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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999, OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO
.
Commission File Number: 0-25160
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ALABAMA NATIONAL BANCORPORATION
(Exact name of registrant as specified in its charter)
Delaware 63-1114426
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
1927 First Avenue North, Birmingham, AL 35203-4009
(Address of principal executive offices) (Zip Code)
(205) 583-3600
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant at March 10, 2000 was $137,778,894.
As of March 10, 2000, the registrant had outstanding 11,065,890 shares of
its common stock.
DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:
(i) The definitive Proxy Statement for the 2000 Annual Meeting of Alabama
National BanCorporation's Stockholders is incorporated by reference into
Part III of this report.
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TABLE OF CONTENTS
Item No. Page No.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS................... 2
PART I
1. Business.................................................. 3
Executive Officers........................................ 10
2. Properties................................................ 10
3. Legal Proceedings......................................... 10
4. Submission of Matters to a Vote of Security Holders....... 10
PART II
5. Market for Registrant's Common Equity and Related 11
Stockholder Matters......................................
6. Selected Financial Data................................... 12
7. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations......................
7A. Quantitative and Qualitative Disclosures about Market 40
Risk.....................................................
8. Financial Statements and Supplementary Data............... 41
9. Changes in and Disagreements with Accountants on 42
Accounting and Financial Disclosure......................
PART III
10. Directors and Executive Officers of the Registrant........ 42*
11. Compensation of Executive Officers and Directors.......... 42*
12. Security Ownership of Certain Beneficial Owners and 42*
Management...............................................
13. Certain Relationships and Related Transactions............ 42*
PART IV
14. Exhibits, Financial Statement Schedules and Reports on 43
Form 8-K.................................................
SIGNATURES.......................................................... 44
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* Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on April 27, 2000 are incorporated by reference in
Part III of this Form 10-K.
1
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, other periodic reports filed by Alabama
National BanCorporation (the "Company" or "ANB") under the Securities Exchange
Act of 1934, as amended, and any other written or oral statements made by or
on behalf of ANB may include "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 which reflect ANB's
current views with respect to future events and financial performance. Such
forward looking statements are based on general assumptions and are subject to
various risks, uncertainties, and other factors that may cause actual results
to differ materially from the views, beliefs and projections expressed in such
statements. These risks, uncertainties and other factors include, but are not
limited to:
(1) Possible changes in economic and business conditions that may affect
the prevailing interest rates, the prevailing rates of inflation, or the
amount of growth, stagnation, or recession in the global, U.S., and
southeastern U.S. economies, the value of investments, collectibility of
loans and the profitability of business entities;
(2) Possible changes in monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and similar
organizations;
(3) The effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers and dealers,
investment companies and finance companies, and changes evolving from the
enactment of the Gramm-Leach-Bliley Act of 1999, and attendant changes in
patterns and effects of competition in the financial services industry;
(4) The cost and other effects of legal and administrative cases and
proceedings, claims, settlements and judgments; and
(5) The ability of ANB to achieve the expected operating results related
to the acquired operations of recently-completed and future acquisitions
(if any), which depends on a variety of factors, including (i) the ability
of ANB to achieve the anticipated cost savings and revenue enhancements
with respect to the acquired operations, (ii) the assimilation of the
acquired operations to ANB's corporate culture, including the ability to
instill ANB's credit practices and efficient approach to the acquired
operations, (iii) the continued growth of the markets in which ANB operates
consistent with recent historical experience, (iv) the absence of material
contingencies related to the acquired operations, including asset quality
and litigation contingencies, and (v) ANB's ability to expand into new
markets and to maintain profit margins in the face of pricing pressures.
The words "believe," "expect," "anticipate," "project" and similar
expressions signify forward looking statements. Readers are cautioned not to
place undue reliance on any forward looking statements made by or on behalf of
ANB. Any such statement speaks only as of the date the statement was made. ANB
undertakes no obligation to update or revise any forward looking statements.
2
PART I
ITEM 1. BUSINESS
Alabama National BanCorporation (the "Company" or "ANB") is a Delaware bank
holding company with its principal place of business in Birmingham, Alabama,
and its main office located at 1927 First Avenue North, Birmingham, Alabama
35203 (Telephone Number: (205) 583-3600). ANB is currently the parent of three
national banks, National Bank of Commerce of Birmingham ("NBC") (Birmingham,
Alabama and the Birmingham metropolitan area), Citizens & Peoples Bank,
National Association (Escambia County, Florida), and Community Bank of Naples,
National Association (Naples, Florida); three state member banks, Alabama
Exchange Bank (Tuskegee, Alabama), Bank of Dadeville (Dadeville, Alabama) and
First Gulf Bank (Baldwin County, Alabama); and four state nonmember banks,
First American Bank (Decatur, Alabama), Public Bank (St. Cloud, Florida),
Georgia State Bank (Mableton, Georgia) and First Citizens Bank, (Talladega,
Alabama) (collectively the "Banks"). In addition, ANB is currently the
ultimate parent of one securities brokerage firm, NBC Securities, Inc.
(Birmingham, Alabama); one receivables factoring company, Corporate Billing,
Inc. (Decatur, Alabama); and one insurance agency, Rankin Insurance, Inc.
(Decatur, Alabama).
Subsidiary Banks
ANB operates through ten subsidiary Banks which have a total of 46 banking
offices and one insurance office (where no banking is conducted) in the states
of Alabama, Georgia and Florida. The Banks focus on traditional consumer,
residential mortgage, commercial and real estate construction lending, and
equipment leasing to customers in their market areas. The Banks also offer a
variety of deposit programs to individuals and small businesses and other
organizations at interest rates generally consistent with local market
conditions. NBC offers trust services, investment services and securities
brokerage services. In addition, the Banks offer individual retirement and
KEOGH accounts, safe deposit and night depository facilities and additional
services such as the sale of traveler's checks, money orders and cashier's
checks.
Lending Activities
General
Through the Banks, ANB offers a range of lending services, including real
estate, consumer and commercial loans, to individuals and small businesses and
other organizations that are located in or conduct a substantial portion of
their business in the Banks' market areas. ANB's total loans, net of unearned
interest, at December 31, 1999, were approximately $1.32 billion, or
approximately 76.9% of total earning assets. The interest rates charged on
loans vary with the degree of risk, maturity and amount of the loan and are
further subject to competitive pressures, money market rates, availability of
funds and government regulations. ANB has no "foreign loans" or loans for
"highly leveraged transactions," as such terms are defined by applicable
banking regulations.
Loan Portfolio
Real Estate Loans. Loans secured by real estate are the primary component of
ANB's loan portfolio, constituting approximately $878.9 million, or 66.5% of
total loans, net of unearned interest, at December 31, 1999. The Banks often
take real estate as an additional source of collateral to secure commercial
and industrial loans. Such loans are classified as real estate loans rather
than commercial and industrial loans if the real estate collateral is
considered significant as a secondary source of repayment for the loan. The
Banks' real estate loan portfolio is comprised of commercial and residential
mortgages. Residential mortgages held in the Banks' loan portfolio, both fixed
and variable, are made based upon amortization schedules of up to 30 years but
generally have maturity dates of five years or less. The Banks' commercial
mortgages accrue at either variable or fixed rates. The variable rates
approximate current market rates. Construction loans are made on a variable
rate basis. Origination fees are normally charged for most loans secured by
real estate. The Banks' primary type of residential mortgage loan is the
single-family first mortgage, typically structured with fixed or adjustable
interest rates, based on market conditions. These loans usually have terms of
five years, with payments through the date of maturity generally based on a 15
or 30 year amortization schedule.
3
The Banks originate residential loans for sale into the secondary market.
Such loans are made in accordance with underwriting standards set by the
purchaser of the loan, normally as to loan-to-value ratio, interest rate and
documentation. Such loans are generally made under a commitment to purchase
from a loan purchaser. The Banks generally collect from the borrower or
purchaser a combination of the origination fee, discount points and/or service
release fee. During 1999, the Banks sold approximately $265.0 million in loans
to such purchasers.
The Banks' nonresidential mortgage loans include commercial, industrial and
unimproved real estate loans. The Banks generally require nonresidential
mortgage loans to have an 80% loan-to-value ratio and usually underwrite their
commercial loans on the basis of the borrower's cash flow and ability to
service the debt from earnings, rather than on the basis of the value of the
collateral. Terms on construction loans are usually less than twelve months,
and the Banks typically require real estate mortgages and personal guarantees
supported by financial statements and a review of the guarantor's personal
finances.
Consumer Loans. Consumer lending includes installment lending to individuals
in the Banks' market areas and generally consists of loans to purchase
automobiles and other consumer durable goods. Consumer loans constituted $73.4
million, or 5.6% of ANB's loan portfolio at December 31, 1999. Consumer loans
are underwritten based on the borrower's income, current debt level, past
credit history and collateral. Consumer rates are both variable and fixed,
with terms negotiable. Terms generally range from one to five years depending
on the nature and condition of the collateral. Periodic amortization,
generally monthly, is typically required.
Commercial and Financial Loans. The Banks make loans for commercial purposes
in various lines of business. These loans are typically made on terms up to
five years at fixed or variable rates. The loans are secured by various types
of collateral including accounts receivable, inventory or, in the case of
equipment loans, the financed equipment. The Banks attempt to reduce their
credit risk on commercial loans by underwriting the loan based on the
borrower's cash flow and its ability to service the debt from earnings, and by
limiting the loan to value ratio. Historically, the Banks have typically
loaned up to 80% on loans secured by accounts receivable, up to 65% on loans
secured by inventory, and up to 80% on loans secured by equipment. The Banks
also make some unsecured commercial loans and offer equipment leasing.
