SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-25160 ALABAMA NATIONAL BANCORPORATION ------------------------------- (Exact Name of Registrant as Specified in Its Charter) DELAWARE 63-1114426 -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 1927 FIRST AVENUE NORTH, BIRMINGHAM, ALABAMA 35203-4009 ------------------------------------------------------- (Address of principal executive office) Registrant's telephone number, including area code: (205) 583-3600 -------------- ------------------------------------------------------------ (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at November 10, 2000 ----- -------------------------------- Common Stock, $1.00 Par Value 11,047,805 INDEX ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES PART I. FINANCIAL INFORMATION PAGE - ----------------------------- ---- Item 1. Financial Statements (Unaudited) Consolidated statements of condition September 30, 2000 and December 31, 1999 ........................ 3 Consolidated statements of income Three months ended September 30, 2000 and 1999; nine months ended September 30, 2000 and 1999 ................... 4 Consolidated statements of other comprehensive income Three months ended September 30, 2000 and 1999; nine months ended September 30, 2000 and 1999 ................... 8 Consolidated statements of cash flows nine months ended September 30, 2000 and 1999 ................... 10 Notes to the unaudited consolidated financial statements September 30, 2000 .............................................. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 30 PART II. OTHER INFORMATION - -------------------------- Item 6. Exhibits and Reports on Form 8-K ................................ 30 SIGNATURES ............................................................... 31 FORWARD-LOOKING INFORMATION - --------------------------- Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements. In addition, Alabama National BanCorporation ("Alabama National" or, the "Company"), through its senior management, from time to time makes forward-looking public statements concerning its expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting Alabama National's best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in Alabama National's Securities and Exchange Commission filings and other public announcements. With respect to the adequacy of the allowance for loan losses for Alabama National, these factors include the rate of growth in the economy, especially in the Southeast, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and the performance of the stock and bond markets. Part I - Financial Information - ------------------------------ Item 1 - Financial Statements (Unaudited) Alabama National BanCorporation and Subsidiaries Consolidated Statements of Condition ------------------------------------ (In thousands, except share amounts) September 30, 2000 December 31, 1999 ------------------ ----------------- (Unaudited) Assets Cash and due from banks ...................................................... $ 75,246 $ 73,125 Interest-bearing deposits in other banks ..................................... 1,893 6,768 Investment securities (estimated market values of $34,454 and $19,738)........ 34,098 19,616 Securities available for sale................................................. 305,543 325,507 Trading securities ........................................................... 246 2,701 Federal funds sold and securities purchased under resell agreements .......... 44,449 33,568 Loans held for sale .......................................................... 8,761 8,615 Loans ........................................................................ 1,587,196 1,321,245 Unearned income .............................................................. (976) (1,085) ---------- ---------- Loans, net of unearned income ................................................ 1,586,220 1,320,160 Allowance for loan losses .................................................... (20,840) (18,068) ---------- ---------- Net loans .................................................................... 1,565,380 1,302,092 Property, equipment and leasehold improvements, net .......................... 48,388 43,855 Intangible assets ............................................................ 14,619 10,730 Cash surrender value of life insurance ....................................... 40,455 31,642 Receivable from investment division customers ................................ 8,102 24,573 Other assets.................................................................. 40,144 39,092 ---------- ---------- Totals........................................................................ $2,187,324 $1,921,884 ========== ========== Liabilities and Stockholders' Equity Deposits: Noninterest bearing......................................................... $ 248,896 $ 210,185 Interest bearing............................................................ 1,455,914 1,231,970 ---------- ---------- Total deposits ............................................................... 1,704,810 1,442,155 Federal funds purchased and securities sold under repurchase agreements ...... 138,089 131,878 Treasury, tax and loan accounts............................................... 2,551 6,199 Short-term borrowings......................................................... 72,589 18,389 Accrued expenses and other liabilities........................................ 37,109 61,003 Long-term debt ............................................................... 78,948 124,005 ---------- ---------- Total liabilities ............................................................ 2,034,096 1,783,629 Common stock, $1 par, authorized 17,500,000 shares; issued 11,187,019 shares at September 30, 2000 and December 31, 1999............... 11,187 11,187 Additional paid-in capital ................................................... 85,642 81,939 Retained earnings ............................................................ 65,466 54,897 Treasury stock at cost, 139,714 and 121,129 shares at September 30, 2000 and December 31, 1999, respectively......................................... (3,523) (3,226) Accumulated other comprehensive income (loss), net of tax .................... (5,544) (6,542) ---------- ---------- Total stockholders' equity ................................................... 153,228 138,255 ---------- ---------- Totals........................................................................ $2,187,324 $1,921,884 ========== ========== See accompanying notes to unaudited consolidated financial statements 3 Alabama National BanCorporation and Subsidiaries Consolidated Statements of Income (Unaudited) --------------------------------------------- (In thousands, except per share data) For the three months ended September 30, ------------------------ 2000 1999 ------- ------- Interest income: Interest and fees on loans......................................................................... $35,638 $26,482 Interest on securities............................................................................. 5,796 5,238 Interest on deposits in other banks................................................................ 28 44 Interest on trading securities..................................................................... 35 77 Interest on Federal funds sold and securities purchased under resell agreements.................... 566 491 ------- ------- Total interest income................................................................................ 42,063 32,332 Interest expense: Interest on deposits............................................................................... 17,901 12,226 Interest on Federal funds purchased and securities sold under repurchase agreements...................................................................... 2,419 1,994 Interest on long and short-term borrowings......................................................... 2,657 1,080 ------- ------- Total interest expense.............................................................................. 22,977 15,300 ------- ------- Net interest income.................................................................................. 19,086 17,032 Provision for loan losses............................................................................ 400 408 ------- ------- Net interest income after provision for loan losses.................................................. 18,686 16,624 Noninterest income: Securities gains................................................................................... 1 - Gain (loss) on disposition of assets............................................................... (7) 38 Service charges on deposit accounts................................................................ 1,946 1,916 Investment division income......................................................................... 1,603 1,406 Securities brokerage income........................................................................ 1,300 779 Trust department income............................................................................ 555 550 Origination and sale of mortgage loans............................................................. 890 860 Bank owned life insurance.......................................................................... 503 386 Insurance commissions.............................................................................. 