ITEM 1. BUSINESS.
GENERAL
The Banc Corporation is a bank holding company registered under the Bank Holding Company Act of 1956 ("BHCA") and, effective March 13, 2000, a financial holding company under the Gramm-Leach-Bliley Act of 1999 ("GLBA"). The Corporation is incorporated under the laws of Delaware and headquartered in Birmingham, Alabama. The Corporation had assets of approximately $1.03 billion, loans of approximately $809.0 million, deposits of approximately $827.3 million and stockholders' equity of approximately $74.9 million as of December 31, 2000. The Corporation offers a broad range of banking and related services in 29 locations in Alabama and the Florida panhandle.
The Corporation was established in April 1998 so that Warrior Capital Corporation could merge into the Corporation on September 24, 1998, and thereby change its name to "The Banc Corporation" and its domicile from Alabama to Delaware. Since then, the Corporation has grown primarily through internal growth and the strategic acquisition of existing community banks and branches. The Corporation completed its last acquisition in October 1999. The Corporation has also opened four de novo offices in Alabama and closed three redundant branches since inception.
The principal subsidiary of the Corporation is The Bank, an Alabama banking corporation. The Bank is headquartered in Birmingham, Alabama and is 99.97% owned by the Corporation. The Bank became a subsidiary of the Corporation as a result of the Warrior merger. The Bank was known as Warrior Savings Bank until February 1998. The Bank has been in business as a full service commercial and retail bank since it was established in 1957 and had five branches at the time of the Warrior merger. During the fourth quarter of 1998, Commerce Bank of Alabama, Inc. and the banking subsidiaries of Commercial Bancshares of Roanoke, Inc., City National Corporation and First Citizens Bancshares, Inc., were merged with and into The Bank, expanding its market areas. On July 13, 1999, the banking subsidiary of BankersTrust of Alabama, Inc., headquartered in Huntsville, Alabama, was merged into The Bank. The Bank also acquired three new branches in 1999. The Bank currently has 22 locations in Alabama. On February 3, 2000, The Bank was converted from an Alabama state chartered nonmember bank to a state chartered member of the Federal Reserve System under the supervision and regulation of the State of Alabama Banking Department and the Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
On June 16, 2000, two of the Corporation's subsidiaries, Emerald Coast Bank, a federally chartered thrift, and C&L Bank, a Florida banking corporation, were merged into the Corporation's largest subsidiary, The Bank. The former locations of Emerald Coast Bank operate as Emerald Coast Bank, a division of The Bank, and the former locations of C&L Bank operate as C&L Bank, a division of The Bank.
Emerald Coast Bank became a subsidiary of the Corporation on February 12, 1999, as a result of the merger of Emerald Coast Bancshares, Inc. with the Corporation. Emerald Coast Bank was originally a Florida state bank formed on August 30, 1996, and was converted into a federally chartered thrift in 1999. Emerald Coast Bank has four locations in Panama City Beach, Destin, Seagrove and Bay Point, Florida. Emerald Coast Financial Management, Inc., a Florida corporation and a subsidiary of The Bank provides investment services and offers insurance products to The Bank's customers and others.
Prior to its merger with The Bank, C&L Bank was a Florida banking corporation headquartered in Bristol, Florida, and had been in operation since 1975. C&L Bank became a subsidiary of the Corporation as a result of the Corporation's acquisitions of C&L Banking Corporation and its bank subsidiary, C&L Bank of Bristol, and C&L Bank of Blountstown on June 30, 1999. C&L Bank has three locations in the panhandle region of Florida.
The principal executive offices of the Corporation and The Bank are located at 17 North 20th Street, Birmingham, Alabama 35203, and the telephone number is (205) 326-2265. As used in this Annual Report
on Form 10-K, the term "Corporation," "we" or "our" refers to The Banc Corporation and its respective subsidiaries and affiliates, including The Bank, unless the context requires otherwise.
STRATEGY
Operations. The Bank targets individuals and local and regional businesses that prefer local bank decision making and personalized service. To implement this strategy, we operate on a decentralized basis with respect to deposit gathering and day to day operations, emphasizing local knowledge and authority to make most credit decisions. The individual presidents of The Bank are responsible for the day-to-day operations and decisions for the branches under his or her supervision. We supplement this decentralized management approach with centralized risk management, policy oversight, credit review, audit and management systems. We implement these administrative and operating policies at each of our locations while retaining local management and advisory directors to capitalize on their knowledge of the local community. We believe this strategy enables The Bank to generate high yielding loans and to attract and retain low cost core deposits that provide a large portion of our funding requirements.
We focus on commercial, consumer, residential mortgage and real estate construction lending to customers in our local markets. We also offer a variety of deposit programs to individuals and to businesses and other organizations at interest rates generally consistent with local market conditions. In addition, we offer individual retirement accounts and investment services, safe deposit and night depository facilities and additional services such as the sale of traveler's checks, money orders and cashier's checks.
Market Areas. We are headquartered in Birmingham, Alabama. We also operate branches in: Albertville, Andalusia, Boaz, Childersburg, Decatur, Frisco City, Gadsden, Guntersville, Huntsville, Kinston, Madison, Mignon, Monroeville, Morris, Mt. Olive, Opp, Rainbow City, Roanoke, Samson, Sylacauga, and Warrior, Alabama, and the panhandle region of Florida, including Destin, Panama City Beach, Seagrove, Bay Point, Altha, Blountstown and Bristol. The Bank expects to open three additional branches of its Emerald Coast franchise in Panama City, Destin and Santa Rosa Beach during 2001.
Growth. Our future growth depends primarily on the expansion of the business of The Bank through internal growth and the opening of new branch offices in new and existing markets. The Bank will also consider the strategic acquisition of other financial institutions and branches with relatively high earnings or exceptional growth potential. Our ability to grow profitably from internal growth depends primarily on our ability to attract and retain low cost and core deposits coupled with the continued opportunity to generate high yielding, quality loans. Our ability to grow profitably through the opening or acquisition of new branches will depend primarily on, among other things, our ability to identify profitable, growing markets and branch locations within such markets, attract necessary deposits to operate such branches profitably and to locate sound loans and investment opportunities within such markets.
We from time to time evaluate business combination opportunities and conduct discussions, due diligence activities and negotiations in connection with those opportunities. As a result, business combination transactions involving cash, debt or equity securities could occur from time to time. Any future business combination or series of business combinations that we might undertake may be material, in terms of assets acquired or liabilities assumed, to our financial condition. Any future acquisition is subject to approval by the appropriate bank regulatory agencies. See "Supervision and Regulation."
LENDING ACTIVITIES
General. We offer a range of lending services, including real estate, consumer and commercial loans, primarily to individuals and businesses and other organizations that are located in or conduct a substantial portion of their business in our market areas. Our total loans at December 31, 2000, were $809.0 million, or 87.8% of total earning assets. The interest rates we charge on loans vary with the risk, maturity and amount of the loan and are subject to competitive pressures, money market rates, availability of funds and government regulations. We do not have any foreign loans or loans for highly leveraged transactions.
Loan Portfolio
Real Estate Loans. Loans secured by real estate are a significant component of our loan portfolio, constituting $474.0 million, or 58.7% of total loans at December 31, 2000. The primary type of real estate loan is single family first mortgage, which is typically structured with fixed or adjustable interest rates, based on market conditions. Fixed rate loans usually have terms of five years or less, with payments through the date of maturity based on a 15 to 30-year amortization schedule. Adjustable rate loans generally have a term of 15 years. We typically charge an origination fee on these loans.
Nonresidential mortgage loans include commercial, industrial and raw land loans. The commercial real estate loans are primarily used to provide financing for retail establishments, offices and manufacturing facilities. We generally require nonresidential mortgage loans to have an 80% loan-to-value ratio and usually underwrite commercial loans on the basis of the borrower's cash flow and ability to service the debt from earnings, rather than the value of the collateral. Terms are typically three to five years and may have payments through the date of maturity based on a 15 to 30 year amortization schedule. Construction loans usually have a term of twelve months and generally require personal guarantees.
Commercial, Industrial, and Agricultural Loans. We make loans for commercial purposes in various lines of business. These loans are typically made on terms up to 5 years at fixed or variable rates and are secured by accounts receivable, inventory or, in the case of equipment loans, the financed equipment. We attempt to reduce our credit risk on commercial loans by limiting the loan to value ratio to 85% on loans secured by eligible accounts receivable, 50% on loans secured by inventory and 75% on loans secured by equipment. We also, from time to time, make unsecured commercial loans. Commercial, industrial and agricultural loans constituted $245.2 million, or 30.3% of our loan portfolio at December 31, 2000.
Consumer Loans. Consumer lending includes installment lending to individuals in our market areas and consists primarily of loans to purchase durable goods. Consumer loans constituted $84.1 million, or 10.4% of our loan portfolio at December 31, 2000. Consumer loans are underwritten based on the borrower's income, current debt, credit history and collateral. Terms generally range from four to five years on automobile loans and one to three years on other consumer loans.
Credit Procedures and Review
Loan Approval. There are credit risks associated with making any loan. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectability.
We use generally recognized loan underwriting criteria and attempt to minimize loan losses through various means. In particular, on larger credits, we generally rely on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral. In addition, we attempt to utilize shorter loan terms in order to reduce the risk of a decline in the value of such collateral.
We address repayment risks by adhering to internal credit policies and procedures that include officer and customer lending limits, a multi-layered loan approval process that includes senior management of The Bank and the Corporation for larger loans, periodic documentation examination and follow-up procedures for any exceptions to credit policies. The point in our loan approval process at which a loan is approved depends on the size of the borrower's credit relationship with us.
Loan Review. We have a loan review process designed to promote early identification of credit quality problems. A risk rating system is employed whereby each loan is assigned a rating that corresponds to the perceived credit risk. Risk ratings are subject to independent review by a centralized loan review department which also performs ongoing, independent review of the risk management process including underwriting, documentation and collateral control. Regular reports are made to senior management and the Board of Directors regarding credit quality as measured by assigned risk ratings and other measures, including, but not limited to, the level of past due percentages and non-performing assets. The loan review function is centralized
and independent of the lending function. Review results are reported to the Audit Committee of the Board of Directors of the Corporation.