Commercial and financial loans constituted $257.0 million, or 19.5% of ANB's
loan portfolio at December 31, 1999. Interest rates are negotiable based upon
the borrower's financial condition, credit history, management stability and
collateral.
Credit Procedures and Review
Loan Approval. Certain credit risks are inherent in making loans. These
include prepayment risks, risks resulting from uncertainties in the future
value of collateral, risks resulting from changes in economic and industry
conditions and risks inherent in dealing with individual borrowers. In
particular, longer maturities increase the risk that economic conditions will
change and adversely affect collectibility.
ANB attempts to minimize loan losses through various means and uses
standardized underwriting criteria. ANB has established a standardized loan
policy for all of the Banks that may be modified based on local market
conditions. In particular, on larger credits, ANB generally relies on the cash
flow of a debtor as the source of repayment and secondarily on the value of
the underlying collateral. In addition, ANB attempts to utilize shorter loan
terms in order to reduce the risk of a decline in the value of such
collateral.
ANB addresses repayment risks by adhering to internal credit policies and
procedures which all of the Banks have adopted. These policies and procedures
include officer and customer lending limits, a multi-layered loan approval
process for larger loans, documentation examination and follow-up procedures
for any exceptions to credit policies. The point in each Bank's loan approval
process at which a loan is approved depends on the size of the borrower's
credit relationship with such Bank. Each of the lending officers at each of
the Banks has the authority to approve loans up to an approved loan authority
amount as approved by each Bank's Board of Directors. Loans in excess of the
highest loan authority amount at each Bank must be approved by the ANB
Executive Vice President in charge of credit administration. In addition,
loans in excess of a particular loan officer's approval authority must be
approved by a more senior officer at the particular Bank, the loan committee
at such Bank, or both.
4
Loan Review. ANB maintains a continuous loan review system for each of NBC
and First American Bank and a scheduled review system for the other Banks.
Under this system, each loan officer is directly responsible for monitoring
the risk in his portfolio and is required to maintain risk ratings for each
credit assigned. The risk rating system incorporates the basic regulatory
rating system as set forth in the applicable regulatory asset quality
examination procedures.
ANB's Loan Review Department ("LRD"), which is wholly independent of the
lending function, serves as a validation of each loan officer's risk
monitoring and rating system. LRD's primary function is to provide the Board
of Directors of each Bank with a thorough understanding of the credit quality
of such Bank's loan portfolio. Other review requirements are in place to
provide management with early warning systems for problem credits as well as
compliance with stated lending policies. LRD's findings are reported, along
with an asset quality review, to the ANB Board of Directors at each bi-monthly
meeting.
Deposits
The principal sources of funds for the Banks are core deposits, consisting
of demand deposits, interest-bearing transaction accounts, money market
accounts, savings deposits and certificates of deposit. Transaction accounts
include checking and negotiable order of withdrawal (NOW) accounts which
customers use for cash management and which provide the Banks with a source of
fee income and cross-marketing opportunities, as well as a low-cost source of
funds. Time and savings accounts also provide a relatively stable and low-cost
source of funding. The largest source of funds for the Banks are certificates
of deposit. Certificates of deposit in excess of $100,000 are held primarily
by customers in the Banks' market areas.
Deposit rates are reviewed weekly by senior management of each of the Banks.
Management believes that the rates the Banks offer are competitive with those
offered by other institutions in the Banks' market areas. ANB focuses on
customer service to attract and retain deposits.
Investment Services
NBC operates an investment department devoted primarily to handling
correspondent banks' investment needs. Services provided by the investment
department include the sale of securities, asset/liability consulting,
safekeeping and bond accounting. NBC also has a wholly owned subsidiary, NBC
Securities, Inc. ("NBC Securities"), that is licensed as a broker-dealer.
Started in mid-1995, NBC Securities provides investment services to
individuals and institutions. These services include the sale of stocks,
bonds, mutual funds, annuities, margin loans, other insurance products and
financial planning. NBC Securities has investment advisers in Birmingham,
Decatur and Gulf Shores, Alabama; Naples and Pensacola, Florida; and Mableton,
Georgia.
Competition
The Banks encounter strong competition in making loans, acquiring deposits
and attracting customers for investment and trust services. Competition among
financial institutions is based upon interest rates offered on deposit
accounts, interest rates charged on loans, other credit and service charges
relating to loans, the quality and scope of the services rendered, the
convenience of banking facilities and, in the case of loans to commercial
borrowers, relative lending limits. The Banks compete with other commercial
banks, savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking companies, and
other financial intermediaries operating in Alabama and elsewhere. Many of
these competitors, some of which are affiliated with large bank holding
companies, have substantially greater resources and lending limits, and may
offer certain services that the Banks do not currently provide. In addition,
many of ANB's non-bank competitors are not subject to the same extensive
federal regulations that govern bank or thrift holding companies and federally
insured banks or thrifts.
5
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act which will, effective March 11, 2000, permit bank holding companies
to become financial holding companies and thereby affiliate with securities
firms and insurance companies and engage in other activities that are
financial in nature. See "Supervision and Regulation." Under the Act,
securities firms and insurance companies that elect to become financial
holding companies may acquire banks and other financial institutions. The
Gramm-Leach-Bliley Act, which represents the most sweeping reform of financial
services regulation in over sixty years, may significantly change the
competitive environment in which ANB and the Banks conduct business. At this
time, however, it is not possible to predict the full effect that the Act will
have on ANB. One consequence may be increased competition from large financial
services companies that will be permitted to provide many types of financial
services, including bank products, to their customers.
The financial services industry is also likely to become more competitive as
further technological advances enable more companies to provide financial
services. These technological advances may diminish the importance of
depository institutions and other financial intermediaries in the transfer of
funds between parties.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"IBBEA") authorized bank holding companies to acquire banks and other bank
holding companies without geographic limitations beginning September 30, 1995.
The arrival of interstate banking is expected to increase further the
competitiveness of the banking industry.
In addition, beginning on June 1, 1997, the IBBEA authorized interstate
mergers and consolidations of existing banks, provided that neither bank's
home state had opted out of interstate branching by May 31, 1997. The States
of Alabama, Georgia and Florida have opted in to interstate branching.
Interstate branching provides that once a bank has established branches in a
state through an interstate merger, the bank may establish and acquire
additional branches at any location in the state where any bank involved in
the interstate merger could have established or acquired branches under
applicable federal or state law.
Size gives the larger banks certain advantages in competing for business
from large corporations. These advantages include higher lending limits and
the ability to offer services in other areas of Alabama and the southeast
region. Some of ANB's competitors still maintain substantially greater
resources and lending limits than ANB. As a result, ANB has not generally
attempted to compete for the banking relationships of large corporations, and
generally concentrates its efforts on small to medium-sized businesses and
individuals to which ANB believes it can compete effectively by offering
quality, personal service. However, management believes it may be able to
compete more effectively for the business of some large corporations, given
its current growth pattern.
Management believes that the Banks' commitment to their respective primary
market areas, as well as their commitment to quality and personalized banking
services, are factors that contribute to the Banks' competitiveness.
Management believes that ANB's decentralized community banking strategy
positions the Banks to compete successfully in their market areas.
Market Areas and Growth Strategy
Through NBC, ANB serves the metropolitan Birmingham market, which includes
portions of Jefferson, Shelby and St. Clair Counties. ANB's First American
Bank subsidiary serves Morgan, Limestone and Madison Counties in north
Alabama. First American's largest market presence is in Decatur, Alabama,
which has demonstrated a growing economic base in recent years. Through First
Gulf Bank, ANB serves Baldwin County, Alabama. Located between Mobile, Alabama
and Pensacola, Florida, Baldwin County has a broad base of economic activity
in the retail and service, agriculture, seafood, tourism and manufacturing
industries. Baldwin County includes the popular tourism and retirement resort
communities of Gulf Shores and Fairhope. Shelby, Baldwin and St. Clair
Counties have been named in statistical surveys as three of the fastest
growing counties in Alabama. In 1997, ANB expanded outside of Alabama with the
opening of Citizens & Peoples Bank, N.A. in Escambia County, Florida. In 1998,
ANB further expanded its presence in markets outside of Alabama with two
acquisitions in Florida and one in Georgia. Public Bank is located in the
fast-growing greater Orlando area, with
6
offices in Altamonte Springs, Kissimmee and St. Cloud, Florida. Community Bank
of Naples, N.A., located in Collier County, Florida, and Georgia State Bank,
located in Cobb County and Paulding County, Georgia, are located in markets
that are among the fastest growing in their respective states. The other
Banks, First Citizens, Alabama Exchange Bank and Bank of Dadeville, are
located in non-metropolitan areas. Each of these three Banks, while
experiencing minimal growth due to market growth that has not been
significant, typically operates at a high level of profitability. As a result,
these Banks tend to produce capital for growth in many of the high growth
markets served by the other Banks. ANB's strategy is to focus on growth in
profitability for these non-metropolitan banks, since market growth has not
been as significant.
Due to continuing consolidation within the banking industry, as well as in
the Southeastern United States, ANB may in the future seek to combine with
other banks or thrifts (or their holding companies) that may be of smaller,
equal or greater size than ANB. ANB currently intends to concentrate on
acquisitions of additional banks or thrifts (or their holding companies) which
operate in attractive market areas in Alabama, Florida and Georgia. In
addition to price and terms, the factors considered by ANB in determining the
desirability of a business acquisition or combination are financial condition,
asset quality, earnings potential, quality of management, market area and
competitive environment.
