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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-25033
THE BANC CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 63-1201350
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
17 NORTH 20TH STREET 35203
BIRMINGHAM, AL (Zip Code)
(Address of Principal Executive Offices)
(205) 326-2265
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Titles of Classes)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent files pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: $84,641,883 as of March 30, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: the number of shares
outstanding as of March 30, 1999, of the registrant's only issued and
outstanding class of stock, its $.001 per share par value common stock, was
12,204,562.
DOCUMENTS INCORPORATED BY REFERENCE
The information set forth under Items 10, 11, 12 and 13 of Part III of this
Report is incorporated by reference from the registrant's definitive proxy
statement for its 1999 annual meeting of stockholders that will be filed no
later than April 30, 1999.
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PART I
ITEM 1. BUSINESS.
GENERAL
The Banc Corporation (the "Corporation") is a bank holding company
registered under the Bank Holding Company Act ("BHCA"), incorporated under the
laws of Delaware in April 1998 and headquartered in Birmingham, Alabama. The
Corporation was established so that Warrior Capital Corporation ("Warrior")
could merge into the Corporation and thereby change its name to "The Banc
Corporation" and its domicile from Alabama to Delaware. Warrior merged with the
Corporation on September 24, 1998.
The principal subsidiary of the Corporation is The Bank, an Alabama banking
corporation headquartered in Birmingham, Alabama. The Bank is 99.75% owned by
the Corporation. The Bank became a subsidiary of the Corporation as a result of
the Warrior merger. 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, the Corporation
acquired one bank and three bank holding companies. As a result, The Bank now
has 17 branches in Alabama. The acquisitions completed during 1998 are
summarized in the following chart:
1998 ACQUISITIONS DATE
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- - Commercial Bancshares of Roanoke, Inc. and its subsidiary,
The Commercial Bank of Roanoke (2 branches)............... October 16, 1998
- - City National Corporation and its subsidiary, City
National Bank of Sylacauga (3 branches)................... October 30, 1998
- - First Citizens Bancorp, Inc. and its subsidiary, First
Citizens Bank of Monroe County (3 branches)............... October 30, 1998
- - Commerce Bank of Alabama (4 branches)..................... November 6, 1998
As of December 31, 1998, the Corporation had assets of approximately $440.8
million, loans of approximately $299.3 million, deposits of approximately $366.0
million and stockholders equity of approximately $51.5 million. The
Corporation's management team has historically been successful in the
integration of multiple community banking organizations. The Corporation has
also retained the existing boards of directors at each of its acquired banks in
order to ensure personalized, responsive, quality service for individuals and
local and regional businesses. The Corporation believes that its operating
philosophy of decentralized decision making supplemented by centralized policy
oversight, credit review and management systems will result in significant
internal loan and deposit growth. The Corporation's growth strategy also
includes opening new branches as well as the acquisition of other financial
institutions and branches.
The principal executive offices of the Corporation and The Bank are located
at 17 North 20th Street, Birmingham, Alabama 35203, and its telephone number is
(205) 326-2265. As used in this Annual Report on Form 10-K, the term
"Corporation" refers to The Banc Corporation and its predecessor, Warrior, and
its subsidiaries and affiliates, including The Bank, unless the context requires
otherwise.
RECENT DEVELOPMENTS
During the fourth quarter of 1998, the Corporation completed an
underwritten public offering of 1,000,000 shares of Corporation common stock
resulting in net proceeds to the Corporation of approximately $9.6 million. On
January 10, 1999, the underwriters of the public offering exercised their
over-allotment option to purchase 150,000 additional shares of Corporation
common stock resulting in proceeds to the Corporation of approximately $1.5
million. The Corporation used the proceeds received from this offering to repay
debt incurred for the acquisition of Commercial Bancshares of Roanoke, Inc. and
for working capital.
On January 13, 1999, the Corporation entered into a binding letter of
intent to acquire BankersTrust of Alabama, Inc., an Alabama bank holding company
domiciled in Delaware ("BankersTrust"). BankersTrust
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owns 100% of BankersTrust of Madison, an Alabama banking corporation, with
branches in Madison and Huntsville, Alabama. The BankersTrust acquisition is
structured as a purchase. Upon completion of the BankersTrust acquisition, The
Bank will add branches in Huntsville and Madison, Alabama. Huntsville is the
fourth largest city in Alabama and is the largest city in Madison County,
Alabama which has a population of approximately 279,000 people.
On February 12, 1999, the Corporation acquired Emerald Coast Bancshares,
Inc. ("Emerald") in exchange for approximately 1,380,000 shares of Corporation
common stock in a transaction that was accounted for as a pooling of interests.
Prior to its acquisition by the Corporation, Emerald was a bank holding company
organized and existing under the laws of the State of Florida. Emerald's banking
subsidiary was Emerald Coast Bank, a Florida banking corporation ("Emerald
Bank"). Emerald Bank was converted to a federally chartered thrift regulated by
the Office of Thrift Supervision ("OTS") in order to facilitate its acquisition
by the Corporation. Emerald Bank is now a wholly-owned subsidiary of the
Corporation with four locations in Panama City Beach, Destin, Seagrove and Bay
Point, Florida (all located in the panhandle of Florida along the Gulf Coast).
Emerald Bank has one subsidiary, Emerald Coast Financial Management, Inc., a
Florida corporation. As of December 31, 1998, Emerald had assets of
approximately $83.6 million, loans of approximately $66.0 million, deposits of
approximately $69.4 million and stockholder's equity of approximately $5.7
million. As a result of the Emerald merger, The Corporation is also now a thrift
holding company registered under the Home Owner's Loan Act and subject to
regulation and examination by the OTS.
On February 25, 1999, the Corporation entered into a Plan and Agreement of
Merger with C&L Banking Corporation ("C&L"), a Florida bank holding company,
pursuant to which C&L will be merged with and into the Corporation (the "C&L
Merger"). C&L owns 98.1% of C&L Bank of Bristol, a Florida banking corporation
("Bristol"). On February 25, 1999, the Corporation entered into a Share Exchange
Agreement with Bristol, Bristol Acquisition Corporation, a wholly owned
subsidiary of the Corporation, and C&L, pursuant to which the outstanding shares
of Bristol not owned by C&L will be exchanged for shares of Corporation common
stock by Bristol Acquisition Corporation, with Bristol becoming a wholly-owned
subsidiary of the Corporation. As of December 31, 1998, C&L had assets of
approximately $48.5 million, loans of approximately $34.9 million, deposits of
approximately $43.4 million and shareholder's equity of approximately $5.0
million. The C&L Merger is structured as a pooling of interests.
On February 25, 1999, the Corporation also entered into a definitive Plan
and Agreement of Merger (the "Blountstown Merger") with C&L Bank of Blountstown
("Blountstown"), a Florida banking corporation, pursuant to which Blountstown
will be merged with and into Bristol simultaneously with the C&L Merger. As of
December 31, 1998, Blountstown had assets of approximately $56.8 million, loans
of approximately $31.7 million, deposits of approximately $52.3 million and
shareholder's equity of approximately $3.9 million. The Blountstown Merger is
structured as a pooling of interests. The C&L Merger and the Blountstown Merger
are conditioned upon one another. In addition, C&L and Blountstown have many of
the same directors, officers and shareholders. The C&L Merger and the
Blountstown Merger will give the Corporation three additional locations in
Altha, Bristol and Blountstown, Florida under the name "C&L Bank".
STRATEGY
Operations. The Corporation operates primarily in non-metropolitan areas,
except for its Birmingham, Alabama, operations which commenced July 1, 1998. The
Corporation targets individuals and local and regional businesses that prefer
local bank decision making and personalized service. As a result of its
strategy, the Corporation operates on a decentralized basis, emphasizing local
knowledge and authority to make credit decisions. The Corporation believes this
strategy enables The Bank to generate high yielding loans and to attract and
retain low cost core deposits that provide substantially all of The Bank's
funding requirements. The Bank has eight presidents and chief executive officers
each of whom is responsible for the day-to-day operations and decisions for the
branches under his or her supervision. The Corporation supplements this
decentralized management approach with centralized policy oversight, credit
review and management systems. The Corporation implements administrative and
operations policies at each of its locations while retaining local management
and directors as an advisory board to capitalize on their knowledge of the local
community.
