1 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, 1996 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) 583-3654 NONE (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 September 30, 1996 ----- --------------------------------- Common Stock, $1.00 Par Value 6,515,418 2 INDEX ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Consolidated statements of condition September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . 3 Consolidated statements of income Three month periods ended September 30, 1996 and 1995; Nine month periods ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . 4 Consolidated statements of cash flows Nine month periods ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . 8 Notes to the unaudited consolidated financial statements September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2 3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED) ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) (IN THOUSANDS, EXCEPT SHARES) September 30, 1996 December 31, 1995 ------------------ ----------------- ASSETS Cash and due from banks .................................................... $ 38,726 $ 39,202 Interest-bearing deposits in other banks ................................... 239 11,168 Investment securities (estimated market values of $75,183 and $61,618) ..... 75,815 61,594 Securities available for sale .............................................. 75,579 92,270 Trading securities ......................................................... 1,866 4,402 Federal funds sold and securities purchased under agreements to resell ..... 21,864 37,820 Loans ...................................................................... 590,590 555,252 Unearned income ............................................................ (1,883) (2,133) ---------- -------- Loans, net of unearned income .............................................. 588,707 553,119 Allowance for loan losses .................................................. (9,245) (8,909) ---------- -------- Net loans .................................................................. 579,462 544,210 Property, equipment and leasehold improvements, net ........................ 20,567 20,163 Intangible assets .......................................................... 7,389 7,595 Other assets ............................................................... 19,684 21,299 ---------- -------- Totals ..................................................................... $ 841,191 $839,723 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest bearing .................................................... $ 119,375 $112,382 Interest bearing ....................................................... 548,850 564,154 ---------- -------- Total deposits ............................................................. 668,225 676,536 Federal funds purchased and securities sold under agreements to repurchase . 51,296 58,921 Treasury tax and loan account .............................................. 6,243 2,441 Short-term borrowings ...................................................... 41,434 21,280 Accrued expenses and other liabilities ..................................... 10,288 21,535 Long-term debt ............................................................. 307 821 ---------- -------- Total liabilities .......................................................... 777,793 781,534 ---------- -------- STOCKHOLDERS' EQUITY: Common stock, $1 par; authorized 10,000,000 shares; issued 6,881,968 and 6,871,968 shares ................................. 6,882 6,872 Additional paid-in capital ................................................. 53,438 53,401 Retained earnings .......................................................... 8,889 3,119 Treasury stock, 366,550 shares at cost ..................................... (5,023) (5,023) Unearned restricted stock .................................................. (208) (278) Unrealized gain (loss) on available for sale securities, net of taxes ...... (580) 98 ---------- -------- Total stockholders' equity ................................................. 63,398 58,189 ---------- -------- Totals ..................................................................... $ 841,191 $839,723 ========== ======== See accompanying notes to unaudited consolidated financial statements. 3 4 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) For the three months ended September 30, -------------------- 1996 1995 ---- ---- INTEREST INCOME: Interest and fees on loans ........................................ $13,456 $7,683 Interest on securities ............................................ 2,430 1,540 Interest on deposits in other banks ............................... 15 - Interest on trading securities .................................... 30 42 Interest on federal funds sold and securities purchased under agreements to resell ........................................... 215 574 ------- ------ Total interest income ................................................ 16,146 9,839 INTEREST EXPENSE: Interest on deposits ............................................. 6,034 4,324 Interest on federal funds purchased and securities sold under agreements to resell ........................................... 711 510 Interest on long and short-term borrowings ....................... 605 251 ------- ------ Total interest expense ............................................... 7,350 5,085 ------- ------ Net interest income .................................................. 8,796 4,754 Provision for loan losses ............................................ - 202 ------- ------ Net interest income after provision for loan losses .................. 8,796 4,552 NONINTEREST INCOME: Securities gains ................................................. 7 - Gain on sale of assets ........................................... 20 - Service charges on deposit accounts .............................. 935 428 Investment services .............................................. 1,801 1,312 Trust department income .......................................... 395 315 Other ............................................................ 705 213 ------- ------ Total noninterest income ............................................. 3,863 2,268 4 5 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) For the three months ended September 30, ------------------- 1996 1995 ---- ---- NONINTEREST EXPENSE: Salaries and employee benefits ......................... 4,819 3,126 Occupancy and equipment expenses ....................... 