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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO
.
Commission File Number: 0-25160
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ALABAMA NATIONAL BANCORPORATION
(Exact name of registrant as specified in its charter)
Delaware 63-1114426
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
1927 First Avenue North, Birmingham, AL 35203-4009
(Address of principal executive offices) (Zip Code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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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), (2) has been subject to
such filing requirements for the past 90 days. [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant at March 10, 1999 was $219,134,027.
As of March 10, 1999, the registrant had outstanding 10,971,686 shares of
its common stock.
DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:
(i) The definitive Proxy Statement for the 1999 Annual Meeting of Alabama
National BanCorporation's stockholders is incorporated by reference into
Part III of this report.
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TABLE OF CONTENTS
Item No. Page No.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS................... 2
PART I
1. Business.................................................. 3
Executive Officers........................................ 10
2. Properties................................................ 10
3. Legal Proceedings......................................... 11
4. Submission of Matters to a Vote of Security Holders....... 11
PART II
5. Market for Registrant's Common Equity and Related 12
Stockholder Matters......................................
6. Selected Financial Data................................... 13
7. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations......................
7A. Quantitative and Qualitative Disclosure About Market 44
Risk.....................................................
8. Financial Statements and Supplementary Data............... 44
9. Changes in and Disagreements with Accountants on 45
Accounting and Financial Disclosure......................
PART III
10. Directors and Executive Officers of the Registrant........ 45*
11. Compensation of Executive Officers and Directors.......... 45*
12. Security Ownership of Certain Beneficial Owners and 45*
Management...............................................
13. Certain Relationships and Related Transactions............ 45*
PART IV
14. Exhibits, Financial Statement Schedules and Reports on 46
Form 8-K.................................................
SIGNATURES.......................................................... 47
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* Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on April 22, 1999 are incorporated by reference in
Part III of this Form 10-K.
1
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, other periodic reports filed by ANB under
the Securities Exchange Act of 1934, as amended, and any other written or oral
statements made by or on behalf of ANB may include "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which reflect ANB's current views with respect to future events and
financial performance. Such forward looking statements are based on general
assumptions and are subject to various risks, uncertainties, and other factors
that may cause actual results to differ materially from the views, beliefs and
projections expressed in such statements. These risks, uncertainties and other
factors include, but are not limited to:
(1) Possible changes in economic and business conditions that may affect
the prevailing interest rates, the prevailing rates of inflation, or the
amount of growth, stagnation, or recession in the global, U.S., and
southeastern U.S. economies, the value of investments, collectibility of
loans and the profitability of business entities;
(2) Possible changes in monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and similar
organizations;
(3) The effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers and dealers,
investment companies and finance companies, and attendant changes in
patterns and effects of competition in the financial services industry;
(4) The cost and other effects of legal and administrative cases and
proceedings, claims, settlements and judgments;
(5) The timely resolution of any Year 2000 issues by ANB and its
customers and vendors; and
(6) The ability of ANB to achieve the expected operating results related
to the acquired operations of recently-completed and future acquisitions
(if any), which depends on a variety of factors, including (i) the ability
to ANB to achieve the anticipated cost savings and revenue enhancements
with respect to the acquired operations, (ii) the assimilation of the
acquired operations to ANB's corporate culture, including the ability to
instill ANB's credit practices and efficient approach to the acquired
operations, (iii) the continued growth of the markets in which ANB operates
consistent with recent historical experience, (iv) the absence of material
contingencies related to the acquired operations, including asset quality
and litigation contingencies, and (v) ANB's ability to expand into new
markets and to maintain profit margins in the face of pricing pressures.
The words "believe," "expect," "anticipate," "project" and similar
expressions signify forward looking statements. Readers are cautioned not to
place undue reliance on any forward looking statements made by or on behalf of
ANB. Any such statement speaks only as of the date the statement was made. ANB
undertakes no obligation to update or revise any forward looking statements.
2
PART I
ITEM 1. BUSINESS
Alabama National BanCorporation (the "Company" or "ANB") is a Delaware bank
holding company with its principal place of business in Birmingham, Alabama,
and its main office located at 1927 First Avenue North, Birmingham, Alabama
35203 (Telephone Number: (205) 583-3600). ANB is currently the parent of four
national banks, National Bank of Commerce of Birmingham ("NBC") (Birmingham,
Alabama and the Birmingham metropolitan area), Citizens & Peoples Bank,
National Association (Escambia County, Florida), First Citizens Bank, National
Association (Talladega, Alabama), and Community Bank of Naples, National
Association (Naples, Florida); three state member banks, Alabama Exchange Bank
(Tuskegee, Alabama), Bank of Dadeville (Dadeville, Alabama) and First Gulf
Bank (Baldwin County, Alabama); and three state nonmember banks, First
American Bank (Decatur, Alabama), Public Bank (St. Cloud, Florida), and
Georgia State Bank (Mableton, Georgia) (collectively the "Banks"). In
addition, ANB is currently the ultimate parent of one securities brokerage
firm, NBC Securities, Inc. (Birmingham, Alabama); one receivables factoring
company, Corporate Billing, Inc. (Decatur, Alabama); and one insurance agency,
Ashland Insurance, Inc. (Ashland, Alabama).
Recent Developments
Community Financial Corporation Merger
Effective October 2, 1998, Community Financial Corporation ("CFC"), a
Georgia bank holding company headquartered in Mableton, Georgia, with
approximately $139 million in total assets as of September 30, 1998, merged
with and into ANB (the "CFC Merger") pursuant to that certain Agreement and
Plan of Merger dated as of June 8, 1998 (the "CFC Merger Agreement"). Pursuant
to the CFC Merger, (i) the stockholders of CFC became stockholders of ANB, and
(ii) ANB became the parent stockholder of CFC's bank subsidiary, Georgia State
Bank, a Georgia state banking corporation. The CFC Merger was accounted for as
a pooling of interests.
The CFC Merger Agreement generally provided, among other things, for the
merger of CFC with and into ANB, pursuant to which each of the 3,059,194
outstanding shares of CFC common stock were converted into the right to
receive 0.351807 shares of ANB common stock, for a total of 1,076,032 shares
of ANB common stock (excluding fractional shares) issued to former CFC
shareholders. In addition, the options held to purchase shares of CFC common
stock were converted into the right to purchase 0.351807 shares of ANB common
stock for each share of CFC common stock subject to option. As part of the CFC
Merger, W. Ray Barnes, formerly a CFC board member, was appointed to serve as
a member of the Board of Directors of ANB.
Community Bank of Naples, National Association Merger
Effective December 31, 1998, Community Bank of Naples, National Association
("CBN"), a national bank with approximately $92.6 million in total assets as
of December 31, 1998, merged with and into a banking subsidiary of ANB (the
"CBN Merger") pursuant to that certain Agreement and Plan of Merger dated as
of September 21, 1998 (the "CBN Merger Agreement"). Immediately following the
CBN Merger, the former assets and liabilities of CBN were transferred to
Community Bank of Naples, N.A., a newly formed national bank subsidiary of ANB
in Naples, Florida. The CBN Merger was accounted for as a pooling of
interests.
The CBN Merger Agreement generally provided, among other things, for the
merger of CBN with and into a banking subsidiary of ANB, pursuant to which
each of the 1,000,000 outstanding shares of CBN common stock were converted
into the right to receive 0.53271 shares of ANB common stock, for a total of
532,608 shares of ANB common stock (excluding fractional shares) issued to
former CBN shareholders. In addition, the options held to purchase shares of
CBN common stock were converted into the right to purchase 0.53271 shares of
ANB common stock for each share of CBN common stock subject to option.
3
Subsidiary Banks
ANB operates through ten subsidiary Banks which have a total of 43 banking
offices in the states of Alabama, Georgia and Florida. The Banks focus on
traditional consumer, residential mortgage, commercial and real estate
construction lending to customers in their market areas. The Banks also offer
a variety of deposit programs to individuals and small businesses and other
organizations at interest rates generally consistent with local market
conditions. NBC offers trust services, investment services and securities
brokerage services. In addition, the Banks offer individual retirement and
KEOGH accounts, safe deposit and night depository facilities and additional
services such as the sale of traveler's checks, money orders and cashier's
checks.
Lending Activities
General
Through the Banks, ANB offers a range of lending services, including real
estate, consumer and commercial loans, to individuals and small businesses and
other organizations that are located in or conduct a substantial portion of
their business in the Banks' market areas. ANB's total loans, net of unearned
interest, at December 31, 1998, were approximately $1.11 billion, or
approximately 74.1% of total earning assets. The interest rates charged on
loans vary with the degree of risk, maturity and amount of the loan and are
further subject to competitive pressures, money market rates, availability of
funds and government regulations. ANB has no foreign loans or loans for
"highly leveraged transactions," as such terms are defined by applicable
banking regulations.
Loan Portfolio
Real Estate Loans. Loans secured by real estate are the primary component of
ANB's loan portfolio, constituting approximately $678.4 million, or 61.3% of
total loans, net of unearned interest, at December 31, 1998. The Banks' real
estate loan portfolio is comprised of commercial and residential mortgages.
Residential mortgages held in the Banks' loan portfolio, both fixed and
variable, are made based upon amortization schedules of up to 30 years but
generally have maturity dates of five years or less. The majority of the
Banks' commercial mortgages are at variable rates, which approximate current
market rates. Construction loans are made on a variable rate basis.
Origination fees are normally charged for all loans secured by real estate.
The Banks' primary type of residential mortgage loan is the single-family
first mortgage, typically structured with fixed or adjustable interest rates,
based on market conditions. These loans usually have terms of five years, with
payments through the date of maturity generally based on a 15 or 30 year
amortization schedule.
The Banks originate residential loans for sale into the secondary market.
Such loans are made in accordance with underwriting standards set by the
purchaser of the loan, normally as to loan-to-value ratio, interest rate and
documentation. Such loans are generally made under a commitment to purchase
from a loan purchaser. The Banks generally collect from the borrower or
purchaser a combination of the origination fee, discount points and/or service
release fee. During 1998, the Banks sold approximately $276 million in loans
to such purchasers.
The Banks' nonresidential mortgage loans include commercial, industrial and
unimproved real estate loans. The Banks generally require nonresidential
mortgage loans to have an 80% loan-to-value ratio and usually underwrite their
commercial loans on the basis of the borrower's cash flow and ability to
service the debt from earnings, rather than on the basis of the value of the
collateral. Terms on construction loans are usually less than twelve months,
and the Banks typically require real estate mortgages and personal guarantees
supported by financial statements and a review of the guarantor's personal
finances.
Consumer Loans. Consumer lending includes installment lending to individuals
in the Banks' market areas and generally consists of loans to purchase
automobiles and other consumer durable goods. Consumer loans constituted $77.2
million, or 7.0% of ANB's loan portfolio at December 31, 1998. Consumer loans
are underwritten based on the borrower's income, current debt level, past
credit history and collateral. Consumer
4
rates are both variable and fixed, with terms negotiable. Terms generally
range from one to five years depending on the nature and condition of the
collateral. Periodic amortization, generally monthly, is required.
Commercial and Financial Loans. The Banks make loans for commercial purposes
in various lines of business. These loans are typically made on terms up to
five years at fixed or variable rates. The loans are secured by various types
of collateral including accounts receivable, inventory or, in the case of
equipment loans, the financed equipment. The Banks attempt to reduce their
credit risk on commercial loans by underwriting the loan based on the
borrower's cash flow and its ability to service the debt from earnings, and by
limiting the loan to value ratio. Historically, the Banks have loaned up to
80% on loans secured by accounts receivable, up to 65% on loans secured by
inventory, and up to 80% on loans secured by equipment. The Banks also make
some unsecured commercial loans. Commercial and financial loans constituted
$257.4 million, or 23.3% of ANB's loan portfolio at December 31, 1998.
Interest rates are negotiable based upon the borrower's financial condition,
credit history, management stability and collateral.
Credit Procedures and Review
Loan Approval. Certain credit risks are inherent in making loans. These
include prepayment risks, risks resulting from uncertainties in the future
value of collateral, risks resulting from changes in economic and industry
conditions and risks inherent in dealing with individual borrowers. In
particular, longer maturities increase the risk that economic conditions will
change and adversely affect collectibility.
ANB attempts to minimize loan losses through various means and uses
standardized underwriting criteria. During 1998, ANB established a standarized
loan policy for all of the Banks that may be modified based on local market
conditions. In particular, on larger credits, ANB generally relies on the cash
flow of a debtor as the source of repayment and secondarily on the value of
the underlying collateral. In addition, ANB attempts to utilize shorter loan
terms in order to reduce the risk of a decline in the value of such
collateral.
ANB addresses repayment risks by adhering to internal credit policies and
procedures of which all of the Banks have adopted. These policies and
procedures include officer and customer lending limits, a multi-layered loan
approval process for larger loans, documentation examination and follow-up
procedures for any exceptions to credit policies. The point in each Bank's
loan approval process at which a loan is approved depends on the size of the
loan and the borrower's credit relationship with such Bank. Each of the
lending officers at each of the Banks has the authority to approve loans up to
an approved loan authority amount as approved by each Bank's Board of
Directors. Loans in excess of the highest loan authority amount at each Bank
must be approved by the ANB Executive Vice President in charge of credit
administration. In addition, loans in excess of a particular loan officer's
approval authority must be approved by a more senior officer at the particular
Bank, the loan committee at such Bank, or both.
Loan Review. ANB maintains a continuous loan review system for each of NBC
and First American Bank and a scheduled review system for the other Banks.
Under this system, each loan officer is directly responsible for monitoring
the risk in his portfolio and is required to maintain risk ratings for each
credit assigned. The risk rating system incorporates the basic regulatory
rating system as set forth in the applicable regulatory asset quality
examination procedures.
ANB's Loan Review Department ("LRD"), which is wholly independent of the
lending function, serves as a validation of each loan officer's risk
monitoring and rating system. LRD's primary function is to provide the Board
of Directors of each Bank with a thorough understanding of the credit quality
of such Bank's loan portfolio. Other review requirements are in place to
provide management with early warning systems for problem credits as well as
compliance with stated lending policies. LRD's findings are reported, along
with an asset quality review, to the ANB Board of Directors at each bi-monthly
meeting.
5
Deposits
The principal sources of funds for the Banks are core deposits, consisting
of demand deposits, interest-bearing transaction accounts, money market
accounts, savings deposits and certificates of deposit. Transaction accounts
include checking and negotiable order of withdrawal (NOW) accounts which
customers use for cash management and which provide the Banks with a source of
fee income and cross-marketing opportunities, as well as a low-cost source of
funds. Time and savings accounts also provide a relatively stable and low-cost
source of funding. The largest source of funds for the Banks are certificates
of deposit. Certificates of deposit in excess of $100,000 are held primarily
by customers in the Banks' market areas. The Banks have not historically
relied upon brokered certificates of deposit as a funding source.
Deposit rates are reviewed weekly by senior management of each of the Banks.
Management believes that the rates the Banks offer are competitive with those
offered by other institutions in the Banks' market areas. ANB focuses on
customer service to attract and retain deposits.
Investment Services
NBC operates an investment department devoted primarily to handling
correspondent banks' investment needs. Services provided by the investment
department include sales of securities, asset/liability consulting,
safekeeping and bond accounting. NBC also has a wholly owned subsidiary, NBC
Securities, Inc. ("NBC Securities"), that is licensed as a broker-dealer. NBC
Securities provides investment services to individuals and institutions. These
services include the sale of stocks, corporate bonds, mutual funds, annuities,
other insurance products and financial planning.
Competition
The Banks encounter strong competition in making loans, acquiring deposits
and attracting customers for investment services. Competition among financial
institutions is based upon interest rates offered on deposit accounts,
interest rates charged on loans, other credit and service charges relating to
loans, the quality and scope of the services rendered, the convenience of
banking facilities and, in the case of loans to commercial borrowers, relative
lending limits. The Banks compete with other commercial banks, savings and
loan associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies, and other financial
intermediaries operating in Alabama, Georgia, Florida and elsewhere. Many of
these competitors, some of which are affiliated with large bank holding
companies, have substantially greater resources and lending limits, and may
offer certain services that the Banks do not currently provide. In addition,
many of ANB's non-bank competitors are not subject to the same extensive
federal regulations that govern bank or thrift holding companies and federally
insured banks or thrifts. The proposed Financial Services Competition Act of
1999, which recently passed the U.S. House of Representatives, would allow
banks to enter certain businesses previously prohibited or highly regulated
for banking enterprises. See "Supervision and Regulation." ANB cannot predict
the impact on competition that would occur upon the passage of this proposed
legislation.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"IBBEA") authorized bank holding companies to acquire banks and other bank
holding companies without geographic limitations beginning September 30, 1995.
The arrival of interstate banking is expected to increase further the
competitiveness of the banking industry.
In addition, beginning on June 1, 1997, the IBBEA authorized interstate
mergers and consolidations of existing banks, provided that neither bank's
home state had opted out of interstate branching by May 31, 1997. The States
of Alabama, Georgia and Florida have each opted in to interstate branching.
Interstate branching provides that once a bank has established branches in a
state through an interstate merger, the bank may establish and acquire
additional branches at any location in the state where any bank involved in
the interstate merger could have established or acquired branches under
applicable federal or state law.
6
Size gives the larger banks certain advantages in competing for business
from large corporations. These advantages include higher lending limits and
the ability to offer services in other areas of Alabama, Georgia, Florida and
the southeast region. Some of ANB's competitors still maintain substantially
greater resources and lending limits than ANB. As a result, ANB has not
generally attempted to compete for the banking relationships of large
corporations, and generally concentrates its efforts on small to medium-sized
businesses and individuals to which ANB believes it can compete effectively by
offering quality, personal service. However, management believes it may be
able to compete more effectively for the business of some large corporations,
given its current growth pattern.
Management believes that the Banks' commitment to their respective primary
market areas, as well as their commitment to quality and personalized banking
services, are factors that contribute to the Banks' competitiveness.
Management believes that ANB's decentralized community banking strategy
positions the Banks to compete successfully in their market areas.
Market Areas and Growth Strategy
Through NBC, ANB serves the lower half of Jefferson County, the upper third
of Shelby County, and St. Clair County, each of which are typically included
in the Birmingham metropolitan area. ANB's First American Bank subsidiary
serves Morgan, Limestone and Madison counties in north Alabama. First
American's largest market presence is in Decatur, Alabama, which has
demonstrated a growing economic base in recent years. Through First Gulf Bank,
ANB serves Baldwin County, Alabama. Located between Mobile, Alabama and
Pensacola, Florida, Baldwin County has a broad base of economic activity in
the retail and service, agriculture, seafood, tourism and manufacturing
industries. Shelby, Baldwin and St. Clair Counties have been named in
statistical surveys as three of the fastest growing counties in Alabama. In
1997, ANB expanded outside of Alabama with the opening of Citizens & Peoples
Bank, N.A. in Escambia County, Florida. In 1998, ANB further expanded its
presence in markets outside of Alabama with two acquisitions in Florida and
one in Georgia. Public Bank is located in the fast-growing Kissimmee-St. Cloud
area of central Florida. Community Bank of Naples, N.A., located in Collier
County, Florida and Georgia State Bank, located in Cobb County and Paulding
County, Georgia, are located in markets that are among the fastest growing in
their respective states. The other Banks, First Citizens, Alabama Exchange
Bank and Bank of Dadeville, are located in non-metropolitan areas. ANB's
strategy is to focus on growth in profitability for these non-metropolitan
banks, since market growth has not been as significant.
Due to continuing consolidation within the banking industry, as well as in
the Southeastern United States, ANB may in the future seek to combine with
other banks or thrifts (or their holding companies) that may be of smaller,
equal or greater size than ANB. ANB currently intends to concentrate on
acquisitions of additional banks or thrifts (or their holding companies) which
operate in attractive market areas in Alabama, Florida and Georgia. In
addition to price and terms, the factors considered by ANB in determining the
desirability of a business acquisition or combination are financial condition,
earnings potential, quality of management, market area and competitive
environment.
In addition to expansion through combinations with other banks or thrifts,
ANB intends to continue to expand where possible through growth of its
existing banks in their respective market areas. During 1998, NBC formed a
commercial leasing division which currently focuses on machinery and equipment
leases to business customers. Also, ANB is exploring expansion into lines of
business closely related to banking and will pursue such expansion if it
believes such lines could be profitable without causing undue risk to ANB.
While ANB plans to continue its growth as described above, there is no
assurance that its efforts will be successful.
Employees
As of December 31, 1998, ANB and the Banks together had approximately 721
full-time equivalent employees. None of these employees is a party to a
collective bargaining agreement. ANB considers its relations with its
employees to be good.
7
Supervision and Regulation
ANB and the Banks are subject to state and federal banking laws and
regulations which impose specific requirements and restrictions on, and
provide for general regulatory oversight with respect to, virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not stockholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable laws or regulations may have a material effect on the business
and prospects of ANB. Beginning with the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and
following in 1991 with the Federal Deposit Insurance Corporation Act
("FDICIA"), numerous additional regulatory requirements have been placed on
the banking industry in the past ten years, and additional changes have been
proposed. The operations of ANB and the Banks may be affected by legislative
changes and the policies of various regulatory authorities. ANB is unable to
predict the nature or the extent of the effect on its business and earnings
that fiscal or monetary policies, economic control, or new federal or state
legislation may have in the future.
As a bank holding company, ANB is subject to the regulation and supervision
of the Federal Reserve. The Banks are subject to supervision and regulation by
applicable state and federal banking agencies, including the Federal Reserve,
the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit
Insurance Corporation (the "FDIC") and applicable state banking departments.
The Banks are also subject to various requirements and restrictions under
federal and state law, including requirements to maintain allowances against
deposits, restrictions on the types and amounts of loans that may be granted
and the interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the Banks.
In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the Federal Reserve as it attempts to control
the money supply and credit availability in order to influence the economy.
Pursuant to the IBBEA, bank holding companies from any state may now acquire
banks located in any other state, subject to certain conditions, including
concentration limits. As of June 1, 1997, a bank may establish branches across
state lines by merging with a bank in another state (unless applicable state
law prohibits such interstate mergers), provided certain conditions are met. A
bank may also establish a de novo branch in a state in which the bank does not
maintain a branch if that state expressly permits such interstate de novo
branching and certain other conditions are met.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in
the event the depository institution becomes in danger of default or is in
default. For example, under a policy of the Federal Reserve with respect to
bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions
and commit resources to support such institutions in circumstances where it
might not do so absent such policy. In addition, the "cross-guarantee"
provisions of federal law require insured depository institutions under common
control to reimburse the FDIC for any loss suffered or reasonably anticipated
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default.
The federal banking agencies have broad powers under current federal law to
take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized" as such terms are defined under regulations issued by each
of the federal banking agencies. In general, the agencies measure capital
adequacy within a framework that makes capital requirements sensitive to the
risk profiles of individual banking companies. The guidelines define capital
as either Tier 1 (primarily common shareholders' equity) or Tier 2 (certain
debt instruments and a portion of the allowance for loan losses). ANB and the
Banks are subject to a minimum Tier 1 capital ratio (Tier 1 capital to
8
risk-weighted assets) of 4%, total capital ratio (Tier 1 plus Tier 2 to risk-
weighted assets) of 8% and Tier 1 leverage ratio (Tier 1 to average quarterly
assets) of 3%. To be considered a "well capitalized" institution, the Tier 1
capital ratio, the total capital ratio, and the Tier 1 leverage ratio must
equal or exceed 6%, 10% and 5%, respectively.
The Banks are subject to the provisions of Section 23A of the Federal
Reserve Act, which place limits on the amount of loans or extensions of credit
to, investments in or certain other transactions with affiliates, and on the
amount of advances to third parties collateralized by the securities or
obligations of affiliates. In general, the Banks' "affiliates" are ANB and
ANB's non-bank subsidiaries.
The Banks are also subject to the provisions of Section 23B of the Federal
Reserve Act that, among other things, prohibit a bank from engaging in certain
transactions with affiliates unless the transactions are on terms
substantially the same, or at least as favorable to the bank, as those
prevailing at the time for comparable transactions with non-affiliated
companies.
The Banks are also subject to certain restrictions on extensions of credit
to executive officers, directors, certain principal stockholders and their
related interests. Such extensions of credit (i) must be made on substantially
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable
features.
The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the Federal Reserve, the FDIC or the OCC shall evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those institutions. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. These factors are considered in evaluating mergers, acquisitions and
applications to open a branch or facility. The CRA also requires all
institutions to make public disclosure of their CRA ratings. Each of the Banks
received outstanding or satisfactory ratings in its most recent evaluation.