402 356 Other.............................................................................................. 957 648 ------- ------- Total noninterest income............................................................................. 8,150 6,939 4 Alabama National BanCorporation and Subsidiaries Consolidated Statements of Income (Unaudited) (Continued) --------------------------------------------------------- (In thousands, except per share data) For the three months ended September 30, -------------------- 2000 1999 ------- ------- Noninterest expense: Salaries and employee benefits............................ 10,756 9,048 Occupancy and equipment expenses ......................... 2,131 1,885 Other..................................................... 4,983 4,301 ------- ------- Total noninterest expense .................................. 17,870 15,234 ------- ------- Income before provision for income taxes ................... 8,966 8,329 Provision for income taxes ................................. 2,760 2,609 ------- ------- Net income ................................................. $ 6,206 $ 5,720 ======= ======= Net income per common share (basic) ........................ $ .56 $ .51 ======= ======= Weighted average common shares outstanding (basic) ......... 11,047 11,127 ======= ======= Net income per common share (diluted) ...................... $ .55 $ .51 ======= ======= Weighted average common shares outstanding (diluted) ....... 11,219 11,315 ======= ======= See accompanying notes to unaudited consolidated financial statements 5 Alabama National BanCorporation and Subsidiaries Consolidated Statements of Income (Unaudited) --------------------------------------------- (In thousands, except per share data) For the nine months ended September 30, --------------------- 2000 1999 -------- ------- Interest income: Interest and fees on loans ............................................................................. $ 97,559 $73,877 Interest on securities.................................................................................. 17,627 14,716 Interest on deposits in other banks .................................................................... 152 65 Interest on trading securities ......................................................................... 97 286 Interest on Federal funds sold and securities purchased under resell agreements......................... 1,746 1,867 -------- ------- Total interest income .................................................................................... 117,181 90,811 Interest expense: Interest on deposits.................................................................................... 47,828 34,306 Interest on Federal funds purchased and securities sold under repurchase agreements..................... 6,683 5,377 Interest on long and short-term borrowings ............................................................. 6,982 2,758 -------- ------- Total interest expense ................................................................................... 61,493 42,441 -------- ------- Net interest income ...................................................................................... 55,688 48,370 Provision for loan losses ................................................................................ 1,553 1,338 -------- ------- Net interest income after provision for loan losses ...................................................... 54,135 47,032 Noninterest income: Securities gains ....................................................................................... 1 189 Gain (loss) on disposition of assets.................................................................... (15) 246 Service charges on deposit accounts .................................................................... 5,699 5,538 Investment division income.............................................................................. 3,949 5,364 Securities brokerage income............................................................................. 3,760 2,665 Trust department income................................................................................. 1,694 1,620 Origination and sale of mortgage loans ................................................................. 2,625 3,229 Bank owned life insurance .............................................................................. 1,491 1,111 Insurance commissions .................................................................................. 1,499 488 Other................................................................................................... 2,697 1,942 -------- ------- Total noninterest income ................................................................................. 23,400 22,392 6 Alabama National BanCorporation and Subsidiaries Consolidated Statements of Income (Unaudited) (Continued) --------------------------------------------------------- (In thousands, except per share data) For the nine months ended September 30, ------------------- 2000 1999 ----- ----- Noninterest expense: Salaries and employee benefits ......................................................... 30,960 27,538 Occupancy and equipment expenses ....................................................... 6,123 5,272 Other................................................................................... 14,817 13,043 ------- ------- Total noninterest expense ................................................................. 51,900 45,853 ------- ------- Income before provision for income taxes .................................................. 25,635 23,571 Provision for income taxes ................................................................ 7,868 7,452 ------- ------- Net income ................................................................................ $17,767 $16,119 ======= ======= Net income per common share (basic) ....................................................... $ 1.61 $ 1.45 ======= ======= Weighted average common shares outstanding (basic) ........................................ 11,059 11,084 ======= ======= Net income per common share (diluted) ..................................................... $ 1.58 $ 1.43 ======= ======= Weighted average common shares outstanding (diluted) ...................................... 11,221 11,273 ======= ======= See accompanying notes to unaudited consolidated financial statements 7 Alabama National BanCorporation and Subsidiaries Consolidated Statements of Other Comprehensive Income (Unaudited) ----------------------------------------------------------------- (In thousands) For the three months ended September 30, ---------------------- 2000 1999 ---- ---- Net income........................................................................................... $6,206 $5,720 Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale ........................................ 3,341 (755) Less: Reclassification adjustment for net gains included in net income ............................. - - ------ ------ Other comprehensive income (loss), before tax ........................................................ 3,341 (755) Provision for (benefit of) income taxes related to items of other comprehensive income ............................................................... 1,162 (475) ------ ------ Other comprehensive income (loss), net of tax ....................................................... 2,179 (280) ------ ------ Comprehensive income ................................................................................ $8,385 $5,440 ====== ====== See accompanying notes to unaudited consolidated financial statements 8 Alabama National BanCorporation and Subsidiaries Consolidated Statements of Other Comprehensive Income (Unaudited) ----------------------------------------------------------------- (In thousands) For the nine months ended September 30, ---------------------- 2000 1999 ------- ------- Net income...................................................................... $17,767 $16,119 Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale.................... 1,439 (5,959) Less: Reclassification adjustment for net gains included in net income................................................................. - 189 ------- ------- Other comprehensive income (loss), before tax .................................. 1,439 (6,148) Provision for (benefit of) income taxes related to items of other comprehensive income........................................... 441 (2,244) ------- ------- Other comprehensive income (loss), net of tax .................................. 998 (3,904) ------- ------- Comprehensive income ........................................................... $18,765 $12,215 ======= ======= See accompanying notes to unaudited consolidated financial statements 9 Alabama National BanCorporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) ------------------------------------------------- (In thousands) For the nine months ended September 30, -------------------- 2000 1999 ---- ---- Net cash flows provided by operating activities .................................................... $ 20,021 $ 30,526 Cash flows from investing activities: Proceeds from maturities of investment securities .................................................. 