1,156 799 Other .................................................. 3,198 1,573 ------ -------- Total noninterest expense ................................ 9,173 5,498 ------ -------- Income before provision for income taxes and minority interest in earnings of consolidated subsidiaries ............................................. 3,486 1,322 Provision for income taxes ............................... 897 132 Income before minority interest in earnings of ------ -------- consolidated subsidiaries ................................ 2,589 1,190 Minority interest in earnings of consolidated subsidiaries ............................................ 4 171 ------ -------- Net income ............................................... 2,585 1,019 Less cash dividends on preferred stock ................... 4 600 ------ -------- Net income available for common shares ................... $2,581 $ 419 ====== ======== Net income per common share .............................. $ 0.39 $ 0.15 ====== ======== Weighted average common and common equivalent shares outstanding .................................... 6,679 2,874 ====== ======== See accompanying notes to unaudited consolidated financial statements. 5 6 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) For the nine months ended September 30, ------------------- 1996 1995 ---- ---- INTEREST INCOME: Interest and fees on loans ......................................... $39,487 $21,966 Interest on securities .............................................. 7,355 4,482 Interest on deposits in other banks ................................. 203 - Interest on trading securities ...................................... 154 42 Interest on federal funds sold and securities purchased under agreements to resell ............................................. 1,274 1,039 ------- ------- Total interest income .................................................. 48,473 27,529 INTEREST EXPENSE: Interest on deposits ............................................... 18,534 11,858 Interest on federal funds purchased and securities sold under agreements to resell ............................................. 2,530 1,242 Interest on long and short-term borrowings ......................... 1,620 703 ------- ------- Total interest expense ................................................. 22,684 13,803 ------- ------- Net interest income .................................................... 25,789 13,726 Provision for loan losses .............................................. 209 210 ------- ------- Net interest income after provision for loan losses .................... 25,580 13,516 NONINTEREST INCOME: Securities gains ................................................... 41 - Gain on sale of assets and deposits ................................ 343 - Service charges on deposit accounts ................................ 2,780 1,258 Investment services ................................................ 5,942 1,967 Trust department income ............................................ 1,105 891 Other .............................................................. 1,771 560 ------- ------- Total noninterest income ............................................... 11,982 4,676 6 7 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) For the nine months ended September 30, -------------------- 1996 1995 ---- ---- NONINTEREST EXPENSE: Salaries and employee benefits ....................... 15,867 7,551 Occupancy and equipment expenses ..................... 3,325 1,988 Other ................................................ 8,126 4,003 ------ ------ Total noninterest expense .............................. 27,318 13,542 ------ ------ Income before provision for income taxes and minority interest in earnings of consolidated subsidiaries ........................................... 10,244 4,650 Provision for income taxes ............................. 3,288 333 Income before minority interest in earnings of ------ ------ consolidated subsidiaries .............................. 6,956 4,317 Minority interest in earnings of consolidated subsidiaries .......................................... 14 613 ------ ------ Net income ............................................. 6,942 3,704 Less cash dividends on preferred stock ................. 4 679 ------ ------ Net income available for common shares ................. $6,938 $3,025 ====== ====== Net income per common share ............................ $ 1.04 $ 1.05 Weighted average common and common equivalent ====== ====== shares outstanding .................................. 6,675 2,874 ====== ====== See accompanying notes to unaudited consolidated financial statements. 7 8 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) For the nine months ended September 30, ------------------- 1996 1995 ---- ---- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES . . . . . . . . . . $ 202 $ (523) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities . . . . . . . . . . . . . . . . . . (23,857) (4,920) Proceeds from maturities of investment securities . . . . . . . . . . . 9,569 4,618 Purchases of securities available for sale . . . . . . . . . . . . . . (34,832) (2,227) Proceeds from sale of securities available for sale . . . . . . . . . . 1,816 - Proceeds from maturities of securities available for sale . . . . . . . 49,452 - Net decrease in interest-bearing deposits in other banks . . . . . . . 10,929 - Net (increase) decrease in federal funds sold and securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . 16,136 (28,893) Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . (35,588) (14,844) Purchases of property, equipment and leasehold improvements . . . . . (1,916) (995) Proceeds from sale of property, equipment and leasehold improvements . 381 - Proceeds from sale of life insurance policy . . . . . . . . . . . . . . 250 - Bank acquisition, net of cash acquired . . . . . . . . . . - 3,113 Proceeds from sale of banking offices, net of cash paid . . . . . . . 274 - Proceeds from sale of other real estate owned . . . . . . . . . . . . . 327 1,118 -------- --------- Net cash used in investing activities . . . . . . . . . . . . . . . . . (7,059) (43,030) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . 189 31,854 Sale of deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,500) - Increase (decrease) in federal funds purchased, securities sold under agreements to repurchase, and treasury, tax and loan account . . . (3,823) 14,831 Net increase in short-term and long-term borrowings . . . . . . . . . . 19,640 3,557 Sale of common stock . . . . . . . . . . . . . . . . . . . . . . . . . 