There are various legal and regulatory limits on the extent to which the
Banks may pay dividends or otherwise supply funds to ANB. In addition, federal
and state regulatory agencies also have the authority to prevent a bank or
bank holding company from paying a dividend or engaging in any other activity
that, in the opinion of the agency, would constitute an unsafe or unsound
practice.
FDIC regulations require that management report on its responsibility for
preparing its institution's financial statements and for establishing and
maintaining an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning
safety and soundness.
There have been a number of legislative and regulatory proposals that would
have an impact on the operation of bank holding companies and their banks. It
is impossible to predict whether or in what form these proposals may be
adopted in the future and, if adopted, what their effect will be on ANB and
the Banks. For example, on May 13, 1998, the U.S. House of Representatives
passed H.R. 10, the "Financial Services Competition Act of 1998," which calls
for a sweeping modernization of the banking system that would permit
affiliations between commercial banks, securities firms, insurance companies
and, subject to certain limitations, other commercial enterprises. The stated
purposes of H.R. 10 are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition. H.R. 10 removes many of the statutory restrictions
contained in current laws regulating the financial services industry and calls
for a new regulatory framework of financial institutions and their holding
companies. Although H.R. 10 failed to reach the voting stage in the U.S.
Senate before the adjournment of the 105th Congress in 1998, H.R. 10 was
reintroduced in the House of Representatives on January 6, 1999, and is
currently under consideration. At this time, it is unknown whether H.R. 10
will be enacted into law, or if enacted, what form the
9
final version of such legislation might take and how such legislation may
affect ANB's business and operations. One consequence may be increased
competition from large financial services companies that, under the bill,
would be permitted to provide many types of financial services to customers.
NBC Securities is a broker-dealer registered with the Securities and
Exchange Commission and is a member of the National Association of Securities
Dealers, Inc.
Executive Officers of the Registrant
The Executive Officers of ANB serve at the pleasure of the Board of
Directors. Set forth below are the current Executive Officers of ANB and a
brief explanation of their principal employment during the last five
(5) years.
John H. Holcomb, III--Age 47--Chairman and Chief Executive Officer. Mr.
Holcomb has served as Chairman and Chief Executive Officer of ANB since April,
1996. Prior to such date, Mr. Holcomb served as President and Chief Operating
Officer of ANB beginning December, 1995. Mr. Holcomb has been President and
Chief Executive Officer of NBC since 1990.
Victor E. Nichol, Jr.--Age 52--President and Chief Operating Officer. Mr.
Nichol has served as President and Chief Operating Officer of ANB since April
1996. Prior to such date, Mr. Nichol served as Executive Vice President of ANB
beginning December 1995. Mr. Nichol has been Executive Vice President of NBC
since 1994.
Dan M. David--Age 53--Vice Chairman. Mr. David has served as Vice Chairman
of ANB since November 30, 1997 when FAB merged with and into ANB. Mr. David
serves as Chairman of First American Bank, a position he has held since 1995.
Mr. David served as Chairman and Chief Executive Officer of FAB from 1995
through 1997, as Vice Chairman and Chief Executive Officer during 1994 and
1995 and as President and Chief Executive Officer from 1986 through 1994.
John R. Bragg--Age 37--Executive Vice President. Mr. Bragg has served as
Executive Vice President of ANB since April 1998 and Executive Vice President
of NBC since 1997. Mr. Bragg served as Senior Vice President of NBC from 1992
until 1997.
Richard Murray, IV--Age 37--Executive Vice President. Mr. Murray has served
as Executive Vice President of ANB since April 1998 and Executive Vice
President of NBC since 1997. Mr. Murray served as Senior Vice President of NBC
from 1990 until 1997.
William G. Sanders, Jr.--Age 35--Executive Vice President. Mr. Sanders has
served as Executive Vice President of ANB since April 1998 and Executive Vice
President of NBC since 1997. Mr. Sanders served as Senior Vice President of
NBC from 1993 until 1997.
William E. Matthews, V--Age 34--Executive Vice President and Chief Financial
Officer. Mr. Matthews has served as Executive Vice President and Chief
Financial Officer of ANB and NBC since April 1998. Prior to that date, Mr.
Matthews served as Senior Vice President of NBC beginning in 1996, and Vice
President of NBC from 1992 through 1996.
ITEM 2. PROPERTIES
ANB currently operates 43 banking offices. Of the 43 banking offices, ANB,
through the Banks, owns 34 banking offices without encumbrance and leases an
additional 9 banking offices. ANB leases its principal administrative offices,
which are located at 1927 First Avenue North, Birmingham, Alabama. See Notes 6
and 9 to the Consolidated Financial Statements of ANB and Subsidiaries
included in this Annual Report on Form 10-K for additional information
regarding ANB's premises and equipment.
10
ITEM 3. LEGAL PROCEEDINGS
ANB, in the normal course of business, is subject to various pending and
threatened litigation. Although it is not possible to determine at this point
in time, based on consultation with legal counsel, management does not
anticipate that the ultimate liability, if any, resulting from such litigation
will have a material effect on ANB's financial condition and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE FOR SECURITY-HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At March 10, 1999, ANB had 1,591 stockholders of record (including shares
held in "street" names by nominees who are record holders) and 10,971,686
shares of ANB Common Stock outstanding. ANB Common Stock is traded in the
over-the-counter market and prices are quoted on NASDAQ/NMS under the symbol
"ALAB."
The reported price range for ANB Common Stock and the dividends declared
during each calendar quarter of 1997 and 1998 are shown below:
Dividends
High Low Declared
------- ------- ---------
1997
First Quarter...................................... $20 1/2 $17 1/2 $.115
Second Quarter..................................... 22 1/2 17 1/2 .115
Third Quarter...................................... 26 1/8 21 3/4 .115
Fourth Quarter..................................... 27 22 .115
1998
First Quarter...................................... 33 3/4 25 3/4 .15
Second Quarter..................................... 37 5/8 31 1/2 .15
Third Quarter...................................... 39 1/2 24 7/8 .15
Fourth Quarter..................................... 28 24 1/8 .15
The last reported sales price of Common Stock as reported on The Nasdaq/NMS
on March 10, 1999 was $24.50. The prices shown do not reflect retail mark-ups
and mark-downs. All share prices have been rounded to the nearest 1/64 of one
dollar. The market makers for ANB Common Stock as of December 31, 1998, were
J. C. Bradford & Co., Raymond James & Associates, Inc., Legg Mason Wood Walker
Inc., The Robinson Humphrey Company, LLC, ABN AMRO Securities (USA), Inc., and
Troster Singer Corporation.
ANB expects to continue its policy of paying quarterly cash dividends
although there is no assurance that such dividends will continue to be paid in
the future. The payment of dividends in the future is dependent on future
income of the Banks, financial position, capital requirements and other
considerations. In addition, the payment of dividends is subject to the
regulatory restrictions described in Item 1 of this Form 10-K under
"Supervision and Regulation."
12
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except ratios and per share data)
Year Ended December 31,
--------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
---------- ---------- ---------- ---------- --------
Income Statement Data:
Interest income......... $ 115,704 $ 104,508 $ 93,178 $ 62,090 $ 48,337
Interest expense........ 56,555 48,379 42,174 30,079 19,812
---------- ---------- ---------- ---------- --------
Net interest income..... 59,149 56,129 51,004 32,011 28,525
Provision for loan
losses................. 1,796 3,421 1,035 1,171 1,770
---------- ---------- ---------- ---------- --------
Net interest income
after provision for
loan losses............ 57,353 52,708 49,969 30,840 26,755
Net securities gains
(losses)............... 174 (2) (84) 21 (52)
Noninterest income...... 29,176 20,296 19,214 10,749 7,328
Noninterest expense..... 61,154 52,788 50,175 32,141 24,671
---------- ---------- ---------- ---------- --------
Income before income
taxes.................. 25,549 20,214 18,924 9,469 9,360
Provision for income
taxes.................. 8,154 6,086 5,279 951 736
---------- ---------- ---------- ---------- --------
Income before minority
interest in earnings of
consolidated
subsidiary............. 17,395 14,128 13,645 8,518 8,624
Minority interest in
earnings of
consolidated
subsidiary............. 23 12 14 650 750
---------- ---------- ---------- ---------- --------
Net income.............. $ 17,372 $ 14,116 $ 13,631 $ 7,868 $ 7,874
========== ========== ========== ========== ========
Balance Sheet Data:
Total assets............ $1,672,049 $1,495,814 $1,260,635 $1,142,064 $714,356
Earning assets.......... 1,493,122 1,313,097 1,149,038 1,035,396 656,936
Securities.............. 329,747 265,501 225,737 231,482 160,132
Loans................... 1,106,074 966,370 868,307 745,961 482,639
Allowance for loan
losses................. 16,540 14,844 12,633 11,621 7,597
Deposits................ 1,275,175 1,125,479 988,876 945,544 604,111
Short-term debt......... 21,700 29,087 42,205 21,280 12,717
Long-term debt.......... 32,328 16,587 12,939 1,089 2,132
Stockholders' equity.... 130,993 116,888 105,204 88,230 51,738
Weighted Average Shares
Outstanding--
Diluted(2)............. 11,173 10,999 10,490 6,429 5,870
Per Common Share Data:
Net income--diluted(3).. $ 1.55 $ 1.28 $ 1.30 $ 1.09 $ 1.22
Book value (period
end)(4)................ 11.94 11.02 10.43 9.04 6.92
Tangible book value
(period end)(4)........ 11.19 10.20 9.66 8.24 6.51
Dividends declared...... 0.60 0.46 0.28 -- --
Performance Ratios:
Return on average
assets................. 1.10% 1.05% 1.17% 1.02% 1.18%
Return on average
equity................. 13.81 12.73 14.22 14.30 17.59
Net interest margin(5).. 4.24 4.62 4.75 4.44 4.66
Net interest margin
(taxable
equivalent)(5)......... 4.31 4.71 4.83 4.53 4.79
Asset Quality Ratios:
Allowance for loan
losses to period end
loans.................. 1.50% 1.54% 1.45% 1.56% 1.57%
Allowance for loan
losses to period end
nonperforming
loans(6)............... 340.61 281.14 377.22 396.61 406.91
Net charge-offs to
average loans.......... 0.01 0.13 0.00 0.05 0.64
Nonperforming assets to
period end loans and
foreclosed
property(6)............ 0.55 0.73 0.48 0.63 0.57
Capital and Liquidity
Ratios:
Average equity to
average assets......... 7.95% 8.27% 8.21% 7.11% 6.68%
Leverage (4.00% required
minimum)(7)............ 7.41 7.75 8.64 10.33 8.26
Risk-based capital
Tier 1 (4.00% required
minimum)(7)........... 10.03 9.89 10.91 10.83 11.36
Total (8.00% required
minimum)(7)........... 11.28 11.14 12.16 12.08 12.61
Average loans to average
deposits............... 83.02 85.44 84.08 78.81 77.65
13
- --------
(1) On December 31, 1998, Community Bank of Naples, N.A. ("Naples") merged
with and into a subsidiary of ANB ("the Naples Merger"). Pursuant to the
terms of the Naples Merger, each share of Naples common stock was
converted into 0.53271 shares of the Company's common stock. On October 2,
1998, Community Financial Corporation ("CFC") merged with and into the
Company ("the CFC Merger"). Pursuant to the terms of the CFC Merger, each
share of CFC common stock was converted into 0.351807 shares of the
Company's common stock. On May 29, 1998, Public Bank Corporation ("PBC")
merged with and into the Company ("the PBC Merger"). Pursuant to the terms
of the PBC Merger, each share of PBC common stock was converted into
0.2353134 shares of the Company's common stock. On November 30, 1997,
First American Bancorporation ("FAB") merged with and into the Company
("the FAB Merger"). Pursuant to the terms of the FAB Merger, each share of
FAB common stock was converted into 0.7199 shares of the Company's common
stock. On September 30, 1996, FIRSTBANC Holding Company, Inc.
("FIRSTBANC") was merged with and into the Company, with each share of
common stock of FIRSTBANC being converted into 7.12917 shares of the
Company's common stock. Each of the aforementioned mergers was accounted
for as pooling of interests. On December 29, 1995, National Commerce
Corporation ("NCC") and Commerce Bankshares, Inc. ("CBS") merged with and
into the Company ("the NCC Merger"). Pursuant to the terms of the NCC
Merger, each share of NCC common stock was converted into 348.14 shares of
the Company's common stock and each share of CBS common stock was
converted into 7.0435 shares of the Company's common stock for a total of
3,106,981 shares (or 50.1%) of the then outstanding Company common stock.
The NCC Merger was accounted for as a "reverse acquisition," whereby NCC
is deemed to have acquired ANB for financial reporting purposes. However,
ANB remained as the continuing legal entity and registrant for Securities
and Exchange Commission filing purposes. Consistent with the reverse
acquisition accounting treatment, the historical income statement
information included in the Five-Year Summary of Selected Financial Data
of the Company is that of NCC for 1995 and 1994. The balance sheet
information included in the historical Five-Year Summary of Selected
Financial Data of the Company is that of NCC for 1994, as adjusted for
subsequent poolings of interest. The historical Five-Year Summary of
Selected Financial Data for all periods have been restated to include the
results of operations of Naples, CFC, PBC, FAB, and FIRSTBANC from the
earliest period presented, except for dividends per common share. (See
Note 1 to the Company's consolidated financial statements included in this
Annual Report).
(2) The weighted average common share and common equivalent shares outstanding
are those of NCC, CBS, Naples, CFC, PBC, FAB, and FIRSTBANC converted into
ANB common and common equivalents at the applicable exchange ratios.
(3) Net income per common share--diluted is calculated based upon net income
as adjusted cash dividends on preferred stock.
(4) Book value and tangible book value at December 31, 1994 are calculated on
the outstanding common shares of NCC, CBS, Naples, CFC, PBC, FAB, and
FIRSTBANC converted at the exchange ratio.
(5) Net interest income divided by average earning assets.
(6) Nonperforming loans and nonperforming assets includes loans past due 90
days or more that are still accruing interest.
(7) Based upon fully phased-in requirements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Basis of Presentation
The following is a discussion and analysis of the consolidated financial
condition of the Company and results of operations as of the dates and for the
periods indicated. On December 31, 1998, Community Bank of Naples, National
Association ("Naples'), a bank headquartered in Naples, Florida, was merged
with and into the Company, pursuant to which each share of Naples common stock
was converted into 0.53271 shares of the Company's common stock for a total of
532,608 shares. On October 2, 1998, Community Financial Corporation ("CFC'), a
one bank holding company headquartered in Mabelton, Georgia, was merged with
and into the Company, pursuant to which each share of CFC common stock was
converted into 0.351807 shares of the Company's common stock for a total of
1,076,032 shares. On May 29, 1998, Public Bank Corporation ("PBC'), a one bank
holding company headquartered in St. Cloud, Florida, was merged with and into
the Company, pursuant to which each share of PBC common stock was converted
into 0.2353134 shares of the Company's common stock for a total of 549,913
shares. The historical consolidated financial statements of the Company
reflect adjustments for 1998 mergers accounted for as poolings of interests
and differ from consolidated financial statements of the Company as previously
reported.
The historical consolidated financial statements of the Company and the
"FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA" derived from the historical
consolidated financial statements of the Company are set forth elsewhere
herein. This discussion should be read in conjunction with those consolidated
financial statements and selected consolidated financial data and the other
financial information included in this Annual Report.
15
Selected Bank Financial Data
The Company's success is dependent upon the financial performance of the
Banks. The Company, with input from the management of each Bank, establishes
operating goals for each Bank. The following tables summarize selected
financial information for 1998 and 1997 for each of the Banks operated by the
Company.
SELECTED BANK FINANCIAL DATA
(Amounts in thousands, except ratios)
(Unaudited)
December 31, 1998
--------------------------------------------------------------------------------------------------------
National Alabama Citizens & First First First Georgia Community
Bank of Exchange Bank of Peoples American Citizens Gulf Public State Bank of
Commerce Bank Dadeville Bank, N.A. Bank Bank, N.A. Bank Bank Bank Naples, N.A.
-------- -------- --------- ---------- -------- ---------- -------- ------- -------- ------------
Summary of
Operations:
Interest income..... $ 51,527 $ 4,958 $ 5,143 $ 1,621 $ 20,014 $ 6,607 $ 7,945 $ 3,917 $ 9,764 $ 5,415
Interest expense.... 27,550 1,726 2,232 1,110 9,293 3,143 3,397 1,356 4,334 2,657
Net interest
income.............. 23,977 3,232 2,911 511 10,721 3,464 4,548 2,561 5,430 2,758
Provision for loan
losses.............. -- 283 21 183 509 16 387 44 10 343
Securities gains
(losses)............ -- -- 3 -- 28 -- 4 -- -- --
Noninterest
income.............. 19,374 708 747 132 3,505 777 1,329 841 1,644 244
Noninterest
expense............. 29,509 1,932 1,706 882 8,685 2,134 3,953 1,919 4,544 2,353
Net income.......... 9,428 1,186 1,343 (266) 3,665 1,509 1,053 966 1,651 43
Balance Sheet
Highlights:
At Period-End:
Total assets...... $767,245 $66,779 $67,958 $40,007 $268,460 $88,465 $112,453 $57,713 $131,294 $92,639
Securities........ 93,863 21,198 18,076 20,714 30,423 34,189 13,035 13,320 46,075 32,952
Loans, net of
unearned income... 528,176 38,488 43,977 13,503 199,302 46,567 87,756 34,457 72,104 40,365
Allowance for loan
losses............ 8,271 521 467 203 2,982 647 1,100 498 1,245 606
Deposits.......... 482,339 59,938 54,550 35,743 229,682 77,811 98,376 51,860 114,468 73,609
Short-term debt... 5,000 -- 5,200 -- -- -- -- -- 4,550 --
Long-term debt.... 20,244 -- -- -- 10,084 -- -- -- -- 2,000
Stockholders'
equity............ 57,348 6,239 6,055 4,129 23,511 7,711 7,776 5,371 10,062 6,241
Performance Ratios:
Return on average
assets.............. 1.27% 1.76% 2.07% (1.02)% 1.50% 1.69% 1.01% 1.82% 1.33% 0.05%
Return on average
equity.............. 17.44 20.83 22.23 (6.28) 16.64 18.07 14.38 18.71 17.05 0.85
Net interest
margin.............. 3.74 5.27 4.85 2.22 4.87 4.26 4.92 5.23 4.77 3.76
Capital and Liquidiy
Ratios:
Average equity to
average assets...... 7.30 8.44 9.31 16.31 9.03 9.37 7.04 9.71 7.82 6.42
Leverage (4.00%
required minimum)... 7.33 7.80 9.02 11.37 9.00 8.06 7.20 9.55 7.24 7.44
Risk-based capital
Tier 1 (4.00%
required
minimum).......... 9.65 12.47 12.76 20.11 10.59 13.60 8.74 14.92 12.30 13.70
Total (8.00%
required
minimum).......... 10.90 13.72 13.76 21.11 11.84 14.82 9.97 16.17 13.55 14.95
Average loans to
average deposits.... 99.15 58.33 80.68 35.83 91.85 61.46 82.08 66.63 63.62 47.20
16
SELECTED BANK FINANCIAL DATA
(Amounts in thousands, except ratios)
(Unaudited)
December 31, 1997
------------------------------------------------------------------------------------------------------
National Alabama Citizens & First First First Georgia Community
Bank of Exchange Bank of Peoples American Citizens Gulf Public State Bank of
Commerce Bank Dadeville Bank, N.A. Bank Bank, N.A. Bank Bank Bank Naples, N.A.
-------- -------- --------- ---------- -------- ---------- ------- ------- -------- ------------
Summary of Operations:
Interest income...... $ 48,401 $ 3,976 $ 5,144 $ 1,896 $ 20,250 $ 6,842 $ 5,068 $ 3,578 $ 7,774 $ 2,758
Interest expense..... 24,998 1,089 2,205 748 8,686 3,025 2,005 1,168 3,107 1,262
Net interest
income.............. 23,403 2,887 2,939 1,148 11,564 3,817 3,063 2,410 4,667 1,496
Provision for loan
losses.............. -- 10 -- 76 2,811 41 50 60 150 223
Securities gains
(losses)............ -- -- 4 -- (15) 3 -- -- 6 --
Noninterest income... 14,048 425 680 225 1,235 664 645 750 1,353 107
Noninterest
expense............. 25,197 1,715 1,887 1,146 9,528 2,414 2,413 1,880 4,046 1,347
Net income........... 8,215 1,084 1,250 126 792 1,473 808 833 1,610 9
Balance Sheet
Highlights:
At Period-End:
Total assets....... $714,725 $64,563 $62,307 $14,677 $239,931 $89,816 $92,779 $49,187 $100,975 $71,790
Securities......... 103,153 15,634 10,977 8,366 29,041 31,670 15,124 8,505 26,385 16,209
Loans, net of
unearned income... 457,605 33,111 43,028 2,734 188,473 48,936 67,426 30,538 65,341 27,701
Allowance for loan
losses............ 7,398 363 494 20 3,086 715 753 469 1,233 313
Deposits........... 456,843 59,015 51,292 10,354 196,596 78,531 82,253 44,127 87,265 64,601
Short-term debt.... 5,880 -- -- -- 12,500 -- -- -- -- --
Long-term debt..... 10,274 -- 4,200 -- -- -- -- -- -- 2,000
Stockholders'
equity............ 50,247 5,025 5,915 4,328 20,401 8,565 6,730 4,797 8,658 4,685
Performance Ratios:
Return on average
assets.............. 1.30% 2.21% 1.98% 0.49% 0.35% 1.70% 1.26% 1.75% 1.72% 0.02%
Return on average
equity.............. 16.87 23.81 21.34 3.51 3.39 17.93 16.15 18.34 20.33 0.20
Net interest
margin.............. 3.95 6.35 5.07 4.97 5.51 4.80 5.35 5.53 5.49 4.04
Capital and Liquidiy
Ratios:
Average equity to
average assets...... 7.69 9.29 9.28 13.90 10.19 9.47 7.80 9.52 8.47 11.22
Leverage (4.00%
required minimum)... 7.41 7.48 9.16 34.69 8.50 9.27 7.36 9.50 7.90 8.06
Risk-based capital...
Tier 1 (4.00%
required
minimum).......... 9.12 10.09 12.70 69.88 10.15 15.27 9.24 10.80 13.10 15.40
Total (8.00%
required
minimum).......... 10.37 11.03 13.79 70.20 11.40 16.52 10.27 11.80 14.30 16.45
Average loans to
average deposits.... 95.64 70.37 85.08 63.44 93.69 66.86 78.84 67.59 68.89 48.38
17
RESULTS OF OPERATIONS
Year ended December 31, 1998, compared with year ended December 31, 1997
The Company's net income increased by $3.3 million, or 23.1%, to $17.4
million in the year ended December 31, 1998, from $14.1 million in the year
ended December 31, 1997. Return on average assets during 1998 was 1.10%,
compared with 1.05% during 1997, and return on average equity was 13.81%
during 1998, compared with 12.73% during 1997.
Net interest income increased $3.0 million, or 5.4%, to $59.1 million in
1998 from $56.1 million in 1997, as interest income increased by $11.2 million
and interest expense increased $8.2 million. The increase in net interest
income is primarily attributable to a $103.8 million increase in average loans
to $1.0 billion during 1998, from $903.9 million during 1997, as a result of
management emphasis on loan growth. The increase in interest expense is
primarily attributable to an increase in average interest-bearing deposits of
$125.5 million to $1.0 billion in 1998, from $895.9 million in 1997. In
general, loans are the Company's highest yielding earning asset.
The Company's net interest spread and net interest margin were 3.67% and
4.24%, respectively, in 1998, decreasing by 34 and 38 basis points,
respectively, from 1997. These decreases reflect declining yield on average
loans and an increasing cost of interest-bearing liabilities, both
attributable to competition from banks and other financial institutions, a
flattening yield curve, and rate compression from recent reductions in the
prime rate.
