<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): February 12, 1999
THE BANC CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-25033 63-1201350
(Commission File No.) (I.R.S. Employer Identification No.)
17 North 20th Street
Birmingham, Alabama 35203
(Address of Principal Executive Offices)
(205) 326-2265
(Registrant's Telephone Number, Including Area Code)
<PAGE> 2
Item 5. Other Events
On February 12, 1999, The Banc Corporation, a Delaware corporation (the
"Corporation"), acquired Emerald Coast Bancshares, Inc., a Florida bank holding
company, in exchange for approximately 1,379,858 shares of Corporation common
stock having a total value of approximately $15.2 million (the "Emerald
Acquisition"). As a result of the Emerald Acquisition, the Corporation believes
that much of the information and disclosure previously reported pursuant to the
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), should be updated and amended to reflect the Corporation's current
status. Accordingly, the Corporation is filing this Current Report on Form 8-K
which contains an updated version of "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the supplemental consolidated
financial statements of the Corporation restated to account for the Emerald
Acquisition as a pooling of interests.
Item 7. Financial Statements and Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
(23)-1 Consent of Ernst & Young LLP
(23)-2 Consent of Saltmarsh Cleaveland & Gund
(27)-1 Restated Supplemental Financial Data Schedule for 1998
(27)-2 Restated Supplemental Financial Data Schedule for 1997
(99)-1 Selected Supplemental Financial Data
(99)-2 Management's Discussion and Analysis of Financial Condition and Results of
Operations
(99)-3 Supplemental Consolidated Financial Statements and Supplementary Data
</TABLE>
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE BANC CORPORATION
By /s/ JAMES A. TAYLOR, JR.
------------------------------------
James A. Taylor, Jr.
Executive Vice President,
General Counsel and Secretary
Dated: April 15, 1999
3
<PAGE> 1
Exhibit 23 - Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-72747) pertaining to the Amended and Restated 1998 Stock
Incentive Plan of The Banc Corporation and Commerce Bank of Alabama Incentive
Stock Compensation Plan and (Form S-8 No. 333-70953) pertaining to The Banc
Corporation 401(k) Plan of our report dated March 19, 1999, with respect to the
supplemental consolidated financial statements of The Banc Corporation and
Subsidiaries in the Current Report (Form 8-K) dated April 15, 1999.
/s/ Ernst & Young LLP
Birmingham, Alabama
April 12, 1999
<PAGE> 1
EXHIBIT (23)-2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm and to the use of our report dated
March 19, 1999 with respect to the consolidated financial statements of Emerald
Coast Bancshares, Inc. and Subsidiary included in the Form 8-K of The Banc
Corporation.
/s/ Saltmarsh, Cleaveland & Gund
-----------------------------
Pensacola, Florida
April 14, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BANC CORPORATION FOR THE TWELVE MONTHS ENDED DECEMBER
31, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 25,595
<INT-BEARING-DEPOSITS> 158
<FED-FUNDS-SOLD> 14,435
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 77,442
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 365,379
<ALLOWANCE> 4,533
<TOTAL-ASSETS> 524,394
<DEPOSITS> 435,366
<SHORT-TERM> 3,700
<LIABILITIES-OTHER> 4,957
<LONG-TERM> 23,160
0
0
<COMMON> 12
<OTHER-SE> 57,211
<TOTAL-LIABILITIES-AND-EQUITY> 524,394
<INTEREST-LOAN> 27,430
<INTEREST-INVEST> 5,440
<INTEREST-OTHER> 1,139
<INTEREST-TOTAL> 34,009
<INTEREST-DEPOSIT> 15,328
<INTEREST-EXPENSE> 15,918
<INTEREST-INCOME-NET> 18,091
<LOAN-LOSSES> 3,433
<SECURITIES-GAINS> 272
<EXPENSE-OTHER> 19,224
<INCOME-PRETAX> (1,345)
<INCOME-PRE-EXTRAORDINARY> (1,345)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (367)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
<YIELD-ACTUAL> 4.69
<LOANS-NON> 946
<LOANS-PAST> 2,234
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,516
<CHARGE-OFFS> 2,354
<RECOVERIES> 570
<ALLOWANCE-CLOSE> 4,533
<ALLOWANCE-DOMESTIC> 4,533
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BANC CORPORATION FOR THE TWELVE MONTHS ENDED DECEMBER
31, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,020
<INT-BEARING-DEPOSITS> 200
<FED-FUNDS-SOLD> 27,605
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,142
<INVESTMENTS-CARRYING> 26,298
<INVESTMENTS-MARKET> 26,309
<LOANS> 216,830
<ALLOWANCE> 2,516
<TOTAL-ASSETS> 363,710
<DEPOSITS> 306,785
<SHORT-TERM> 8,229
<LIABILITIES-OTHER> 3,199
<LONG-TERM> 0
0
0
<COMMON> 10
<OTHER-SE> 45,497
<TOTAL-LIABILITIES-AND-EQUITY> 363,710
<INTEREST-LOAN> 19,378
<INTEREST-INVEST> 5,288
<INTEREST-OTHER> 1,038
<INTEREST-TOTAL> 25,704
<INTEREST-DEPOSIT> 11,823
<INTEREST-EXPENSE> 11,952
<INTEREST-INCOME-NET> 13,752
<LOAN-LOSSES> 1,849
<SECURITIES-GAINS> 217
<EXPENSE-OTHER> 11,849
<INCOME-PRETAX> 2,374
<INCOME-PRE-EXTRAORDINARY> 2,374
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,678
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 4.72
<LOANS-NON> 1,029
<LOANS-PAST> 1,294
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,760
<CHARGE-OFFS> 1,373
<RECOVERIES> 280
<ALLOWANCE-CLOSE> 2,516
<ALLOWANCE-DOMESTIC> 2,516
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE> 1
EXHIBIT (99)-1 SELECTED SUPPLEMENTAL FINANCIAL DATA
The following table sets forth selected financial data for the
Corporation derived from the Corporation's Supplemental consolidated financial
statements and should be read in conjunction with the related supplemental
consolidated financial statements and notes thereto. See Exhibit (99)-3
Supplemental Financial Statements and Supplemental Data.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, (2) (3)
-------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF FINANCIAL CONDITION
DATA:
Total assets $ 524,394 $ 363,710 $ 272,172 $ 200,739 $ 149,515
Loans, net of unearned income 365,379 216,830 153,074 101,484 70,213
Investment securities 77,442 82,440 77,738 64,905 53,242
Deposits 435,366 306,785 234,884 173,106 131,701
Stockholders' equity 57,211 45,497 33,346 25,146 17,000
SELECTED STATEMENT OF OPERATIONS DATA:
Interest income 34,009 25,704 17,974 13,820 10,800
Interest expense 15,918 11,952 8,025 5,932 4,086
------------- ------------- ------------- ------------- -------------
Net interest income 18,091 13,752 9,949 7,888 6,714
Provision for loan losses 3,433 1,849 966 550 167
Noninterest income 3,221 2,320 1,966 1,621 1,461
Merger related costs 1,466 -- -- -- --
Other noninterest expense 17,758 11,849 9,456 7,285 5,524
------------- ------------- ------------- ------------- -------------
Income (loss) before tax (1,345) 2,374 1,493 1,674 2,484
Income tax (benefit) expense (978) 696 390 326 638
------------- ------------- ------------- ------------- -------------
Net (loss) income $ (367) $ 1,678 $ 1,103 $ 1,348 $ 1,846
============= ============= ============= ============= =============
PER SHARE DATA:
Net (loss) income-basic and diluted $ [.03] $ .20 $ .15 $ .21 $ .34
Book value 4.78 4.39 4.09 3.79 3.18
Dividends (1) -- .09 .08 .08 .07
PERFORMANCE RATIOS:
Return on average assets (.08)% .53% .49% .76% 1.26%
Return on average equity (.78) 4.79 3.87 6.02 10.91
ASSET QUALITY RATIOS:
Allowance for loan losses to nonperforming
loans 142.50% 108.30% 85.70% 190.34% 210.47%
Allowance for loan losses to loans, net of
unearned income 1.24 1.16 1.15 1.46 1.77
Nonperforming loans to loans, net of unearned
income .87 1.07 1.34 .76 .84
Net loan charge-offs to average loans .65 .57 .57 .37 .25
CAPITAL RATIOS:
Leverage ratio 11.01% 13.59% 13.91% 12.54% 11.42%
Tier 1 risk-based capital ratio 13.87 18.28 18.71 21.58 20.68
Total risk-based capital ratio 14.99 19.31 19.71 22.83 21.93
</TABLE>
(1) Dividends per share represent dividends paid on the common stock of the
Corporation's predecessor Warrior Capital Corporation.
(2) Information for all prior periods has been restated for the poolings of
interests completed during 1998 and February 1999.
(3) The selected financial data includes the financial data for Emerald Coast
Bancshares, Inc. since the date of its inception, August 30, 1996.
<PAGE> 1
EXHIBIT (99)-2. SUPPLEMENTAL 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 supplemental 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 subsidiaries of the
Corporation are The Bank, a bank organized and existing under the laws of
Alabama and headquartered in Birmingham, Alabama, and Emerald Coast Bank, a
federally-chartered thrift headquartered in Panama City Beach, Florida.
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 to date in 1999:
<TABLE>
<CAPTION>
1998
DATE COMPLETED COMPANY ACQUIRED BANKING LOCATIONS
- -------------- ---------------- ----------------
<S> <C> <C>
October 16, 1998 Commercial Bancshares of Roanoke, Alabama(2)
Roanoke, 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
</TABLE>
Pending Acquisitions. The following chart lists three other financial
institutions the Corporation has agreed to acquire since January 1, 1999:
<TABLE>
<CAPTION>
DATE OF AGREEMENT COMPANY TO BE ACQUIRED BANKING LOCATIONS
- ----------------- ---------------------- -----------------
<S> <C> <C>
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
</TABLE>
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 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.
1
<PAGE> 2
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 for its
Alabama based operations:
o establishing awareness of and educating key personnel with respect to
Year 2000 issues and the Corporation's plan to address those potential
problems;
o identifying significant systems and assessing potential Year 2000 issues
relating to those systems;
o renovating and repairing noncompliant systems;
o testing and validating solutions; and
o 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 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 combined projected total cost of the Year 2000 project for The Bank and
Emerald Coast Bank is currently estimated at approximately $360,000 and is being
funded through operating cash flows. As of December 31, 1998, the Corporation
has incurred $145,000 in expenses, with $2,000 and $143,000 expensed in 1997 and
1998, respectively. The majority of the remaining cost will be spent on
converting Commercial Bancshares of Roanoke and First Citizens Bank to its
centralized data processing system. These conversions are scheduled to be
completed in the first half of 1999. The other banks acquired in 1998 were
converted in 1998. Emerald Coast Bank will continue to process data on its own
system in the foreseeable future. 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
2
<PAGE> 3
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.
During 1998, Emerald Coast Bank established a committee to review all
computer-based systems and applications. This committee developed an action plan
for identifying, renovating, testing and implementing required solutions to
ensure that its computer and information systems will function properly in the
year 2000. This plan, which has been approved by the Board of Directors of
Emerald Coast Bank provides a goal of having all of the Emerald Coast Banks'
systems and applications evaluated, tested and updated where necessary to
address the year 2000 problem by June 30, 1999. In addition, the plan requires
Emerald Coast Bank to develop a detailed contingency plan and business
resumption plan in the event of an unanticipated failure (i.e. power outage,
telecommunications failure, etc.) It is expected that this portion of the plan
will also be developed and tested prior to June 30, 1999. As of March 31, 1999,
the committee estimated that Emerald Coast Bank was 90% complete toward reaching
its goal of Year 2000 readiness.