100 - Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . (1,168) - Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . (4) (679) Dividends paid to minority stockholders . . . . . . . . . . . . . . . - (172) Retirement of preferred stock . . . . . . . . . . . . . . . . . . . . . (53) (3,580) -------- --------- Net cash provided by financing activities . . . . . . . . . . . . . . . 6,381 45,811 -------- --------- Increase (decrease) in cash and cash equivalents. . . . . . . . . . . . (476) 2,258 Cash and cash equivalents, beginning of period . . . . . . . . . . . . 39,202 20,427 -------- --------- Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 38,726 $ 22,685 ======== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . $ 23,209 $ 13,513 ======== ========= Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . $ 3,669 $ 752 ======== ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Acquisition of collateral in satisfaction of a loan . . . . . . . . . . $ 275 $ 1,238 ======== ========= Adjustment to market value of other real estate owned . . . . . . . . . $ (16) $ 50 ======== ========= Adjustment to market value of securities available for sale, net of deferred income taxes . . . . . . . . . . . . . . . . . . $ (678) $ 1,319 ======== ========= See accompanying notes to unaudited consolidated financial statements. 8 9 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 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, 1996 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, 1996. For further information, refer to the consolidated financial statements and footnotes thereto included in Form 10-K, Annual Report under the Securities Exchange Act of 1934, for the year ended December 31, 1995. NOTE B - COMMITMENT AND CONTINGENCIES The Company'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 In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," ("Statement 121") which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement 121 effective January 1, 1996. The adoption of Statement 121 did not have a material effect on the Company's unaudited consolidated financial statements. In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing Rights, an Amendment of FASB No. 65," ("Statement 122"). Statement 122 requires companies that originate mortgage loans to capitalize the cost of mortgage servicing rights separate from the cost of originating the loan when a definitive plan to sell those loans and retain the mortgage servicing rights exist. Prior to the adoption of Statement 122 only mortgage servicing rights that are purchased from other parties are capitalized and recorded as an asset. Therefore, Statement 122 eliminates the accounting inconsistencies that existed between mortgage servicing rights that are derived from loan origination activities and those acquired through purchase transactions. Statement 122 also requires that capitalized mortgage servicing rights be assessed for impairment based on the fair value of those rights. The Company adopted Statement 122 effective January 1, 1996, with no material effect on the Company's unaudited consolidated financial statements. 9 10 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE D-MERGERS AND ACQUISITIONS On December 29, 1995, Alabama National BanCorporation ("ANB") merged ("the Merger") with National Commerce Corporation ("NCC") and Commerce Bankshares, Inc. ("CBS") (collectively the "Company"). The Merger was accomplished by converting each share of NCC stock into 348.14 shares of ANB stock and each share of CBS stock into 7.0435 shares of ANB stock for a total of 3,106,981 shares (or 50.1%) of the Company stock. The Merger was accounted for as a "reverse acquisition," whereby NCC is deemed to have acquired ANB for financial reporting purposes. However, ANB remains the continuing legal entity and registrant for Securities and Exchange Commission filing purposes. Consistent with the reverse acquisition accounting treatment, the historical financial statements of the Company presented for the three months and the nine months ended September 30, 1995 are actually only the consolidated financial statements of NCC and differ from the consolidated financial statements of ANB as previously reported. The operations of ANB are included in the financial statements from the date of the Merger. The historical stockholders' equity of NCC prior to the Merger is retroactively restated for the equivalent number of shares received in the Merger after giving effect to any difference in par value of ANB's and NCC stock by an offset to paid-in capital. The purchase price, determined by the ANB common stock average closing price for the month of March 1995, prior to the announcement of the Merger plus direct acquisition costs, was allocated to the ANB assets and liabilities acquired based on their fair market value at the date of acquisition. The excess of the purchase price over the fair market value of net assets acquired is being amortized on a straight line basis over twenty five years. The ANB assets purchased and liabilities assumed (at fair market values) as of December 29, 1995 were as follows (in thousands): Cash, due from banks, interest-bearing deposits with other banks, and federal funds sold . . . . . . . . . . . . . . . . . $ 27,788 Securities available for sale . . . . . . . . . . . . . . . . . . . . . 27,821 Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . 19,954 Loans, net of unearned income and allowance for loan losses . . . . . . 204,485 Bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . 11,734 Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,423 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,354 Deposits assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . (253,611) Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . (20,217) --------- Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,731 ========= The following pro forma consolidated results of operations for the three and the nine months ended September 30, 1995, are presented as if the Merger had occurred on January 1, 1995. For the three For the nine months ended months ended ------------ ------------ September 30, 1995 ---------------------------------- (In thousands, except per share data) Net interest income $8,099 $23,692 Provision for loan losses 415 544 Noninterest income 2,958 6,852 Noninterest expense 7,956 21,458 Provision for income taxes 476 1,444 Net income 2,210 7,098 Earnings per common and common equivalent share $.33 $1.07 10 11 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE D-MERGERS AND ACQUISITIONS (CONTINUED) Historical financial information of Alabama National BanCorporation and its subsidiaries prior to the Merger described above is as follows: December 29, 1995 September 30, 1995 ----------------- ------------------ (In thousands) Statement of Condition Data - --------------------------- Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . $19,877 $33,414 Securities available for sale . . . . . . . . . . . . . . . . . . . . . 