The Company recorded a provision for loan losses of $1.8 million during 1998
compared with $3.4 million one year ago. $509,000 of the 1998 provision for
loan losses and $2.8 million of the 1997 provision for loan losses was
recorded at FAB, primarily associated with higher loss experience in FAB's
indirect automobile lending and sub-prime mortgage lending portfolios (which
lending businesses were discontinued during 1997). Management believes that
both loan loss experience and asset quality indicate that the allowance for
loan losses is maintained at an adequate level. The Company's allowance for
loan losses as a percentage of period-end loans was 1.50% at December 31,
1998, compared to 1.54% at December 31, 1997, and the allowance for loan
losses as a percentage of period-end nonperforming assets was 271.6% at
December 31, 1998, compared with 211.0% at December 31, 1997. The Company
experienced net charge-offs of $100,000 in 1998 equating to a ratio of net
charge-offs to average loans of 0.01% compared with net charge-offs of $1.2
million in 1997 equating to a ratio of net charge-offs to average loans of
0.13%. See "--Provision and Allowance for Loan Losses."
Noninterest income, including net securities gains and losses, increased
$9.1 million, or 44.6%, to $29.4 million in 1998, compared with $20.3 million
in 1997. The Company experienced increases in its fee-based divisions
(investment services, trust, and mortgage lending) of $6.3 million, or 54.3%,
to $17.9 million in 1998 from $11.6 million in 1997. Service charges increased
by $660,000, or 10.0%, to $7.3 million in 1998 from $6.6 million in 1997.
Earnings on bank owned life insurance policies totaled $1.2 million in 1998
compared with $39,000 in 1997. These policies were purchased in December of
1997 and, accordingly, 1998's earnings on these policies are substantially
higher as they reflect a full year's earnings. Non-recurring sales of assets
netted $247,000 in 1998 and included a gain of $310,000 resulting from the
sale of a certain portion of FAB's loan portfolio. In 1997, non-recurring
sales of assets included a charge to provide for the consolidation of FAB's
data processing facilities into the existing Company facility and included
losses resulting from abandonment of certain leasehold improvements, which
totaled $499,000. Noninterest expense increased $8.4 million, or 15.8%, to
$61.2 million during 1998, compared with $52.8 million during 1997. See "--
Noninterest Income and Expense."
Income before the provision for income taxes increased $5.3 million, or
26.4%, to $25.5 million in 1998, from $20.2 million in 1997. Net income
increased $3.3 million during 1998.
18
Year ended December 31, 1997, compared with year ended December 31, 1996
The Company's net income increased by $485,000, or 3.6%, to $14.1 million in
the year ended December 31, 1997, from $13.6 million in the year ended
December 31, 1996. Return on average assets during 1997 was 1.05%, compared
with 1.17% during 1996, and return on average equity was 12.73% during 1997,
compared with 14.22% during 1996.
Net interest income increased $5.1 million, or 10.0%, to $56.1 million in
1997 from $51.0 million in 1996, as interest income increased by $11.3 million
and interest expense increased $6.2 million. The increase in net interest
income was primarily attributable to a $107.3 million increase in average
loans to $903.9 million during 1997, from $796.6 million during 1996, as a
result of management emphasis on loan growth. The increase in interest expense
was primarily attributable to an increase in average time deposits of $79.5
million to $491.8 million in 1997, from $412.8 million in 1996. All other
funding sources increased a total of $43.8 million, or 8.8% from 1996 to 1997.
The Company's net interest spread and net interest margin were 4.01% and
4.62%, respectively, in 1997, decreasing by 12 and 13 basis points,
respectively, from 1996. These decreases reflected the Company's operation in
competitive loan and deposit markets.
The Company recorded a provision for loan losses of $3.4 million during
1997, compared with a provision for loan losses of $1.0 million during 1996,
an increase of $2.4 million, or 230.5%, resulting from higher loss experience
at FAB in its indirect automobile lending and sub-prime mortgage lending
portfolios, both of which were discontinued in 1997. The Company's allowance
for loan losses as a percentage of period-end loans was 1.54% at December 31,
1997, compared to 1.45% at December 31, 1996, and the allowance for loan
losses as a percentage of period-end nonperforming assets was 211.0% at
December 31, 1997, compared with 301.3% at December 31, 1996. The Company
experienced net charge-offs of $1.2 million in 1997 equating to a ratio of net
charge-offs to average loans of 0.13%. See "-- Provision and Allowance for
Loan Losses."
Noninterest income, including securities gains and losses, increased $1.2
million, or 6.1%, to $20.3 million in 1997, compared with $19.1 million in
1996. The increase was attributable to steady growth in all fee-based business
lines of the Company. Noninterest expense increased $2.6 million, or 5.2%, to
$52.8 million in 1997 from $50.2 million in 1996.
Income before the provision for income taxes increased $1.3 million, or
6.8%, to $20.2 million in 1997, from $18.9 million in 1996. Income before
minority interest in earnings of consolidated subsidiary and net income
increased $483,000 and $485,000, respectively, during 1997.
Net Interest Income
The largest component of the Company's net income is its net interest income
- -- the difference between the interest income earned on assets and interest
paid on deposits and borrowed funds used to support its assets. Net interest
income is determined by the yield earned on the Company's earning assets and
rates paid on its interest-bearing liabilities, the relative amounts of
earning assets and interest-bearing liabilities and the maturity and repricing
characteristics of its earning assets and interest-bearing liabilities. Net
interest income divided by average earning assets represents the Company's net
interest margin.
Average Balances, Income, Expenses and Rates
The following table depicts, on a taxable equivalent basis for the periods
indicated, certain information related to the Company's average balance sheet
and its average yields on assets and average costs of liabilities. Such yields
or costs are derived by dividing income or expense by the average daily
balances of the associated assets or liabilities.
19
AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
(Amounts in thousands, except yields and rates)
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
---------- -------- ------ ---------- -------- ------ ---------- ------- ------
ASSETS:
-------
Earning assets:
Loans(1)(3)............ $1,007,695 $ 92,343 9.16% $ 903,930 $ 85,549 9.46% $ 796,556 $76,664 9.62%
Securities:
Taxable................ 273,782 17,213 6.29 213,533 13,829 6.48 197,120 12,488 6.34
Tax exempt............. 33,182 2,510 7.56 32,939 2,628 7.98 29,246 2,255 7.71
Cash balances in other
banks................. 2,019 106 5.25 1,042 55 5.28 4,060 240 5.91
Funds sold............. 75,039 4,256 5.67 59,683 3,353 5.62 44,653 2,263 5.07
Trading account
securities............ 4,352 264 6.07 3,488 193 5.53 2,814 183 6.50
---------- -------- ---------- -------- ---------- -------
Total earning
assets(2)............ 1,396,069 116,692 8.36 1,214,615 105,607 8.69 1,074,449 94,093 8.76
---------- -------- ---------- -------- ---------- -------
Cash and due from
banks.................. 56,529 49,004 42,261
Premises and equipment.. 37,404 35,142 33,717
Other assets............ 108,715 55,822 28,798
Allowance for loan
losses................. (15,608) (13,329) (12,081)
---------- ---------- ----------
Total assets.......... $1,583,109 $1,341,254 $1,167,144
========== ========== ==========
LIABILITIES:
------------
Interest-bearing
liabilities:
Interest-bearing
transaction accounts.. $ 167,034 4,271 2.56 $ 141,830 3,703 2.61 $ 163,873 5,017 3.06
Savings and money
market deposits....... 313,254 11,678 3.73 262,356 9,509 3.62 225,579 7,834 3.47
Time deposits.......... 541,142 30,466 5.63 491,751 27,477 5.59 412,280 23,231 5.63
Funds purchased........ 127,856 6,807 5.32 85,956 4,491 5.22 71,660 3,624 5.06
Other short-term
borrowings............ 26,323 1,613 6.13 43,988 2,712 6.17 29,980 2,064 6.88
Long-term debt......... 30,548 1,720 5.63 8,583 487 5.67 7,831 404 5.16
---------- -------- ---------- -------- ---------- -------
Total interest-bearing
liabilities.......... 1,206,157 56,555 4.69 1,034,464 48,379 4.68 911,203 42,174 4.63
---------- -------- ---------- -------- ---------- -------
Demand deposits........ 192,427 162,081 145,680
Accrued interest and
other liabilities..... 58,696 33,827 14,398
Stockholders' equity... 125,829 110,882 95,863
---------- ---------- ----------
Total liabilities and
stockholders'
equity............... $1,583,109 $1,341,254 $1,167,144
========== ========== ==========
Net interest spread..... 3.67% 4.01% 4.13%
==== ==== ====
Net interest
income/margin on a
taxable equivalent
basis.................. 60,137 4.31% 57,228 4.71% 51,919 4.83%
==== ==== ====
Tax equivalent
adjustment(2).......... 988 1,099 915
-------- -------- -------
Net interest
income/margin.......... $ 59,149 4.24% $ 56,129 4.62% $51,004 4.75%
======== ==== ======== ==== ======= ====
- --------
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments are based on the assumed rate of 34%, and do
not give effect to the disallowance for Federal income tax purposes of
interest expense related to certain tax-exempt assets.
(3) Fees in the amount of $3,273,000, $3,244,000, and $2,943,000 are included
in interest and fees on loans for 1998, 1997, and 1996, respectively.
20
During 1998, the Company experienced an increase in net interest income of
$3.0 million, or 5.4%, to $59.1 million, compared with $56.1 million in 1997.
Net interest income increased despite a decrease in the net interest spread of
34 basis points to 3.67% in 1998 from 4.01% in 1997, and a decrease in the net
interest margin of 38 basis points to 4.24% in 1998, compared with 4.62% in
1997. Because the relative yield on loans exceeds that of all other earning
assets, the primary reason for the increased net interest income was a 11.5%
increase in average loan volume. The primary reason for the decrease in the
net interest spread and net interest margin was "spread-compression" resulting
from, generally, lower rates on loans, and higher rates on marginal funding
sources, such as time deposits, and Federal funds purchased, as well as an
increase in higher cost time deposits as a percentage of total deposits, which
are among the highest cost funding sources available to the Company. During
1998, net average earning assets increased by $181.5 million, or 14.9%, to
$1.40 billion from $1.21 billion in 1997. The major components of this
increase included average loans which increased $103.8 million, or 11.5%, to
$1.01 billion in 1998 from $903.9 million in 1997, and securities which
increased $60.5 million, or 24.5%, to $307.0 million in 1998 from $246.5
million in 1997.
Analysis of Changes in Net Interest Income
The following table sets forth, on a taxable equivalent basis, the effect
that varying levels of earning assets and interest-bearing liabilities and the
applicable rates had on changes in net interest income for 1998 and 1997. For
the purposes of this table, changes which are not solely attributable to
volume or rate are allocated to volume and rate on a pro rata basis.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Amounts in thousands)
December 31,
--------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
Variance Due to Variance Due to
--------------------------- ---------------------------
Volume Yield/Rate Total Volume Yield/Rate Total
------- ---------- ------- ------- ---------- -------
Earning assets:
Loans................... $ 9,573 $(2,779) $ 6,794 $10,178 $(1,293) $ 8,885
Securities:
Taxable............... 3,801 (417) 3,384 1,060 281 1,341
Tax exempt............ 19 (137) (118) 292 81 373
Cash balances in other
banks.................. 51 -- 51 (161) (24) (185)
Funds sold.............. 873 30 903 824 266 1,090
Trading account
securities............. 51 20 71 40 (30) 10
------- ------- ------- ------- ------- -------
Total interest
income............. 14,368 (3,283) 11,085 12,233 (719) 11,514
Interest-bearing
liabilities:
Interest-bearing
transaction accounts... 641 (73) 568 (628) (686) (1,314)
Savings and money market
deposits............... 1,875 294 2,169 1,324 351 1,675
Time deposits........... 2,790 199 2,989 4,413 (167) 4,246
Funds purchased......... 2,228 88 2,316 748 119 867
Other short-term
borrowings............. (1,081) (18) (1,099) 880 (232) 648
Long-term debt.......... 1,236 (3) 1,233 41 42 83
------- ------- ------- ------- ------- -------
Total interest
expense............ 7,689 487 8,176 6,778 (573) 6,205
------- ------- ------- ------- ------- -------
Net interest income
on a taxable
equivalent basis... $ 6,679 $(3,770) 2,909 $ 5,455 $ (146) 5,309
======= ======= ======= =======
Taxable equivalent
adjustment............. 111 (184)
------- -------
Net interest income..... $ 3,020 $ 5,125
======= =======
21
Interest Sensitivity and Market Risk
Interest Sensitivity
The Company monitors and manages the pricing and maturity of its assets and
liabilities in order to diminish the potential adverse impact that changes in
interest rates could have on net interest income. The principal monitoring
technique employed by the Company is the measurement of the interest
sensitivity "gap," which is the positive or negative dollar difference between
assets and liabilities that are subject to interest rate repricing within a
given period of time. Interest rate sensitivity can be managed by repricing
assets and liabilities, selling securities available for sale, replacing an
asset or liability at maturity or by adjusting the interest rate during the
life of an asset or liability.
The Company evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation and repricing, and sources and prices of
off-balance sheet commitments in order to decrease interest sensitivity risk.
The Company uses computer simulations to measure the net income effect of
various interest rate scenarios. The modeling reflects interest rate changes
and the related impact on net income over specified periods of time.
The following table illustrates the Company's interest rate sensitivity at
December 31, 1998, assuming the relevant assets and liabilities are collected
and paid, respectively, based upon historical experience rather than their
stated maturities.
INTEREST SENSITIVITY ANALYSIS
(Amounts in thousands, except ratios)
December 31, 1998
-------------------------------------------------------------------
After One After Three
Within Through Through Greater
One Three Twelve Within One Than One
Month Months Months Year Year Total
-------- --------- ----------- ---------- -------- ----------
ASSETS:
-------
Earning assets:
Loans(1).............. $466,784 $ 97,510 $ 177,025 $ 741,319 $360,398 $1,101,717
Securities(2)......... 20,458 30,020 103,166 153,644 169,074 322,718
Interest-bearing
deposits in other
banks................ 225 -- -- 225 -- 225
Funds sold............ 57,076 -- -- 57,076 -- 57,076
-------- -------- --------- ---------- -------- ----------
Total interest-
earning assets...... $544,543 $127,530 $ 280,191 $ 952,264 $529,472 $1,481,736
LIABILITIES:
------------
Interest-bearing
liabilities:
Interest-bearing
deposits:
Demand deposits...... $ -- $ -- $ 187,481 $ 187,481 $ -- $ 187,481
Savings and money
market deposits..... 298,817 -- -- 298,817 -- 298,817
Time deposits(3)..... 62,166 118,530 283,877 464,573 91,854 556,427
Funds purchased....... 158,083 158,083 158,083
Short-term
borrowings(4)........ 18,556 9,200 27,756 27,756
Long-term debt........ 2 4 18 24 32,304 32,328
-------- -------- --------- ---------- -------- ----------
Total interest-
bearing
liabilities......... $537,624 $127,734 $ 471,376 $1,136,734 $124,158 $1,260,892
-------- -------- --------- ---------- -------- ----------
Period gap.............. $ 6,919 $ (204) $(191,185) $ (184,470) $405,314
======== ======== ========= ========== ========
Cumulative gap.......... $ 6,919 $ 6,715 $(184,470) $ (184,470) $220,844 $ 220,844
======== ======== ========= ========== ======== ==========
Ratio of cumulative gap
to total earning
assets................. 0.47% 0.45% (12.45)% (12.45)% 14.90%
22
- --------
(1) Excludes nonaccrual loans of $4,357,000.
(2) Excludes investment equity securities with a market value of $7,029,000.
(3) Excludes matured certificates which have not been redeemed by the customer
and on which no interest is accruing.
(4) Includes treasury, tax and loan account of $1,506,000.
The Company generally benefits from increasing market rates of interest when
it has an asset-sensitive gap and generally benefits from decreasing market
interest rates when it is liability sensitive. The Company is liability
sensitive throughout one year after one month. The analysis presents only a
static view of the timing and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of core
deposits may change contractually within a relatively short time frame, but
those are viewed by management as significantly less interest sensitive than
market-based rates such as those paid on non-core deposits. Accordingly,
management believes that a liability-sensitive gap position is not as
indicative of the Company's true interest sensitivity as it would be for an
organization which depends to a greater extent on purchased funds to support
earning assets. Net interest income may be impacted by other significant
factors in a given interest rate environment, including changes in the volume
and mix of earning assets and interest-bearing liabilities.
Market Risk
The Company's earnings are dependent on its net interest income which is the
difference between interest income earned on all earning assets, primarily
loans and securities, and interest paid on all interest bearing liabilities,
primarily deposits. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
inherent interest rate risk in its lending, investing and deposit gathering
activities. The Company seeks to reduce its exposure to market risk through
actively monitoring and managing its interest rate risk. Management relies
upon static "gap" analysis to determine the degree of mismatch in the maturity
and repricing distribution of interest earning assets and interest bearing
liabilities which quantifies, to a large extent, the degree of market risk
inherent in the Company's balance sheet. Gap analysis is further augmented by
simulation analysis to evaluate the impact of varying levels of prevailing
interest rates and the sensitivity of specific earning assets and interest
bearing liabilities to changes in those prevailing rates. Simulation analysis
consists of evaluating the impact on net interest income given changes from
200 basis points below to 200 basis points above the current prevailing rates.
Management makes certain assumptions as to the effect varying levels of
interest rates have on certain earning assets and interest bearing
liabilities, which assumptions consider both historical experience and
consensus estimates of outside sources.
With respect to the primary earning assets, loans and securities, certain
features of individual types of loans and specific securities introduce
uncertainty as to their expected performance at varying levels of interest
rates. In some cases, imbedded options exist whereby the borrower may elect to
repay the obligation at any time. These imbedded prepayment options make
anticipating the performance of those instruments difficult given changes in
prevailing rates. At December 31, 1998, mortgage backed securities totaling
$183.0 million, or 10.9% of total assets and essentially every loan, net of
unearned income, (totaling $1.11 billion, or 66.2% of total assets), carry
such imbedded options. Management believes that assumptions used in its
simulation analysis about the performance of financial instruments with such
imbedded options are appropriate. However, the actual performance of these
financial instruments may differ from management's estimates due to several
factors, including the diversity and sophistication of the customer base, the
general level of prevailing interest rates and the relationship to their
historical levels, and general economic conditions. The difference between
those assumptions and actual results, if significant, could cause the actual
results to differ from those indicated by the simulation analysis.
Deposits totaled $1.28 billion, or 76.3% of total assets, at December 31,
1998. Since deposits are the primary funding source for earning assets, the
associated market risk is considered by management in its simulation analysis.
Generally, it is anticipated that deposits will be sufficient to support
funding requirements.
23
However, the rates paid for deposits at varying levels of prevailing interest
rates have a significant impact on net interest income and therefore, must be
quantified by the Company in its simulation analysis. Specifically, the
Company's spread, the difference between the rates earned on earning assets
and rates paid on interest bearing liabilities, is generally higher when
prevailing rates are higher. As prevailing rates reduce, the spread tends to
compress, with severe compression at very low prevailing interest rates. This
characteristic is called "spread compression" and adversely effects net
interest income in the simulation analysis when anticipated prevailing rates
are reduced from current rates. Management relies upon historical experience
to estimate the degree of spread compression in its simulation analysis.
Management believes that such estimates of possible spread compression are
reasonable. However, if the degree of spread compression varies from that
expected, the actual results could differ from those indicated by the
simulation analysis.
The following table illustrates the results of simulation analysis used by
the Company to determine the extent to which market risk would have effected
the net interest margin if prevailing interest rates differed from actual
rates during 1998 and 1997. Because of the inherent use of estimates and
assumptions in the simulation model used to derive this information, the
actual results for 1998 and, certainly, the future impact of market risk on
the Company's net interest margin, may differ from that found in the table.
MARKET RISK
(Amounts in thousands)
Year ended December 31, 1998 Year ended December 31, 1997
Change in --------------------------------- ---------------------------------
Prevailing Net Interest Change from Net Interest Change from
Interest Rates Income Amount Income Amount Income Amount Income Amount
- -------------- --------------- -------------- --------------- --------------
+200 basis points....... $ 63,238 6.91% $ 59,813 6.56%
+100 basis points....... 61,194 3.46 57,971 3.28
0 basis points.......... 59,149 -- 56,129 --
- -100 basis points....... 57,063 (3.53) 54,146 (3.53)
- -200 basis points....... 54,977 (7.05) 52,158 (7.07)
Provision and Allowance for Loan Losses
The Company has policies and procedures for evaluating the overall credit
quality of its loan portfolio including timely identification of potential
problem credits. On a monthly basis, management reviews the appropriate level
for the allowance for loan losses based on the results of the internal
monitoring and reporting system, analysis of economic conditions in its
markets and a review of historical statistical data, current trends regarding
the volume and severity of past due and problem loans and leases, the
existence and effect of concentrations of credit, and changes in national and
local economic conditions for both the Company and other financial
institutions. Also considered in management's evaluation of the adequacy of
the allowance for loan losses are the results of regulatory examinations
conducted for each bank, including evaluation of the Company's policies and
procedures and findings from the Company's independent loan review department.
The provision for loan losses decreased by $1.6 million, or 47.5%, to $1.8
million in 1998 from $3.4 million in 1997. Due to an increase during 1997 in
the loss experience in FAB's indirect automobile lending and sub-prime lending
portfolios, management deemed it prudent to increase FAB's provision for loan
losses during 1997. These indirect automobile lending and sub-prime mortgage
lending businesses were discontinued in late 1997, and management believes the
allowance for loan losses, at its current level, adequately covers the
Company's exposure to loan losses.
Management's judgment as to the adequacy of the allowance for loan losses is
also based upon assumptions about future events which it believes to be
reasonable. These assumptions include consistent application of sound
underwriting standards, continued low turnover among lending staff, general
economic conditions including stable interest rates, and stable levels of
nonperforming loans. Should these assumptions change, there is no assurance
that charge-offs in future periods will not exceed the allowance for loan
losses or that additional loan loss provisions will not be required.
24
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance for loan losses at an appropriate level
as determined by management. Loan losses and recoveries are charged or
credited directly to the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
(Amounts in thousands, except percentages)
Year ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
Total loans outstanding at
end of period, net of
unearned income.......... $1,106,074 $966,370 $868,307 $745,961 $482,639
========== ======== ======== ======== ========
Average amount of loans
outstanding, net of
unearned income.......... $1,007,695 $903,930 $796,556 $512,739 $439,216
========== ======== ======== ======== ========
Allowance for loan losses
at beginning of period... $ 14,844 $ 12,633 $ 11,621 $ 7,597 $ 8,418
Charge-offs:
Commercial, financial
and agricultural....... 418 516 809 1,247 3,316
Real estate--mortgage... 200 531 160 454 282
Consumer................ 1,246 1,880 1,027 543 366
---------- -------- -------- -------- --------
Total charge-offs..... 1,864 2,927 1,996 2,244 3,964
---------- -------- -------- -------- --------
Recoveries:
Commercial, financial
and agricultural....... 1,012 1,068 1,525 1,294 715
Real estate--mortgage... 296 200 152 296 125
Consumer................ 456 449 296 383 306
---------- -------- -------- -------- --------
Total recoveries...... 1,764 1,717 1,973 1,973 1,146
---------- -------- -------- -------- --------
Net charge-offs....... 100 1,210 23 271 2,818
Provision for loan
losses................... 1,796 3,421 1,035 1,171 1,770
Changes incidental to
acquisitions............. -- -- -- 3,124 227
---------- -------- -------- -------- --------
Allowance for loan losses
at period-end............ $ 16,540 $ 14,844 $ 12,633 $ 11,621 $ 7,597
========== ======== ======== ======== ========
Allowance for loan losses
to period-end loans...... 1.50% 1.54% 1.45% 1.56% 1.57%
Net charge-offs to average
loans ................... 0.01 0.13 0.00 0.05 0.64
Allocation of Allowance
There is no formal allocation of the allowance for loan losses by loan
category.
25
Nonperforming Assets
The following table presents the Company's nonperforming assets for the
dates indicated.