RESULTS OF OPERATIONS
Year Ended December 31, 1998, compared with years ended December 31, 1997 and
1996
Net income (loss) decreased $2.1 million, to ($367,000) for the year ended
December 31, 1998, from $1.7 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 34.5% to $1.1 million from 1997 net income of $1.7 million,
and decreased 0.4% from 1996 net income of $1.1 million.
The Corporation's return on average assets in 1998 was (.08)%, compared to
.53% in 1997 and .49% in 1996. Return on average equity was (.78)% in 1998
compared to 4.79% in 1997 and 3.87% in 1996. Average equity to average assets
was 10.9% in 1998 compared to 11.0% in 1997 and 12.7% in 1996.
Net interest income increased $4.3 million, or 31.6% to $18.1 million for
the year ended December 31, 1998, from $13.8 million for the year ended December
31, 1997, which increased $3.8 million, or 38.2% from $9.9 million in 1996.
Interest income increased $8.3 million, or 32.3% to $34.0 million for the year
ended December 31, 1998 from $25.7 million for the year ended December 31, 1997,
which increased $7.7 million, or 43.0%, from $18.0 million for the year ended
December 31, 1996.
The increase in interest income is attributable to an increase in average
earning assets, which consist primarily of loans. A significant portion of the
loan growth is due to the opening of a branch office in Birmingham, Alabama on
July 1, 1998; and the growth of the Emerald operations. Average loans increased
$83.7 million or 43.9% to $274.6 million during 1998 from $190.9 million for the
year ended December 31, 1997, which increased $70.8 million or 59.0% from $120.1
million for the year 1996.
3
<PAGE> 4
Interest expense increased $3.9 million, or 33.2% to $15.9 million for the
year ended December 31, 1998 from $12.0 million for the year ended December 31,
1997, which increased $4.0 million, or 48.9% from $8.0 million in 1996. The
increase in interest expense is a result of the opening of the Birmingham branch
on July 1, 1998, and the growth of the Emerald operations. Average
interest-bearing deposits increased $75.9 million, or 31.9% to $314.1 million
for 1998, from $238.1 million for 1997 which increased $74.9 million, or 45.0%
from $164.3 million in 1996.
The provision for loan losses was $3.4 million for the year ended December
31, 1998 compared to $1.8 million in 1997 and $966,000 in 1996. The
Corporation's allowance for loan losses as a percentage of loans was 1.24%,
1.16% and 1.15% at December 31, 1998, 1997 and 1996, respectively. The allowance
for loan losses as a percentage of period-end nonperforming loans was 142.5% at
December 31, 1998, compared to 108.3% at December 31, 1997 and 85.7% at December
31, 1996. The Corporation had net charge-offs of $1.8 million in 1998, resulting
in a ratio of net charge-offs to average loans of .65%. This compares to $1.1
million or .57% in 1997 and $683,000 or .57% in 1996.
Noninterest income increased $901,000, or 38.8% to $3.2 million in 1998,
from $2.3 million in 1997, which increased $354,000, or 18.0% from $2.4 million
in 1996, primarily as the result of additional customer service charges and fees
and gains from sales of residential mortgage loans.
Noninterest expense increased $7.4 million, or 62.2% to $19.2 million in
1998 from $11.8 million in 1997, which increased $2.4 million, or 25.3% from
$9.5 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 $978,000 (72.7%) on a
loss of $1.3 million. For 1997 and 1996, the Corporation's income tax expense
was $696,000 (29.3%) and $390,000 (26.1%) on pre-tax income of $2.4 million and
$1.5 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 $1.5 million (net of a valuation allowance)
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 Corporation's
subsidiaries and the implementation of various tax planning strategies to
maximize realization of the deferred tax asset. The Corporation believes that
the Corporation's subsidiaries may be able to generate sufficient operating
earnings to realize the deferred tax benefits. However, 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.
4
<PAGE> 5
CONSOLIDATED AVERAGE BALANCE INTEREST/INCOME/EXPENSE
AND YIELD/RATES TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of unearned
income(1) .................. $ 274,596 $ 27,430 9.99% $190,881 $19,378 10.15% $120,064 $12,698 10.58%
Investment securities
Taxable .................... 78,446 4,725 6.02 73,818 4,795 6.50 55,497 3,613 6.51
Tax-exempt ................. 14,081 953 6.77 8,441 661 7.83 9,771 799 8.18
--------- --------- -------- ------- --------- -------
Total investment
securities.............. 92,527 5,678 6.14 82,259 5,456 6.63 65,268 4,412 6.76
Federal funds sold ......... 15,857 941 5.93 17,105 955 5.58 19,466 1,002 5.15
Other investments .......... 2,585 198 7.66 1,140 83 7.28 812 65 8.00
--------- --------- -------- ------- --------- -------
Total interest-earning 385,565 34,247 8.88 291,385 25,872 8.88 205,610 18,177 8.84
assets.................
Noninterest-earning assets:
Cash and due from banks ...... 17,061 12,415 9,080
Premises and equipment ....... 22,272 8,341 4,200
Accrued interest and other
assets....................... 8,567 7,730 7,474
Allowance for loan losses .... (4,185) (2,381) (1,587)
--------- --------- --------
Total assets ........... $ 429,280 $ 317,490 $224,777
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand deposits .............. $ 90,274 $ 3,031 3.36% $ 51,115 $ 1,889 3.64% $ 33,581 $ 1,045 3.11%
Savings deposits ............. 25,402 743 2.92 27,303 791 2.90 26,178 796 3.04
Time deposits ................ 198,405 11,554 5.82 159,743 9,173 5.74 104,525 6,156 5.89
Other borrowings ............. 11,543 590 5.11 2,437 129 5.29 620 28 4.52
--------- --------- ------ -------- ------- ---- -------- ------- --------
Total interest-bearing
liabilities .......... 325,624 15,918 4.89 240,598 11,952 4.97 164,904 8,025 4.87%
Noninterest-bearing liabilities:
Demand deposits .............. 50,039 39,453 29,029
Accrued interest and other
liabilities ................ 6,778 2,396 2,319
Stockholders' equity ......... 46,839 35,043 28,525
--------- --------- --------
Total liabilities and
stockholders' equity . $ 429,280 $ 317,490 224,777
========= ========= ========
Net interest income/net interest
spread ....................... 18,329 3.99% 13,920 3.91% 10,152 3.97%
========= ==== ==== =======
Net yield on earning assets .... 4.75% 4.78% 4.94%
==== ==== =======
Taxable equivalent adjustment:
Investment securities(2) ..... 238 168 203
--------- ------- -------
Net interest income .... $ 18,091 $ 13,752 $ 9,949
========= ========= =======
</TABLE>
- ---------------
(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.
5
<PAGE> 6
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans .......... $ 8,052 $(313) $ 8,365 $ 6,680 $(521) $ 7,201
Interest on securities:
Taxable ........................ (70) (350) 280 1,182 (8) 1,190
Tax-exempt ..................... 292 (97) 389 (138) (34) (104)
Interest on federal funds .............. (14) 60 (74) (47) 84 (131)
Interest on other investments .......... 115 5 110 18 (6) 24
------- ----- ------- ------- ----- -------
Total interest income .......... 8,375 (695) 9,070 7,695 (485) 8,180
------- ----- ------- ------- ----- -------
Expense from interest-bearing liabilities:
Interest on demand deposits ............ 1,172 (252) 1,424 814 190 624
Interest on savings deposits ........... (48) 7 (55) (5) (38) 33
Interest on time deposits .............. 2,381 161 2,220 3,017 (156) 3,173
Interest on other borrowings ........... 461 (21) 482 101 7 94
------- ----- ------- ------- ----- -------
Total interest expense ......... 3,966 (105) 4,071 3,927 3 3,924
------- ----- ------- ------- ----- -------
Net interest income ............ $ 4,409 $(590) $ 4,999 $ 3,768 $(488) $ 4,256
======= ===== ======= ======= ===== =======
- --------------
</TABLE>
(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 $34.2 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
0.88, 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 2.6% assuming an instantaneous increase in interest rates of 200
basis points, or decrease on an annual basis by 3.4%, 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 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.
6
<PAGE> 7
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 in its Alabama operations. Emerald Coast Bank
uses an outside independent group that reviews 25% of all new loans closed and
all loans greater than $250,000 on a quarterly basis. The loans are reviewed for
proper documentation as well as loan quality. 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 68.5% to $365.4
million for the year ended December 31, 1998 from $216.8 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 $66.1 million, or 91.7%, consumer
loans increased $20.8 million, or 44.0% and mortgage loans increased $37.8
million, or 48.5%.
Net charge-offs increased 63.2% over the same period from $1.1 million in
1997 to $1.8 million in 1998. The ratio of net charge-offs to average loans has
increased in each of the past four years, averaging 0.54%, with the last two
years being 0.65% in 1998 and 0.57% 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 142.5% at December
31, 1998 from 108.3% 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 1.24%. The average allowance as a percentage of period ending loans for
the last three years has been 1.18%.
7
<PAGE> 8
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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at beginning of period $ 2,516 $ 1,760 $ 1,477 $ 1,246 $ 1,251
Allowance of acquired bank ...................... 368 -- -- -- --
Charge-offs:
Commercial, industrial and agricultural ....... 818 537 67 7 125
Real estate ................................... 311 57 46 58 --
Consumer ...................................... 1,225 779 731 403 149
-------- -------- -------- -------- -------
Total charge-offs ..................... 2,354 1,373 844 468 274
Recoveries:
Commercial, industrial and agricultural ....... 94 40 22 24 3
Real estate ................................... 81 23 5 3 1
Consumer ...................................... 395 217 134 122 99
-------- -------- -------- -------- -------
Total recoveries ...................... 570 280 161 149 103
-------- -------- -------- -------- -------
Net charge-offs ................................. 1,784 1,093 683 319 171
Provision for loan losses ....................... 3,433 1,849 966 550 166
-------- -------- -------- -------- -------
Allowance for loan losses at end of period ...... $ 4,533 $ 2,516 $ 1,760 $ 1,477 $ 1,246
======== ======== ======== ======== =======
Loans at end of period, net of unearned income .. $365,379 $216,830 $153,074 $101,484 $70,213
Average loans, net of unearned income ........... 274,596 190,881 120,064 85,229 68,600
Ratio of ending allowance to ending loans ....... 1.24% 1.16% 1.15% 1.46% 1.77%
Ratio of net charge-offs to average loans ....... 0.65 0.57 0.57 0.37 0.25
Net charge-offs as a percentage of:
Provision for loan losses ..................... 52.0 59.1 70.7 58.0 103.0
Allowance for loan losses ..................... 39.4 43.4 38.8 21.6 13.7
Allowance for loan losses as a percentage
of nonperforming loans ........................ 142.5 108.3 85.7 190.3 210.5
</TABLE>
Allocation of Allowance. The Corporation historically has allocated its
allowance for loan losses to specific loan categories. Although the allowance is
allocated, it is available to absorb losses in the entire loan portfolio.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ----------------- ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- --------- -------- --------- -------- -------- ------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Commercial, industrial and
agricultural............... $ 1,859 41% $ 805 32% $ 510 29% $ 340 23% $ 170 14%
Real estate -- Construction.. 181 4 151 6 70 4 62 4 50 4
Real estate -- Mortgage....... 272 6 931 37 669 38 573 38 574 46
Consumer...................... 2,176 48 604 24 493 28 496 34 440 35
Other......................... 45 1 25 1 18 1 6 1 12 1
------- --- ------- --- ------- --- ------- --- ------- ---
$ 4,533 100% $ 2,516 100% $ 1,760 100% $ 1,477 100% $ 1,246 100%
======= === ======= === ======= === ======= === ======= ===
</TABLE>
Nonperforming Assets. The following table represents the Corporation's
nonperforming assets for the dates indicated.