DEPOSITS
Core deposits are our principal source of funds, consisting of demand deposits, interest-bearing transaction accounts, savings deposits and certificates of deposit. Transaction accounts include checking, money market and NOW accounts that provide The Bank with a source of fee income and cross-marketing opportunities, as well as a low-cost source of funds. Time and savings accounts also provide a relatively stable and low-cost source of funding. The largest source of funds for The Bank is certificates of deposit. Certificates of deposit in excess of $100,000 are held primarily by customers in our market areas.
Deposit rates are set periodically by the Asset Liability Management Committee which includes senior management of The Bank and the Corporation. We believe our rates are competitive with those offered by competing institutions in their market areas; however, we focus on customer service, not high rates, to attract and retain deposits.
COMPETITION
We encounter strong competition both in making loans and attracting deposits. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges. Customers also consider the quality and scope of the services rendered, the convenience of banking facilities and, in the case of loans to commercial borrowers, relative lending limits, and may also consider the fact that other banks offer different services. In addition, most of our non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks. See "Supervision and Regulation." Competition may further intensify if additional financial services companies enter markets in which we conduct business.
EMPLOYEES
As of December 31, 2000, we employed approximately 394 individuals primarily at The Bank. We believe that our employee relations have been and continue to be good.
SUPERVISION AND REGULATION
The Corporation is a bank holding company registered with the Federal Reserve Board under the BHCA and, effective March 13, 2000, a financial holding company under the GLBA. We are subject to the supervision, examination and reporting requirements of the Federal Reserve Board, the BHCA and the GLBA. The BHCA and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.
The supervision and regulation of banks and bank holding companies and their subsidiaries are intended primarily for the protection of depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation (the "FDIC") and the banking system as a whole, not for the protection of bank holding company stockholders or creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the power to impose substantial fines and other penalties for violation of laws and regulations. The following description summarizes some of the laws to which we are subject. References herein to applicable statutes and regulations are brief summaries thereof, do not purport to be complete and are qualified in their entirety by reference to such statutes and regulations.
The Bank, an Alabama state chartered bank and member of the Federal Reserve System, is subject to regulation, supervision and examination by the Federal Reserve Board and Alabama Banking Department.
Gramm-Leach-Bliley Act. The GLBA became law on November 12, 1999, and key provisions affecting bank holding companies became effective March 11, 2000. The GLBA enables bank holding companies to acquire insurance companies and securities firms and effectively repeals depression-era laws which prohibited the affiliation of banks and these other financial services entities under a single holding company. Certain qualified bank holding companies and other types of financial services entities may elect to become financial holding companies under the new law. Financial holding companies are permitted to engage in activities considered financial in nature, as defined in the GLBA, and may engage in a broader range of activities than bank holding companies or banks. The GLBA will enable financial holding companies to offer a wide variety of financial services, or services incident to financial services, including banking, securities underwriting, merchant banking and insurance (both underwriting and agency services). The new financial services authorized by the GLBA also may be engaged in by a "financial subsidiary" of a national or state bank, with the exception of insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development, and merchant banking, all of which must be conducted under the financial holding company.
To become a financial holding company, a bank holding company must provide notice to the Federal Reserve Board of its desire to become a financial holding company, and certify to the Federal Reserve Board that each of its bank subsidiaries is "well-capitalized," "well-managed" and has at least a "satisfactory" rating under the CRA. These requirements are also necessary to maintain financial holding company status. On February 12, 2000, we filed our election to become a financial holding company with the Federal Reserve Board. Our election was effective as of March 13, 2000.
Regulatory Restrictions on Dividends. Various federal and state statutory provisions limit the amount of dividends The Bank can pay to the Corporation without regulatory approval. Approval of the Federal Reserve Board is required for payment of any dividend by a state chartered bank that is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year would exceed the total of its net profits (as defined by regulatory agencies) for that year combined with its retained net profits for the proceeding two years. In addition, a state member bank may not pay a dividend in an amount greater than its net profits then on hand. State member banks may also be subject to similar restrictions imposed by the laws of the states in which they are chartered.
Under Alabama law, a bank may not pay a dividend in excess of 90% of its net earnings until the bank's surplus is equal to at least 20% of its capital. The Bank is also required by Alabama law to obtain the prior approval of the Superintendent of the State Banking Department of Alabama for its payment of dividends if the total of all dividends declared by The Bank in any calendar year will exceed the total of (1) The Bank's net earnings (as defined by statute) for that year, plus (2) its retained net earnings for the preceding two years, less any required transfers to surplus. In addition, no dividends may be paid from The Bank's surplus without the prior written approval of the Superintendent.
In addition, federal bank regulatory authorities have authority to prohibit the payment of dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board's view that a bank holding company experiencing earnings weaknesses should not pay cash dividends that exceed its net income or that could only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. The ability of The Bank and the Corporation to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines.
As of December 31, 2000, an aggregate of approximately $6.5 million was available for payment of dividends by The Bank to the Corporation under applicable restrictions, without obtaining regulatory approval.
Source of Strength. Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to its banking subsidiaries and commit resources to their support. This support may be required by the Federal Reserve Board at times when, absent this policy, a bank holding company may not be inclined to provide it. A bank holding company, in certain circumstances, could be required to
guarantee the capital plan of an undercapitalized banking subsidiary. In addition, any capital loans by a bank holding company to any of its depository institution subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of the banks.
Under the Federal Deposit Insurance Act ("FDIA"), an FDIC-insured depository institution can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled FDIC-insured depository institution "in danger of default." "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. The FDIC's claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institution.
Safe and Sound Banking Practices. Banks and bank holding companies are not permitted to engage in unsafe or unsound banking practices. The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe or unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1,000,000 for each day the activity continues.
Capital Adequacy Requirements. The Corporation and The Bank are required to comply with the capital adequacy standards established by the Federal Reserve Board, and The Bank is subject to additional requirements of the FDIC and the Alabama Banking Department. The Federal Reserve Board has adopted two basic measures of capital adequacy for bank holding companies: a risk based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be in compliance.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital Ratio") of total capital ("Total Capital") to risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8%. At least half of Total Capital must comprise common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets ("Tier 1 Capital"). The remainder may consist of subordinated debt, other preferred stock and a limited amount of loan loss reserves ("Tier 2 Capital").
In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of at least 3%, plus an additional cushion of 100 to 200 basis points. Our Leverage Ratio was 8.47% at December 31, 2000. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a tangible Tier 1 Capital Leverage Ratio (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities.
The federal bank regulatory agencies' risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital
positions well above the minimum ratios. The federal and state bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
The Bank was in compliance with the applicable minimum capital requirements as of December 31, 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Failure to meet capital guidelines could subject The Bank to a variety of enforcement remedies by federal bank regulatory agencies, including termination of deposit insurance by the FDIC, and to certain restrictions on business.
As of December 31, 2000, both The Bank and the Corporation were "well-capitalized."
Branching. The BHCA, as amended by the interstate banking provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"), repealed the prior statutory restrictions on interstate banking, so that the Corporation may acquire a bank located in any other state, and any bank holding company located outside Alabama may lawfully acquire any Alabama-based bank regardless of state law to the contrary, in either case subject to certain deposit-percentage minimums, aging requirements and other restrictions. In addition, the Interstate Banking Act generally provided that after June 1, 1997, national and state-chartered banks may branch interstate through acquisitions of banks in other states.
Alabama and other states have laws relating specifically to acquisitions of banks, bank holding companies and other types of financial institutions. Alabama law sets five years as the minimum age of banks which may be acquired.
Restrictions on Transactions With Affiliates and Insiders. Transactions between The Bank and its affiliates, including the Corporation, are subject to Sections 23A and 23B of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Corporation or any of its subsidiaries. Section 23B of the Federal Reserve Act generally requires that certain transactions between a bank and its respective affiliates be on terms substantially the same, or at least as favorable to such bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal stockholders and their related interests (collectively referred to herein as "insiders") contained in the Federal Reserve Act and Regulation O apply to all federally insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. State banking laws also have similar provisions.
FDIC Insurance Assessments. Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the "undercapitalized" category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. An institution is also assigned by the FDIC to one of three supervisory subgroups within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institution's state supervisor). An institution's insurance assessment rate is then determined based on the capital category and supervisory category to which it is assigned. Under the risk-based assessment system,
there are nine assessment risk classifications (i.e., combinations of capital groups and supervisory subgroups) to which different assessment rates are applied.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.
Community Reinvestment Act. The Bank is subject to the CRA. The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank's record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") requires federal banking agencies to make public a rating of a bank's performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed by federal banking agencies in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or thrift or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. The Bank, and previously C&L Bank and Emerald Coast Bank, had received a satisfactory CRA rating from federal banking agencies.
Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, The Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act and the Real Estate Settlement Procedures Act among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans or engaging in other types of transactions with customers.
INSTABILITY OF REGULATORY STRUCTURE
Various bills are routinely introduced in the United States Congress and state legislatures with respect to the regulation of financial institutions. Certain of these proposals, if adopted, could significantly change the regulations of banks and the financial services industry. The Corporation cannot predict whether any of these proposals will be adopted or, if adopted, how these proposals would affect the Corporation.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, especially the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Corporation and its subsidiaries cannot be predicted.
ITEM 2.
ITEM 2. PROPERTIES.
The corporate headquarters of the Corporation are located at 17 North 20th Street, Birmingham, Alabama. As of December 21, 1999, the Corporation and The Bank, who jointly owned the building, converted the building into condominiums known as The Bank Condominiums. The Bank owns the Bank Unit, which consists of 4 floors of the building and houses The Bank's headquarters, a branch of The Bank,
many of The Bank's centralized functions and the Corporation's headquarters. The Corporation intends to sell or lease the remaining condominium units for commercial and residential use.
The Corporation and its subsidiaries operate through 30 office facilities, including its operations center. Of these, 23 are owned by the Corporation or one of its subsidiaries and 7 are leased. Rental expense on the leased properties totaled approximately $537,000 in 2000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
While we may from time to time be a party to various legal proceedings arising from the ordinary course of our business, we believe that, other than as set forth below, there are no proceedings threatened or pending against the Corporation at this time that will individually, or in the aggregate, materially or adversely affect the Corporation's business, financial condition or results of operations.