NONPERFORMING ASSETS
(Amounts in thousands, except percentages)
At December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Nonaccrual loans...................... $4,357 $4,228 $2,735 $2,843 $1,570
Restructured loans.................... 499 1,052 605 949 297
Loans past due 90 days or more and
still accruing....................... -- -- 9 126 --
------ ------ ------ ------ ------
Total nonperforming loans........... 4,856 5,280 3,349 3,918 1,867
Other real estate owned............... 1,234 1,756 842 780 883
------ ------ ------ ------ ------
Total nonperforming assets.......... $6,090 $7,036 $4,191 $4,698 $2,750
====== ====== ====== ====== ======
Allowance for loan losses to period-
end loans............................ 1.50% 1.54% 1.45% 1.56% 1.57%
Allowance for loan losses to period-
end nonperforming loans.............. 340.61 281.14 377.22 296.61 406.91
Allowance for loan losses to period-
end nonperforming assets............. 271.59 210.97 301.43 247.36 276.25
Net charge-offs to average loans...... 0.01 0.13 0.00 0.05 0.64
Nonperforming assets to period-end
loans and foreclosed property........ 0.55 0.73 0.48 0.63 0.57
Nonperforming loans to period-end
loans................................ 0.44 0.55 0.39 0.53 0.39
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts,
that the borrower's financial condition is such that collection of interest is
doubtful. A delinquent loan is generally placed on nonaccrual status when it
becomes 90 days or more past due. When a loan is placed on nonaccrual status,
all interest which is accrued on the loan is reversed and deducted from
earnings as a reduction of reported interest. No additional interest is
accrued on the loan balance until collection of both principal and interest
becomes reasonably certain. When a problem loan is finally resolved, there may
ultimately be an actual writedown or charge-off of the principal balance of
the loan which would necessitate additional charges to the allowance for loan
losses. During the years ending December 31, 1998, 1997 and 1996,
approximately $384,000, $371,000, and $279,000, respectively, in additional
interest income would have been recognized in earnings if the Company's
nonaccrual loans had been current in accordance with their original terms.
Total nonperforming assets decreased $946,000 to $6.1 million at December
31, 1998, from $7.0 million at December 31, 1997. The allowance for loan
losses to period-end nonperforming assets was 271.59% at December 31, 1998,
compared with 210.97% at December 31, 1997. This ratio will generally
fluctuate from period to period depending upon nonperforming asset levels at
period end. The nonperforming assets decreased at year end 1998 compared with
1997 primarily due to the discontinuance of new originations in the indirect
automobile and sub-grade mortgage loan portfolios at FAB.
26
Potential Problem Loans
A potential problem loan is one that management has serious doubts as to the
borrower's future performance under terms of the loan contract. These loans
are current as to principal and interest, and accordingly, they are not
included in the nonperforming asset categories. Management monitors these
loans closely in order to ensure that the Company's interests are protected.
At December 31, 1998, the Company had certain loans considered by management
to be potential problem loans totaling $25.4 million. The level of potential
problem loans is factored into the determination of the adequacy of the
allowance for loan losses.
Noninterest Income and Expense
Noninterest income
The Company relies on four distinct product lines for the production of
recurring noninterest income: traditional retail and commercial banking and
operating segments including mortgage banking, trust services and investment
services. Combined fees associated with these product lines totaled $25.2
million in 1998, compared with $18.2 million in 1997, an increase of $7.0
million, or 38.3%. Non-recurring gains netted $247,000 in 1998 resulting
primarily from the gain on sale of certain portions of FAB's loan portfolio in
early 1998 totaling $391,000 and in 1997 non-recurring losses totaled
$499,000, resulting from a charge to provide for the consolidation of FAB's
data processing facility into the existing Company facility and by losses
resulting from the abandonment of certain leasehold improvements.
The following table sets forth, for the periods indicated, the principal
components of noninterest income.
NONINTEREST INCOME
(Amounts in thousands)
Year ended December 31,
------------------------
1998 1997 1996
------- ------- -------
Service charges on deposit accounts................... $ 7,259 $ 6,599 $ 6,238
Investment services income............................ 11,508 8,162 7,889
Trust fees............................................ 2,101 1,799 1,550
Origination and sale of mortgage loans................ 4,303 1,644 1,187
Gain on disposal of assets and deposits............... 247 (497) 148
Securities gains (losses)............................. 174 (2) (84)
Bank owned life insurance............................. 1,167 39 35
Other................................................. 2,591 2,550 2,167
------- ------- -------
Total noninterest income.......................... $29,350 $20,294 $19,130
======= ======= =======
27
Noninterest Expense
The following table sets forth, for the periods indicated, the principal
components of noninterest expense.
NONINTEREST EXPENSE
(Amounts in thousands)
Year ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
Salaries and employee benefits......................... $36,021 $29,992 $28,756
Net occupancy expense.................................. 6,724 6,623 6,481
Amortization of goodwill............................... 302 298 305
Advertising............................................ 976 1,445 1,218
Banking assessments.................................... 298 411 1,090
Data processing expenses............................... 2,435 2,151 1,770
Legal and professional fees............................ 3,609 1,947 2,057
Non-credit losses (recoveries)......................... 129 283 (24)
Other.................................................. 10,660 9,638 8,522
------- ------- -------
Total noninterest expense............................ $61,154 $52,788 $50,175
======= ======= =======
Salaries and employee benefits increased $6.0 million, or 20.1%, in 1998.
Revenue in the investment services and mortgage lending divisions increased
significantly during 1998, and compensation of employees in these areas is
largely commission based.
Noninterest expenses increased $8.4 million, or 15.8%, to $61.2 million in
1998, from $52.8 million in 1997. Advertising decreased by $469,000, or 32.5%,
to $976,000 in 1998, from $1.4 million in 1997. Data processing fees increased
$284,000, or 13.2%, in 1998 to $2.4 million, in part, due to approximately
$300,000 in conversion costs related to the mergers completed by the Company
in 1998, part of which was offset by operating cost reductions attributable to
consolidation of data processing operations. Legal and professional fees,
$3.6 million in 1998, increased $1.7 million, or 85.4%, from $1.9 million in
1997 as a result of costs associated with mergers completed during 1998.
The 1996 banking assessment amount includes a one-time charge of $677,000
relating to recapitalization of the SAIF fund through a FDIC assessment.
Investment Services
The following table sets forth, for the periods indicated, the summary of
operations for the investment services departments of the Company:
INVESTMENT SERVICES DIVISION
(Amounts in thousands)
Year ended December
31,
---------------------
1998 1997 1996
------- ------ ------
Investment services revenue.............................. $11,508 $8,162 $7,889
Other revenue............................................ 1,409 1,311 1,354
------- ------ ------
Total investment revenue............................... 12,917 9,473 9,243
Expenses and allocated charges........................... 10,500 8,479 8,551
------- ------ ------
Net investment services revenue........................ $ 2,417 $ 994 $ 692
======= ====== ======
28
National Bank of Commerce of Birmingham ("NBC") operates an investment
department devoted primarily to handling correspondent banks' investment
needs. NBC has a wholly owned subsidiary, NBC Securities, Inc. ("NBC
Securities"), that is licensed as a broker-dealer. Together, NBC's investment
department and NBC Securities comprise the Investment Service Division.
Investment services revenues consist primarily of commission income from the
sale of investment securities. Investment services revenues increased $3.3
million, or 41.0%, to $11.5 million in 1998 from $8.2 million in 1997,
primarily as a result continued favorable market conditions. Investment
services revenues increased $273,000, or 3.5%, to $8.2 million in 1997 from
$7.9 million in 1996. Other investment services revenue consists of interest
and dividends on trading assets and fee based services including
asset/liability consulting, bond accounting and security safekeeping. These
results include certain income and expense items that are allocated by
management to the investment services areas of the Company.
These results are not necessarily the same as would be expected if these
activities were conducted by a stand-alone entity because certain corporate
overhead expenses are not allocated directly to this division.
Trust Division
The following table sets forth, for the periods indicated, the summary of
operations for the trust division of the Company:
TRUST DIVISION
(Amounts in thousands)
Year ended December
31,
--------------------
1998 1997 1996
------ ------ ------
Trust division income..................................... $2,101 $1,799 $1,550
Expenses and allocated charges............................ 1,169 1,105 1,175
------ ------ ------
Net trust division revenue.............................. $ 932 $ 694 $ 375
====== ====== ======
Trust division income increased $302,000, or 16.8%, to $2.1 million in 1998
from $1.8 million in 1997 due to new customer relationships and growth of
existing assets managed. Similar conditions resulted in a 16.1% increase in
trust department fees to $1.8 million in 1997 from $1.6 million in 1996.
Despite the increase in Trust division income, Trust division expenses and
allocated charges decreased 6.0% in 1997 versus 1996, from $1.2 million to
$1.1 million
These results are not necessarily the same as would be expected if these
activities were conducted by a stand-alone entity because certain corporate
overhead expenses are not allocated directly to this division.
29
Mortgage Lending Division
The following table sets forth, for the periods indicated, the summary of
operations for the mortgage lending division of the Company.
MORTGAGE LENDING DIVISION
(Amounts in thousands)
Year ended December
31,
--------------------
1998 1997 1996
------ ------ ------
Origination and sale of mortgage loans................. $4,303 $1,644 $1,187
Interest income........................................ 474 545 293
------ ------ ------
Total revenue........................................ 4,777 2,189 1,480
Expenses and allocated charges......................... 2,635 1,643 1,010
------ ------ ------
Net mortgage lending division revenue................ $2,142 $ 546 $ 470
====== ====== ======
Fees charged in connection with the origination and resale of mortgage loans
totaled $4.3 million in 1998 and $1.6 million in 1997, an increase of $2.7
million, or 161.7%, resulting from a favorable interest rate environment,
staff additions, and expansion of services into different geographic areas
serviced by the Company. Expenses and allocated charges in the mortgage
lending division grew 60.4% to $2.6 million in 1998 from $1.6 million in 1997,
an increase if $992,000. In spite of this 60.4% increase, these expenses grew
at a lower rate than revenues as a result of more efficient operations and
leveraging the available fixed cost structure.
These results are not necessarily the same as would be expected if these
activities were conducted by a stand-alone entity because certain corporate
overhead expenses are not allocated directly to this division.
Earning Assets
Loans
Loans are the largest category of earning assets and typically provide
higher yields than the 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. Loans averaged $1.01
billion in 1998 compared to $903.9 million in 1997, an increase of $103.8
million, or 11.5%. At December 31, 1998, total loans, net of unearned income,
were $1.11 billion compared to $966.4 million at the end of 1997, an increase
of $139.7 million, or 14.5%.
30
The growth in the Company's loan portfolio is attributable to general
economic conditions that resulted in increased loan demand from existing
customers and the Company's ability to attract new customers while maintaining
consistent underwriting standards. The following table details the composition
of the loan portfolio by category at the dates indicated.
COMPOSITION OF LOAN PORTFOLIO
(Amounts in thousands, except percentages)
December 31,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
---------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Commercial and
financial.............. $ 257,409 23.24% $208,666 21.55% $203,616 23.33% $177,906 23.68% $124,145 25.58%
Real estate:
Construction........... 74,024 6.68 72,166 7.45 62,628 7.18 47,313 6.30 36,281 7.48
Mortgage--residential.. 310,691 28.06 294,686 30.42 266,659 30.54 213,244 28.38 105,526 21.75
Mortgage--commercial... 291,437 26.32 253,338 26.16 206,393 23.65 195,856 26.07 150,981 31.11
Mortgage--other........ 2,215 .20 2,299 .24 3,627 .42 4,407 .59 1,508 .31
Consumer................ 77,187 6.97 89,971 9.29 94,888 10.87 93,163 12.40 57,056 11.76
Other................... 94,509 8.53 47,346 4.89 35,005 4.01 19,415 2.58 9,768 2.01
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total gross loans...... 1,107,472 100.00% 968,472 100.00% 872,816 100.00% 751,304 100.00% 485,265 100.00%
====== ====== ====== ====== ======
Unearned income......... (1,398) (2,102) (4,509) (5,343) (2,626)
---------- -------- -------- -------- --------
Total loans, net of
unearned income....... 1,106,074 966,370 868,307 745,961 482,639
Allowance for loan
losses................. (16,540) (14,844) (12,633) (11,621) (7,597)
---------- -------- -------- -------- --------
Total net loans........ $1,089,534 $951,526 $855,674 $734,340 $475,042
========== ======== ======== ======== ========
In the context of this discussion, a "real estate mortgage loan" is defined
as any loan, other than loans for construction purposes, secured by real
estate, regardless of the purpose of the loan. It is common practice for
financial institutions in the Company's market areas to obtain a security
interest or lien in real estate whenever possible, in addition to any other
available collateral. This collateral is taken to reinforce the likelihood of
the ultimate repayment of the loan and tends to increase the magnitude of the
real estate loan portfolio component.
The principal component of the Company's loan portfolio is real estate
mortgage loans. At year-end 1998, this category totaled $678.4 million and
represented 61.3% of the total loan portfolio, compared to $622.5 million, or
64.3%, of the total loan portfolio, at year-end 1997.
Commercial mortgage loans increased $38.1 million, or 15.0%, to $291.4
million at December 31, 1998. Residential mortgage loans increased $16.0
million, or 5.4%, to $310.7 million at December 31, 1998, compared with $294.7
million at December 31, 1997.
The growth of commercial and financial loans totaled $48.7 million, or
23.4%, in 1998, reflecting management emphasis on the wholesale commercial
loan market.
Consumer loans decreased $12.8 million, or 14.2%, during 1998 to $77.2
million from $90.0 million in 1997 as a result of reduced emphasis on certain
areas of consumer lending (such as indirect automobile loans).
Other categories of loans increased $47.2 million, or 99.6% to $94.5 million
during 1998 as a result of growth in margin lending in the investment services
division, which are fully secured by marketable securities, and leases from a
newly organized leasing division of the Company. The Company engages in no
foreign lending operations.
31
The repayment of loans is a source of additional liquidity for the Company.
The following table sets forth the Company's loans maturing within specific
intervals at December 31, 1998.
LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
(Amounts in thousands)
December 31, 1998
----------------------------------------
Over one year Over
One year through five five
or less years years Total
-------- ------------- -------- --------
Commercial, financial and
agricultural........................ $162,871 $ 86,177 $ 8,361 $257,409
Real estate--construction............ 59,344 10,631 4,050 74,025
Real estate--residential............. 52,051 91,161 167,479 310,691
Real estate--commercial.............. 77,017 137,803 76,617 291,437
Consumer............................. 22,420 53,343 1,424 77,187
Predetermined Floating
Rates Rates
------------- --------
Maturing after one year but within five years........ $257,467 $121,648
Maturing after five years............................ 75,498 182,433
-------- --------
$332,965 $304,081
======== ========
The information presented in the above table is based upon 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.
Securities
Securities, including securities classified as held to maturity (or
investment securities) and available for sale, represent a significant portion
of the Company's earning assets. Securities averaged $307.0 million during
1998, compared with $246.5 million during 1997, an increase of $60.5 million,
or 24.5%. Growth in the securities portfolio is generally a function of growth
in funding sources net of lending opportunities. At December 31, 1998, the
securities portfolio totaled $324.2 million, including securities held to
maturity with an amortized cost of $34.6 million and securities available for
sale with a market value of $289.6 million.
32
The following tables set forth the carrying value of securities held by the
Company at the dates indicated.
INVESTMENT SECURITIES
(Amounts in thousands)
December 31,
-----------------------------------
1998 1997
----------------- -----------------
Cost Market Cost Market
-------- -------- -------- --------
U.S. Treasury Securities................ $ 2,607 $ 2,518 $ 8,992 $ 9,026
U.S. Government Agencies................ 787 792 3,066 3,068
State and political subdivisions........ 9,673 10,087 10,067 10,431
Mortgage backed securities.............. 21,588 21,817 43,893 44,006
-------- -------- -------- --------
Total............................... $ 34,655 $ 35,214 $ 66,018 $ 66,531
======== ======== ======== ========
AVAILABLE FOR SALE SECURITIES
(Amounts in thousands)
December 31,
-----------------------------------
1998 1997
----------------- -----------------
Cost Market Cost Market
-------- -------- -------- --------
U.S. Treasury........................... $ 8,624 $ 8,724 $ 14,063 $ 14,123
U.S. Government Agencies................ 86,130 85,986 67,385 67,474
State and political subdivisions........ 25,659 26,377 25,344 25,882
Mortgage backed securities.............. 160,589 161,442 83,955 84,197
Other................................... 7,090 7,029 7,470 7,408
-------- -------- -------- --------
Total............................... $288,092 $289,558 $198,217 $199,084
======== ======== ======== ========
33
The following tables show the scheduled maturity and average yields of
securities owned by the Company at December 31, 1998.
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
(Amounts in thousands, except yields)
December 31, 1998
------------------------------------------------------------------------------------
After one but
Within five After five but
Within one year years Within ten years After ten years Other securities
---------------- ---------------- ---------------- --------------- -----------------
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------- -------- ------- -------- ------- -------- ------ -------- -------- --------
U.S. Treasury........... $ 2,499 6.22%
U.S. Government
Agencies............... 499 6.49 $ 365 6.19% $ 31 6.00%
State and political
subdivisions........... 215 6.76 4,427 7.54 $ 4,531 8.00 $ 500 8.25%
Mortgage backed
securities............. -- -- -- -- -- -- -- -- $ 21,588 6.64%
------- ------- ------- ----- --------
Total................. $ 3,213 6.33% $ 4,792 7.44% $ 4,562 7.99% $ 500 8.25% $ 21,588 6.64%
======= ==== ======= ==== ======= ==== ===== ==== ======== ====
- --------
(1) Computed on a tax-equivalent basis utilizing a 34% tax rate, without
giving effect to the disallowance for Federal income tax purposes of
interest related to certain tax-exempt assets.
SECURITIES AVAILABLE FOR SALE MATURITY DISTRIBUTION AND YIELDS
(Amounts in thousands, except yields)
December 31, 1998
------------------------------------------------------------------------------------
After one but
Within five After five but
Within one year years Within ten years After ten years Other securities
---------------- ---------------- ---------------- --------------- -----------------
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------- -------- ------- -------- ------- -------- ------ -------- -------- --------
U.S. Treasury........... $ 6,397 6.18% $ 2,327 6.09%
U.S. Government
Agencies............... 2,027 7.05 49,347 5.88 $34,362 6.17% $ 250 6.84%
State and political
subdivisions........... 2,327 6.97 9,526 6.58 10,925 6.91 3,599 7.04
Mortgage backed
securities............. -- -- -- -- -- -- -- -- $161,442 6.57%
Equity securities....... -- -- -- -- -- -- -- -- 7,029 6.89
------- ------- ------- ------ --------
Total................. $10,751 6.51% $61,200 6.00% $45,287 6.34% $3,849 7.02% $168,471 6.59%
======= ==== ======= ==== ======= ==== ====== ==== ======== ====
- --------
(1) Computed on a tax-equivalent basis utilizing a 34% tax rate, without
giving effect to the disallowance for Federal income tax purposes of
interest related to certain tax-exempt assets.
At December 31, 1998, mortgage-backed securities consisting of
collateralized mortgage obligations and pass-through mortgage obligations
totaled $183.0 million, classified as investment securities of $21.6 million
and securities available for sale of $161.4 million. Management expects the
annual repayment of the underlying mortgages to vary as a result of monthly
repayment of principal and/or interest required under terms of the underlying
promissory notes. Further, the actual rate of repayment is subject to changes
depending upon both terms of the underlying mortgages and the relative level
of mortgage interest rates. When relative interest rates decline to levels
below that of the underlying mortgages, acceleration of principal repayment is
expected as some borrowers on the underlying mortgages refinance to lower
rates. When the underlying rates on mortgage loans are comparable to, or in
excess of, market rates, repayment more closely conforms to scheduled
amortization in accordance with terms of the promissory note. Accordingly,
management generally expects repayment of the collateralized mortgage
obligations in three to five years, and repayment of the pass-through mortgage
obligations in five to seven years.
34
Other attributes of securities are discussed in "--Interest Sensitivity and
Market Risk."
Short-Term Investments
The Company utilizes overnight investment of funds in Federal funds sold and
securities purchased under agreements to resell to ensure that adequate
liquidity will be maintained, while at the same time minimizing the level of
uninvested cash reserves. Short-term investments are also utilized by the
Company when the level of funds committed to lending and investment portfolio
programs changes or the level of deposit generation changes. During 1998,
Federal funds sold and securities purchased under agreements to resell
averaged $75.0 million, compared to $59.7 million during 1997, representing a
$15.4 million, or 25.7%, increase as the Company experienced growth in both
loans and investment securities.
Trading Account Securities
An important aspect of investment department operations, but less so to the
Company in total, are trading account securities, which represent securities
owned by the Company prior to delivery to the Company's customers. Trading
account securities averaged $4.4 million in 1998 and $3.5 million in 1997;
this small dollar amount reflects management's policy of limiting positions in
such securities to reduce its exposure to market and interest rate changes.
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities increased $171.7 million, or 16.6%, to
$1.21 billion in 1998, from $1.03 billion in 1997. Average interest-bearing
deposits increased $125.5 million, or 14.0%, to $1.02 billion in 1998, from
$895.9 million in 1997 attributable to successful marketing efforts. Average
Federal funds purchased and securities sold under agreements to repurchase
increased $41.9 million, or 48.7%, to $127.9 million in 1998, from $86.0
million in 1997 due, in part, from additional liquidity provided by downstream
correspondent banks. Average short-term borrowings decreased by $17.7 million,
or 40.2%, to $26.3 million in 1998, compared to $44.0 million in 1997 as some
of the funding requirements were shifted from short-term to long-term. Average
long-term borrowings increased $21.9 million to $30.5 million in 1998, from
$8.6 in 1997.
Deposits
Average total deposits increased $155.8 million, or 14.7%, to $1.21 billion
during 1998, from $1.06 billion during 1997. At December 31, 1998, total
deposits were $1.28 billion, compared with $1.13 billion at December 31, 1997,
an increase of $149.7 million, or 13.3%.
35
The following table sets forth the deposits of the Company by category at
the dates indicated.
DEPOSITS
(Amounts in thousands, except percentages)
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
---------- -------- ---------- -------- -------- -------- -------- -------- -------- --------
Demand................. $ 232,450 18.23% $ 180,341 16.02% $155,695 15.74% $148,816 15.74% $ 99,074 16.40%
NOW.................... 187,481 14.70 155,147 13.78 133,762 13.52 156,464 16.55 85,020 14.07
Savings and money
market................ 298,817 23.43 294,072 26.13 254,570 25.74 239,031 25.28 193,973 32.11
Time less than
$100,000.............. 403,156 31.63 369,363 32.83 332,278 33.59 308,223 32.59 169,765 28.10
Time greater than
$100,000.............. 153,271 12.01 126,556 11.24 112,877 11.41 93,010 9.84 56,279 9.32
---------- ------ ---------- ------ -------- ------ -------- ------ -------- ------
Total deposits........ $1,275,175 100.00% $1,125,479 100.00% $989,182 100.00% $945,544 100.00% $604,111 100.00%
========== ====== ========== ====== ======== ====== ======== ====== ======== ======
Core deposits, which exclude time deposits of $100,000 or more, provide for
a relatively stable funding source that supports earning assets. The Company's
core deposits totaled $1.12 billion, or 88.0%, of total deposits at December
31, 1998 and totaled $998.9 million, or 88.8%, of total deposits at December
31, 1997.
Deposits, in particular core deposits, have historically been the Company's
primary source of funding and have enabled the Company to meet successfully
both short-term and long-term liquidity needs. Management anticipates that
such deposits will continue to be the Company's primary source of funding in
the future. The Company's loan-to-deposit ratio was 86.7% at December 31,
1998, and 85.9% at the end of 1997, and the ratio averaged 83.0% during 1998
and 85.4% during 1997. The maturity distribution of the Company's time
deposits in excess of $100,000 at December 31, 1998, is shown in the following
table.
MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME
DEPOSITS OF $100,000 OR MORE
(Amounts in thousands)
December 31, 1998
-----------------------------------------------------------
After
After One Six
Through After Three Through After
Within One Three Through Six Twelve Twelve
Month Months Months Months Months Total
---------- --------- ----------- -------- -------- --------
Certificates of deposit
of $100,000 or more.... $21,405 $23,835 $35,891 $ 31,105 $ 20,715 $132,951
Other time deposits of
$100,000 or more....... 11,405 7,865 -- -- 1,050 20,320
------- ------- ------- -------- -------- --------
Total................. $32,810 $31,700 $35,891 $ 31,105 $ 21,765 $153,271
======= ======= ======= ======== ======== ========
Approximately 42.1% of the Company's time deposits over $100,000 had
scheduled maturities within three months. Large 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. Some financial institutions partially fund their balance sheets
with large certificates of deposit obtained through brokers. The Company has
not historically used brokered deposits.