27,821 19,015 Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,762 196,051 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298,683 294,894 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253,611 261,820 Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 26,994 33,078 For the nine For the nine months ended months ended ------------ ------------ September 30, 1995 ------------------ (In thousands) Statement of Income Data - ------------------------ Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $3,594 $10,712 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . 213 334 Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . 693 2,185 Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . 2,426 7,820 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,202 3,327 Net income per common share . . . . . . . . . . . . . . . . . . . . . . $ .35 $ .96 CBS was formed on April 4, 1995 to succeed as owner of all the interest of National Bank of Commerce of Birmingham ("NBC"), a consolidated subsidiary of NCC. CBS, a bank and thrift holding company, was formed primarily to accomplish the acquisition of Talladega Federal Savings and Loan Association (TFSLA). On July 20, 1995, CBS issued 600,125 shares of its common stock to NCC and 95,126 shares of its common stock to the individual stockholders of NBC in exchange for all the common stock of NBC and became a consolidated subsidiary of NCC. Also, on August 1, 1995, CBS acquired all of the stock of TFSLA for $1,703,000 in cash. This acquisition was accounted for under the purchase method; accordingly, the purchase price was allocated to the assets and liabilities based on their values. No goodwill was recorded. At the date of acquisition, TFSLA had assets of $34,982,000 and equity of $1,813,000. The results of operations of TFSLA are included in NCC's results of operations beginning August 1, 1995. TFSLA was merged with Citizens Bank of Talladega, another subsidiary of the Company on December 29, 1995. The TFSLA assets purchased and liabilities assumed as of August 1, 1995 were as follows (in thousands): Cash, due from banks, interest-bearing deposits with other banks, and federal funds sold . . . . . . . . . . . . . . . . . $ 4,815 Securities available for sale . . . . . . . . . . . . . . . . . . . . . 334 Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . 5,583 Loans, net of unearned income and allowance for loan losses . . . . . . 16,757 Bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . 528 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,028 Deposits assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,956) Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . (386) -------- Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,703 ======== 11 12 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE D - MERGERS AND ACQUISITIONS (CONTINUED) On September 30, 1996, FirstBank Holding Company, Inc. ("FIRSTBANC"), a one bank holding company headquartered in Robertsdale, Alabama, was merged into the Company. The Company acquired all of the outstanding common stock of FIRSTBANC in exchange for 305,000 shares of the Company's common stock. At the merger date, FIRSTBANC had approximately $36 million in total assets, year-to-date net interest income of approximately $1.2 million and year-to-date net income of approximately $325,000. The consolidated financial statements of the Company give effect to the FIRSTBANC merger, which was accounted for as a pooling-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. The Company's consolidated financial data for the three months and nine months ended September 30, 1995 have been restated as follows: As As Previously Currently Reported FIRSTBANC Reported -------- --------- -------- Three Months Ended September 30, 1995: Net interest income $4,373 $381 $4,754 Provision for loan losses 200 2 202 Net income 907 112 1,019 Nine Months Ended September 30, 1995: Net interest income $12,592 $1,134 $13,726 Provision for loan losses 200 10 210 Net income 3,400 304 3,704 12 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 the Company at September 30, 1996, and the results of its operations for the three and nine month periods ended September 30, 1996 and 1995. On December 29, 1995, Alabama National BanCorporation ("ANB") merged ("the Merger") with National Commerce Corporation ("NCC") and Commerce Bankshares, Inc. ("CBS") (collectively the "Company"). The Merger was accomplished, among other things, by converting each share of NCC stock into 348.14 shares of ANB stock and each share of CBS stock into 7.0435 shares of ANB stock for a total of 3,106,981 shares (or 50.1%) of the Company stock. The Merger was accounted for as a "reverse acquisition," whereby NCC is deemed to have acquired ANB for financial reporting purposes. However, ANB remains the continuing legal entity and registrant for Securities and Exchange Commission filing purposes. Consistent with the reverse acquisition accounting treatment, the historical financial statements of the Company presented for the three and nine month periods ended September 30, 1995, are the consolidated financial statements of NCC and differ from the consolidated financial statements of ANB previously reported. The results of operations of ANB are included in the financial statements from the date of the Merger. (See Note D to the Company's unaudited consolidated financial statements.) On September 30, 1996, FirstBanc Holding Company, Inc. ("FIRSTBANC") was merged into the Company with each share of FIRSTBANC stock being converted into 7.12917 shares of ANB stock. The FIRSTBANC merger was accounted for as a pooling- of-interests. Accordingly, financial statements for all periods have been restated to reflect the results of operations of the combined companies from the earliest period presented, except for dividends per share. (See Note D to the Company's unaudited consolidated financial statements.) This information should be read in conjunction with the Company'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 the Company's Annual Report on Form 10-K for the year ended December 31, 1995. PERFORMANCE OVERVIEW The