The Bank is currently a defendant in various legal proceedings pending in state court arising out of certain losses that occurred in our Decatur branch in late 1999. When we discovered the loss, we moved immediately to collect monies and other assets from individuals and entities that we identified as being connected, directly or indirectly, to our loss. This resulted in a recovery of some of our losses, primarily through the transfer to The Bank of various assets, including the assets of one business directly involved in our loss. Subsequently, some of those individuals abandoned their agreement to work with The Bank and brought suit alleging various causes of action and requesting the return of assets that they had previously turned over to The Bank. Additionally, other individuals, who allege that they suffered a related loss have brought suits making various claims on certain of the assets that were delivered to The Bank. These cases include: Bill Steenson and Jason Steenson v. The Bank, et al, Case No. CV 99-907; Hames v. The Bank, et al, Case No. CV99-899; John C. Moses v. The Bank, et al, Case No. CV 00-158; Preston Peete v. The Bank, et al, Case No. CV00-804. Discovery is ongoing in these matters, but certain critical information remains unavailable as a result of several individuals asserting their Fifth Amendment right against self incrimination, or otherwise refusing to cooperate. 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.
The Bank has placed its insurance carrier on notice regarding these events, and we are continuing to investigate the facts and circumstances of the loss, as is our insurance carrier. We have not yet brought any independent causes of action related to the loss, though we may in the future. It is not possible to determine at this time whether any additional litigation will be filed, or if filed, what its outcome will be.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Before the Corporation's public offering on December 10, 1998, there was no public market for Corporation common stock. The Corporation's common stock trades on Nasdaq under the ticker symbol "TBNC". As of March 16, 2001, there were approximately 921 record holders of the Corporation's common stock. The following table sets forth, for the calendar periods indicated, the range of high and low closing prices:
On December 31, 2000, the last sale price for the common stock was $5.25 per share.
We have never paid dividends on our common stock, and there can be no assurances that we will pay dividends in the future. We conduct our principal business through our subsidiaries, primarily The Bank. We derive cash available to pay dividends primarily, if not entirely, from dividends paid to the Corporation by The Bank. Certain state and federal legal and regulatory restrictions limit The Bank's ability to pay dividends to the Corporation. The Corporation's ability to pay dividends to its stockholders will depend on the Corporation's earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Corporation's ability to service any equity or debt obligations senior to the Corporation common stock and other factors deemed relevant by the Corporation's Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data for the Corporation derived from our consolidated financial statements and should be read in conjunction with the related consolidated financial statements and notes thereto. See "Item 8. Financial Statements and Supplemental Data."
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(1) The selected financial data includes the financial data for Emerald Coast Bancshares, Inc. since the date of its inception, August 30, 1996.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
BASIS OF PRESENTATION
The following is a narrative discussion and analysis of significant changes in the Corporation's results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and selected financial data included elsewhere in this document.
The principal subsidiary of the Corporation is The Bank, a bank organized and existing under the laws of Alabama and headquartered in Birmingham, Alabama which operates 29 banking offices throughout Alabama and the panhandle of Florida. Other subsidiaries of the Corporation include TBC Capital Statutory Trust II ("TBC Capital"), a Connecticut statutory trust, and Morris Avenue Management Group, Inc. ("MAMG"), an Alabama corporation, both of which are wholly owned. TBC Capital is a special purpose entity formed solely to issue cumulative trust preferred securities. MAMG is a real estate management company formed to manage all the Corporation's real properties.
Recently Completed Acquisitions. The acquisition of other banking organizations during 1998 and 1999 contributed significantly to the Corporation's development. During the fourth quarter of 1998, Commerce Bank of Alabama, Inc. and the banking subsidiaries of Commercial Bancshares of Roanoke, Inc., City National Corporation and First Citizens Bancshares, Inc. were merged with and into The Bank. Emerald Coast Bank became a subsidiary of the Corporation on February 12, 1999, as a result of the merger of Emerald Coast Bancshares, Inc. with the Corporation. C&L Bank became a subsidiary of the Corporation as a result of the Corporation's acquisitions of C&L Banking Corporation and its bank subsidiary. C&L Bank of Bristol, and C&L Bank of Blountstown on June 30, 1999. The banking subsidiary of BankersTrust of Alabama, Inc., was merged into The Bank on July 13, 1999. On June 16, 2000, Emerald Coast Bank and C&L Bank merged into The Bank. The Bank also acquired three new branches in Southeast Alabama 1999.
The Corporation has not made any acquisitions since November 1999.
FORWARD LOOKING STATEMENTS
This discussion contains information and forward-looking statements that are based on the Corporation's belief as well as certain assumptions made by, and information currently available to, the Corporation with respect to its ability to achieve the operating results it expects relating to the recently-completed acquisitions; the ability of the Corporation to achieve anticipated cost savings and revenue enhancements with respect to the acquired operations; the assimilation of the acquired operations by the Corporation, including installing the Corporation's centralized policy oversight, credit review and management systems at the acquired institutions; the absence of material contingencies related to the acquired operations; the adequacy of the allowance for loan losses; the ability of the Corporation to resolve any pending litigation on acceptable terms; the effect of legal proceedings on the Corporation's financial condition, results of operations and liquidity and market risk disclosures, as well as other information. (See "Item 3: Legal Proceedings") The risks and uncertainties that may affect operations, performance, growth projections and the results of the Corporation's business include, but are not limited to, fluctuations in the economy, the relative strength and weakness in the commercial and consumer sector and in the real estate market, the actions taken by the Federal Reserve Board for the purpose of managing the economy, interest rate movements, the impact of competitive products, services and pricing, timely development by the Corporation of technology enhancements for its products and operating systems, legislation and similar matters. Although management of the Corporation believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Actual results may vary materially from those anticipated, estimated, projected or expected.
RESULTS OF OPERATIONS
Year Ended December 31, 2000, compared with year ended December 31, 1999
The Corporation's net income increased $1.5 million, or 51.8% to $4.4 million in the year ended December 31, 2000, from $2.9 million in the year ended December 31, 1999. This increase is due primarily to
increases in the Corporation's net interest income and noninterest income, offset by increases in the provision for loan losses and noninterest expenses. The Corporation's return on average assets in 2000 was .48%, compared to .41% in 1999. Return on average equity was 6.03% in 2000 compared to 4.33% in 1999. Average equity to average assets was 7.92% in 2000 compared to 9.36% in 1999.
Net interest income increased $6.3 million, or 21.9% to $35.1 million for the year ended December 31, 2000, from $28.8 million for the year ended December 31, 1999 as interest income increased $19.5 million, or 35.1%, and interest expense increased $13.2 million, or 49.2%. The increase in net interest income is primarily attributable to a $174.7 million, or 32.6% increase in average loans to $710.4 million during 2000, from $535.8 million during 1999. This increase was offset by a $171.6 million, or 30.3% increase in average interest-bearing liabilities to $737.2 million during 2000, from $565.6 million during 1999.
The Corporation's net interest spread and net interest margin were 3.83% and 4.36%, respectively, in 2000, compared to 3.98% and 4.55% in 1999. The 15 basis point decline in net interest spread is primarily the result of an increase in volume and rates of interest bearing liabilities during 2000, offset in part by increased volume and yields in the loan portfolio. The rise in volume and rates of interest bearing liabilities is primarily the result of an increase in time deposits, which constituted a significant source of funding for the increase in loan volume. A significant portion of these deposits were raised through brokers, with the remaining funds generated through branch offices. Time deposits typically carry higher interest rates than other sources of deposit funding, however, these funds were necessary to meet the loan demands of new market areas and larger metropolitan market areas.
The provision for loan losses was $5.0 million for the year ended December 31, 2000 compared to $2.9 million in 1999. The provision for loan losses represents the amount determined by management necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. The Corporation had net charge-offs of $4.1 million in 2000, resulting in a ratio of net charge-offs to average loans of .57%, compared to $4.8 million or .90% in 1999. Net charge-offs, as a percentage of the provision for loan losses, were 81.98% in 2000, compared to 169.89% in 1999. Net charge-offs during 2000 are more reflective of historical averages because net charge-offs during 1999 included the charge-off of loans acquired in a purchase business combination and a significant loss from a single commercial loan customer. The Corporation believes that in future periods loan losses should reflect amounts, exclusive of 1999, that are similar to its historical averages.
Noninterest income increased $1.7 million, or 26.9% to $7.8 million in 2000, from $6.2 million in 1999, primarily as the result of increased income from mortgage banking operations, additional customer service charges and other income. Income from mortgage banking operations was $1.7 million, or 21.1% of total noninterest income, an increase of $245,000 from $1.4 million in 1999. Income from customer service charges and fees was $4.0 million, or 50.6% of total noninterest income, an increase of $636,000 or 20.0% from $3.4 million in 1999, primarily due to the increase in the volume of customer deposits. Other noninterest income was $2.1 million, or 26.2% of total noninterest income, an increase of $729,000, or 55.1% from $1.3 million in 1999. This increase in other noninterest income is primarily due to an increase in the cash surrender value of single premium life insurance and miscellaneous fees and commissions.
Noninterest expense increased $3.4 million, or 12.0% to $32.1 million in 2000 from $28.7 million in 1999. Salaries and employee benefits increased $2.7 million, or 20.0% to $16.1 million in 2000 compared to $13.4 million in 1999. The increase in salaries and benefits primarily resulted from the acquisition of new banks and branches, and the addition of personnel in the administration and operation areas. As of December 31, 2000, the Corporation had 394 employees compared to 364 as of December 31, 1999. The 1999 acquisition of new banks and branches will affect the comparison of all categories of noninterest expenses since the 1999 amounts only reflect the noninterest expenses related to these acquisition since the purchase date. All other noninterest expenses increased $756,000, or 5.0% to $16.0 million, compared to $15.3 million in 1999. This increase in other expenses included a $651,000 increase in occupancy expenses, a $170,000 increase in professional fees and a $338,000 increase in goodwill amortization. Occupancy expenses increased during 2000 as a result of increased depreciation and maintenance related to the Corporation's headquarters and The Bank's operations center. The increase in goodwill amortization relates to purchase acquisitions closed in the third and fourth
quarters of 1999. Professional fees increased primarily due to increased auditing, consulting and legal services necessary for a growing financial institution.
Income before provision for income taxes increased $2.0 million, or 55.6% to $5.4 million in 2000, from $3.4 million in 1999.
Since September 7, 2000, the Corporation has recognized $504,000 of accrued distributions on the $15.0 million principal amount of 10.6% cumulative preferred trust securities issued through its wholly-owned trust subsidiary TBC Capital Statutory Trust II.