36
Borrowed Funds
Borrowed funds include four broad categories; (i) Federal funds purchased
and securities sold under agreements to repurchase, (ii) treasury, tax and
loan balances, (iii) Federal Home Loan Bank ("FHLB") borrowings, and (iv)
borrowings from an independent bank. Because of a relatively high loan-to-
deposit ratio, the existence and stability of these funding sources are
critical to the Company's maintenance of short-term and long-term liquidity.
Federal funds purchased and securities sold under agreements to repurchase
represent both an input of excess funds from correspondent bank customers of
the Company as well as a cash management tool offered to corporate customers.
At December 31, 1998, these funds totaled $162.6 million, compared with $141.4
million at December 31, 1997.
At December 31, 1998 Treasury, tax and loan balances totaled $1.5 million,
compared to $5.2 million at December 31, 1997. The Company collects tax
deposits from customers and is permitted to retain these balances until
established collateral limits are exceeded or until the U.S. Treasury
withdraws its balances.
The Company's average borrowing from an independent bank under a $20 million
credit facility ("the Credit Facility") was $13.5 million during 1998,
compared with $17.9 million during 1997. As of December 31, 1998, the
outstanding balance under the Credit Facility was $11.5 million, leaving a
remaining availability under the Credit Facility of $8.5 million. The Credit
Facility bears interest at a rate that varies with LIBOR and is secured by
stock in the Banks. Effective January 19, 1998, the Credit Facility was
renegotiated and renewed providing for a current maturity date of May 31,
1999. The Company has historically renewed the Credit Facility prior to its
maturity date.
Five of the Banks are members of the FHLB. At December 31, 1998, these Banks
had available FHLB lines of $93.8 million, under which $46.8 million was
outstanding, including advances classified as short-term of $14.8 million and
advances classified as long-term of $32.0 million. This compares to borrowings
of $30.0 million at December 31, 1997, of which $13.8 million was short-term
and $16.2 million was long-term.
37
The following table sets forth, for the periods indicated, the principal
components of borrowed funds.
BORROWED FUNDS
(Amounts in thousands, except percentages)
December 31,
---------------------------
1998 1997 1996
-------- -------- -------
Federal funds purchased and securities sold under
agreements to repurchase:
Balance at end of period....................... $162,633 $141,437 $93,848
Average balance outstanding.................... 127,856 85,956 71,660
Maximum outstanding at any month's end......... 162,633 141,610 93,848
Weighted average interest rate at period-end... 4.70% 6.15% 5.93%
Weighted average interest rate during the
period........................................ 5.32 5.23 5.15
Treasury, tax and loan:
Balance at end of period....................... $ 1,506 $ 5,210 $ 2,968
Average balance outstanding.................... 3,626 2,506 2,767
Maximum outstanding at any month's end......... 6,944 5,210 6,242
Weighted average interest rate at period-end... 4.45% 5.90% 5.15%
Weighted average interest rate during the
period........................................ 4.30 4.99 4.01
Notes Payable:
Balance at end of period....................... $ 11,500 $ 15,337 $18,100
Average balance outstanding.................... 13,516 18,037 19,785
Maximum outstanding at any month's end......... 15,250 19,350 22,476
Weighted average interest rate at period-end... 6.32% 6.70% 6.79%
Weighted average interest rate during the
period........................................ 6.44 6.63 7.19
Short-term advances from the Federal Home Loan
Bank:
Balance at end of period....................... $ 10,200 $ 13,750 $24,000
Average balance outstanding.................... 9,181 23,445 7,428
Maximum outstanding at any month's end......... 10,200 31,250 24,000
Weighted average interest rate at period-end... 5.54% 5.80% 6.01%
Weighted average interest rate during the
period........................................ 6.40 5.81 5.70
Long-term advances from the Federal Home Loan
Bank:
Balance at end of period....................... $ 32,000 $ 16,200 $12,500
Average balance outstanding.................... 30,192 8,157 7,263
Maximum outstanding at any month's end......... 32,000 28,700 12,500
Weighted average interest rate at period-end... 5.09% 5.73% 5.53%
Weighted average interest rate during the
period........................................ 5.59 5.59 5.70
Convertible debentures:
Balance at end of period....................... $ -- $ -- $ 105
Average balance outstanding.................... -- 14 105
Maximum outstanding at any month's end......... -- 105 105
Weighted average interest rate at period-end... % % 8.57%
Weighted average interest rate during the
period........................................ -- 7.14 8.57
Capital leases:
Balance at end of period....................... $ 328 $ 387 $ 439
Average balance outstanding.................... 356 412 463
Maximum outstanding at any month's end......... 387 439 487
Weighted average interest rate at period-end... 9.04% 9.04% 8.88%
Weighted average interest rate during the
period........................................ 8.98 8.98 9.07
38
Capital Resources and Liquidity Management
Capital Resources
The Company's stockholders' equity increased $14.1 million, or 12.1%, to
$131.0 million at December 31, 1998, from $116.9 million at December 31, 1997.
This net increase was primarily attributable to net income for 1998 of $17.4
million and proceeds from the exercise of stock options totaling $1.9 million,
less dividends paid of $5.6 million.
Under the capital guidelines of their regulators, the Company and the Banks
are currently required to maintain a minimum risk-based total capital ratio of
8%, with at least 4% being Tier I capital. Tier I capital consists of common
stockholders' equity, qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less goodwill. In
addition, under the guidelines, the Company and the Banks must maintain a
minimum Tier I leverage ratio of Tier I capital to total assets of at least
3%, but this minimum ratio is typically increased by 100 to 200 basis points
for other than the highest rated institutions.
The Company exceeded its fully phased-in regulatory capital ratios at
December 31, 1998, 1997 and 1996, as set forth in the following table.
ANALYSIS OF CAPITAL
(Amounts in thousands, except percentages)
December 31,
--------------------------------
1998 1997 1996
---------- ---------- --------
Tier 1 Capital.............................. $ 122,732 $ 109,682 $ 98,694
Tier 2 Capital.............................. 15,296 13,867 11,308
---------- ---------- --------
Total qualifying capital(1)............... $ 138,028 $ 123,549 $110,002
========== ========== ========
Risk-adjusted total assets (including off-
balance sheet exposures)................... $1,223,641 $1,109,326 $904,606
Tier 1 risk-based capital ratio (4.00%
required minimum).......................... 10.03% 9.89% 10.91%
Total risk-based capital ratio (8.00%
required minimum).......................... 11.28 11.14 12.16
Tier 1 leverage ratio (4.00% required
minimum)................................... 7.41 7.75 8.64
- --------
(1) Does not include $1,244,000, $977,000 and $1,325,000 of the Company's
allowance for loan losses at December 31, 1998, 1997 and 1996,
respectively, in excess of 1.25% of risk-adjusted total assets.
39
Each of the Banks is required to maintain risk-based and leverage ratios
similar to those required for the Company. Each of the Banks exceeded these
regulatory capital ratios at December 31, 1998, as set forth in the following
table.
BANK CAPITAL RATIOS
Tier 1 Risk Total Risk Tier 1
Based Based Leverage
----------- ---------- --------
Alabama National BanCorporation............... 10.03% 11.28% 7.41%
National Bank of Commerce of Birmingham....... 9.65 10.90 7.33
Alabama Exchange Bank......................... 12.47 13.72 7.80
Bank of Dadeville............................. 12.76 13.76 9.02
Citizens & Peoples Bank, N.A.................. 20.11 21.11 11.37
Community Bank of Naples, National
Association.................................. 13.70 14.95 7.44
First American Bank........................... 10.59 11.84 9.00
First Citizens Bank, N.A...................... 13.60 14.82 8.06
First Gulf Bank............................... 8.74 9.97 7.20
Georgia State Bank............................ 12.30 13.55 7.24
Public Bank................................... 14.92 16.17 9.55
Required minimums............................. 4.00 8.00 4.00
Liquidity Management
Liquidity management involves monitoring the Company's sources and uses of
funds in order to meet its day-to-day cash flow requirements while maximizing
profits. Liquidity represents the ability of an entity to convert assets into
cash or cash equivalents without significant loss and to raise additional
funds by increasing liabilities.
Without proper liquidity management, the Company will not be able to perform
the primary function of a financial intermediary and would, therefore, not be
able to meet the needs of the communities it serves.
Increased liquidity in typical interest rate environments often involves
decreasing profits by investing in earning assets with shorter maturities.
Liquidity management is made more complex because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities of the investment portfolio is very predictable and
subject to a high degree of control at the time investment decisions are made.
However, net deposit inflows and outflows are far less predictable and are not
subject to nearly the same degree of control.
Assets included in the Company's Consolidated Statements of Condition
contribute to liquidity management. Federal funds sold and securities
purchased under agreements to resell position, its primary source of
liquidity, averaged $75.0 million during 1998 and was $57.1 million at
December 31, 1998, and averaged $59.7 million during 1997 and was $78.9
million at December 31, 1997. If required in short-term liquidity management,
these assets could be converted to cash immediately. Cash received from the
repayment of investment securities and loans provide a constant source of cash
that contributes to liquidity management. Unpledged securities, with a
carrying value of approximately $147.4 million at December 31, 1998 provide
the Company an opportunity to generate cash by, 1) providing additional
collateral by selling securities under agreements to repurchase, 2) providing
collateral to obtain public funds or 3) providing collateral to borrow
directly from the Federal Reserve Bank or the Federal Home Loan Bank. See "--
Loans" and "Securities."
40
Liquidity can also be managed using liabilities included in the Company's
Consolidated Statement of Condition, such as Federal funds purchased and
securities sold under agreements to repurchase and short-term borrowing.
Combined Federal funds purchased and securities sold under agreements to
repurchase, Treasury, tax and loan, and short-term borrowings averaged $154.2
million during 1998 and was $185.8 million at December 31, 1998, and averaged
$129.9 million during 1997 and was $175.7 million at December 31, 1997.
Overnight borrowing lines with upstream correspondent banks, $156.1 million at
December 31, 1998, of which $119.8 million was unused, provide additional
sources of liquidity to the Company on an unsecured basis. The Federal Home
Loan Bank provides secured and unsecured credit lines to five of the Company's
banks totaling approximately $93.8 million. At December 31, 1998, advances
under these lines totaled $46.8 million, including $14.8 million classified as
short-term and $32.0 million classified as long-term. Long-term liquidity
needs are met through the Company's deposit base (approximately 88% of the
Company's deposits at December 31, 1998, are considered core deposits), and
the repayment of loans and other investments as they mature. The Company is
able to manage its long-term liquidity needs by adjusting the rates it pays on
longer-term deposits and the amount and mix of longer-term investments in its
portfolio.
The Company, as a stand alone corporation, has more limited access to
liquidity sources than its banks and depends on dividends from its
subsidiaries as its primary source of liquidity. The Company's liquidity is
diminished by required payments on its outstanding short-term debt. The
ability of its subsidiaries to pay dividends is subject to general regulatory
restrictions which may, but are not expected to, have a material negative
impact on the liquidity available to the Company. (See Note 17 to the
Company's Consolidated Financial Statements included in this Annual Report.)
If circumstances warrant, the Company's short-term liquidity needs can also be
met by additional borrowings of approximately $8.5 million representing the
unused portion of the Company's credit facility with an unrelated bank. See
"--Borrowed Funds."
Accounting Rule Changes
Derivative Investments and Hedging Activities
In June 1998, the FASB issued Statement of Financial Standard No. 133,
Accounting for Derivative Instruments and Hedging Activities, ("Statement
133"), effective for all fiscal quarters of all fiscal years beginning after
June 30, 1999. Statement 133 standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. If certain conditions are met, an entity may elect to designate a
derivative instrument as a hedging instrument. Statement 133 generally
provides for matching the timing of gain or loss recognition on the hedging
instrument with the recognition of (a) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (b) the
earnings effect of the hedged forecasted transaction. Management of the
Company does not expect the adoption of Statement 133 to have a material
impact on its financial statements since the Company does not enter into
derivative instruments.
Mortgage-Backed Securities
In October, 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, an amendment of FASB Statement No. 65, ("Statement 134").
Statement 134 amends Statement 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. This
statement is effective for the first fiscal quarter after December 15, 1998.
However, since the Company does not securitize mortgage loans, management does
anticipate any financial statement impact of adopting this statement.
41
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company and its subsidiaries are primarily monetary
in nature. Therefore, interest rates have a more significant effect on the
Company's performance than do the effects of changes in the general rate of
inflation and change 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. Management 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. See "--Interest
Sensitivity and Market Risk."
Industry Developments
Certain recently enacted and proposed legislation could have an effect on
both the costs of doing business and the competitive factors facing the
financial institutions industry. The Company is unable at this time to assess
the impact of this legislation on its financial condition or results of
operations.
Year 2000--Technology Considerations
The Company is aware of the many areas affected by the Year 2000 computer
issue as addressed by the Federal Financial Institutions Examination Council
("FFIEC") in its interagency statement which provided an outline for
institutions to effectively manage the Year 2000 challenges. The board of
directors of the Company has approved a Year 2000 plan, which includes
multiple phases, tasks to be completed, and target dates for completion.
Issues addressed therein include awareness, assessment, validation,
implementation, testing and contingency planning. Progress under this plan is
reported to the board of directors on a regular basis.
The Company's core bank operating software has been certified by the
Company's software vendor to be Year 2000 compliant. To verify this
compliance, the Company loaded the software along with loan, deposit and
general ledger data onto a separate test system. The data was aged and dates
on the test system were advanced into 2000, and results from this test have
been validated by Company personnel. The Company's testing and validation of
results indicates that the core bank operating software is 100% Year 2000
compliant. The Company also has a number of secondary systems, and testing on
these systems is either complete or substantially complete. The Company's
target date for completion of such testing is March 31, 1999.
While the Company's plans are to complete testing of in-house systems prior
to March 31, 1999, there are several industry-wide tests which require
participation of the Company as well as the testing of new systems. In
addition to the systems outlined above, the Company is tracking the Year 2000
readiness of its utility companies and is finalizing contingency plans for
these services as they relate to critical operations.
Since it routinely upgrades and purchases technologically advanced software
and hardware, the Company has determined that the costs of making
modifications to correct any Year 2000 issues will not materially affect
reported operating results. Year 2000 costs to date, including an allocation
for internal personnel, total approximately $230,000 through 1998, of which
$70,000 represent capital expenditures. No significant information technology
projects have been terminated or rescheduled as a result of any implications
arising from the Year 2000 issue. The Company estimates that its remaining
capital expenditures to prepare for Year 2000 and correct for any Year 2000
issues should not exceed $100,000 and its remaining operating expenditures
(including personnel expenses for Company employees) should not exceed
$100,000.
The Company also recognizes the importance of determining that its borrowers
are addressing the Year 2000 problem to avoid deterioration of the loan
portfolio solely due to this issue. All material relationships have been
identified to assess the inherent risks, and Year 2000 questionnaires have
been obtained from such borrowers where considered appropriate. Deposit
customers have received statement inserts and informational material in this
regard. The Company is working on a one-on-one basis with any borrower that
has been identified as having high Year 2000 risk exposure.
Management does not believe that the Company will incur significant
additional costs associated with the Year 2000 issue. However, management
cannot predict the amount of financial difficulties it may incur due to
customer and vendor inability to perform according to their agreements with
the Company or the effects that
42
other third parties may bring as a result of this issue. The Company also
anticipates that deposit customers may perceive a need for increased cash in
the latter part of 1999 and management has made liquidity contingency plans to
address this potential additional need for currency. Management has held
discussions with the Federal Reserve and the Federal Home Loan Bank with
regard to such potential increased currency and funding needs. Although the
Federal Reserve has announced plans to increase the amount of currency in
circulation in preparing for Year 2000, a lack of liquidity in the financial
system could have a significant negative impact on the Company. Accordingly,
there can be no assurance that the failure or delay of others to address the
issue or that the costs involved in such process will not have a material
adverse impact on the Company's business, financial condition and results of
operations.
The Company's contingency plans are being tested and may be modified as
testing progresses. The Securities and Exchange Commission has asked reporting
companies to address a reasonable "worst case" scenario with respect to the
Year 2000 issue. Management's estimate of the "worst case" scenario is a loss
of electrical power and telecommunications service. The Company is preparing
to have a backup electrical power generator to run its mainframe computer
system in case of difficulties with its electricity vendor, but is unable to
ascertain how such a loss of electrical power would impact its operations and
those of its customers if such power loss was sustained for a material length
of time.
43
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is contained in Item 7 herein under
the heading "Interest Sensitivity and Market Risk".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements and Financial Statement Schedules of
ANB and subsidiaries listed in ITEM 14(a) have been included in this Annual
Report and should be referred to in their entirety. The Supplementary
Financial Information required by Item 302 of Regulation S-K is set forth
below. The information for the first three quarters in 1998 and each quarter
in 1997 differs from that previously reported in ANB's Quarterly Reports on
Form 10-Q for the first three quarters of 1998 and 1997 and in ANB's Annual
Report on Form 10-K for the year ended December 31, 1997, because each of the
mergers completed by the Company during 1998 was accounted for as a pooling of
interests.
SELECTED QUARTERLY FINANCIAL DATA
(Amounts in thousands, except per share data)
(Unaudited)
1998 Quarters 1997 Quarters
------------------------------------------- -------------------------------------------
First Second Third Fourth First Second Third Fourth
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Summary of Operations:
Interest income......... $ 27,840 $ 29,565 $ 28,426 $ 29,873 $ 24,653 $ 25,754 $ 26,650 $ 27,451
Interest expense........ 13,718 14,734 13,997 14,106 11,227 11,871 12,249 13,032
Net interest income..... 14,122 14,831 14,429 15,767 13,426 13,883 14,401 14,419
Provision for loan
losses................. 345 256 287 908 571 1,316 402 1,135
Securities gains
(losses)............... 28 145 1 -- 11 1 15 (29)
Noninterest income...... 7,181 7,112 7,084 7,799 5,007 4,698 5,270 5,321
Noninterest expense..... 14,396 14,844 13,924 18,013 12,575 12,485 13,186 14,551
Net income.............. 4,550 4,749 5,052 3,021 3,619 3,446 4,095 2,956
Dividends on common
stock.................. 1,287 1,371 1,403 1,565 741 865 748 988
Per Common Share Data:
Book Value.............. $ 11.33 $ 11.54 $ 11.85 $ 11.94 $ 10.22 $ 10.56 $ 10.83 $ 11.02
Tangible book value..... 10.52 10.76 11.10 11.19 9.50 9.84 10.13 10.20
Net income.............. 0.41 0.43 0.45 0.27 0.33 0.31 0.37 0.27
Dividends declared...... 0.15 0.15 0.15 0.15 0.115 0.115 0.115 0.115
Balance Sheet Highlights
At Period-End:
Total assets........... $1,535,092 $1,575,768 $1,699,754 $1,672,049 $1,305,950 $1,336,526 $1,365,541 $1,495,814
Securities.............. 289,989 306,281 366,127 329,747 236,125 248,830 254,065 265,501
Loans, net of unearned
income................. 980,779 1,002,344 1,028,219 1,106,074 883,577 905,587 923,545 966,370
Allowance for loan
losses................. 15,054 15,776 16,016 16,540 12,918 14,023 14,131 14,844
Deposits................ 1,188,681 1,253,621 1,255,138 1,275,175 1,057,705 1,090,747 1,072,785 1,125,479
Short-term debt......... 35,785 14,150 22,200 26,250 21,921 31,250 32,157 29,087
Long-term debt.......... 21,576 26,653 17,344 32,328 12,927 9,713 15,949 16,587
Stockholders' equity.... 120,776 124,912 130,714 130,993 107,715 111,315 114,737 116,888
44
During the fourth quarter of 1998, the Company incurred after-tax merger-
related charges totaling $2.3 million, which reduced earnings per share on a
diluted basis to $.27 per share. In the absence of these charges, operating
earnings per share on a diluted basis would have been $.48 per share. During
the fourth quarter of 1997, the Company incurred after-tax merger-related
charges totaling $658,000, which reduced earnings per share on a diluted basis
from $.33 per share on an operating basis to $.27 per share.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding Executive Officers is
included in Part I of this Form 10-K under the caption "Executive Officers of
the Registrant" in accordance with Instruction 3 of the Instructions to
Paragraph (b) of Item 401 of Regulation S-K.
The information required by this Item regarding directors is incorporated by
reference pursuant to General Instruction G(3) of Form 10-K from ANB's
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
on or before March 26, 1999.
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
The information required by this Item is incorporated by reference pursuant
to General Instruction G(3) of Form 10-K from ANB's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or before March 26,
1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference pursuant
to General Instruction G(3) of Form 10-K from ANB's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A on or before March 26,
1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference pursuant
to General Instruction G(3) of Form 10-K from ANB's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A or before March 26, 1999.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) and (2) and (d)--Financial Statements and Financial Statement
Schedules.
Financial Statements: The Consolidated Financial Statements of ANB and
subsidiaries, included herein (pages F-1 to F-31) are as follows:
Report of Independent Auditors
PricewaterhouseCoopers LLP
Consolidated Statements of Condition--December 31, 1998 and 1997
Consolidated Statements of Income--Years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Comprehensive Income--Years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity--Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules: All schedules to the consolidated financial
statements required by Article 9 of Regulation S-X have been omitted because
they are not applicable or because the required information has been
incorporated in the consolidated financial statements and related notes
included in this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
Report on Form 8-K filed October 5, 1998 to report ANB's merger with
Community Financial Corporation, effective October 2, 1998.
(c) Exhibits.
The exhibits listed on the exhibit index beginning on page 49 of this Form
10-K are filed herewith or are incorporated herein by reference.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this the 15th
day of March, 1999.
ALABAMA NATIONAL BANCORPORATION
/s/ John H. Holcomb, III
By: _________________________________
John H. Holcomb, III,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ John H. Holcomb, III Chairman and Chief Executive March 15, 1999
____________________________________ Officer (principal
John H. Holcomb, III executive officer)
/s/ Victor E. Nichol, Jr. President and Chief March 15, 1999
____________________________________ Operating Officer and
Victor E. Nichol, Jr. Director
/s/ William E. Matthews, V Executive Vice President and March 15, 1999
____________________________________ Chief Financial Officer
William E. Matthews, V
/s/ James S. Parks, Jr. Senior Vice President- March 15, 1999
____________________________________ Finance, and Treasurer
James S. Parks, Jr. (principal accounting
officer)
/s/ W. Ray Barnes Director March 15, 1999
____________________________________
W. Ray Barnes
/s/ T. Morris Hackney Director March 15, 1999
____________________________________
T. Morris Hackney
/s/ John D. Johns Director March 15, 1999
____________________________________
John D. Johns
/s/ John J. McMahon, Jr. Director March 15, 1999
____________________________________
John J. McMahon, Jr.
/s/ C. Phillip McWane Director March 15, 1999
____________________________________
C. Phillip McWane
/s/ Drayton Nabers, Jr. Director March 15, 1999
____________________________________
Drayton Nabers, Jr.
