UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC

Form 10-Q/A

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

The Banc Corporation

Delaware		63-1201350
(State or Other Jurisdiction of Incorporation)		(IRS Employer Identification No.)

17 North 20th Street, Birmingham, Alabama 35203

(205) 326-2265

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Large Accelerated Filer o           Accelerated Filer þ           Non-Accelerated Filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of June 30, 2005
Common stock, $.001 par value		19,551,411

 

 

Introductory Note – 2005 Amendment to Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2005

          This Amendment No. 1 to Form 10-Q is being filed by The Banc Corporation (“the Corporation”) to amend its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 filed with the Securities and Exchange Commission (the “SEC”) on August 9, 2005 (the “Initial Form 10-Q”). This Amendment No. 1 is required due to inaccuracies in the Initial Form 10-Q related to our accounting for certain derivative financial instruments under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”).

          This Amendment No. 1 contains restated unaudited Condensed Consolidated Financial Statements for the three and six months ended June 30, 2005, which supersede our previously issued unaudited Condensed Consolidated Financial Statements contained in our original Quarterly Report on Form 10-Q for the same interim period. For information regarding the amendment, see Note 1 to our unaudited Condensed Consolidated Financial Statements contained herein. This Amendment No. 1, includes amendments to Part I — Items 1, 2 and 4. For the convenience of readers, we have also included the remaining unamended Items, which are unchanged from the date of the original filing.

          Except as otherwise specifically noted, all information contained herein is as of June 30, 2005 and does not reflect any events or changes that have occurred subsequent to that date. The Corporation is not required to and has not updated any forward-looking statements previously included in the Initial Form 10-Q.

          This Amendment No. 1 includes amendments to Part 1, Item 4, “Controls and Procedures”, reflecting management’s revised assessment of our disclosure controls and procedures as of June 30, 2005. This revised assessment results from our determination that there was a material weakness in our internal control over financial reporting related to our accounting for certain interest rate swaps commonly used by financial institutions to hedge their interest rate exposure with respect to brokered certificates of deposit. We have entered into such swap arrangements from time to time, and have historically accounted for these swaps using an abbreviated method of fair value hedge accounting under SFAS 133, known as the “short-cut” method, which assumes that the hedging transactions are effective.

          However, in light of recent informal technical interpretations of accounting for these instruments, we determined that these swaps did not qualify for the short-cut method in prior periods because the related certificates-of-deposit broker placement fee caused the swaps not to have a fair value of zero at inception, which is a requirement for use of the short-cut method under SFAS 133. Therefore, after discussions with our independent registered public accounting firm, we concluded that any fluctuations in the market value of these interest rate swaps should have been recorded through our income statement. Accordingly, while we believe that the swaps have been and will continue to be highly effective hedges, we determined that the use of the short-cut method in 2004 and 2005 constituted a material weakness in the Corporation’s internal control over financial reporting in light of our subsequent determination that such treatment did not comply with generally accepted accounting principles. Solely as a result of such material weakness, we concluded, upon reevaluation, that our internal control over financial reporting was not effective as of December 31, 2004 or during the year ended December 31, 2005.

          Our determination that such swaps did not qualify for hedge accounting under SFAS 133 did not have a material effect on our reported results of operations for the year ending December 31, 2004 or for prior periods, and thus we have not restated or amended such previously reported results for periods ending on or prior to December 31, 2004.

PART I FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)

		(Restated)
		June 30,				December 31,
		2005				2004
		(Unaudited)
ASSETS
Cash and due from banks		$	29,651			$	23,489
Interest-bearing deposits in other banks			4,769				11,411
Federal funds sold			7,595				11,000
Investment securities available for sale			264,178				288,308
Mortgage loans held for sale			29,822				8,095
Loans, net of unearned income			903,456				934,868
Less: Allowance for loan losses			(12,263	)			(12,543	)
Net loans			891,193				922,325
Premises and equipment, net			55,782				60,434
Accrued interest receivable			6,084				6,237
Stock in FHLB and Federal Reserve Bank			11,821				11,787
Cash surrender value of life insurance			38,614				38,369
Other assets			43,758				41,673
TOTAL ASSETS		$	1,383,267			$	1,423,128
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Noninterest-bearing		$	95,972			$	89,487
Interest-bearing			943,820				977,719
TOTAL DEPOSITS			1,039,792				1,067,206
Advances from FHLB			146,090				156,090
Federal funds borrowed and security repurchase agreements			38,157				49,456
Notes payable			3,860				3,965
Junior subordinated debentures owed to unconsolidated subsidiary trusts			31,959				31,959
Accrued expenses and other liabilities			21,222				13,913
TOTAL LIABILITIES			1,281,080				1,322,589
Stockholders’ Equity
Convertible preferred stock, par value $.001 per share; authorized 5,000,000 shares; shares issued and outstanding -0- and 62,000, respectively			—				—
Common stock, par value $.001 per share; authorized 35,000,000 shares; shares issued 19,805,956 and 18,025,932, respectively; outstanding 19,551,411 and 17,749,846, respectively			20				18
Surplus — preferred			—				6,193
— common stock			84,589				68,428
Retained earnings			20,267				29,591
Accumulated other comprehensive loss			(648	)			(1,094	)
Treasury stock, at cost			(341	)			(390	)
Unearned ESOP stock			(1,651	)			(1,758	)
Unearned restricted stock			(49	)			(449	)
TOTAL STOCKHOLDERS’ EQUITY			102,187				100,539
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,383,267			$	1,423,128

See Notes to Condensed Consolidated Financial Statements.

THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2005				2004				2005				2004
		(Restated)								(Restated)
INTEREST INCOME
Interest and fees on loans		$	15,590			$	13,691			$	30,468			$	27,258
Interest on investment securities
Taxable			2,945				2,109				5,870				3,822
Exempt from Federal income tax			59				26				117				41
Interest on federal funds sold			109				41				191				75
Interest and dividends on other investments			254				231				497				396
Total interest income			18,957				16,098				37,143				31,592
INTEREST EXPENSE
Interest on deposits			6,528				4,505				12,565				8,782
Interest on other borrowed funds			1,881				1,456				3,738				3,122
Interest on subordinated debentures			699				626				1,384				1,252
Total interest expense			9,108				6,587				17,687				13,156
NET INTEREST INCOME			9,849				9,511				19,456				18,436
Provision for loan losses			1,500				—				2,250				—
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			8,349				9,511				17,206				18,436
NONINTEREST INCOME
Service charges and fees on deposits			1,166				1,397				2,278				2,788
Mortgage banking income			762				383				1,208				787
Investment security (losses) gains			(68	)			37				(977	)			428
Change in fair value of derivatives			933				—				703				—
Gain on sale of branches			—				—				—				739
Increase in cash surrender value of life insurance			391				410				742				813
Insurance proceeds			5,000				—				5,000				—
Other income			510				572				987				1,012
TOTAL NONINTEREST INCOME			8,694				2,799				9,941				6,567
NONINTEREST EXPENSES
Salaries and employee benefits			5,927				5,871				11,329				11,457
Occupancy, furniture and equipment expense			2,059				2,094				4,040				4,052
Management separation costs			2,961				—				15,338				—
Other operating expenses			4,536				3,202				8,098				6,804
TOTAL NONINTEREST EXPENSES			15,483				11,167				38,805				22,313
Income (loss) before income taxes			1,560				1,143				(11,658	)			2,690
INCOME TAX EXPENSE (BENEFIT)			412				79				(4,645	)			398
NET INCOME (LOSS)			1,148				1,064				(7,013	)			2,292
PREFERRED STOCK DIVIDENDS			305				217				305				217
EFFECT OF EARLY CONVERSION OF PREFERRED STOCK			2,006				—				2,006				—
NET (LOSS) INCOME APPLICABLE TO COMMON STOCKHOLDERS		$	(1,163	)		$	847			$	(9,324	)		$	2,075
BASIC NET (LOSS) INCOME PER COMMON SHARE		$	(0.06	)		$	0.05			$	(0.50	)		$	0.12
DILUTED NET (LOSS) INCOME PER COMMON SHARE		$	(0.06	)		$	0.05			$	(0.50	)		$	0.11
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			18,726				17,578				18,562				17,569
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, ASSUMING DILUTION			18,726				18,487				18,562				18,532

See Notes to Condensed Consolidated Financial Statements.

THE BANC CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(DOLLARS IN THOUSANDS)

		Six Months Ended
		June 30
		2005				2004
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES		$	(20,929	)		$	5,028
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits in other banks			6,642				(4,926	)
Net decrease (increase) in federal funds sold			3,405				(18,000	)
Proceeds from sales of securities available for sale			57,150				71,720
Proceeds from maturities of investment securities available for sale			20,105				36,105
Purchases of investment securities available for sale			(53,609	)			(161,819	)
Net decrease (increase) in loans			31,603				(39,344	)
Purchases of premises and equipment			(511	)			(2,801	)
Proceeds from sales of premises and equipment			3,055				579
Net cash paid in branch sale			—				(6,626	)
Purchase of life insurance			—				(5,000	)
Increase in other investments			(34	)			(1,744	)
Net cash provided (used) by investing activities			67,806				(131,856	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposit accounts			(26,711	)			82,144
Net (decrease) increase in FHLB advances and other borrowed funds			(21,299	)			39,326
Payments made on long term debt			(105	)			(105	)
Proceeds from sale of common stock			7,705				49
Cash dividends paid			(305	)			(217	)
Net cash (used) provided by financing activities			(40,715	)			121,197
Net increase (decrease) in cash and due from banks			6,162				(5,631	)
Cash and due from banks at beginning of period			23,489				31,679
CASH AND DUE FROM BANKS AT END OF PERIOD		$	29,651			$	26,048

See Notes to Condensed Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. For a summary of significant accounting policies that have been consistently followed, see Note 1 to the Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004. It is management’s opinion that all adjustments, consisting of only normal and recurring items necessary for a fair presentation, have been included. Operating results for the three- and six-month periods ended June 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

The condensed statement of financial condition at December 31, 2004, which has been derived from the financial statements audited by Carr, Riggs & Ingram, LLC, independent public accountants, as indicated in their report included in the Corporation’s Annual Report on Form 10-K, does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Restated Results of Operations and Financial Condition:

The Corporation is restating its previously reported financial information for the second quarter and first six months of 2005 to correct errors in those consolidated financial statements relating to its derivative accounting under Statement of Financial Accounting Standards 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). In addition, the following Notes to the Consolidated Financial Statements have been restated: 5, 6, 7 and 10. These restated consolidated financial statements supercede the Corporation’s previously issued condensed consolidated financial statements reported in the Corporation’s Initial Form 10-Q filed with the SEC on August 9, 2005.

In 2005 and prior years, the Corporation entered into interest rate swap agreements (CD swaps) to hedge the interest rate risk inherent in certain of its brokered certificates of deposit (brokered CDs). From the inception of the hedging program, the Corporation applied a method of fair value hedge accounting under SFAS 133 to account for the CD swaps that allowed the Corporation to assume no ineffectiveness in these transactions (the so-called “short-cut” method). The Corporation has recently concluded that the CD swaps did not qualify for this method in prior periods because the related CD broker placement fee was determined, in retrospect, to have caused the swap not to have a fair value of zero at inception (which is required under SFAS 133 to qualify for the short-cut method).

Fair value hedge accounting allows a company to record the effective portion of the change in fair value of the hedged item (in this case, the brokered CDs) as an adjustment to income that offsets the fair value adjustment on the related interest rate swaps. Eliminating the application of fair value hedge accounting reverses the fair value adjustments that were made to the brokered CDs. Therefore, while the interest rate swap is recorded on the consolidated statement of condition at its fair value, the related hedged item, the brokered CDs, are required to be carried at par, net of the unamortized balance of the CD broker placement fee. In addition, the CD broker placement fee, which was incorporated into the swap, is now separately recorded as an adjustment to the par amount of the brokered CDs and amortized through the maturity date of the related CDs.

The net cumulative pre-tax effect of eliminating the fair value adjustment to the brokered CDs at June 30, 2005 is $703,000 (representing an $8,000 elimination of the fair value adjustment to the brokered CDs less a $711,000 adjustment to record the unamortized CD broker placement fees). The cumulative after-tax impact was a $443,000 increase to retained earnings.

The following tables summarize the effects of the amendment on the condensed consolidated statement of financial condition at June 30, 2005 and condensed consolidated statements of operations for the three and six months ended June 30, 2005. The restatement did not affect previously reported cash flows from operating activities, investing activities or financing activities.

Condensed Consolidated
Statement of Condition		June 30, 2005
(In thousands)		As previously Reported				Restated
Other assets		$	44,018			$	43,758
Interest-bearing deposits			944,523				943,820
Retained earnings			19,824				20,267

		For the three months ended								For the six months ended
		June 30, 2005								June 30, 2005
Condensed Consolidated Statement of Operations		As previously								As previously
(In thousands, except per share data)		Reported				Restated				Reported				Restated
Change in fair value of derivatives		$	—			$	933			$	—			$	703
Income (loss) before income tax expense (benefit)			627				1,560				(12,361	)			(11,658	)
Income tax expense (benefit)			67				412				(4,905	)			(4,645	)
Net income (loss)			560				1,148				(7,456	)			(7,013	)
Net loss applicable to common stockholders			(1,751	)			(1,163	)			(9,767	)			(9,324	)
Basic and diluted net loss per common share		$	(0.09	)		$	(0.06	)		$	(0.53	)		$	(0.50	)

As of June 30, 2005 the notional amount of these CD swaps totaled $46,500,000 with a recorded negative fair value of $8,000. The weighted average life as of June 30, 2005 is 9.40 years; the weighted average fixed rate (receiving rate) is 4.48%, which matches the brokered CD rate, and the weighted average variable rate (paying rate) is 3.25% (LIBOR based).