The Corporation's income tax expense was $996,000 and $520,000 in 2000 and 1999, respectively. The primary difference in the effective tax rate and the federal statutory rate (34%) for 2000 and 1999 arose from the recognition of a rehabilitation tax credit of $1.3 million and $731,000, respectively, generated from the restoration of the Corporation's headquarters, the John A. Hand Building.
The Corporation's determination of the realization of deferred tax assets is based upon management's judgment of various future events and uncertainties, including the timing and amount of future income earned by its subsidiaries and the implementation of various tax planning strategies to maximize realization of the deferred tax assets. The Corporation believes that its subsidiaries will be able to generate sufficient operating earnings to realize the deferred tax benefits. In addition, a portion of the amount of the deferred tax asset that can be realized in any year is subject to certain statutory federal income tax limitations. The Corporation periodically evaluates the realizability of the deferred tax assets and, if necessary, adjusts any valuation allowance accordingly.
Year Ended December 31, 1999, compared with year ended December 31, 1998
The Corporation's net income increased $2.6 million to $2.9 million in the year ended December 31, 1999, from $285,000 in the year ended December 31, 1998. This increase is due primarily to increases in the Corporation's net interest income and noninterest income, partially offset by an increase in noninterest expenses. The Corporation's return on average assets in 1999 was .41%, compared to .05% in 1998. Return on average equity was 4.33% in 1999 compared to .51% in 1998. Average equity to average assets was 9.36% in 1999 compared to 10.46% in 1998.
The Corporation incurred nonrecurring merger related costs of $744,000 and $1.5 million during 1999 and 1998, respectively. Without these nonrecurring expenses, operating earnings for the year ended December 31, 1999 would have been $3.6 million, an increase of $1.8 million from 1998 operating earnings of $1.8 million. These nonrecurring expenses consisted primarily of professional fees for legal and accounting services.
Net interest income increased $6.5 million, or 29.4% to $28.8 million for the year ended December 31, 1999, from $22.3 million for the year ended December 31, 1998 as interest income increased $13.1 million, or 30.8%, and interest expense increased $6.5 million, or 32.4%. The increase in net interest income is primarily attributable to a $194.9 million, or 57.2% increase in average loans to $535.8 million during 1999, from $340.8 million during 1998. This increase was partially offset by a $159.8 million, or 39.4% increase in average interest-bearing liabilities to $565.6 million during 1999, from $405.7 million during 1998.
The Corporation's net interest spread and net interest margin were 3.98% and 4.55%, respectively, in 1999, compared to 3.96% and 4.73% in 1998. The 18 basis point decline in net interest margin is primarily the result of lower yields in the loan portfolio during 1999 offset in part by a lower average rate on interest bearing liabilities. The lower yields in the loan portfolio are primarily the result of an increase in volume in the Birmingham market where competition produces lower yielding loans than in smaller markets. However, the lower yields are offset by an increase in the volume of loans produced in the larger market.
The provision for loan losses was $2.9 million for the year ended December 31, 1999 compared to $4.7 million in 1998. The provision for loan losses represents the amount determined by management necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. The Corporation had net charge-offs of $4.8 million in 1999, resulting in a ratio of net charge-offs to average loans of .90%. This compares to $2.3 million, or .67% in 1998. Net charge-off loans as a percentage of the provision
for loan losses was 169.89% in 1999, compared to 49.39% in 1998. The increase in net charge-off loans resulted primarily from the charge-off of loans acquired in a business combination and charge-offs related to a single commercial loan customer.
Noninterest income increased $2.1 million, or 51.0% to $6.2 million in 1999, from $4.1 million in 1998, primarily as the result of increased income from mortgage banking operations and additional customer service charges and fees. Income from mortgage banking operations was $1.4 million, or 22.9% of total noninterest income, an increase of $1.2 million from $232,000 in 1998, primarily due to the mortgage banking department of the bank operating for the full year. Income from customer service charges and fees was $3.3 million, or 54.3% of total noninterest income, an increase of $343,000, or 11.4% from $3.0 million in 1998, primarily due to the increase in the volume of customer deposits. Also included in other noninterest income for 1999 is $383,000 attributable to the increase in the cash surrender value of single premium life insurance policies purchased during 1999 and $342,000 gain from the sale of real estate.
Noninterest expense increased $6.6 million, or 29.6% to $28.7 million in 1999 from $22.1 million in 1998. Salaries and employee benefits increased $2.8 million, or 26.3% to $13.4 million in 1999 compared to $10.6 million in 1998. The increase in salaries and benefits primarily resulted from the acquisition of new banks and branches, and the addition of personnel in the administration and operation areas. All other noninterest expenses increased $3.8 million, or 32.7% to $15.3 million, compared to $11.5 million in 1998. This increase in other expenses included a $1.8 million increase in occupancy expenses, a $1.0 million increase in professional fees and $907,000 in foreclosure losses. Occupancy expenses increased during 1999 as a result of the Corporation incurring a full year of depreciation, rental expense and maintenance on buildings and equipment either acquired or leased since the acquisitions. Professional fees increased primarily due to increased auditing, consulting and legal services necessary for a growing financial institution. The majority of the foreclosure losses represent payments made by the Corporation to secure certain rights in properties acquired in foreclosure from a single commercial account.
Income before provision for income taxes increased $3.9 million to $3.4 million in 1999, from a $439,000 pre-tax loss in 1998.
The Corporation's income tax expense (benefit) was $520,000 and $(724,000) in 1999 and 1998, respectively. The primary difference in the effective tax rate and the federal statutory rate (34%) for 1999 and 1998 arose from the recognition of a rehabilitation tax credit of $730,000 and $1.7 million, respectively, generated from the restoration of the Corporation's headquarters, the John A. Hand Building.
NET INTEREST INCOME
The largest component of the Corporation's net income is its net interest income, which is the difference between the income earned on interest earning assets and interest paid on deposits and borrowings used in support of such assets. Net interest income is determined by the rates earned on the Corporation's interest earning assets, rates paid on its interest-bearing liabilities, the relative amounts of interest earning assets and interest-bearing liabilities, the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities. Net interest income divided by average interest-earning assets represents the Corporation's net interest margin.
Average Balances, Income, Expenses and Rates. The following tables depict, on a tax-equivalent basis for the periods indicated, certain information related to the Corporation's average balance sheet and its average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from daily averages.
CONSOLIDATED AVERAGE BALANCE INTEREST/INCOME/EXPENSE AND YIELD/RATES TAXABLE EQUIVALENT BASIS
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(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.
Analysis of Changes in Net Interest Income. The following table sets forth, on a taxable equivalent basis, the effect which the varying levels of earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the years ended December 31, 2000 and 1999.
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(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.
MARKET RISK -- INTEREST RATE SENSITIVITY
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to a change in interest rates, exchange rates and equity prices. The Corporation's primary market risk is interest rate risk.
The primary objective of asset/liability management is to manage interest rate risk and achieve reasonable stability in net interest income throughout interest rate cycles. This is achieved by maintaining the proper balance of interest rate sensitive earning assets and interest rate sensitive liabilities. The relationship of rate sensitive earning assets to rate sensitive liabilities is the principal factor in projecting the effect that fluctuating interest rates will have on future net interest income. Rate sensitive earning assets and interest-bearing liabilities are those that can be repriced to current market rates within a relatively short time period.
During the next twelve months approximately $127.0 million more interest-bearing liabilities than interest-earning assets can be repriced to current market rates. As a result, the one-year cumulative gap (the ratio of rate sensitive assets to rate sensitive liabilities) at December 31, 2000, was .80, indicating a liability sensitive position. The Corporation's gap position is closely matched during the first ninety days of 2001 with a gap ratio of .96. For the period ending December 31, 2001, the Corporation's interest rate risk model, which relies on management's growth assumptions, indicates that projected net interest income will increase on an annual basis by 8.9%, or approximately $3.8 million, assuming an instantaneous increase in interest rates of 200 basis points. Assuming an instantaneous decrease of 200 basis points, projected net interest income is expected to decrease on an annual basis by 11.3%, or approximately $4.9 million. The effect on net interest income produced by these scenarios is within the Corporation's policy.
The Corporation attempts to manage the one-year gap position as close to even as possible. This ensures the Corporation of avoiding wide variances in case of a rapid change in its interest rate environment. Also, certain products that are classified as being rate sensitive do not reprice on a contractual basis. These products include regular savings, interest-bearing transaction accounts, money market and now accounts. The rates paid on these accounts are typically not related directly to market interest rates, and management exercises some discretion in adjusting these rates as market rates change. In the event of a rapid shift in interest rates, management would attempt to take certain actions to mitigate the negative impact to net interest income. These actions include but are not limited to, restructuring of interest-earning assets, seeking alternative funding sources and entering into interest rate swap agreements.
The Corporation evaluates interest rate sensitivity risk and then formulates guidelines regarding asset generation and repricing, funding sources and pricing and off-balance sheet commitments in order to decrease interest rate sensitivity risk. The Corporation uses computer simulations to measure the net interest income effect of various interest rate scenarios. The modeling reflects interest rate changes and the related impact on net interest income over specified periods of time.
LIQUIDITY
The goal of liquidity management is to provide adequate funds to meet changes in loan demand or any potential unexpected deposit withdrawals. Additionally, management strives to maximize its earnings by investing its excess funds in securities and other securitized loan assets with maturities matching its offsetting liabilities. See the "Selected Loan Maturity and Interest Rate Sensitivity" and the "Maturity Distribution of Investment Securities" tables.
Historically, the Corporation has maintained a high loan-to-deposit ratio. To meet its short-term liquidity needs, the Corporation maintains core deposits and has borrowing capacity through the Federal Home Loan Bank ("FHLB"), federal funds lines and a line of credit with two regional banks. Long-term liquidity needs are met primarily through these sources, the repayment of loans and the maturity or sale of investment securities, including short-term investments.
FINANCIAL CONDITION
Loans. Loans are the largest category of earning assets and typically provide higher yields than other types of earning assets. Loans involve inherent credit and liquidity risks which management attempts to control and counterbalance. At December 31, 2000, total loans net of unearned income were $808.2 million, an increase of $175.4 million from $632.8 million at December 31, 1999. This compares to increases of $200.9 million during 1999 from $431.9 million at December 31, 1998 and $149.0 million during 1998 from $282.9 million at December 31, 1997. For the three-year period ended December 31, 2000, these increases represent an annual compound growth rate of 41.9% with loans averaging $710.4 million during 2000 compared to $535.8 million during 1999 and $340.8 million during 1998. The average yield of the loan portfolio was 9.64%, 9.19% and 10.07% for the periods ending December 31, 2000, 1999 and 1998, respectively. Loan growth during the three-year period ended December 31, 2000 was generated primarily through internal growth in the
Birmingham, Alabama and Florida markets. During this period approximately $42 million in loan growth was attributable to cash purchases of existing banks and branches.