Company's net income was $2.585 million for the third quarter of 1996 (the "1996 Quarter") compared to $1.019 million for the third quarter of 1995 (the "1995 quarter"). Net income for the nine month period ended September 30, 1996 (the "1996 nine months") was $6.942 million compared to $3.704 million for the nine months ended September 30, 1995 (the "1995 nine months"). Net income per common share for the 1996 and 1995 quarters was $.39 and $.15, respectively. For the 1996 nine months, net income per common share was $1.04 compared to $1.05 for the 1995 nine months. The Company has approximately 3.8 million more common shares outstanding for the 1996 quarter and nine months as a result of the Merger. During the 1996 quarter, the Company absorbed an after tax charge of approximately $420,000 ($.06 per common share) as the result of final Savings Association Insurance Fund ("SAIF") legislation enacted on September 30, 1996. The Company realized $126,000 ($.02 per common share) in income in the 1996 quarter from resolution of a matter involving a letter of credit. The principal reason for the increase in net income for the 1996 quarter and the 1996 nine months is the Merger. The improvement in 1996 net earnings through September 30 is attributable to an increased interest margin and increased noninterest income, a reduced minority interest in the earnings of consolidated subsidiaries, less increased noninterest expenses and income taxes. The return on average assets for the Company was 1.12% for the 1996 nine months compared to 1.09% for the 1995 nine months. The return on average stockholders' equity decreased for the 1996 nine months to 15.01%, as compared to 17.97% for the 1995 nine months. Book value per share at September 30, 1996 was $9.73, an increase of $.79 from year end 1995. Tangible book value per share at September 30, 1996 was $8.60, an increase of $.83 from year end 1995. The Company declared $.19 in cash dividends on common shares in the 1996 nine months. 13 14 NET INCOME The largest component of the Company's net income is its net interest income, which is the difference between the income earned on assets and the interest paid on deposits and borrowings used to support such assets. As a result of the Merger, average earning assets for the 1996 nine months increased by approximately $286.0 million and average interest- bearing liabilities increased by approximately $255.2 million. The Company's net interest income benefited from the faster growth of average earning assets than average interest-bearing liabilities. The average taxable equivalent rates earned on assets were 8.59% for the 1996 nine months, compared to 8.65% for the 1995 nine months. The average rates paid on interest-bearing liabilities were 4.67% for the 1996 nine months compared to 5.09% for the 1995 nine months. The net interest margin for the 1996 nine months was 4.52% compared to 4.29% for the 1995 nine months. 14 15 The following table depicts, on a taxable equivalent basis for the 1996 and 1995 nine months, certain information related to the Company's average balance sheet and its average yields on assets and average costs of liabilities. Such yields or costs are derived by dividing income or expense by the average daily balance of the associated assets or liabilities. AVERAGE BALANCES, INCOME AND EXPENSES AND RATES (AMOUNTS IN THOUSANDS, EXCEPT YIELDS AND RATES) NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------------------------------------------------- 1996 1995 ------------------------------------- --------------------------------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ ASSETS: BALANCE EXPENSE RATE BALANCE EXPENSE RATE ------- ------- ---- ------- ------- ---- Earning assets: Loans (1) (3) ................................. $563,306 $39,617 9.38% $312,152 21,966 9.38% Securities: Taxable ...................................... 139,544 6,640 6.34 87,764 4,509 6.85 Tax exempt ................................... 17,732 1,083 8.14 2,422 135 7.43 Cash balances in other banks .................. 5,159 203 5.25 0 0 (-) Funds sold .................................... 31,168 1,274 5.45 23,444 1,039 5.91 Trading account securities .................... 3,182 154 6.45 897 42 6.24 -------- ------- -------- ------- Total earning assets (2) .................. 760,091 48,971 8.59 426,679 27,691 8.65 -------- ------- -------- ------- Cash and due from banks ......................... 29,545 17,520 Premises and equipment .......................... 29,367 7,659 Other assets .................................... 15,079 7,368 Allowance for loan losses ....................... (9,249) (5,131) -------- -------- Total assets ............................. $824,833 $454,095 ======== ======== LIABILITIES: Interest-bearing liabilities: Interest-bearing transaction accounts ......... $81,073 1,693 2.78 $36,397 819 3.00 Savings and money market deposits ............. 199,462 5,423 3.63 127,274 4,163 4.36 Time deposits ................................. 270,342 11,418 5.63 155,092 6,861 5.90 Funds purchased ............................... 64,476 2,530 5.23 29,625 1,242 5.59 Other short-term borrowings ................... 32,201 1,567 6.49 12,586 655 6.94 Long-term debt ................................ 777 53 9.09 908 63 9.25 -------- ------- ---- -------- ------- ---- Total interest-bearing liabilities ....... 648,331 22,684 4.67 361,882 13,803 5.09 -------- ------- ---- -------- ------- ---- Demand deposits ................................. 103,528 56,101 Accrued interest and other liabilities .......... 11,288 8,633 Stockholders' equity ............................ 61,686 27,479 -------- -------- Total liabilities and stockholders' equity .. $824,833 $454,095 ======== ======== Net interest spread ............................. 3.92% 3.56% ==== ==== Net interest income/margin on a taxable equivalent basis .................... 26,287 4.61% 13,888 4.34% ==== ==== Tax equivalent adjustment (2).................... 498 162 ------- ------- Net interest income/margin ...................... $25,789 4.52% $13,726 4.29% ======= ==== ======= ==== (1) Average loans include nonaccrual loans. All loans and deposits are domestic. (2) Tax equivalent adjustments are based on an assumed tax rate of 34%, and do not give effect to the disallowance for Federal income tax purposes of interest expense related to certain tax exempt assets. (3) Fees in the amount of $1,197,000 and $573,000 are included in interest and fees on loans for the nine months ended September 30, 1996 and 1995, respectively. 