6,476 13,100 Purchases of investment securities ................................................................. (20,954) - Purchases of securities available for sale ......................................................... (37,071) (210,425) Proceeds from sale of securities available for sale ................................................ 126 256 Proceeds from maturities of securities available for sale .......................................... 58,450 166,571 Net (increase) decrease in interest bearing deposits in other banks ................................ 4,875 (12,771) Net (increase) decrease in Federal funds sold and securities purchased under resell agreements .......................................................................... (10,881) (4,459) Net increase in loans .............................................................................. (198,370) (156,236) Purchases of property, equipment and leasehold improvements ........................................ (6,595) (6,900) Cash paid for bank-owned life insurance ............................................................ (8,213) - Costs capitalized on other real estate owned ....................................................... (48) - Proceeds from sale of other real estate owned ...................................................... 470 - Purchase of treasury stock in purchase business combination ........................................ - (3,226) Cash paid in purchase business combination, net of cash received ................................... (19,019) (114) Proceeds from sale of property, equipment and leasehold improvements ............................... 7 18 --------- -------- Net cash used in investing activities .............................................................. (230,747) (214,186) --------- -------- Cash flows from financing activities: Net increase in deposits .......................................................................... 208,639 133,790 Increase (decrease) in Federal funds purchased and securities sold under agreements to repurchase .................................................................. 6,211 (16,093) Net increase in short and long-term borrowings and capital leases.................................. 5,495 68,427 Exercise of stock options ......................................................................... 58 704 Purchase of treasury stock ........................................................................ (588) - Dividends on common stock ......................................................................... (6,968) (5,967) --------- --------- Net cash provided by financing activities ......................................................... 212,847 180,861 --------- --------- Increase in cash and cash equivalents ............................................................. 2,121 (2,799) Cash and cash equivalents, beginning of period .................................................... 73,125 70,813 --------- --------- Cash and cash equivalents, end of period .......................................................... $ 75,246 $ 68,014 ========= ========= Supplemental schedule of noncash investing and financing activities Acquisition of collateral in satisfaction of loans ................................................ $ 421 $ 1,017 ========= ========= Adjustment to market value of securities available for sale, net of deferred income taxes ........................................................................ $ 998 $ (3,904) ========= ========= Assets acquired in purchase business combination .................................................. $ 70,293 $ 3,704 ========= ========= Liabilities assumed in purchase business combination ............................................. $ 54,361 $ 721 ========= ========= See accompanying notes to unaudited consolidated financial statements 10 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 NOTE A - BASIS OF PRESENTATION - ------------------------------ The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2000, are subject to year-end audit and are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2000. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Alabama National's Annual Report on Form 10-K for the year ended December 31, 1999. NOTE B - COMMITMENT AND CONTINGENCIES - ------------------------------------- Alabama National's subsidiary banks make loan commitments and incur contingent liabilities in the normal course of business, which are not reflected in the consolidated statements of condition. NOTE C - RECENTLY ISSUED PRONOUNCEMENTS - --------------------------------------- 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. Statement 133, as amended by Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of SFAS No. 133, and Statement of Financial Accounting Standards No. 138, Accounting for Derivative Instruments and Hedging Activities - an Amendment of SFAS No. 133, is effective for fiscal years beginning after June 15, 2000, and is effective for interim periods in the year of adoption. Management of Alabama National does not expect the adoption of Statement 133 to have a material impact on its financial statements since Alabama National does not invest in derivative instruments. 11 NOTE D - EARNINGS PER SHARE - ----------------------------- The following table reflects the reconciliation of the numerator and denominator of the basic earnings per share computation to the diluted earnings per share computation for the three months and nine months ended September 30, 2000 and 1999. Per Share Income Shares Amount -------- --------- --------- (In thousands, except per share amounts) THREE MONTHS ENDED SEPTEMBER 30, 2000 Basic EPS net income................................... $ 6,206 11,047 $0.56 ===== Effect of dilutive securities.......................... - 172 ------- ------ Diluted EPS............................................ $ 6,206 11,219 $0.55 ======= ====== ===== THREE MONTHS ENDED SEPTEMBER 30, 1999 Basic EPS net income................................... $ 5,720 11,127 $0.51 ===== Effect of dilutive securities.......................... - 188 ------- ------ Diluted EPS............................................ $ 5,720 11,315 $0.51 ======= ====== ===== NINE MONTHS ENDED SEPTEMBER 30, 2000 Basic EPS net income................................... $17,767 11,059 $1.61 ===== Effect of dilutive securities.......................... - 162 ------- ------ Diluted EPS............................................ $17,767 11,221 $1.58 ======= ====== ===== NINE MONTHS ENDED SEPTEMBER 30, 1999 Basic EPS net income................................... $16,119 11,084 $1.45 ===== Effect of dilutive securities.......................... - 189 ------- ------ Diluted EPS............................................ $16,119 11,273 $1.43 ======= ====== ===== NOTE E - TREASURY STOCK REPURCHASE PLAN - ---------------------------------------- In the second quarter of 2000, the Board of Directors of Alabama National authorized the repurchase of up to 250,000 shares of the Company's common stock. On October 10, 2000, the Board of Directors rescinded this share repurchase program. A total of 30,000 shares were purchased under the rescinded plan. NOTE F - MERGERS AND ACQUISITIONS - ---------------------------------- On August 4, 2000, First American Bank, a subsidiary of Alabama National, completed the acquisition of two banking branches in Madison and Huntsville, Alabama. The acquisition increased loans and deposits by approximately $68.9 million and $54.0 million, respectively. The acquisition was accounted for as a purchase transaction. On October 10, 2000, Alabama National entered into a merger agreement with Peoples State Bank, located in Groveland, Florida. Under the terms of the merger agreement, Peoples State Bank will merge with a newly formed subsidiary of Alabama National, whereby Peoples State Bank will become a wholly owned subsidiary of Alabama National. Alabama National will issue approximately 735,000 shares of its common stock to existing Peoples State Bank shareholders at an exchange ratio of 1.164 shares of Alabama National common stock for each share of Peoples State Bank common stock. As of September 30, 2000, Peoples State Bank had assets of $121.6 million. The merger with Peoples State Bank is expected to be completed in the first quarter of 2001. The merger is subject to Peoples State Bank shareholder approval and certain regulatory approvals, and is expected to be accounted for as a pooling of interests. 