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The Bank focuses on residential mortgage, consumer, commercial and real
estate construction lending to customers in its local markets. The Bank also
offers a variety of deposit programs to individuals and to businesses and other
organizations at interest rates generally consistent with local market
conditions. In addition, The Bank offers individual retirement and KEOGH
accounts, safe deposit and night depository facilities and additional services
such as the sale of traveler's checks, money orders and cashier's checks.
Growth. The Corporation believes its future growth will depend primarily
on the expansion of the business of its banking subsidiaries through internal
growth, the opening of new branch offices in new markets and the acquisition of
other financial institutions and branches. The ability to grow profitably
through the opening or acquisition of new branches will depend primarily on,
among other things, the Corporation's ability to identify profitable, growing
markets and branch locations within such markets, attract necessary deposits to
operate such branches profitably and locate sound loans and investment
opportunities within such markets.
MARKET AREAS
Through The Bank, the Corporation operates in Birmingham, Alabama and its
suburbs of Warrior, Morris and Mount Olive, Alabama in relatively rural northern
Jefferson County. The Bank also operates branches in Albertville, Childersburg,
Decatur, Frisco City, Gadsden, Guntersville, Mignon, Monroeville(2), Rainbow
City, Roanoke(2) and Sylacauga, Alabama. As of February 12, 1999, through
Emerald Bank, the Corporation also operates in Panama City Beach, Destin,
Seagrove and Bay Point, Florida.
LENDING ACTIVITIES
General. Through its banking subsidiaries, the Corporation offers 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 The Bank's market
areas. The Bank's total loans at December 31, 1998 were $299.3 million, or 78%
of total earning assets. The interest rates charged on loans vary with the
degree of risk, maturity and amount of the loan and are further subject to
competitive pressures, money market rates, availability of funds and government
regulations. The Corporation has no foreign loans or loans for highly leveraged
transactions.
Loan Portfolio
Real Estate Loans. Loans secured by real estate are the largest component
of the Corporation's loan portfolio, constituting $118.7 million, or 40% of
total loans at December 31, 1998. The Corporation's primary type of real estate
loan is single family first mortgage loans, 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
generally based on a 15 to 30-year amortization schedule. Adjustable rate loans
generally have a term of 15 years. The Bank typically charges an origination fee
on these loans.
The Bank's nonresidential mortgage loans include commercial, industrial and
raw land loans. The commercial real estate loans are typically used to provide
financing for retail establishments, offices and manufacturing facilities. The
Bank generally requires nonresidential mortgage loans to have an 80% loan-to-
value ratio and usually underwrites its commercial loans on the basis of the
borrower's cash flow and ability to service the debt from earnings, rather than
on the basis of the value of the collateral. Terms are typically 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. The Bank makes 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. The Bank attempts to reduce its credit risk on commercial loans by
limiting the loan to value ratio to 65% on loans secured by accounts receivable
or inventory and 75% on equipment loans. The Bank also makes unsecured
commercial loans. Commercial, industrial and agricultural loans constituted
$112.3 million, or 37% of the Corporation's loan portfolio at December 31, 1998.
Consumer Loans. Consumer lending includes installment lending to
individuals in the Corporation's market areas and consists of loans to purchase
automobiles, recreational vehicles, mobile homes and
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appliances. Consumer loans constituted $61.1 million, or 20% of the
Corporation's loan portfolio at December 31, 1998. 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 collectibility.
The Corporation attempts to minimize loan losses through various means and
uses generally recognized underwriting criteria. In particular, on larger
credits, the Corporation generally relies on the cash flow of a debtor as the
source of repayment and secondarily on the value of the underlying collateral.
In addition, the Corporation attempts to utilize shorter loan terms in order to
reduce the risk of a decline in the value of such collateral.
The Corporation addresses repayment risks by adhering to internal credit
policies and procedures that include officer and customer lending limits, a
multi-layered loan approval process for larger loans, periodic documentation
examination and follow-up procedures for any exceptions to credit policies. The
point in the Corporation's loan approval process at which a loan is approved
depends on the size of the borrower's credit relationship with the Corporation.
Loan Review. The Corporation has a loan review process designed to promote
early identification of credit quality problems. All loan officers are charged
with the responsibility of reviewing at least quarterly all past due loans in
their respective portfolios. The Bank's loan officers establish a watch list of
loans to be reviewed quarterly by The Bank's Board of Directors. The Chief
Lending Officer of The Bank along with other officers, also conduct a regular
centralized internal review which tests compliance with loan policy and
documentation for all loans over $250,000 and a sampling of smaller loans.
DEPOSITS
The principal sources of funds for The Bank are core deposits, consisting
of demand deposits, interest-bearing transaction accounts, savings deposits and
certificates of deposit. Transaction accounts include checking, money market and
negotiable order of withdrawal (NOW) accounts that provide the banks 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 The Bank's market areas.
Deposit rates are set weekly by senior management of The Bank, subject to
approval by management of the Corporation. Management believes that the rates
The Bank offers are competitive with those offered by competing institutions in
The Bank's market areas. The Bank focuses on customer service, not high rates,
to attract and retain core deposits.
COMPETITION
The Bank encounters 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 the fact that other
banks may offer certain services, such as trust services, that The Bank does not
currently provide. In addition, most of the Corporation's non-bank competitors
are not subject to the same extensive federal regulations that govern bank
holding companies, federally insured banks and federally insured thrifts. See
"Supervision and Regulation."
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SUPERVISION AND REGULATION
The supervision and regulation of banks and bank holding companies is
intended primarily for the protection of depositors, the deposit insurance funds
of 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, thrift holding companies and
banks including the power to impose substantial fines and other penalties for
violation of laws and regulations.
The following is a summary of some of the laws to which the Corporation and
its banking subsidiaries 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.
Banking Holding Company
The Corporation is a bank holding company registered under the BHCA, and it
is subject to supervision, regulation and examination by the Board of Governors
of the Federal Reserve System (the "Federal Reserve"). 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.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy
of the Federal Reserve that bank holding companies should pay cash dividends on
common stock only out of income available over the past year and only if
prospective earnings retention is consistent with the organization's expected
future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the bank
holding company's ability to serve as a source of strength to its banking
subsidiaries.
The Corporation's principal source of funds to pay dividends on the shares
of Corporation common stock will be cash dividends that the Corporation receives
from its subsidiaries. The payment of dividends by The Bank to the Corporation
is subject to certain restrictions imposed by state and federal banking laws,
regulations and authorities. As of December 31, 1998, an aggregate of
approximately $486 thousand was available for payment of dividends by The Bank
to the Corporation under applicable restrictions, without regulatory approval.
See "-- The Bank".
The federal banking statutes prohibit federally insured banks from making
any capital distributions (including a dividend payment) if, after making the
distribution, the institution would be "undercapitalized" as defined by statute.
In addition, the relevant federal regulatory agencies also have authority to
prohibit an insured bank from engaging in an unsafe or unsound practice, as
determined by the agency, in conducting an activity. The payment of dividends
could be deemed to constitute such an unsafe or unsound practice depending on
the financial condition of The Bank and other bank and thrift subsidiaries.
Regulatory authorities could impose stricter limitations on the ability of The
Bank and other bank and thrift subsidiaries to pay dividends to the Corporation
if such limits were deemed appropriate to preserve certain capital adequacy
requirements.
Under Federal Reserve policy, a bank holding company is expected to act as
a source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required by the Federal Reserve
at times when, absent this policy, a 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 the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the bankruptcy trustee will be deemed to have assumed, and
is required to cure immediately, any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.
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Activities "Closely Related" to Banking. The BHCA prohibits a bank holding
company, with certain limited exceptions, from acquiring direct or indirect
ownership or control of any voting shares of any company which is not a bank or
from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve, or order or regulation, to be so closely
related to banking or managing or controlling banks, as to be a proper incident
thereto. Some of the activities that have been determined to be closely related
to banking are making or servicing loans, performing certain data processing
services, acting as an investment or financial advisor to certain investment
trusts and investment companies and providing securities brokerage services.