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual ...................................... $ 946 $1,029 $1,478 $420 $249
Past due (contractually past due 90 days or more) 2,234 1,294 576 356 343
Restructured .................................... -- -- -- -- --
------ ------ ------ ---- ----
$3,180 $2,323 $2,054 $776 $592
====== ====== ====== ==== ====
</TABLE>
A delinquent loan is generally placed on nonaccrual status when it becomes
90 days or more past due and management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that the collection of interest is doubtful. When a loan is
placed on nonaccrual status, all interest which has been accrued on the loan but
8
<PAGE> 9
remains unpaid is reserved and deducted from earnings as a reduction of reported
interest income. No additional interest income is accrued on the loan balance
until the collection of both principal and interest becomes reasonably certain.
When a problem loan is finally resolved, there may ultimately be an actual
write-down or charge-off of the principal balance of the loan, which would
necessitate additional charges to earnings.
EARNING ASSETS
Loans. Loans are the largest category of earning assets and typically
provide higher yields than other types of earning assets. Associated with the
higher loan yields are the inherent credit and liquidity risks which management
attempts to control and counterbalance. At December 31, 1998, total loans net of
unearned income were $365.4 million, an increase of $148.6 million from $216.8
million at December 31, 1997. Average loans increased $83.7 million for the same
period. Loans averaged $274.6 million in 1998 compared to $190.9 million in 1997
and $120.1 million in 1996. At December 31, 1997, total loans net of unearned
income were $216.8 million compared to $153.0 million at December 31, 1996, and
$101.5 million at December 31, 1995.
DISTRIBUTION OF LOANS BY CATEGORY
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial, industrial and agricultural $ 138,190 $ 72,086 $ 45,494 $ 23,488 $ 9,777
Real estate -- construction ........... 35,647 17,730 5,604 4,272 2,881
Real estate -- mortgage ............... 115,894 78,071 59,808 39,682 32,975
Consumer .............................. 67,968 47,187 40,731 34,293 25,236
Other ................................. 8,468 2,995 2,861 443 669
--------- --------- --------- --------- --------
Total loans ................. $ 366,167 $ 218,069 $ 154,498 $ 102,178 $ 71,538
Unearned income ....................... (788) (1,239) (1,424) (694) (1,325)
Allowance for loan losses ............. (4,533) (2,516) (1,760) (1,477) (1,246)
--------- --------- --------- --------- --------
Net loans ................... $ 360,846 $ 214,314 $ 151,314 $ 100,007 $ 68,967
========= ========= ========= ========= ========
</TABLE>
The repayment of loans in the loan portfolio as they mature is also a source
of liquidity for the Corporation. The following table sets forth the
Corporation's loans maturing within specified intervals at December 31, 1998.
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
(IN THOUSANDS)
RATE STRUCTURE FOR LOANS MATURING
MATURITY OVER ONE YEAR
-------------------------------------------------------- ----------------------------------
OVER ONE YEAR
ONE YEAR THROUGH FIVE PREDETERMINED FLOATING OR
OR LESS YEARS OVER FIVE YEARS TOTAL INTEREST RATE ADJUSTABLE RATE
--------- -------------- --------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 171,467 $ 145,821 $ 48,091 $ 365,379 $ 154,870 $ 39,042
========= ========= ============= ========= ============ ==============
</TABLE>
The information presented in the above table is based on the contractual
maturities of the individual loans, including loans which may be subject to
renewal at their contractual maturity. Renewal of such loans is subject to
review and credit approval, as well as modification of terms upon their
maturity. Consequently, management believes this treatment presents fairly the
maturity and repricing structure of the loan portfolio.
Investment Securities. The investment securities portfolio is a significant
component of the Corporation's total earning assets. Total securities averaged
$92.5 million in 1998, compared to $82.3 million in 1997 and $65.3 million in
1996. At December 31, 1998, the Corporation's securities portfolio totaled $77.4
million.
9
<PAGE> 10
The following table sets forth the book value of the securities held by the
Corporation at the dates indicated.
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
U.S. Treasury and Govt agencies....................................... $ 7,055 $48,273
State and political subdivisions...................................... 18,245 11,244
Mortgage-backed securities............................................ 48,894 18,976
Other investments..................................................... 3,095 3,528
------- -------
Total investment securities................................. $77,289 $82,021
======= =======
</TABLE>
The following table shows the scheduled maturities and average yields of
securities held at December 31, 1998.
MATURITY DISTRIBUTION OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
MATURING
-------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE WITHIN FIVE WITHIN TEN
YEAR YEARS YEARS AFTER TEN YEARS TOTAL
---------------- ---------------- ---------------- --------------- -------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury and Govt Agencies $ 847 4.12% $ 1,704 5.72% $4,004 6.65% $ 500 7.01% $ 7,055 6.15%
State and political subdivisions 231 5.84 4,012 5.75 2,647 6.22 11,355 5.20 18,245 5.48
Mortgage-backed securities .... 1,991 5.21 6,294 6.33 2,536 6.92 38,073 6.39 48,894 6.36
Other investments.............. 563 6.46 1,319 6.47 269 5.51 944 5.94 3,095 6.24
------ ------- ------ ------- -------
Total investments............. $3,632 5.19% $13,329 6.09% $9,456 6.57% $50,872 6.12% $77,289 6.13%
====== ======= ====== ======= =======
</TABLE>
Short-Term Investments. Short-term investments, which consist primarily of
federal funds sold, averaged $ 15.9 million in 1998, compared to $ 17.1 million
in 1997 and $ 19.5 million in 1996. These funds are a primary source of the
Corporation's liquidity and are generally invested on an overnight basis.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Deposits. Average total deposits increased $86.5 million, or 31.2% to $364.1
million during 1998, from $277.6 million in 1997. Average total deposits
increased $84.3 million, or 43.6% to $277.6 million during 1997, from $193.3
million in 1996.
The following table sets forth average deposits of the Corporation by
category for the periods indicated.
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
AVERAGE FOR THE YEAR
-----------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE
AMOUNT AVERAGE AMOUNT AVERAGE AMOUNT AVERAGE
OUTSTANDING RATE PAID OUTSTANDING RATE PAID OUTSTANDING RATE PAID
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits . $ 50,039 --% $ 39,453 --% $ 29,029 --%
Interest bearing demand deposits .... 90,274 3.36 51,115 3.64 33,581 3.11
Savings deposits .................... 25,402 2.92 27,303 2.90 26,178 3.04
Time deposits ....................... 198,405 5.82 159,743 5.74 104,525 5.89
-------- -------- --------
Total average deposits .... $364,120 4.21% $277,614 4.26% $193,313 4.14%
======== ======== ========
</TABLE>
10
<PAGE> 11
Deposits, and particularly core deposits, have historically been the
Corporation's primary source of funding and have enabled the Corporation to meet
successfully both its short-term and long-term liquidity needs. The Corporation
anticipates that such deposits will continue to be its primary source of funding
in the future. The Corporation's loan to deposit ratio was 82.9% at December 31,
1998, compared to 69.9% at December 31, 1997. The maturity distribution of the
Corporation's time deposits over $100,000 at December 31, 1998 is shown in the
following table.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
----------------------------------------------------------
UNDER 3-6 6-12 OVER
3 MONTHS MONTHS MONTHS 12 MONTHS TOTAL
---------- ---------- ---------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$31,686 $ 7,848 $ 15,540 $11,705 $ 66,779
======= ======= ======== ======= ========
</TABLE>
Approximately 47.4 % of the Corporation's time deposits over $100,000 had
scheduled maturities within three months. The Corporation believes that large
denomination certificate of deposit customers tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding for
liquidity planning purposes than core deposits. While some financial
institutions partially fund their balance sheets using large certificates of
deposits obtained through brokers, these broker deposits are generally expensive
and are unreliable as long-term funding sources. Accordingly, the Corporation
does not actively solicit brokered deposits.
Advances from Federal Home Loan Bank. In order to meet additional loan
demand, the Corporation borrowed $23.2 million from the FHLB during 1998. The
following is a summary of advances from the FHLB outstanding as of December 31,
1998.
<TABLE>
<CAPTION>
INTEREST
MATURITY DATE RATE AMOUNT
------------- ------- -------
<S> <C> <C>
February 6, 2003.......................................... 4.99% $15,660
April 2, 2003............................................. 5.52% 2,000
March 26, 2008............................................ 5.51% 1,000
June 23, 2008............................................. 5.51% 1,500
July 10, 2008............................................. 4.99% 3,000
-------
$23,160
=======
</TABLE>
The advances are secured by FHLB stock and a blanket lien on certain
residential real estate loans.
NONINTEREST EXPENSE
Noninterest expense increased $7.4 million, or 62.2% to $19.2 million in
1998 from $11.8 million in 1997. The increase is primarily attributable to the
increases in salaries and employee benefits, occupancy expenses, the creation of
new departments and the conversion of the data processing system. During 1998,
the Corporation was formed and staffed appropriately to manage its growth. New
branches were opened for The Bank in Birmingham and Decatur in 1998 and for
Emerald Coast Bank in 1997, resulting in increased salaries and benefits and
occupancy expense. Emerald Coast Bank sold all of its branch locations in 1998
in a sale-lease back transaction which resulted in an increase in rent expense
of approximately $150,000. The various data processing systems acquired were
consolidated into a new operations center which was staffed with existing
employees. Salaries and benefits increased $2.7 million and occupancy expense
increased $957,000. The other major component of the increase in noninterest
expense was $1.5 million incurred in legal, accounting and printing expenses
related to the Corporation's recent acquisitions and the write off of obsolete
equipment and software.
11
<PAGE> 12
REGULATORY CAPITAL TABLE
The table below represents the Corporation's actual regulatory and minimum
regulatory capital requirements at December 31, 1998 (Dollars in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
------------------ ----------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital .............. $60,923 14.99% $32,519 8.00% $40,649 10.00%
(to Risk Weighted Assets)
Tier 1 Capital ............. 56,393 13.87% 16,260 4.00% 24,389 6.00%
(to Risk Weighted Assets)
Tier 1 Capital ............. 56,393 11.01% 20,482 4.00% 25,603 5.00%
(to Average Assets)
</TABLE>
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Corporation are primarily monetary in nature.
Therefore, interest rates have a more significant effect on the Corporation's
performance than do the effects of changes in the general rate of inflation and
changes in prices. In addition, interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services. The
Corporation seeks to manage the relationships between interest sensitive assets
and liabilities in order to protect against wide interest rate fluctuations,
including those resulting from inflation.