Note 2 — RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R), which is a revision of SFAS 123 and supersedes Accounting Principles Board (APB) Opinion 25. On April 14, 2005, the Securities and Exchange Commission announced the adoption of a new rule that amended the compliance dates for SFAS No. 123R. Under SFAS 123R, registrants would have been required to implement the standard as of the beginning of the first interim or annual period that begins after June 15, 2005. The Commission’s new rule allows issuers to implement SFAS 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The Commission’s new rule does not change the accounting required by SFAS 123R; it changes only the dates for compliance with the standard. The new standard requires companies to recognize an expense in the statement of operations for the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation method. This expense will be recognized over the period during which an employee is required to provide service in exchange for the award. SFAS 123R carries forward prior guidance on accounting for awards to non-employees. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately prior to the modification. The Corporation is evaluating

the impact on its results of operations from adopting SFAS 123R, but expects it to be comparable to the pro forma effects of applying the original SFAS 123 (see Note 10).

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, to amend APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS 153 amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and re-places it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date SFAS 153 was issued. The provisions of SFAS 153 are to be applied prospectively. The Corporation does not believe SFAS 153 will have a material impact on its financial statements.

In May of 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections. SFAS 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle.

SFAS 154 carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This Statement also carries forward the guidance in Opinion 20 requiring justification of a change in accounting principle on the basis of preferability. SFAS 154 is effective for fiscal years beginning after December 15, 2005. The Corporation does not believe SFAS 154 will have a material impact on its financial statements.

Note 3 — RECENT DEVELOPMENTS

In May 2005, the Corporation received $5,000,000 (approximately $3,200,000 after-tax or $.17 per common share) to resolve its insurance claims relating to fraud losses which occurred in previous periods.

On July 21, 2005, the Corporation announced that it had bought out the employment contracts of the Chief Financial Officer and the General Counsel, effective June 30, 2005. Under these agreements, in lieu of the payments to which they would have been entitled under their employment agreements, the Corporation paid a total of $2,392,343 on July 22, 2005. In addition, these officers became fully vested in stock options and restricted stock previously granted to them and in benefits under their deferred compensation agreements with the Corporation.

On June 17, 2005, the Corporation’s banking subsidiary filed an application to change its charter to a federal savings bank charter under the Office of Thrift Supervision. The Corporation’s banking subsidiary is currently regulated by the Alabama Banking Department and the Federal Reserve.

On January 24, 2005, the Corporation announced that it had entered into a series of executive management change agreements. These agreements set forth the employment of C. Stanley Bailey as Chief Executive Officer and a director of the Corporation and chairman of the Corporation’s banking subsidiary, C. Marvin Scott as President of the Corporation and the Corporation’s banking subsidiary, and Rick D. Gardner as Chief Operating Officer of the Corporation and the Corporation’s banking subsidiary. These agreements also provided for the purchase by Mr. Bailey, Mr. Scott and Mr. Gardner, along with other investors, of 925,636 shares of common stock of the Corporation at $8.17 per share. The Corporation also entered into agreements with James A. Taylor and James A. Taylor, Jr. under which they will continue to serve as Chairman of the Board of the Corporation and as a director of the Corporation, respectively, but would cease their employment as officers of the Corporation and officers and directors of the Corporation’s banking subsidiary.

Under the agreement with Mr. Taylor, in lieu of the payments to which he would have been entitled under his employment agreement, the Corporation paid Mr. Taylor $3,940,155 on January 24, 2005, and is scheduled to pay an additional $3,152,124 on January 24, 2006, and $788,031 on January 24, 2007. The agreement also provides for the provision of certain insurance benefits to Mr. Taylor, the transfer of a “key man” life insurance policy to Mr. Taylor, and the maintenance of such policy by the Corporation for five years (with the cost of maintaining such policy included in the above amounts), in each case substantially as required by his employment agreement. This obligation to provide such payments and benefits to Mr. Taylor is absolute and will survive the death or disability of Mr. Taylor.

Under the agreement with Mr. Taylor, Jr., in lieu of the payments to which he would have been entitled under his employment agreement, the Corporation paid Mr. Taylor, Jr., $1,382,872 on January 24, 2005. The agreement also provides for the provision of certain insurance benefits to Mr. Taylor, Jr. and for the immediate vesting of his unvested incentive awards and deferred compensation in each case substantially as required by his employment agreement. This obligation to provide such payments and benefits to Mr. Taylor, Jr. is absolute and will survive the death or disability of Mr. Taylor, Jr.

In connection with the above described management separation transactions, the Corporation recognized pre-tax expenses of $3.0 million and $15.3 million for the three- and six-months periods ended June 30, 2005. At June 30, 2005, the Corporation had $6.7 million of accrued liabilities related to these agreements. See Note 24 to the Consolidated Financial Statements included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004 for further information.

Note 4 — ASSET SALES

In February 2004, the Corporation’s banking subsidiary sold its Morris, Alabama branch, which had assets of approximately $1,037,000 and liabilities of $8,217,000. The Corporation realized a $739,000 pre-tax gain on the sale.

In March 2005, the Corporation sold its corporate aircraft, realizing a $355,000 pre-tax loss.

Note 5 — SEGMENT REPORTING

The Corporation has two reportable segments, the Alabama Region and the Florida Region. The Alabama Region consists of operations located throughout the state of Alabama. The Florida Region consists of operations located in the eastern panhandle region of Florida. The Corporation’s reportable segments are managed as separate business units because they are located in different geographic areas. Both segments derive revenues from the delivery of financial services. These services include commercial loans, mortgage loans, consumer loans, deposit accounts and other financial services.

The Corporation evaluates performance and allocates resources based on profit or loss from operations. There are no material intersegment sales or transfers. Net interest revenue is used as the basis for performance evaluation rather than its components, total interest revenue and total interest expense. The accounting policies used by each reportable segment are the same as those discussed in Note 1 to the Consolidated Financial Statements included in the Form 10-K for the year ended December 31, 2004. All costs have been allocated to the reportable segments. Therefore, combined amounts agree to the consolidated totals (in thousands).