47
Name Title Date
---- ----- ----
/s/ G. Ruffner Page, Jr. Director March 15, 1999
____________________________________
G. Ruffner Page, Jr.
/s/ W. Stancil Starnes Director March 15, 1999
____________________________________
W. Stancil Starnes
/s/ William D. Montgomery Director March 15, 1999
____________________________________
William D. Montgomery
/s/ Dan M. David Vice Chairman and Director March 15, 1999
____________________________________
Dan M. David
/s/ C. Lloyd Nix Director March 15, 1999
____________________________________
C. Lloyd Nix
/s/ William E. Sexton Director March 15, 1999
____________________________________
William E. Sexton
48
EXHIBIT INDEX
Exhibit
Number Description Reference
------- ----------- ---------
3.1 Certificate of Incorporation.............................. (1)
3.1A Certificate of Amendment of Certificate of Incorporation.. (2)
3.1B Certificate of Merger filed with the Secretary of State of
the State of Delaware on December 29, 1995............... (4)
3.1C Certificate of Amendment of Certificate of Incorporation.. (9)
3.2 Bylaws.................................................... (1)
4.1 Provisions of the Certificate of Incorporation and the
Bylaws of Alabama National BanCorporation which Define
the Rights of Security holders........................... (1)
10.1 Alabama National BanCorporation 1994 Stock Option Plan.... (1)
10.2 Form of Stock Option Agreement utilized in connection with
the 1994 Stock Option Plan............................... (2)
10.3 Agreement dated September 18, 1995, by and among James A.
Taylor and Frank W. Whitehead, Alabama National
BanCorporation, National Commerce Corporation and
Commerce Bankshares, Inc. ............................... (3)
10.3A Amendment to Agreement dated September 18, 1995 executed
by James A. Taylor, Alabama National BanCorporation,
National Commerce Corporation and Commerce Bankshares,
Inc. on November 17, 1995................................ (3)
10.4 Commerce Bankshares, Inc. Long Term Incentive Compensation
Plan..................................................... (3)
10.4A Form of Incentive Stock Option Agreement.................. (3)
10.4B Form of Restricted Stock Agreement........................ (3)
10.5 Lease Agreement between Woodward Properties and NBC....... (3)
10.6 NBC Pension Plan.......................................... (4)
10.7 Credit Agreement between Alabama National BanCorporation
and AmSouth Bank of Alabama dated as of December 29, 1995
relating to a $23,000,000 Revolving Loan................. (4)
10.7A Promissory Note between Alabama National BanCorporation
and AmSouth Bank of Alabama dated as of December 29, 1995
relating to a $23,000,000 Revolving Loan................. (4)
10.7B Pledge Agreement between Alabama National BanCorporation
and AmSouth Bank of Alabama dated as of December 29, 1995
relating to a $23,000,000 Revolving Loan................. (4)
10.7C First Amendment to Credit Agreement between Alabama
National BanCorporation and AmSouth Bank dated February
10, 1997................................................. (6)
10.7D Second Amendment to Credit Agreement between Alabama
National BanCorporation and AmSouth Bank dated January
19, 1998................................................. (8)
10.8 Alabama National BanCorporation Performance Share Plan.... (5)
10.9 Alabama National BanCorporation Deferred Compensation Plan
for Directors Who Are Not Employees of the Company....... (5)
10.10 Agreement and Plan of Merger dated as of July 24, 1997
between Alabama National BanCorporation and First
American Bancorp......................................... (7)
10.11 Employment Agreement dated November 30, 1997 between Dan
M. David and Alabama National BanCorporation............. (8)
49
Exhibit
Number Description Reference
------- ----------- ---------
10.12 First American Bancorp Stock Option Plan dated October 20,
1992...................................................... (8)
10.13 First American Bancorp 1994 Stock Option Plan.............. (8)
10.14 First American Bancorp Nonqualified Stock Option Agreement
with Dan M. David dated March 7, 1997..................... (8)
10.15 Agreement and Plan of Merger dated as of March 5, 1998
between Alabama National BanCorporation and Public Bank
Corporation............................................... (10)
10.16 Agreement and Plan of Merger dated as of June 8, 1998
between Alabama National BanCorporation and Community
Financial Corporation..................................... (11)
10.17 Agreement and Plan of Merger dated as of September 21, 1998
between Alabama National BanCorporation, Citizens &
Peoples Bank, National Association, and Community Bank of
Naples, National Association.............................. (12)
11.1 Statement Regarding Computation of Per Share Earnings...... (13)
21.1 Subsidiaries of Alabama National BanCorporation............ (13)
23.1 Consent of PricewaterhouseCoopers LLP...................... (13)
27.1 Financial Data Schedule.................................... (13)
- --------
(1) Filed as an Exhibit to ANB's Annual Report on Registration Statement on
Form S-1 (Registration No. 33-83800) and is incorporated herein by
reference.
(2) Filed as an Exhibit to ANB's Annual Report on Form 10-K for the year
ended December 31, 1994 and is incorporated herein by reference.
(3) Filed as an Exhibit to ANB's Registration Statement on Form S-4
(Registration No. 33-97152) and is incorporated herein by reference.
(4) Filed as an Exhibit to ANB's Annual Report on Form 10-K for the year
ended December 31, 1995 and is incorporated herein by reference.
(5) Filed as an Exhibit to ANB's Annual Report on Form 10-K for the year
ended December 31, 1996 and is incorporated herein by reference.
(6) Filed as an Exhibit to ANB's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997 and is incorporated herein by reference.
(7) Filed as Appendix A to ANB's Registration Statement on Form S-4
(Registration No. 333-36565) and is incorporated herein by reference.
(8) Filed as an Exhibit to ANB's Annual Report on Form 10-K for the year
ended December 31, 1997.
(9) Filed as an Exhibit to ANB's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and is incorporated by reference.
(10) Filed as Appendix A to ANB's Registration Statement on Form S-4
(Registration No. 333-49771) and is incorporated herein by reference.
(11) Filed as Appendix A to ANB's Registration Statement on Form S-4
(Registration No. 333-59813) and is incorporated herein by reference.
(12) Filed as Appendix A to ANB's Registration Statement on Form S-4
(Registration No. 333-66327) and is incorporated herein by reference.
(13) Filed as an Exhibit to ANB's Annual Report on Form 10-K for the year
ended December 31, 1998.
50
Alabama National BanCorporation and Subsidiaries
Consolidated Financial Statements
December 31, 1998 and 1997 and the
three years ended December 31, 1998
Annual Report on Form 10-K
Item 14(a)(1) and (2) and (d)
List of Financial Statements
and Financial Statement Schedules
year ended December 31, 1998
Alabama National Bancorporation
Birmingham, Alabama
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997 and the three years ended December 31, 1998
Page
----
Audited Consolidated Financial Statements
Report of Independent Accountants.......................................... F-1
Consolidated Statements of Financial Condition............................. F-2
Consolidated Statements of Income.......................................... F-3
Consolidated Statements of Comprehensive Income............................ F-4
Consolidated Statements of Changes in Stockholders' Equity................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Alabama National BanCorporation
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, comprehensive
income, stockholders' equity, and of cash flows present fairly, in all
material respects, the financial position of Alabama National BanCorporation
and its subsidiaries (the Company) at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 15, 1999
F-1
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
(in thousands, except share data)
1998 1997
---------- ----------
ASSETS
------
Cash and due from banks................................ $ 70,813 $ 53,216
Interest-bearing deposits in other banks............... 225 2,391
Investment securities (market value $35,214 and $66,531
for 1998 and 1997, respectively)...................... 34,655 66,018
Securities available for sale.......................... 289,558 199,084
Trading securities..................................... 5,534 399
Federal funds sold and securities purchased under
agreements to resell.................................. 57,076 78,835
Loans.................................................. 1,107,472 968,472
Unearned income........................................ (1,398) (2,102)
---------- ----------
Loans, net of unearned income.......................... 1,106,074 966,370
Allowance for loan losses.............................. (16,540) (14,844)
---------- ----------
Net loans.......................................... 1,089,534 951,526
---------- ----------
Property, equipment, and leasehold improvements, net... 38,875 36,748
Intangible assets...................................... 8,226 8,726
Cash surrender value of life insurance................. 29,669 26,888
Other assets........................................... 47,884 71,983
---------- ----------
$1,672,049 $1,495,814
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Noninterest bearing.................................. $ 232,450 $ 180,341
Interest bearing..................................... 1,042,725 945,138
---------- ----------
Total deposits..................................... 1,275,175 1,125,479
---------- ----------
Federal funds purchased and securities sold under
agreements to repurchase............................. 162,633 141,437
Treasury, tax and loan accounts....................... 1,506 5,210
Short-term borrowings................................. 21,700 29,087
Accrued expenses and other liabilities................ 47,714 61,126
Long-term debt........................................ 32,328 16,587
---------- ----------
Total liabilities.................................. 1,541,056 1,378,926
---------- ----------
Commitments and contingencies (see Notes 9 and 10)
Stockholders' equity:
Common stock, $1 par; authorized 17,500,000 and
10,000,000 at December 31, 1998 and 1997,
respectively; issued and outstanding 10,971,686 and
10,602,982 shares in 1998 and 1997, respectively.... 10,972 10,603
Additional paid-in capital........................... 78,570 77,081
Retained earnings.................................... 40,584 28,838
Unearned restricted stock............................ (92)
Unearned ESOP shares................................. (75) (87)
Accumulated other comprehensive income, net of tax... 942 545
---------- ----------
Total stockholders' equity......................... 130,993 116,888
---------- ----------
$1,672,049 $1,495,814
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997, and 1996
(in thousands, except share data)
1998 1997 1996
-------- -------- -------
Interest income:
Interest and fees on loans....................... $ 92,208 $ 85,342 $76,447
Interest on securities........................... 18,870 15,565 14,045
Interest on deposits in other banks.............. 106 55 240
Interest on trading securities................... 264 193 183
Interest on federal funds sold................... 4,256 3,353 2,263
-------- -------- -------
Total interest income........................... 115,704 104,508 93,178
-------- -------- -------
Interest expense:
Interest on deposits............................. 46,415 40,688 36,081
Interest on federal funds purchased.............. 6,807 4,527 3,633
Interest on short-and long-term borrowings....... 3,333 3,164 2,460
-------- -------- -------
Total interest expense.......................... 56,555 48,379 42,174
-------- -------- -------
Net interest income............................. 59,149 56,129 51,004
Provision for loan losses.......................... 1,796 3,421 1,035
-------- -------- -------
Net interest income after provision for loan
losses......................................... 57,353 52,708 49,969
-------- -------- -------
Noninterest income:
Securities (losses) gains........................ 174 (2) (84)
Gain (loss) on disposition of assets and
deposits........................................ 247 (497) 148
Service charges on deposit accounts.............. 7,259 6,599 6,238
Investment services commission income............ 11,508 8,162 7,889
Trust department income.......................... 2,101 1,799 1,550
Origination and sale of mortgages................ 4,303 1,644 1,187
Bank owned life insurance........................ 1,167 39 35
Other............................................ 2,591 2,550 2,167
-------- -------- -------
Total noninterest income........................ 29,350 20,294 19,130
-------- -------- -------
Noninterest expense:
Salaries and employee benefits................... 36,021 29,992 28,756
Occupancy and equipment expense.................. 6,724 6,622 6,481
Other............................................ 18,409 16,174 14,938
-------- -------- -------
Total noninterest expense....................... 61,154 52,788 50,175
-------- -------- -------
Income before provision for income taxes and
minority interest in earnings
of consolidated subsidiaries...................... 25,549 20,214 18,924
Provision for income taxes......................... 8,154 6,086 5,279
-------- -------- -------
Income before minority interest in earnings of
consolidated subsidiaries......................... 17,395 14,128 13,645
Minority interest in earnings of consolidated
subsidiaries...................................... 23 12 14
-------- -------- -------
Net income...................................... 17,372 14,116 13,631
Less cash dividends on preferred stock............. 4
-------- -------- -------
Net income available for common shares.......... $ 17,372 $ 14,116 $13,627
======== ======== =======
Net income per common share (basic)................ $ 1.61 $ 1.34 $ 1.37
======== ======== =======
Weighted average common shares outstanding
(basic)........................................... 10,804 10,552 9,960
======== ======== =======
Net income per common share (diluted).............. $ 1.55 $ 1.28 $ 1.30
======== ======== =======
Weighted average common and common equivalent
shares outstanding (diluted)...................... 11,173 10,999 10,490
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 1998, 1997, and 1996
(in thousands)
1998 1997 1996
------- ------- -------
Net income............................................ $17,372 $14,116 $13,631
Other comprehensive income:
Unrealized gains (losses) on securities available
for sale arising during the period................. 773 1,585 (282)
Less: Reclassification adjustment for net gains
(losses) included in net income...................... 174 (2) (84)
------- ------- -------
Other comprehensive income, before tax................ 599 1,587 (198)
Provision for income taxes related to items of other
comprehensive income (expense)....................... 202 571
------- ------- -------
Other comprehensive income, net of tax................ 397 1,016 (198)
------- ------- -------
Comprehensive income, net of tax...................... $17,769 $15,132 $13,433
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997, and 1996
(in thousands, except share data)
Accumulated
Other
Comprehensive
Additional Unearned Income
Common Paid-In Retained Restricted Unearned (Loss), Net Total
Shares Stock Capital Earnings Stock ESOP of Tax Equity
---------- ------- ---------- -------- ---------- -------- ------------- --------
Balance, December 31,
1995.................... 9,371,012 $ 9,370 $70,251 $ 9,161 $(278) $ (273) $ 88,231
Net income.............. 13,632 13,632
Stock split of merged
bank prior to pooling... 146,893 147 2,819 (2,966) 0
Distribution for
fractional shares....... (3) (3)
Sale of stock by a
merged bank............. 532,608 533 4,467 5,000
Issuance of restricted
stock................... 8,822 9 183 192
Preferred stock
dividends declared by
merged bank prior to
pooling................. (4) (4)
Common stock dividends
declared ($0.28 per
share).................. (1,747) (1,747)
Redemption of FirstBanc
Holding Company, Inc.
preferred stock......... (53) (53)
Exercise of stock
options................. 23,633 24 138 162
Shares acquired by
ESOP.................... $(100) (100)
Amortization of unearned
restricted stock........ 93 93
Change in other
comprehensive income,
net of taxes............ (198) (198)
---------- ------- ------- ------- ----- ----- ------ --------
Balance, December 31,
1996.................... 10,082,968 10,083 77,805 18,073 (185) (100) (471) 105,205
Net income.............. 14,116 14,116
Stock split of merged
bank prior to pooling... 414,174 414 (408) (6) 0
Distribution for
fractional shares....... (399) (11) (3) (14)
Conversion of
debentures.............. 25,199 25 80 105
Issuance of restricted
stock................... 1,493 1 33 34
Common stock dividends
declared ($0.46 per
share).................. (3,342) (3,342)
Exercise of stock
options................. 75,168 75 (431) (356)
Shares released by
ESOP.................... 2 13 15
Amortization of unearned
restricted stock........ 93 93
Issuance of shares
associated with director
deferred compensation
plans................... 4,379 5 80 85
Proportional reduction
in consolidated
subsidiary.............. (69) (69)
Change in other
comprehensive income,
net of taxes............ 1,016 1,016
---------- ------- ------- ------- ----- ----- ------ --------
Balance, December 31,
1997.................... 10,602,982 10,603 77,081 28,838 (92) (87) 545 116,888
Net income.............. 17,372 17,372
Common stock dividends
declared ($.60 per
share).................. (5,626) (5,626)
Exercise of stock
options................. 368,704 369 1,489 1,858
Shares released by
ESOP.................... 12 12
Amortization of unearned
restricted stock........ 92 92
Change in other
comprehensive income,
net of taxes............ 397 397
---------- ------- ------- ------- ----- ----- ------ --------
Balance, December 31,
1998.................... 10,971,686 $10,972 $78,570 $40,584 $ 0 $ (75) $ 942 $130,993
========== ======= ======= ======= ===== ===== ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997, and 1996
(in thousands)
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income.................................. $ 17,372 $ 14,116 $ 13,631
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................. 1,796 3,421 1,035
Deferred tax benefit...................... (595) (1,191) (518)
Depreciation and amortization............. 3,255 2,774 3,153
Loss (gain) on disposal of property and
equipment................................ (142) 499 489
Securities (gain) loss.................... (174) 2 84
Loss (gain) on other real estate.......... (15) (65) 5
Net amortization of securities............ 254 57 (75)
Income earned on bank owned life
insurance................................ (1,167)
Net increase (decrease) in trading
securities............................... (5,135) 1,537 2,466
Minority interest in earnings of
consolidated subsidiaries................ 23 12 14
(Increase) decrease in other assets....... 23,306 (45,559) (2,778)
Increase (decrease) in other liabilities.. (12,809) 46,718 (3,226)
Other..................................... 73 107 (346)
--------- --------- ---------
Net cash provided by operating
activities............................. 26,042 22,428 13,934
--------- --------- ---------
Cash flows from investing activities:
Purchases of investment securities.......... (1,700) (41,817)
Proceeds from calls and maturities of
investment securities...................... 31,214 24,197 21,443
Purchases of securities available for sale.. (248,716) (113,168) (65,577)
Proceeds from sales of securities available
for sale................................... 1,236 6,835 23,516
Proceeds from calls and maturities of
securities available for sale.............. 157,779 44,103 65,209
Net decrease (increase) in interest-bearing
deposits in other banks.................... 2,166 (2,142) 10,968
Net decrease (increase) in federal funds
sold and securities purchased under
agreements to resell....................... 21,759 (27,210) (7,827)
Net increase in loans....................... (141,575) (95,038) (123,144)
Purchases of property, equipment, and
leasehold improvements..................... (5,172) (6,773) (6,870)
Proceeds from sale of property, equipment,
and leasehold improvements................. 299 767 1,022
Proceeds from sale of other real estate
owned...................................... 2,523 1,537 1,066
Costs capitalized on other real estate
owned...................................... (118) (514)
Cash paid for bank-owned life insurance..... (1,614) (22,253) (371)
Purchase acquisitions, net of cash
acquired................................... 14,483
--------- --------- ---------
Net cash used in investing activities... (180,219) (176,876) (122,382)
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the years ended December 31, 1998, 1997, and 1996
(in thousands)
1998 1997 1996
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits....................... $149,696 $114,171 $ 52,063
Sale of deposits............................... (8,500)
Increase in federal funds purchased and
securities sold under agreements to
repurchase.................................... 21,196 46,037 33,977
Net increase (decrease) in short and long-term
borrowings and capital leases................. 4,650 (5,571) 32,674
Proceeds from issuance of common stock......... 5,143
Exercise of stock options...................... 1,858 (356) 162
Dividends on preferred stock................... (4)
Dividends on common stock...................... (5,626) (3,342) (1,747)
Redemption of preferred stock.................. (53)
Distribution for fractional shares............. (14) (3)
Change in other liabilities.................... (5,023)
-------- -------- --------
Net cash provided by financing activities.. 171,774 150,925 108,689
-------- -------- --------
Increase (decrease) in cash and cash
equivalents............................... 17,597 (3,523) 241
Cash and cash equivalents, beginning of year..... 53,216 56,739 56,498
-------- -------- --------
Cash and cash equivalents, end of year........... $ 70,813 $ 53,216 $ 56,739
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid for interest......................... $ 54,886 $ 48,653 $ 41,823
======== ======== ========
Cash paid for income taxes..................... $ 4,810 $ 7,070 $ 3,428
======== ======== ========
Transfer of investment securities to available
for sale...................................... $ 4,770
========
Supplemental schedule of noncash investing
activities:
Foreclosure of other real estate owned......... $ 1,771 $ 992 $ 1,001
======== ======== ========
Transfer of property to other real estate
owned......................................... $ 97 $ 198
======== ========
Reduction in proportional interest in
consolidated subsidiary....................... $ 69 $ 392
======== ========
Increase in unrealized holding (gain) loss on
securities available for sale................. $ (397) $ (1,016) $ 198
======== ======== ========
Unearned restricted stock and performance plan
awards........................................ $ 93 $ 178 $ 184
======== ======== ========
Conversion of debentures....................... $ 105
========
Assets acquired and liabilities assumed in
merger transactions (Note 1):
Assets acquired in business combination...... $ 6,290 $ 2,154
======== ========
Liabilities assumed in business combination.. $ 22,120 $ 8,950
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Business Segment--The accounting and reporting policies of the Company
conform with generally accepted accounting principles and with general
financial service industry practices. The Company provides a full range of
banking and bank-related services to individual and corporate customers
through its ten subsidiary banks located in Alabama, Georgia, and Florida.
Basis of Presentation and Principles of Consolidation--The consolidated
financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates--In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the statement of condition dates and revenues and
expenses for the periods shown. Actual results could differ from those
estimates.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and
cash equivalents include cash on hand and due from banks.
Securities--Investment securities are stated at amortized cost as a result
of management's ability and intent to hold the securities until maturity.
Related premiums are amortized and discounts are accreted on the effective
interest method.
Securities available for sale are those securities intended to be held for
an indefinite period of time. The Company may sell these securities as part of
its asset/liability strategy in response to changes in interest rates, changes
in prepayment risk, or similar factors. Securities available for sale are
recorded at market value. Unrealized holding gains and losses on securities
classified as available for sale are carried as a separate component of
stockholders' equity.
Trading securities, principally obligations of U.S. government agencies, are
securities held for sale and are stated at market. Bond purchases and sales
are recorded on trade date. Accounts receivable from and accounts payable to
bond customers and dealers are included in other assets and liabilities and
represent security transactions entered into for which the securities have not
been delivered. Unrealized holding gains and losses on securities classified
as trading are reported in earnings.
Gains and losses on the sale of securities are computed using the specific
identification method.
Loans and 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 level yields.
Certain impaired loans are reported at the present value of expected future
cash flows using the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent.
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes the collection 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
evaluations 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
loan problems, and current economic conditions which may affect the borrower's
ability to pay. Accrual of interest is discontinued on a loan when 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. Payments received on such loans are applied first to
principal until the obligation is satisfied. Any remaining payments are then
recorded as interest income.
F-8
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property, Equipment, and Leasehold Improvements--Property, equipment, and
leasehold improvements are stated at cost less accumulated depreciation and
amortization. Depreciation is principally computed using the straight-line
method over the estimated useful life of each type of asset. Leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful lives of the improvements or the terms of the related
leases. Maintenance and repairs are expensed as incurred; improvements and
betterments are capitalized. When items are retired or otherwise disposed of,
the related costs and accumulated depreciation are removed from the accounts
and any resulting gains or losses are credited or charged to income. Estimated
useful lives generally are as follows:
Buildings...................................................... 5-45 years
Leasehold improvements......................................... 10-30 years
Furniture, equipment, and vault................................ 3-30 years
Other Real Estate--Other real estate, primarily property acquired by
foreclosure, is capitalized at the lower of fair value less estimated selling
costs or cost of the property or loan immediately prior to its classification
as other real estate. Other real estate is not depreciated and is carried at
the lower of cost or fair value less estimated selling costs. Losses,
representing the difference between the sales price and the carrying value of
the property, are recorded immediately, while gains on sales financed by the
Company are deferred until the initial and continuing investment by the
borrower equals or exceeds specified equity percentages. Gains on all other
sales are recorded immediately.
Intangible Assets--Intangible assets consist of the excess of cost over the
fair value of net assets of acquired businesses and core deposit intangibles.
The excess of cost over the fair value of net assets of acquired businesses,
which totaled $8,006,000 and had related accumulated amortization of
$1,699,000 and $1,397,000 at December 31, 1998 and 1997, respectively, is
being amortized over a period of 20 years, principally using the straight-line
method of amortization. Core deposit intangibles, which totaled $3,625,000 and
had related accumulated amortization of $1,706,000 and $1,508,000 at December
31, 1998 and 1997, respectively, are being amortized over 10 years using the
straight-line method of amortization. The carrying value of excess of cost
over net assets of subsidiaries acquired is reviewed if facts and
circumstances suggest that it may be impaired. If warranted, analysis,
including undiscounted income projections, are made to determine if
adjustments to the carrying value or amortization periods are necessary.
Software costs--Software costs with a recorded cost of $2,079,000 and
$1,931,000 and related accumulated amortization of $1,747,000 and $1,608,000
are included in other assets at December 31, 1998 and 1997, respectively.
Amortization expense of approximately $140,000, $212,000, and $150,000 was
recorded in 1998, 1997, and 1996, respectively.
Income Taxes--Deferred income taxes are provided on all temporary
differences between the financial reporting basis and the income tax basis of
assets and liabilities.
Stock-Based Employee Compensation--In 1996, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (Statement 123), which calls for a value based
method. Beginning in 1996, compensation cost for stock-based employee
compensation arrangements is measured at the grant date based on the value of
the award and is recognized over the service period.
Advertising Costs--The Company expenses the costs of advertising when those
costs are incurred.
F-9
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Collateral Requirements--The Company requires collateral for certain
transactions with retail and commercial customers. Specifically, margin loans
made for the purpose of borrowing against marketable investment securities
generally do not exceed 50% of the total market value of a customer's
marginable securities portfolio at the time of the transaction or any time
thereafter. Repurchase agreements, limited to commercial customers, generally
do not exceed the market value of securities used to secure such transactions
at the time of the transaction or thereafter. Federal funds sold are made to
correspondent banks on an unsecured basis and generally do not exceed limits
established for each bank resulting from evaluation of the bank's financial
position.
Reclassifications---Certain reclassifications have been made to the prior
year financial statements to conform with the 1998 presentation.
Recently Issued Accounting Standards--In June 1997, the FASB issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (Statement 130). Statement 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income includes all changes in equity
during a period, excluding investments by and distributions to stockholders.
Under Statement 130, the Company has reported changes in unrealized gains and
losses attributable to securities available for sale, as well as the
amortization of unearned restricted stock, as components of comprehensive
income. The 1997 and 1996 financial information has been reclassified to
conform to the requirements of the statement.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of a Business
Enterprise and Related Information (Statement 131). Statement 131 establishes
standards for the way that public business enterprises report information
about products and services, geographic areas, and major customers. As a
result of implementing this statement, the Company has expanded the
disclosures related to its operating segments (see Note 19).