12
<PAGE> 1
EXHIBIT (99)-3
The Banc Corporation and Subsidiaries
Supplemental Consolidated Financial Statements
Years ended December 31, 1998 and 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors..........................................................................1
Report of Independent Auditors..........................................................................2
Supplemental Consolidated Statements of Financial Condition.............................................3
Supplemental Consolidated Statements of Operations......................................................5
Supplemental Consolidated Statements of Cash Flows......................................................6
Supplemental Consolidated Statements of Changes in Stockholders' Equity.................................8
Notes to Supplemental Consolidated Financial Statements.................................................9
</TABLE>
<PAGE> 2
Report of Independent Auditors
Board of Directors
The Banc Corporation
We have audited the accompanying supplemental consolidated statements of
financial condition of The Banc Corporation and Subsidiaries as of December 31,
1998 and 1997 and the related supplemental consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. The supplemental consolidated
financial statements give retroactive effect to the merger of The Banc
Corporation and Emerald Coast Bancshares, Inc. on February 12, 1999 which has
been accounted for using the pooling of interests method as described in the
notes to the supplemental consolidated financial statements. These financial
statements are the responsibility of the management of The Banc Corporation. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits. We did not audit the financial statements of
Emerald Coast Bancshares, Inc., which statements reflect total assets
constituting 16% in 1998 and 15% in 1997, and net interest income constituting
17% in 1998, 11% in 1997, and 2% in 1996 of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included for Emerald Coast
Bancshares, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of The Banc Corporation
and Subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, after giving retroactive effect to the merger of
Emerald Coast Bancshares, Inc. as described in the notes to the supplemental
consolidated financial statements in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Birmingham, Alabama
March 19, 1999
1
<PAGE> 3
INDEPENDENT AUDITOR'S REPORT
Board of Directors
The Banc Corporation
We have audited and reported on the consolidated statements of
financial condition of Emerald Coast Bancshares, Inc. and Subsidiary as
of December 31, 1998 and 1997 and the consolidated statements of
operations, changes in stockholders' equity, and cash flows for the
years ended December 31, 1998 and 1997, and for the four months ended
December 31, 1996 prior to their inclusion in the supplemental
consolidated financial position of The Banc Corporation and
Subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998. These consolidated
financial statements are the responsibility of the management of
Emerald Coast Bancshares, Inc. and Subsidiary. Our responsibility is to
express an opinion on these financial statements based on our audits.
The contribution to the assets of the supplemental consolidated
financial statements of The Banc Corporation by Emerald Coast
Bancshares, Inc. and Subsidiary represented 16% in 1998 and 15% in
1997, and to net interest income 17% in 1998, 11% in 1997, and 2% in
1996 of the related consolidated totals.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Emerald Coast Bancshares, Inc. and Subsidiary as of December 31,
1998 and 1997, and the consolidated results of their operations and
their cash flows for the years ended December 31, 1998 and 1997 and
for the four months ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Saltmarsh, Cleaveland & Gund
Pensacola, Florida
March 19, 1999
2
<PAGE> 4
The Banc Corporation and Subsidiaries
Supplemental Consolidated Statements of Financial Condition
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 25,595 $ 15,020
Interest bearing deposits in other banks 158 200
Federal funds sold 14,435 27,605
Securities available for sale 77,442 56,142
Securities held-to-maturity (fair value of
$26,309 in 1997) -- 26,298
Mortgage loans held for sale 4,899 --
Loans 366,167 218,069
Unearned income (788) (1,239)
------------------------
Loans, net of unearned income 365,379 216,830
Less allowance for loan losses (4,533) (2,516)
------------------------
Net loans 360,846 214,314
Premises and equipment, net 28,515 17,291
Accrued interest receivable 3,791 3,194
Stock in FHLB and Federal Reserve Bank 1,760 649
Other assets 6,953 2,997
------------------------
$524,394 $363,710
========================
</TABLE>
See notes to supplemental consolidated financial statements.
3
<PAGE> 5
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
----------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand $ 67,963 $ 39,864
Interest-bearing demand 124,761 65,172
Savings 25,609 23,501
Time deposits $100,000 and over 66,779 61,406
Other time 150,254 116,842
----------------------
Total deposits 435,366 306,785
Advances from FHLB 23,160 --
Other borrowed funds 3,700 8,229
Accrued expenses and other liabilities 4,957 3,199
----------------------
Total liabilities 467,183 318,213
Stockholders' equity:
Preferred stock, par value $.001 per share; shares
authorized 5,000,000; shares issued -0- -- --
Common stock, par value $.001 per share; shares
authorized 25,000,000; shares issued 11,973,180 in
1998 and 10,374,242 in 1997 12 10
Surplus 42,888 30,481
Retained earnings 14,233 14,770
Accumulated other comprehensive income 78 236
----------------------
Total stockholders' equity 57,211 45,497
----------------------
$524,394 $363,710
======================
</TABLE>
See notes to supplemental consolidated financial statements.
4
<PAGE> 6
The Banc Corporation and Subsidiaries
Supplemental Consolidated Statements of Operations
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 27,430 $19,378 $12,698
Interest on taxable securities 4,725 4,795 3,613
Interest on tax exempt securities 715 493 596
Interest on federal funds sold 941 955 1,002
Interest and dividends on other investments 198 83 65
-----------------------------------
Total interest income 34,009 25,704 17,974
Interest expense:
Interest on deposits 15,328 11,823 7,997
Interest expense on advances from FHLB and other
borrowed funds 590 129 28
-----------------------------------
Total interest expense 15,918 11,952 8,025
-----------------------------------
Net interest income 18,091 13,752 9,949
Provision for loan losses 3,433 1,849 966
-----------------------------------
Net interest income after provision for loan losses 14,658 11,903 8,983
Noninterest income:
Service charges and fees 2,251 1,862 1,622
Gain on sale of loans 232 25 --
Securities gains 272 217 52
Other 466 216 292
-----------------------------------
Total noninterest income 3,221 2,320 1,966
Noninterest expense:
Salaries and employee benefits 9,276 6,493 5,068
Occupancy and equipment 2,908 1,951 1,507
Merger related costs 1,466 -- --
Other 5,574 3,405 2,881
-----------------------------------
Total noninterest expenses 19,224 11,849 9,456
-----------------------------------
(Loss) income before income taxes (1,345) 2,374 1,493
Income tax (benefit) expense (978) 696 390
-----------------------------------
Net (loss) income $ (367) $ 1,678 $ 1,103
===================================
Average common shares outstanding 11,011 8,449 7,217
Average common shares outstanding, assuming dilution 11,011 8,568 7,314
Basic and diluted net (loss) income per common share $ (.03) $ .20 $ .15
Dividends per common share -- .09 .08
</TABLE>
See notes to supplemental consolidated financial statements.
5
<PAGE> 7
The Banc Corporation and Subsidiaries
Supplemental Consolidated Statements of Cash Flows
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (367) $ 1,678 $ 1,103
Adjustments to reconcile net (loss) income to net cash
(used) provided by operations:
Depreciation 1,634 965 698
Net amortization (accretion) of securities 293 (265) (75)
Gain on sale of securities available for sale
(272) (217) (52)
Provision for loan losses 3,433 1,849 966
Increase in mortgage loans held for sale (4,899) -- --
Increase in accrued interest receivable (234) (541) (443)
Deferred income tax benefit (1,697) (5) (378)
Other changes, net 1,702 24 172
---------------------------------------
Net cash (used) provided by operating activities (407) 3,488 1,991
INVESTING ACTIVITIES
Proceeds from maturity of interest bearing deposits
241 -- 202
Decrease (increase) in federal funds sold 21,420 (14,135) 3,890
Proceeds from sales of securities available for
sale 61,109 28,185 9,107
Proceeds from maturities of securities available
for sale 39,509 8,951 10,071
Proceeds from maturities of securities held to
maturity 15,028 12,137 10,178
Purchase of securities available for sale (69,468) (38,661) (30,744)
Purchase of securities held to maturity (23,520) (14,568) (11,330)
Net increase in loans (137,017) (64,847) (52,531)
Net cash paid in business combination (5,786) -- --
Purchase of premises and equipment (14,670) (4,851) (4,610)
Proceeds from sale of bank premises 3,795 -- --
Other investing activities, net (3,429) (404) (226)
---------------------------------------
Net cash used in investing activities (112,788) (88,193) (65,993)
</TABLE>
6
<PAGE> 8
The Banc Corporation and Subsidiaries
Supplemental Consolidated Statements of Cash Flows (continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net increase in demand and savings deposits $ 66,339 $29,477 $48,488
Net increase in time deposits 26,642 42,425 13,837
Increase (decrease) in FHLB advances 23,160 (1,600) 1,600
Payment on assumed debt -- (1,513) --
(Payments) advances of other borrowed funds (4,529) 7,980 (1,005)
Proceeds from issuance and reissuance of common stock 12,279 17,890 7,764
Repurchase of common stock -- (9,496) (16)
Dividends paid by pooled subsidiary (121) (389) (364)
--------------------------------------
Net cash provided by financing activities 123,770 84,774 70,304
--------------------------------------
Increase in cash and due from banks 10,575 69 6,302
Cash and due from banks at beginning of year 15,020 14,951 8,649
--------------------------------------
Cash and due from banks at end of year $ 25,595 $15,020 $14,951
======================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 15,433 $11,710 $ 7,703
Income taxes 455 889 796
Noncash transactions:
Assets acquired in business combination $ 43,413 $ -- --
Liabilities assumed in business combination 36,113 -- --
Real estate acquired by assuming related liability
and issuing common stock -- 4,534 --
Minority interest in subsidiary acquired by issuing
common stock 130 -- --
</TABLE>
See notes to supplemental consolidated financial statements.
7
<PAGE> 9
The Banc Corporation and Subsidiaries
Supplemental Consolidated Statements of Changes in Stockholders' Equity
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
COMMON RETAINED INCOME TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS (LOSS) STOCK EQUITY
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 7 $12,083 $12,795 $ 261 $ -- $25,146
Comprehensive income:
Net income -- -- 1,103 -- -- 1,103
Other comprehensive (loss), net of taxes of $149:
Unrealized losses on securities available for
sale, net of reclassification adjustment -- -- -- (286) -- (286)
-------------
Comprehensive income 817
Dividends declared by pooled subsidiary -- -- (364) -- -- (364)
Issuance of 1,508,461 shares of common stock,
net of direct costs 1 7,714 -- -- -- 7,715
Stock options exercised -- 50 -- -- -- 50
Purchase of 7,454 shares of treasury stock -- -- -- -- (16) (16)
Retirement of 7,454 shares of treasury stock -- -- (16) -- 16 --
---------------------------------------------------------------------------
Balance at December 31, 1996 8 19,847 13,518 (25) -- 33,348
Comprehensive income:
Net income -- -- 1,678 -- -- 1,678
Other comprehensive income, net of taxes of $136:
Unrealized gains on securities available for
sale, net of reclassification adjustment -- -- -- 261 -- 261
-------------
Comprehensive income 1,939
Dividends declared by pooled subsidiary -- -- (389) -- -- (389)
Issuance of 1,778,215 shares of common stock, net
of direct costs 2 8,429 -- -- -- 8,431
Acquisition of building through issuance of
460,500 shares of common stock -- 2,205 -- -- -- 2,205
Purchase of 1,990,908 shares of treasury stock -- -- -- -- (9,496) (9,496)
Reissuance of treasury stock -- -- -- -- 9,459 9,459
Retirement of 14,908 shares of treasury stock -- -- (37) -- 37 --
---------------------------------------------------------------------------
Balance at December 31, 1997 10 30,481 14,770 236 -- 45,497
Comprehensive loss:
Net loss -- -- (367) -- -- (367)
Other comprehensive (loss) net of taxes of $108:
Unrealized losses on securities available for
sale, arising during the period, net of
reclassification adjustment -- -- -- (158) -- (158)
-------------
Comprehensive loss (525)
Issuance of 1,526,054 shares of common stock,
net of direct costs 2 12,102 -- -- -- 12,104
Stock options exercised -- 291 -- -- -- 291
Restricted shares issued by pooled subsidiary -- 114 -- -- -- 114
Redemption of common stock by pooled subsidiary -- -- (49) -- -- (49)
Dividends paid by pooled subsidiary -- -- (121) -- -- (121)
---------------------------------------------------------------------------
Balance at December 31, 1998 $ 12 $42,888 $14,233 $ 78 $-- $57,211
===========================================================================
</TABLE>
See notes to supplemental consolidated financial statements.
