 compared to 41.8%
of total net charge-off loans for the year 2005. Net single family real estate loan charge-offs
totaled $243,000, or 39.7% of total net charge-off loans, for the first quarter of 2006 compared to
11.4% of total net charge-off loans for the year 2005. Net consumer loan charge-offs totaled
$158,000, or 25.8% of total net charge-off loans, for the first quarter of 2006 compared with 8.7%
of total net charge-off loans for the year 2005.
The
increase in single family real estate gross charge-offs during the
first quarter of 2006 is primarily attributable to an
increase in the number of fourth quarter 2005 bankruptcy filings.
Management does not expect the losses in this sector of the portfolio
to continue this upward trend. The increase in gross consumer loan
charge-offs during the first quarter of 2006 is primarily
attributable to customer overdraft charge-offs (32%) and credit card
losses (17%). Management expects customer
overdraft losses to continue at similar, but decreasing, rates as
management expects
third-party collections to provide additional loss recoveries over
time. Management believes that credit card losses, which represented 17% of the total
consumer loan losses, represent an isolated event with no significant future
losses expected. The remaining consumer loan losses can be attributed
to the ordinary course of business activities as loans move from
non-performing to loss status.
Nonperforming Assets. Nonperforming assets decreased $1.0 million, to $5.6 million as of March 31,
2006 from $6.6 million as of December 31, 2005. As a percentage of net loans plus nonperforming
assets, nonperforming assets decreased from 0.68% at December 31, 2005 to 0.56% at March 31, 2006.
The following table represents our nonperforming assets for the dates indicated.
22
NONPERFORMING ASSETS
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in Thousands) |
|
Nonaccrual |
|
$ |
4,130 |
|
|
$ |
4,550 |
|
Accruing loans 90 days or more delinquent |
|
|
|
|
|
|
49 |
|
Restructured |
|
|
|
|
|
|
153 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
4,130 |
|
|
|
4,752 |
|
Other real estate owned |
|
|
1,437 |
|
|
|
1,842 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
5,567 |
|
|
$ |
6,594 |
|
|
|
|
|
|
|
|
Nonperforming loans as a percent of loans |
|
|
0.42 |
% |
|
|
0.49 |
% |
|
|
|
|
|
|
|
Nonperforming assets as a percent of loans plus nonperforming assets |
|
|
0.56 |
% |
|
|
0.68 |
% |
|
|
|
|
|
|
|
Loans past due 30 days or more, net of non-accruals, improved to .34% at March 31, 2006 from .35%
at December 31, 2005.
The following is a summary of nonperforming loans by category for the dates shown:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Dollars in thousands) |
|
Commercial and industrial |
|
$ |
1,480 |
|
|
$ |
1,797 |
|
Real estate construction and land development |
|
|
414 |
|
|
|
469 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
Single-family |
|
|
1,528 |
|
|
|
1,639 |
|
Commercial |
|
|
655 |
|
|
|
675 |
|
Other |
|
|
|
|
|
|
11 |
|
Consumer |
|
|
53 |
|
|
|
161 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
$ |
4,130 |
|
|
$ |
4,752 |
|
|
|
|
|
|
|
|
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.
Impaired Loans. At March 31, 2006, the recorded investment in impaired loans under SFAS 114 totaled
$3.4 million, with approximately $1.7 million in allowance for loan losses specifically allocated
to impaired loans. This represents a decrease of $100,000 from $3.5 million at December 31, 2005.
The following is a summary of impaired loans and the specifically allocated allowance for loan
losses by category as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING |
|
|
SPECIFIC |
|
|
|
BALANCE |
|
|
ALLOWANCE |
|
Commercial and industrial |
|
$ |
1,690 |
|
|
$ |
1,069 |
|
Real estate construction and land development |
|
|
424 |
|
|
|
112 |
|
Real estate mortgages |
|
|
|
|
|
|
|
|
Commercial |
|
|
1,328 |
|
|
|
470 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,442 |
|
|
$ |
1,651 |
|
|
|
|
|
|
|
|
Potential Problem Loans. In addition to nonperforming loans, management has identified $1.8 million
in potential problem loans as of March 31, 2006 compared to $1.1 million as of December 31, 2005.
Potential problem loans are loans where known information about possible credit problems of the
borrowers causes management to have doubts as to the ability of such borrowers to comply with the
present repayment terms and may result in disclosure of such loans as nonperforming.