In addition to expansion through combinations with other banks or thrifts,
ANB intends to continue to expand where possible through growth of its
existing banks in their respective market areas. During 1998, NBC formed a
commercial leasing division which currently focuses on machinery and equipment
leases to business customers. Also, ANB is exploring expansion into lines of
business closely related to banking and will pursue such expansion if it
believes such lines could be profitable without causing undue risk to ANB.
During 1999, First American Bank acquired Rankin Insurance, Inc., a full
service independent property and casualty insurance agency located in Decatur,
Alabama. For the seven months of 1999 that it was owned by ANB, Rankin
generated approximately $1.1 million in commission revenue and is in the
process of expanding this business into several of the markets served by the
Bank. While ANB plans to continue its growth as described above, there is no
assurance that its efforts will be successful.
Employees
As of December 31, 1999, ANB and the Banks together had approximately 817
full-time equivalent employees. None of these employees is a party to a
collective bargaining agreement. ANB considers its relations with its
employees to be good.
Supervision and Regulation
ANB and the Banks are subject to state and federal banking laws and
regulations which impose specific requirements and restrictions on, and
provide for general regulatory oversight with respect to, virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not stockholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable laws or regulations may have a material effect on the business
and prospects of ANB.
Beginning with the enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and following in December 1991 with the
Federal Deposit Insurance Corporation Act ("FDICIA"), numerous additional
regulatory requirements have been placed on the banking industry in the past
ten years, and additional changes have been proposed. The operations of ANB
and the Banks may be affected by legislative changes and the policies of
various regulatory authorities. ANB is unable to predict the nature or the
extent of the effect on its business and earnings that fiscal or monetary
policies, economic control, or new federal or state legislation may have in
the future.
As a bank holding company, ANB is subject to the regulation and supervision
of the Federal Reserve. The Banks are subject to supervision and regulation by
applicable state and federal banking agencies, including the Federal Reserve,
the Office of the Comptroller of the Currency (the "OCC") and the Federal
Deposit Insurance Corporation (the "FDIC"). The Banks are also subject to
various requirements and restrictions under federal
7
and state law, including requirements to maintain allowances against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the Banks.
In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the Federal Reserve as it attempts to control
the money supply and credit availability in order to influence the economy.
Pursuant to the IBBEA, bank holding companies from any state may now acquire
banks located in any other state, subject to certain conditions, including
concentration limits. As of June 1, 1997, a bank may establish branches across
state lines by merging with a bank in another state (unless applicable state
law prohibits such interstate mergers), provided certain conditions are met. A
bank may also establish a de novo branch in a state in which the bank does not
maintain a branch if that state expressly permits such interstate de novo
branching and certain other conditions are met.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in
the event the depository institution becomes in danger of default or is in
default. For example, under a policy of the Federal Reserve with respect to
bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions
and commit resources to support such institutions in circumstances where it
might not do so absent such policy. In addition, the "cross-guarantee"
provisions of federal law require insured depository institutions under common
control to reimburse the FDIC for any loss suffered or reasonably anticipated
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default.
The federal banking agencies have broad powers under current federal law to
take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized" as such terms are defined under regulations issued by each
of the federal banking agencies. In general, the agencies measure capital
adequacy within a framework that makes capital requirements sensitive to the
risk profiles of individual banking companies. The guidelines define capital
as either Tier 1 (primarily common shareholders' equity) or Tier 2 (certain
debt instruments and a portion of the allowance for loan losses). ANB and the
Banks are subject to a minimum Tier 1 capital ratio (Tier 1 capital to risk-
weighted assets) of 4%, a total capital ratio (Tier 1 plus Tier 2 to risk-
weighted assets) of 8% and a Tier 1 leverage ratio (Tier 1 to average
quarterly assets) of 3%. To be considered a "well capitalized" institution,
the Tier 1 capital ratio, the total capital ratio, and the Tier 1 leverage
ratio must equal or exceed 6%, 10% and 5%, respectively.
The Banks are subject to the provisions of Section 23A of the Federal
Reserve Act, which place limits on the amount of loans or extensions of credit
to, investments in or certain other transactions with affiliates, and on the
amount of advances to third parties collateralized by the securities or
obligations of affiliates. In general, the Banks' "affiliates" are ANB and
ANB's non-bank subsidiaries.
The Banks are also subject to the provisions of Section 23B of the Federal
Reserve Act that, among other things, prohibit a bank from engaging in certain
transactions with affiliates unless the transactions are on terms
substantially the same, or at least as favorable to the bank, as those
prevailing at the time for comparable transactions with non-affiliated
companies.
The Banks are also subject to certain restrictions on extensions of credit
to executive officers, directors, certain principal stockholders and their
related interests. Such extensions of credit (i) must be made on substantially
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable
features.
8
The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the Federal Reserve, the FDIC or the OCC shall evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those institutions. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. These factors are considered in evaluating mergers, acquisitions and
applications to open a branch or facility. The CRA also requires all
institutions to make public disclosure of their CRA ratings. Each of the Banks
received outstanding or satisfactory ratings in its most recent evaluation.
There are various legal and regulatory limits on the extent to which the
Banks may pay dividends or otherwise supply funds to ANB. In addition, federal
and state regulatory agencies also have the authority to prevent a bank or
bank holding company from paying a dividend or engaging in any other activity
that, in the opinion of the agency, would constitute an unsafe or unsound
practice.
FDIC regulations require that management report on its responsibility for
preparing its institution's financial statements and for establishing and
maintaining an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning
safety and soundness.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Act which will, effective March 11, 2000, permit bank holding companies
to become financial holding companies and thereby affiliate with securities
firms and insurance companies and engage in other activities that are
financial in nature. A bank holding company may become a financial holding
company by filing a declaration if each of its subsidiary banks is well
capitalized under the FDICIA prompt corrective action provisions, is well
managed, and has at least a satisfactory rating under the CRA. No regulatory
approval will be required for a financial holding company to acquire a
company, other than a bank or savings association, engaged in activities that
are financial in nature or incidental to activities that are financial in
nature, as determined by the Federal Reserve.
The Gramm-Leach-Bliley Act broadly defines "financial in nature" to include
securities underwriting, dealing and market making; sponsoring mutual funds
and investment companies; insurance underwriting and agency; merchant banking;
and activities that the Federal Reserve has determined to be closely related
to banking. The Act also permits the Federal Reserve, in consultation with the
Department of Treasury, to determine that other activities are "financial in
nature" and therefore permissible for financial holding companies. A national
bank also may engage, subject to limitations on investment, in activities that
are financial in nature (other than insurance underwriting, insurance company
portfolio investment, merchant banking, real estate development and real
estate investment) through a financial subsidiary of the bank, if the bank is
well capitalized, well managed and has at least a satisfactory CRA rating.
Subsidiary banks of a financial holding company or national banks with
financial subsidiaries must continue to be well capitalized and well managed
in order to continue to engage in activities that are financial in nature
without regulatory actions or restrictions, which could include divestiture of
the financial subsidiary or subsidiaries. In addition, a financial holding
company or a bank may not acquire a company that is engaged in activities that
are financial in nature unless each of the subsidiary banks of the financial
holding company or the bank at issue has a CRA rating of satisfactory or
better.
The Act preserves the role of the Federal Reserve as the umbrella supervisor
for holding companies while at the same time incorporating a system of
functional regulation designed to take advantage of the strengths of the
various federal and state regulators. In particular, the Act replaces the
broad exemption from Securities and Exchange Commission regulation that banks
previously enjoyed with more limited exemptions, and it reaffirms that states
are the regulators for the insurance activities of all persons, including
federally-chartered banks.
The Gramm-Leach-Bliley Act also establishes a minimum federal standard of
financial privacy. Financial institutions are required to institute written
privacy policies that must be disclosed to customers at certain required
intervals.
NBC Securities is a broker-dealer registered with the Securities and
Exchange Commission and is a member of the National Association of Securities
Dealers, Inc.
9
Executive Officers of the Registrant
The Executive Officers of ANB serve at the pleasure of the Board of
Directors. Set forth below are the current Executive Officers of ANB and a
brief explanation of their principal employment during the last five
(5) years.
John H. Holcomb, III--Age 48--Chairman and Chief Executive Officer. Mr.
Holcomb has served as Chairman and Chief Executive Officer of ANB since April,
1996. Prior to such date, Mr. Holcomb served as President and Chief Operating
Officer of ANB beginning December, 1995. Mr. Holcomb has been President and
Chief Executive Officer of NBC since 1990.
Victor E. Nichol, Jr.--Age 53--President and Chief Operating Officer. Mr.
Nichol has served as President and Chief Operating Officer of ANB since April
1996. Prior to such date, Mr. Nichol served as Executive Vice President of ANB
beginning December 1995. Mr. Nichol has been Executive Vice President of NBC
since 1994.
Dan M. David--Age 54--Vice Chairman. Mr. David has served as Vice Chairman
of ANB since November 30, 1997 when FAB merged with and into ANB. Mr. David
serves as Chairman of First American Bank, a position he has held since 1995.
Mr. David served as Chairman and Chief Executive Officer of FAB from 1995
through 1997, as Vice Chairman and Chief Executive Officer during 1994 and
1995 and as President and Chief Executive Officer from 1986 through 1994.
John R. Bragg--Age 38--Executive Vice President. Mr. Bragg has served as
Executive Vice President of ANB since April 1998 and Executive Vice President
of NBC since 1997. Mr. Bragg served as Senior Vice President of NBC from 1992
until 1997.