12 NOTE G - SEGMENT REPORTING - --------------------------- Alabama National's reportable segments represent the distinct major product lines it 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 Alabama National's consolidated totals (in thousands). Investment Securities Mortgage Retail and Services Brokerage Trust Lending Insurance Commercial Corporate Elimination Division Division Division Division Division Banking Overhead Entries Total ---------- ---------- -------- -------- ---------- ---------- ---------- ------------ -------- Nine months ended September 30, 2000: - ------------------- Interest income $ - $2,793 $ - $ 318 $ 16 $115,599 $ (45) $(1,500) $117,181 Interest expenses 1,500 201 10 60,270 1,012 (1,500) 61,493 ----------------------------------------------------------------------------------------------------- Net interest income 1,293 117 6 55,329 (1,057) 55,688 Provision for loan losses 1,553 1,553 Noninterest income 3,949 3,760 1,694 2,840 1,499 9,642 16 23,400 Noninterest expense 3,764 4,400 987 2,060 1,421 36,941 $ 2,327 51,900 ----------------------------------------------------------------------------------------------------- Net income before tax $ 185 $ 653 $ 707 $ 897 $ 84 $ 26,477 $(3,368) $ - $ 25,635 ===================================================================================================== Nine months ended September 30, 1999: - ------------------- Interest income $ - $1,278 $ - $ 372 $ 1 $ 89,804 $ (72) $ (545) $ 90,638 Interest expenses 545 240 5 41,666 551 (545) 42,462 ----------------------------------------------------------------------------------------------------- Net interest income 733 132 (4) 48,138 (623) 48,376 Provision for loan losses 1,338 1,338 Noninterest income 5,364 2,665 1,620 3,420 488 8,654 175 22,386 Noninterest expense 4,752 3,091 856 2,288 449 32,415 2,002 45,853 ----------------------------------------------------------------------------------------------------- Net income before tax $ 612 $ 307 $ 764 $1,264 $ 35 $ 23,039 $(2,450) $ - $ 23,571 ===================================================================================================== Corporate overhead is comprised of compensation and benefits for certain members of management, merger-related costs, interest expense on parent company debt, amortization of intangibles and other expenses. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Basis of Presentation - --------------------- The following is a discussion and analysis of the consolidated financial condition of Alabama National and results of operations as of the dates and for the periods indicated. All significant intercompany accounts and transactions have been eliminated. The accounting and reporting policies of Alabama National conform with generally accepted accounting principles and with general financial services industry practices. This information should be read in conjunction with Alabama National's unaudited consolidated financial statements and related notes appearing elsewhere in this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in Alabama National's Annual Report on Form 10-K for the year ended December 31, 1999. Performance Overview - -------------------- Alabama National's net income was $6.21 million for the third quarter of 2000 (the "2000 third quarter") compared to $5.72 million for the third quarter of 1999 (the "1999 third quarter"). Net income for the nine month period ended September 30, 2000 (the "2000 nine months") was $17.77 million compared to $16.12 million for the nine months ended September 30, 1999 (the "1999 nine months"). Net income per diluted common share for the 2000 and 1999 third quarters was $0.55 and $0.51, respectively. For the 2000 nine months, net income per diluted common share was $1.58 compared to $1.43 for the 1999 nine months. The annualized return on average assets for Alabama National was 1.17% for the 2000 third quarter compared to 1.27% for the 1999 third quarter. The annualized return on average assets for Alabama National was 1.17% for the 2000 nine months compared to 1.25% for the 1999 nine months. The annualized return on average stockholders' equity for the 2000 third quarter was 16.39%, as compared to 16.45% for the 1999 third quarter. The annualized return on average stockholders' equity increased for the 2000 nine months to 16.42%, as compared to 15.86% for the 1999 nine months. Book value per share at September 30, 2000 was $13.87, an increase of $1.38 from year-end 1999. Tangible book value per share at September 30, 2000 was $12.55, an increase of $1.03 from year-end 1999. Alabama National paid cash dividends totaling $0.63 on common shares during the 2000 nine months, compared to $0.54 on common shares during the 1999 nine months. Net Income - ---------- The principal reason for the increase in net income for each of the 2000 third quarter and the 2000 nine months, compared to the same periods in 1999, was the growth in net interest income, which is the difference between the income earned on interest bearing assets and the interest paid on deposits and borrowings used to support such assets. Net interest income increased by $2.1 million, or 12.06%, to $19.1 million during the 2000 third quarter from $17.0 million during the 1999 third quarter. Net interest income increased to $55.7 million during the 2000 nine months from $48.4 million during the 1999 nine months, representing an increase of $7.3 million, or 15.1%. The increase in net interest income was offset by an increase in noninterest expense of $2.6 million, to $17.9 million for the 2000 third quarter, and $6.0 million to $51.9 million for the 2000 nine months, compared to $15.2 million and $45.9 million, respectively, for the same periods in 1999. 14 Average earning assets for the 2000 third quarter and nine months increased by approximately $313.6 million and $294.5 million, respectively, and was substantially matched by growth in average interest-bearing liabilities of $319.4 million and $306.6 million during the 2000 third quarter and nine months, respectively. The average taxable equivalent rate earned on assets was 8.74% and 8.56% for the 2000 third quarter and nine months compared to 8.02% and 7.93% for the 1999 third quarter and nine months, respectively. The average rate paid on interest-bearing liabilities was 5.36% and 5.06% for the 2000 third quarter and nine months, respectively, compared to 4.38% and 4.31% for the 1999 third quarter and nine months, respectively. The net interest margin for the 2000 third quarter and nine months was 3.94% and 4.04%, respectively, compared to 4.19% for both the 1999 third quarter and nine months, respectively. The reduction in net interest margin is largely due to strong loan demand in excess of growth in low cost deposit accounts. This has resulted in much of the incremental growth of loans being funded by higher cost liability sources, such as Federal Home Loan Bank advances, in-market CD's, and brokered CD's. The following tables depict, on a taxable equivalent basis for the 2000 and 1999 third quarter and nine months, certain information related to Alabama National'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 balance of the associated assets or liabilities. 15 AVERAGE BALANCES, INCOME AND EXPENSES AND RATES (Amounts in thousands, except yields and rates) Three months ended September 30, ---------------------------------------------------------------------------------- 2000 1999 -------------------------------------- ----------------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Cost Balance Expense Cost ----------- ----------- ----------- -------------- ----------- ----------- Assets: Earning assets: Loans (1) (3).................................. $1,544,399 $35,687 9.19% $1,226,461 $26,530 8.58% Securities: Taxable....................................... 313,077 5,418 6.88 302,275 4,832 6.34 Tax exempt.................................... 29,995 573 7.60 33,624 615 7.26 Cash balances in other banks................... 2,423 28 4.60 2,528 44 6.91 Funds sold..................................... 33,417 566 6.74 40,727 491 4.78 Trading account securities..................... 1,964 35 7.09 6,016 77 5.08 ---------- ------- ---------- ------- Total earning assets (2)................... 1,925,275 42,307 8.74 1,611,631 32,589 8.02 ---------- ------- ---------- ------- Cash and due from banks.......................... 68,189 67,595 Premises and equipment........................... 47,646 45,616 Other assets..................................... 90,903 73,084 Allowance for loan losses........................ (20,195) (17,419) ---------- ---------- Total assets.............................. $2,111,818 $1,780,507 ========== ========== Liabilities: Interest-bearing liabilities: Interest-bearing transaction accounts.......... $ 246,366 2,113 3.41 201,940 1,293 2.54 Savings deposits............................... 304,411 2,771 3.62 322,225 2,788 3.43 Time deposits.................................. 836,628 13,017 6.19 637,623 8,145 5.07 Funds purchased................................ 158,071 2,419 6.09 143,385 1,994 5.52 Other short-term borrowings.................... 80,953 1,452 7.14 12,880 181 5.58 Long-term debt................................. 79,571 1,205 6.02 68,506 899 5.21 ---------- ------- ---------- ------- Total interest-bearing liabilities........ 1,706,000 22,977 5.36 1,386,559 15,300 4.38 ---------- ------- ---------- ------- Demand deposits.................................. 225,129 219,187 Accrued interest and other liabilities........... 30,032 36,803 Stockholders' equity............................. 150,657 137,958 ---------- ---------- Total liabilities and stockholders' equity... $2,111,818 $1,780,507 ========== ========== Net interest spread.............................. 3.38% 3.64% ==== ==== Net interest income/margin on a taxable equivalent basis..................... 19,330 3.99% 17,289 4.26% ==== ==== Tax equivalent adjustment (2).................... 244 257 ------- ------- Net interest income/margin....................... $19,086 3.94% $17,032 4.19% ======= ==== ======= ==== ________________ (1) Average loans include nonaccrual loans. All loans and deposits are domestic. (2) Tax equivalent adjustments are based upon assumed tax rate of 34%, and do not reflect the disallowance for Federal income tax purposes of interest expense related to certain tax exempt assets. (3) Fees in the amount of $826,000 and $704,000 are included in interest and fees on loans for the three months ended September 30, 2000 and 1999, respectively. 