		Alabama				Florida
		Region				Region				Combined
		(Restated)								(Restated)
Three months ended June 30, 2005
Net interest income		$	6,757			$	3,092			$	9,849
Provision for loan losses			1,379				121				1,500
Noninterest income (1)			8,365				329				8,694
Noninterest expense (2)(3)			14,456				1,027				15,483
Income tax (benefit) expense			(206	)			618				412
Net (loss) income			(507	)			1,655				1,148
Total assets			1,108,062				275,205				1,383,267
Three months ended June 30, 2004
Net interest income		$	6,886			$	2,625			$	9,511
Provision for loan losses (1)			984				(984	)			—
Noninterest income (1)			2,467				332				2,799
Noninterest expense (2)			8,743				2,424				11,167
Income tax (benefit) expense			(377	)			456				79
Net income			3				1,061				1,064
Total assets (1)			1,063,265				224,771				1,288,036
Six months ended June 30, 2005
Net interest income		$	13,535			$	5,921			$	19,456
Provision for loan losses			2,112				138				2,250
Noninterest income (1)			9,288				653				9,941
Noninterest expense (2)(3)			36,630				2,175				38,805
Income tax (benefit) expense			(5,845	)			1,200				(4,645	)

		Alabama				Florida
		Region				Region				Combined
		(Restated)								(Restated)
Net (loss) income			(10,074	)			3,061				(7,013	)
Six months ended June 30, 2004
Net interest income		$	13,213			$	5,223			$	18,436
Provision for loan losses (1)			1,956				(1,956	)			—
Noninterest income (1)			5,865				702				6,567
Noninterest expense (2)			17,412				4,901				22,313
Income tax (benefit) expense			(481	)			879				398
Net income			191				2,101				2,292

Note 6 — NET (LOSS) INCOME PER COMMON SHARE

The following table sets forth the computation of basic and diluted net (loss) income per common share (in thousands, except per share amounts):

		Three Months Ended								Six Months Ended
		June 30								June 30
		2005				2004				2005				2004
		(Restated)								(Restated)
Numerator:
Net income (loss)		$	1,148			$	1,064				(7,013	)			2,292
Less preferred dividends			305				217				305				217
Less effect of preferred stock conversion			2,006				—				2,006				—
For basic and diluted, net (loss) income applicable to common stockholders		$	(1,163	)		$	847			$	(9,324	)		$	2,075
Denominator:
For basic, weighted average common shares outstanding			18,726				17,578				18,562				17,569
Effect of dilutive stock options, restricted stock and convertible preferred			—				909				—				963
Weighted average common shares outstanding, assuming dilution			18,726				18,487				18,562				18,532
Basic net (loss) income per common share		$	(.06	)		$	.05			$	(.50	)		$	.12
Diluted net (loss) income per common share		$	(.06	)		$	.05			$	(.50	)		$	.11

Net (loss) income applicable to common stockholders and net (loss) income per common share reflect the effects of the early conversion of 62,000 shares of the Corporation’s convertible preferred stock into 775,000 shares of common stock at a conversion price of $8.00 per share. Such conversion was effective as of June 30, 2005. As a result of such conversion, the excess of the market value of the common stock issued at the date of conversion over the aggregate issue price is reflected as a reduction in retained earnings with a corresponding increase in surplus, thereby reducing net income applicable to common stockholders for purposes of calculating earnings per common share. This non-cash charge did not affect total stockholders’ equity.

Common stock equivalents of 1,387,000 and 1,357,000 were not included in computing diluted net loss per common share for the three- and six-month periods ended June 30, 2005, respectively, because their effects were anti-dilutive.

Note 7 — COMPREHENSIVE INCOME (LOSS) (Restated)

Total comprehensive income (loss) was $3,059,000 and $(6,567,000), respectively, for the three and six-month periods ended June 30, 2005, and $(1,879,000) and $(122,000) respectively, for the three- and six-month periods ended June 30, 2004. Total comprehensive (loss) income consists of net (loss) income and the unrealized gain or loss on the Corporation’s available-for-sale securities portfolio arising during the period.

During the first quarter of 2005, the Corporation realized a $909,000 pre-tax loss as a result of a $50 million sale of bonds in the investment portfolio which closed in April 2005. The Corporation reinvested the proceeds in bonds intended to enhance the yield and cash flows of its investment securities portfolio. The new investment securities are classified as available for sale.

Note 8 — INCOME TAXES

The difference between the effective tax rate and the federal statutory rate in 2005 and 2004 is primarily due to certain tax-exempt income.

Note 9 — JUNIOR SUBORDINATED DEBENTURES

The Corporation has sponsored two trusts, TBC Capital Statutory Trust II (“TBC Capital II”) and TBC Capital Statutory Trust III (“TBC Capital III”), of which 100% of the common equity is owned by the Corporation. The trusts were formed for the purpose of issuing Corporation-obligated mandatory redeemable trust preferred securities to third-party investors and investing the proceeds from the sale of such trust preferred securities solely in junior subordinated debt securities of the Corporation (the debentures). The debentures held by each trust are the sole assets of that trust. Distributions on the trust preferred securities issued by each trust are payable semi-annually at a rate per annum equal to the interest rate being earned by the trust on the debentures held by that trust. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. The Corporation has entered into agreements which, taken collectively, fully and unconditionally guarantee the trust preferred securities subject to the terms of each of the guarantees. The debentures held by the TBC Capital II and TBC Capital III capital trusts are first redeemable, in whole or in part, by the Corporation on September 7, 2010 and July 25, 2006, respectively.

The trust preferred securities held by the trusts qualify as Tier 1 capital for the Corporation under Federal Reserve Board guidelines.

Consolidated debt obligations related to subsidiary trusts holding solely debentures of the Corporation follow (in thousands):

		June 30, 2005				December 31, 2004
10.6% junior subordinated debentures owed to TBC Capital Statutory Trust II due September 7, 2030		$	15,464			$	15,464
6-month LIBOR plus 3.75% junior subordinated debentures owed to TBC Capital Statutory Trust III due July 25, 2031			16,495				16,495
Total junior subordinated debentures owed to unconsolidated subsidiary trusts		$	31,959			$	31,959

As of June 30, 2005 and December 31, 2004, the interest rate on the $16,495,000 subordinated debentures was 6.71% and 5.74%, respectively.

Currently, the Corporation must obtain regulatory approval prior to paying any dividends on these trust preferred securities. The Federal Reserve approved the timely payment of the Corporation’s semi-annual distributions on our trust preferred securities in January, March and July, 2005.

Note 10 — STOCKHOLDERS’ EQUITY

During the first quarter of 2005, the Corporation issued 925,636 shares of its common stock at $8.17 per share, the then-current market price, to the new members of the management team and other investors, in a private placement. The Corporation received proceeds, net of issuance cost, of $7,328,000.