DISTRIBUTION OF LOANS BY CATEGORY
The repayment of loans as they mature is a source of liquidity for the Corporation. The following table sets forth the Corporation's loans in selected categories maturing within specified intervals at December 31, 2000.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY (DOLLARS IN THOUSANDS)
The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity and repricing structure of the loan portfolio.
Allowance for Loan Losses. The Corporation maintains an allowance for loan losses at a level that it believes is adequate to absorb estimated losses inherent in the loan portfolio, plus estimated losses associated with off-balance sheet credit instruments such as letters of credits and unfunded lines of credit. The Corporation prepares an analysis to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan losses. Generally, the Corporation estimates the allowance using factors such as historical loss experience based on volume and types of loans, volume and trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information.
The Corporation manages and controls 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/approval procedure, sets limits on credit concentration and enforces regulatory requirements.
Loan portfolio concentration risk is reduced through concentration limits for borrowers and collateral types and through geographical diversification. Concentration risk is measured and reported to senior management and the Board of Directors on a regular basis.
A risk rating system is employed whereby each loan is assigned a rating which corresponds to the perceived credit risk. Risk ratings are subject to independent review by a Loan Review Department, which also performs ongoing, independent review of the risk management process that includes underwriting, documentation and collateral control. Regular reports are made to senior management and the Board of Directors regarding credit quality as measured by assigned risk ratings and other measures, including, but not limited to, the level of past due percentages and nonperforming assets.
The loan review function is centralized and independent of the lending function. Review results are reported to the Audit Committee of the Board of Directors as well as to the Corporation's independent auditors.
The Corporation historically has allocated its allowance for loan losses to specific loan categories. Although the allowance is allocated, it is available to absorb losses in the entire loan portfolio.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
Net charge-offs decreased 16.0% from $4.8 million in 1999 to $4.1 million in 2000. The ratio of net charge-offs to average loans averaged .67% for the five year period ended December 31, 2000, with a ratio of .57% in 2000 and .90% in 1999. Historically, net charge-offs have been more significant for commercial and consumer loans. Net charge-offs during 2000 are more reflective of historical averages because net charge-offs during 1999 included the charge-off of loans acquired in a purchase business combination and a significant loss from a single commercial loan customer. The Corporation believes that in future periods loan losses should reflect amounts that are similar to its historical averages, exclusive of 1999.
The allowance as a percentage of loans at December 31, 2000 was 1.11%. The allowance as a percentage of loans for the five-year period ending December 31, 2000 has averaged 1.25%. Allowance for loan losses as a percentage of non-performing loans decreased to 90.85% at December 31, 2000 from 216.22% at December 31, 1999. Nonperforming loans increased $6.2 million to $9.9 million as of December 31, 2000 from $3.7 million as of December 31, 1999. As a percent of net loans, nonperforming loans increased from .59% at December 31, 1999 to 1.22% at December 31, 2000. The increase in nonperforming loans during 2000 includes a single credit, secured by real estate, totaling $4.9 million which management believes is fully recoverable. The allowance for loan losses as a percent of nonperforming loans, excluding this credit, was 181.6% as of December 31, 2000.
The following table summarizes certain information with respect to the Corporation's allowance for loan losses and the composition of charge-offs and recoveries for the periods indicated.
SUMMARY OF LOAN LOSS EXPERIENCE
Nonperforming Loans. The following table represents the Corporation's nonperforming loans for the dates indicated.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
A delinquent loan is generally placed on nonaccrual status when it becomes 90 days or more past due and management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that the collection of interest is doubtful. When a loan is placed on nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. 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, which may necessitate additional charges to earnings.
Investment Securities. The investment securities portfolio is a significant component of the Corporation's total earning assets. Total securities averaged $81.0 million in 2000, compared to $86.6 million in 1999 and $109.1 million in 1998. The investment securities portfolio produced average tax equivalent yields of 6.71%, 6.40% and 6.32% for the years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000, the Corporation's securities portfolio had an amortized cost of $96.3 million.
The following table sets forth the amortized costs of the securities held by the Corporation at the dates indicated.
INVESTMENT PORTFOLIO
The following table shows the scheduled maturities and average yields of securities held at December 31, 2000.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
Short-Term Investments. Short-term investments as of December 31, 2000 consisted of federal funds sold of $3.1 million compared to $5.8 million as of December 31, 1999. Federal funds sold averaged $14.6 million during 2000, compared to $15.1 million in 1999 and $27.2 million in 1998 and produced average yields of 6.36%, 5.04%, and 5.49%, respectively. Federal funds are a primary source of the Corporation's liquidity and are generally invested on an overnight basis. In addition to federal funds sold, the Corporation will also invest in short-term commercial paper. As of December 31, 2000, the Corporation did not hold any commercial paper, as compared to December 31, 1999, commercial paper totaled $14.5 million, all of which matured January, 2000.
In addition to liquidity management, the Corporation also utilizes short-term investments when the level of funds committed to lending and investment portfolios change, or the level of deposit generation changes.
Deposits. During 2000, average total deposits increased $145.6 million, or 24.4% to $742.8 million, from $597.2 million in 1999. During 1999, average total deposits increased $141.4 million, or 31.0% from $455.8 million in 1998, which increased $94.7 million, or 26.2% from $361.1 million in 1997. The increase in average deposits for the three-year period ended December 31, 2000 represents an average annual compound growth rate of 27.2%. Deposit growth during this three-year period has been generated primarily through internal growth in the Corporation's various markets. Deposit growth attributed to the cash purchase of existing banks and branches totaled approximately $94.0 million dollars during the same period.
The following table sets forth average deposits of the Corporation by category for the periods indicated.
AVERAGE DEPOSITS
Noninterest bearing deposits totaled $88.9 million at December 31, 2000, an increase of 6.2%, or $5.1 million from $83.7 million at December 31, 1999. Of the $5.1 million increase in noninterest bearing deposits, 41.2%, or $2.1 million were generated in branches located in the Alabama region, the other 58.8%, or $3.0 million were generated in branches in the Florida region. Noninterest bearing deposits comprised 10.8% of total deposits at, December 31, 2000, compared to 12.3% at December 31, 1999.
Interest bearing deposits totaled $738.4 million at December 31, 2000, an increase of 23.3%, or $139.6 million from $598.8 million at December 31, 1999. The $139.6 million increase in interest bearing deposits from December 31, 1999 was generated primarily in branches located in the Alabama region and includes brokered deposits totaling $46.1 million. These brokered deposits carry an average rate of 6.8% and mature as follows: second quarter 2001, $25.9 million; fourth quarter 2001, $14.9 million; and second quarter 2002, $5.3 million.
During 2000, average interest bearing deposits increased $135.7 million, or 26.3% to $651.4 million, from $515.7 million in 1999, compared to an increase during 1999 of $121.5 million, or 30.8% from $394.2 million in 1998, which increased $83.1 million, or 26.7% from $311.1 million in 1997. Interest bearing deposits comprised 89.2% of total deposits at December 31, 2000, compared to 87.7% at December 31, 1999 and carried an average rate of 5.37%, 4.65% and 4.97% for the years ended December 31, 2000, 1999 and 1998, respectively.
Deposits, and particularly core deposits, have historically been the Corporation's primary source of funding and have enabled the Corporation to meet successfully both its short-term and long-term liquidity needs. These core deposits represent 71.4% of the Corporation's total deposits at December 31, 2000. The Corporation anticipates that such deposits will continue to be its primary source of funding in the future. The Corporation's loan-to-deposit ratio was 97.7% at December 31, 2000, compared to 92.7% at December 31,
]1999. The maturity distribution of the Corporation's time deposits over $100,000 at December 31, 2000 is shown in the following table.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
Approximately 26.0% of the Corporation's time deposits over $100,000 had scheduled maturities within three months. The Corporation believes that large denomination certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits.
Borrowed Funds. During 2000, average borrowed funds increased $35.9 million, or 72.1% to $85.8 million, from $49.9 million during 1999, which increased $38.3 million, or 331.9% from $11.5 million during 1998. The average rate paid on borrowed funds during 2000, 1999 and 1998 was 5.78%, 5.31% and 5.11%, respectively. Because of a relatively high loan-to-deposit ratio, the existence and stability of these funding sources are critical to the Corporation's maintenance of short-term and long-term liquidity.
Borrowed funds as of December 31, 2000 consist primarily of advances from the FHLB. The following is a summary, by year of maturity, of advances from the FHLB as of December 31, 2000 and 1999 (in thousands):
The above schedule is by contractual maturity. Certain advances are subject to call dates as follows: year 2001, $21,340,000; 2002, $58,000,000; 2003, $18,160,000, 2004, $2,000,000 and 2005, $4,800,000.
The advances are secured by FHLB stock, agency securities and a blanket lien on certain residential real estate loans, all with a carrying value of approximately $171.8 million at December 31, 2000. The Corporation has remaining approximately $32.0 million in unused lines of credit with the FHLB subject to the availability of qualified collateral.
As of December 31, 2000, the Corporation has available $15.0 million under a line of credit with two regional banks. Interest is one and one quarter (1.25%) percentage points in excess of the applicable LIBOR Index Rate. The line matures May 1, 2001.
The Corporation also has available approximately $25.3 million in unused federal funds lines of credit with regional banks, subject to certain restrictions and collateral requirements.
Guaranteed Preferred Beneficial Interest in the Corporation's Subordinated Debentures. On September 7, 2000, TBC Capital Statutory Trust II ("TBC Capital"), a Connecticut statutory trust wholly-owned by the Corporation, received $15,000,000 in proceeds in exchange for $15,000,000 principal amount of TBC Capital's 10.6% cumulative trust preferred securities in a pooled trust preferred private placement. The
proceeds were used to purchase an equal principal amount of 10.6% subordinated debentures of the Corporation. The Corporation has fully and unconditionally guaranteed all obligations of TBC Capital on a subordinated basis with respect to the preferred securities. Subject to certain limitations, the preferred securities qualify as Tier 1 capital and are presented in the Consolidated Statement of Financial Condition as "Guaranteed preferred beneficial interests in the Corporation's subordinated debentures." The sole asset of TBC Capital is the subordinated debentures issued by the Corporation. Both the preferred securities of TBC Capital and the subordinated debentures of the Corporation each have 30-year lives. However, both the Corporation and TBC Capital have a call option after ten years, subject to regulatory approval, or earlier depending upon certain changes in tax or investment company laws, or regulatory capital requirements.