8
<PAGE> 10
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Banc Corporation (Corporation) is a bank holding company 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. During the fourth quarter of 1998, the Corporation
acquired four financial institutions: Commercial Bancshares of Roanoke, Inc. and
its subsidiary, the Commercial Bank of Roanoke (Roanoke), on October 16, 1998;
City National Corporation and its subsidiary, City National Bank of Sylacauga
(City National), on October 30, 1998; First Citizens Bancorp, Inc. and First
Citizens Bank of Monroe County (First Citizens), on October 30, 1998; and
Commerce Bank of Alabama (Commerce), on November 6, 1998. Each of the acquired
banks and their branches have been merged with and into The Bank resulting in a
single bank with 17 branch offices in Alabama.
On February 12, 1999, the Corporation acquired Emerald Coast Bancshares, Inc.
and its subsidiary, Emerald Coast Bank (Emerald). Emerald Coast Bank was formed
on August 30, 1996. Emerald Coast Bancshares, Inc. was incorporated on August
16, 1997, at which time it acquired all of the outstanding shares of Emerald
Coast Bank. Emerald Coast Bancshares, Inc. was merged into the Corporation on
February 12, 1999. Emerald Coast Bank is a separate subsidiary of the
Corporation with four branch offices in Northwest Florida. In February 1999,
Emerald Coast Bank changed its charter from a state bank to a federal thrift.
BASIS OF PRESENTATION
The supplemental consolidated financial statements of the Corporation give
retroactive effect to the mergers with Warrior, City National, First Citizens,
Commerce and Emerald, which have been accounted for using the pooling of
interests method as described in Note 13. The merger with Roanoke was accounted
for as a purchase. The Corporation's supplemental consolidated statements of
operations include the results of operations of Roanoke from October 16, 1998,
its date of acquisition. All significant intercompany accounts and transactions
have been eliminated.
9
<PAGE> 11
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVESTMENT SECURITIES
Investment securities are classified as either held-to-maturity, available for
sale or trading at the time of purchase. The Corporation defines
held-to-maturity securities as debt securities which management has the positive
intent and ability to hold to maturity.
Held-to-maturity securities are reported at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest income
using the effective yield method.
Securities available for sale are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities nor as securities to be held to maturity. Unrealized holding gains
and losses, net of deferred taxes, on securities available for sale are reported
as a separate component of stockholders' equity until realized.
Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by unearned discount
and an allowance for loan losses. Interest income with respect to loans is
accrued on the principal amount outstanding, except for interest on certain
consumer loans, which is recognized over the term of the loan using a method
which approximates a level yield.
10
<PAGE> 12
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
loan is impaired. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized only to the
extent of interest payments received.
Impaired loans are specifically reviewed loans for which it is probable that the
Corporation will be unable to collect all amounts due according to the terms of
the loan agreement. Impairment is measured by comparing the recorded investment
in the loan with the present value of expected future cash flows discounted at
the loan's effective interest rate, at the loans observable market price, or the
fair value of the collateral if the loan is collateral dependent. A valuation
allowance is provided to the extent that the measure of the impaired loans is
less than the recorded investment. A loan is not considered impaired during a
period of delay in payment if the ultimate collectibility of all amounts due is
expected. Larger groups of homogenous loans such as consumer installment and
residential real estate mortgage loans are collectively evaluated for
impairment. Payments received on impaired loans for which the ultimate
collectibility of principal is uncertain are generally applied first as
principal reductions.
The allowance for loan loss is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes the collectibility of principal is unlikely. The allowance
is the amount that management believes will be adequate to absorb possible
losses on existing loans which may become uncollectible, based on evaluation of
the collectibility of loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, and
current economic conditions that may affect the borrower's ability to pay.
11
<PAGE> 13
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of cost or market,
determined on a net aggregate basis. Differences between the carrying amount of
mortgage loans held for sale and the amounts received upon sale are credited or
charged to income at the time the proceeds of the sale are collected. The fair
values are based on quoted market prices of similar loans sold in conjunction
with securitization transactions, adjusted for differences in loan
characteristics.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed over the estimated service lives of the
assets using certain straight-line and accelerated methods, generally using five
to fifty years for premises and five to ten years for furniture and equipment.
Expenditures for maintenance and repairs are charged to operations as incurred;
expenditures for renewals and betterments are capitalized and written off by
depreciation charges. Property retired or sold is removed from the asset and
related accumulated depreciation accounts and any profit or loss resulting
therefrom is reflected in the statement of operations.
INTANGIBLE ASSETS
Intangible assets, primarily goodwill, are included in other assets, net of
amortization calculated on a straight-line basis over a fifteen-year period.
The Corporation reviews on a regular basis the carrying value of goodwill to
determine if any impairment has occurred or if the period of recoverability has
changed. If this review indicates that goodwill will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the carrying value of the goodwill will be
reduced by the estimated shortfall of such cash flows. At December 31, 1998 and
1997 goodwill, net of accumulated amortization totaled $867,000 and $414,000,
respectively.
12
<PAGE> 14
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER REAL ESTATE
Other real estate, acquired through partial or total satisfaction of loans, is
carried at the lower of cost or net realized value in other assets. At the date
of acquisition, losses are charged to the allowance for loan losses. Gain or
loss from the sale of other real estate is included in other expense.
INCOME TAXES
The supplemental consolidated financial statements are prepared on the accrual
basis. The Corporation accounts for income taxes using the liability method
pursuant to Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to reverse.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Corporation has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements and commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
PER SHARE AMOUNTS
Earnings per share computations are based on the weighted average number of
shares outstanding during the periods presented.
Diluted earnings per share computations are based on the weighted average number
of shares outstanding during the period, plus the dilutive effect of stock
options. All per share amounts reflect the adoption of SFAS No. 128, Earnings
per Share.
13
<PAGE> 15
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123)
establishes a "fair value" based method of accounting for stock-based
compensation plans and allows entities to adopt that method of accounting for
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by the Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). The
Corporation has elected to follow Opinion 25 and related interpretations in
accounting for its employee stock options. Under Opinion 25, because the
exercise price of the Corporation's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Statement 123 requires the disclosure of pro forma net income and earnings per
share determined as if the Corporation had accounted for its employee stock
options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model. Option valuation models require the input of subjective assumptions.
Because these assumptions are subjective, the effects of applying Statement 123
for pro forma disclosures are not likely to be representative of the effects on
reported net income for future years.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Corporation adopted SFAS No. 130, Reporting
Comprehensive Income (Statement 130). This statement establishes standards for
reporting the components of comprehensive income and requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain items that are reported directly within a separate
component of stockholders' equity and bypass net income. The adoption of
Statement 130 had no impact on the Corporation's financial condition or results
of operations.
14
<PAGE> 16
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
On December 31, 1998, the Corporation adopted SFAS No.131, Disclosures About
Segments of an Enterprise and Related Information (Statement 131). This
statement changes the reporting of segment information in annual financial
statements and requires public companies to report selected segment information
in interim financial reports to shareholders. Under the Statement's "management
approach," public companies are to report financial and descriptive information
about their operating segments. Operating segments are revenue-producing
components of an enterprise for which separate financial information is produced
internally and are subject to evaluation by the chief operating decision maker
in deciding how to allocate resources to segments. The disclosure requirements
of Statement 131 had no impact on the Corporation's financial condition or
results of operations.
On December 31, 1998, the Corporation adopted SFAS No. 132, Employer's
Disclosures about Pensions and Other Postretirement Benefits (Statement 132).
This statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis. The adoption of Statement 132 had no
impact on the Corporation's financial condition or results of operation.
15
<PAGE> 17
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June of 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (Statement 133).
This statement established accounting and reporting standards for derivatives
and for hedging activities. It requires that an entity recognize all derivatives
as either assets or liabilities in the statement of financial condition and
measure those instruments at fair value. The statement continues to allow
derivative instruments to be used to hedge various risks and sets forth specific
criteria to be used to determine when hedge accounting can be used. It also
establishes special accounting treatment for fair value hedges, cash flow hedges
and foreign currency hedges. The accounting for qualifying hedges results in
recognizing offsetting changes in value or cash flows of both the hedge and the
hedged item in earnings in the same period. Changes in the fair value of
derivatives that do not meet the criteria of a qualifying hedge or that
represent the ineffective portion of a hedge are required to be recognized in
earnings in the period of change. The provisions of this statement become
effective for quarterly and annual reporting beginning January 1, 2000. The
impact of adopting Statement 133 on the Corporation's financial condition or
results of operations has not been determined at this time.
2. INVESTMENT SECURITIES
The amounts at which investment securities are carried and their approximate
fair values at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities available for sale:
Equity securities $ 170 $ -- $ 25 $ 145
U.S. Treasury and agency securities 7,055 24 5 7,074
State, county and municipal securities 18,245 448 18 18,675
Mortgage-backed securities 48,894 173 491 48,576
Corporate debt 1,712 25 -- 1,737
Other securities 1,213 22 -- 1,235
----------------------------------------------------
Total $77,289 $692 $539 $77,442
====================================================
</TABLE>
16
<PAGE> 18
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
2. INVESTMENT SECURITIES (CONTINUED)
The amounts at which investment securities are carried and their approximate
fair values at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Investment securities available for sale:
Equity securities $ 261 $ -- $ 38 $ 223
U.S. Treasury and agency securities 31,829 68 54 31,843
State, county and municipal securities 7,699 353 -- 8,052
Mortgage-backed securities 12,867 101 29 12,939
Corporate debt 3,067 18 -- 3,085
----------------------------------------------------
Total $55,723 $540 $121 $56,142
====================================================
Investment securities held to maturity:
U.S. Treasury and agency securities $16,444 $ 21 $ 56 $16,409
State, county and municipal securities 3,545 61 13 3,593
Mortgage-backed securities 6,109 25 38 6,096
Corporate debt 200 11 -- 211
----------------------------------------------------
Total $26,298 $118 $107 $26,309
====================================================
</TABLE>
Securities with an amortized cost of $40,151,000 and $35,066,000 at December 31,
1998 and 1997, respectively, were pledged to secure United States government
deposits and other public funds and for other purposes as required or permitted
by law.
The amortized cost and estimated fair values of investment securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
17
<PAGE> 19
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
2. INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------------------------
(in thousands)
<S> <C> <C>
Due in one year or less $ 1,470 $ 1,469
Due after one year through five years 7,035 7,159
Due after five years through ten years 6,921 7,138
Due after ten years 12,799 12,955
Mortgage-backed securities 48,894 48,576
Equity securities 170 145
------------------------
$77,289 $77,442
========================
</TABLE>
Gross realized gains on sales of investment securities available for sale in
1998, 1997 and 1996 were $384,000, $245,000 and $82,000, respectively, and gross
realized losses for the same periods were $112,000, $28,000 and $30,000,
respectively.