Effective June 30, 2005, 62,000 shares of the Corporation’s convertible preferred stock were converted into 775,000 shares of common stock at a conversion price of $8.00 per share. As a result of such conversion, the excess of the market value of the common stock issued at the date of conversion over the aggregate issue price is reflected as a reduction in retained earnings with a corresponding increase in surplus, thereby reducing net income applicable to common stockholders for purposes of calculating earnings per common share. This non-cash charge did not affect total stockholders’ equity.

On April 1, 2002, the Corporation issued 157,000 shares of restricted common stock to certain directors and key employees pursuant to the Second Amended and Restated 1998 Stock Incentive Plan. Under the Restricted Stock Agreements, the shares of restricted stock may not be sold or assigned in any manner for a five-year period that began on April 1, 2002. During this restricted period, the participant is eligible to receive dividends and exercise voting privileges. The restricted stock also has a corresponding vesting period with one-third vesting at the end of

No. 25, Accounting for Stock Issued to Employees. The Corporation has elected to follow APB Opinion 25 and related interpretations in accounting for its employee stock options. Accordingly, compensation cost for fixed and variable stock-based awards is measured by the excess, if any, of the fair market price of the underlying stock over the amount the individual is required to pay. Compensation cost for fixed awards is measured at the grant date, while compensation cost for variable awards is estimated until both the number of shares an individual is entitled to receive and the exercise or purchase price are known (measurement date). No option-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The pro forma information below was determined as if the Corporation had accounted for its employee stock options under the fair value method of SFAS 123. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Corporation’s pro forma information follows (in thousands except earnings per share information):

		For the Three Months Ended								For the Six Months Ended
		June 30, 2005				June 30, 2004				June 30, 2005				June 30, 2004
		(Restated)								(Restated)
Net income (loss):
As reported		$	1,148			$	1,064			$	(7,013	)		$	2,292
Pro forma			(407	)			666				(10,729	)			1,787
(Loss) earnings per common share:
As reported		$	(.06	)		$	.05			$	(.50	)		$	.12
Pro forma			(.15	)			.03				(.70	)			.09
Diluted (loss) earnings per common share:
As reported		$	(.06	)		$	.05			$	(.50	)		$	.11
Pro forma			(.15	)			.02				(.70	)			.08

The fair value of the options granted was based upon the Black-Scholes pricing model. The Corporation used the following weighted average assumptions for:

		June 30
		2005				2004
Risk-free interest rate			4.34	%			4.69	%
Volatility factor			.41				.41
Weighted average life of options			7.00				7.00
Dividend yield			0.00				0.00

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Basis of Presentation

The following is a discussion and analysis of our June 30, 2005 consolidated financial condition and results of operations for the three- and six-month periods ended June 30, 2005 and 2004. All significant intercompany accounts and transactions have been eliminated. Our accounting and reporting policies conform to generally accepted accounting principles.

This information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, appearing in our Annual Report on Form 10-K for the year ended December 31, 2004.

Restated Results of Operations and Financial Condition:

We are restating our previously reported financial information for the second quarter and first six months of 2005 to correct errors in those consolidated financial statements relating to its derivative accounting under Statement of Financial Accounting Standards 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”).

In 2005 and prior years, we entered into interest rate swap agreements (CD swaps) to hedge the interest rate risk inherent in certain of our brokered certificates of deposit (brokered CDs). From the inception of the hedging program, we applied a method of fair value hedge accounting under SFAS 133 to account for the CD swaps that allowed us to assume no ineffectiveness in these transactions (the so-called “short-cut” method). We have recently concluded that the CD swaps did not qualify for this method in prior periods because the related CD broker placement fee was determined, in retrospect, to have caused the swap not to have a fair value of zero at inception (which is required under SFAS 133 to qualify for the short-cut method).

Fair value hedge accounting allows a company to record the effective portion of the change in fair value of the hedged item (in this case, the brokered CDs) as an adjustment to income that offsets the fair value adjustment on the related interest rate swaps. Eliminating the application of fair value hedge accounting reverses the fair value adjustments that were made to the brokered CDs. Therefore, while the interest rate swap is recorded on the consolidated statement of condition at its fair value, the related hedged item, the brokered CDs, are required to be carried at par, net of the unamortized balance of the CD broker placement fee. In addition, the CD broker placement fee, which was incorporated into the swap, is now separately recorded as an adjustment to the par amount of the brokered CDs and amortized through the maturity date of the related CDs.

The net cumulative pre-tax effect of eliminating the fair value adjustment to the brokered CDs at June 30, 2005 is $703,000 (representing a $8,000 elimination of the fair value adjustment to the brokered CDs less a $711,000 adjustment to record the unamortized CD broker placement fees). The cumulative after-tax impact was a $443,000 increase to retained earnings. Although these CD swaps cannot retrospectively qualify for hedge accounting under SFAS 133, there is no effect on cash flows for these changes, and the effectiveness of the CD swaps as economic hedge transactions has not been affected by these changes in accounting treatment.

Overview

Our principal subsidiary is The Bank, an Alabama-chartered financial institution headquartered in Birmingham, Alabama which operates 26 banking offices in Alabama and the eastern panhandle of Florida. Other subsidiaries include TBC Capital Statutory Trust II (“TBC Capital II”), a Connecticut statutory trust, TBC Capital Statutory Trust III (“TBC Capital III”), a Delaware business trust, and Morris Avenue Management Group, Inc. (“MAMG”), an Alabama corporation, all of which are wholly owned. TBC Capital II and TBC Capital III are unconsolidated special purpose entities formed solely to issue cumulative trust preferred securities. MAMG is a real estate management company that manages our headquarters, our branch facilities and certain other real estate owned by The Bank.

Our total assets were $1.383 billion at June 30, 2005, a decrease of $40 million, or 2.80%, from $1.423 billion as of December 31, 2004. Our total loans, net of unearned income, were $903 million at June 30, 2005, a decrease of $32 million, or 3.36%, from $935 million as of December 31, 2004. Our total deposits were $1.040 billion at June 30, 2005, a decrease of $27 million, or 2.50%, from $1.067 billion as of December 31, 2004. These declines reflect our strategy of deleveraging the balance sheet and focusing on deposit and loan mix realignment which management

compared to .34% for the second quarter of 2004. Return on average stockholders’ equity, on an annualized basis, was 4.56% for the second quarter of 2005 compared to 4.26% for the second quarter of 2004.

During the second quarter of 2005, we incurred certain nonoperating charges related to management changes, in addition to the recognition of losses on other real estate and an increase in the provision for loan losses.