15 16 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 from the 1996 nine months compared to the 1995 nine months. For the purposes of this table, changes which are not soley 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, ------------------------------------ 1996 COMPARED TO 1995 VARIANCE DUE TO ------------------------------------ VOLUME YIELD/RATE TOTAL ----------- ---------- ------ EARNING ASSETS: Loans ............................................ $17,651 $ - $17,651 Securities: Taxable ........................................ 2,489 (358) 2,131 Tax exempt ..................................... 934 14 948 Cash balances in other banks ..................... 203 - 203 Funds sold ....................................... 321 (86) 235 Trading account securities ....................... 111 1 112 ------- ------ ------- Total interest income ....................... 21,709 (429) 21,280 INTEREST-BEARING LIABILITIES: Interest-bearing transaction accounts ............ 938 (64) 874 Savings and money market deposits ................ 2,049 (789) 1,260 Time deposits .................................... 4,884 (327) 4,557 Funds purchased .................................. 1,373 (85) 1,288 Other short-term borrowings ...................... 957 (45) 912 Long-term debt ................................... (9) (1) (10) ------- ------ ------- Total interest expense ...................... 10,192 (1,311) 8,881 ------- ------ ------- Net interest income on a taxable equivalent basis .......................... $11,517 $ 882 12,399 ======= ====== Taxable equivalent adjustment .................... (336) ------- Net interest income .............................. $12,063 ======= 16 17 Net revenue from earning assets during the 1996 nine months increased $12.1 million or 87.9%, over the corresponding period in 1995. Approximately 93% of this increase came from volume. 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. No provision was made for the 1996 quarter, compared to a $202,000 provision during the 1995 quarter. Recoveries exceeded charge-offs by $159,000 for the 1996 quarter compared to net charge-offs of $189,000 for the same period of 1995. The provision for loan losses was $209,000 for the 1996 nine months, compared to $210,000 for the 1995 nine months. Recoveries exceeded charge-offs by $127,000 for the 1996 nine months, compared to net charge-offs of $221,000 for the 1995 nine months. The allowance for loan losses as a percentage of outstanding loans, net of unearned income was 1.57% at September 30, 1996, compared to 1.61% at December 31, 1995. 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. Noninterest income for the 1996 quarter was $3.9 million, compared to $2.3 million for the 1995 quarter. For the 1996 nine months noninterest income increased to $12.0 million, compared to $4.7 million for the 1995 nine months. Gain on the sale of assets and deposits of $343,000 during the 1996 nine months resulted from the sale of a branch and the deposits at that branch of $274,000, the sale of other real estate of $28,000 and the sale of loans and miscellaneous assets of $41,000. Service charges on deposits for the 1996 quarter were $935,000, compared with $428,000 for the 1995 quarter. For the 1996 nine months, service charges were $2.8 million, compared with $1.3 million for the 1995 nine months. For both 1996 periods, substantially all of the increase came from the banks acquired in the Merger. Continued increased activity in the investment services division resulted in a $489,000 increase in the 1996 quarter over the same period in 1995 and a $4.0 million increase in the 1996 nine months, when compared to the 1995 nine months. Management anticipates this increased activity to continue, but is unable to predict the impact on the future results of operations. A slowdown was experienced in the 1996 quarter. Trust fees increased $80,000 in the 1996 quarter compared to the 1995 quarter and increased $214,000 for the 1996 nine months, when compared with the 1995 nine months. Other noninterest income increased $492,000 in the 1996 quarter when compared to the 1995 quarter and increased $1.2 million for the 1996 nine months when compared with the 1995 nine months. $258,000 of this increase in the 1996 quarter and $523,000 of this increase in the 1996 nine months came from banks acquired in the Merger. Miscellaneous charges by NBC Securities, Inc., a subsidiary of the Company, accounted for $283,000 of the increase for the 1996 quarter and $469,000 of the increase for the 1996 nine months. The 1996 nine months includes an $80,000 recovery from a settlement with a third-party financial institution. Noninterest expense was $9.2 million for the 1996 quarter, compared to $5.5 million for the 1995 quarter. For the 1996 nine months, noninterest expense was $27.3 million, a $13.8 million increase over the 1995 nine months. Salaries and employee benefits increased to $4.8 million for the 1996 quarter, compared to $3.1 million for the 1995 quarter. For the 1996 nine months, salaries and employee benefits increased to $15.9 million from $7.6 million in the 1995 nine months. The increase in the 1996 quarter were principally the result of $1.3 million in salaries and employee benefits of the banks acquired in the Merger and increased salaries and employee benefits of the investment services division of approximately $418,000. The increase in salaries and employee benefits for the 1996 nine months were principally the result of $5.2 million in salaries and employee benefits of the banks acquired in the Merger, including $947,000 in charges connected with the settlement of employment contracts of the former chairman and CEO of the Company and one of the subsidiary bank presidents, and increased salaries and employee benefits of the investment services division of $2.8 million. Occupancy and equipment expense increased to $1.2 million in the 1996 quarter, compared to $799,000 in the 1995 quarter. Approximately $444,000 of this increase came from the banks acquired in the Merger. For the 1996 nine months, occupancy and equipment expenses increased to $3.3 million compared to $2.0 million for the same period on 1995. Substantially all of this increase came from banks acquired in the Merger. Other noninterest expense increased to $3.2 million in the 1996 quarter, compared to $1.6 million in the 1995 quarter. Approximately $1.8 million of this increase, including the SAIF assessment of $677,000, came from banks acquired in the Merger. Other noninterest expense increased to $8.1million in the 1996 nine months, compared to $4.0 million in the 1995 nine months. Substantially all of this increase came from the banks acquired in the Merger (including the SAIF assessment and a $375,000 charge for the settlement of the employee contracts with the former chairman and CEO of the Company. 