During 1998 the Corporation transferred securities with a carrying value of
$34,790,000 and fair value of $34,988,000 from the held to maturity category to
available for sale. The unrealized gain of $198,000 at the date of transfer has
been recognized in other comprehensive income net of deferred income taxes of
$79,000. The securities were transferred in order to provide liquidity to the
Corporation to meet the increasing loan demand being generated from its
Birmingham branch which opened on July 1, 1998.
The components of other comprehensive loss for the year ended December 31, 1998
are as follows:
<TABLE>
<CAPTION>
Pre-tax Income Tax Net of Income
Amount (Benefit) Expense Tax
-------------------------------------------
<S> <C> <C> <C>
Unrealized gain on available for sale securities $ 6 $ -- $ 6
Less: reclassification adjustment for gains
realized in net loss 272 108 164
--------------------------------------
Net unrealized loss $(266) $(108) $(158)
======================================
</TABLE>
18
<PAGE> 20
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
3. LOANS
At December 31, 1998 and 1997 the composition of the loan portfolio was as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------
(in thousands)
<S> <C> <C>
Commercial and industrial $138,190 $ 72,086
Real estate - construction 35,647 17,730
Real estate - mortgage 115,894 78,071
Consumer 67,968 47,187
All other loans 8,468 2,995
--------------------------
Total loans $366,167 $218,069
==========================
</TABLE>
At December 31, 1998 and 1997 the Corporation's recorded investment in loans
considered to be impaired under SFAS No. 114 was $894,000 and $300,000,
respectively. There was approximately $134,000 and $29,000 at December 31, 1998
and 1997, respectively, in the allowance for loan losses specifically allocated
to impaired loans. The average recorded investment in impaired loans during
1998, 1997 and 1996 was approximately $598,000, $258,000 and $215,000,
respectively. No material amount of interest income was recognized on impaired
loans for the years ended December 31, 1998, 1997 and 1996.
The Corporation has no commitments to loan additional funds to the borrowers
whose loans are on nonaccrual.
4. ALLOWANCE FOR LOAN LOSSES
A summary of the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------------
(in thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,516 $ 1,760 $ 1,477
Allowance of acquired bank 368 -- --
Provision for loan losses 3,433 1,849 966
Loan charge-offs (2,354) (1,373) (844)
Recoveries 570 280 161
-------------------------------------------
Balance at end of year $ 4,533 $ 2,516 $ 1,760
===========================================
</TABLE>
19
<PAGE> 21
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
5. PREMISES AND EQUIPMENT AND LEASES
Components of premises and equipment at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------
(in thousands)
<S> <C> <C>
Land $ 3,534 $ 3,137
Premises 20,141 7,064
Furniture and equipment 9,440 6,885
---------------------------
33,115 17,086
Less accumulated depreciation and amortization (5,227) (4,473)
---------------------------
Net book value of premises and
equipment in service 27,888 12,613
Real estate under renovation 627 4,678
---------------------------
Total $ 28,515 $ 17,291
===========================
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was
$1,634,000, $965,000 and $698,000, respectively.
Emerald Coast Bank leases all of its branch buildings under operating leases
expiring through 2003. The leases require payment of taxes, insurance and
maintenance costs in addition to rental payments. In addition, three of the four
building leases have two five-year renewal options.
Future minimum lease payments under operating leases for the years indicated
below are summarized as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 415
2000 403
2001 392
2002 392
2003 200
------
Total $1,802
======
</TABLE>
20
<PAGE> 22
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
5. PREMISES AND EQUIPMENT AND LEASES (CONTINUED)
Rental expense relating to operating leases amounted to approximately $201,000,
$52,000, and $45,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
6. DEPOSITS
The following schedule details interest expense on deposits:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------
(in thousands)
<S> <C> <C> <C>
Interest-bearing demand $ 3,030 $ 1,859 $1,045
Savings 743 791 796
Time deposits $100,000 and over
3,371 2,811 2,123
Other time 8,184 6,362 4,033
----------------------------------------
Total $15,328 $11,823 $7,997
========================================
</TABLE>
At December 31, 1998, the scheduled maturities of time deposits are as follows
(in thousands):
<TABLE>
<S> <C>
1999 $151,400
2000 40,969
2001 6,502
2002 4,124
2003 and thereafter 14,038
--------
$217,033
========
</TABLE>
21
<PAGE> 23
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
7. ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB) AND OTHER BORROWED FUNDS
The following is a summary of advances from the FHLB as of December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Maturity Date Interest Rate Amount
<S> <C> <C>
July 10, 2008 4.99% $ 3,000
June 23, 2008 5.51% 1,500
March 26, 2008 5.51% 1,000
April 2, 2003 5.52% 2,000
February 6, 2003 4.99% 15,660
-------
$23,160
=======
</TABLE>
The advances are secured by FHLB stock and a blanket lien on certain residential
real estate loans with a carrying value of approximately $61,822,000 at December
31, 1998.
The Corporation had federal funds purchased outstanding of $3,150,000 and
$7,670,000 at December 31, 1998 and 1997, respectively.
8. STOCK OPTION PLANS AND RESTRICTED STOCK
The Corporation has established a stock option plan for directors and certain
key employees that provide for the granting of incentive and nonqualified
options to purchase up to 1,000,000 shares of the Corporation's common stock.
The terms of the options granted are determined by the compensation committee of
the Board of Directors. All options granted have a maximum term of ten years,
and the option price per share of options granted cannot be less than the fair
market value of the Corporation's common stock on the grant date. All options
granted during 1998 under this plan vest 20% on the grant date immediately and
an additional 20% annually on the anniversary of the grant date.
In addition, the Corporation assumed the Commerce Bank of Alabama Incentive
Stock Compensation Plan concurrent with the Commerce merger. Options to purchase
82,396 shares of the Corporation's common stock have been granted under this
plan. No additional options may be granted under this plan.
Emerald, which merged with the Corporation on February 12, 1999, granted to
officers options to purchase 10,177 shares in 1998, 10,177 shares in 1997 and
61,060 shares in 1996,
22
<PAGE> 24
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
8. STOCK OPTION PLANS AND RESTRICTED STOCK (CONTINUED)
on an equivalent Corporation shares basis. These options were issued at a
price approximating fair value at the date of the grant. These options vested
immediately and had no expiration date. All of these options were exercised one
day prior to the merger.
For purposes of the following disclosures, the number and exercise prices for
options granted by entities which merged with the Corporation during 1998 and
options granted by Emerald, have been converted to equivalent amounts for the
Corporation based on the exchange ratios in the mergers.
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996
--------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Under option, beginning of year 202,589 $ 4.70 186,575 $4.64 64,213 $4.28
Granted 466,677 10.87 16,014 5.40 134,038 4.79
Exercised 48,460 3.65 - - 11,675 4.28
======== ======== ========
Under option, end of year 620,806 9.52 202,589 4.71 186,576 4.64
======== ======== ========
Exercisable at end of year 255,606 196,751 178,402
======== ======== ========
Weighted-average fair value per
option of options granted
during the year $ 5.49 $ 1.22 $ 1.20
======== ======== ========
</TABLE>
A further summary about options outstanding at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE IN YEARS (1) PRICE OUTSTANDING PRICE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.30 46,700 6.5 $ 4.30 46,700 $ 4.30
4.91 81,413 - 4.91 81,413 4.91
6.24 36,193 7.6 6.24 36,193 6.24
11.00 456,500 10.0 11.00 91,300 11.00
======= =======
620,806 9.5 9.42 255,606 7.16
======= =======
</TABLE>
(1) Excludes options granted by Emerald, which did not expire.
23
<PAGE> 25
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
8. STOCK OPTION PLANS AND RESTRICTED STOCK (CONTINUED)
The Corporation recognizes compensation cost for stock-based employee
compensation awards in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees. The Corporation recognized no compensation cost for
stock-based employee compensation awards for the years ended December 31, 1998,
1997 and 1996. If the Corporation had recognized compensation cost in accordance
with SFAS No. 123, net income and earnings per share would have been reduced as
follows (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
Net (loss) income:
As reported $ (367) $ 1,678 $ 1,103
Pro forma (1,981) 1,666 998
Basic net (loss) income per share:
As reported $ (.03) $ .20 $ .15
Pro forma (.18) .20 .14
Diluted net (loss) income per share:
As reported (.03) .20 .15
Pro forma (.18) .19 .14
</TABLE>
The fair value of the options granted in 1998 was based upon the Black-Scholes
pricing model using the following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate 6.44%
Expected life of the options 6 years
Expected dividends (as a percent of the fair value of the stock) 0.00%
Expected volatility .424%
</TABLE>
Emerald issued 24,424 shares (on an equivalent Corporation shares basis) under
the terms of a Restricted Stock Award Agreement between Emerald and its Chairman
and Chief Executive Officer. All restricted shares vested in 1998 as a result of
the pending merger with the Corporation. Compensation expense of $114,000 has
been recognized in 1998 relating to these shares.
24
<PAGE> 26
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
9. RETIREMENT PLANS
Warrior, which merged with the Corporation on September 24, 1998, sponsors a
defined benefit plan ("Plan") that provides retirement, disability and death
benefits. All employees of Warrior over age 21 are eligible to participate in
the plan after the completion of one year of service. The Corporation
contributes amounts to the pension funds sufficient to satisfy funding
requirements of the Employee Retirement Income Security Act. The net periodic
pension costs and the prepaid pension costs related to the Plan are not material
to the Corporation's financial condition and results of operations.
The Corporation sponsors a profit-sharing plan which permits participants to
make contributions by salary reduction pursuant to Section 401(k) of the
Internal Revenue Code. This plan covers substantially all employees who meet
certain age and length of service requirements. The Corporation matches
contributions at its discretion. The Corporation's contributions to the plan
were $179,000, $170,000 and $147,000 in 1998, 1997 and 1996, respectively.
10. INCOME TAXES
The components of the income tax (benefit) expense are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 427 $ 730 $ 671
State 38 133 97
Benefit of net operating loss
carryforwards (NOL) (153) (162) --
---------------------------------------
Total current expense 312 701 768
Deferred tax benefit expense (1,290) (5) (378)
---------------------------------------
Total income tax (benefit) expense $ (978) $ 696 $ 390
=======================================
</TABLE>
25
<PAGE> 27
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
Significant components of the Corporation's deferred tax assets and liabilities
as of December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Deferred tax assets:
Rehabilitation tax credit $1,737 $ --
Provision for loan losses 1,565 797
NOL carryover 235 397
Alternative minimum tax credit carryover 47 95
Other 127 193
-----------------------
Total deferred assets before valuation allowance 3,711 1,482
Valuation allowance (200) --
-----------------------
Total deferred tax assets after valuation allowance 3,511 1,482
Deferred tax liabilities:
Difference in book and tax basis of premises and equipment
1,445 816
Purchase accounting adjustments 318 --
Depreciation 265 305
Cash to accrual basis adjustment 81 138
Unrealized gain on securities 77 184
Other 7 182
-----------------------
Total deferred tax liabilities 2,193 1,625
-----------------------
Net deferred tax asset (liability) $1,318 $ (143)
=======================
</TABLE>
26
<PAGE> 28
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
10. INCOME TAXES (CONTINUED)
The effective tax rate differs from the expected tax using statutory rate of
34%. Reconciliation between the expected tax and the actual income tax (benefit)
expense follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Expected (benefit) tax at 34% of income before taxes $ (458) $ 807 $ 507
Add (deduct):
Rehabilitation tax credit (1,737) -- --
State income taxes, net of federal tax benefit (12) 65 53
Effect of interest income exempt from Federal
income taxes (254) (185) (219)
Nondeductible merger costs 447 -- --
Basis reduction 590 -- --
Valuation Allowance 200 -- --
Other items - net 246 9 49
---------------------------------------
Income tax (benefit) expense $ (978) $ 696 $ 390
=======================================
</TABLE>
The Corporation has generated a rehabilitation tax credit of $1,737,000 during
1998 which can be carried forward and utilized through 2019. This credit was
established as a result of the restoration and enhancement of the John A. Hand
building, which is designated as a Historical Structure and serves as the
corporate headquarters for the Corporation. This credit is equal to 20% of
certain qualified expenditures incurred by the Corporation prior to December 31,
1998.