We incurred a $7.01 million net loss for the six-month period ended June 30, 2005 (first six months of 2005), compared to $2.29 million in net income for the six-month period ended June 30, 2004 (first six months of 2004). Net (loss) income per common share was $(.50) for the first six months of 2005 compared to $.11 per common share for the first six months of 2004. Return on average assets, on an annualized basis, was (1.00)% for the first six months of 2005 compared to .37% for the first six months of 2004. Return on average stockholders’ equity, on an annualized basis, was (14.00)% for the first six months of 2005 compared to 4.59% for the first six months of 2004. Book value per share at June 30, 2005 was $5.23, compared to $5.31 as of December 31, 2004. Tangible book value per share at June 30, 2005 was $4.60, compared to $4.62 as of December 31, 2004.

The decrease in our net income during the first six months of 2005 compared to the first six months of 2004 is the result of certain nonoperating charges related to the management changes which occurred in the first and second quarters of 2005, the recognition of losses in the bond portfolio, losses on other real estate, losses from the sale of certain assets and an increase in the provision for loan losses.

Net interest income is the difference between the income earned on interest-earning assets and interest paid on interest-bearing liabilities used to support such assets. Net interest income increased $338,000, or 3.55%, to $9.8 million for the second quarter of 2005 compared to $9.5 million for the second quarter of 2004. Net interest income increased primarily due to a $2.8 million increase in total interest income offset by a $2.5 increase in total interest expense. The increase in total interest income is primarily due to a $76 million increase in the average volume of loans and a $72 million increase in the average volume of investment securities.

Average interest-earning assets for the second quarter of 2005 increased $120 million, or 10.7%, to $1.241 billion from $1.121 billion in the second quarter of 2004. This increase in average interest-earning assets was offset by a $120 million, or 11.2%, increase in average interest-bearing liabilities to $1.191 billion for the second quarter of 2005 from $1.071 billion for the second quarter of 2004. The ratio of average interest-earning assets to average interest-bearing liabilities was 104.3% and 104.7% for the second quarters of 2005 and 2004, respectively. Average interest-bearing assets produced a taxable equivalent yield of 6.14% for the second quarter of 2005 compared to 5.78% for the second quarter of 2004.

For the second quarter of 2005 as compared to the second quarter of 2004, the increase in total interest expense is attributable to a 60 basis point increase in the average interest rate paid on interest-bearing liabilities and a $120 million increase in the volume of average interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 3.07% for the second quarter of 2005, compared to 2.47% for the second quarter of 2004. Our net interest spread and net interest margin were 3.07% and 3.19%, respectively, for the second quarter of 2005, compared to 3.31% and 3.42% for the second quarter of 2004.

Net interest income increased $1.0 million, or 5.53%, to $19.4 million for the first six months of 2005 compared to $18.4 million for the first six months of 2004. Net interest income increased primarily due to a $5.5 million increase in total interest income offset by a $4.5 increase in total interest expense. The increase in total interest income is primarily due to a $85.8 million increase in the average volume of loans and a $98.1 million increase in the average volume of investment securities.

Average interest-earning assets for the first six months of 2005 increased $164 million, or 15.0%, to $1.259 billion from $1.095 billion in the first six months of 2004. This increase in average interest-earning assets was offset by a $163 million, or 15.7%, increase in average interest-bearing liabilities, to $1.207 billion for the first six months of 2005 from $1.044 billion for the first six months of 2004. The ratio of average interest-earning assets to average interest-bearing liabilities was 104.3% and 104.9% for the first six months of 2005 and 2004, respectively. Average interest-bearing assets produced a taxable equivalent yield of 5.96% for the first six months of 2005 compared to 5.81% for the first six months of 2004.

For the six-month period ended June 30, 2005 as compared to the six-month period ended June 30, 2004, the increase in total interest expense is attributable to a 42 basis point increase in the average interest rate paid on interest-bearing liabilities and a $163 million increase in the volume of average interest-bearing liabilities. The average rate paid on interest-bearing liabilities was 2.95% for the first six months of 2005, compared to 2.53% for the first six months of 2004. Our net interest spread and net interest margin were 3.01% and 3.13%, respectively, for the first six months of 2005, compared to 3.28% and 3.39% for the first six months of 2004.

Average Balances, Income, Expense and Rates. The following table depicts, on a taxable equivalent basis for the periods indicated, certain information related to our average balance sheet and average yields on assets and average costs of liabilities. Average yields are calculated by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been calculated on a daily basis.

		Three Months Ended June 30,
		2005												2004
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
										(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income(1)		$	945,407			$	15,590				6.61	%		$	869,376			$	13,691				6.33	%
Investment securities
Taxable			251,876				2,945				4.69				183,643				2,109				4.62
Tax-exempt(2)			6,616				89				5.40				2,744				39				5.72
Total investment securities			258,492				3,034				4.71				186,387				2,148				4.64
Federal funds sold			15,851				109				2.76				17,670				41				.93
Other investments			21,571				254				4.72				47,945				231				1.94
Total interest-earning assets			1,241,321				18,987				6.14				1,121,378				16,111				5.78
Noninterest-earning assets:
Cash and due from banks			29,032												30,783
Premises and equipment			57,211												58,129
Accrued interest and other assets			87,290												83,443
Allowance for loan losses			(12,783	)											(23,308	)
Total assets		$	1,402,071											$	1,270,425
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits		$	335,803				1,645				1.96			$	258,926				813				1.26
Savings deposits			27,078				10				0.15				28,987				11				0.15
Time deposits			605,584				4,873				3.23				578,039				3,681				2.56
Other borrowings			190,113				1,881				3.97				173,170				1,456				3.38
Subordinated debentures			31,959				699				8.77				31,959				626				7.88
Total interest-bearing liabilities			1,190,537				9,108				3.07				1,071,081				6,587				2.47
Noninterest-bearing liabilities:
Demand deposits			92,120												87,153
Accrued interest and other liabilities			18,356												11,643
Stockholders’ equity			101,058												100,548
Total liabilities and stockholders’ equity		$	1,402,071											$	1,270,425
Net interest income/net interest spread							9,879				3.07	%							9,524				3.31	%
Net yield on earning assets											3.19	%											3.42	%
Taxable equivalent adjustment:
Investment securities(2)							30												13
Net interest income						$	9,849											$	9,511

     The following table sets forth, on a taxable equivalent basis, the effect that the varying levels of our interest-earning assets and interest-bearing liabilities and the applicable rates have had on the changes in net interest income for the three months ended June 30, 2005 and 2004.

		Three Months Ended June 30 (1)
		2005 Vs 2004
		Increase				Changes Due To
		(Decrease)				Rate				Volume
		(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans		$	1,899			$	638			$	1,261
Interest on securities:
Taxable			836				33				803
Tax-exempt			50				(2	)			52
Interest on federal funds			68				73				(5	)
Interest on other investments			23				201				(178	)
Total interest income			2,876				943				1,933
Expense from interest-bearing liabilities:
Interest on demand deposits			832				542				290
Interest on savings deposits			(1	)			—				(1	)
Interest on time deposits			1,192				1,008				184
Interest on other borrowings			425				272				153
Interest subordinated debentures			73				73				—
Total interest expense			2,521				1,895				626
Net interest income		$	355			$	(952	)		$	1,307

The following table depicts, on a taxable equivalent basis for the periods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Average yields are calculated by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been calculated on a daily basis.