A portion of the proceeds from the offering were used to repay approximately $10,400,000 of borrowings under the Corporation's line of credit with the balance to be used for general corporate purposes including additional capital investment in The Bank.
Stockholder's Equity. Stockholder's equity increased $6.0 million during 2000 to $74.9 million at December 31, 2000 from $68.9 million at December 31, 1999. The increase in stockholder's equity during 2000 primarily consisted of $4.4 million net income and $1.9 million unrealized gain on securities available for sale, net of taxes.
Regulatory Capital. The table below represents the Corporation's and its subsidiary's actual regulatory and minimum regulatory capital requirements at December 31, 2000 (dollars in thousands):
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial institutions such as the Corporation are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Corporation's performance than do the effects of changes in the general rate of inflation and changes in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. The Corporation seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Please refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risk -- Interest Rate Sensitivity."
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated financial statements of the Corporation meeting the requirements of Regulation S-X are included on the succeeding pages of this Item. All other financial statements and schedules have been omitted because they are not required or are not applicable.
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
CONTENTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors The Banc Corporation
We have audited the accompanying consolidated statements of financial condition of The Banc Corporation and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of Emerald Coast Bancshares, Inc., C&L Bank of Blountstown and C&L Banking Corporation as of and for the year ended December 31, 1998, which statements combined reflect net interest income constituting 33% of the related consolidated totals in 1998. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for Emerald Coast Bancshares, Inc, C&L Bank of Blountstown and C&L Banking Corporation, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Banc Corporation and Subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Birmingham, Alabama March 1, 2001
REPORT OF INDEPENDENT AUDITORS
Board of Directors The Banc Corporation
We have audited and reported on the consolidated statements of financial condition of Emerald Coast Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997 and the consolidated statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1998 and 1997, prior to their inclusion in the consolidated financial position of The Banc Corporation and Subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the management of Emerald Coast Bancshares, Inc. and Subsidiary. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Emerald Coast Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for the years ended December 31, 1998 and 1997 in conformity with generally accepted accounting principles.
Saltmarsh Cleaveland & Gund
Pensacola, Florida March 19, 1999
REPORT OF INDEPENDENT AUDITORS
Board of Directors The Banc Corporation
We have audited and reported on the statements of financial condition of C & L Bank of Blountstown as of December 31, 1998 and 1997, and the related statements of income, changes in stockholders' equity, and cash flows for the years then ended December 31, 1998 and 1997. These financial statements are the responsibility of the management of C & L Bank of Blountstown. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of C & L Bank of Blountstown as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Williams, Cox, Weidner and Cox
March 3, 1999 Marianna, Florida
REPORT OF INDEPENDENT AUDITORS
Board of Directors The Banc Corporation
We have audited and reported on the statements of financial condition of C & L Bank of Bristol as of December 31, 1998 and 1997, and the statements of income, changes in stockholders' equity, and cash flows for the years then ended December 31, 1998 and 1997. These financial statements are the responsibility of the management of C & L Bank of Bristol. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of C & L Bank of Bristol as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
William, Cox, Weidner and Cox
March 3, 1999
Marianna, Florida
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
See notes to consolidated financial statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
See notes to consolidated financial statements.
THE BANC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
See notes to consolidated financial statements.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Banc Corporation ("Corporation"), through its subsidiaries, provides a full range of banking and bank-related services to individual and corporate customers across Alabama and the panhandle of Florida. The accounting and reporting policies of the Corporation conform with generally accepted accounting principles and to general practice within the banking industry. The following summarizes the most significant of these policies.
BASIS OF PRESENTATION
The Corporation's consolidated financial statements have been retroactively restated to reflect the pooling of interest business combinations with Emerald Coast Bancshares, Inc. ("Emerald"), which was consummated in the first quarter of 1999, and C&L Banking Corporation ("C&L") and C&L Bank of Blountstown ("Blountstown"), which were consummated in the second quarter of 1999. In addition, Blountstown was immediately merged into C&L's subsidiary to form a single bank subsidiary, the C&L Bank of Bristol.
On July 13, 1999, the Corporation acquired BankersTrust of Alabama, Inc. ("BankersTrust") in a business combination accounted for as a purchase. As such, the Corporation's consolidated financial statements include the results of operations of BankersTrust only from its date of acquisition. See Note 14 for more disclosure regarding the Corporation's business combinations.
In June, 2000, the Corporation combined its three banking subsidiaries to form a single bank. This merger did not have any effect on the current or prior year consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements and notes to consolidated financial statements include the accounts of the Corporation and its wholly-owned or majority-owned subsidiaries. All significant intercompany transactions or balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statements of cash flows, cash and cash equivalents are defined as those amounts included in the statements of financial condition caption "Cash and Due from Banks."
The Corporation's banking subsidiary is required to maintain average reserve balances with the Federal Reserve Bank based on a percentage of deposits. The average amount of the reserves at December 31, 2000 was $4,421,000.
INVESTMENT SECURITIES
Investment securities are classified as either held to maturity, available for sale or trading at the time of purchase. The Corporation defines held to maturity securities as debt securities which management has the positive intent and ability to hold to maturity.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Held to maturity securities are reported at cost, adjusted for amortization of premiums and accretion of discounts that are recognized in interest income using the effective yield method.
Securities available for sale are reported at fair value and consist of bonds, notes, debentures, and certain equity securities not classified as trading securities nor as securities to be held to maturity. Unrealized holding gains and losses, net of deferred taxes, on securities available for sale are excluded from earnings and reported in accumulated other comprehensive income (loss) within stockholders' equity.
Gains and losses on the sale of securities available for sale are determined using the specific-identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unearned discount and an allowance for loan losses. Interest income with respect to loans is accrued on the principal amount outstanding, except for interest on certain consumer loans, which is recognized over the term of the loan using a method which approximates a level yield.
Accrual of interest is discontinued on loans which are past due greater than ninety days unless the loan is well secured and in the process of collection. "Well secured," means that the debt must be secured by collateral having sufficient realizable value to discharge the debt, including accrued interest, in full. "In the process of collection," means that collection of the debt is proceeding in due course either through legal action or other collection effort that is reasonably expected to result in repayment of the debt in full within a reasonable period of time, usually within one hundred eighty days of the date the loan became past due. Any unpaid interest previously accrued on these loans is reversed from income. Interest payments received on these loans are applied as a reduction of the loan principal balance.
Impaired loans are specifically reviewed loans for which it is probable that the Corporation will be unable to collect all amounts due according to the terms of the loan agreement. Impairment is measured by comparing the recorded investment in the loan with the present value of expected future cash flows discounted at the loan's effective interest rate, at the loans observable market price, or the fair value of the collateral if the loan is collateral dependent. A valuation allowance is provided to the extent that the measure of the impaired loans is less than the recorded investment. A loan is not considered impaired during a period of delay in payment if the ultimate collectibility of all amounts due is expected. Larger groups of homogenous loans such as consumer installment and residential real estate mortgage loans are collectively evaluated for impairment. Payments received on impaired loans for which the ultimate collectibility of principal is uncertain are generally applied first as principal reductions.
The allowance for loan loss is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectibility of principal is unlikely. The allowance is the amount that management believes will be adequate to absorb possible losses on existing loans which may become uncollectible.
Management reviews the adequacy of the allowance on a monthly basis. The allowance for classified loans is established based on risk ratings assigned by loan officers. Loans are risk rated using a seven point scale, and loan officers are responsible for the timely reporting of changes in the risk ratings. This process, and the assigned risk ratings, are subject to review by the Corporation's internal loan review function. Based on the assigned risk ratings, the loan portfolio is segregated into the regulatory classifications of: Special Mention, Substandard, Doubtful or Loss. Regulatory reserve percentages are applied to these categories to estimate the amount of loan loss. Reserve percentages assigned to non-rated loans are based on historical charge-off experience adjusted for geographic location and other risk factors.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Significant problem credits are individually reviewed by management. Generally, these loans are commercial or real estate construction loans selected for review based on their balance, assigned risk rating, payment history, and other risk factors at the time of management's review. Losses are estimated on each loan based on management's review. These individually reviewed credits are excluded from the classified loan loss calculation discussed above.
To evaluate the overall adequacy of the allowance to absorb losses inherent in the Corporation's loan portfolio, the Corporation considers general economic conditions, geographic concentrations, and changes in the nature and volume of the loan portfolio. Management's assessment of these conditions is reflected in the portion of the allowance that is unallocated.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or market, determined on a net aggregate basis. Differences between the carrying amount of mortgage loans held for sale and the amounts received upon sale are credited or charged to income at the time the proceeds of the sale are collected. The fair values are based on quoted market prices of similar loans, adjusted for differences in loan characteristics.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over the estimated service lives of the assets using straight-line and accelerated methods, generally using five to forty years for premises and five to ten years for furniture and equipment.
Expenditures for maintenance and repairs are charged to operations as incurred; expenditures for renewals and betterments are capitalized and written off by depreciation charges. Property retired or sold is removed from the asset and related accumulated depreciation accounts and any profit or loss resulting therefrom is reflected in the statement of income.
INTANGIBLE ASSETS
Intangible assets, primarily goodwill, are included in other assets, net of amortization calculated on a straight-line basis over a fifteen-year period.
The Corporation reviews on a regular basis the carrying value of goodwill to determine if any impairment has occurred or if the period of recoverability has changed. If this review indicates that goodwill will not be recoverable, the carrying value of the goodwill will be written off in the current period. At December 31, 2000 and 1999 goodwill, net of accumulated amortization totaled $6,648,000 and $7,219,000, respectively.
OTHER REAL ESTATE
Other real estate, acquired through partial or total satisfaction of loans, is carried at the lower of cost or net realizable value in other assets. At the date of acquisition, losses are charged to the allowance for loan losses. Subsequent gains or losses on the sale or losses from the valuation of other real estate are included in other expense. Other real estate totaled $2,706,000 and $2,185,000 at December 31, 2000 and 1999, respectively.
INCOME TAXES
The consolidated financial statements are prepared on the accrual basis. The Corporation accounts for income taxes using the liability method pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Corporation has entered into off balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements and commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.