At December 31, 1998, the Corporation had net operating loss carryforwards for
federal tax purposes of $595,000, which will expire in 2011 and 2012.
Income taxes paid were $455,000, $889,000 and $796,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Applicable income tax expense of
$108,000, $87,000 and $21,000 on securities gains for the years ended December
31, 1998, 1997 and 1996, respectively, is included in income taxes.
27
<PAGE> 29
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS
The Corporation has entered into transactions with its directors, executive
officers, significant stockholders and their affiliates (related parties). Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. The aggregate amount of loans to such
related parties at December 31, 1998 and 1997 were $19,036,000 and $9,575,000,
respectively.
Activity during the year ended December 31, 1998 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 31, DECEMBER 31,
1997 ADVANCES REPAYMENTS RECLASSIFICATION 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$9,575 $25,193 $(10,930) $(4,802) $19,036
=========================================================================================================
</TABLE>
At December 31, 1998, the outstanding deposits of such related parties amounted
to approximately $25,814,000.
During 1997 the Corporation, through its predecessor Warrior, purchased a
twenty-one story building in downtown Birmingham from Taylor Acquisition
Corporation, a corporation owned by James A. Taylor, Sr., Chairman and Chief
Executive Officer of the Corporation and certain family members. The building
was purchased through the issuance of 1,535 shares of Warrior common stock
(equivalent to 460,500 shares of the Corporation) and, in addition, the
Corporation assumed $1,513,000 in outstanding debt on the property. The building
and related equipment have been capitalized at the appraised fair value of
$3,718,000.
In July 1998, Emerald sold the land and building of its main office building and
two branch offices to an entity under the control of certain members of
Emerald's Board of Directors for their fair value of approximately $3,795,000.
The sales were accounted for under a sale-leaseback arrangement. The total
deferred gain on the sales of $87,000 is being amortized into income over the
lease terms. At December 31, 1998, the remaining deferred gain was $79,000.
Terms of the leases are described in Note 5. Rental expense under these
operating leases amounted to approximately $163,000 in 1998.
28
<PAGE> 30
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES
The supplemental consolidated financial statements do not reflect the
Corporation's various commitments and contingent liabilities which arise in the
normal course of business and which involve elements of credit risk, interest
rate risk and liquidity risk. These commitments and contingent liabilities are
commitments to extend credit and standby letters of credit. The following is a
summary of the Corporation's maximum exposure to credit loss for loan
commitments and standby letters of credit (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------
<S> <C> <C>
Commitments to extend credit $47,670 $20,764
Standby letters of credit 2,341 1,131
</TABLE>
Commitments to extend credit and standby letters of credit all include exposure
to some credit loss in the event of nonperformance of the customer. The
Corporation's credit policies and procedures for credit commitments and
financial guarantees are the same as those for extension of credit that are
recorded in the supplemental consolidated statement of financial condition.
Because these instruments have fixed maturity dates, and because many of them
expire without being drawn upon, they do not generally present any significant
liquidity risk to the Corporation.
The Corporation is party to litigation and claims arising in the normal course
of business. Management, after consultation with legal counsel, believes that
the liabilities, if any, arising from such litigation and claims will not be
material to the supplemental consolidated financial statements.
29
<PAGE> 31
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
13. BUSINESS COMBINATIONS AND MERGER RELATED COSTS
The Corporation has completed the following business combinations during 1998:
<TABLE>
<CAPTION>
Accounting
Date Institution Total Assets Consideration Treatment
- ------------------------------------------------------------------------------------------------------------
(dollars in
millions)
<S> <C> <C> <C> <C>
September 24 Warrior Capital Corporation $ 84 5,448,000 shares of Pooling
common stock
October 16 Commercial Bancshares of 42 $7,300,000 cash Purchase
Roanoke, Inc.
October 30 City National Corporation 84 2,026,579 shares of Pooling
common stock
October 30 First Citizens Bancorp, Inc. 35 652,859 shares of Pooling
common stock
November 6 Commerce Bank of Alabama 105 1,547,198 shares of Pooling
common stock
</TABLE>
The following table presents financial information contributed by the pooled
companies during 1998 prior to the consummation of the mergers (in thousands):
<TABLE>
<CAPTION>
NET INTEREST INCOME NET INCOME (LOSS)
-------------------------------------------
<S> <C> <C>
Net interest income
Warrior $2,908 $ 387
Commerce 3,714 (404)
First Citizens 1,706 175
City National 3,231 (209)
</TABLE>
30
<PAGE> 32
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
13. BUSINESS COMBINATIONS AND MERGER RELATED COSTS (CONTINUED)
On February 12, 1999, the Corporation consummated the merger with Emerald. On a
supplemental consolidated basis, Emerald contributed $3,149,000 of net interest
income and $72,000 of net income ($.06 per equivalent share of Corporation
common stock) during 1998.
The following table presents net interest income, net income and net income per
common share of the combining entities on a historical and a historical combined
basis, and on a supplemental combined basis (amounts in thousands, except per
share data):
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Net interest income:
Warrior $ 3,152 $2,826
Commerce 3,485 1,886
First Citizens 1,742 1,429
City National 3,810 3,566
-------------------------
Historical combined 12,189 9,707
Emerald 1,563 242
-------------------------
Supplemental combined $13,752 $9,949
=========================
Net income (loss):
Warrior $ 798 $ 790
Commerce 228 (293)
First Citizens 423 400
City National 625 560
-------------------------
Historical combined 2,074 1,457
Emerald (396) (354)
-------------------------
Supplemental combined $ 1,678 $1,103
=========================
Net income (loss) per equivalent share of Corporation:
Warrior $ .26 $ .29
Commerce .15 (.20)
First Citizens .68 .64
City National .31 .28
Historical combined .29 .21
Emerald (.31) (.28)(1)
Supplemental combined .20 .15
(1) For the four month period ended December 31, 1996. Emerald Coast Bank
was formed August 30, 1996.
</TABLE>
31
<PAGE> 33
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
13. BUSINESS COMBINATIONS AND MERGER RELATED COSTS (CONTINUED)
The Corporation's supplemental consolidated financial statements include the
results of operations of Roanoke only from October 16, 1998, its date of
acquisition. The following unaudited summary information presents the
supplemental consolidated results of operations of the Corporation on a pro
forma basis, as if Commercial Bancshares of Roanoke, had been acquired on
January 1, 1997. The pro forma summary information does not necessarily reflect
the results of operations that would have occurred, if the acquisition had
occurred as of the beginning of the periods presented, or of results that may
occur in the future.
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Interest income $36,324 $28,818
Interest expense 16,996 13,259
-------------------------
Net interest income 19,328 15,559
Provision for loan losses 3,776 2,250
Noninterest income 4,010 3,300
Noninterest expense 20,760 13,858
-------------------------
(Loss) income before income taxes
(1,198) 2,751
Income tax (benefit) expense (941) 765
-------------------------
Net (loss) income $ (257) $ 1,986
=========================
Basic and diluted net (loss) income
per common share $ (.03) $ .20
=========================
</TABLE>
Total intangible assets recorded in connection with this transaction of
approximately $483,000 are being amortized on a straight-line basis over 15
years.
In 1998, the Corporation incurred and recognized a pre-tax, non-recurring merger
and consolidation charge of $1,466,000 related to the mergers with Warrior,
Commerce, First Citizens, and City National. The charge consisted of
professional and other fees associated with the mergers ($1,314,000) and
obsolete equipment write-offs ($152,000).
The Corporation recorded $152,000 of write-offs related primarily to computer
equipment and software impaired as a result of the Corporation's consolidation
of certain back-office and branch operations, and instituting efficiencies
through alteration and elimination of activities of the combining enterprises.
32
<PAGE> 34
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
13. BUSINESS COMBINATIONS AND MERGER RELATED COSTS (CONTINUED)
The Corporation's other business combinations pending as of December 31, 1998,
or announced thereafter, are as follows (unaudited):
<TABLE>
<CAPTION>
Anticipated
Asset Size Accounting
Institution (in millions) (1) Consideration Treatment
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
C&L Banking Corporation $49 Corporation Common Stock Pooling
C&L Bank of Blountstown 57 Corporation Common Stock Pooling
BankersTrust of Alabama, Inc. 45 Corporation Common Stock Purchase
(1) As of September 30, 1998 for BankersTrust of Alabama, Inc.; all others
as of December 31, 1998.
</TABLE>
14. REGULATORY RESTRICTIONS
The Corporation's subsidiaries are required to maintain reserve balances with
the Federal Reserve Bank. The amount of reserve balances maintained as of
December 31, 1998 was $1,447,000.
The primary source of funds available to the Corporation is the payment of
dividends by its subsidiary. Banking regulations limit the amount of dividends
that may be paid without prior approval of the subsidiaries regulatory agency.
Approximately $486,000 in retained earnings are available to be paid as
dividends by the subsidiaries at December 31, 1998.
The Corporation and its subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its subsidiaries must meet specific capital
guidelines that involve quantitative measures of the Corporation's and its
subsidiaries' assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation's and its
subsidiaries' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
33
<PAGE> 35
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
14. REGULATORY RESTRICTIONS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998 and 1997 that the Corporation and its subsidiaries meet all capital
adequacy requirements to which it is subject.
As of December 31, 1998 and 1997, the most recent notification from the FDIC
categorized the subsidiaries as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the
Corporation and its subsidiaries must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
34
<PAGE> 36
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
14. REGULATORY RESTRICTIONS (CONTINUED)
The Corporation and its subsidiaries actual capital amounts and ratios are also
presented in the table (dollars in thousands).
<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Corporation $60,923 14.99% $32,519 8.00% $40,649 10.00%
The Bank 38,485 11.85 25,971 8.00 32,464 10.00
Emerald Coast Bank 6,283 9.50 5,293 8.00 6,618 10.00
Tier I Capital (to Risk Weighted Assets):
Corporation 56,393 13.87 16,260 4.00 24,389 6.00
The Bank 34,626 10.67 12,985 4.00 19,478 6.00
Emerald Coast Bank 5,609 8.48 2,646 4.00 3,969 6.00
Tier I Capital (to Average Assets):
Corporation 56,393 11.01 20,482 4.00 25,603 5.00
The Bank 34,626 8.32 16,646 4.00 20,808 5.00
Emerald Coast Bank 5,609 6.92 3,244 4.00 4,055 5.00
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Corporation 47,364 19.31 19,624 8.00 24,530 10.00
The Bank 30,350 15.46 15,705 8.00 19,631 10.00
Emerald Coast Bank 5,870 13.50 3,479 8.00 4,349 10.00
Tier I Capital (to Risk Weighted Assets):
Corporation 44,847 18.28 9,812 4.00 14,718 6.00
The Bank 28,221 14.37 7,856 4.00 11,783 6.00
Emerald Coast Bank 5,482 12.60 1,740 4.00 2,610 6.00
Tier I Capital (to Average Assets):
Corporation 44,847 13.59 13,917 4.00 16,497 5.00
The Bank 28,221 10.08 11,199 4.00 13,999 5.00
Emerald Coast Bank 5,482 10.47 2,093 4.00 2,617 5.00
</TABLE>
35
<PAGE> 37
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
In February, 1999, Emerald Coast Bank changed its charter from a state bank to a
federal thrift. The minimum requirements for capital adequacy purposes for a
thrift are a total capital to risk weighted assets ratio of 8%, a tier 1 capital
to adjusted total assets rating of 3%, and a tangible capital to adjusted total
assets ratio of 1.5%. Management believes Emerald Coast Bank will meet these
minimum capital requirements during 1999.