16 AVERAGE BALANCES, INCOME AND EXPENSES AND RATES (Amounts in thousands, except yields and rates) Nine months ended September 30, ------------------------------------------------------------------------------- 2000 1999 ------------------------------------ --------------------------------------- Average Income/ Yield/ Average Income/ Yield/ Balance Expense Cost Balance Expense Cost ------------ ---------- -------- ----------- ---------- -------- Assets: Earning assets: Loans (1) (3).................................... $1,446,936 $ 97,712 9.02% $1,163,205 $74,029 8.51% Securities: Taxable......................................... 319,475 16,500 6.90 290,197 13,491 6.22 Tax exempt...................................... 30,308 1,708 7.53 33,465 1,856 7.42 Cash balances in other banks..................... 3,650 152 5.56 1,393 65 6.24 Funds sold....................................... 37,322 1,746 6.25 49,683 1,867 5.02 Trading account securities....................... 1,891 97 6.85 7,163 286 5.34 ---------- -------- ---------- ------- Total earning assets (2)..................... 1,839,582 117,915 8.56 1,545,106 91,594 7.93 ---------- -------- ---------- ------- Cash and due from banks............................ 69,996 64,227 Premises and equipment............................. 46,249 42,147 Other assets....................................... 86,990 84,215 Allowance for loan losses.......................... (19,121) (17,149) ---------- ---------- Total assets................................ $2,023,696 $1,718,546 ========== ========== Liabilities: Interest-bearing liabilities: Interest-bearing transaction accounts............ $ 242,754 5,798 3.19 191,999 3,344 2.33 Savings deposits................................. 302,933 8,016 3.53 318,487 7,994 3.36 Time deposits.................................... 774,936 34,014 5.86 591,771 22,968 5.19 Funds purchased.................................. 150,894 6,683 5.92 145,187 5,377 4.95 Other short-term borrowings...................... 48,751 2,556 7.00 23,197 935 5.39 Long-term debt................................... 104,012 4,426 5.68 47,036 1,823 5.18 ---------- -------- ---------- ------- Total interest-bearing liabilities.......... 1,624,280 61,493 5.06 1,317,677 42,441 4.31 ---------- -------- ---------- ------- Demand deposits.................................... 223,952 216,458 Accrued interest and other liabilities............. 30,959 48,533 Stockholders' equity............................... 144,505 135,878 ---------- ---------- Total liabilities and stockholders' equity..... $2,023,696 $1,718,546 ========== ========== Net interest spread................................ 3.50% 3.62% ==== ==== Net interest income/margin on a taxable equivalent basis....................... 56,422 4.10% 49,153 4.25% ==== ==== Tax equivalent adjustment (2)...................... 734 783 -------- ------- Net interest income/margin......................... $ 55,688 4.04% $48,370 4.19% ======== ==== ======= ==== ________________ (1) Average loans include nonaccrual loans. All loans and deposits are domestic. (2) Tax equivalent adjustments are based upon assumed tax rate of 34%, and do not reflect the disallowance for Federal income tax purposes of interest expense related to certain tax exempt assets. (3) Fees in the amount of $2,376,000 and $2,250,000 are included in interest and fees on loans for the three months ended September 30, 2000 and 1999, respectively. 17 The following tables set forth, on a taxable equivalent basis, the effect which varying levels of earning assets and interest-bearing liabilities and the applicable rates had on changes in net interest income for the 2000 third quarter and nine months compared to the 1999 third quarter and nine months, respectively. For the purposes of these tables, 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) Nine Months Ended September 30, -------------------------------------- 2000 Compared to 1999 Variance Due to -------------------------------------- Volume Yield/Rate Total -------------------------------------- Earning assets: Loans................................................. $19,262 $4,421 $23,683 Securities: Taxable............................................. 1,444 1,565 3,009 Tax exempt.......................................... (192) 44 (148) Cash balances in other banks.......................... 99 (12) 87 Funds sold............................................ (677) 556 (121) Trading account securities............................ (293) 104 (189) ------- ------ ------- Total interest income............................ 19,643 6,678 26,321 Interest-bearing liabilities: Interest-bearing transaction accounts................. 1,024 1,430 2,454 Savings and money market deposits..................... (521) 543 22 Time deposits......................................... 7,795 3,251 11,046 Funds purchased....................................... 218 1,088 1,306 Other short-term borrowings........................... 1,275 346 1,621 Long-term debt........................................ 2,411 192 2,603 ------- ------ ------- Total interest expense........................... 12,202 6,850 19,052 ------- ------ ------- Net interest income on a taxable equivalent basis............................... $ 7,441 $ (172) 7,269 ======= ====== Taxable equivalent adjustment......................... 49 ------- Net interest income................................... $ 7,318 ======= 18 ANALYSIS OF CHANGES IN NET INTEREST INCOME (Amounts in thousands) Three Months Ended September 30, ------------------------------------- 2000 Compared to 1999 Variance Due to -------------------------------------- Volume Yield/Rate Total -------------------------------------- Earning assets: Loans................................................ $7,186 $1,971 $9,157 Securities: Taxable............................................ 173 413 586 Tax exempt......................................... (189) 147 (42) Cash balances in other banks......................... (2) (14) (16) Funds sold........................................... (463) 538 75 Trading account securities........................... (179) 137 (42) ------ ------ ------ Total interest income........................... 6,526 3,192 9,718 Interest-bearing liabilities: Interest-bearing transaction accounts................ 321 499 820 Savings and money market deposits.................... (620) 603 (17) Time deposits........................................ 2,853 2,019 4,872 Funds purchased...................................... 212 213 425 Other short-term borrowings.......................... 1,207 64 1,271 Long-term debt....................................... 156 150 306 ------ ------ ------ Total interest expense.......................... 4,129 3,548 7,677 ------ ------ ------ Net interest income on a taxable equivalent basis.............................. $2,397 $ (356) 2,041 ====== ====== Taxable equivalent adjustment........................ 13 ------ Net interest income.................................. $2,054 ====== The provision for loan losses represents a charge to current earnings necessary to maintain the allowance for loan losses at an appropriate level based on management's analysis of the potential risk in the loan portfolio. The amount of the provision is a function of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, the amount of loan losses actually charged against the allowance during a given period and current economic conditions. The provision for loan losses was $400,000 for the 2000 third quarter, compared with $408,000 in the 1999 third quarter. The provision for loan losses was $1,553,000 for the 2000 nine months, compared to $1,338,000 in the 1999 nine months. The higher provision for loan losses in the 2000 nine months is attributable to the growth in loans during the 2000 nine months compared to the 1999 nine months. The allowance for loan losses as a percentage of outstanding loans, net of unearned income, was 1.31% at September 30, 2000, compared to 1.37% at December 31, 1999. Because of the inherent uncertainty of assumptions made during the assessment process, there can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additional allocations to the allowance will not be required. See Asset Quality. ------------- Total noninterest income for the 2000 third quarter was $8.2 million, compared to $6.9 million for the 1999 third quarter. For the 2000 nine months, noninterest income increased to $23.4 million compared to $22.4 million for the 19 1999 nine months. Noninterest income includes service charges on deposits, investment division revenue, securities brokerage revenue, trust department revenue, fees relating to the origination and sale of mortgage loans, and insurance commission revenue. Service charges on deposits for both the 2000 third quarter and 1999 third quarter were $1.9 million. For the 1999 nine months, service charge income increased to $5.7 million from the 1999 nine months' level of $5.5 million. During the 2000 third quarter investment division revenue increased to $1.6 million compared to $1.4 million for the 1999 third quarter. Despite the slight increase in investment division revenue during the 2000 third quarter, revenue for the investment division for the 2000 nine months decreased by $1.5 million, to $3.9 million, compared to $5.4 million for the 1999 nine