PER SHARE AMOUNTS
Earnings per share computations are based on the weighted average number of shares outstanding during the periods presented.
Diluted earnings per share computations are based on the weighted average number of shares outstanding during the period, plus the dilutive effect of stock options.
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123) establishes a "fair value" based method of accounting for stock-based compensation plans and allows entities to adopt that method of accounting for their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by the Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). The Corporation has elected to follow Opinion 25 and related interpretations in accounting for its employee stock options. Under Opinion 25, because the exercise price of the Corporation's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
Statement 123 requires the disclosure of pro forma net income and earnings per share determined as if the Corporation had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model. Option valuation models require the input of subjective assumptions. Because these assumptions are subjective, the effects of applying Statement 123 for pro forma disclosures are not likely to be representative of the effects on reported net income for future years (see Note 9).
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities", as amended by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", requires derivative instruments be carried at fair value on the statement of financial condition. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. The statement also provides for offsetting changes in fair value or cash flows of both the derivative and the hedged asset or liability to be recognized in earnings in the same period; however, any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The Corporation will adopt the provisions of this statement, as amended, for its quarterly and annual reporting beginning January 1, 2001, the statement's effective date. Because the Corporation has not entered into any derivative transactions, the adoption of this statement will not have a material impact on the financial statements.
In September, 2000, Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (Statement 140), was issued by the FASB. Statement 140 replaces Statement 125, issued in June 1996. Statement 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. Statement 140 is effective for transfers occurring after March 31, 2001. However, the expanded disclosures about securitizations and collateral are effective for fiscal years ending after December 15, 2000. The adoption of Statement 140 will not have a material impact on the Corporation's financial condition or results of operations.
2. INVESTMENT SECURITIES
The amounts at which investment securities are carried and their approximate fair values at December 31, 2000 are as follows:
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENT SECURITIES -- (CONTINUED)
The amounts at which investment securities are carried and their approximate fair values at December 31, 1999 are as follows:
Securities with an amortized cost of $77,427,000 and $36,450,000 at December 31, 2000 and 1999, respectively, were pledged to secure United States government deposits and other public funds and for other purposes as required or permitted by law.
The amortized cost and estimated fair values of investment securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Gross realized gains on sales of investment securities available for sale in 2000, 1999 and 1998 were $169,000, $170,000 and $391,000, respectively, and gross realized losses for the same periods were $38,000, $87,000 and $112,000, respectively.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENT SECURITIES -- (CONTINUED)
The components of other comprehensive income (loss) for the years ended December 31, 2000 and 1999 are as follows:
3. LOANS
At December 31, 2000 and 1999 the composition of the loan portfolio was as follows:
At December 31, 2000 and 1999 the Corporation's recorded investment in loans considered to be impaired under SFAS No. 114 was $18,000,000 and $12,111,000, respectively. At December 31, 2000 and 1999, there was approximately $3,000,000 in the allowance for loan losses specifically allocated to impaired loans. The average recorded investment in impaired loans during 2000, 1999 and 1998 was approximately $15,100,000, $6,484,000 and $598,000, respectively. Interest income recognized on loans considered impaired totaled approximately $1,284,000 and $431,000 for the years ended December 31, 2000 and 1999, respectively. No material amount of interest income was recognized on impaired loans for the year ended December 31, 1998.
The Corporation has no commitments to loan additional funds to the borrowers whose loans are on nonaccrual.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses for the years ended December 31, 2000, 1999 and 1998 follows:
5. PREMISES AND EQUIPMENT
Components of premises and equipment at December 31, 2000 and 1999 are as follows:
Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was $2,598,000, $2,194,000 and $1,786,000, respectively.
The Corporation leases certain Florida branch buildings under operating leases expiring through 2003. The leases require payment of taxes, insurance and maintenance costs in addition to rental payments. In addition, three of the four building leases have two five-year renewal options.
Future minimum lease payments under the operating leases are summarized as follows:
Rental expense relating to operating leases amounted to approximately $757,003, $734,000 and $299,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEPOSITS
The following schedule details interest expense on deposits:
At December 31, 2000, the scheduled maturities of time deposits are as follows (in thousands):
7. BORROWED FUNDS
The following is a summary, by year of maturity, of advances from the Federal Home Loan Bank ("FHLB") as of December 31, 2000 and 1999 (in thousands):
The above schedule is by contractual maturity. Call dates for the above are as follows: 2001, $21,340,000; 2002, $58,000,000; 2003, $18,160,000; 2004, $2,000,000 and 2005, $4,800,000.
The advances are secured by FHLB stock, agency securities and a blanket lien on certain residential real estate loans all with a carrying value of approximately $171,776,000 at December 31, 2000.
As of December 31, 1999 the Corporation had borrowed $7,104,000 under a $15,000,000 line of credit with a regional bank. Interest is one and one-quarter (1.25%) percentage points in excess of the applicable LIBOR Index Rate and the line matures May 1, 2001. The loan agreement contains various covenants pertaining to the maintenance of regulatory capital, specified levels of classified assets and the amount of stockholders' equity. The Corporation was in compliance with all covenants as of December 31, 1999. As of December 31, 2000 there were no outstanding balances under this line.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. GUARANTEED PREFERRED BENEFICIAL INTEREST IN THE CORPORATION'S SUBORDINATED DEBENTURES
On September 7, 2000, TBC Capital Statutory Trust II ("TBC Capital"), a Connecticut statutory trust established by the Corporation, received $15,000,000 in proceeds in exchange for $15,000,000 principal amount of TBC Capital's 10.6% cumulative trust preferred securities in a pooled trust preferred private placement. The proceeds were used to purchase an equal principal amount of 10.6% subordinated debentures of the Corporation. The Corporation has fully and unconditionally guaranteed all obligations of TBC Capital on a subordinated basis with respect to the preferred securities. The Corporation accounts for TBC Capital as a minority interest. Subject to certain limitations, the preferred securities qualify as Tier I capital and are presented in the Consolidated Statement of Financial Condition as "Guaranteed preferred beneficial interests in the Corporation's subordinated debentures." The sole asset of TBC Capital is the subordinated debentures issued by the Corporation. Both the preferred securities of TBC Capital and the subordinated debentures of the Corporation each have 30-year lives. However, both the Corporation and TBC Capital have a call option after ten years, subject to regulatory approval, or earlier, depending upon certain changes in tax or investment company laws, or regulatory capital requirements.
A portion of the proceeds from the offering were used to repay approximately $10,400,000 of borrowings under the Corporation's line of credit with the balance to be used for general corporate purposes including additional capital investment in the Corporation's bank subsidiary.
9. STOCK OPTION PLAN
The Corporation has established a stock option plan for directors and certain key employees that provide for the granting of incentive and nonqualified options to purchase up to 1,500,000 shares of the Corporation's common stock. The terms of the options granted are determined by the compensation committee of the Board of Directors. All options granted have a maximum term of ten years, and the option price per share of options granted cannot be less than the fair market value of the Corporation's common stock on the grant date. All options granted under this plan vest 20% on the grant date and an additional 20% annually on the anniversary of the grant date.
In addition, the Corporation assumed the Commerce Bank of Alabama Incentive Stock Compensation Plan ("Commerce Plan") concurrent with the Commerce merger. Options to purchase 82,396 shares of the Corporation's common stock have been granted under this plan, of which, 52,227 were exercised during 1999. No additional options may be granted under this plan.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTION PLAN -- (CONTINUED)
For purposes of the following disclosures, the number and exercise prices for options granted under the Commerce Plan have been converted to equivalent amounts for the Corporation based on the exchange ratios in the merger.
A further summary about options outstanding at December 31, 2000 is as follows:
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCK OPTION PLAN -- (CONTINUED)
The Corporation recognizes compensation cost for stock-based employee compensation awards in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. The Corporation recognized no compensation cost for stock-based employee compensation awards for the years ended December 31, 2000, 1999 and 1998. If the Corporation had recognized compensation cost in accordance with SFAS No. 123, net income and earnings per share would have been reduced as follows (amounts in thousands, except per share data):
The fair value of the options granted was based upon the Black-Scholes pricing model. The Corporation used the following weighted-average assumptions for:
10. RETIREMENT PLANS
Warrior Savings Bank ("Warrior"), which merged with the Corporation on September 24, 1998, sponsored a defined benefit plan ("Plan") that provides retirement, disability and death benefits. All employees of Warrior over age 21 were eligible to participate in the plan after the completion of one year of service. The Corporation contributed amounts to the pension funds sufficient to satisfy funding requirements of the Employee Retirement Income Security Act. The net periodic pension costs and the prepaid pension costs related to the Plan are not material to the Corporation's financial condition and results of operations. This plan was terminated in July 2000 and final distributions will be made in the first quarter of the year 2001.
The Corporation sponsors a profit-sharing plan that permits participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet certain age and length of service requirements. The Corporation matches contributions at its discretion. The Corporation's contributions to the plan were $108,000, $108,000 and $199,000 in 2000, 1999 and 1998, respectively.
The Corporation has nonqualified benefit plans that are designed to provide retirement and death benefits to certain executive officers and directors. The benefit amounts are based on the excess amount earned on single premium life insurance policies owned by the Corporation. Under the plan, the Corporation recovers both its investment and opportunity costs before allocating any benefits to the participants. Benefit payments to participants are not guaranteed since they are dependent on the excess earnings generated by the life insurance policies. Payments under these plans are scheduled to begin in 2003 for some participants who will
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RETIREMENT PLANS -- (CONTINUED) reach retirement age. In connection with the plans, the Corporation has purchased single premium life insurance policies with cash surrender values of approximately $12,200,000 and $11,500,000 at December 31, 2000 and 1999, respectively. Compensation expense related to these plans totaled $401,000 and $140,000 for 2000 and 1999, respectively.
11. INCOME TAXES
The components of the income tax expense (benefit) are as follows (in thousands):
Significant components of the Corporation's deferred tax assets and liabilities as of December 31, 2000 and 1999 are as follows (in thousands):
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES -- (CONTINUED)
The effective tax rate differs from the expected tax using statutory rate of 34%. Reconciliation between the expected tax and the actual income tax expense (benefit) follows (in thousands):
The Corporation has available at December 31, 2000 unused rehabilitation tax credits that can be carried forward and utilized against future taxable income. Unused credits and expiration dates are as follows:
This credit was established as a result of the restoration and enhancement of the John A. Hand Building, which is designated as an historical structure and serves as the corporate headquarters for the Corporation. This credit is equal to 20% of certain qualified expenditures incurred by the Corporation prior to December 31, 2000. The Corporation is required to reduce its tax basis in the John A. Hand Building by the amount of the credit.