17 18 Income tax expense was $897,000 for the 1996 quarter compared to $132,000 for the 1995 quarter. For the 1996 nine months, income tax expense was $3.3 million, compared to $333,000 for the 1995 nine months. The principal reason for these increases was NCC's utilization of its loss carryforwards and credit carry forwards in the year ended December 31, 1995. The effective tax rates the 1996 quarter and the 1996 nine months were 25.7% and 32.1%, respectively. EARNING ASSETS Loans comprised the largest single category of the Company's earning assets on September 30, 1996. Loans, net of unearned income were $588.7 million or 70.0% of total assets at September 30, 1996, compared to $553.1 million or 65.9% at December 31, 1995. Loans grew $35.6 million or 6.4% during the 1996 nine months. Investment securities increased $14.2 million for the 1996 nine months. Purchases of investment securities totaled $23.9 million and maturities and calls of investment securities totaled $9.7 million. Securities available for sale decreased $16.7 million in the 1996 nine months. Purchases of available for sale securities totaled $34.8 million and sales, maturities and calls of available for sale securities totaled $51.3 million. Overall investment securities and securities available for sale decreased $2.5 million during the 1996 nine months. Trading accounts securities decreased $2.5 million during the 1996 nine months. The trading account securities are securities owned by the Company prior to delivery to the Company's customers. It is the policy of the Company 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 $21.9 million at September 30, 1996 compared to $37.9 million at December 31, 1995, a decrease of $16.0 million. Interest-bearing deposits in other banks at September 30, 1996 were $239,000 compared to $11.2 million at December 31, 1995. Approximately $8.5 million of this reduction in interest- bearing deposits at other banks was used to fund the sale of deposits by a subsidiary bank. DEPOSITS AND OTHER FUNDING SOURCES Deposits decreased $8.3 million from year-end 1995, to $668.2 million at September 30, 1996. One of the subsidiary banks sold a branch and its deposits, which totaled $8.5 million. Additionally, one customer used escrow funds at another subsidiary bank totaling $9.4 million. Excluding these two transactions, deposits grew approximately $9.6 million. Federal funds purchased and securities sold under agreements to repurchase totaled $51.3 million at September 30, 1996 an decrease of $7.6 million from December 31, 1995. The Treasury tax and loan account increased to $6.2 million at September 30, 1996, compared with $2.4 million at December 31, 1995. Short-term borrowings at September 30, 1996 totaled $41.4 million and consisted of $18.4 million in borrowings by the Company from an independent bank and $23.0 million in borrowings by subsidiary banks from the Federal Home Loan Bank. The Company's only long-term debt at September 30, 1996 was capital lease obligations which decreased $17,000 during the 1996 nine months. 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 interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual writedown or charge-off of the principal balance of the loan which would necessitate additional charges to earnings. 18 19 At September 30, 1996, nonperforming assets totaled $3.2 million, an increase of $272,000 from December 31, 1995. Nonperforming assets as a percentage of loans plus other real estate was .55% at September 30, 1996 compared to .53% at December 31,1995. NONPERFORMING ASSETS (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES) SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ Nonaccrual loans ........................................ $ 1,936 $ 1,245 Restructured loans ...................................... 896 949 Loans past due 90 days or more and still accruing ....... - 126 --------- --------- Total nonperforming loans .......................... 2,832 2,320 Other real estate owned ................................. 385 625 --------- --------- Total nonperforming assets ......................... $ 3,217 $ 2,945 ========= ========= Nonperforming assets to period-end loans and foreclosed real estate ............................ .55% .53% Allowance for loan losses to period-end nonperforming assets ............................... 287.38 302.51 Net recoveries to average loans (1) ..................... .03 .04 - ---------------------- (1) Annualized for the nine months ended September 30, 1996. Net recoveries for the 1996 nine months totaled $127,000. The allowance for loan losses as a percentage of total loans was 1.57% at September 30,1996 compared to 1.61% on December 31,1995. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (AMOUNTS IN THOUSANDS) Allowance for loan losses at December 31,1995 . . . . . . . . . . . . . . . . . . . . . $ 8,909 Charge-offs: Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . 548 Real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403 -------- Total charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,026 Recoveries: Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . 923 Real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 -------- Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,153 -------- Net recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Provision charged to income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 -------- Allowance for loan losses at September 30, 1996 . . . . . . . . . . . . . . . . . . . . $ 9,245 ======== 19 20 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, 1996 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 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 its net interest income. The principal monitoring technique employed by the Company is the measurement of the interest sensitivity "gap," which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets and liabilities, selling securities available for sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact of rising or falling interest rates on net interest income. The Company 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. The Company uses computer simulations to measure the net income effect of various interest rate scenarios. The modeling reflects interest rate changes and the related impact on net income over specified periods of time. The following table illustrates the Company's interest rate sensitivity at September 30, 1996, assuming relevant assets and liabilities are collected and paid, respectively, in accordance with their stated maturities. 