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures About Pensions and Other
Postretirement Benefits (Statement 132). Statement 132, effective for fiscal
years beginning after December 15, 1997, standardizes the disclosure
requirements for pensions and other postretirement benefits, eliminates
certain disclosures, and requires additional information on changes in the
benefit obligations and fair values of plan assets. As a result of
implementing Statement 132, the Company has restated prior year disclosures to
conform to the requirements of the statement.
In June 1998, the FASB issued Statement of Financial Standard No. 133,
Accounting for Derivative Instruments and Hedging Activities (Statement 133),
effective for all fiscal quarters of all fiscal years beginning after June 30,
1999. Statement 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, by
requiring that an entity recognize those items as assets or liabilities in the
statement of financial position and measure them at fair value. If certain
conditions are met, an entity may elect to designate a derivative instrument
as a hedging instrument. Statement 133 generally provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of (a) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (b) the earnings effect
of the hedged forecasted transaction. Management of the Company does not
expect the adoption of Statement 133 to have a material impact on its
financial statements since the Company does not enter into derivative
instruments.
F-10
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1998, the FASB issued Statement of Financial Accounting Standards
No. 134, Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise, an amendment of FASB Statement No. 65 (Statement 134). Statement
134 amends Statement 65 to require that after the securitization of mortgage
loans held for sale, an entity engaged in mortgage banking activities classify
the resulting mortgage-backed securities or other retained interests based on
its ability and intent to sell or hold those investments. This statement is
effective for the first fiscal quarter after December 15, 1998. However, since
the Company does not securitize mortgage loans, management does not anticipate
any financial statement impact of adopting this statement.
2. Business Combinations
On December 31, 1998, Community Bank of Naples, N.A. (Naples), headquartered
in Naples, Florida, was merged (the Naples Merger) into Alabama National
BanCorporation and Subsidiaries (the Company). On October 2, 1998, Community
Financial Corporation (CFC), a one bank holding company headquartered in
Mableton, Georgia, was merged (the CFC Merger) into the Company. Public Bank
Corporation (Public), a one bank holding company headquartered in St. Cloud,
Florida, was merged (the Public Merger) into the Company on May 29, 1998. A
one bank holding company headquartered in Decatur, Alabama, First American
Bancorp (FAB), was merged (the FAB Merger) into the Company on November 30,
1997. FirstBank Holding Company, Inc. (FirstBanc) was merged into the Company
(the FirstBanc Merger) on September 30, 1996. FirstBanc was a one bank holding
company headquartered in Robertsdale, Alabama.
Additional information related to these mergers is presented in the
following table:
Year-To-Date
Shares of Net Interest Year-To-Date
Company Total Assets at Income at Date Net Income at
Common Stock Date of Merger of Merger Date of Merger
Merger Issued (Approximately) (Approximately) (Approximately)
- ------ ------------ --------------- --------------- ---------------
Naples............ 532,608 $ 92,600,000 $ 2,800,000 $ 43,000
CFC............... 1,076,032 $138,900,000 $ 4,000,000 $1,400,000
Public............ 549,913 $ 53,300,000 $ 1,000,000 $ 374,000
FAB............... 2,107,966 $235,000,000 $10,600,000 $ 754,000
FirstBanc......... 305,000 $ 36,000,000 $ 1,200,000 $ 325,000
The consolidated financial statements of the Company give effect to these
mergers, all of which were accounted for as poolings of interests and,
accordingly, financial statements for all periods have been restated to
reflect the results of operations of the companies on a combined basis from
the earliest period presented, except for dividends per share.
F-11
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's consolidated financial data for the years ended December 31,
1997 and 1996 have been restated as follows (in thousands, except per share
data):
As Effect As
Previously of Currently
Reported Poolings Reported
---------- -------- ---------
As of and for the year ended December 31, 1997:
Net interest income........................... $47,548 $ 8,581 $ 56,129
Net income.................................... $11,668 $ 2,448 $ 14,116
Stockholders' equity.......................... $97,933 $18,955 $116,888
Net income per share (diluted)................ $ 1.31 $ (.03) $ 1.28
As of and for the year ended December 31, 1996:
Net interest income........................... $44,934 $ 6,070 $ 51,004
Net income.................................... $12,127 $ 1,504 $ 13,631
Stockholders' equity.......................... $88,803 $16,402 $105,205
Net income per share (diluted)................ $ 1.38 $ (.08) $ 1.30
3. Securities
The amortized costs and estimated market values of investment securities
(carried at amortized cost) and securities available for sale (carried at
market value) are as follows (in thousands):
December 31, 1998
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
Investment securities:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies.......... $ 3,394 $ 21 $ $ 3,415
Obligations of states and political
subdivisions....................... 9,673 414 10,087
Mortgage backed securities issued or
guaranteed by U.S. government
agencies........................... 21,588 143 19 21,712
-------- ------ ---- --------
Totals............................ $ 34,655 $ 578 $ 19 $ 35,214
======== ====== ==== ========
Securities available for sale:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies.......... $ 94,754 $ 429 $473 $ 94,710
Obligations of states and political
subdivisions....................... 25,659 735 17 26,377
Mortgage backed securities issued or
guaranteed by U.S. government
agencies........................... 160,589 1,116 263 161,442
Equity securities................... 7,090 61 7,029
-------- ------ ---- --------
Totals............................ $288,092 $2,280 $814 $289,558
======== ====== ==== ========
F-12
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
Investment securities:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies.......... $ 12,058 $ 40 $ 4 $ 12,094
Obligations of states and political
subdivisions....................... 10,067 364 10,431
Mortgage-backed securities issued or
guaranteed by U.S. government
agencies........................... 43,893 204 91 44,006
-------- ------ ---- --------
Totals............................ $ 66,018 $ 608 $ 95 $ 66,531
======== ====== ==== ========
Securities available for sale:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies.......... $ 81,448 $ 338 $189 $ 81,597
Obligations of states and political
subdivisions....................... 25,344 542 4 25,882
Mortgage-backed securities issued or
guaranteed by U.S. government
agencies........................... 83,955 657 415 84,197
Equity securities................... 7,470 62 7,408
-------- ------ ---- --------
Totals............................ $198,217 $1,537 $670 $199,084
======== ====== ==== ========
Maturities of securities at December 31, 1998 are summarized as follows (in
thousands):
Investment
Securities Available for Sale
------------------- -------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year or less............ $ 3,213 $ 3,235 $ 10,663 $ 10,751
Due after one year through five
years............................. 4,792 4,961 61,011 61,200
Due after five years through ten
years............................. 4,562 4,781 44,960 45,287
Due after ten years................ 500 525 3,779 3,849
Mortgage-backed securities......... 21,588 21,712 160,589 161,442
Equity securities.................. 7,090 7,029
------- ------- -------- --------
Totals........................... $34,655 $35,214 $288,092 $289,558
======= ======= ======== ========
During 1998, gross gains of $174,000 were realized and there were no gross
realized losses. During 1997, gross gains of $12,000 and gross losses of
$14,000 were realized. In 1996, gross gains of $95,000 and gross losses of
$179,000 were realized.
During 1996, the Company sold investment securities with an amortized cost
of $3,502,000, resulting in realized losses of $42,000. These securities were
transferred to NBC pursuant to the 1996 merger of a former ANB subsidiary and
NBC. The securities did not meet the criteria of NBC's formal investment
policy.
Equity securities are comprised primarily of Federal Home Loan Bank and
Federal Reserve Bank stock; these holdings are required under regulatory
guidelines.
F-13
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Loans and Other Real Estate
Major classification of loans at December 31, 1998 and 1997 are summarized
as follows (in thousands):
1998 1997
---------- --------
Commercial, financial, and agricultural................ $ 257,409 $208,666
Real estate............................................ 678,367 622,489
Consumer............................................... 77,187 89,971
Other.................................................. 94,509 47,346
---------- --------
Gross loans............................................ 1,107,472 968,472
Less unearned income................................... (1,398) (2,102)
---------- --------
Loans, net of unearned income.......................... 1,106,074 966,370
Less allowance for loan losses......................... (16,540) (14,844)
---------- --------
Net loans.............................................. $1,089,534 $951,526
========== ========
In the normal course of business, loans are made to directors, officers, and
their affiliates. Such loans are made on substantially the same terms as to
other customers of the banks. The aggregate of such loans was $45,363,000 and
$37,875,000 at December 31, 1998 and 1997, respectively. During 1998 and 1997,
new loans of $38,163,000 and $37,391,000 were funded and repayments totaled
$30,675,000 and $34,281,000 respectively.
Loans on which the accrual of interest has been discontinued or reduced
amounted to approximately $4,357,000 and $4,228,000 at December 31, 1998 and
1997, respectively. If the loans of the Company had been current throughout
their terms, gross interest income for the years ended December 31, 1998 and
1997, respectively, would have increased by approximately $384,000 and
$371,000.
Other real estate at December 31, 1998 and 1997 totaled $1,234,000 and
$1,756,000, respectively.
At December 31, 1998 and 1997, the recorded investment in loans for which
impairment has been recognized totaled $4,843,000 and $5,223,000,
respectively, and these loans had a corresponding valuation allowance of
$270,000 and $249,000. The Company recognized no interest on impaired loans
during the portion of the year that they were impaired. The impaired loans at
December 31, 1998 and 1997 were measured for impairment primarily using the
fair value of the collateral.
The Company grants real estate, commercial, and consumer loans to customers
primarily in Alabama, Georgia and Florida. Although the Company has a
diversified loan portfolio, significant concentrations include loans
collateralized by improved and undeveloped commercial and residential real
estate.
F-14
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Allowance for Loan Losses
A summary of the allowance for loan losses for the years ended December 31,
1998, 1997, and 1996 is as follows (in thousands):
1998 1997 1996
------- ------- -------
Balance, beginning of year........................ $14,844 $12,633 $11,621
Provision charged to operations................... 1,796 3,421 1,035
------- ------- -------
16,640 16,054 12,656
------- ------- -------
Loans charged off................................. (1,864) (2,927) (1,996)
Recoveries........................................ 1,764 1,717 1,973
------- ------- -------
Net charge-offs................................... (100) (1,210) (23)
------- ------- -------
Balance, end of year.............................. $16,540 $14,844 $12,633
======= ======= =======
6. Property, Equipment, and Leasehold Improvements
Major classifications of property, equipment, and leasehold improvements at
December 31, 1998 and 1997 are summarized as follows (in thousands):
1998 1997
------- -------
Land........................................................ $ 8,779 $ 7,519
Buildings and improvements.................................. 23,775 22,924
Leasehold improvements...................................... 4,842 4,842
Furniture, equipment, and vault............................. 18,827 16,474
Construction in progress.................................... 1,803 1,859
------- -------
58,026 53,618
Less accumulated depreciation and amortization.............. 19,151 16,870
------- -------
Property, equipment, and leasehold improvements, net........ $38,875 $36,748
======= =======
7. Deposits
Deposits at December 31, 1998 and 1997 are summarized as follows (in
thousands):
1998 1997
---------- ----------
Demand deposit accounts............................... $ 232,450 $ 180,341
NOW accounts.......................................... 187,481 155,147
Savings and money market accounts..................... 298,817 294,072
Time deposits less than $100,000...................... 403,156 369,363
Time deposits of $100,000 or more..................... 153,271 126,556
---------- ----------
Total deposits........................................ $1,275,175 $1,125,479
========== ==========
Certain directors of the Company, including their families and affiliated
companies, are deposit customers. Total deposits of these persons at December
31, 1998 and 1997 were approximately $24,048,000 and $37,128,000,
respectively.
F-15
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Short- and Long-Term Borrowings
Short-term debt is summarized as follows (in thousands):
1998 1997
------- -------
Federal Home Loan Bank (FHLB) debt due June 5, 1998; rate
varies with LIBOR (London Interbank Offered Rate) and was
5.783% at December 31, 1997; collateralized by FHLB stock
and certain first mortgage loans.......................... $12,500
Note payable to independent bank under secured master note
agreement; rate varies with LIBOR and was 6.3191% and
6.6875% at December 31, 1998 and 1997, respectively;
collateralized by the Company's stock in subsidiary
banks..................................................... $11,500 15,250
FHLB debt due May 24, 1999; rate varies with LIBOR and was
5.2875% at December 31, 1998; collateralized by FHLB stock
and certain first mortgage loans.......................... 9,200
FHLB debt due August 1998; rate varies with LIBOR and was
5.915% at December 31, 1997; collateralized by FHLB stock
and certain first mortgage loans.......................... 1,250
FHLB debt due January 31, 1999; interest at fixed rate of
5.24%; collateralized by FHLB stock and certain first
mortgage loans............................................ 1,000
Other short-term notes payable............................. 87
------- -------
Total short-term borrowings................................ $21,700 $29,087
======= =======
Long-term debt is summarized as follows (in thousands):
1998 1997
------- ------
FHLB debt due May 24, 1999; rate varies with LIBOR and was
5.569% at December 31, 1997; collateralized by FHLB stock
and certain first mortgage loans............................ $9,200
FHLB debt due July 11, 2002; interest at fixed rate of 5.78%;
convertible at the option of the FHLB on July 12, 1999 to a
three month LIBOR advance; collateralized by FHLB stock and
certain first mortgage loans................................ $ 5,000 5,000
FHLB debt due October 21, 2003; interest at fixed rate of
4.30%; convertible at the option of the FHLB on October 21,
2000 to a three month LIBOR advance; collateralized by FHLB
stock and certain first mortgage loans...................... 10,000
FHLB debt due March 26, 2008; interest at fixed rate of
5.51%; convertible at the option of the FHLB on March 26,
2003 to a three month LIBOR advance; collateralized by FHLB
stock and certain first mortgage loans...................... 5,000
FHLB debt due July 25, 2001; interest at fixed rate of 6.40%;
collateralized by FHLB stock and pledged available for sale
securities with a carrying value of $2,504,000 and
$2,491,000 at December 31, 1998 and 1997, respectively...... 2,000 2,000
FHLB debt due June 18, 2003; interest at fixed rate of 5.40%;
convertible at the option of the FHLB on June 18, 2000 to a
three month LIBOR advance; collateralized by FHLB stock and
certain first mortgage loans................................ 5,000
F-16
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 1997
------- -------
FHLB debt due November 5, 2003; interest at fixed rate of
4.74%; convertible at the option of the FHLB on November
5, 2001 to a three month LIBOR advance; collateralized by
FHLB stock and certain first mortgage loans............... 5,000
Capital leases payable..................................... 328 387
------- -------
Total long-term debt....................................... $32,328 $16,587
======= =======
The note payable to an independent bank at December 31, 1998 is payable in
full on May 31, 1999. Maximum borrowings under the secured master note
agreement is $20,000,000 and interest is payable quarterly. Total interest
expense paid on the note was $870,000 in 1998, $1,156,000 in 1997, and
$1,343,000 in 1996.
At December 31, 1998, the Company has $51,600,000 of available credit with
the FHLB in addition to the $42,200,000 above, $8,500,000 of available credit
with a large regional financial institution, and federal funds lines of
$156,050,000 with various correspondent banks, of which $119,750,000 remains
available.
The FHLB has a blanket lien on the Company's 1-4 family mortgage loans in
the amount of the outstanding debt.
Additional details regarding short-term debt are shown below (in thousands):
1998 1997 1996
------- ------- -------
Average amount outstanding during the year........ $22,697 $43,236 $29,813
Maximum amount outstanding at any month end....... $48,147 $50,600 $46,476
Weighted average interest rate:
During year..................................... 6.42% 6.16% 6.79%
End of year..................................... 5.83% 6.27% 6.35%
9. Leases
One of the Company's subsidiary banks leases its main office building from a
partnership, which includes a director and a stockholder of the Company, under
a noncancelable operating lease expiring in 2013. Leases classified as capital
leases include branch offices with a net book value of approximately $221,000
at December 31, 1998. Additionally, this subsidiary bank leases other branch
offices and equipment under operating leases.
Minimum future rental payments for the capital and operating leases are as
follows (in thousands):
Capital Operating
Leases Leases
------- ---------
1999....................................................... $ 90 $ 1,058
2000....................................................... 90 1,055
2001....................................................... 75 1,016
2002....................................................... 54 1,013
2003....................................................... 54 1,016
Thereafter................................................. 51 9,079
---- -------
Total minimum payments..................................... 414 $14,237
=======
Less amount representing interest.......................... 86
----
Net capital lease obligation............................... $328
====
F-17
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rents charged to operations under operating lease agreements for the years
ended December 31, 1998, 1997, and 1996 were approximately $1,342,000,
$1,350,000, and $1,219,000, respectively, of which $968,000, $942,000, and
$870,000, respectively, during 1998, 1997, and 1996 relate to leases with
related parties.
10. Commitments and Contingencies
In the normal course of business, the Company makes commitments to meet the
financing needs of its customers. These commitments include commitments to
extend credit and standby letters of credit. These instruments include, to
varying degrees, elements of credit risk in excess of the amount recognized in
the consolidated statements of condition. The Company's exposure to credit
risk is the extent of nonperformance by the counterparty to the financial
instrument for commitments to extend credit and standby letters of credit and
is represented by the contractual amount of those instruments. The Company
uses the same credit policies and procedures in making commitments and
conditional obligations as it does for loans.
At December 31, 1998 and 1997, unused commitments under lines of credit
aggregated approximately $276,877,000 and $220,091,000, of which $21,132,000
and $14,898,000 pertained to related parties, respectively. The Company
evaluates each customer's credit worthiness on a one-by-one basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property, plant, and equipment, residential real estate and income-producing
commercial properties.
The Company had approximately $8,814,000 and $3,203,700 in irrevocable
standby letters of credit outstanding at December 31, 1998 and 1997, of which
$204,000 at December 31, 1997 pertained to related parties. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The collateral varies but may
include accounts receivable, inventory, property, plant, and equipment, and
residential real estate for those commitments for which collateral is deemed
necessary.
The Company, in the normal course of business, is subject to various pending
and threatened litigation. Based on legal counsel's opinion, management does
not anticipate that the ultimate liability, if any, resulting from such
litigation will have a material adverse effect on the Company's financial
condition or results of operations.
11. Employee Benefit Plans
One of the subsidiary banks, NBC, has a defined benefit pension plan
covering substantially all employees. Benefits are based on years of service
and the average monthly earnings for the last sixty months of employment. The
Company's policy is to use the "projected unit credit" actuarial method for
financial reporting purposes and the "frozen entry age" actuarial method for
funding purposes. The components of net pension expense for the years ended
December 31, 1998, 1997, and 1996 are as follows (in thousands):
1998 1997 1996
----- ----- -----
Service cost............................................... $ 505 $ 412 $ 342
Interest cost.............................................. 261 210 167
Expected return on assets.................................. (297) (209) (163)
Amortization of transition (asset)/obligation.............. (2) (2) (2)
Amortization of prior service cost......................... 2 2 2
Recognized net actuarial (gain)/loss....................... 23 12 20
----- ----- -----
Net pension cost........................................... $ 492 $ 425 $ 366
===== ===== =====
F-18
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of the beginning and ending balances of the projected
benefit obligation and plan assets, as well as disclosure of the plans funded
status for the years ended December 31, 1998 and 1997, is as follows (in
thousands):
1998 1997
------- ------
Change in benefit obligation
Projected benefit obligation at end of prior year............. $ 3,774 $2,580
Service cost................................................ 505 412
Interest cost............................................... 261 209
Actuarial loss.............................................. 464 629
Benefits paid............................................... (29) (56)
------- ------
Projected benefit obligation at end of year................... $ 4,975 $3,774
======= ======
Change in plan assets
Fair value of plan assets at end of prior year................ $ 3,041 $2,398
Actual return on plan assets................................ 303 292
Employer contributions...................................... 422 407
Benefits paid............................................... (29) (56)
------- ------
Fair value of plan assets at end of year...................... $ 3,737 $3,041
======= ======
Funded status
Plan assets less than projected benefit obligation............ $ 1,238 $ 733
Unrecognized net loss......................................... (1,195) (761)
Unrecognized prior service cost............................... (15) (17)
Unrecognized net asset at date of initial application......... 11 13
------- ------
Accrued pension liability (asset)............................. $ 39 $ (32)
======= ======
Primary assumptions used to actuarially determine net pension expense are as
follows:
1998 1997 1996
---- ---- ----
Settlement (discount rate).................................... 6.50% 7.00% 7.00%
Expected long-term rate of return on plan assets.............. 9.00% 9.00% 9.00%
Salary increase rate.......................................... 4.25% 4.25% 4.25%
The Company has a qualified employee benefit plan under Section 401(k) of
the Internal Revenue Code covering substantially all employees. Employees can
contribute up to 10% of their salary to the plan on a pre-tax basis and the
Company matches participants' contributions up to the first 2% of each
participant's salary. The Company's matching contribution charged to
operations related to this plan, as well as other plans of merged banks, was
$431,000, $375,000, and $277,000 for the years ended December 31, 1998, 1997,
and 1996, respectively.
Several of the subsidiary banks have deferred compensation plans for the
benefit of the Company's former chief executive officer. Payments under the
plans are scheduled to begin March 15, 1997 and March 15, 2002, or at his
death, if earlier, and continue for a period of 15 years. In connection with
the plans, the banks purchased single premium life insurance policies on the
life of the officer. At December 31, 1998, the cash surrender value of the
policies was $2,182,000.
F-19
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A subsidiary of the Company maintains life insurance contracts to provide
benefits to its directors under Executive Supplemental Income Plan agreements.
Under these agreements, the subsidiary is obligated to pay death benefits to
the beneficiaries of its directors. These death benefits are funded through
the purchase of whole life insurance policies under which the subsidiary is
the beneficiary. These contracts provide dividends and increases in asset
value from which these benefits will be paid. At December 31, 1998 and 1997,
the cash surrender value of the insurance contracts was approximately
$1,415,000 and $1,046,000, respectively. Expenses incurred for benefits
relating to this plan were approximately $27,000, $21,000, and $46,000 during
1998, 1997, and 1996, respectively.
Additionally, ANB and five of its subsidiary banks have deferred
compensation plans that cover certain former directors of ANB and the
presidents of certain subsidiary banks. In connection with the plans, ANB and
each subsidiary have purchased single premium life insurance policies on all
participants, except one. At December 31, 1998, the cash surrender value of
these policies was $1,965,473.
The Company has fixed stock options outstanding which were granted under
separate stock option plans of the different parties to the FAB Merger, CFC
Merger, and Naples Merger. Additionally, the Company had fixed stock option
plans with options granted prior to these mergers. No future stock option
awards are anticipated under any of these plans. Under the terms of stock
option plans related to FAB, options to purchase shares of FAB's common stock
were granted in 1996 and 1997. As a result of the FAB Merger, all of the
options previously issued under these stock option plans became immediately
exercisable on November 30, 1997. In 1996, the fair value of each option grant
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for the grants:
cash dividend yield of 0%; expected volatility of 11.4%, risk-free interest
rate of 5.5%; and expected life of 7 years. The weighted average grant date
fair value of 1996 option grants was $5.21. In 1997, the fair value of each
option grant was estimated on the grant date using the Black-Scholes option-
pricing model with the following weighted average assumptions used for the
grants: cash dividend yield of 0%; expected volatility of 17%; risk-free
interest rate of 6.5%; and expected life of 10 years. The weighted average
grant date fair value of 1997 option grants was $9.86. No stock option related
compensation expense was recorded in 1998. Compensation expense recorded in
1997 and 1996 related to these options was $325,000 and $5,000, respectively.
Under terms of the stock option plans related to the Naples Merger, options to
purchase 37,290 shares of Naples' common stock were granted in 1996. The fair
value of each option was estimated on the date of the grant using the Black-
Scholes option-pricing model with the following weighted average assumptions
used for the grants: cash dividend yield of 0%; expected volatility of 0%,
risk-free interest rate of 6.0%; and expected life of 10 years. The weighted
average grant date fair value of the Naples option grants was $9.39. Under the
Naples options plan, compensation expense of $31,000 was recorded in each of
1998, 1997, and 1996.