Other activities approved by the Federal Reserve include consumer financial
counseling, tax planning and tax preparation, futures and options advisory
services, check guaranty services, collection agency and credit bureau services
and personal property appraisals. In approving acquisitions by bank holding
companies of companies engaged in banking-related activities, the Federal
Reserve considers a number of factors and weighs the expected benefits to the
public (such as greater convenience and increased competition or gains in
efficiency) against the risks of possible adverse effects (such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices). The Federal Reserve is also empowered to
differentiate between activities commenced de novo and activities commenced
through acquisition of a going concern.
Securities Activities. The Federal Reserve has approved applications by
bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer receivable-related securities and one-to-four family
mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to use
such subsidiaries to underwrite and deal in corporate debt and equity
securities.
Safe and Sound Banking Practices. Bank holding companies are not permitted
to engage in unsafe or unsound banking practices. The Federal Reserve's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10%
or more of the company's consolidated net worth. The Federal Reserve may oppose
the transaction if it believes that the transaction would constitute an unsafe
or unsound practice or would violate any law or regulation. Depending upon the
circumstances, the Federal Reserve could take the position that paying a
dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of bank
holding companies and their nonbanking 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.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Capital Adequacy Requirements. The Federal Reserve has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of December 31, 1998, the Corporation's ratio of Tier 1 capital to
total risk-weighted assets was 14.89%, and its ratio of total capital to total
risk-weighted assets was 16.02%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources."
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In addition to the risk-based capital guidelines, the Federal Reserve uses
a leverage ratio as an additional tool to evaluate the capital adequacy of bank
holding companies. The leverage ratio is a company's Tier 1 capital divided by
its average total consolidated assets. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis points
or more above the regulatory minimum. The Corporation is required to maintain a
leverage ratio of 4%. As of December 31, 1998, the Corporation's leverage ratio
was 11.76%.
The federal banking 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 bank
regulatory agencies may set capital requirements for a particular banking
organizations that are higher than the minimum ratios when circumstances
warrant. Federal Reserve 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.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit a
capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater enforcement power in
situations where an institution becomes "significantly" or "critically"
undercapitalized or fails to submit a capital restoration plan. For example, a
bank holding company controlling such an institution can be required to obtain
prior Federal Reserve approval of proposed dividends or might be required to
consent to a consolidation or to divest the troubled institution or other
affiliates.
Acquisitions by Bank Holding Companies. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve before it
may acquire all or substantially all of the assets of any bank, or ownership or
control of any voting shares of any bank, if after such acquisition it would own
or control, directly or indirectly, more than 5% of the voting shares of such
bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served and various competitive
factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve has been notified and has not objected to the transaction. Under
a rebuttable presumption established by the Federal Reserve, the acquisition of
10% or more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act, would, under the
circumstances set forth in the presumption, constitute acquisition of control of
that bank holding company.
In addition, any company is required to obtain the approval of the Federal
Reserve under the BHCA before acquiring 25% (5% in the case of an acquiror that
is a bank holding company) or more of the outstanding common stock of the
Corporation, or otherwise obtaining control or a "controlling influence" over
the Corporation.
Thrift Holding Company
In addition to being a registered bank holding company, by virtue of the
acquisition of Emerald Bank on February 12, 1999, the Corporation is a
registered thrift holding company as defined by the Home Owners'
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Loan Act ("HOLA"). As such, the Corporation is subject to OTS regulation,
examination, supervision and reporting requirements. As a thrift subsidiary of a
thrift holding company, Emerald Bank is subject to regulation by the OTS and
subject to certain restrictions in its dealings with the Corporation and
affiliates thereof.
Qualified Thrift Lender Test. In general, thrifts must maintain at least
65% of their portfolio assets in specific, qualified investments. The 1997
Omnibus Appropriations Act allows assets such as mortgage backed securities,
credit cards, small business loans and other types of loans (in applicable
percentages) to qualify under this test.
Activities Restrictions. The Corporation intends to operate as a unitary
thrift holding company. There are few restrictions on the activities of a
unitary thrift holding company imposed by the HOLA. However, the broad latitude
to engage in activities under current law can be restricted if the OTS
determines that there is reasonable cause to believe that the continuation by a
thrift holding company of an activity constitutes a serious risk to the
financial safety, soundness or stability of its subsidiary thrift. The OTS may
impose such restrictions as deemed necessary to address such risk including
limiting: (i) payment of dividends by the thrift; (ii) transactions between the
thrift and its affiliates; and (iii) any activities of the thrift that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the thrift. In addition, legislative initiatives
may be introduced in the U.S. Congress which could result in the imposition of
restrictions on the activities of the Corporation in the future. However, if
Emerald Bank were to fail to meet the qualified thrift lender test, then the
Corporation would become subject to the activities restrictions applicable to
multiple thrift holding companies. Multiple thrift holding companies are subject
to a variety of restrictions on the types of services that may be offered and
the types of activities that may be engaged in by the multiple thrift holding
company and its affiliates. Unless the thrift requalifies as a qualified thrift
lender within one year thereafter, the holding company shall register as and
become subject to the restrictions applicable to a bank holding company.
Restrictions on Acquisitions. Thrift holding companies are prohibited from
acquiring, without prior approval of the OTS, (i) control of any other thrift or
thrift holding company or substantially all the assets thereof or (ii) more than
5% of the voting shares of a thrift or holding company thereof which is not a
subsidiary. Under certain circumstances, a registered thrift holding company is
permitted to acquire, with the approval of the OTS, up to 15% of the voting
shares of an undercapitalized thrift pursuant to a "qualified stock issuance"
without that thrift being deemed controlled by the holding company. In order for
the shares acquired to constitute a "qualified stock issuance," the shares must
consist of previously unissued stock or treasury shares, the shares must be
acquired for cash, the savings and loan holding company's other subsidiaries
must have tangible capital of at least 6 1/2% of total assets, there must not be
more than one common director or officer between the thrift holding company and
the issuing thrift and transactions between the thrift and the thrift holding
company and any of its affiliates must conform to Sections 23A and 23B of the
Federal Reserve Act. Except with the prior approval of the OTS, no director or
officer of a thrift holding company or person owning or controlling by proxy or
otherwise more than 25% of such company's stock, may also acquire control of any
thrift, other than a subsidiary thrift, or of any other thrift holding company.
The Bank
The deposits of The Bank, an Alabama-chartered banking corporation, are
insured by the Bank Insurance Fund ("BIF") of the FDIC. The Bank is a not member
of the Federal Reserve System; therefore, The Bank is subject to supervision and
regulation by the FDIC and the Alabama Banking Department. Such supervision and
regulation subjects The Bank to special restrictions, requirements, potential
enforcement actions and periodic examination by the FDIC and the Alabama Banking
Department. Because the Federal Reserve regulates the bank holding company
parent of The Bank, the Federal Reserve also has supervisory authority which
directly affects The Bank.
Branching. Under Alabama law, an Alabama-chartered bank can establish a
branch anywhere in Alabama provided that the branch is approved in advance by
the Alabama Banking Department. The branch must also be approved by the FDIC
which considers a number of factors, including financial history, capital
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adequacy, earnings prospects, character of management, needs of the community
and consistency with corporate powers.
Restrictions on Transactions With Affiliates and Insiders. Transactions
between The Bank and its affiliates, including the Corporation, are subject to
Section 23A 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 its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between The 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
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
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, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and
Assets. Dividends paid by The Bank have provided a substantial part of the
Corporation's operating funds and, for the foreseeable future, it is anticipated
that dividends paid by The Bank to the Corporation will continue to be the
Corporation's principal source of operating funds. Capital adequacy requirements
serve to limit the amount of dividends that may be paid by The Bank. Under
federal law, The Bank can not pay a dividend if, after paying the dividend, The
Bank would be "undercapitalized." The FDIC may declare a dividend payment to be
unsafe and unsound even though The Bank would continue to meet its capital
requirements after the dividend.
Because the Corporation is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Corporation) or any shareholder or creditor thereof.
Examinations. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the bank's established book
value of such assets. The Alabama Banking Department also periodically conducts
examinations of state banks.
Capital Adequacy Requirements. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.