Richard Murray, IV--Age 37--Executive Vice President. Mr. Murray has served
as Executive Vice President of ANB since April 1998 and Executive Vice
President of NBC since 1997. Mr. Murray served as Senior Vice President of NBC
from 1990 until 1997.
William G. Sanders, Jr.--Age 36--Executive Vice President. Mr. Sanders has
served as Executive Vice President of ANB since April 1998 and Executive Vice
President of NBC since 1997. Mr. Sanders served as Senior Vice President of
NBC from 1993 until 1997.
William E. Matthews, V--Age 35--Executive Vice President and Chief Financial
Officer. Mr. Matthews has served as Executive Vice President and Chief
Financial Officer of ANB and NBC since April 1998. Prior to that date, Mr.
Matthews served as Senior Vice President of NBC beginning in 1996, and Vice
President of NBC from 1992 through 1996.
ITEM 2. PROPERTIES
ANB, through the Banks, currently operates 46 banking offices and one
insurance office. Of these offices, ANB, through the Banks, owns 38 banking
offices without encumbrance and leases an additional 8 banking offices and its
one insurance office. ANB, through NBC, leases its principal administrative
offices, which are located at 1927 First Avenue North, Birmingham, Alabama.
See Notes 6 and 9 to the Consolidated Financial Statements of ANB and
Subsidiaries included in this Annual Report on Form 10-K beginning on page F-1
for additional information regarding ANB's premises and equipment.
ITEM 3. LEGAL PROCEEDINGS
ANB, in the normal course of business, is subject to various pending and
threatened litigation. Although it is not possible to determine at this point
in time, based on consultation with legal counsel, management does not
anticipate that the ultimate liability, if any, resulting from such litigation
will have a material effect on ANB's financial condition and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At March 10, 2000 ANB had 1,250 stockholders of record (including shares
held in "street" names by nominees who are record holders) and 11,065,890
shares of ANB Common Stock outstanding. ANB Common Stock is traded in the
over-the-counter market and prices are quoted on the NASDAQ/NMS under the
symbol "ALAB."
The reported sales price range for ANB Common Stock and the dividends
declared during each calendar quarter of 1998 and 1999 are shown below:
Dividends
High Low Declared
--------- ------ ---------
1998
First Quarter..................................... $33 3/4 25 3/4 $.15
Second Quarter.................................... 37 5/8 31 1/2 .15
Third Quarter..................................... 39 1/2 24 7/8 .15
Fourth Quarter.................................... 28 24 1/8 .15
1999
First Quarter..................................... $26 29/32 21 3/4 .18
Second Quarter.................................... 25 3/8 22 1/2 .18
Third Quarter..................................... 27 1/2 22 5/8 .18
Fourth Quarter.................................... 24 5/8 17 3/4 .18
The last reported sales price of ANB Common Stock as reported on the
NASDAQ/NMS on March 10, 2000 was $16.50. The prices shown do not reflect
retail mark-ups and mark-downs. All share prices have been rounded to the
nearest 1/64 of one dollar. The market makers for ANB Common Stock as of
December 31, 1999, were J.C. Bradford & Co., Raymond James & Associates, Inc.,
Legg Mason Wood Walker Inc., The Robinson Humphrey Company, LLC, ABN AMRO
Securities (USA), Inc., Speer, Leeds & Kellogg, Mayer & Schweitzer, Inc., and
Sherwood Securities Corp.
11
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except ratios and per share data)
Year Ended December 31,
----------------------------------------------------------
1999 1998(1) 1997(1) 1996(1) 1995(1)
---------- ---------- ---------- ---------- ----------
Income Statement Data:
Interest income......... $ 125,668 $ 115,704 $ 104,508 $ 93,178 $ 62,090
Interest expense........ 59,283 56,555 48,379 42,174 30,079
---------- ---------- ---------- ---------- ----------
Net interest income..... 66,385 59,149 56,129 51,004 32,011
Provision for loan
losses................. 1,954 1,796 3,421 1,035 1,171
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses............ 64,431 57,353 52,708 49,969 30,840
Net securities gains
(losses)............... 190 174 (2) (84) 21
Noninterest income...... 30,367 29,176 20,296 19,214 10,749
Noninterest expense..... 62,455 61,154 52,788 50,175 32,141
---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 32,533 25,549 20,214 18,924 9,469
Provision for income
taxes.................. 10,237 8,154 6,086 5,279 951
---------- ---------- ---------- ---------- ----------
Income before minority
interest in earnings of
consolidated subsidiary
....................... 22,296 17,395 14,128 13,645 8,518
Minority interest in
earnings of
consolidated
subsidiary............. 25 23 12 14 650
---------- ---------- ---------- ---------- ----------
Net income.............. $ 22,271 $ 17,372 $ 14,116 $ 13,631 $ 7,868
========== ========== ========== ========== ==========
Balance Sheet Data:
Total assets............ $1,921,884 $1,672,049 $1,495,814 $1,260,635 $1,142,064
Earning assets.......... 1,716,935 1,493,122 1,313,097 1,149,038 1,035,396
Securities.............. 345,123 324,213 265,102 224,939 227,087
Loans held for sale..... 8,615 19,047 5,291 4,339 2,431
Loans, net of unearned
income................. 1,320,160 1,087,027 961,079 863,968 743,530
Allowance for loan
losses................. 18,068 16,540 14,844 12,633 11,621
Deposits................ 1,442,155 1,275,175 1,125,479 988,876 945,544
Short-term debt......... 18,389 21,700 29,087 42,205 21,280
Long-term debt.......... 124,005 32,328 16,587 12,939 1,089
Stockholders' equity.... 138,255 130,993 116,888 105,204 88,230
Weighted Average Shares
Outstanding--
Diluted(2)............. 11,273 11,173 10,999 10,490 6,429
Per Common Share Data:
Net income--diluted(3).. $ 1.98 $ 1.55 $ 1.28 $ 1.30 $ 1.09
Book value (period
end)................... 12.36 11.94 11.02 10.43 9.04
Tangible book value
(period end)........... 11.40 11.19 10.20 9.66 8.24
Dividends declared...... 0.72 0.60 0.46 0.28 --
Performance Ratios:
Return on average
assets................. 1.26% 1.10% 1.05% 1.17% 1.02%
Return on average
equity................. 16.28 13.81 12.73 14.22 14.30
Net interest margin(4).. 4.18 4.24 4.62 4.75 4.44
Net interest margin
(taxable
equivalent)(4)......... 4.25 4.31 4.71 4.83 4.53
Asset Quality Ratios:
Allowance for loan
losses to period end
loans(5)............... 1.37% 1.52% 1.54% 1.46% 1.56%
Allowance for loan
losses to period end
nonperforming
loans(6)............... 394.67 340.61 281.14 377.22 296.61
Net charge-offs to
average loans(5)....... 0.04 0.01 0.13 0.00 0.05
Nonperforming assets to
period end loans and
foreclosed
property(5)(6)......... 0.40 0.56 0.73 0.48 0.63
Capital and Liquidity
Ratios:
Average equity to
average assets......... 7.77% 7.95% 8.27% 8.21% 7.11%
Leverage (4.00% required
minimum)(7)............ 7.18 7.41 7.75 8.64 10.33
Risk-based capital
Tier 1 (4.00% required
minimum)(7)........... 9.38 10.03 9.89 10.91 10.83
Total (8.00% required
minimum)(7)........... 10.62 11.28 11.14 12.16 12.08
Average loans to average
deposits............... 88.96 83.02 85.44 84.08 78.81
12
- --------
(1) On December 31, 1998, Community Bank of Naples, N.A. ("Naples") merged
with and into a subsidiary of ANB (the "Naples Merger"). Pursuant to the
terms of the Naples Merger, each share of Naples common stock was
converted into 0.53271 shares of the Company's common stock. On October 2,
1998, Community Financial Corporation ("CFC") merged with and into the
Company (the "CFC Merger"). Pursuant to the terms of the CFC Merger, each
share of CFC common stock was converted into 0.351807 shares of the
Company's common stock. On May 29, 1998, Public Bank Corporation ("PBC")
merged with and into the Company (the "PBC Merger"). Pursuant to the terms
of the PBC Merger, each share of PBC common stock was converted into
0.2353134 shares of the Company's common stock. On November 30, 1997,
First American Bancorporation ("FAB") merged with and into the Company
(the "FAB Merger"). Pursuant to the terms of the FAB Merger, each share of
FAB common stock was converted into 0.7199 shares of the Company's common
stock. On September 30, 1996, FIRSTBANC Holding Company, Inc.
("FIRSTBANC") was merged with and into the Company, with each share of
common stock of FIRSTBANC being converted into 7.12917 shares of the
Company's common stock. Each of the aforementioned mergers was accounted
for as pooling of interests. On December 29, 1995, National Commerce
Corporation ("NCC") and Commerce Bankshares, Inc. ("CBS") merged with and
into the Company (the "NCC Merger"). Pursuant to the terms of the NCC
Merger, each share of NCC common stock was converted into 348.14 shares of
the Company's common stock and each share of CBS common stock was
converted into 7.0435 shares of the Company's common stock for a total of
3,106,981 shares (or 50.1%) of the then outstanding Company common stock
being issued to NCC and CBS shareholders. The NCC Merger was accounted for
as a "reverse acquisition," whereby NCC is deemed to have acquired ANB for
financial reporting purposes. However, ANB remained as the continuing
legal entity and registrant for Securities and Exchange Commission filing
purposes. Consistent with the reverse acquisition accounting treatment,
the historical income statement information included in the Five-Year
Summary of Selected Financial Data of the Company is that of NCC for 1995.
