SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 63-1114426
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(State of Incorporation) (I.R.S. Employer Identification No.)
1927 FIRST AVENUE NORTH, BIRMINGHAM, ALABAMA 35203-4009
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(Address of principal executive office)
Registrant's telephone number, including area code: (205) 583-3654
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---------------------------------------------
(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 11, 1998
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Common Stock, $1.00 Par Value 10,495,415
INDEX
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION PAGE
- ----------------------------- ----
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Condition
September 30, 1998 and December 31, 1997. . . . . . . . . . . . . . . 3
Consolidated Statements of Income
Three Month Periods Ended September 30, 1998 and 1997;
Nine month periods ended September 30, 1998 and 1997. . . . . . . . . 4
Consolidated Statements of Other Comprehensive Income
Three Month Periods Ended September 30, 1998 and 1997;
Nine Month Periods Ended September 30, 1998 and 1997. . . . . . . . . 8
Consolidated Statements of Cash Flows
Nine Month Periods Ended September 30, 1998 and 1997. . . . . . . . . 9
Notes to the Unaudited Consolidated Financial Statements,
September 30, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 26
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
FORWARD-LOOKING INFORMATION
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Statements contained in this Quarterly Report on form 10-Q which are not
historical facts are forward-looking statements. In addition, Alabama National,
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 judgement 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.
2
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Alabama National BanCorporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
------------------------------------------------
September 30, 1998 December 31, 1997
------------------ -----------------
(In thousands)
Assets
Cash and due from banks ............................................................ $ 47,324 $ 46,192
Interest-bearing deposits in other banks ........................................... 381 2,391
Investment securities (estimated market values of $41,932 and $65,521).............. 41,260 65,003
Securities available for sale ...................................................... 230,348 157,504
Trading securities ................................................................. 9,585 399
Federal funds sold and securities purchased under resell agreements ................ 61,904 55,545
Loans .............................................................................. 927,458 875,430
Unearned income .................................................................... (1,271) (2,102)
----------- -----------
Loans, net of unearned income ...................................................... 926,187 873,328
Allowance for loan losses .......................................................... (14,320) (13,298)
----------- -----------
Net loans .......................................................................... 911,867 860,030
Property, equipment and leasehold improvements, net ................................ 32,731 32,830
Intangible assets .................................................................. 8,351 8,726
Cash surrender value of life insurance ............................................. 26,836 25,842
Other assets ....................................................................... 106,892 70,130
----------- -----------
Totals ............................................................................. $ 1,477,479 $ 1,324,592
=========== ===========
Liabilities and Stockholders' Equity
Deposits:
Noninterest bearing .............................................................. $ 172,651 $ 156,035
Interest bearing ................................................................. 887,228 817,389
----------- -----------
Total deposits ..................................................................... 1,059,879 973,424
Federal funds purchased and securities sold under repurchase agreements ............ 173,417 139,118
Treasury, tax and loan account ..................................................... 6,027 6,762
Short-term borrowings .............................................................. 22,200 27,750
Accrued expenses and other liabilities ............................................. 86,405 59,451
Long-term debt ..................................................................... 15,344 14,587
----------- -----------
Total liabilities .................................................................. 1,363,272 1,221,092
Common stock, $1 par, authorized 17,500,000 shares; issued 9,419,383 and
9,198,120 shares at September 30, 1998 and
December 31, 1997, respectively .................................................. 9,419 9,198
Additional paid-in capital ......................................................... 66,277 65,241
Retained earnings .................................................................. 37,110 28,696
Unearned restricted stock .......................................................... (23) (92)
Accumulated other comprehensive income, net of tax ................................. 1,424 457
----------- -----------
Total stockholders' equity ......................................................... 114,207 103,500
----------- -----------
Totals ............................................................................. $ 1,477,479 $ 1,324,592
=========== ===========
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,
--------------------
1998 1997
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Interest income:
Interest and fees on loans ............................ $ 20,401 $ 19,900
Interest on securities ................................ 3,820 3,273
Interest on deposits in other banks ................... 31 3
Interest on trading securities ........................ 33 42
Interest on Federal funds sold and securities purchased
under resell agreements ............................. 970 727
-------- --------
Total interest income ..................................... 25,255 23,945
Interest expense
Interest on deposits .................................. 10,365 9,214
Interest on Federal funds purchased and securities sold
under repurchase agreements ......................... 1,816 1,068
Interest on long and short-term borrowings ............ 621 832
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Total interest expense .................................... 12,802 11,114
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Net interest income ....................................... 12,453 12,831
Provision for loan losses ................................. 222 364
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Net interest income after provision for loan losses ....... 12,231 12,467
Noninterest income:
Securities gains ...................................... 3 8
Service charges on deposit accounts ................... 1,567 1,418
Investment services ................................... 2,557 2,170
Trust department income ............................... 510 500
Origination and sale of mortgage loans ................ 990 401
Gain (loss) on disposal of assets ..................... 11 (81)
Other ................................................. 923 491
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Total noninterest income .................................. 6,561 4,907
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,
-------------------
1998 1997
---- ----
Noninterest expense:
Salaries and employee benefits ...................................... 7,729 7,090
Occupancy and equipment expenses .................................... 1,415 1,533
Other ............................................................... 3,480 3,278
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Total noninterest expense ............................................... 12,624 11,901
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Income before provision for income taxes ................................ 6,168 5,473
Provision for income taxes .............................................. 1,810 1,911
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Net income .............................................................. $ 4,358 $ 3,562
======= =======
Net income per common share (basic) ...................................... $ .47 $ .39
======= =======
Weighted average common shares outstanding (basic) ....................... 9,267 9,173
======= =======
Net income per common share (diluted) .................................... $ .46 $ .38
======= =======