The FDIC's risk-based capital guidelines generally require state banks to
have a minimum of Tier 1 capital to total risk-weighted assets of 4.0% and a
ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for The Bank as for the Corporation. As of
December 31, 1998, The Bank's ratio of Tier 1 capital to total risk-weighted
assets was 10.67% and its ratio of total capital to total risk-weighted assets
was 11.85%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well-capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank
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has a total risk based capital ratio of 10.0% or higher; a Tier 1 risk based
capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher; and is not
subject to any written agreement, order or directive requiring it to maintain a
specific capital level for any capital measure. An "adequately capitalized" bank
has a total risk based capital ratio of 8.0% or higher; a Tier 1 risk based
capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or
higher if the bank was rated a CAMEL 1 in its most recent examination report and
is not experiencing significant growth); and does not meet the criteria for a
well capitalized bank. A bank is "under capitalized" if it fails to meet any one
of the ratios required to be adequately capitalized. The Bank is classified as
"well capitalized" for purposes of the FDIC's prompt corrective action
regulations.
In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
As an institution's capital decreases, the FDIC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management and other restrictions. The FDIC has only
very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Deposit Insurance Assessments. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk based
assessment system as required by the Federal Deposit Insurance Corporation
Improvements Act ("FDICIA"). Under this system, FDIC-insured depository
institutions pay insurance premiums at rates based on their risk classification.
Institutions assigned to higher-risk classifications (that is, institutions that
pose a greater risk of loss to their respective deposit insurance funds) pay
assessments at higher rates than institutions that pose a lower risk. An
institution's risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators. In
addition, the FDIC can impose special assessments in certain instances. The
current range of BIF assessments is between 0% and 0.27% of deposits.
The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the SAIF and to assure the
payment of the Financial Corporation's ("FICO") bond obligations. Under this
act, banks insured under the BIF are required to pay a portion of the interest
due on bonds that were issued by FICO to help shore up the ailing Federal
Savings and Loan Insurance Corporation in 1987. The BIF rate must equal
one-fifth of the Savings Association Insurance Fund ("SAIF") rate through
year-end 1999, or until the insurance funds are merged, whichever occurs first.
Thereafter, BIF and SAIF payers will be assessed pro rata for the FICO bond
obligations. With regard to the assessment for the FICO obligation, the current
BIF rate is .0126% of deposits.
Enforcement Powers. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Corporation or its banking
subsidiaries, as well as officers,
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directors and other institution-affiliated parties of these organizations, to
administrative sanctions and substantial civil money penalties. The appropriate
federal banking agency may appoint the FDIC as conservator or receiver for a
banking institution (or the FDIC may appoint itself, under certain
circumstances) if any one or more of a number of circumstances exist, including,
without limitation, the fact that the banking institution is undercapitalized
and has no reasonable prospect of becoming adequately capitalized; fails to
become adequately capitalized when required to do so; fails to submit a timely
and acceptable capital restoration plan; or materially fails to implement an
accepted capital restoration plan. The Alabama Banking Department also has broad
enforcement powers over The Bank including the power to impose orders, remove
officers and directors, impose fines and appoint supervisors and conservators.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll over
brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository institutions liable
to the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("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. 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 in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with any
other bank holding company. An unsatisfactory record can substantially delay or
block the transaction.
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 and the Fair Housing 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 to or
engaging in other types of transactions with such customers.
Emerald Bank
The deposits of Emerald Bank are insured up to $100,000 per insured member
(as defined by law and regulation) by the SAIF administered by the FDIC and are
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against thrifts, after giving the OTS an opportunity to take
such action.
Branching. Current OTS policy generally permits a federally-chartered
thrift to establish branch offices outside of its home state if the thrift meets
the domestic building and loan test in Section 7701(a)(19) of the Code, or the
asset composition test of subparagraph (c) of that section, and if, with respect
to each state outside of its home state where the thrift has established
branches, the branches, taken alone, also satisfy one of the two tax tests. A
thrift seeking to take advantage of this authority would have to have a
branching application approved by the OTS, which would consider the regulatory
capital of the thrift and its record under the CRA, among other things.
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Restrictions on Transactions with Affiliates and Insiders. Transactions
between a thrift and its affiliates are subject to quantitative and qualitative
restrictions under Sections 23A and 23B of the Federal Reserve Act. Affiliates
of a thrift include, among other entities, the thrift's holding company and
companies that are under common control with the thrift.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a thrift or its subsidiaries may engage in
certain "covered transactions" with affiliates to an amount equal to 10% of the
thrift's capital and surplus, in the case of covered transactions with any one
affiliate, and to an amount equal to 20% of such capital and surplus, in the
case of covered transactions with all affiliates. In addition, a thrift and its
subsidiaries may engage in covered transactions and certain other transactions
only on terms or under circumstances that are substantially the same, or at
least as favorable to the thrift or its subsidiary, as those prevailing at the
time for comparable transactions with non-affiliated companies. A "covered
transaction" is defined to include a loan or extension of credit to an
affiliate; a purchase of investment securities issued by an affiliate; a
purchase of assets from an affiliate, with certain exceptions; the acceptance of
securities issued by an affiliate as collateral for a loan or extension of
credit to any party; or the issuance of a guarantee, acceptance, or letter of
credit on behalf of an affiliate.
In addition, under the OTS regulations, a thrift may not make a loan or
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for bank holding companies; a thrift may not purchase or
invest in securities of an affiliate other than shares of a subsidiary; a thrift
and its subsidiaries may not purchase a low-quality asset from an affiliate; and
covered transactions and certain other transactions between a thrift or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions, each
loan or extension of credit by a thrift to an affiliate must be secured by
collateral with a market value ranging from 100% to 130% (depending on the type
of collateral) of the amount of the loan or extension of credit.
The OTS regulation generally excludes all non-bank and non-thrift
subsidiaries of thrifts from treatment as affiliates, except to the extent that
the OTS or the Federal Reserve decides to treat such subsidiaries as affiliates.
The regulation also requires thrifts to make and retain records that reflect
affiliate transactions in reasonable detail, and provides that certain classes
of thrifts may be required to give the OTS prior notice of affiliate
transactions.
Restrictions on Distributions of Subsidiary Thrift Dividends and
Capital. OTS regulations govern capital distributions by thrifts, which include
cash dividends, stock redemptions or repurchases, cash-out mergers, interest
payments on certain convertible debt and other transactions charged to the
capital account of a thrift to make capital distributions. Generally, the
regulation creates a safe harbor for specified levels of capital distributions
from thrifts meeting at least their minimum capital requirements, so long as
such thrifts notify the OTS and receive no objection to the distribution from
the OTS. Thrifts and distributions that do not qualify for the safe harbor are
required to obtain prior OTS approval before making any capital distributions.
Generally, thrifts that before and after the proposed distribution meet or
exceed their fully phased-in capital requirements, or Tier 1 thrifts, may make
capital distributions during any calendar year equal to the higher of (i) 100%
of net income for the calendar year-to-date plus 50% of its "surplus capital
ratio" at the beginning of the calendar year or (ii) 75% of net income over the
most recent four-quarter period. The "surplus capital ratio" is defined to mean
the percentage by which the thrift's ratio of total capital to assets exceeds
the ratio of its fully phased-in capital requirement to assets. "Fully phased-in
capital requirement" is defined to mean a thrift's capital requirement under the
statutory and regulatory standards, as modified to reflect any applicable
individual minimum capital requirement imposed on the thrift. Failure to meet
fully phased-in or minimum capital requirements will result in further
restrictions on capital distributions including possible prohibition without
explicit OTS approval. See "-- Capital Adequacy Requirements."
In order to make distributions under these safe harbors, Tier 1 and Tier 2
thrifts must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 thrift deemed to
be in need of more than normal supervision by the OTS may be downgraded to a
Tier 2 or Tier 3 thrift as a result of such a
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determination. Emerald Bank currently is a Tier 1 institution for purposes of
the regulation dealing with capital distributions.
The OTS has also imposed additional requirements that would require thrifts
with more than a "normal" level of interest rate risk to maintain additional
capital. Certain exceptions would apply based upon capitalization and size of a
thrift. Emerald Bank believes that it would not be deemed to have more than a
"normal" level of interest rate risk.