The historical Five-Year Summary of Selected Financial Data for all
periods have been restated to include the results of operations of Naples,
CFC, PBC, FAB, and FIRSTBANC from the earliest period presented, except
for dividends per common share. (See Note 2 to the Company's consolidated
financial statements included in this Annual Report).
(2) The weighted average common share and common equivalent shares outstanding
are those of NCC, CBS, Naples, CFC, PBC, FAB, and FIRSTBANC converted into
ANB common stock and common stock equivalents at the applicable exchange
ratios.
(3) Net income per common share--diluted is calculated based upon net income
adjusted for cash dividends on preferred stock.
(4) Net interest income divided by average earning assets.
(5) Does not include loans held for sale.
(6) Nonperforming loans and nonperforming assets includes loans past due 90
days or more that are still accruing interest. It is the Company's policy
to place all loans on nonaccrual status when over ninety days past due.
(7) Based upon fully phased-in requirements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Basis of Presentation
The following is a discussion and analysis of the consolidated financial
condition of the Company and results of operations as of the dates and for the
periods indicated. All significant intercompany accounts and transactions have
been eliminated. The accounting and reporting policies of the Company conform
with generally accepted accounting principles and with general financial
service industry practices.
The historical consolidated financial statements of the Company and the
"FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA" derived from the historical
consolidated financial statements of the Company are set forth elsewhere
herein. This discussion should be read in conjunction with those consolidated
financial statements and selected consolidated financial data and the other
financial information included in this Annual Report.
13
Selected Bank Financial Data
The Company's success is dependent upon the financial performance of its
subsidiary banks (the "Banks"). The Company, with input from the management of
each Bank, establishes operating goals for each Bank. The following tables
summarize selected financial information for 1999 and 1998 for each of the
Banks.
SELECTED BANK FINANCIAL DATA
(Amounts in thousands, except ratios)
(Unaudited)
December 31, 1999
------------------------------------------------------------------------------------------------------
National Alabama Citizens & First First First Georgia Community
Bank of Exchange Bank of Peoples American Citizens Gulf Public State Bank of
Commerce Bank Dadeville Bank, N.A. Bank Bank Bank Bank Bank Naples, N.A.
-------- -------- --------- ---------- -------- -------- -------- ------- -------- ------------
Summary of Operations:
Interest income....... $ 55,306 $ 4,813 $ 5,039 $ 2,772 $ 22,386 $ 6,389 $ 9,058 $ 4,475 $ 10,823 $ 6,014
Interest expense...... 28,747 1,590 2,155 1,776 9,781 2,891 3,780 1,500 4,760 2,801
Net interest income... 26,559 3,223 2,884 996 12,605 3,498 5,278 2,975 6,063 3,213
Provision for loan
losses................ 25 150 117 166 680 27 353 65 15 356
Securities gains
(losses).............. -- -- -- 6 -- 7 6 -- 23 --
Noninterest income.... 18,674 683 644 298 4,518 806 1,624 1,082 1,660 590
Noninterest expense... 30,287 1,895 1,615 1,100 10,418 2,052 4,080 2,332 4,507 1,739
Net income............ 10,269 1,249 1,267 40 4,232 1,634 1,636 1,021 2,103 1,061
Balance Sheet
Highlights:
At Period-End:
Total assets......... $893,076 $72,162 $70,702 $44,857 $301,440 $92,442 $131,229 $71,444 $160,135 $106,619
Securities........... 120,638 21,310 16,382 13,892 41,489 39,354 11,988 14,499 40,468 25,006
Loans, net of
unearned income...... 639,859 41,643 42,636 24,932 226,161 43,489 103,577 45,218 90,039 69,069
Allowance for loan
losses............... 8,517 623 500 359 3,318 580 1,448 547 1,213 963
Deposits............. 583,739 60,794 55,914 36,697 240,606 78,967 109,328 60,563 136,702 84,790
Short-term debt...... 6,199 -- -- -- -- -- 2,000 -- -- --
Long-term debt....... 56,000 5,000 8,700 -- 23,039 6,000 10,000 5,000 5,000 5,000
Stockholders'
equity............... 61,855 5,780 5,196 3,598 27,667 6,198 9,088 5,597 10,693 6,703
Performance Ratios:
Return on average
assets................ 1.29% 1.84% 1.86% 0.09% 1.50% 1.83% 1.33% 1.63% 1.46% 1.16%
Return on average
equity................ 17.25 19.90 21.26 1.03 16.46 20.66 19.35 18.22 19.88 16.39
Net interest margin... 3.64 5.28 4.64 2.65 4.94 4.29 4.74 5.30 4.65 4.17
Capital and Liquidity
Ratios:
Average equity to
average assets........ 7.45 9.26 8.77 9.26 9.09 8.87 6.86 8.97 7.33 7.09
Leverage (4.00%
required minimum)..... 7.26 7.81 8.25 9.37 8.43 7.16 7.19 8.75 7.37 7.29
Risk-based capital
Tier 1 (4.00%
required minimum).... 8.84 12.18 12.60 13.58 10.51 13.87 9.30 12.66 11.65 10.73
Total (8.00% required
minimum)............. 10.01 13.43 13.72 14.77 11.76 15.08 10.55 13.82 12.85 11.98
Average loans to
average deposits...... 108.95 62.85 77.01 56.75 90.97 54.38 90.51 67.04 67.92 70.52
14
SELECTED BANK FINANCIAL DATA (continued)
(Amounts in thousands, except ratios)
(Unaudited)
December 31, 1998
-------------------------------------------------------------------------------------------------------
National Alabama Citizens & First First First Georgia Community
Bank of Exchange Bank of Peoples American Citizens Gulf Public State Bank of
Commerce Bank Dadeville Bank, N.A. Bank Bank Bank Bank Bank Naples, N.A.
-------- -------- --------- ---------- -------- -------- -------- ------- -------- ------------
Summary of Operations:
Interest income....... $ 51,527 $ 4,958 $ 5,143 $ 1,621 $ 20,014 $ 6,607 $ 7,945 $ 3,917 $ 9,764 $ 5,415
Interest expense...... 27,550 1,726 2,232 1,110 9,293 3,143 3,397 1,356 4,334 2,657
Net interest income... 23,977 3,232 2,911 511 10,721 3,464 4,548 2,561 5,430 2,758
Provision for loan
losses............... -- 283 21 183 509 16 387 44 10 343
Securities gains
(losses)............. -- -- 3 -- 28 -- 4 -- -- --
Noninterest income.... 19,374 708 747 132 3,505 777 1,329 841 1,644 244
Noninterest expense... 29,509 1,932 1,706 882 8,685 2,134 3,953 1,919 4,544 2,353
Net income............ 9,428 1,186 1,343 (266) 3,665 1,509 1,053 966 1,651 43
Balance Sheet
Highlights:
At Period-End:
Total assets........ $767,245 $66,779 $67,958 $40,007 $268,460 $88,465 $112,453 $57,713 $131,294 $92,639
Securities.......... 93,863 21,198 18,076 20,714 30,423 34,189 13,035 13,320 46,075 32,952
Loans, net of
unearned income.... 528,176 38,488 43,977 13,503 199,302 46,567 87,756 34,457 72,104 40,365
Allowance for loan
losses............. 8,271 521 467 203 2,982 647 1,100 498 1,245 606
Deposits............ 482,339 59,938 54,550 35,743 229,682 77,811 98,376 51,860 114,468 73,609
Short-term debt..... 5,000 -- 5,200 -- -- -- -- -- 4,550 --
Long-term debt...... 20,244 -- -- -- 10,084 -- -- -- -- 2,000
Stockholders'
equity............. 57,348 6,239 6,055 4,129 23,511 7,711 7,776 5,371 10,062 6,241
Performance Ratios:
Return on average
assets............... 1.27% 1.76% 2.07% (1.02)% 1.50% 1.69% 1.01% 1.82% 1.33% 0.05%
Return on average
equity............... 17.44 20.83 22.23 (6.28) 16.64 18.07 14.38 18.71 17.05 0.85
Net interest margin... 3.74 5.27 4.85 2.22 4.87 4.26 4.92 5.23 4.77 3.76
Capital and Liquidity
Ratios:
Average equity to
average assets....... 7.30 8.44 9.31 16.31 9.03 9.37 7.04 9.71 7.82 6.42
Leverage (4.00%
required minimum).... 7.33 7.80 9.02 11.37 9.00 8.06 7.20 9.55 7.24 7.44
Risk-based capital
Tier 1 (4.00%
required minimum).. 9.65 12.47 12.76 20.11 10.59 13.60 8.74 14.92 12.30 13.70
Total (8.00%
required minimum).. 10.90 13.72 13.76 21.11 11.84 14.82 9.97 16.17 13.55 14.95
Average loans to
average deposits..... 99.15 58.33 80.68 35.83 91.85 61.46 82.08 66.63 63.62 47.20
15
Results of Operations
Year ended December 31, 1999, compared with year ended December 31, 1998
The Company's net income increased by $4.9 million, or 28.2%, to $22.3
million in the year ended December 31, 1999, from $17.4 million in the year
ended December 31, 1998. Return on average assets during 1999 was 1.26%,
compared with 1.10% during 1998, and return on average equity was 16.28%
during 1999, compared with 13.81% during 1998.