Weighted average common and common equivalent shares outstanding (diluted) 9,506 9,465
======= =======
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,
-------------------
1998 1997
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Interest income:
Interest and fees on loans ............................ $ 61,192 $ 58,066
Interest on securities ................................ 10,828 9,528
Interest on deposits in other banks ................... 95 8
Interest on trading securities ........................ 191 111
Interest on Federal funds sold and securities purchased
under resell agreements ............................. 2,528 2,018
-------- --------
Total interest income ..................................... 74,834 69,731
Interest expense
Interest on deposits .................................. 30,147 27,089
Interest on Federal funds purchased and securities sold
under repurchase agreements ......................... 4,973 3,009
Interest on long and short-term borrowings ............ 2,208 2,248
-------- --------
Total interest expense .................................... 37,328 32,346
-------- --------
Net interest income ....................................... 37,506 37,385
Provision for loan losses ................................. 745 2,113
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Net interest income after provision for loan losses ....... 36,761 35,272
Noninterest income:
Securities gains ...................................... 174 21
Service charges on deposit accounts ................... 4,558 4,166
Investment services ................................... 8,346 5,833
Trust department income ............................... 1,567 1,324
Origination and sale of mortgage loans ................ 2,685 777
Gain on disposal of assets ............................ 319 (75)
Other ................................................. 2,465 1,902
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Total noninterest income .................................. 20,114 13,948
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,
-------------------
1998 1997
---- ----
Noninterest expense:
Salaries and employee benefits ...................................... 23,425 19,782
Occupancy and equipment expenses .................................... 4,380 4,356
Other ............................................................... 11,141 10,281
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Total noninterest expense ............................................... 38,946 34,419
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Income before provision for income taxes ................................ 17,929 14,801
Provision for income taxes .............................................. 5,454 4,866
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Net income .............................................................. $12,475 $ 9,935
======= =======
Net income per common share (basic) ...................................... $ 1.35 $ 1.09
======= =======
Weighted average common shares outstanding (basic) ....................... 9,221 9,147
======= =======
Net income per common share (diluted) .................................... $ 1.32 $ 1.05
======= =======
Weighted average common and common equivalent shares outstanding (diluted) 9,483 9,449
======= =======
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,
--------------------
1998 1997
---- ----
Net income ................................................... $ 4,358 $ 3,562
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Other comprehensive income:
Unrealized gains on securities available for sale
arising during the period................................. 1,247 850
Less: Reclassification adjustment for net gains
included in net income.................................... (3) (8)
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Other comprehensive income, before tax ....................... 1,244 842
Provision for income taxes related to items of
other comprehensive income ............................... 444 270
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Other comprehensive income, net of tax ....................... 800 572
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Comprehensive income ......................................... $ 5,158 $ 4,134
======= =======
For the nine months
ended September 30,
--------------------
1998 1997
---- ----
Net income ................................................... $12,475 $ 9,935
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Other comprehensive income:
Unrealized gains on securities available for sale
arising during the period................................. 1,552 1,076
Less: Reclassification adjustment for net gains
included in net income.................................... (44) (21)
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Other comprehensive income, before tax ....................... 1,508 1,055
Provision for income taxes related to items of
other comprehensive income ............................... 541 405
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Other comprehensive income, net of tax ....................... 967 650
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Comprehensive income ......................................... $13,442 $10,585
======= =======
See accompanying notes to unaudited consolidated financial statements
8
Alabama National BanCorporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
------------------------------------------------
For the nine months
ended September 30,
--------------------
1998 1997
---- ----
(In thousands)
Net cash flows provided by (used in) operating activities ........... $ (3,734) $ 13,776
Cash flows from investing activities:
Purchases of investment securities .................................. -- (3,580)
Proceeds from maturities of investment securities ................... 23,685 20,867
Purchases of securities available for sale .......................... (144,605) (55,280)
Proceeds from sale of securities available for sale ................. 241 4,390
Proceeds from maturities of securities available for sale ........... 73,142 12,879
Net (increase) decrease in interest bearing deposits
in other banks .................................................. 2,010 (1,852)
Net increase in Federal funds sold and securities purchased
under resell agreements ......................................... (6,359) (8,168)
Net increase in loans ............................................... (53,632) (30,823)
Purchases of property, equipment, and leasehold improvements ........ (2,137) (3,472)
Proceeds from sale of property, equipment, and leasehold improvements 99 1
Proceeds from sale of assets ........................................ -- 46
--------- ---------
Net cash used by investing activities ............................... (107,556) (64,992)
--------- ---------
Cash flows from financing activities:
Net increase in deposits ............................................ 86,455 51,293
Increase in Federal funds purchased and securities sold
under agreements to repurchase .................................. 34,299 9,665
Net decrease in short and long-term borrowings and capital leases ... (5,528) (7,116)
Proceeds from issuance of common stock .............................. -- 105
Exercise of stock options ........................................... 1,260 (437)
Dividends on common stock ........................................... (4,061) (2,232)
Repurchase fractional shares ........................................ (3) (3)
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Net cash provided by financing activities ........................... 112,422 51,275
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Increase in cash and cash equivalents ............................... 1,132 59
Cash and cash equivalents, beginning of period ...................... 46,192 48,128
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Cash and cash equivalents, end of period ............................ $ 47,324 $ 48,187
========= =========
Cash paid for income taxes .......................................... $ 4,014 $ 2,775
========= =========
Supplemental schedule of noncash investing and financing activities
Acquisition of collateral in satisfaction of loans .................. $ 1,050 $ 335
========= =========
Adjustment to market value of securities available for sale, net
of deferred income taxes ........................................ $ 967 $ 14
========= =========
See accompanying notes to unaudited consolidated financial statements
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
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, 1998
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, 1998. These
interim financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in Alabama National's Form
10-K for the year ended December 31, 1997.