Capital Adequacy Requirements. Current OTS capital standards require
thrifts to satisfy three different capital requirements. Under these standards,
thrifts must maintain "tangible" capital equal to 1.5% of adjusted total assets,
"core" capital equal to 3% of adjusted total assets and "total" capital (a
combination of core and "supplementary" capital) equal to 8% of "risk-weighted"
assets. For purposes of the regulation, core capital generally consists of
common stockholders' equity (including retained earnings), non-cumulative
perpetual preferred stock and related surplus minority interests in the equity
accounts of fully consolidated subsidiaries, certain non-withdrawable accounts
and pledged deposits and "qualifying supervisory goodwill." Tangible capital is
given the same definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the thrift's intangible
assets. Emerald Bank currently meets all capital requirements imposed by federal
law.
Corrective Measures for Capital Deficiencies: The prompt corrective action
regulation of the OTS requires certain mandatory actions and authorizes certain
other discretionary actions to be taken by the OTS against a thrift that falls
within certain undercapitalized capital categories specified in the regulation.
The regulation establishes five categories of capital classification:
"well-capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulation, the
risk-based capital, leverage capital, and tangible capital ratios are used to
determine an institution's capital classification. At December 31, 1998, Emerald
Bank met the capital requirements of a "well capitalized" institution under
applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if, following
the distribution or payment, the institution would be within any of the three
undercapitalized categories. In addition, adequately capitalized institutions
may accept brokered deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits.
Undercapitalized institutions may not accept, renew, or roll-over brokered
deposits.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized, but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and if the institution is
undercapitalized, require it to comply with certain restrictions applicable to
significantly undercapitalized institutions.
The deposits of Emerald Bank are currently insured by the SAIF. Both the
SAIF and the BIF, the federal deposit insurance fund that covers commercial bank
deposits, are required by law to attain and thereafter maintain a reserve ratio
of 1.25% of insured deposits. The BIF had achieved a fully funded status in
contrast to the SAIF and, therefore, the FDIC substantially reduced the average
deposit insurance premium paid by commercial banks to a level approximately 75%
below the average premium paid by thrifts.
Deposit Insurance Assessments. The under funded status of the SAIF had
resulted in the introduction of federal legislation intended to, among other
things, recapitalize the SAIF and address the resulting premium disparity. On
September 30, 1996, the Omnibus Appropriations Act was signed into law. The
legislation authorized a one-time charge on SAIF insured deposits at a rate of
$.657 per $100.00 of March 31, 1995 deposits. Additional provisions of the Act
include new BIF and SAIF premiums and the merger of BIF and SAIF. The new BIF
and SAIF premiums will include a premium for repayment of the FICO bonds plus
any regular insurance assessment, currently nothing for the lowest risk category
institutions.
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The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. The Corporation is
aware of no existing circumstances which would result in termination of Emerald
Bank's deposit insurance.
Enforcement Powers. The OTS' enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OTS.
Liquidity Requirements. Each thrift is required to maintain an average
daily balance of liquid assets (including cash, certain time deposits and
savings accounts, bankers' acceptances, certain government obligations, and
certain other investments) in each calendar quarter equal to a certain
percentage of the sum of either: (i) its liquidity base (consisting of certain
net withdrawable accounts plus short-term borrowings) as of the end of the
preceding calendar quarter, or (ii) the average daily balance of its liquidity
base during the preceding quarter. The liquidity requirement may vary from time
to time (between 4% and 10%) depending upon economic conditions and savings
flows of all thrifts. Emerald Coast meets such liquidity requirements
Federal Home Loan Bank System. Emerald Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of the thrifts. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It makes
loans to members (i.e., advances) in accordance with the policies and procedures
established by the Board of Directors of the FHLB.
As a member, Emerald Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Atlanta,
whichever is greater. At December 31, 1998, Emerald Bank had $225,000 in FHLB
stock (2,250 shares), which was in compliance with this requirement.
Community Reinvestment Act and Fair Lending Developments. Emerald Bank is
subject to certain fair lending requirements and reporting obligations involving
home mortgage lending operations and CRA activities. A thrift's compliance with
its CRA obligations is based on a performance-based evaluation system which
bases CRA ratings on an institution's lending service and investment
performance. When a holding company applies for approval to acquire another
financial institution or financial institution holding company, the OTS will
review the assessment of each subsidiary thrift of the applicant; and such
records may be the basis for denying the application.
INSTABILITY OF REGULATORY STRUCTURE
Various legislation is from time to time introduced in Congress including
proposals to overhaul the bank regulatory system, expand the insurance,
securities and certain other powers of banking institutions and bank holding
companies, limit the investments that a depository institution may make with
insured funds, restrict the powers of thrift holding companies and restrict the
powers of or eliminate the thrift charter. Such legislation may change banking
statutes and the operating environment of the Corporation and its subsidiaries
in substantial and unpredictable ways.
Specifically, a financial services modernization bill cleared the Senate
Banking Committee on March 4, 1999, and is targeted for a floor vote during the
first two weeks of May 1999. The measure would allow bank holding companies to
engage in a broad array of financial activities, including insurance, securities
underwrit-
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ing and merchant banking. National banks with $1 billion or less in assets could
engage in those activities through operating subsidiaries. The House Banking
Committee cleared its version of the financial services modernization
legislation on March 11, 1999. Like the Senate measure, the House bill would
allow new cross-industry business combinations; however, the House bill would do
so by means of newly created financial holding companies and affiliated firms.
Securities affiliates would be required to comply with all applicable federal
securities laws, including registration and other requirements applicable to
broker-dealers. The House bill also provides that insurance activities shall be
subject to specified state insurance regulations and supervision. The Senate
bill includes similar insurance provisions, but unlike the House bill, it does
not prohibit national banks from underwriting title insurance. The Corporation
cannot determine the likelihood that this legislation will be enacted, or what
form it will take should it be adopted by both the House and Senate. The
Corporation also cannot determine the ultimate effect that potential
legislation, if enacted, or implementing regulations with respect thereto, would
have on the financial condition or results of operations of the Corporation or
its subsidiaries.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and thrifts and their holding companies. In addition, the Federal
Reserve and FDIC are possessed of extensive authority to police unsafe or
unsound practices and violations of applicable laws and regulations by
depository institutions and their holding companies. For example, the FDIC may
terminate the deposit insurance of any institution which it determines has
engaged in an unsafe or unsound practice. The agencies can also assess civil
money penalties, issue cease and desist or removal orders, seek injunctions and
publicly disclose such actions. FDICIA, FIRREA and other laws have expanded the
agencies' authority in recent years, and the agencies have not yet fully tested
the limits of their powers.
EFFECT ON ECONOMIC ENVIRONMENT
The policies of regulatory authorities, including the monetary policy of
the Federal Reserve, have a significant effect on the operating results of bank
holding companies and their subsidiaries. Among the means available to the
Federal Reserve 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 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. PROPERTIES.
The Corporation owns the John A. Hand building, a 21-story office building
located at 17 North 20th Street, Birmingham, Alabama 35203, in which the
Corporation's headquarters are located and in which the Birmingham branch of The
Bank is located. The Corporation also owns The Bank's locations in Warrior,
Morris, Mt. Olive, Decatur, Albertville, Guntersville, Rainbow City,
Monroeville, Frisco City, Sylacauga, Childersburg, Mignon and Roanoke, Alabama.
The Corporation leases The Bank's locations in Gadsden and Monroeville, Alabama.
As of February 12, 1999, the Corporation leases Emerald Bank's locations in
Panama City Beach, Destin, Seagrove and Bay Point, Florida.
ITEM 3. LEGAL PROCEEDINGS.
While the Corporation may from time to time be a party to various legal
proceedings arising from the ordinary course of its business, the Corporation
believes that there are currently no proceedings threatened or
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pending against the Corporation at this time that will individually, or in the
aggregate, materially or adversely affect the Corporation's business or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Corporation's common stock trades on The Nasdaq Stock Market under the
symbol "TBNC". As of March 30, 1999, there were approximately 711 record holders
of the Corporation's common stock. The range of high and low sales prices from
December 10, 1998, the date on which the Company's common stock began trading on
Nasdaq, through December 31, 1998 was $14.38 and $11.78. On December 31, 1998,
the last sale price for the common stock was $12.43 per share.