Net interest income increased $7.3 million, or 12.2%, to $66.4 million in
1999 from $59.1 million in 1998, as interest income increased by $10.0 million
and interest expense increased $2.7 million. The increase in net interest
income is primarily attributable to a $193.3 million increase in average loans
to $1.2 billion during 1999, from $1.0 billion in 1998, as a result of
management emphasis on loan growth. In general, loans are the Company's
highest yielding earning asset. The increased interest expense is primarily
attributable to an increase in average time deposits of $71.1 million to
$612.3 million in 1999, from $541.1 million in 1998 and an increase in average
long-term debt to $58.4 million in 1999, from $30.5 million in 1998, an
increase of $27.4 million. The increases are due to the Company's need to fund
loan growth and these funding sources generally bear higher interest rates
than interest-bearing transaction accounts.
The Company's net interest spread and net interest margin were 3.63% and
4.18%, respectively, in 1999, decreasing by 4 and 6 basis points,
respectively, from 1998. These slight decreases reflect declining yields on
average loans that exceeded the decline in cost of interest-bearing
liabilities, attributable to increased competition from banks and other
financial institutions.
The Company recorded a provision for loan losses of $2.0 million during 1999
compared with $1.8 million one year ago. Management believes that both loan
loss experience and asset quality indicate that the allowance for loan losses
is maintained at an adequate level. The Company's allowance for loan losses as
a percentage of period-end loans (excluding loans held for sale) was 1.37% at
December 31, 1999, compared with 1.52% at December 31, 1998, and the allowance
for loan losses as a percentage of period-end nonperforming assets was 343.2%
at December 31, 1999, compared with 271.6% at December 31, 1998. The Company
experienced net charge-offs of $426,000 in 1999 equating to a ratio of net
charge-offs to average loans of 0.04% compared with net charge-offs of
$100,000 in 1998 equating to a ratio of net charge-offs to average loans of
0.01%. See "Provision and Allowance for Loan Losses."
Noninterest income, including net securities gains and losses, increased
$1.2 million, or 4.1%, to $30.6 million in 1999, compared with $29.4 million
in 1998. The Company experienced revenue decreases in its investment services
and mortgage lending divisions of $1.7 million, or 10.9%, to $14.1 million in
1999 from $15.8 million in 1998. Service charges on deposit accounts increased
by $220,000, or 3.0%, to $7.5 million in 1999 from $7.3 million in 1998.
Earnings on bank owned life insurance policies totaled $1.5 million in 1999
compared with $1.2 million, representing an increase of 28.9%. The Company's
newly acquired insurance division recorded revenue of $1.1 million during
1999. During 1999, the Company also recognized a gain of $819,000 on the
curtailment of its defined benefit pension plan. Non-recurring sales of assets
resulted in gains of $249,000 in 1999 compared to $247,000 in 1998.
Noninterest expense increased $1.3 million, or 2.1%, to $62.5 million during
1999, compared with $61.2 million during 1998. See "Noninterest Income and
Expense."
Income before the provision for income taxes increased $7.0 million, or
27.4%, to $32.5 million in 1999, from $25.5 million in 1998. Net income
increased $4.9 million during 1999.
Year ended December 31, 1998, compared with year ended December 31, 1997
The Company's net income increased by $3.3 million, or 23.1%, to $17.4
million in the year ended December 31, 1998, from $14.1 million in the year
ended December 31, 1997. Return on average assets during 1998 was 1.10%,
compared with 1.05% during 1997, and return on average equity was 13.81%
during 1998, compared with 12.73% during 1997.
Net interest income increased $3.0 million, or 5.4%, to $59.1 million in
1998 from $56.1 million in 1997, as interest income increased by $11.2 million
and interest expense increased $8.2 million. The increase in net
16
interest income was primarily attributable to a $103.8 million increase in
average loans to $1.0 billion during 1998, from $903.9 million during 1997, as
a result of management emphasis on loan growth. The increase in interest
expense was primarily attributable to an increase in average interest-bearing
deposits of $125.5 million to $1.0 billion in 1998, from $895.9 million in
1997. In general, loans are the Company's highest yielding earning asset.
The Company's net interest spread and net interest margin were 3.67% and
4.24%, respectively, in 1998, decreasing by 34 and 38 basis points,
respectively, from 1997. These decreases reflected a declining yield on
average loans and an increasing cost of interest-bearing liabilities, both
attributable to competition from banks and other financial institutions, a
flattening yield curve, and rate compression from recent reductions in the
prime rate.
The Company recorded a provision for loan losses of $1.8 million during 1998
compared with $3.4 million during 1997. $509,000 of the 1998 provision for
loan losses and $2.8 million of the 1997 provision for loan losses was
recorded at FAB, primarily associated with higher loss experience in FAB's
indirect automobile lending and sub-prime mortgage lending portfolios (which
lending businesses were discontinued during 1997). The Company's allowance for
loan losses as a percentage of period-end loans was 1.52% at December 31,
1998, compared to 1.54% at December 31, 1997, and the allowance for loan
losses as a percentage of period-end nonperforming assets was 271.6% at
December 31, 1998, compared with 211.0% at December 31, 1997. The Company
experienced net charge-offs of $100,000 in 1998 equating to a ratio of net
charge-offs to average loans of 0.01% compared with net charge-offs of $1.2
million in 1997 equating to a ratio of net charge-offs to average loans of
0.13%. See "Provision and Allowance for Loan Losses."
Noninterest income, including net securities gains and losses, increased
$9.1 million, or 44.6%, to $29.4 million in 1998, compared with $20.3 million
in 1997. The Company experienced increases in its fee-based divisions
(investment services, trust, and mortgage lending) of $6.3 million, or 54.3%,
to $17.9 million in 1998 from $11.6 million in 1997. Service charges increased
by $660,000, or 10.0%, to $7.3 million in 1998 from $6.6 million in 1997.
Earnings on bank owned life insurance policies totaled $1.2 million in 1998
compared with $39,000 in 1997. These policies were purchased in December of
1997 and, accordingly, 1998's earnings on these policies are substantially
higher as they reflect a full year's earnings. Non-recurring sales of assets
netted $247,000 in 1998 and included a gain of $310,000 resulting from the
sale of a certain portion of FAB's loan portfolio. In 1997, non-recurring
sales of assets included a charge to provide for the consolidation of FAB's
data processing facilities into the existing Company facility and included
losses resulting from abandonment of certain leasehold improvements, which
totaled $499,000. Noninterest expense increased $8.4 million, or 15.9%, to
$61.2 million during 1998, compared with $52.8 million during 1997. See
"Noninterest Income and Expense."
Income before the provision for income taxes increased $5.3 million, or
26.4%, to $25.5 million in 1998, from $20.2 million in 1997. Net income
increased $3.3 million during 1998.
Net Interest Income
The largest component of the Company's net income is its net interest
income--the difference between the income earned on assets and interest paid
on deposits and borrowed funds used to support its assets. Net interest income
is determined by the yield earned on the Company's earning assets and rates
paid on its interest-bearing liabilities, the relative amounts of earning
assets and interest-bearing liabilities and the maturity and repricing
characteristics of its earning assets and interest-bearing liabilities. Net
interest income divided by average earning assets represents the Company's net
interest margin.
Average Balances, Income, Expenses and Rates
The following table depicts, on a taxable equivalent basis for the periods
indicated, certain information related to the Company's average balance sheet
and its average yields on assets and average costs of liabilities. Such yields
or costs are derived by dividing income or expense by the average daily
balances of the associated assets or liabilities.
17
AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
(Amounts in thousands, except yields and rates)
Year ended December 31,
-----------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
ASSETS:
-------
Earning assets:
Loans(1)(3)............ $1,201,041 $102,549 8.54% $1,007,695 $ 92,343 9.16% $ 903,930 $ 85,549 9.46%
Securities:
Taxable................ 297,843 18,834 6.32 273,782 17,213 6.29 213,533 13,829 6.48
Tax exempt............. 33,173 2,458 7.41 33,182 2,510 7.56 32,939 2,628 7.98
Cash balances in other
banks................. 1,830 110 6.01 2,019 106 5.25 1,042 55 5.28
Funds sold............. 46,647 2,406 5.16 75,039 4,256 5.67 59,683 3,353 5.62
Trading account
securities............ 6,669 356 5.34 4,352 264 6.07 3,488 193 5.53
---------- -------- ---------- -------- ---------- --------
Total earning
assets(2)........... 1,587,203 126,713 7.98 1,396,069 116,692 8.36 1,214,615 105,607 8.69
---------- -------- ---------- -------- ---------- --------
Cash and due from
banks.................. 65,474 56,529 49,004
Premises and equipment.. 42,041 37,404 35,142
Other assets............ 84,244 108,715 55,822
Allowance for loan
losses................. (17,323) (15,608) (13,329)
---------- ---------- ----------
Total assets......... $1,761,639 $1,583,109 $1,341,254
========== ========== ==========
LIABILITIES:
------------
Interest-bearing
liabilities:
Interest-bearing
transaction accounts.. $ 197,811 4,860 2.46 $ 167,034 4,271 2.56 $ 141,830 3,703 2.61
Savings and money
market deposits....... 321,791 10,668 3.32 313,254 11,678 3.73 262,356 9,509 3.62
Time deposits.......... 612,263 32,061 5.24 541,142 30,466 5.63 491,751 27,477 5.59
Funds purchased........ 146,111 7,258 4.97 127,856 6,807 5.32 85,956 4,491 5.22
Other short-term
borrowings............ 25,539 1,407 5.51 26,323 1,613 6.13 43,988 2,712 6.17
Long-term debt......... 58,445 3,029 5.18 30,548 1,720 5.63 8,583 487 5.67
---------- -------- ---------- -------- ---------- --------
Total interest-
bearing
liabilities......... 1,361,960 59,283 4.35 1,206,157 56,555 4.69 1,034,464 48,379 4.68
---------- -------- ---------- -------- ---------- --------
Demand deposits........ 218,263 192,427 162,081
Accrued interest and
other liabilities..... 44,609 58,696 33,827
Stockholders' equity... 136,807 125,829 110,882
---------- ---------- ----------
Total liabilities and
stockholders'
equity.............. $1,761,639 $1,583,109 $1,341,254
========== ========== ==========
Net interest spread..... 3.63% 3.67% 4.01%
==== ==== ====
Net interest
income/margin on a
taxable equivalent
basis.................. 67,430 4.25% 60,137 4.31% 57,228 4.71%
==== ==== ====
Tax equivalent
adjustment(2).......... 1,045 988 1,099
-------- -------- --------
Net interest
income/margin.......... $ 66,385 4.18% $ 59,149 4.24% $ 56,129 4.62%
======== ==== ======== ==== ======== ====
- --------
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments are based on the assumed rate of 34%, and do
not give effect to the disallowance for Federal income tax purposes of
interest expense related to certain tax-exempt assets.