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
- ---------------------------------------
Comprehensive Income
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, Alabama National will report changes in
realized gains and losses attributable to available for sale securities as
components of comprehensive income. This Statement is effective for fiscal years
beginning after December 15, 1997, and requires comparative financial
information presented for prior periods to be reclassified to conform to the
requirements of the statement. As a result of implementing Statement 130,
Alabama National recorded other comprehensive income, net of taxes, of $967,000
and $650,000 for the nine months ended September 30, 1998 and 1997,
respectively. These amounts had previously been reported as a direct change in
stockholders equity and relate to the change in unrealized gains (losses) on
securities available for sale.
Segment Reporting
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures About Segments of a Business Enterprise and Related Information
("Statement 131"). Statement 131, effective for fiscal years beginning after
December 15, 1997, establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Early application is permitted, but is
not required, and comparative information for interim periods in the initial
year of application must be reported in statements for interim periods in the
second year of application.
Pensions and Other Postretirement Benefits
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. Restatement of disclosures for previous periods is required.
10
Derivative Instruments and Hedging Activities
In June, 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("Statement
133"). Statement 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative (that is, gains and losses)
depends on the intended use of the derivative and the resulting designation.
Statement 133 is effective for all fiscal quarters of fiscal years beginning at
June 15, 1999, although early application is permitted. Management believes that
the implementation of Statement 133 will have no effect on Alabama National's
operations and consolidated financial statements.
Securitization of Mortgage Loans Held for Sale
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, ("Statement
134") an amendment to Statement 65, which establishes accounting and reporting
standards for certain activities of mortgage banking enterprises and other
enterprises that conduct operations that are substantially similar to the
primary operations of a mortgage banking enterprise. Effective for the first
fiscal quarter beginning after December 15, 1998, Statement 134 requires that
after the securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities must classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to sell
or hold those investments. Management believes that the implementation of
Statement 134 will have no effect on Alabama National's operations and
consolidated financial statements.
NOTE D-MERGERS AND ACQUISITIONS
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On May 29, 1998, Public Bank Corporation ("Public"), a one bank holding company
headquartered in St. Cloud, Florida, was merged with and into Alabama National
(the "Public Merger"). Pursuant to the Public Merger, each share of Public
common stock was converted into 0.2353134 shares of Alabama National common
stock for a total of 549,913 shares of Alabama National stock issued to Public
shareholders. The Public Merger was accounted for as a pooling of interests.
On October 2, 1998, Community Financial Corporation ("Community Financial"),
headquartered in Mabelton Georgia, was merged with and into Alabama National
(the "Community Financial Merger"). Under terms of the Community Financial
Merger, Alabama National issued 1,076,032 shares of Alabama National common
stock to Community Financial shareholders on a ratio of 0.351807 shares of
Alabama National common stock for each share of Community Financial common
stock. Upon consummation of the Community Financial Merger, Georgia State Bank,
the former bank subsidiary of Community Financial, became a wholly owned
subsidiary of Alabama National. Community Financial had assets of $138.9 million
at September 30, 1998. The merger with Community Financial was accounted for as
a pooling of interests. Since the Community Financial Merger was consummated
after September 30, 1998, Community Financial is not included in the
consolidated financial information of Alabama National in this Quarterly Report
on Form 10-Q.
On September 21, 1998, Alabama National entered into a merger agreement (the
"Naples Merger Agreement") with Community Bank of Naples, National Association
("Naples"), located in Naples, Florida. Under terms of the Naples Merger
Agreement, Naples will be merged with and into Citizens & Peoples Bank, N.A., a
subsidiary of Alabama National. Alabama National will issue approximately
533,000 shares of its common stock to existing Naples shareholders on an
exchange ratio of 0.53271 shares of Alabama National common stock for each share
of Naples common stock. As of September 30, 1998, Naples had assets of $83.2
million. The merger with Naples is expected to be completed by December 31,
1998, subject to Naples' shareholder approval and certain regulatory approvals,
and is expected to be accounted for as a pooling of interests.
11
NOTE E - 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 1998 and 1997 nine months and the 1998 and 1997 third
quarters.