The Corporation has never paid dividends on its common stock, and there can
be no assurances that dividends will be paid in the future. The Corporation
conducts its principal business through its subsidiaries. The Corporation
derives cash available to pay dividends primarily, if not entirely, from
dividends paid to the Corporation by its subsidiaries. Certain state and federal
legal and regulatory restrictions limit the subsidiaries' 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.
In September 1997, Warrior purchased shares of Warrior common stock at a
price of $4.79 per share from the following Warrior directors who are now
directors of the Corporation: Johnny Wallis, 436,200; Marie Swift, 172,500; and
Peter N. Dichiara, 90,000. In October 1997, the following directors of the
Corporation purchased the following number of shares of Warrior common stock at
$4.79 per share: James R. Andrews, 210,000; Charles Barkley, 210,000; Larry R.
House, 208,800; James Mailon Kent, Jr., 210,000; Mayer Mitchell, 105,000; Harold
Ripps, 210,000; Michael A. Stephens, 210,000; and Larry D. Striplin, 210,000.
(The dollar amounts and the share numbers set forth above have been adjusted to
take into account the 300-for-one exchange effected in the Warrior merger in
September 1998.)
During 1997, Warrior purchased the John A. Hand Building, a 21-story office
building in downtown Birmingham, from Taylor Acquisition Corporation, a
corporation owned by James A. Taylor, Chairman and Chief Executive Officer of
the Corporation, and certain family members including his son, James A. Taylor,
Jr., Executive Vice President and General Counsel of the Corporation. Warrior
purchased the building in exchange for 460,500 shares of Warrior common stock,
valued at $4.79 per share, and Warrior assumed $1,513,000 in outstanding debt on
the property. James A. Taylor received 368,400 shares of Warrior common stock,
valued at $4.79 per share, and James A. Taylor, Jr. received 30,000 shares of
Warrior common stock, valued at $4.79 per share. Other members of the Taylor
family received the remaining 62,100 shares of Warrior common stock. The
building, property and related equipment were appraised at $3,718,000 at the
time of the transaction.
During 1998, Warrior sold a total of 495,000 shares of Warrior common stock
at $4.79 per share to various executive officers and directors of the
Corporation. James A. Taylor, James A. Taylor, Jr., Richard M. Scrushy and James
R. Andrews each purchased 210,000, 105,000, 105,000 and 75,000 shares,
respectively. All of the above transactions were structured to be exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data for the Corporation
derived from the Corporation's 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.
YEAR ENDED DECEMBER 31,(2)
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF FINANCIAL CONDITION
DATA:
Total assets................................ $440,845 $307,713 $250,955 $200,739 $149,515
Loans, net of unearned income............... 299,345 179,005 141,228 101,484 70,213
Investment securities....................... 69,851 73,911 73,302 64,905 53,242
Deposits.................................... 365,972 264,162 219,644 173,106 131,701
Stockholders' equity........................ 51,475 39,981 27,442 25,146 17,000
SELECTED STATEMENT OF OPERATIONS DATA:
Interest income............................. 28,167 22,590 17,593 13,820 10,800
Interest expense............................ 13,225 10,401 7,886 5,932 4,086
-------- -------- -------- -------- --------
Net interest income............... 14,942 12,189 9,707 7,888 6,714
Provision for loan losses................... 3,094 1,516 896 550 167
Noninterest income.......................... 2,617 2,205 1,956 1,621 1,461
Merger related costs........................ 1,466 -- -- -- --
Other noninterest expense................... 14,460 9,913 8,663 7,285 5,524
-------- -------- -------- -------- --------
Income (loss) before tax.................... (1,461) 2,965 2,104 1,674 2,484
Income tax (benefit) expense................ (1,022) 891 647 326 638
-------- -------- -------- -------- --------
Net(loss)income................... $ (439) $ 2,074 $ 1,457 $ 1,348 $ 1,846
======== ======== ======== ======== ========
PER SHARE DATA:
Net (loss) income -- basic and diluted...... $ (.04) $ .29 $ .21 $ .21 $ .34
Book value.................................. 4.82 4.39 3.99 3.79 3.18
Dividends(1)................................ -- .09 .08 .08 .07
PERFORMANCE RATIOS:
Return on average assets.................... (.12)% .75% .66% .76% 1.26%
Return on average equity.................... (1.06) 7.05 5.49 6.02 10.91
ASSET QUALITY RATIOS:
Allowance for loan losses to nonperforming
loans..................................... 209.20% 114.65% 82.28% 190.34% 210.47%
Allowance for loan losses to loans, net of
unearned income........................... 1.29 1.19 1.20 1.46 1.77
Nonperforming loans to loans, net of
unearned income........................... .62 1.04 1.45 .76 .84
Net loan charge-offs to average loans....... .78 .66 .58 .37 .25
CAPITAL RATIOS:
Leverage ratio.............................. 11.76% 14.17% 12.31% 12.54% 11.42%
Tier 1 risk-based capital ratio............. 14.89 19.49 16.72 21.58 20.68
Total risk-based capital ratio.............. 16.02 20.55 17.77 22.83 21.93
(1) Dividends per share represent dividends paid on the common stock of the
Corporation's predecessor Warrior, prior to the merger.
(2) Information for all prior periods has been restated for the poolings of
interest completed during 1998.
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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 Corporation was established in April 1998 so that Warrior Capital
Corporation, a registered Alabama bank holding company could merge into the
Corporation and thereby change its name to "The Banc Corporation" and its
domicile from Alabama to Delaware. Warrior merged with the Corporation on
September 24, 1998. Before it merged with Warrior, the Corporation was a shell
corporation with no independent operations. The principal subsidiary of the
Corporation is The Bank, a bank organized and existing under the laws of Alabama
and headquartered in Birmingham, Alabama. See "Business."
Recently Completed Acquisitions. The acquisitions of other banks and
related institutions have contributed significantly to the Corporation's growth
since the Warrior merger. The following chart lists the Corporation's business
combinations completed during 1998 and thus far in 1999:
1998
DATE COMPLETED COMPANY ACQUIRED BANKING LOCATIONS
-------------- ---------------- -----------------
October 16, 1998 Commercial Bancshares of Roanoke, Roanoke, Alabama(2)
Inc.
October 30, 1998 First Citizens Bancorp, Inc. Monroeville(2) and Frisco City,
Alabama
October 30, 1998 City National Corporation Sylacauga, Childersburg and Mignon,
Alabama
November 6, 1998 Commerce Bank of Alabama Albertville, Gadsden, Guntersville
and Rainbow City, Alabama
1999
DATE COMPLETED COMPANY ACQUIRED BANKING LOCATIONS
-------------- ---------------- -----------------
February 12, 1999 Emerald Coast Bancshares, Inc. Panama City Beach, Destin, Seagrove
and Bay Point, Florida
Pending Acquisitions. The following chart lists three other financial
institutions the Corporation has agreed to acquire since January 1, 1999:
DATE OF AGREEMENT COMPANY TO BE ACQUIRED BANKING LOCATIONS
- ----------------- ---------------------- -----------------
January 13, 1999 BankersTrust of Alabama, Inc. Huntsville and Madison, Alabama
February 25, 1999 C&L Banking Corporation Bristol, Florida
February 25, 1999 C&L Bank of Blountstown Blountstown and Altha, Florida
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 and pending 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 effect of legal proceedings on
the Corporation's financial condition, results of operations and liquidity; Year
2000 compliance issues and market risk disclosures, as well as other
information. 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
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strength and weakness in the commercial and consumer sector and in the real
estate market, the actions taken by the Federal Reserve 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.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Corporation's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could cause a system failure or miscalculations resulting in
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements or engage in similar normal business
activities.
The Corporation has a five-step plan to resolve the Year 2000 Issue:
- establishing awareness of and educating key personnel with respect to
Year 2000 issues and the Corporation's plan to address those potential
problems;
- identifying significant systems and assessing potential Year 2000 issues
relating to those systems;
- renovating and repairing noncompliant systems;
- testing and validating solutions; and
- implementing those solutions.