Applicable income tax expense of $48,000, $32,000 and $111,000 on securities gains for the years ended December 31, 2000, 1999 and 1998, respectively, is included in income taxes.
12. RELATED PARTY TRANSACTIONS
The Corporation has entered into transactions with its directors, executive officers, significant stockholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans to such related parties at December 31, 2000 and 1999 were $19,900,000 and $25,975,000, respectively. Activity during the year ended December 31, 2000 is summarized as follows (in thousands):
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS -- (CONTINUED)
At December 31, 2000, the deposits of such related parties in the subsidiary banks amounted to approximately $7,777,000.
In July 1998, Emerald sold the land and building of its main office building and two branch offices to an entity under the control of certain members of Emerald's Board of Directors for their fair value of approximately $3,794,700. The sales were accounted for under a sale-leaseback arrangement. The deferred gain on the sales amounted to $87,000 and is being amortized into income over the lease terms. At December 31, 2000, the deferred gain amounted to approximately $45,000. Terms of the leases are described in Note 5. Rental expense under these operating leases amounted to approximately $473,000 and $459,000 in 2000 and 1999, respectively.
13. COMMITMENTS AND CONTINGENCIES
The consolidated financial statements do not reflect the Corporation's various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit and standby letters of credit. The following is a summary of the Corporation's maximum exposure to credit loss for loan commitments and standby letters of credit (in thousands):
Commitments to extend credit and standby letters of credit all include exposure to some credit loss in the event of nonperformance of the customer. The Corporation's credit policies and procedures for credit commitments and financial guarantees are the same as those for extension of credit that are recorded in the consolidated statement of financial condition. Because these instruments have fixed maturity dates, and because many of them expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation.
The Corporation is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial statements.
14. MERGERS AND ACQUISITIONS AND MERGER RELATED COSTS
The Corporation completed the following business combinations during 1999 and 1998:
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. MERGERS AND ACQUISITIONS AND MERGER RELATED COSTS -- (CONTINUED)
In addition, on November 4, 1999, the Corporation purchased three branches in south Alabama with assets totaling approximately $22,000,000 for $1,565,000 in cash.
The following table presents financial information contributed by the pooled companies during 1999 prior to the consummation of the mergers (in thousands):
The following table presents net interest income, net income and basic net income per common share of the combining entities in the 1999 pooling transactions on a historical and combined basis for the year 1998 (amounts in thousands, except per share data):
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. MERGERS AND ACQUISITIONS AND MERGER RELATED COSTS -- (CONTINUED)
On July 13, 1999, the Corporation acquired BankersTrust of Alabama, Inc. ("BankersTrust") in a business combination accounted for as a purchase. BankersTrust was a one-bank holding company operating in north Alabama. The net assets of BankersTrust included loans of $25,000,000 and deposits of $36,000,000. The total cost of the acquisition was $1,624,000, which exceeded the fair value of the net assets of BankersTrust by $5,125,000. The excess is being amortized on a straight-line basis over 15 years. On October 16, 1998, the Corporation acquired Commercial Bancshares of Roanoke ("Roanoke") in a business combination accounted for as a purchase. Roanoke was a one-bank holding company operating in east Alabama. The Corporation's consolidated financial statements include the results of operations of BankersTrust and Roanoke only from the dates of acquisition.
The following unaudited summary information presents the consolidated results of operations of the Corporation on a pro forma basis, as if BankersTrust had been acquired on January 1, 1998. The pro forma summary does not necessarily reflect the results of operations that would have occurred if the acquisition had occurred as of the beginning of the periods presented, or of results that may occur in the future.
The following is a summary of pre-tax nonrecurring merger related costs incurred by the Corporation during 1999 and 1998:
15. REGULATORY RESTRICTIONS
A source of funds available to the Corporation is the payment of dividends by its subsidiary. Banking regulations limit the amount of dividends that may be paid without prior approval of the subsidiary's regulatory agency. Approximately $6,535,000 in retained earnings are available to be paid as dividends by the subsidiary at December 31, 2000.
The Corporation and its subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its subsidiary must meet specific capital guidelines that involve quantitative measures of the Corporation's and its subsidiary's assets, liabilities, and
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. REGULATORY RESTRICTIONS -- (CONTINUED)
certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and its subsidiary's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and its subsidiary to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000 and 1999 that the Corporation and its subsidiary meet all capital adequacy requirements to which they are subject.
As of December 31, 2000, the most recent notification from the Federal Reserve Bank categorized the Corporation and its subsidiary as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Corporation and its subsidiary must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category:
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Corporation in estimating fair values of financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and short-term instruments, including interest bearing deposits in other banks, federal funds sold and short-term commercial paper, approximate their fair value.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Securities available for sale and securities held to maturity. Fair values for securities are based on quoted market prices. The carrying values of stock in FHLB and Federal Reserve Bank approximate fair values.
Mortgage loans held for sale. The carrying amounts of mortgage loans held for sale approximate their fair value.
Net loans. Fair values for variable-rate loans that reprice frequently and have no significant change in credit risk are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for commercial real estate and commercial loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Accrued interest receivable. The carrying amounts of accrued interest receivable approximate their fair values.
Deposits. The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit ("CDs") approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Advances from FHLB. Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.
Note payable and other borrowed funds. The carrying amounts of note payable and other borrowed funds approximate their fair values.
Guaranteed preferred beneficial interest in the Corporation's subordinated debentures. Rates currently available to the Corporation for preferred offerings with similar terms and maturities are used to estimate fair value.
Off-balance sheet items. The fair values of commitments to extend credit and standby letters of credit are not material to the Corporation's financial condition.
Limitations. Fair value estimates are made at a specific point of time and are based on relevant market information which is continuously changing. Because no quoted market prices exist for a significant portion of the Corporation's financial instruments, fair values for such instruments are based on management's assumptions with respect to future economic conditions, estimated discount rates, estimates of the amount and timing of future cash flows, expected loss experience, and other factors. These estimates are subjective in nature involving uncertainties and matters of significant judgment; therefore, they cannot be determined with precision. Changes in the assumptions could significantly affect the estimates.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
The estimated fair values of the Corporation's financial instruments are as follows:
17. OTHER NONINTEREST EXPENSE
Other noninterest expense consisted of the following (in thousands):
18. CONCENTRATIONS OF CREDIT RISK
All of the Corporation's loans, commitments and standby letters of credit have been granted to customers in the Corporation's market area. The concentrations of credit by type of loan or commitment are set forth in Notes 3 and 13, respectively.
The Corporation maintains cash balances and federal funds sold at several financial institutions. Cash balances at each institution are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to $100,000. At various times throughout the year cash balances held at these institutions will exceed federally
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. CONCENTRATIONS OF CREDIT RISK -- (CONTINUED)
insured limits. The Bank's management monitors these institutions on a quarterly basis in order to determine that the institutions meet "well-capitalized" guidelines as established by the FDIC.
19. NET INCOME PER SHARE
The following table sets forth the computation of basic net income per common share and diluted net income per common share (in thousands, except per share amounts):
20. PARENT COMPANY
The condensed financial information for The Banc Corporation (Parent Company only) is presented as follows (in thousands):
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. PARENT COMPANY -- (CONTINUED)
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. PARENT COMPANY -- (CONTINUED)
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 2000 and 1999 follows (in thousands, except per share data):
22. SEGMENT REPORTING
The Corporation has two reportable segments, the Alabama Region and the Florida Region. The Alabama Region consists of operations located throughout the state of Alabama. The Florida Region consists of operations located in the panhandle of Florida. The Corporation's reportable segments are managed as separate business units because they are located in different geographic areas. Both segments derive revenues from the delivery of financial services. These services include commercial loans, mortgage loans, consumer loans, deposit accounts and other financial services. A significant portion of the Corporation's administrative costs are allocated to the Alabama Region.
THE BANC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. SEGMENT REPORTING -- (CONTINUED)
The Corporation evaluates performance and allocates resources based on profit or loss from operations. There are no material intersegment sales or transfers. Net interest revenue is used as the basis for performance evaluation rather than its components, total interest revenue and total interest expense. The accounting policies used by each reportable segment are the same as those discussed in Note 1. All costs have been allocated to the reportable segments. Therefore, combined segment amounts agree to the consolidated totals.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the captions "Directors and Executive Officers of the Registrant," "Election of Directors," "Committees of the Company's Board of Directors and Meeting Attendance," "Executive Compensation and Other Information," "Security Ownership of Certain Beneficial Owners and Management," and "Certain Relationships and Related Transactions" included in the Corporation's definitive proxy statement to be filed no later than April 30, 2001, in connection with the Corporation's 2001 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K.
The Corporation filed a Current Report on Form 8-K on October 3, 2000 under Item 5 thereof to report the completion of a private placement of trust preferred securities.
(c) Exhibits.
The exhibits required to be filed with this Annual Report on Form 10-K pursuant to Item 601, of Regulation S-K are listed under "Exhibits" in Part IV, Item 14(a) (3) of this Annual Report on Form 10-K, and are incorporated herein by reference.
(d) Financial Statement Schedules.
The Financial Statement Schedules required to be filed with this Annual Report on Form 10-K are listed under "Financial Statement Schedules" in Part IV, Item 14(a) (2) of this Annual Report on Form 10-K, and are incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE BANC CORPORATION
By: /s/ JAMES A. TAYLOR ------------------------------------ James A. Taylor Chairman of the Board and Chief Executive Officer
March 30, 2001
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James A. Taylor, Jr. and David R. Carter, and each of them, the true and lawful agents and his attorneys-in-fact with full power and authority in each said agents and attorneys-in-fact, acting singly, to sign for the undersigned as Director or an officer of the Corporation, or as both, the Corporation's 2000 Annual Report on Form 10-K to be filed with the Securities and Exchange Commission, Washington, D.C. under the Securities Exchange Act of 1934, and to sign any amendment or amendments to such Annual Report, including an Annual Report pursuant to 11-K to be filed as an amendment to the Form 10-K; hereby ratifying and confirming all acts taken by such agents and attorneys-in-fact as herein authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
EXHIBIT INDEX