36
<PAGE> 38
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Corporation in estimating
fair values of financial instruments as disclosed herein:
Cash and short-term instruments. The carrying amounts of cash and short-term
instruments approximate their fair value.
Securities available-for-sale and securities held-to maturity. Fair values for
securities are based on quoted market prices. The carrying values of restricted
equity securities approximate fair values.
Mortgage loans held for sale. The carrying amounts of mortgage loans held for
sale approximate their fair value.
Net loans. Fair values for variable-rate loans that reprice frequently and have
no significant change in credit risk are based on carrying values. Fair values
for certain mortgage loans (for example, one-to-four family residential), and
other consumer loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial loans are
estimated using discounted cash flow analyses using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
Accrued interest receivable. The carrying amounts of accrued interest receivable
approximate their fair values.
Deposits. The fair values disclosed for demand deposits are, by definition,
equal to the amount payable on demand at the reporting date (that is, their
carrying amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit ("CDs") approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Advances from FHLB. Rates currently available to the Corporation for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
37
<PAGE> 39
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Other borrowed funds. The carrying amounts of other borrowed funds approximate
their fair values.
Off-balance sheet items. The fair values of commitments to extend credit and
standby letters of credit are not material to the Corporation's financial
condition.
Limitations. Fair value estimates are made at a specific point of time and are
based on relevant market information which is continuously changing. Because no
quoted market prices exist for a significant portion of the Corporation's
financial instruments, fair values for such instruments are based on
management's assumptions with respect to future economic conditions, estimated
discount rates, estimates of the amount and timing of future cash flows,
expected loss experience, and other factors. These estimates are subjective in
nature involving uncertainties and matters of significant judgment; therefore,
they cannot be determined with precision. Changes in the assumptions could
significantly affect the estimates.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-----------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 25,595 $ 25,595 $ 15,020 $ 15,020
Interest bearing deposits in other
banks 158 158 200 200
Federal funds sold 14,435 14,435 27,605 27,605
Securities available for sale 77,442 77,442 56,142 56,142
Securities held-to-maturity -- -- 26,298 26,309
Mortgage loans held for sale 4,898 4,898 -- --
Net loans 360,846 365,167 214,314 216,703
Accrued interest receivable 3,791 3,791 3,194 3,194
Financial liabilities:
Deposits 435,366 437,119 306,785 304,176
Advances from FHLB 23,160 23,166 -- --
Other borrowed funds 3,700 3,700 8,229 8,229
</TABLE>
38
<PAGE> 40
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
16. OTHER NONINTEREST EXPENSE
Other noninterest expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Professional fees $1,031 $ 522 $ 347
Directors fees 560 293 249
Insurance and assessments 311 209 172
Postage, stationery and supplies
729 417 426
Advertising 358 259 189
Other operating expense 2,585 1,705 1,478
--------------------------------
Total $5,574 $3,405 $2,881
================================
</TABLE>
17. CONCENTRATIONS OF CREDIT RISK
All of the Corporation's loans, commitments and standby letters of credit have
been granted to customers in the Corporation's market area. The concentrations
of credit by type of loan or commitment are set forth in Notes 3 and 12,
respectively.
The Corporation maintains cash balances and federal funds sold at several
financial institutions in Alabama and Florida. Cash balances at each institution
are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to
$100,000. At various times throughout the year cash balances held at these
institutions will exceed federally insured limits. The Bank's management
monitors these institutions on a quarterly basis in order to determine that the
institutions meet "well-capitalized" guidelines as established by the FDIC.
39
<PAGE> 41
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
18. NET (LOSS) INCOME PER SHARE
The following table sets forth the computation of basic net (loss) income per
common share and diluted net (loss) income per common share (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Numerator:
For basic and diluted, net (loss) income $ (367) $1,678 $1,103
==================================
Denominator:
For basic, weighted average common shares
outstanding 11,011 8,449 7,217
Effect of dilutive stock options -- 119 97
==================================
Average diluted common shares outstanding
11,011 8,568 7,314
==================================
Basic and diluted net (loss) income per common
share $ (.03) $ .20 $ .15
==================================
</TABLE>
40
<PAGE> 42
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
19. PARENT COMPANY
The condensed financial information for The Banc Corporation (Parent Company
only) is presented as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------------------
<S> <C> <C>
STATEMENTS OF FINANCIAL CONDITION
Assets:
Cash $ 2,536 $ 6,783
Investment in subsidiaries 40,674 34,312
Intangibles, net 444 415
Premises and equipment - net 15,012 4,822
Other assets 674 279
---------------------
$59,340 $46,611
=====================
Liabilities:
Accounts payable and deferred taxes $ 965 $ 816
Dividends payable -- 40
Accrued expenses and other liabilities 1,164 258
Stockholders' equity 57,211 45,497
---------------------
$59,340 $46,611
=====================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
Income:
Dividends from subsidiaries $ 2,370 $ 269 $ 401
Interest 199 67 2
Other income 515 95 124
-----------------------------------
3,084 431 527
Expense:
Directors' fees 194 136 98
Salaries and benefits 529 94 77
Occupancy expense 250 -- --
Interest expense 81 -- --
Other 1,117 70 46
-----------------------------------
2,171 300 221
-----------------------------------
Income before income taxes and
equity in undistributed earnings
of subsidiaries 913 131 306
Income tax benefit (expense) 1,321 48 (27)
-----------------------------------
Income before equity in undistributed
earnings of subsidiaries 2,234 179 279
Equity in undistributed (loss)
earnings of subsidiaries (2,601) 1,499 824
-----------------------------------
Net (loss) income $ (367) $1,678 $ 1,103
===================================
</TABLE>
41
<PAGE> 43
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
19. PARENT COMPANY (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (367) $ 1,678 $ 1,103
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Amortization and depreciation expense 171 25 21
Equity in undistributed loss (earnings) of
subsidiary 2,601 (1,499) (824)
Increase (decrease) in other liabilities 786 62 (139)
(Increase) decrease in other assets (1,181) (194) 70
-------- -------- -------
Net cash provided by operating activities 2,010 72 231
NET CASH USED IN INVESTING ACTIVITIES
Purchases of premises and equipment (9,102) (141) --
Net cash paid in acquisition (5,390) -- --
Maturity of investment securities
available for sale 500 -- --
Sale of investment securities
available for sale 246 -- --
Proceeds from other receivables 329 30 --
Capital contribution to subsidiary (5,000) -- --
-------- -------- -------
Net cash used in investing activities (18,417) (111) --
CASH USED IN FINANCING ACTIVITIES
Dividends paid by pooled subsidiary (121) (389) (364)
Proceeds from issuance of common stock 12,281 17,878 --
Repurchase of common stock -- (9,496) (16)
Decrease in notes payable -- -- (30)
Payment on assumed debt -- (1,513) --
-------- -------- -------
Net cash provided (used) by financing activities 12,160 6,480 (410)
Net (decrease) increase in cash (4,247) 6,441 (179)
Cash at beginning of year 6,783 342 521
-------- -------- -------
Cash at end of year $ 2,536 $ 6,783 $ 342
======== ======== =======
</TABLE>
42
<PAGE> 44
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
20. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited results of operations for each quarter of 1998 and
1997 follows (in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------
<S> <C> <C> <C> <C>
1998
Total interest income $7,309 $ 7,738 $ 9,031 $ 9,931
Total interest expense 3,508 3,529 4,158 4,723
Net interest income 3,801 4,209 4,873 5,208
Provision for loan losses 410 623 2,190 210
Securities gains -- 62 148 62
Merger related costs -- -- -- 1,466
Income (loss) before income taxes 883 669 (2,283) (614)
Net income (loss) 652 695 (1,324) (390)
Basic and diluted net income
(loss) per share .06 .07 (0.13) (0.03)
1997
Total interest income $5,686 $ 6,207 $ 6,652 $ 7,159
Total interest expense 2,616 2,886 3,143 3,307
Net interest income 3,070 3,321 3,509 3,852
Provision for loan losses 431 324 336 758
Securities (losses) gains -- (1) 98 120
Income before income taxes 518 633 868 355
Net income 376 448 464 390
Basic and diluted net income per share .05 .05 .06 .04
</TABLE>
21. SEGMENT REPORTING
The Corporation has two reportable segments, the Alabama Region and the Florida
Region. The Alabama Region consists of operations located throughout the state
of Alabama. The Florida Region consists of operations located in the panhandle
of Florida. The Corporation's reportable segments are managed as separate
business units because they are located in different geographic areas. Both
43
<PAGE> 45
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
segments derive revenues from the delivery of financial services. These
services include commercial loan, mortgage loans, consumer loans, deposit
accounts, and other financial services.
The Corporation evaluates performance and allocates resources based on profit or
loss from operations. There are no material intersegment sales or transfers.
Net interest revenue is used as the basis for performance evaluation rather than
its components, total interest revenue and total interest expense. The
accounting policies used by each reportable segment are the same as those
discussed in Note 1. All costs have been allocated to the reportable segments.
Therefore, combined segment amounts agree to the consolidated totals.
<TABLE>
<CAPTION>
ALABAMA FLORIDA
REGION REGION COMBINED
---------------------------------------
<S> <C> <C> <C>
1998
Net interest income $ 14,942 $ 3,149 $ 18,091
Provision for loan loss 3,094 339 3,433
Non-interest income 2,617 604 3,221
Non-interest expense 15,926 3,298 19,224
Income tax (benefit) expense (1,022) 44 (978)
Net (loss) income (439) 72 (367)
Total assets 440,845 83,549 524,394
1997
Net interest income 12,189 1,563 13,752
Provision for loan loss 1,516 333 1,849
Non-interest income 2,205 115 2,320
Non-interest expense 9,913 1,936 11,849
Income tax expense (benefit) 891 (195) 696
Net income (loss) 2,074 (396) 1,678
Total assets 307,713 55,997 363,710
1996
Net interest income 9,707 242 9,949
Provision for loan loss 896 70 966
Non-interest income 1,956 10 1,966
Non-interest expense 8,663 793 9,456
Income tax expense (benefit) 647 (257) 390
Net income (loss) 1,457 (354) 1,103
Total assets 250,955 21,217 272,172
</TABLE>
44
<PAGE> 46
The Banc Corporation and Subsidiaries
Notes to Supplemental Consolidated Financial Statements (continued)
22. SUBSEQUENT EVENT
In January 1999, the underwriters of the Corporation's public offering exercised
their option to purchase an additional 150,000 shares of the Corporation's $.001
par value common stock at $11.00 per share, providing $1,534,500 which was used
for working capital.
In December 1998, Emerald Coast Bank received approval from the Office of Thrift
Supervision to change its charter to a federal thrift from a state bank. The
change to a federal thrift charter was completed in February 1999.
45