23
Stockholders Equity. At March 31, 2006, total stockholders equity was $105.8 million, an increase
of $700,000 from $105.1 million at December 31, 2005. The increase in stockholders equity during
the first quarter of 2006 resulted primarily from net income of $850,000 and the exercise of stock
options for 110,985 shares with net proceeds of $721,000. These increases were partially offset by
a net loss of $961,000 in comprehensive income for the mark-to-market adjustment for
available-for-sale securities. As of March 31, 2006 we had 20,351,736 shares of common stock issued
and 20,084,587 shares outstanding.
Regulatory Capital. The table below represents our and our federal thrift subsidiarys regulatory
and minimum regulatory capital requirements at March 31, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well |
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
Capitalized Under |
|
|
|
|
|
|
|
|
|
|
|
Adequacy |
|
|
Prompt Corrective |
|
|
|
Actual |
|
|
Purposes |
|
|
Action |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
As of March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Core Capital (to Adjusted Total Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
$ |
118,451 |
|
|
|
8.38 |
% |
|
$ |
56,545 |
|
|
|
4.00 |
% |
|
$ |
70,681 |
|
|
|
5.00 |
% |
Superior Bank |
|
|
113,475 |
|
|
|
8.09 |
|
|
|
56,080 |
|
|
|
4.00 |
|
|
|
70,100 |
|
|
|
5.00 |
|
Total Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
129,063 |
|
|
|
11.17 |
|
|
|
92,440 |
|
|
|
8.00 |
|
|
|
115,550 |
|
|
|
10.00 |
|
Superior Bank |
|
|
124,087 |
|
|
|
10.85 |
|
|
|
91,510 |
|
|
|
8.00 |
|
|
|
114,388 |
|
|
|
10.00 |
|
Tier 1 Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
118,451 |
|
|
|
10.25 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
69,330 |
|
|
|
6.00 |
|
Superior Bank |
|
|
113,475 |
|
|
|
9.92 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
68,633 |
|
|
|
6.00 |
|
Tangible Capital (to Adjusted Total Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation |
|
|
118,451 |
|
|
|
8.38 |
|
|
|
21,204 |
|
|
|
1.50 |
|
|
|
N/A |
|
|
|
N/A |
|
Superior Bank |
|
|
113,475 |
|
|
|
8.09 |
|
|
|
21,030 |
|
|
|
1.50 |
|
|
|
N/A |
|
|
|
N/A |
|
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.
As shown in the Condensed Consolidated Statement of Cash Flows, operating activities provided $6.0
million in funds in the first quarter of 2006, primarily due to a decrease in mortgage loans held
for sale of $3.6 million in addition to net income, depreciation, and provision for loan losses of $850,000,
$769,000, and $600,000, respectively, compared to a net use of funds of $20.0 million in the first
quarter of 2005, primarily due to an increase in mortgage loans held for sale of $13.9 million and a
net loss of $8.1 million.
Investing activities were a net user of funds in the first quarter of 2006 due to an increase in
loans, while they were a net provider in the first quarter of 2005 due to calls and sale of
securities available for sale. We sold securities in 2005 as part of a strategy to deleverage our
balance sheet.
Financing activities were a net provider of funds in the first quarter of 2006, as we increased our
levels of brokered certificates of deposit while decreasing repurchase agreements and other
borrowings. Financing activities were also a net provider in the first quarter of 2005 due to the
issuance of new stock. Other increases in interest-bearing demand deposit accounts were used to pay
down advances from the FHLB.
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
24
include the words may, could, should, will, would, hope, might, believe, expect,
anticipate, estimate, intend, plan, assume or similar expressions constitute
forward-looking statements.
These forward-looking statements, implicitly and explicitly, include the assumptions underlying the
statements and other information with respect to our beliefs, plans, objectives, goals,
expectations, anticipations, estimates, intentions, financial condition, results of operations,
future performance and business, including our expectations and estimates with respect to our
revenues, expenses, earnings, return on equity, return on assets, efficiency ratio, asset quality,
the adequacy of our allowance for loan losses and other financial data and capital and performance
ratios.