months. The decreased revenue for the 2000 nine months reflects a decline in demand for debt securities from community banks. Securities brokerage revenue increased 66.9% to $1.3 million during the 2000 third quarter and totaled $3.8 million for the 2000 nine months, an increase of 41.1% over 1999 nine month total of $2.7 million. The increase in brokerage revenue is attributable to continued strong production in this area and favorable market conditions. Trust fees remained relatively flat for the third quarter and nine months of 2000 and 1999. Fees generated from the origination and sale of mortgages for the 2000 third quarter totaled $890,000, relatively unchanged from 1999's third quarter total of $860,000. During the 2000 nine months fees generated from the origination and sale of mortgage loans were $2.6 million compared to $3.2 million for the 1999 nine months. The year to date decrease is due to rising interest rates and the impact of rising interest rates on refinancing and new mortgage origination activity. Insurance commission revenue increased to $402,000 for the 2000 third quarter, representing a 12.9% increase over 1999's third quarter total of $356,000. Insurance commission revenue totaled $1.5 million for the 2000 nine months, compared to $488,000 during the 1999 nine months. The insurance division was acquired on May 28, 1999, so the 1999 nine months include only four month's results for this division. Noninterest expense was $17.9 million for the 2000 third quarter compared to $15.2 million for the 1999 third quarter. For the 2000 nine months, noninterest expense was $51.9 million compared to $45.9 million for the 1999 nine months. Noninterest expense includes salaries and employee benefits, occupancy and equipment expenses and other expenses. Salaries and employee benefits were $10.8 million for the 2000 third quarter compared to $9.0 million for the 1999 third quarter. For the 2000 nine months, salaries and employee benefits were $31.0 million compared to $27.5 million in the 1999 nine months. The increase in salaries and employee benefits partially results from the acquired insurance agency noted above, and the acquisition of two banking branches during the 2000 third quarter, but primarily represents general staffing increases in other areas of Alabama National relating to continued expansion and additional compensation related to annual performance reviews. Occupancy and equipment expense totaled $2.1 million in the 2000 third quarter and $1.9 million in the 1999 third quarter. Occupancy and equipment expense totaled $6.1 million in the 2000 nine months and $5.3 million in the 1999 nine months. Other noninterest expense increased to $5.0 million in the 2000 third quarter, compared with $4.3 million in the 1999 third quarter. Other noninterest expense was $14.8 million in the 2000 nine months and $13.0 million in the 1999 nine months. Other noninterest expense is comprised of advertising expenses, banking assessments, data processing expenses, legal and professional fees, directors fees, postage and freight charges, supplies and printing expenses, amortization of intangibles and various other expenses. Because of an increase in pre-tax income, income tax expense was $2.8 million for the 2000 third quarter compared to $2.6 million for the 1999 third quarter. For the 2000 nine months income tax expense was $7.9 million, compared to $7.5 million for the 1999 nine months. The effective tax rates for the 2000 third quarter and the 2000 nine months were 30.8% and 30.7%, respectively, compared to 31.3% and 31.6% for the same periods of 1999. These effective rates are impacted by items of income and expense that are not subject to federal or state taxation. 20 Earning Assets - -------------- Loans comprised the largest single category of Alabama National's earning assets on September 30, 2000. Loans, net of unearned income, were $1.59 billion or 72.5% of total assets at September 30, 2000, compared to $1.32 billion or 68.7% at December 31, 1999. Loans grew $266.1 million, or 20.2%, during the 2000 nine months compared to 1999 year-end totals, due to continued strong loan demand in many markets served by Alabama National and the successful calling efforts by the lending staff. Average loans grew $283.7 million, or 24.4%, during the 2000 nine months, compared to the 1999 nine months. Loans, net of unearned income and average loans were impacted by the acquisition of two banking branches during the 2000 third quarter. The acquired branches had outstanding loans of approximately $68.9 million. 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) September 30, 2000 December 31, 1999 ---------------------------- -------------------------- Percent Percent Amount of Total Amount of Total ---------- -------- ---------- -------- Commercial, financial and agricultural............................. $ 258,603 16.29% $ 257,047 19.45% Real estate: Construction............................. 207,221 13.06 148,228 11.22 Mortgage - residential................... 426,241 26.85 358,400 27.13 Mortgage - commercial.................... 444,276 27.99 369,158 27.94 Mortgage - other......................... 3,973 .25 3,111 .24 Consumer................................... 75,407 4.75 73,388 5.55 Other...................................... 171,475 10.80 111,913 8.47 ---------- ------ ---------- ------ Total gross loans........................ 1,587,196 100.00% 1,321,245 100.00% ====== ====== Unearned income............................ (976) (1,085) ---------- ---------- Total loans, net of unearned income........................ 1,586,220 1,320,160 Allowance for loan losses.................. (20,840) (18,068) ---------- ---------- Total net loans.......................... $1,565,380 $1,302,092 ========== ========== Investment securities increased $14.5 million in the 2000 nine months from $19.6 million at December 31, 1999 to $34.1 million at September 30, 2000. During the 2000 nine months, the Company purchased $21.0 million of investment securities and received $6.5 million from maturities, including principal paydowns of mortgage backed securities. Securities available for sale decreased $20.0 million in the 2000 nine months from $325.5 million at December 31, 1999, to $305.5 million at September 30, 2000. Purchases of available for sale securities totaled $37.1 million and maturities, calls, and sales of available for sale securities totaled $58.6 million. Write downs to estimated market value of available for sale securities totaled $1.0 million, net of income taxes, during the 2000 nine months. Trading account securities, which had a balance of $246,000 at September 30, 2000, are securities owned by Alabama National prior to sale and delivery to Alabama National's customers. It is the policy of Alabama National to limit positions in such securities to reduce its exposure to market and interest rate changes. Federal funds sold and securities purchased under agreements to resell totaled $44.4 million at September 30, 2000, and $33.6 million at December 31, 1999. 21 Deposits and Other Funding Sources - ---------------------------------- Deposits increased $262.7 million from year-end 1999, to $1.70 billion at September 30, 2000. All categories of deposits experienced growth during the 2000 nine months. During the 2000 third quarter, deposits increased $54.0 million due to the acquisition of the two banking branches in Huntsville, Alabama. Included in deposits at September 30, 2000 and December 31, 1999, were $93.1 million and $47.5 million of brokered deposits, respectively. Federal funds purchased and securities sold under agreements to repurchase totaled $138.1 million at September 30, 2000, an increase of $6.2 million from December 31, 1999. The treasury, tax and loan account decreased to $2.6 million at September 30, 2000, compared with $6.2 million at December 31, 1999. Short- term borrowings at September 30, 2000, totaled $72.6 million, including a note payable to a third party bank of $26.6 million and advances from the Federal Home Loan Bank ("FHLB") totaling $46.0 million. At September 30, 2000, the Company also had $78.9 million of FHLB advances classified as long-term debt. Alabama National's short-term debt at September 30, 2000 and December 31, 1999 is summarized as follows: SHORT-TERM BORROWINGS (Amounts in thousands) September 30, December 31, 2000 1999 ------------- ------------ Note payable to third party bank under secured master note agreement; interest rate varies with LIBOR and was 7.306% and 7.2113% at September 30, 2000 and December 31, 1999, respectively; collateralized by the Company's stock in subsidiary banks. $26,589 $16,389 FHLB open ended notes payable, interest rate varies daily based on the FHLB Daily Rate Credit interest price and was 6.70% and 4.55% at September 30, 2000 and December 31, 1999, respectively; collateralized by FHLB stock and certain first mortgage loans. 1,000 2,000 FHLB debt due July 25, 2001; interest at a fixed rate of 6.40%; collateralized by FHLB stock and certain pledged available for sale securities. Borrowing was classified as long-term at December 31, 1999. 2,000 - FHLB debt due June 4, 2001; interest rate varies with three month LIBOR and was 6.6225% on September 30, 2000; collateralized by FHLB stock and certain first mortgage loans. 