Per Share
Income Shares Amount
Three months ended September 30, 1998
Basic EPS net income ..................... $ 4,358 9,267 $ 0.47
=======
Effect of dilutive securities options .... -- 239
------- -------
Diluted EPS .............................. $ 4,358 9,506 $ 0.46
======= ======= =======
Three months ended September 30, 1997
Basic EPS net income ..................... $ 3,562 9,173 $ 0.39
=======
Effect of dilutive securities options .... -- 292
------- -------
Diluted EPS .............................. $ 3,562 9,465 $ 0.38
======= ======= =======
Nine months ended September 30, 1998
Basic EPS net income ..................... $12,475 9,221 $ 1.35
=======
Effect of dilutive securities options .... -- 262
------- -------
Diluted EPS .............................. $12,475 9,483 $ 1.32
======= ======= =======
Nine months ended September 30, 1997
Basic EPS net income ..................... $ 9,935 9,147 $ 1.09
=======
Effect of dilutive securities options .... -- 302
------- -------
Diluted EPS .............................. $ 9,935 9,449 $ 1.05
======= ======= =======
12
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 at September 30, 1998, and the results of its
operations for the three and nine month periods ended September 30, 1998 and
1997. On November 30, 1997, First American Bancorp ("First American"), a one
bank holding company headquartered in Decatur, Alabama, was merged with and into
Alabama National, pursuant to which each share of First American common stock
was converted into 0.7199 shares of Alabama National's common stock for a total
of 2,071,966 shares of Alabama National common stock issued to First American
shareholders. On May 29, 1998, Public Bank Corporation ("Public"), a one bank
holding company headquartered in St. Cloud Florida, was merged with and into
Alabama National, pursuant to which each share of Public common stock was
converted into 0.2353134 shares of Alabama National's common stock for a total
of 549,913 shares of Alabama National common stock issued to Public
shareholders. The First American and Public mergers 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.
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, 1997.
Performance Overview
- --------------------
Alabama National's net income was $4.36 million for the third quarter of 1998
(the "1998 third quarter") compared to $3.56 million for the third quarter of
1997 (the "1997 third quarter"). Net income for the nine month period ended
September 30, 1998 (the "1998 nine months") was $12.48 million compared to $9.94
million for the nine months ended September 30, 1997 (the "1997 nine months").
Net income per diluted common share for the 1998 and 1997 third quarters was
$.46 and $.38, respectively. For the 1998 nine months, net income per diluted
common share was $1.32 compared to $1.05 for the 1997 nine months.
The annualized return on average assets for Alabama National was 1.22% for the
1998 nine months compared to 1.13% for the 1997 nine months. The annualized
return on average stockholders' equity increased for the 1998 nine months to
15.32%, as compared to 13.55% for the 1997 nine months. Book value per share at
September 30, 1998 was $12.13, an increase of $1.07 from year end 1997. Tangible
book value per share at September 30, 1998 was $11.24, an increase of $.99 from
year end 1997. Alabama National paid a $.45 cash dividend on common shares in
the 1998 nine months, compared to $.345 on common shares in the 1997 nine
months.
Net Income
- ----------
The principal reasons for the increase in net income for the 1998 third quarter
and the 1998 nine months, compared to the same periods in 1997, was the growth
in fee based divisions of Alabama National and a reduction in the provision for
loan losses. Total noninterest income increased by $1.7 million, or 33.7%, to
$6.6 million during the 1998 third quarter from $4.9 million during the 1997
third quarter. Total noninterest income increased to $20.1 million during the
1998 nine months from $13.9 million during the 1997 nine months, an increase of
$6.2 million, or 44.2%. Alabama National's provision for loan losses was
$222,000 for the 1998 third quarter and $745,000 for the 1998 nine months, as
compared with $364,000 and $2.1 million for the 1997 third quarter and nine
months, respectively. The provision for loan losses was lower in both 1998
periods relative to the 1997 periods due to a number of factors, including
improvement in the net charge off (recovery) experience and asset quality
ratios.
The largest component of Alabama National's net income is its 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.
13
Alabama National's net interest income totaled $12.5 million during the 1998
third quarter, a decrease of $378,000 compared to the 1997 third quarter. During
the 1998 nine months, net interest income totaled $37.5 million, an increase of
$121,000, or 0.3%, over the 1997 nine months. Alabama National's nine months net
interest income increased primarily as a result of the recovery of interest
associated with the collection of previously charged-off loans totaling $567,000
during the 1998 nine months. Without this recovery the net interest income would
have been reduced during the 1998 third quarter and 1998 nine months compared
with comparable periods of 1997. Average earning assets for the 1998 nine months
increased by approximately $117.0 million and was matched by growth in average
interest-bearing liabilities of $120.1 million. The average taxable equivalent
rate earned on assets was 8.47% for the 1998 nine months compared to 8.73% for
the 1997 nine months. The average rate paid on interest-bearing liabilities was
4.79% for the 1998 nine months compared to 4.68% for the 1997 nine months. Due
to the reduction in earning asset yields and an increase in interest bearing
liability costs, the net interest margin for the 1998 nine months was 4.20%
compared to 4.63% for the 1997 nine months. Absent a change in the interest rate
environment, management expects continued pressure on the net interest margin.
The following table depicts, on a taxable equivalent basis for the 1998 and 1997
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.