(3) Fees in the amount of $3,268,000, $3,273,000, and $3,244,000 are included
in interest and fees on loans for 1999, 1998, and 1997, respectively.
18
During 1999, the Company experienced an increase in net interest income of
$7.3 million, or 12.2%, to $66.4 million, compared with $59.1 million in 1998.
Net interest income increased despite a decrease in the net interest spread of
4 basis points to 3.63% in 1999 from 3.67% in 1998, and a decrease in the net
interest margin of 6 basis points to 4.18% in 1999, compared with 4.24% in
1998. Because the relative yield on loans exceeds that of all other earnings
assets, the primary reason for the increased net interest income was a 19.2%
increase in average loan volume. The slight decline in net interest spread and
net interest margin is due to declining yields on average loans that exceeded
the decline in cost of interest-bearing liabilities, attributable to
competition from banks and other financial institutions. The Company's average
liabilities in 1999 included more interest bearing liabilities than in 1998.
During 1999, net average earning assets increased by $191.1 million, or
13.79%, to $1.59 billion from $1.40 billion in 1998. The major components of
this increase included average loans which increased $193.3 million, or 19.2%,
to $1.20 billion in 1999 from $1.01 billion in 1998, and securities which
increased $24.0 million, or 7.8%, to $331.0 million in 1999 from $307.0
million in 1998.
Analysis of Changes in Net Interest Income
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 1999 and 1998.
For the purposes of this table, changes which are not solely attributable to
volume or rate are allocated to volume and rate on a pro rata basis.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Amounts in thousands)
December 31,
--------------------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
Variance Due to Variance Due to
--------------------------- ---------------------------
Volume Yield/Rate Total Volume Yield/Rate Total
------- ---------- ------- ------- ---------- -------
Earning assets:
Loans................... $16,782 $(6,576) $10,206 $ 9,573 $(2,779) $ 6,794
Securities:
Taxable............... 1,538 83 1,621 3,801 (417) 3,384
Tax exempt............ (1) (51) (52) 19 (137) (118)
Cash balances in other
banks.................. (10) 14 4 51 -- 51
Funds sold.............. (1,494) (356) (1,850) 873 30 903
Trading account
securities............. 127 (35) 92 51 20 71
------- ------- ------- ------- ------- -------
Total interest
income............. 16,942 (6,921) 10,021 14,368 (3,283) 11,085
Interest-bearing
liabilities:
Interest-bearing
transaction accounts... 762 (173) 589 641 (73) 568
Savings and money market
deposits............... 309 (1,319) (1,010) 1,875 294 2,169
Time deposits........... 3,808 (2,213) 1,595 2,790 199 2,989
Funds purchased......... 921 (470) 451 2,228 88 2,316
Other short-term
borrowings............. (47) (159) (206) (1,081) (18) (1,099)
Long-term debt.......... 1,456 (147) 1,309 1,236 (3) 1,233
------- ------- ------- ------- ------- -------
Total interest
expense............ 7,209 (4,481) 2,728 7,689 487 8,176
------- ------- ------- ------- ------- -------
Net interest income
on a taxable
equivalent basis... $ 9,733 $(2,440) 7,293 $ 6,679 $(3,770) 2,909
======= ======= ======= =======
Taxable equivalent
adjustment............. (57) 111
------- -------
Net interest income..... $ 7,236 $ 3,020
======= =======
19
Interest Sensitivity and Market Risk
Interest Sensitivity
The Company monitors and manages the pricing and maturity of its assets and
liabilities in order to diminish the potential adverse impact that changes in
interest rates could have on net interest income. The principal monitoring
technique employed by the Company is simulation analysis, which technique is
augmented by "gap" analysis.
In sensitivity analysis, the Company reviews each individual asset and
liability category and their projected behavior in various different interest
rate environments. These projected behaviors are based upon management's past
experiences and upon current competitive environments, including the various
environments in the different markets in which the Company competes. Using
this projected behavior and differing rate scenarios as inputs, the simulation
analysis generates as output a projection of net interest income. The Company
also periodically verifies the validity of this approach by comparing actual
results with those that were projected in previous models. See "Market Risk."
Another technique used by the Company in interest rate management is the
measurement of the interest sensitivity "gap," which is the positive or
negative dollar difference between assets and liabilities that are subject to
interest rate repricing within a given period of time. Interest rate
sensitivity can be managed by repricing assets and liabilities, selling
securities available for sale, replacing an asset or liability at maturity or
by adjusting the interest rate during the life of an asset or liability.
The Company evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation and repricing, and sources and prices of
off-balance sheet commitments in order to decrease interest sensitivity risk.
The Company uses computer simulations to measure the net income effect of
various interest rate scenarios. The modeling reflects interest rate changes
and the related impact on net income over specified periods of time.
20
The following table illustrates the Company's interest rate sensitivity at
December 31, 1999, assuming the relevant assets and liabilities are collected
and paid, respectively, based upon historical experience rather than their
stated maturities.
INTEREST SENSITIVITY ANALYSIS
(Amounts in thousands, except ratios)
December 31, 1999
-----------------------------------------------------------------
After One After Three
Within Through Through Greater
One Three Twelve Within Than One
Month Months Months One Year Year Total
-------- --------- ----------- -------- -------- ----------
ASSETS:
-------
Earning assets:
Loans(1).............. $485,302 $ 99,398 $ 181,673 $766,373 $558,256 $1,324,629
Securities(2)......... 17,999 11,364 45,710 75,073 261,381 336,454
Trading securities.... 2,701 -- -- 2,701 -- 2,701
Interest-bearing
deposits in other
banks................ 6,768 -- -- 6,768 -- 6,768
Funds sold............ 33,568 -- -- 33,568 -- 33,568
-------- -------- --------- -------- -------- ----------
Total interest-
earning assets...... $546,338 $110,762 $ 227,383 $884,483 $819,637 $1,704,120
LIABILITIES:
------------
Interest-bearing
liabilities:
Interest-bearing
deposits:
Demand deposits...... $ 69,825 $ -- $ -- $ 69,825 $148,058 $ 217,883
Savings and money
market deposits..... 122,195 -- 8,165 130,360 166,363 296,723
Time deposits(3)..... 76,675 161,918 367,559 606,152 111,212 717,364
Funds purchased....... 131,878 -- -- 131,878 -- 131,878
Short-term
borrowings(4)........ 24,588 -- -- 24,588 -- 24,588
Long-term debt........ 1 2 15 18 123,721 123,739
-------- -------- --------- -------- -------- ----------
Total interest-
bearing
liabilities......... $425,162 $161,920 $ 375,739 $962,821 $549,354 $1,512,175
-------- -------- --------- -------- -------- ----------
Period gap.............. $121,176 $(51,158) $(148,356) $(78,338) $270,283
======== ======== ========= ======== ========
Cumulative gap.......... $121,176 $ 70,018 $ (78,338) $(78,338) $191,945 $ 191,945
======== ======== ========= ======== ======== ==========
Ratio of cumulative gap
to total earning
assets................. 22.18% 63.21% (34.45)% (34.45)% 23.42%
- --------
(1) Excludes nonaccrual loans of $4,146,000.
(2) Excludes investment equity securities with a market value of $8,669,000.
(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 $6,199,000.
The Company generally benefits from increasing market rates of interest when
it has an asset-sensitive gap and generally benefits from decreasing market
interest rates when it is liability sensitive. The Company is liability
sensitive throughout one year after three months. The analysis presents only a
static view of the timing and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of core
deposits may change contractually within a relatively short time frame, but
those are viewed by management as significantly less interest sensitive than
market-based rates such as those paid on non-core deposits. For this and other
reasons, management relies more upon the simulation analysis (as noted above)
in managing interest rate risk. Accordingly, management believes that a
liability-sensitive gap position is not as indicative of the Company's true
interest sensitivity as it would be for an organization which depends to a
greater extent on purchased funds to support earning assets. Net interest
income may be impacted by other significant factors in a given interest rate
environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.