To date, the Corporation has completed the first three steps and expects to
complete the remaining steps during the second and third quarters of 1999. The
Corporation determined that it needed to upgrade significant portions of its
software and hardware so that those systems will utilize dates beyond December
31, 1999. The Corporation presently believes that with these upgrades of its
existing software and hardware, potential Year 2000 issues can be mitigated.
The Corporation adopted a Year 2000 Merger Policy to address Year 2000
issues related to the Corporation's acquisitions. The Year 2000 Merger Policy is
designed to act as a guide for both the Corporation and its acquired entities in
addressing Year 2000 issues. The Corporation is using this policy to ensure that
both the Corporation and its acquired entities follow a logical and planned
process for identifying, assessing and remediating Year 2000 issues and testing
and implementing those solutions.
The Corporation is utilizing both internal and external resources to
reprogram, replace and test software and other components of its systems for
Year 2000 modifications. Modifications have been scheduled to ensure that
mission-critical systems are completed in time to allow for extended testing.
The Corporation's systems are divided into two categories, those maintained
internally by the Corporation's information systems personnel and those provided
by external vendors. For internally maintained systems, revisions were
implemented during the first quarter of 1999. The Corporation has already
installed the Year 2000 releases provided by vendors on its core-business
systems and is on target to complete century date testing and validation of
these core business systems. For the remainder of the externally maintained
systems, the Corporation has received written confirmation from its vendors that
each system will be made Year 2000 compliant in 1999. The Corporation will
continue to assess with its vendors the status of their Year 2000 compliance and
install any necessary additional code releases through 1999.
The majority of the Corporation's software is supplied by third parties
affecting most significant systems of the Corporation. The Corporation has begun
formal communications with all of its significant suppliers and large customers
to determine the extent to which the Corporation is vulnerable to those third
parties' failure to
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remediate their own Year 2000 issues. The Corporation is applying the majority
of its resources that are allocated to the Year 2000 Issue to installing and
testing vendor releases. To date, the Corporation is not aware of any external
agent with a Year 2000 issue that would have a material adverse effect on the
Corporation's financial condition or results of operations.
The projected total cost of the Year 2000 project is currently estimated at
approximately $300,000 and is being funded through operating cash flows. As of
December 31, 1998, the Corporation has incurred $140,000 in expenses, with
$2,000 and $138,000 expensed in 1997 and 1998, respectively. The majority of the
remaining cost will be spent on converting each of the recently acquired banks
to a centralized data processing system. These conversions are scheduled to be
completed in the first half of 1999. The costs of the project and the date on
which the Corporation plans to complete Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
assurance that these estimates will be achieved, and actual results could differ
materially from those plans.
The Corporation believes it has an effective program in place to resolve
the Year 2000 Issue in a timely manner. However, disruptions in the economy that
are beyond the Corporation's control resulting from Year 2000 issues could
materially adversely affect the Corporation. Furthermore, the Corporation has no
means of ensuring that third parties that it does not control will be Year 2000
compliant. The Corporation believes that failure of third parties to address
their Year 2000 problems in a timely fashion presents the greatest likelihood of
the Corporation not being Year 2000 compliant. Such a failure could materially
adversely impact the Corporation's operations, the estimated costs of the Year
2000 project and the target dates for completion. The effect of non-compliance
by third parties is not determinable at this time. The Corporation could be
subject to litigation for computer systems product failure, including equipment
shutdown or failure to properly date business records. The amount of potential
liability, if any and lost revenue cannot be reasonably estimated at this time.
The Corporation is currently developing contingency plans in the event that
efforts to renovate the Corporation's systems are not fully successful or are
not completed in accordance with current expectations. The contingency plans
address risk factors related to the Corporation's acquisitions, including the
inadequate allocation of resources to Year 2000 issues by one or more of the
acquired companies; and the potential costs of completing renovation or
replacement of non-compliant systems of one or more of the acquired companies.
RESULTS OF OPERATIONS
Year Ended December 31, 1998, compared with years ended December 31, 1997 and
1996
Net income (loss) decreased $2.5 million, to ($439,000) for the year ended
December 31, 1998, from $2.1 million for the year ended December 31, 1997,
primarily because of (a) increased loan loss reserves and (b) non-recurring
expenses incurred for the Corporation's recently completed mergers. Without the
non-recurring charges operating earnings for the year ended December 31, 1998
would have decreased 50.5% to $1.0 million from 1997 net income of $2.1 million,
and decreased 29.5% from 1996 net income of $1.5 million.
The Corporation's return on average assets in 1998 was (.12)%, compared to
.75% in 1997 and .66% in 1996. Return on average equity was (1.06)% in 1998
compared to 7.05% in 1997 and 5.49% in 1996. Average equity to average assets
was 11.5% in 1998 compared to 10.6% in 1997 and 12.1% in 1996.
Net interest income increased $2.7 million, or 22.6% to $14.9 million for
the year ended December 31, 1998, from $12.2 million for the year ended December
31, 1997, which increased $2.5 million, or 25.6% from $9.7 million in 1996.
Interest income increased $5.6 million, or 24.6% to $28.2 million for the year
ended December 31, 1998 from $22.6 million for the year ended December 31, 1997,
which increased $5.0 million, or 28.4%, from $17.6 million for the year ended
December 31, 1996.
The increase in interest income is attributable to an increase in average
earning assets, due primarily to the opening of a branch office in Birmingham,
Alabama on July 1, 1998. Average loans increased $57.9 million or 35.4% to
$221.7 million during 1998 from $163.8 million for the year ended December 31,
1997, which increased $45.8 million or 38.9% from $118.0 million for the year
1996.
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Interest expense increased $2.8 million, or 27.2% to $13.2 million for the
year ended December 31, 1998 from $10.4 million for the year ended December 31,
1997, which increased $2.5 million, or 31.9% from $7.9 million in 1996. The
increase in interest expense is mainly attributable to the opening of the
Birmingham branch on July 1, 1998, which experienced rapid deposit growth.
Average interest-bearing deposits increased $50.5 million, or 24.2% to $259.6
million for 1998, from $209.1 million for 1997 which increased $47.6 million, or
29.4% from $161.5 million in 1996.
The provision for loan losses was $3.1 million for the year ended December
31, 1998 compared to $1.5 million in 1997 and $896,000 in 1996. The
Corporation's allowance for loan losses as a percentage of loans was 1.3% at
December 31, 1998, compared to 1.2% at December 31, 1997 and 1996. The allowance
for loan losses as a percentage of period-end nonperforming loans was 209.2% at
December 31, 1998, compared to 114.6% at December 31, 1997 and 82.3% at December
31, 1996. The Corporation had net charge-offs of $1.7 million in 1998, resulting
in a ratio of net charge-offs to average loans of .8%. This compares to $1.1
million or .7% in 1997 and $683,000 or .6% in 1996.
Noninterest income increased $412,000, or 18.7% to $2.6 million in 1998,
from $2.2 million in 1997, which increased $249,000, or 12.7% from $2.0 million
in 1996, primarily as the result of additional customer service charges and
fees.
Noninterest expense increased $6.0 million, or 60.6% to $15.9 million in
1998 from $9.9 million in 1997, which increased $1.3 million, or 14.4% from $8.7
million in 1996. The increase is primarily attributable to increases in salaries
and employee benefits, occupancy expenses due to the opening of new offices, the
creation of new departments and the conversion of the data processing system.
Another major component of the increase in noninterest expense is approximately
$1.5 million incurred in legal, accounting and printing expenses related to the
Corporations recent acquisitions and the write off of obsolete equipment.
The Corporation's income tax benefit for 1998 was $1.0 million (70.0%) on a
loss of $1.5 million. For 1997 and 1996, the Corporation's income tax expense
was $891,000 (30.1%) and $647,000 (30.8%) on pre-tax income of $3.0 million and
$2.1 million, respectively. The primary difference in the effective tax rate and
the federal statutory rate (34%) for 1998 arose from the recognition of a
rehabilitation tax credit of $1.7 million generated from the restoration of the
Corporation's headquarters, the John A. Hand building. The rate differences for
1997 and 1996 are related to the Corporation's investment in tax-free state,
county and municipal securities.