14
AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
(Amounts in thousands, except yields and rates)
Nine months ended September 30,
----------------------------------------------------------------------------------
1998 1997
----------------------------------------- ---------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Assets: Balance Expense Rate Balance Expense Rate
------------- ------------- -------------- ------------- -------------- ----------
Earning assets:
Loans (1) (3) .............................. $ 895,679 $ 61,294 9.15% $ 824,021 $ 58,165 9.41%
Securities:
Taxable ................................... 201,745 9,640 6.39 169,886 8,252 6.48
Tax exempt ................................ 30,974 1,886 8.14 31,622 1,933 8.15
Cash balances in other banks ............... 2,141 95 5.93 225 8 4.74
Funds sold ................................. 58,935 2,528 5.74 48,249 2,018 5.58
Trading account securities ................. 4,345 191 5.88 2,863 111 5.17
----------- ----------- ----------- -----------
Total earning assets (2) ............... 1,193,819 75,634 8.47 1,076,866 70,487 8.73
----------- ----------- ----------- -----------
Cash and due from banks ...................... 45,538 35,505
Premises and equipment ....................... 30,917 31,963
Other assets ................................. 104,722 38,042
Allowance for loan losses .................... (13,783) (11,680)
----------- -----------
Total assets .......................... $ 1,361,213 $ 1,170,696
=========== ===========
Liabilities:
Interest-bearing liabilities:
Interest-bearing transaction accounts ...... $ 136,116 2,825 2.77 $ 118,067 2,398 2.71
Savings deposits ........................... 274,928 7,939 3.86 234,940 6,360 3.61
Time deposits .............................. 458,431 19,383 5.65 441,507 18,331 5.54
Funds purchased ............................ 123,041 4,973 5.40 76,246 3,009 5.26
Other short-term borrowings ................ 25,498 1,238 6.49 44,105 1,980 5.99
Long-term debt ............................. 23,017 970 5.63 6,101 268 5.86
----------- ----------- ----------- -----------
Total interest-bearing liabilities .... 1,041,031 37,328 4.79 920,966 32,346 4.68
----------- ----------- ---- ----------- ----------- ----
Demand deposits .............................. 161,310 135,589
Accrued interest and other liabilities ....... 50,302 16,413
Stockholders' equity ......................... 108,570 97,728
----------- -----------
Total liabilities and stockholders' equity $ 1,361,213 $ 1,170,696
=========== ===========
Net interest spread .......................... 3.68% 4.05%
==== ====
Net interest income/margin on
a taxable equivalent basis ................. 38,306 4.29% 38,141 4.72%
==== ====
Tax equivalent adjustment (2) ................ 800 756
----------- -----------
Net interest income/margin ................... $ 37,506 4.20% $ 37,385 4.63%
=========== ==== =========== ====
- ----------------
(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 $1,854,000 and $1,860,000 are included in interest and
fees on loans for the nine months ended September 30, 1998 and 1997,
respectively.
15
The following table sets 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 1998 nine months
compared to the 1997 nine months. 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)
September 30,
-------------------------------
1998 Compared to 1997
Variance Due to
-------------------------------
Volume Yield/Rate Total
-------------------------------
Earning assets:
Loans ................................ $ 4,813 $(1,684) $ 3,129
Securities:
Taxable ............................ 1,506 (118) 1,388
Tax exempt ......................... (45) (2) (47)
Cash balances in other banks ......... 85 2 87
Funds sold ........................... 451 59 510
Trading account securities ........... 63 17 80
------- ------- -------
Total interest income ........... 6,873 (1,726) 5,147
Interest-bearing liabilities:
Interest-bearing transaction accounts. 373 54 427
Savings and money market deposits .... 1,122 457 1,579
Time deposits ........................ 693 359 1,052
Funds purchased ...................... 1,882 82 1,964
Other short-term borrowings .......... (895) 153 (742)
Long-term debt ....................... 713 (11) 702
------- ------- -------
Total interest expense .......... 3,888 1,094 4,982
------- ------- -------
Net interest income on a taxable
equivalent basis .............. $ 2,985 $(2,820) 165
======= =======
Taxable equivalent adjustment ........ (44)
-------
Net interest income .................. $ 121
=======
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 and
anticipated economic conditions. The provision for loan losses was $222,000 for
the 1998 third quarter, compared with $364,000 in the 1997 third quarter. The
provision for loan losses was $745,000 for the 1998 nine months, compared to
$2.1 million in the 1997 nine months. The ability to establish a lower provision
in the 1998 third quarter and 1998 nine months relates to elimination of the
indirect automobile lending and sub-prime lending portfolios associated with
First American. In addition, Alabama National's loan loss experience was
favorable in the first nine months of 1998, with recoveries exceeding
charge-offs by $277,000 for the 1998 nine months. The allowance for loan losses
as a percentage
16
of outstanding loans, net of unearned income, was 1.55% at September 30, 1998,
compared to 1.52% at December 31, 1997.
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 1998 third quarter was $6.6 million, compared
to $4.9 million for the 1997 third quarter. For the 1998 nine months,
noninterest income increased to $20.1 million compared to $13.9 million for the
1997 nine months. Noninterest income includes service charges on deposits,
investment services revenues, trust department revenues, and fees relating to
the sale and origination of mortgage loans. Service charges on deposits for the
1998 third quarter were $1.6 million compared with $1.4 million for the 1997
third quarter. For the 1998 nine months, service charges were $4.6 million,
compared with $4.2 million for the 1997 nine months. Reflecting solid demand for
debt securities, revenue in the investment services division totaled $2.6
million in the 1998 third quarter versus $2.2 million the 1997 third quarter,
and totaled $8.3 million in the 1998 nine months, compared to $5.8 million in
the 1997 nine months. Trust fees increased $10,000 in the 1998 third quarter
compared to the 1997 third quarter and increased $243,000 for the 1998 nine
months when compared with the 1997 nine months. Fees relating to the sale and
origination of mortgage loans totaled $990,000 in the 1998 third quarter
compared with $401,000 in the 1997 third quarter and $2.7 million in the 1998
nine months compared with $777,000 during the 1997 nine months. Attributable
primarily to an increase in income related to bank owned life insurance
policies, other noninterest income increased $432,000 in the 1998 third quarter
when compared to the 1997 third quarter and increased $563,000 for the 1998 nine
months when compared with the 1997 nine months.