43,000 - ------- ------- Total short-term borrowings $72,589 $18,389 ======= ======= 22 Alabama National's long-term debt at September 30, 2000 and December 31, 1999 is summarized as follows: LONG-TERM BORROWINGS (Amounts in thousands) September 30, December 31, 2000 1999 ------------- ------------ 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 $ 10,000 FHLB debt due April 23, 2004; interest rate varies with LIBOR and was 6.46% and 5.9425% at September 30, 2000 and December 31, 1999, respectively; rate changes to 5.02% from April 23, 2001 to April 23,2004; convertible at the option of the FHLB on April 23, 2001 to a three month LIBOR advance; collateralized by FHLB stock and certain first mortgage loans. 13,700 13,700 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 5,000 FHLB debt due July 25, 2001; interest at a fixed rate of 6.40%; collateralized by FHLB stock and certain pledged available for sale securities. Borrowing classified as short-term at September 30, 2000. - 2,000 FHLB debt due June 18, 2003; interest at a 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. Note was called during 2000. - 5,000 FHLB debt due November 5, 2003; interest at a 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 5,000 FHLB debt due August 7, 2009; interest at a fixed rate of 4.95%; convertible at the option of the FHLB on February 7, 2000 and any payment date thereafter; collateralized by FHLB stock and certain first mortgage loans. Note was called during 2000. - 25,000 FHLB debt due July 30, 2004; interest at a fixed rate of 5.715%; convertible in whole at the option of the FHLB on July 30, 2001; collateralized by FHLB stock and certain first mortgage loans. 5,000 5,000 FHLB debt due December 2, 2009; interest at a fixed rate of 5.29%; convertible in whole at the option of the FHLB on June 2, 2000; collateralized by FHLB stock, certain first mortgage loans and pledged available for sale securities. Note was called during 2000. - 43,000 23 September 30, December 31, 2000 1999 ------------- ------------ FHLB debt due October 12, 2001; interest rate varies with LIBOR and reprices monthly; rate at September 30, 2000 and December 31, 1999 was 6.66063% and 6.50125%, respectively; collateralized by FHLB stock, certain first mortgage loans and certain pledged available for sale securities. 10,000 10,000 FHLB debt due February 11, 2003; interest rate varies with LIBOR and reprices monthly; rate at September 30, 2000 was 6.42%; collateralized by FHLB stock and certain first mortgage loans. 25,000 - FHLB debt due June 15, 2010; interest at a fixed rate of 6.00%; convertible in whole at the option of FHLB on December 15, 2000 to a three month LIBOR advance; collateralized by FHLB stock and certain first mortgage loans. 5,000 - Various notes payable 29 39 Capital leases payable 219 266 ------- -------- Total long-term borrowings $78,948 $124,005 ======= ======== Asset Quality - ------------- Nonperforming loans are comprised of loans past due 90 days or more and still accruing interest, loans accounted for on a nonaccrual basis and loans in which the terms have been restructured to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower. At September 30, 2000, the Company had no loans past due 90 days or more and still accruing interest. 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. It is Alabama National's policy to place a delinquent loan on nonaccrual status when it becomes 90 days or more past due. When a loan is placed on nonaccrual status, all interest that is accrued on the loan balance is reversed and deducted from earnings as a reduction of reported interest. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual writedown or charge-off of the principal balance of the loan which could necessitate additional charges to the allowance for loan losses. 24 At September 30, 2000, nonperforming assets totaled $5.8 million, an increase of $1.0 million from December 31, 1999. At September 30, 2000, nonperforming assets as a percentage of loans plus other real estate were 0.37%, unchanged from year-end 1999. The following table presents the Company's nonperforming assets for the dates indicated. NONPERFORMING ASSETS (Amounts in thousands, except percentages) September 30, December 31, 2000 1999 ----------- ------------ Nonaccrual loans ....................................... $ 4,615 $ 4,141 Restructured loans ..................................... - 5 Loans past due 90 days or more and still accruing ...... - - ------- ------- Total nonperforming loans............................ 4,615 4,146 Other real estate owned ................................ 1,225 687 ------- ------- Total nonperforming assets........................... $ 5,840 $ 4,833 ======= ======= Allowance for loan losses to period-end loans .......... 1.31% 1.37% Allowance for loan losses to period-end nonperforming loans.................................. 451.57 435.79 Allowance for loan losses to period-end nonperforming assets................................. 356.85 373.85 Net charge-offs to average loans ...................... 0.02 0.04 Nonperforming assets to period-end loans and other real estate owned.......................... 0.37 0.37 Nonperforming loans to period-end loans ................ 0.29 0.31 25 Net loan charge-offs for the 2000 nine months totaled $181,000, or 0.02% (annualized) of average loans for the period. The allowance for loan losses as a percentage of total loans, net of unearned income, was 1.31% at September 30, 2000, compared to 1.37% at December 31, 1999. The following table analyzes activity in the allowance for loan losses for the 2000 nine months. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES For the Nine Months Ended September 30, 2000 (Amounts in thousands, except percentages) Allowance for loan losses at beginning of period............................................ $18,068 Charge-offs: Commercial, financial and agricultural......................... 216 Real estate - mortgage......................................... 84 Consumer....................................................... 486 ------- Total charge-offs............................................ 786 ======= Recoveries: Commercial, financial and agricultural......................... 139 Real estate - mortgage......................................... 205 Consumer....................................................... 261 ------- Total recoveries............................................. 605 ------- Net charge-offs.............................................. 181 ------- Provision for loan losses......................................... 1,553 Additions to allowance through purchase........................... 1,400 ------- Allowance for loan losses at end of period.................................................. $20,840 ======= The loan portfolio is periodically reviewed to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. This analysis includes a review of delinquency trends, actual losses and internal credit ratings. Based on this analysis, management considers the allowance for loan losses at September 30, 2000, to be adequate to cover probable loan losses in the portfolio as of that date. However, because of the inherent uncertainty of assumptions made during the evaluation process, there can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additional allocations to the allowance will not be required. Interest Rate 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 simulation analysis, which technique is augmented by "gap" analysis. In simulation analysis, the Company reviews each individual asset and liability category and their projected behavior in various different interest rate environments. These projected behaviors are based upon management's past experiences and upon current competitive environments, including the various environments in the different markets in which the Company competes. Using this projected behavior and differing rate scenarios as inputs, the simulation analysis generates as output a projection of net interest income. The Company also periodically verifies the validity of this approach by comparing actual results with those that were projected in previous models. See Market Risk. ----------- 26 Another technique used by the Company in interest rate management 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 Alabama National's interest rate sensitivity at September 30, 2000, assuming 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) September 30, 2000 ------------------------------------------------------------------------ Zero After Three One Through Through Through Three Twelve Three Greater Than Months Months Years Three Years Total --------- ----------- -------- ------------ ---------- Assets: Earning assets: Loans (1)................................. $723,514 $ 239,059 $281,576 $346,217 $1,590,366 Securities (2)............................ 26,462 35,277 72,647 194,813 329,199 Trading securities........................ 246 - - - 246 Interest-bearing deposits in other banks............................. 1,893 - - - 1,893 Funds sold................................ 44,449 - - - 44,449 -------- --------- -------- -------- ---------- Total interest-earning assets........ $796,564 $ 274,336 $354,223 $541,030 $1,966,153 Liabilities: Interest-bearing liabilities: Interest-bearing deposits: Demand deposits....................... $ 78,220 $ - $ - $184,869 $ 263,089 Savings and money market deposits..... 88,457 - - 211,590 300,047 Time deposits (3)..................... 258,848 534,234 78,318 21,378 892,778 Funds purchased.......................... 