The Corporation's determination of the realization of the deferred tax
asset is based upon management's judgment of various future events and
uncertainties, including the timing and amount of future income earned by The
Bank and the implementation of various tax planning strategies to maximize
realization of the deferred tax asset. The Corporation believes that The Bank
may 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. Because of these uncertainties, a valuation allowance has been
established. The Corporation periodically evaluates the realizability of the
deferred tax asset and, if necessary, adjusts the valuation allowance
accordingly.
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 and the rates paid on its interest-bearing
liabilities, the relative amounts of interest earning assets and
interest-bearing liabilities, and 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.
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CONSOLIDATED AVERAGE BALANCES, INTEREST/INCOME/EXPENSE
AND YIELD/RATES TAXABLE EQUIVALENT BASIS
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
(DOLLARS IN THOUSANDS)
ASSETS
Earning assets:
Loans, net of unearned income(1)...... $221,687 $22,249 10.04% $163,788 $16,683 10.19% $117,960 $12,448 10.55%
Investment securities
Taxable............................. 70,152 4,188 5.97 67,773 4,407 6.50 54,851 3,552 6.48
Tax-exempt.......................... 14,081 953 6.77 8,441 661 7.83 9,771 799 8.18
-------- ------- -------- ------- -------- -------
Total investment securities..... 84,233 5,141 6.10 76,214 5,068 6.65 64,622 4,351 6.73
Federal funds sold.................. 14,897 903 6.06 16,559 924 5.58 18,126 932 5.14
Other investments................... 1,292 112 8.67 1,140 83 7.28 812 65 8.00
-------- ------- -------- ------- -------- -------
Total interest-earning assets... 322,109 28,405 8.82 257,701 22,758 8.83 201,520 17,796 8.83
Noninterest-earning assets:
Cash and due from banks............... 14,573 10,973 8,840
Premises and equipment................ 18,355 4,251 3,501
Accrued interest and other assets..... 6,404 6,726 7,340
Allowance for loan losses............. (3,657) (1,993) (1,517)
-------- -------- --------
Total assets.................... $357,784 $277,658 $219,684
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits....................... $ 64,321 $ 2,199 3.42% $ 38,817 $ 1,333 3.43% $ 32,452 $ 995 3.07%
Savings deposits...................... 24,601 720 2.93 26,917 780 2.90 26,135 795 3.04
Time deposits......................... 170,688 9,932 5.82 143,361 8,236 5.74 102,951 6,068 5.89
Other borrowings...................... 7,694 374 4.86 1,052 52 4.94 620 28 4.52
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities................... 267,304 13,225 4.95 210,147 10,401 4.95 162,158 7,886 4.86%
Noninterest-bearing liabilities:
Demand deposits....................... 42,943 35,859 28,673
Accrued interest and other
liabilities......................... 6,257 2,243 2,308
Stockholders' equity.................. 41,280 29,409 26,545
-------- -------- --------
Total liabilities and
stockholders' equity.......... $357,784 $277,658 $219,684
======== ======== ========
Net interest income/net interest
spread................................ 15,180 3.87% 12,357 3.88% 9,910 3.97%
===== ===== =====
Net yield on earning assets............. 4.71% 4.80% 4.92%
===== ===== =====
Taxable equivalent adjustment:
Investment securities(2).............. 238 168 203
------- ------- -------
Net interest income............. $14,942 $12,189 $ 9,707
======= ======= =======
- ---------------
(1) Nonaccrual loans of an immaterial amount 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.
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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 income for the years ended December 31, 1998 and 1997.
YEAR ENDED DECEMBER 31
---------------------------------------------------------
1998 VS 1997 1997 VS 1996
--------------------------- ---------------------------
CHANGES DUE TO CHANGES DUE TO
INCREASE -------------- INCREASE --------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------- ----- ------ ---------- ----- ------
(DOLLARS IN THOUSANDS)
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans............ $5,566 $(246) $5,812 $4,235 $(439) $4,674
Interest on securities:
Taxable.......................... (219) (362) 143 855 15 840
Tax-exempt....................... 292 (97) 389 (138) (34) (104)
Interest on federal funds................ (21) 79 (100) (8) 79 (87)
Interest on other investments............ 29 16 13 18 (6) 24
------ ----- ------ ------ ----- ------
Total interest income............ 5,647 (610) 6,257 4,962 (385) 5,347
------ ----- ------ ------ ----- ------
Expense from interest-bearing liabilities:
Interest on demand deposits.............. 866 (10) 876 338 122 216
Interest on savings deposits............. (60) 7 (67) (15) (38) 23
Interest on time deposits................ 1,696 126 1,570 2,168 (155) 2,323
Interest on other borrowings............. 322 (5) 327 24 3 21
------ ----- ------ ------ ----- ------
Total interest expense........... 2,824 118 2,706 2,515 (68) 2,583
------ ----- ------ ------ ----- ------
Net interest income.............. $2,823 $(728) $3,551 $2,447 $(317) $2,764
====== ===== ====== ====== ===== ======
- ---------------
(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 rate.
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.
Over the next twelve months approximately $6.1 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, 1998, was
0.97, indicating a slightly liability sensitive position. However, the
Corporation's interest rate risk is heavily asset sensitive during the first
ninety days of 1999. As of December 31, 1998, the Corporation's interest rate
risk model indicated that projected net interest income would increase on an
annual basis by 3.6% assuming an instantaneous increase in interest rates of 200
basis points, or decrease on an annual basis by 4.0%, assuming an instantaneous
decrease of 200 basis points
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
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include regular savings, interest-bearing transaction accounts, money market and
now accounts. The rates paid on these accounts are not typically directly
related 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
income effect of various interest rate scenarios. The modeling reflects interest
rate changes and the related impact on net income over specified periods of
time.
The goal of liquidity management is to provide adequate funds to meet
changes in loan and lease 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.
PROVISION AND 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 Bank's personnel conducts a review of all loans over $250,000 and a
sample of loans less than $250,000. Specific reserves are allocated based on
these reviews. General reserves are allocated based on the aforementioned
factors. Thus, there can be no assurance that charge-offs in future periods will
not exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required. The adequacy of the allowance
for loan losses and the effectiveness of the Corporation's monitoring and
analysis system are also reviewed periodically by the banking regulators.
Additions to the allowance for loan losses, which are expensed on the
Corporation's statement of operations, are made periodically to maintain the
allowance at an appropriate level based on the analysis of the potential risk in
the loan portfolio. Loan losses and recoveries are charged or credited directly
to the allowance. Total loans net of unearned income increased 67.2% to $299.3
million for the year ended December 31, 1998 from $179.0 million at December 31,
1997. While loan growth was significant in 1998, it was well diversified between
commercial, industrial, agricultural, consumer and mortgage loans. Commercial,
industrial and agricultural loans increased $54.4 million, or 93.9%, consumer
loans increased $18.6 million, or 43.7% and mortgage loans increased $41.9
million, or 54.5%.
Net charge-offs increased 60.8% over the same period from $1.1 million in
1997 to $1.7 million in 1998. The ratio of net charge-offs to average loans has
increased in each of the past four years, averaging 0.53%, with the last two
years being 0.78% in 1998 and 0.66% in 1997. Historically, net charge-offs have
been more significant for commercial and consumer loans. Allowance for loan
losses as a percentage of non-performing loans increased to 209.2% at December
31, 1998 from 114.6% at December 31, 1997. The dollar level of nonperforming
loans has remained consistent for the past three years; however, with the
dramatic increase in loan volume, the actual dollar amount could increase in the
future. The allowance as a percentage of period ending loans at December 31,
1998 was 1.29%. The average allowance as a percentage of period ending loans for
the last three years has been 1.28%.
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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
YEAR ENDED DECEMBER 31
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
Allowance for loan losses at beginning of
period................................. $ 2,129 $ 1,690 $ 1,477 $ 1,246 $ 1,251
Allowance of acquired bank............... 368 -- -- -- --
Charge-offs:
Commercial, industrial and
agricultural........................ 803 522 67 7 125
Real estate............................ 267 57 46 58 --
Consumer............................... 1,205 779 731 403 149
-------- -------- -------- -------- -------
Total charge-offs.............. 2,275 1,358 844 468 274
Recoveries:
Commercial, industrial and
agricultural........................ 77 40 22 24 3
Real estate............................ 81 23 5 3 1
Consumer............................... 385 218 134 122 99
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