Noninterest expense was $12.6 million for the 1998 third quarter compared to
$11.9 million for the 1997 third quarter. For the 1998 nine months, noninterest
expense was $38.9 million compared to $34.4 million for the 1997 nine months.
Noninterest expense includes salaries and employee benefits, occupancy and
equipment expenses and other expenses. Salaries and employee benefits were $7.7
million for the 1998 third quarter compared to $7.1 million for the 1997 third
quarter. For the 1998 nine months, salaries and employee benefits were $23.4
million compared to $19.8 million in the 1997 nine months. The increase in
salaries and employee benefits is primarily attributable to additional sales
volume in the investment services and mortgage origination divisions of Alabama
National, as much of the compensation in these divisions is commission-based.
Occupancy and equipment expense totaled $1.4 million in the 1998 third quarter
and $1.5 million in the 1997 third quarter. For each of the 1998 and 1997 nine
months, occupancy and equipment expenses totaled $4.4 million. Other noninterest
expense increased to $3.5 million in the 1998 third quarter, compared with $3.3
million in the 1997 third quarter. Other noninterest expense was $11.1 million
in the 1998 nine months and $10.3 million in the 1997 nine months. Other
noninterest expense includes merger related charges of $271,000 for the 1998
nine months.
Despite an increase in pre-tax income, income tax expense was $1.8 million for
the 1998 third quarter compared to $1.9 for the 1997 third quarter, reflecting
an increase in tax exempt income related to bank-owned life insurance policies
and additional available low-income tax housing credits. For the 1998 nine
months, income tax expense was $5.5 million compared to $4.9 million for the
1997 nine months, which reflects higher taxable income. The effective tax rates
for the 1998 third quarter and the 1998 nine months were 29.3% and 30.4%,
respectively.
Earning Assets
- --------------
Loans comprised the largest single category of Alabama National's earning assets
on September 30, 1998. Loans, net of unearned income, were $926.2 million or
62.7% of total assets at September 30, 1998, compared to $873.3 million or 65.9%
at December 31, 1997. Loans grew $52.9 million, or 6.1%, during the 1998 nine
months.
Investment securities decreased $23.7 million in the 1998 nine months,
substantially all of which is attributable to paydowns of mortgage backed
securities.
Securities available for sale increased $72.8 million in the 1998 nine months.
Purchases of available for sale securities totaled $144.6 million and
maturities, calls, and sales of available for sale securities totaled $73.2
million. Write up to
17
estimated market value of available for sale securities totaled $967,000 net of
income taxes, during the 1998 nine months.
Trading account securities, $9.6 million at September 30, 1998, 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 $61.9
million at September 30, 1998 and $55.5 at December 31, 1997.
Deposits and Other Funding Sources
- ----------------------------------
Deposits increased $86.5 million from year-end 1997, to $1.1 billion at
September 30, 1998. Primarily all of the growth in deposits are related to
consumer certificates of deposit.
Federal funds purchased and securities sold under agreements to repurchase
totaled $173.4 million at September 30, 1998, an increase of $34.3 million from
December 31, 1997. The treasury, tax and loan account decreased to $6.0 million
at September 30, 1998, compared with $6.8 million at December 31, 1997.
Short-term borrowings at September 30, 1998 totaled $22.2 million, including a
note payable to an independent bank of $12.0 million and two advances from the
Federal Home Loan Bank ("FHLB") totaling $10.2 million.
Alabama National's long-term debt at September 30, 1998 and December 31, 1997 is
summarized as follows:
September 30, December 31,
1998 1997
------- -------
FHLB debt due May 24, 1999; varies with LIBOR; collateralized
by FHLB stock and certain first mortgage loans ................................. $ -- $ 9,200
FHLB debt due July 11, 2002; bears interest at 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 June 18, 2003; bears interest at 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
FHLB debt due March 26, 2008; bears interest at 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
Capital lease obligations ...................................................... 344 387
------- -------
$15,344 $14,587
======= =======
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. 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. 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 has been accrued on the loan but remains unpaid is
reversed and deducted from earnings as a reduction of reported interest income.
No additional interest is accrued on the loan balance until the collection of
both principal and
18
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 earnings.
At September 30, 1998, nonperforming assets totaled $5.9 million, a decrease of
$1.1 million from December 31, 1997. Nonperforming assets as a percentage of
loans plus other real estate were .64% at September 30, 1998 compared to .80% at
December 31, 1997. The reduction in the level of nonperforming assets is
consistent with the elimination of the sub-prime mortgage lending portfolio and
the reduction in the indirect automobile portfolio. The indirect automobile
portfolio is reduced due to termination of new originations of these loans and
amortization of pre-existing loans in this portfolio.