20 21 INTEREST SENSITIVITY ANALYSIS (AMOUNTS IN THOUSANDS, EXCEPT RATIOS) SEPTEMBER 30, 1996 ----------------------------------------------------------------------------- AFTER ONE AFTER THREE THROUGH THROUGH GREATER WITHIN ONE THREE TWELVE WITHIN ONE THAN MONTH MONTHS MONTHS YEAR ONE YEAR TOTAL ----------------------------------------------------------------------------- ASSETS: Earning assets: Loans(1) ........................... $ 206,812 $ 82,422 $ 103,160 $ 392,394 $ 194,377 $ 586,771 Securities(2) ...................... 4,012 1,526 7,555 13,093 138,117 151,210 Interest-bearing deposits in other banks ...................... 239 - - 239 - 239 Funds sold ......................... 21,864 - - 21,864 - 21,864 --------- --------- --------- --------- -------- --------- Total interest-earning assets.. 232,927 83,948 110,715 427,590 332,494 760,084 LIABILITIES: Interest-bearing liabilities: Interest-bearing deposits: Demand deposits ................ 80,834 - - 80,834 - 80,834 Savings deposits ............... 190,329 - - 190,329 - 190,329 Time deposits(3) ............... 26,721 53,844 139,226 219,791 57,896 277,687 Funds purchased ................... 51,296 - - 51,296 - 51,296 Short-term borrowings(4) .......... 47,677 - - 47,677 - 47,677 Long-term debt .................... 1 4 15 20 287 307 --------- --------- --------- --------- --------- -------- Total interest-bearing liabilities.................. 396,858 53,848 139,241 589,947 58,183 648,130 --------- --------- --------- --------- --------- -------- Period gap ............................ $(163,931) $ 30,100 $ (28,526) $(162,357) $ 274,311 ========= ========= ========= ========= ========= Cumulative gap ........................ $(163,931) $(133,831) $(162,357) $(162,357) $ 111,954 $111,954 ========= ========= ========= ========= ========= ======== Ratio of cumulative gap to total earning assets ...................... (21.57)% (17.61)% (21.36)% (21.36)% 14.73% - ---------------------------- (1) Excludes nonaccrual loans of $1,936,000. (2) Excludes investment equity securities of $2,050,000. (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 $6,243,000. The Company 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. The Company is liability sensitive in the one month, three through twelve months and within one year time frames. However, the Company'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 the Company's true interest sensitivity as it would be for an organization which depends to a greater extent on purchased funds to support earning assets. Net interest income may be 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. 21 22 LIQUIDITY AND CAPITAL ADEQUACY The Company's net loan to deposit ratio increased to 88.1% at September 30, 1996, compared to 81.8% at year end 1995. The Company's liquid assets as a percentage of total deposits were 9.10% at September 30, 1996, compared to 13.04% at year-end 1995. At September 30, 1996, the Company had unused federal funds lines of approximately $52.2 million, unused lines at the Federal Home Loan Bank of $37.2 million and an unused credit line at an independent bank of $4.56 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 shortfall will exist. Based on this analysis, management believes that the Company has adequate liquidity to meet short-term operating requirements. The Company's stockholders' equity increased by $5.2 million to $63.4 million at September 30, 1996 from December 31, 1995. This increase was attributable to: Net income ............................................................. $6,942,000 Increase in unrealized losses on securities available for sale, net of deferred income tax benefits ........................................ (678,000) Cash dividends declared ................................................ (1,172,000) Decrease in unearned restricted stock .................................. 70,000 Exercise of options for 10,000 shares of common stock .................. 100,000 Retirement of preferred stock of FIRSTBANC ............................. (53,000) ---------- Net increase ..................................................... $5,209,000 ========== A strong capital position is vital to the continued profitability of the Company because it promotes depositor and investor confidence and provides a solid foundation for future growth of the organization. The capital of the Company and its subsidiary banks (the "Banks") exceeded all prescribed regulatory capital guidelines at September 30, 1996. Under the capital guidelines of their regulators, the Company and the Banks are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier 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, the Company 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 the Company and each subsidiary bank at September 30, 1996: 22 23 TIER 1 RISK TOTAL RISK TIER 1 BASED BASED LEVERAGE ----- ----- -------- Alabama National BanCorporation 9.46% 10.71% 6.78% Subsidiary Banks: National Bank of Commerce ...................................... 11.11 12.36 8.25 Alabama Exchange Bank .......................................... 13.60 14.85 9.57 Bank of Dadeville .............................................. 13.00 14.12 9.66 First National Bank of Ashland ................................. 12.29 13.50 8.22 Gulf Bank ...................................................... 11.51 12.76 9.97 Citizens Bank of Talladega ..................................... 14.12 15.37 9.00 St. Clair Federal Savings Bank ................................. 10.92 12.17 7.51 First Bank of Baldwin County ................................... 14.89 16.14 9.19 Required minimums .............................................. 4.00 8.00 4.00 23 24 Part II Other Information Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits: 27 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K (1) On July 5, 1996, amendment No. 1 on Form 8-K/A was filed to Form 8-K of Alabama National BanCorporation previously filed on April 30, 1996, Commission File No. 0-25160. 24 25 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 8, 1996 /s/ John H. Holcomb, III ---------------- ------------------------ John H. Holcomb, III, its Chairman and Chief Executive Officer DATE: November 8, 1996 /s/ Frank W. Whitehead ---------------- ---------------------- Frank W. Whitehead, its Executive Vice President, Treasurer and Chief Financial Officer 25