Although we believe that the expectations reflected in our forward-looking statements are
reasonable, these statements involve risks and uncertainties which are subject to change based on
various important factors (some of which are beyond our control). The following factors, among
others, could cause our financial performance to differ materially from our goals, plans,
objectives, intentions, expectations and other forward-looking statements: (1) the strength of the
United States economy in general and the strength of the regional and local economies in which we
conduct operations; (2) the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal Reserve System; (3)
inflation, interest rate, market and monetary fluctuations; (4) our ability to successfully
integrate the assets, liabilities, customers, systems and management we acquire or merge into our
operations; (5) our timely development of new products and services in a changing environment,
including the features, pricing and quality compared to the products and services of our
competitors; (6) the willingness of users to substitute competitors products and services for our
products and services; (7) the impact of changes in financial services policies, laws and
regulations, including laws, regulations and policies concerning taxes, banking, securities and
insurance, and the application thereof by regulatory bodies; (8) our ability to resolve any legal
proceeding on acceptable terms and its effect on our financial condition or results of operations;
(9) technological changes; (10) changes in consumer spending and savings habits; (11) regulatory,
legal or judicial proceedings, and (12) the effect of natural disasters, such as hurricanes, in our
geographic markets.
If one or more of the factors affecting our forward-looking information and statements proves
incorrect, then our actual results, performance or achievements could differ materially from those
expressed in, or implied by, forward-looking information and statements contained in this report.
Therefore, we caution you not to place undue reliance on our forward-looking information and
statements.
We do not intend to update our forward-looking information and statements, whether written or oral,
to reflect changes. 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 or qualitative disclosures about market
risk as of March 31, 2006 from those presented in our annual report on Form 10-K for the year ended
December 31, 2005.
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, 2005, is hereby incorporated herein
by reference.
ITEM 4. CONTROLS AND PROCEDURES
CEO AND CFO CERTIFICATION
Appearing as exhibits to this report are Certifications of our Chief Executive Officer (CEO) and
our Principal Financial Officer (PFO). The Certifications are required to be made by Rule 13a -
14 of the Securities Exchange Act of 1934, as amended. This Item contains the information about the
evaluation that is referred to in the Certifications, and the information set forth below in this
Item 4 should be read in conjunction with the Certifications for a more complete understanding of
the Certifications.
25
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 PFO, as appropriate, to
allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control
objectives.
We conducted an evaluation (the Evaluation) of the effectiveness of the design and operation of
our disclosure controls and procedures under the supervision and with the participation of our
management, including our CEO and PFO, as of March 31, 2006. Based upon the Evaluation, our CEO and
PFO have concluded that, as of March 31, 2006, our disclosure controls and procedures are effective
to ensure that material information relating to The Banc Corporation and its subsidiaries is made
known to management, including the CEO and PFO, particularly during the period when our periodic
reports are being prepared.
Except as
set forth below, 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.
As
previously disclosed, during January 2006 we identified a
material weakness in internal control over financial reporting at
December 31, 2005 relating to our use of the short-cut
method
of hedge accounting with respect to certain interest rate swaps
(CD
swaps) relating to brokered certificates of deposits. For more
information regarding this material weakness, see Item 9A,
Controls and Procedures, in our annual report on
Form 10-K for the year ended December 31, 2005. To
remediate this material weakness, management engaged external
consultants to provide support and technical expertise regarding the
documentation, initial and ongoing testing and valuations of our
interest rate swaps and application of hedge accounting to enhance our
existing internal financial control policies and procedures with
respect to the types of swaps at issue to ensure that they are
accounted for in accordance with generally accepted accounting
principles as currently interpreted. Based on such remediation, we
have concluded that our current accounting for such transactions does
not represent a material weakness in our internal control over
financial reporting and that our internal control over financial
accounting was effective at March 31, 2006.
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 the 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.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
26
ITEM 6. EXHIBITS.
(a) Exhibit:
|
2.01 |
|
Agreement and Plan of Merger by and between Community Bancshares, Inc. and The Banc
Corporation, dated as of April 29, 2006. |
|
|
31.01 |
|
Certification of principal executive officer pursuant to Rule 13a-14(a). |
|
|
31.02 |
|
Certification of principal financial officer pursuant to 13a-14(a). |
|
|
32.01 |
|
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350. |
|
|
32.02 |
|
Certification of principal financial officer pursuant to 18 U.S.C. Section 1350. |
SIGNATURES
Pursuant with the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
The Banc Corporation
(Registrant)
|
|
Date: May 10, 2006 |
By: |
/s/ C. Stanley Bailey
|
|
|
|
C. Stanley Bailey |
|
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
Date: May 10, 2006 |
By: |
/s/ James C. Gossett
|
|
|
|
James C. Gossett |
|
|
|
Chief Accounting Officer
(Principal Financial and Accounting Officer) |
|
|
27