NONPERFORMING ASSETS
(Amounts in thousands, except percentages)
September 30, December 31,
1998 1997
--------- ---------
Nonaccrual loans .................................. $ 4,132 $ 4,178
Restructured loans ................................ 523 1,052
Loans past due 90 days or more and still accruing . -- --
--------- ---------
Total nonperforming loans .................... 4,655 5,230
Other real estate owned ........................... 1,256 1,756
--------- ---------
Total nonperforming assets ................... $ 5,911 $ 6,986
========= =========
Allowance for loan losses to period-end loans ..... 1.55% 1.52%
Allowance for loan losses to period-end
nonperforming loans .......................... 307.63 254.26
Allowance for loan losses to period-end
nonperforming assets ......................... 242.26 190.35
Net charge-offs (recoveries) to average loans ..... (0.04) 0.14
Nonperforming assets to period-end loans
and other real estate owned .................. 0.64 0.80
Nonperforming loans to period-end loans ........... 0.50 0.60
Net loan recoveries for the 1998 nine months totaled $277,000, or .04%
(annualized) of average loans for the period. The allowance for loan losses as a
percentage of total loans, net of unearned income, was 1.55% at September 30,
1998, compared to 1.52% at December 31, 1997. The following table analyzes
activity in the allowance for loan losses for the 1998 nine months.
19
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
For the Nine Months Ended September 30, 1998
(Amounts in thousands, except percentages)
Allowance for loan losses at
beginning of period .................................. $ 13,298
Charge-offs:
Commercial, financial and agricultural ............... 155
Real estate - mortgage ............................... 142
Consumer ............................................. 908
--------
Total charge-offs ............................... 1,205
--------
Recoveries:
Commercial, financial and agricultural ............... 888
Real estate - mortgage ............................... 266
Consumer ............................................. 328
--------
Total recoveries ................................ 1,482
--------
Net charge-offs ................................ (277)
Provision for loan losses ................................... 745
--------
Allowance for loan losses at
period-end ........................................... $ 14,320
========
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, 1998 to be
adequate to cover possible 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
- -------------------------
Alabama National 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 its net interest income. The principal monitoring
technique employed by Alabama National 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. Managing the amount of assets and liabilities
repricing in the same time interval helps to hedge the risk and minimize the
impact of rising or falling interest rates on net interest income.
Alabama National evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation and repricing, funding sources and
pricing, and off-balance sheet commitments in order to decrease interest
sensitivity risk. Alabama National 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.
20
The following table illustrates Alabama National's interest rate sensitivity at
September 30, 1998, 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, 1998
-----------------------------------------------------------------------------------------
After One After Three
Through Through
Within One Three Twelve Within One Greater Than
Month Months Months Year One Year Total
----------- ----------- ----------- ----------- ------------ -----------
Assets:
Earning assets:
Loans (1) ............................ $ 403,491 $ 74,726 $ 153,589 $ 631,806 $ 290,249 $ 922,055
Securities (2) ....................... 24,347 18,920 64,331 107,598 167,952 275,550
Interest-bearing deposits in
other banks ........................ 381 - - 381 - 381
Funds sold ........................... 61,904 - - 61,904 - 61,904
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets ... $ 490,123 $ 93,646 $ 217,920 $ 801,689 $ 458,201 $ 1,259,890
Liabilities:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits .................. $ - $ - $ 140,492 $ 140,492 $ - $ 140,492
Savings deposits ................. 275,076 - - 275,076 - 275,076
Time deposits (3) ................ 50,090 82,501 260,306 392,897 78,763 471,660
Funds purchased ..................... 173,417 - - 173,417 - 173,417
Short-term borrowings (4) ........... 28,227 - - 28,227 - 28,227
Long-term debt ...................... 2 4 18 24 15,320 15,344
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 526,812 $ 82,505 $ 400,816 $ 1,010,133 $ 94,083 $ 1,104,216
----------- ----------- ----------- ----------- ----------- -----------
Period gap .............................. $ (36,689) $ 11,141 $ (182,896) $ (208,444) $ 364,118
=========== =========== =========== =========== ===========
Cumulative gap .......................... $ (36,689) $ (25,548) $ (208,444) $ (208,444) $ 155,674 $ 155,674
=========== =========== =========== =========== =========== ===========
Ratio of cumulative gap to total
earning assets ......................... (2.91)% (2.03)% (16.54)% (16.54)% 12.36%
- ----------------------------
(1) Excludes nonaccrual loans of $4,132,000.
(2) Excludes investment equity securities of $5,643,000.
(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 $6,027,000.
21
Alabama National generally would benefit from increasing market rates of
interest when it has an asset-sensitive gap and generally would benefit from
decreasing market rates of interest when it is liability sensitive. Alabama
National is liability sensitive through the one year time frame. 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, 1998, mortgage backed securities totaling
$182.0 million, or 12.3% of total assets and essentially every loan, net of
unearned income, (totaling $926.2 million, or 62.7% 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 $1.1 billion, or 71.9%, of total assets at September 30, 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. 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
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.