		Six Months Ended June 30,
		2005												2004
		Average				Income/				Yield/				Average				Income/				Yield/
		Balance				Expense				Rate				Balance				Expense				Rate
										(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned income(1)		$	949,626			$	30,468				6.47	%		$	863,800			$	27,258				6.35	%
Investment securities Taxable			264,178				5,870				4.48				170,639				3,822				4.50
Tax-exempt(2)			6,624				177				5.39				2,030				62				6.14
Total investment securities			270,802				6,047				4.50				172,669				3,884				4.52
Federal funds sold			14,726				191				2.62				16,055				75				0.94
Other investments			23,962				497				4.18				42,257				396				1.88
Total interest-earning assets			1,259,116				37,203				5.96				1,094,781				31,613				5.81
Noninterest-earning assets:
Cash and due from banks			30,748												29,002
Premises and equipment			58,076												58,076
Accrued interest and other assets			83,525												82,192
Allowance for loan losses			(12,792	)											(24,396	)
Total assets		$	1,418,673											$	1,239,655
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Demand deposits		$	319,371				2,755				1.74			$	248,361				1,494				1.21
Savings deposits			27,643				21				0.15				29,692				24				0.16
Time deposits			631,728				9,789				3.12				561,091				7,264				2.60
Other borrowings			196,323				3,738				3.84				172,606				3,122				3.64
Subordinated debentures			31,959				1,384				8.73				31,959				1,252				7.88
Total interest-bearing liabilities			1,207,024				17,687				2.95				1,043,709				13,156				2.53
Noninterest-bearing liabilities:
Demand deposits			93,792												84,200
Accrued interest and other liabilities			16,870												11,419
Stockholders’ equity			100,987												100,327
Total liabilities and stockholders’ equity		$	1,418,673											$	1,239,655
Net interest income/net interest spread							19,516				3.01	%							18,457				3.28	%
Net yield on earning assets											3.13	%											3.39	%
Taxable equivalent adjustment:
Investment securities(2)							60												21
Net interest income						$	19,456											$	18,436

The following table sets forth, on a taxable equivalent basis, the effect that the varying levels of our interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the six months ended June 30, 2005 and 2004.

		Six Months Ended June 30 (1)
		2005 vs 2004
		Increase				Changes Due To
		(Decrease)				Rate				Volume
		(Dollars in thousands)
Increase (decrease) in:
Income from interest-earning assets:
Interest and fees on loans		$	3,210			$	513			$	2,697
Interest on securities:
Taxable			2,048				—				2,048
Tax-exempt			115				(2	)			117
Interest on federal funds			116				117				(1	)
Interest on other investments			101				201				(100	)
Total interest income			5,590				829				4,761
Expense from interest-bearing liabilities:
Interest on demand deposits			1,261				763				498
Interest on savings deposits			(3	)			(1	)			(2	)
Interest on time deposits			2,525				1,550				975
Interest on other borrowings			616				176				440
Interest subordinated debentures			132				132				—
Total interest expense			4,531				2,620				1,911
Net interest income		$	1,059			$	(1,791	)		$	2,850

Noninterest income. Noninterest income increased $5.9 million, or 210.6%, to $8.7 million for the second quarter of 2005 from $2.8 million for the second quarter of 2004, primarily due to $5.0 million in insurance proceeds received in the second quarter of 2005 which resolved our claims arising from fraud losses which occurred in previous periods and a $933,000 change in the fair value of derivatives. Mortgage banking income increased $379,000, or 99.0%, to $762,000 in the second quarter of 2005 from $383,000 in the second quarter of 2004. This increase in mortgage banking income was offset by a decrease in gains on securities of $105,000 and a decrease in service charges on deposits of $231,000 in the second quarter of 2005. This decrease is primarily due to a loss of transaction accounts from 2004 to 2005. Management is currently pursuing new accounts and customers through direct marketing and other promotional efforts to increase this source of revenue. Service charges on deposit accounts increased $54,000, or 4.9%, in the second quarter of 2005 over first quarter of 2005.

Noninterest income increased $3.3 million, or 51.4%, to $9.9 million for the first six months of 2005 from $6.6 million for the first six months of 2004, primarily due to $5.0 million in insurance proceeds received in the second quarter of 2005 and a $933,000 change in the fair value of derivatives, offset by losses we realized in 2005 on our investment portfolio compared to gains on the sale of investments and our Morris branch in 2004. The investment portfolio losses were realized primarily in the first quarter of 2005 as a result of a $50 million sale of bonds in the investment portfolio. We reinvested the proceeds in bonds intended to enhance the yield and cash flows of our investment securities portfolio. The new investment securities were classified as available for sale. Service charges on deposits decreased $510,000, or 18.3%, to $2.3 million in the first six months of 2005 from $2.8 million in the first six months of 2004. As discussed above, this decrease is primarily due to a loss of transaction accounts from 2004 to 2005. Mortgage banking income increased $421,000, or 53.5%, to $1.2 million in the first six months of 2005 from $787,000 in the first six months of 2004.

Noninterest expense. Noninterest expense increased $4.3 million, or 38.7%, to $15.5 million for second quarter of 2005 from $11.2 million for the second quarter of 2004. This increase is primarily due to the employment contract buyouts of $3.0 million in the second quarter of 2005 (see Note 3 to the condensed consolidated financial statements). We also incurred $1.0 million of write-downs and losses on other real estate in the second quarter of 2005, primarily related to a single property on which an updated appraised value was obtained.

Noninterest expense increased $16.5 million, or 73.9%, to $38.8 million for first six months of 2005 from $22.3 million for the first six months of 2004. This increase is primarily due to the management separation costs of $15.3 million incurred in the first six months of 2005. The management separation charges primarily include severance

payments, accelerated vesting of restricted stock and deferred compensation agreements, employment contract buy-outs and professional fees (see Note 3 to the condensed consolidated financial statements). Salaries and benefits decreased $128,000, or 1.1%, to $11.3 million for the first six months of 2005 from $11.4 million for the first six months of 2004. All other noninterest expenses increased $1.3 million, or 19.2%, to $8.1 million for the first six months of 2005 from $6.8 million for the first six months of 2004, primarily due to the $355,000 loss on the sale of our corporate aircraft in the first quarter of 2005 and the additional $1.0 million of other real estate losses in the second quarter of 2005.