Under terms of the stock option plans related to the CFC Merger, options to
purchase shares of CFC's common stock were granted to certain officers and
directors of CFC in 1996, 1997, and 1998. The fair value of each option was
estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for the grants:
cash dividend yield of 1% in 1998 and 0% in 1997 and 1996; expected volatility
of .05% in 1998 and 0% in 1997 and 1996, risk-free interest rate of 5.00%,
5.80%, and 5.11% for 1998, 1997, and 1996, respectively; and expected life of
seven years for each of 1998, 1997, and 1996. The weighted average grant date
fair value of CFC's option grants was $5.91, $4.09, and $9.72 in 1998, 1997,
and 1996, respectively. Under the CFC plans, compensation expense was $59,000,
$40,000, and $50,000 in 1998, 1997, and 1996, respectively.
F-20
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's fixed stock options as of December
31, 1998, 1997, and 1996 and changes during each of the three years then ended
is presented below:
1998 1997 1996
------------------ ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- ------- --------
Outstanding, beginning
of year................ 487,146 $ 7.98 585,777 $ 8.05 598,712 $ 7.97
Granted................. 11,258 20.66 41,771 15.61 49,979 10.22
Exercised............... (168,347) 6.19 (140,402) (10.68) (10,352) 9.83
Forfeited............... (52,562) 8.50
-------- ------ -------- ------- ------- ------
Outstanding, end of
year................... 330,057 $ 9.33 487,146 $ 7.98 585,777 $ 8.09
======== ====== ======== ======= ======= ======
Options exercisable, end
of year................ 258,785 260,509 307,958
======== ======== =======
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
Options Outstanding
--------------------------
Remaining
Exercise Number Contractual Options
Price Outstanding Life Exercisable
-------- ----------- -------------- -----------
$ 5.03.............................. 10,554 March 2004 10,554
$ 5.68.............................. 56,356 August 2003
$ 5.97.............................. 5,277 March 2005 5,277
$ 6.39.............................. 80,848 October 2002 80,848
$ 9.39.............................. 37,290 August 2006 22,374
$10.00.............................. 52,333 November 2004 52,333
$10.10.............................. 14,848 October 2004 14,848
$11.37.............................. 7,740 March 2006 7,740
$13.00.............................. 6,833 November 2005 6,833
$14.64.............................. 4,949 February 2006 4,949
$15.29.............................. 7,740 March 2007 7,740
$15.56.............................. 26,995 March 2007 26,995
$16.17.............................. 7,036 September 2007 7,036
$20.60.............................. 7,740 March 2008 7,740
$20.78.............................. 3,518 September 2009 3,518
------- -------
330,057 258,785
======= =======
The Company has 64,979 restricted shares of stock outstanding pursuant to a
Restricted Stock Agreement (RSA) originated in 1994. The RSA provides for
employees covered by the plan to elect a cash award equal to an amount of
personal income tax liability resulting from the award. RSA participants are
entitled to vote their respective shares. No dividends are permitted, and the
sale or transfer of shares is restricted for five years. Shares awarded to
participants that leave NBC prior to the completion of five years of service
following the award are required to be surrendered and are ratably awarded to
remaining participants. During the years ending December 31, 1998, 1997 and
1996, total expense for the RSA was $92,000, $93,000, and $93,000,
respectively.
During 1996, the Company adopted a Performance Share Plan to offer long-term
incentives in addition to current compensation to key executives. The criteria
for payment of performance share awards is based upon a comparison of the
Company's average return on average equity over an award period to that of a
comparison
F-21
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
group of bank holding companies. If the Company's results are below the median
of the comparison group, no portion of the award is earned. If the Company's
results are at or above the 90th percentile, the award maximum is earned. The
vesting period for the awards is four years. Under the plan, 400,000 shares
have been reserved for issuances. The number of shares granted in 1996 was
16,750 shares with an approximate market value at the date of grant of
$222,000. In 1997, 16,000 shares were granted under the plan with an
approximate market value at the date of grant of $308,000. In 1998, 17,813
shares were granted under the plan with an approximate market value at the
date of grant of $470,000. At December 31, 1998, outstanding awards of
expected and maximum payouts were 65,762 and 70,890 shares, respectively.
Expense recorded for the Performance Share Plan was $411,400, $105,000, and
$55,500 in 1998, 1997, and 1996, respectively.
During October 1997, the Company adopted a Performance Share Plan to offer
long-term incentives to key executives at one of the Company's subsidiary
banks (the Subsidiary PSP). Under the plan, non-employee directors of that
bank who are not also directors of the Company will be eligible to receive
performance share awards providing certain criteria are met. Those criteria
are that the director purchase a prescribed number of shares of the Company's
stock (as provided in the Subsidiary PSP) and that the director continues to
serve as a member of the board of directors of that bank until December 31,
2002. The amount of actual shares to be paid, assuming the preceding
conditions are met, will be based on the net income of that bank for the year
ended December 31, 2002. The maximum number of shares of common stock which
may be awarded under the Subsidiary PSP is approximately 20,000 shares, which
vest over a sixty-three month period. During 1997, the maximum number of
shares were assumed to be granted, with an approximate market value on the
date of grant of $503,000. Expense recorded for the Subsidiary PSP was $96,000
in 1998 and $24,000 in 1997.
The Company maintains deferral of compensation plans for certain directors
who are not employees of the Company. Under the plan, a non-employee director
may choose to have all or part of the cash and/or stock equivalents he would
normally receive as compensation deferred for future payment at such time and
in such manner as the director specifies at the time of the election, so long
as any annuity payment period does not exceed ten years. The cash portion of
the deferral of compensation account earns interest at a rate which
approximates the Company's short-term borrowing rate. Dividends earned on the
stock equivalent portion are credited to the deferral of compensation account
in the form of additional stock equivalents. At December 31, 1998, the amount
payable under terms of these plans totaled $364,000. For the years ending
December 31, 1998, 1997, and 1996, approximately $207,000, $136,000, and
$64,000, respectively, was expensed under these plans.
One of the Company's subsidiary banks has a deferred compensation plan
whereby directors may elect to have all or a portion of their compensation
deferred. Expense recognized under the plan was $23,000, $18,000, and $17,500
in 1998, 1997, and 1996, respectively. At December 31, 1998, amounts payable
under the plan totaled $63,000.
F-22
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A subsidiary of the Company adopted an ESOP plan that covers substantially
all the subsidiary's employees, subject to certain minimum age and service
requirements. The subsidiary makes contributions to the ESOP as determined
annually by its Board of Directors. In November 1996, the ESOP incurred debt
to purchase 6,701 shares of subsidiary stock thus converting the plan from a
nonleveraged ESOP to a leveraged ESOP. Prior to the leveraged ESOP, the
subsidiary made cash contributions to the ESOP which were used to purchase
4,944 shares of Company stock and, in turn, allocated to the participants.
Subsequent to November 1996, contributions to the ESOP will, at a minimum, be
applied to meet the ESOP's debt service requirements. As the debt is repaid,
shares are released and allocated to active employees, based on the proportion
of debt service paid during the year. Accordingly, the debt incurred by the
ESOP is recorded as a note payable and the shares purchased with the debt
proceeds are reported as unearned ESOP shares in the consolidated balance
sheet. As the debt is repaid, the Company will also record compensation
expense equal to the current market price of the shares released, and the
shares will become outstanding for purposes of earnings per share
computations. Compensation expense of approximately $42,000, $36,000, and
$24,000 was recognized during 1998, 1997, and 1996, respectively. During 1998
and 1997, respectively, approximately 754 and 894 shares were released. ESOP
shares at December 31, 1998 are summarized as follows:
Allocated shares............................................... 6,593
Unallocated shares............................................. 5,052
--------
Total ESOP shares............................................ 11,645
========
Fair value of unallocated shares............................... $126,000
========
The Company is in the process of winding down the ESOP. Some of the
unallocated shares of the ESOP will be sold on the open market to pay off the
debt incurred by the ESOP. The remaining shares will be distributed to the
participants on a pro rata basis. The Company anticipates this process to be
completed by June 30, 1999.
12. Income Taxes
The components of the provision for income taxes consist of the following
for the years ended December 31, 1997, 1996, and 1995 (in thousands):
1998 1997 1996
------ ------ ------
Current:
Federal............................................... $7,989 $6,482 $5,048
State................................................. 760 796 833
------ ------ ------
Total current expense................................... 8,749 7,278 5,881
Deferred:
Federal............................................... (655) (681) (58)
State................................................. 119 (99) (73)
------ ------ ------
Total deferred benefit.................................. (536) (780) (131)
Change in valuation allowance........................... (59) (412) (471)
------ ------ ------
Total provision for income taxes........................ $8,154 $6,086 $5,279
====== ====== ======
F-23
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities for the years ended December
31, 1998 and 1997 are as follows (in thousands):
1998 1997
------ ------
Deferred tax assets:
Loan loss reserve.............................................. $3,422 $3,161
Other real estate owned basis difference....................... 28 95
Net operating loss............................................. 171 775
Deferred compensation.......................................... 931 658
Loan fees...................................................... 285 326
Other.......................................................... 373 234
------ ------
Total deferred tax asset......................................... 5,210 5,249
Valuation allowance.............................................. (59)
Deferred tax liabilities:
Depreciation and basis difference.............................. 2,381 2,235
Unrealized gains on securities................................. 617 343
Other.......................................................... 14 406
Core deposits.................................................. 179 213
------ ------
Total deferred tax liabilities................................... 3,191 3,197
------ ------
Net deferred tax asset........................................... $2,019 $1,993
====== ======
Total provision for income taxes differs from the amount which would be
provided by applying the statutory federal income tax rate to pretax earnings
as illustrated below for the years ended December 31, 1998, 1997, and 1996 (in
thousands):
1998 1997 1996
------ ------ ------
Provision for income taxes at statutory federal
income tax rate.................................. $8,687 $6,897 $6,462
Increase (decrease) resulting from:
State income taxes, net of federal income tax
benefit........................................ 541 446 545
Change in valuation allowance................... (59) (412) (471)
Tax free interest income........................ (677) (689) (666)
Nondeductible meals and entertainment........... 92 108 84
Disallowed interest expense deduction........... 87 85 85
Goodwill and core deposit amortization.......... 103 105 98
Bad debt recapture.............................. (113)
General business and other credits.............. (706) (614) (244)
Net operating losses............................ (55) (61) (61)
Other, net...................................... 141 221 (440)
------ ------ ------
Total provision for income taxes.................. $8,154 $6,086 $5,279
====== ====== ======
For Federal income tax purposes, one of the Company's subsidiaries has net
operating loss carryforwards totaling $504,000, which will expire beginning in
2006. One subsidiary of the Company has state net operating loss carryforwards
and tax credits totaling $3,732,000 and $83,000, respectively, which will
expire beginning in 2006.
F-24
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Noninterest Expense
The following table sets forth, for the years ended December 31, 1998, 1997,
and 1996, the principal components of noninterest expense (in thousands):
1998 1997 1996
------- ------- -------
Salaries and employee benefits...................... $36,021 $29,992 $28,756
Net occupancy expense............................... 6,724 6,622 6,481
Amortization of goodwill............................ 302 298 305
Advertising......................................... 976 1,439 1,180
Banking assessments................................. 298 382 1,090
Data processing expenses............................ 2,435 1,974 1,606
Legal and professional fees......................... 3,609 1,908 2,044
Noncredit losses (recoveries)....................... 129 283 (24)
Other............................................... 10,660 9,890 8,737
------- ------- -------
Total noninterest expense........................... $61,154 $52,788 $50,175
======= ======= =======
14. Earnings Per Share
The following table reflects the reconciliation, after adjusting for stock
splits, of the basic EPS computation to the diluted EPS computation (in
thousands, except per share data):
Per Share
Income Shares Amount
------- ------ ---------
1998
Basic EPS net income................................ $17,372 10,804 $1.61
=====
Effect of dilutive securities options............... 369
------- ------
Diluted EPS......................................... $17,372 11,173 $1.55
======= ====== =====
1997
Basic EPS net income................................ $14,116 10,552 $1.34
=====
Effect of dilutive securities options............... 447
------- ------
Diluted EPS......................................... $14,116 10,999 $1.28
======= ====== =====
1996
Basic EPS net income(1)............................. $13,627 9,960 $1.37
=====
Effect of dilutive securities options............... 505
Convertible debentures, net of taxes................ 5 25
------- ------
Diluted EPS......................................... $13,632 10,490 $1.30
======= ====== =====
- --------
(1) Basic EPS net income excludes cash dividends on preferred stock.
F-25
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash, Due From Banks, Interest-Bearing Cash Balances, and Federal Funds
Sold--The carrying amount is a reasonable estimate of fair value.
Investment, Available for Sale, and Trading Securities--Fair value is based
on quoted market prices or dealer quotes.
Loans--The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Deposits--The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated using
the rates currently offered for deposits of similar remaining maturities.
Federal Funds Purchased, Short-Term Borrowings, and Long-Term Debt--The
carrying amount is a reasonable estimate of fair value.
Commitments to Extend Credit and Standby Letters of Credit--All commitments
to extend credit and standby letters of credit have original terms, at their
issuance, of one year or less; therefore, the fair value of these instruments
does not materially differ from their stated value.
The estimated fair values of financial instruments at December 31, 1998 and
1997 are as follows (in thousands):
1998 1997
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Financial assets:
Cash and due from banks.............. $ 70,813 $ 70,813 $ 53,216 $ 53,216
Interest-bearing deposits in other
banks............................... 225 225 2,391 2,391
Federal funds sold and securities
purchased under agreements to
resell.............................. 57,076 57,076 78,835 78,835
Investment securities and securities
available for sale.................. 324,213 324,772 265,102 265,019
Trading securities................... 5,534 5,534 399 399
Loans................................ 1,106,074 1,133,460 966,370 960,656
Financial liabilities:
Deposits............................. 1,275,175 1,284,915 1,125,479 1,123,549
Federal funds purchased; securities
sold under agreements to resell; and
treasury, tax, and loan account..... 164,139 164,139 146,647 146,647
Short-term borrowings................ 21,700 21,700 29,087 29,087
Long-term debt....................... 32,328 34,088 16,587 16,594
F-26
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Parent Company
The condensed financial information of the parent company only for the years
ended December 31, 1998, 1997, and 1996 is presented as follows (in
thousands):
1998 1997
-------- --------
Balance Sheets
Assets:
Cash...................................................... $ 2,482 $ 2,983
Securities available for sale............................. 337 399
Investments in subsidiaries............................... 139,386 124,561
Intangibles............................................... 6,669 7,003
Other assets.............................................. 1,360 1,177
-------- --------
Total assets................................................ $150,234 $136,123
======== ========
Liabilities and stockholders' equity:
Accounts payable.......................................... $ 7,601 $ 3,662
Accrued interest payable.................................. 140 236
Short- and long-term debt................................. 11,500 15,337
-------- --------
Total liabilities........................................... 19,241 19,235
-------- --------
Stockholders' equity:
Common stock.............................................. 10,972 10,603
Additional paid-in capital................................ 78,570 77,081
Retained earnings......................................... 40,584 28,838
Unearned restricted stock................................. (92)
Unearned ESOP............................................. (75) (87)
Accumulated other comprehensive income, net of taxes...... 942 545
-------- --------
Total stockholders' equity.................................. 130,993 116,888
-------- --------
Total liabilities and stockholders' equity.................. $150,234 $136,123
======== ========
1998 1997 1996
------- ------- -------
Statements of Income
Income:
Dividends from subsidiaries......................... $ 7,496 $10,421 $ 8,370
Securities gains.................................... 139
Other............................................... 41 34 60
------- ------- -------
7,676 10,455 8,430
------- ------- -------
Expenses:
Interest expense.................................... 870 1,165 1,393
Other expenses...................................... 3,797 1,940 3,405
------- ------- -------
Total expenses........................................ 4,667 3,105 4,798
------- ------- -------
Income before equity in undistributed earnings of
subsidiaries......................................... 3,009 7,350 3,632
Equity in undistributed earnings of subsidiaries...... 13,059 5,816 8,289
------- ------- -------
Income before income taxes............................ 16,068 13,166 11,921
Income tax benefit.................................... 1,304 950 1,710
------- ------- -------
Net income............................................ $17,372 $14,116 $13,631
======= ======= =======
F-27
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 1997 1996
------- ------- -------
Statements of Cash Flows
Cash flows from operating activities:
Net income.......................................... $17,372 $14,116 $13,631
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of investment in consolidated
subsidiaries in excess of net assets acquired and
core deposits.................................... 334 369 289
Equity in undistributed earnings of subsidiaries.. (13,059) (5,816) (8,321)
Deferred tax (benefit) expense.................... (474) 99 (282)
Other............................................. 222 285 275
Increase in other assets and liabilities.......... 4,147 1,097 39
------- ------- -------
Net cash provided by operating activities....... 8,542 10,150 5,631
------- ------- -------
Cash flows from investing activities
Additional investment in subsidiaries............... (1,500) (3,014)
Decrease (increase) in securities available for
sale............................................... 62 (194) (1)
------- ------- -------
Net cash used in investing activities........... (1,438) (3,208) (1)
------- ------- -------
Cash flows from financing activities
Dividends on common stock........................... (5,626) (3,342) (1,747)
Dividends of preferred stock........................ (4)
Change in other liabilities......................... (438) (5,024)
Exercise of stock options........................... 1,858 82 100
Issuance of common stock............................ 205
Distribution for fractional shares.................. (14) (3)
Net (decrease) increase in borrowings............... (3,837) (1,763) 1,223
Redemption of preferred stock....................... (53)
------- ------- -------
Net cash used in financing activities........... (7,605) (5,475) (5,303)
------- ------- -------
Net (decrease) increase in cash................. (501) 1,467 327
Cash, beginning of year............................. 2,983 1,516 1,189
------- ------- -------
Cash, end of year................................... $ 2,482 $ 2,983 $ 1,516
======= ======= =======
17. Regulatory
The subsidiary banks are required by law to maintain reserves in cash or
deposits with the Federal Reserve Bank or other banks. At December 31, 1998,
the required reserves totaled $13,663,000.
At December 31, 1998 and 1997, securities with carrying values of
$176,794,000 and $149,564,000, respectively, were pledged to secure U.S.
government deposits and other public funds and for purposes as required or
permitted by law.
The Company has a policy of collecting amounts from its subsidiaries
sufficient to cover expenses of the Company and to service Company debt. Such
amounts have been received in the form of dividends declared by the
subsidiaries. Payment of dividends is subject to the financial condition of
the subsidiaries and the Company's judgment as to the desirability of
utilizing alternative sources of funds. The payment of dividends by the
subsidiary banks is also subject to various regulatory requirements. At
December 31, 1998, $27,555,000 of the
F-28
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
retained earnings of the subsidiary banks are available for payment of
dividends to the Company under the various regulatory requirements, without
special approval from the applicable regulators.
The Company is 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 Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company maintain minimum amounts and ratios (set forth in the
table below) of total qualifying capital 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, that the Company meets all capital adequacy requirements to which it
is subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Company must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The actual capital amounts and ratios of the Company are presented in the
table below (in thousands):
To Be Well
Capitalized
Under Prompt
Corrective
For Capital Action
Actual Adequacy Purposes Provisions
-------------- ----------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------------------ -------- -----
As of December 31, 1998:
Total qualifying capital
(to risk-weighted
assets).................. $138,028 11.28% $ 97,891 8.00% $122,364 10.00%
Tier I capital (to risk-
weighted assets)......... $122,732 10.03% $ 48,946 4.00% $ 37,418 6.00%
Tier I Capital (to average
assets).................. $122,732 7.41% $ 66,250 4.00% $ 82,813 5.00%
As of December 31, 1997:
Total qualifying capital
(to risk-weighted
assets).................. $123,549 11.14% $ 88,746 8.00% $ 90,461 10.00%
Tier I capital (to risk-
weighted assets)......... $109,682 9.89% $ 44,373 4.00% $ 54,276 6.00%
Tier I Capital (to average
assets).................. $109,682 7.75% $ 56,636 4.00% $ 70,795 5.00%
F-29
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The actual capital amounts and ratios of National Bank of Commerce, the
Company's most significant subsidiary, are presented in the table below (in
thousands):
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
As of December 31, 1998:
Total qualifying capital (to
risk-weighted assets)........... $64,397 10.90% $47,278 8.00% $59,097 10.00%
Tier I capital (to risk-weighted
assets)......................... $57,010 9.65% $23,639 4.00% $35,458 6.00%
Tier I Capital (to average
assets)......................... $57,010 7.33% $31,092 4.00% $38,866 5.00%
As of December 31, 1997:
Total qualifying capital (to
risk-weighted assets)........... $56,949 10.37% $43,950 8.00% $54,938 10.00%
Tier I capital (to risk-weighted
assets)......................... $50,082 9.12% $21,975 4.00% $32,963 6.00%
Tier I Capital (to average
assets)......................... $50,082 7.41% $27,042 4.00% $33,802 5.00%
18. Related Party Transactions
In addition to the previously disclosed related party transactions, the
Company received trust fees of approximately $700,000 in 1998, $589,000 in
1997, and $488,000 in 1996 from related parties.
19. Segment Reporting
In addition to the traditional commercial and consumer retail banking
products, the Company also offers trust services, mortgage lending services,
and investment services to its customers. The trust division manages the
assets of both corporate and individual customers, all of which are primarily
located in the Birmingham, Alabama market. The mortgage lending division makes
home loans to individuals throughout the state of Alabama. The majority of the
loans made are sold to corporate investors, who also service the loans. The
investment services division sells fixed income and equity securities trading
services to both individual and corporate customers. These three divisions,
along with the commercial and retail banking division, are considered the
Company's reportable segments for the purpose of Statement 131.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies except that certain overhead
expenses are not allocated among the segments. Additionally, the fixed assets
utilized by the various divisions are not separately identified by management.
Accordingly, the results of operations for the trust, mortgage lending, and
investment banking segments are not indicative of the results which would be
achieved if each of the segments were a separate company. Intersegment
transactions are accounted for at fair market value.
F-30
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's reportable segments represent the distinct major product lines
the Company offers and are viewed separately for strategic planning purposes
by management. The following table is a reconciliation of the reportable
segment revenues, expenses, and profit to the Company's consolidated totals
(in thousands):
Investment Mortgage Retail and
Services Trust Lending Commercial Corporate Elimination
Division Division Division Banking Overhead(1) Entries Total
---------- -------- -------- ---------- ----------- ----------- --------
Year ended December 31,
1998:
Interest income......... $ 1,564 $ 474 $114,462 $(796) $115,704
Interest expense........ 401 395 56,555 (796) 56,555
------- ------ -------- ----- --------
Net interest income..... 1,163 79 57,907 59,149
Provision for loan
losses................. 1,796 1,796
Noninterest income...... 11,754 $2,101 4,608 11,192 (305) 29,350
Noninterest expense..... 10,500 1,169 2,545 42,226 $ 5,019 (305) 61,154
------- ------ ------ -------- ------- ----- --------
Net income before
provision for income
taxes and minority
interest............... $ 2,417 $ 932 $2,142 $ 25,077 $(5,019) $ 0 $ 25,549
======= ====== ====== ======== ======= ===== ========
Year ended December 31,
1997:
Interest income......... $ 713 $ 545 $103,499 $(249) $104,508
Interest expense........ 110 139 48,379 (249) 48,379
------- ------ -------- ----- --------
Net interest income..... 603 406 55,120 56,129
Provision for loan
losses................. 3,421 3,421
Noninterest income...... 8,760 $1,799 1,644 8,091 20,294
Noninterest expense..... 8,369 1,105 1,504 39,840 $ 1,970 $ $ 52,788
------- ------ ------ -------- ------- ----- --------
Net income before
provision for income
taxes and minority
interest............... $ 994 $ 694 $ 546 $ 19,950 $(1,970) $ 0 $ 20,214
======= ====== ====== ======== ======= ===== ========
Year ended December 31,
1996:
Interest income......... $ 657 $ 293 $ 92,402 $(174) $ 93,178
Interest expense........ 90 84 42,174 (174) 42,174
------- ------ -------- ----- --------
Net interest income..... 567 209 50,228 51,004
Provision for loan
losses................. 1,035 1,035
Noninterest income...... 8,586 $1,550 1,187 7,807 19,130
Noninterest expense..... 8,461 1,175 926 37,783 $ 1,830 50,175
------- ------ ------ -------- ------- ----- --------
0
Net income before
provision for income
taxes and minority
interest............... $ 692 $ 375 $ 470 $ 19,217 $(1,830) $ 0 $ 18,924
======= ====== ====== ======== ======= ===== ========
- --------
(1) Corporate overhead is comprised of compensation and benefits for certain
members of management and merger-related costs.
F-31