22
The following table illustrates the results of simulation analysis used by
Alabama National to determine the extent to which market risk would have
effected the net interest margin if prevailing interest rates differed from
actual rates during the 1998 nine months. Because of the inherent use of
estimates and assumptions in the simulation model used to derive this
information, the actual results for the 1998 nine months and 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, except percentages)
Change from
Net Interest 1998 Net Interest
Change in prevailing Interest Rates Income Amount Income Amount
- ----------------------------------- ------------- -------------
+ 200 basis points .................. $39,936 6.48 %
+ 100 basis points .................. 38,721 3.24
0 basis points ...................... 37,506 -
- - 100 basis points .................. 36,340 (3.11)
- - 200 basis points .................. 35,169 (6.23)
Liquidity and Capital Adequacy
- ------------------------------
Alabama National's net loan to deposit ratio was 86.0% at September 30, 1998,
compared to 88.4% at year end 1997. Alabama National's liquid assets as a
percentage of total deposits were 11.2% at September 30, 1998, compared to 10.7%
at year-end 1997. At September 30, 1998, Alabama National had unused federal
funds lines of approximately $52.1 million, unused lines at the Federal Home
Loan Bank of $53.0 million and an unused credit line at an independent bank of
$8.0 million. 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 $10.7 million from December
31, 1997 to $114.2 million at September 30, 1998. This increase was attributable
to:
Net income ................................................... $ 12,475,000
Increase in unrealized gain on securities available for
sale, net of deferred income taxes ....................... 967,000
Cash dividends declared ...................................... (4,061,000)
Exercise of options .......................................... 1,260,000
Payment for fractional shares ................................ (3,000)
Decrease in unearned restricted stock ........................ 69,000
------------
Net increase ............................................. $ 10,707,000
============
23
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, 1998. 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, 1998:
Tier 1 Risk Total Risk Tier 1
Based Based Leverage
----- ----- --------
Alabama National BanCorporation ............... 9.54 % 10.79 % 7.57%
National Bank of Commerce of Birmingham ....... 9.02 10.27 7.39
Alabama Exchange Bank ......................... 11.84 12.84 7.46
Bank of Dadeville ............................. 12.69 13.53 9.33
Citizens & Peoples Bank, N.A................... 26.96 27.65 13.68
First American Bank ........................... 10.43 11.68 9.18
First Citizens Bank, N.A....................... 13.78 14.89 8.47
First Gulf Bank ............................... 8.98 10.09 7.04
Public Bank ................................... 17.11 18.36 9.94
Required minimums ............................. 4.00 8.00 4.00
Year 2000
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Alabama National 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 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.
Alabama National has formed a Year 2000 committee that is charged with
overseeing the completion of the project. Alabama National has completed its
awareness phase, assessment phase, and the majority of the renovation phase and
is actively involved in validating and implementing the plan. Currently, Alabama
National is involved in its testing phase and anticipates that this phase will
be substantially completed by December 31, 1998. Since it routinely upgrades and
purchases technologically advanced software and hardware, Alabama National has
determined that the costs of making modifications to correct any Year 2000
issues will not materially affect reported operating results. Alabama National
estimates that its total expenditures related to Year 2000 compliance should not
exceed approximately $460,000, $300,000 of which represent capital expenditures.
To date, Alabama National's expenditures total approximately $66,000, of which
$56,800 represent capital expenditures.
Alabama National vendors and suppliers have been contacted for written
confirmation of their product readiness for Year 2000 compliance. Negative or
deficient responses are analyzed and periodically reviewed to prescribe timely
actions within Alabama National's contingency planning. Alabama National's core
bank operating software has been renovated by the vendor and the compliant
version has been loaded to a separate test system. Tests have been performed on
this system and bank personnel are validating the results.
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Alabama National also recognizes the importance of determining that its
borrowers are facing 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 appropriate. Deposit customers have received
statement stuffers and informational material in this regard. Alabama National
plans to work on a one-on-one basis with any borrower who has been identified as
having high Year 2000 risk exposure.
Accordingly, management does not believe that Alabama National will incur
significant additional costs associated with the Year 2000 issue. However, there
can be no assurances that all hardware and software that Alabama National will
use will be Year 2000 compliant. Management cannot predict the amount of
financial difficulties it may incur due to customer and vendor inability to
perform according to their agreements with Alabama National or the effects that
other third parties may bring as a result of this issue. Therefore, 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
Alabama National's business, financial condition and results of operations.
Alabama National's contingency plans relative to Year 2000 issues have not been
finalized. These plans are evolving as the testing of systems progresses. During
the testing phase (currently scheduled for completion by December 31, 1998)
management will develop and modify a "worst case scenario" contingency plan
based on testing results. Alabama National also anticipates that deposit
customers will have increased demands for cash in the latter part of 1999 and
correspondingly management plans to maintain higher liquidity levels to address
this demand.
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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, 1997 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 10.1 - Agreement and Plan of Merger by and among
Alabama National, Citizens and Peoples Bank, N.A.,
and Community Bank of Naples, N.A., dated September
21, 1998 (filed as an Exhibit to Alabama National's
Registration Statement on Form S-4, (Commission File
No. 333-66327) and is incorporated herein by
reference).
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedules (for SEC use only)
(b) Reports on Form 8-K
Report on Form 8-K filed October 5, 1998, to report the
completion of the merger of Community Financial with
and into Alabama National, effective October 2, 1998.
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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 11, 1998 /s/ John H. Holcomb, III
----------------- ------------------------
John H. Holcomb, III, its Chairman and
Chief Executive Officer
Date: November 11, 1998 /s/ William E. Matthews, V.
----------------- ---------------------------
William E. Matthews, V., its
Executive Vice President and
Chief Financial Officer
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