Income tax expense. Our income tax expense was $412,000 for the second quarter of 2005, compared to $79,000 for the second quarter of 2004. We recognized an income tax benefit of $4.6 million for the first six months of 2005, compared to income tax expense of $398,000 for the first six months of 2004. The primary difference in the effective rate and the federal statutory rate (34%) for the three- and six-month periods ended June 30, 2005 and 2004 is due to certain tax-exempt income from investments and insurance policies.

Provision for Loan Losses. The provision for loan losses represents the amount determined by management to be necessary to maintain the allowance for loan losses at a level capable of absorbing inherent losses in the loan portfolio. Management reviews the adequacy of the allowance on a quarterly basis. The allowance for loan loss calculation is segregated into various segments that include classified loans, loans with specific allocations and pass rated loans. A pass rated loan is generally characterized by a very low to average risk of default and is a loan in which management perceives there is a minimal risk of loss. Loans are rated using an eight-point scale, with loan officers having the primary responsibility for assigning the risk ratings and for the timely reporting of changes in the risk ratings. These processes, and the assigned risk ratings, are subject to review by our internal loan review function and senior management. Based on the assigned risk ratings, the criticized and classified loans in the portfolio are segregated into the following regulatory classifications: Special Mention, Substandard, Doubtful or Loss. Generally, regulatory reserve percentages are applied to these categories to estimate the amount of loan loss allowance, adjusted for previously mentioned risk factors. Impaired loans are reviewed specifically and separately under Statement of Financial Accounting Standards No. 114 (SFAS 114) to determine the appropriate reserve allocation. Management compares the investment in an impaired loan against the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if the loan is collateral-dependent, to determine the specific reserve allowance. Reserve percentages assigned to non-rated loans are based on historical charge-off experience adjusted for other risk factors. To evaluate the overall adequacy of the allowance to absorb losses inherent in our loan portfolio, management considers historical loss experience based on volume and types of loans, trends in classifications, volume and trends in delinquencies and non-accruals, economic conditions and other pertinent information. Based on future evaluations, additional provisions for loan losses may be necessary to maintain the allowance for loan losses at an appropriate level. See “Financial Condition — Allowance for Loan Losses” for additional discussion.

The provision for loan losses was $1.5 million for the second quarter of 2005 and $2.25 million for the first six months of 2005. Our provision for loan losses increased during the second quarter of 2005 primarily as a result of an increase in classified loans of $3.2 million identified during the second quarter. In addition, we incurred charge-offs during the second quarter of 2005 related to the reassessment of collateral values on certain nonperforming commercial credits and the settlement of a disputed collateral lien. We did not record a provision for loan loss in the first six months of 2004. During the first six months of 2005, we had net charged-off loans totaling $2.5 million, compared to net charged-off loans of $5.0 million in the first six months of 2004. The annualized ratio of net charged-off loans to average loans was .54% in the first six months of 2005 compared to 1.16% for the first six months of 2004 and 1.52% for the year 2004. The allowance for loan losses totaled $12.3 million, or 1.36% of loans, net of unearned income, at June 30, 2005 compared to $12.5 million, or 1.34% of loans, net of unearned income, at December 31, 2004. See “Allowance for Loan Losses” for additional discussion.

Financial Condition

Total assets were $1.383 billion at June 30, 2005, a decrease of $40 million, or 2.80%, from $1.423 billion as of December 31, 2004. Average total assets for the first six months of 2005 totaled $1.419 billion, which was supported by average total liabilities of $1.318 billion and average total stockholders’ equity of $101 million.

Short-term liquid assets. Short-term liquid assets (cash and due from banks, interest-bearing deposits in other banks and federal funds sold) decreased $3.9 million, or 8.5%, to $42.0 million at June 30, 2005 from $45.9 million at December 31, 2004. At June 30, 2005, short-term liquid assets comprised 3.0% of total assets, compared to 3.2% at December 31, 2004. We continually monitor our liquidity position and will increase or decrease our short-term liquid assets as we deem necessary.

Investment Securities. Total investment securities decreased $24.1 million, or 8.4%, to $264.2 million at June 30, 2005, from $288.3 million at December 31, 2004. Mortgage-backed securities, which comprised 38.9% of the total

investment portfolio at June 30, 2005, increased $42.3 million, or 69.7%, to $102.9 million from $60.6 million at December 31, 2004. Investments in U.S. agency securities, which comprised 41.3% of the total investment portfolio at June 30, 2005, decreased $70.6 million, or 39.3%, to $109.2 million from $179.8 million at December 31, 2004. During the second quarter of 2005, we closed on the sale of $50 million in bonds and reinvested the proceeds in bonds intended to enhance the yield and cash flows of our investment securities portfolio. The new investment securities were classified as available for sale. The total investment portfolio at June 30, 2005 comprised 21.6% of all interest-earning assets, compared to 22.8% at December 31, 2004, and produced an average taxable equivalent yield of 4.7% for the second quarter of 2005, compared to 4.6% for the second quarter of 2004 and 4.5% for the first six months of 2005 and 2004.

Loans. Loans, net of unearned income, totaled $903.5 million at June 30, 2005, a decrease of 3.4%, or $31.4 million, from $934.9 million at December 31, 2004. Mortgage loans held for sale totaled $29.8 million at June 30, 2005, an increase of $21.7 million from $8.1 million at December 31, 2004. Average loans, including mortgage loans held for sale, totaled $945.4 million for the second quarter of 2005 compared to $869.4 million for the second quarter of 2004. Average loans, including mortgage loans held for sale, totaled $949.6 million for the first six months of 2005 compared to $863.8 million for the first six months of 2004. Loans, net of unearned income, comprised 73.95% of interest-earning assets at June 30, 2005, compared to 73.88% at December 31, 2004. Mortgage loans held for sale comprised 2.4% of interest-earning assets at June 30, 2005, compared to .6% at December 31, 2004. The loan portfolio produced an average yield of 6.6% for the second quarter of 2005 and 6.5% for the first six months of 2005, compared to 6.3% for the second quarter and first six months of 2004. The following table details the distribution of our loan portfolio by category as of June 30, 2005 and December 31, 2004 (in thousands):

Distribution of Loans by Category

		June 30, 2005								December 31, 2004
						Percent								Percent
						of								of
		Amount				Total				Amount				Total
Commercial and industrial		$	115,775				12.8	%		$	131,979				14.1	%
Real estate — construction and land development			259,054				28.6				249,188				26.6
Real estate — mortgage Single-family			238,903				26.4				250,718				26.8
Commercial			236,275				26.1				242,279				25.9
Other			26,634				2.9				25,745				2.7
Consumer			21,481				2.4				28,431				3.0
Other			6,699				.8				8,045				.9
Total loans			904,821				100.0	%			936,385				100.0	%
Unearned income			(1,365	)							(1,517	)
Allowance for loan losses			(12,263	)							(12,543	)
Net loans		$	891,193							$	922,325