138,089 - - - 138,089 Short-term borrowings (4)................ 70,589 2,000 - - 72,589 Long-term debt........................... 63,709 5,023 10,066 150 78,948 -------- --------- -------- -------- ---------- Total interest-bearing liabilities.... $697,912 $ 541,257 $ 88,384 $417,987 $1,745,540 -------- --------- -------- -------- ---------- Period gap................................... $ 98,652 $(266,921) $265,839 $123,043 ======== ========= ======== ======== Cumulative gap............................... $ 98,652 $(168,269) $ 97,570 $220,613 $ 220,613 ======== ========= ======== ======== ========== Ratio of cumulative gap to total earning assets.............................. 5.02% -8.56% 4.96% 11.22% ____________________________ (1) Excludes nonaccrual loans of $4,615,000. (2) Excludes available for sale equity securities of $10,362,000. (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 $2,551,000. 27 Alabama National generally benefits from increasing market rates of interest when it has an asset-sensitive gap and generally benefits from decreasing market rates of interest when it is liability sensitive. Alabama National is liability sensitive through the one-year time frame, except for the zero through three- month period. However, Alabama National's gap analysis is not a precise indicator of its interest sensitivity position. The analysis presents only a static view of the timing of maturities 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 rates 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 Alabama National'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 affected 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 - ----------- Alabama National'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. Alabama National's market risk arises primarily from inherent interest rate risk in its lending, investing and deposit gathering activities. Alabama National 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 Alabama National'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 September 30, 2000, mortgage backed securities totaling $190.8 million, or 8.72% of total assets and essentially every loan, net of unearned income, (totaling $1.59 billion, or 72.5% 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 financial 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 $1.70 billion, or 77.9%, of total assets at September 30, 2000. 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. 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 Alabama National in its simulation analysis. Specifically, Alabama National'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 28 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 Alabama National to determine the extent to which market risk would affect net interest margin for the next twelve months if prevailing interest rates increased or decreased the specified amounts from current rates. Because of the inherent use of estimates and assumptions in the simulation model used to derive this information, the actual results of the future impact of market risk on Alabama National's net interest margin may differ from that found in the table. MARKET RISK (Amounts in thousands) As of September 30, 2000 As of December 31, 1999 Change in ------------------------------ -------------------------------- Prevailing Interest Net Interest Change from Net Interest Change from Rates Income Amount Income Amount Income Amount Income Amount - -------------------- ------------- ------------- ------------- ------------- +200 basis points $85,029 5.69% $74,125 1.49% +100 basis points 83,168 3.37 73,490 0.62 0 basis points 80,455 - 73,037 - -100 basis points 78,868 (1.97) 71,591 (1.98) -200 basis points 75,935 (5.62) 69,424 (4.95) Liquidity and Capital Adequacy - ------------------------------ Alabama National's net loan to deposit ratio was 93.0% at September 30, 2000, compared to 91.5% at year-end 1999. Alabama National's liquid assets as a percentage of total deposits were 7.13% at September 30, 2000, compared to 7.87% at year-end 1999. At September 30, 2000, Alabama National had unused federal funds lines of approximately $157.7 million, unused lines at the Federal Home Loan Bank of $142.7 million and an unused credit line with a third party bank of $5.4 million. The Company also has access to approximately $170.9 million via a credit facility with the Federal Reserve Bank of Atlanta. At September 30, 2000, and year-end 1999, there were no outstanding borrowings under this Federal Reserve credit facility. Management analyzes the level of off-balance sheet assets such as unfunded loan commitments and outstanding letters of credit as they relate to the levels of cash, cash equivalents, liquid investments, and available funds lines in an attempt to minimize the possibility that a potential liquidity shortfall will exist. Based on this analysis, management believes that Alabama National has adequate liquidity to meet short-term operating requirements. However, no assurances can be given in this regard. Alabama National's stockholders' equity increased by $15.0 million from December 31, 1999, to $153.2 million at September 30, 2000. This increase was attributable to the following (in thousands): Net income....................................................... $17,767 Dividends........................................................ (6,968) Purchase of treasury stock....................................... (588) Issuance of stock from treasury.................................. 61 Decrease in unrealized loss on securities........................ available for sale, net of deferred taxes...................... 998 Additional paid in capital related to stock based compensation... 3,703 ------- Net increase..................................................... $14,973 ======= 29 A strong capital position is vital to the continued profitability of Alabama National because it promotes depositor and investor confidence and provides a solid foundation for future growth of the organization. The capital of Alabama National and its subsidiary banks (the "Banks") exceeded all prescribed regulatory capital guidelines at September 30, 2000. Under the capital guidelines of their regulators, Alabama National and the Banks are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common stockholders' equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill. In addition, Alabama National and the Banks must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 3%, but this minimum ratio is increased by 100 to 200 basis points for other than the highest rated institutions. The following table sets forth the risk-based and leverage ratios of Alabama National and each subsidiary bank at September 30, 2000: Tier 1 Risk Total Risk Tier 1 Based Based Leverage ----------- ---------- -------- Alabama National BanCorporation............. 8.67% 9.91% 6.90% National Bank of Commerce of Birmingham..... 9.40 10.57 7.70 Alabama Exchange Bank....................... 12.75 14.00 7.48 Bank of Dadeville........................... 12.05 13.24 7.96 Citizens & Peoples Bank, N.A................ 12.15 13.40 8.95 Community Bank of Naples, N.A............... 10.50 11.75 7.15 First American Bank......................... 9.48 10.73 8.60 First Citizens Bank......................... 14.07 15.31 7.24 First Gulf Bank............................. 9.07 10.32 7.19 Georgia State Bank.......................... 11.22 12.36 7.63 Public Bank................................. 9.79 10.84 7.89 Required minimums........................... 4.00 8.00 4.00 Item 3 - Quantitative and Qualitative Disclosures about Market Risk The information required by this item is contained in Item 2 herein under the headings "Interest Rate Sensitivity" and "Market Risk". Part II Other Information Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 3.1 - Certificate of Incorporation (filed as an Exhibit to Alabama National's Registration Statement on Form S-1 (Commission File no. 33-83800) and incorporated herein by reference). Exhibit 3.1A - Certificate of Amendment of Certificate of Incorporation (filed as an Exhibit to Alabama National's Annual Report of Form 10-K for the year ended December 31, 1996 and incorporated herein by reference). Exhibit 3.1B - Certificate of Merger (filed as an Exhibit to Alabama National's Annual Report of Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). Exhibit 3.1C - Certificate of Amendment of Certificate of Incorporation dated April 23, 1998 (filed as an Exhibit to Alabama National's Report of Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference). Exhibit 3.2 - Bylaws (filed as an Exhibit to Alabama National's Registration Statement on Form S-1 (Commission File No. 33-83800) and incorporated herein by reference). Exhibit 10 - National Bank of Commerce Building Amended, Restated and Consolidating Lease. Exhibit 11 - Computation of Earnings Per Share Exhibit 27 - Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K None. 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALABAMA NATIONAL BANCORPORATION Date: November 10, 2000 /s/ John H. Holcomb, III ----------------- ---------------------------------------- John H. Holcomb, III, its Chairman and Chief Executive Officer Date: November 10, 2000 /s/ William E. Matthews, V. ----------------- ---------------------------------------- William E. Matthews, V., its Executive Vice President and Chief Financial Officer 31