21
Market Risk
The Company's earnings are dependent on its net interest income which is the
difference between interest income earned on all earning assets, primarily
loans and securities, and interest paid on all interest bearing liabilities,
primarily deposits. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
inherent interest rate risk in its lending, investing and deposit gathering
activities. The Company seeks to reduce its exposure to market risk through
actively monitoring and managing its interest rate risk. Management relies
upon static "gap" analysis to determine the degree of mismatch in the maturity
and repricing distribution of interest earning assets and interest bearing
liabilities which quantifies, to a large extent, the degree of market risk
inherent in the Company's balance sheet. Gap analysis is further augmented by
simulation analysis to evaluate the impact of varying levels of prevailing
interest rates and the sensitivity of specific earning assets and interest
bearing liabilities to changes in those prevailing rates. Simulation analysis
consists of evaluating the impact on net interest income given changes from
200 basis points below to 200 basis points above the current prevailing rates.
Management makes certain assumptions as to the effect varying levels of
interest rates have on certain earning assets and interest bearing
liabilities, which assumptions consider both historical experience and
consensus estimates of outside sources.
With respect to the primary earning assets, loans and securities, certain
features of individual types of loans and specific securities introduce
uncertainty as to their expected performance at varying levels of interest
rates. In some cases, imbedded options exist whereby the borrower may elect to
repay the obligation at any time. These imbedded prepayment options make
anticipating the performance of those instruments difficult given changes in
prevailing rates. At December 31, 1999, mortgage backed securities totaling
$207.0 million, or 10.8% of total assets and essentially every underlying
loan, net of unearned income, (totaling $1.32 billion, or 68.7% 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 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 $1.44 billion, or 75.0% of total assets, at December 31,
1999. 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 the Company in its simulation analysis.
Specifically, the Company's spread, the difference between the rates earned on
earning assets and rates paid on interest bearing liabilities, is generally
higher when prevailing rates are higher. As prevailing rates reduce, the
spread tends to compress, with severe compression at very low prevailing
interest rates. This characteristic is called "spread compression" and
adversely effects net interest income in the simulation analysis when
anticipated prevailing rates are reduced from current rates. Management relies
upon historical experience to estimate the degree of spread compression in its
simulation analysis. Management believes that such estimates of possible
spread compression are reasonable. However, if the degree of spread
compression varies from that expected, the actual results could differ from
those indicated by the simulation analysis.
22
The following table illustrates the results of simulation analysis used by
the Company to determine the extent to which market risk would have effected
the net interest margin if prevailing interest rates differed from actual
rates during 1999. Because of the inherent use of estimates and assumptions in
the simulation model used to derive this information, the actual results for
1999 and, certainly, the future impact of market risk on the Company's net
interest margin, may differ from that found in the table.
MARKET RISK
(Amounts in thousands)
Year ended December 31, 1999 Year ended December 31, 1998
Change in --------------------------------- ---------------------------------
Prevailing Net Interest Change from Net Interest Change from
Interest Rates Income Amount Income Amount Income Amount Income Amount
- -------------- --------------- -------------- --------------- --------------
+200 basis points....... $ 74,125 1.49 % $ 63,238 6.91 %
+100 basis points....... 73,490 0.62 61,194 3.46
0 basis points.......... 73,037 -- 59,149 --
- -100 basis points....... 71,591 (1.98) 57,063 (3.53)
- -200 basis points....... 69,424 (4.95) 54,977 (7.05)
Provision and Allowance for Loan Losses
The Company has policies and procedures for evaluating the overall credit
quality of its loan portfolio including timely identification of potential
problem credits. On a monthly basis, management reviews the appropriate level
for the allowance for loan losses. This review and analysis is based on the
results of the internal monitoring and reporting system, analysis of economic
conditions in its markets and a review of historical statistical data, current
trends regarding the volume and severity of past due and problem loans and
leases, the existence and effect of concentrations of credit, and changes in
national and local economic conditions for both the Company and other
financial institutions. Management also considers in its evaluation of the
adequacy of the allowance for loan losses the results of regulatory
examinations conducted for each Bank, including evaluation of the Company's
policies and procedures and findings from the Company's independent loan
review department.
The provision for loan losses increased by $158,000, or 8.8%, to $1.95
million in 1999 from $1.8 million in 1998. This increased provision reflected
the Company's large growth in loans during 1999. The growth in loans exceeded
the growth in loan loss provision, primarily due to the Company's low charge
off experience and low nonperforming asset levels. Management believes the
allowance for loan losses, at its current level, adequately covers the
Company's exposure to loan losses.
Management's periodic evaluation of the adequacy of the allowance for loan
losses is based on the Company's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrowers'
ability to repay, estimated value of any underlying collateral, and an
analysis of current economic conditions. While management believes that it has
established the allowance in accordance with generally accepted accounting
principles and has taken into account the views of its regulators and the
current economic environment, there can be no assurance that in the future the
Company's regulators or its economic environment will not require further
increases in the allowance.
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance for loan losses at an appropriate level
as determined by management. Loan losses and recoveries are charged or
credited directly to the allowance for loan losses.
23
The following table presents the information associated with the Company's
allowance and provision for loan losses for the dates indicated.
ALLOWANCE FOR LOAN LOSSES
(Amounts in thousands, except percentages)
Year ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- --------
Total loans outstanding
at end of period, net
of unearned income(1).. $1,320,160 $1,087,027 $961,079 $863,968 $743,530
========== ========== ======== ======== ========
Average amount of loans
outstanding, net of
unearned income(1)..... $1,190,111 $1,003,366 $900,644 $794,105 $509,956
========== ========== ======== ======== ========
Allowance for loan
losses at beginning of
period................. $ 16,540 $ 14,844 $ 12,633 $ 11,621 $ 7,597
Charge-offs:
Commercial, financial
and agricultural..... 211 418 516 809 1,247
Real estate--
mortgage............. 392 200 531 160 454
Consumer.............. 674 1,246 1,880 1,027 543
---------- ---------- -------- -------- --------
Total charge-offs... 1,277 1,864 2,927 1,996 2,244
---------- ---------- -------- -------- --------
Recoveries:
Commercial, financial
and agricultural..... 188 1,012 1,068 1,525 1,294
Real estate--
mortgage............. 348 296 200 152 296
Consumer.............. 315 456 449 296 383
---------- ---------- -------- -------- --------
Total recoveries.... 851 1,764 1,717 1,973 1,973
---------- ---------- -------- -------- --------
Net charge-offs..... 426 100 1,210 23 271
Provision for loan
losses................. 1,954 1,796 3,421 1,035 1,171
Changes incidental to
acquisitions........... -- -- -- -- 3,124
---------- ---------- -------- -------- --------
Allowance for loan
losses at period-end... $ 18,068 $ 16,540 $ 14,844 $ 12,633 $ 11,621
========== ========== ======== ======== ========
Allowance for loan
losses to period-end
loans(1)............... 1.37% 1.52% 1.54% 1.46% 1.56%
Net charge-offs to
average loans(1)....... 0.04 0.01 0.13 0.00 0.05
- --------
(1) Does not include loans held for sale.
Allocation of Allowance
There is no formal allocation of the allowance for loan losses by loan
category.
24
Nonperforming Assets
The following table presents the Company's nonperforming assets for the
dates indicated.
NONPERFORMING ASSETS
(Amounts in thousands, except percentages)
At December 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Nonaccrual loans................. $ 4,146 $ 4,357 $ 4,228 $ 2,735 $ 2,843
Restructured loans............... 432 499 1,052 605 949
Loans past due 90 days or more
and still accruing.............. -- -- -- 9 126
------- ------- ------- ------- -------
Total nonperforming loans...... 4,578 4,856 5,280 3,349 3,918
Other real estate owned.......... 687 1,234 1,756 842 780
------- ------- ------- ------- -------
Total nonperforming assets..... $ 5,265 $ 6,090 $ 7,036 $ 4,191 $ 4,698
======= ======= ======= ======= =======
Allowance for loan losses to
period-end loans(1)............. 1.37% 1.52% 1.54% 1.46% 1.56%
Allowance for loan losses to
period-end nonperforming loans.. 394.67 340.61 281.14 377.22 296.61
Allowance for loan losses to
period-end nonperforming
assets.......................... 343.17 271.59 210.97 301.43 247.36
Net charge-offs to average
loans(1)........................ 0.04 0.01 0.13 0.00 0.05
Nonperforming assets to period-
end loans and foreclosed
property(1)..................... 0.40 0.56 0.73 0.48 0.63
Nonperforming loans to period-end
loans(1)........................ 0.35 0.45 0.55 0.39 0.53
- --------
(1) Does not include loans held for sale.
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts,
that the borrower's financial condition is such that collection of interest is
doubtful. It is the Company's policy to place a delinquent loan on nonaccrual
status when it becomes 90 days or more past due. When a loan is placed on
nonaccrual status, all interest which is accrued on the loan is reversed and
deducted from earnings as a reduction of reported interest. No additional
interest is accrued on the loan balance until collection of both principal and
interest becomes reasonably certain. When a problem loan is finally resolved,
there may ultimately be an actual writedown or charge-off of the principal
balance of the loan which would necessitate additional charges to the
allowance for loan losses. During the years ending December 31, 1999, 1998 and
1997, approximately $391,000, $384,000, and $371,000, respectively, in
additional interest income would have been recognized in earnings if the
Company's nonaccrual loans had been current in accordance with their original
terms.
Total nonperforming assets decreased $825,000 to $5.3 million at December
3l, 1999, from $6.1 million at December 31, 1998. The allowance for loan
losses to period-end nonperforming assets was 343.17% at December 31, 1999,
compared with 271.59% at December 31, 1998. This ratio will generally
fluctuate from period to period depending upon nonperforming asset levels at
period end. All categories of nonperforming assets decreased at year end 1999
compared with 1998, with the largest decline being a $547,000 reduction in
other real estate owned.
Potential Problem Loans
A potential problem loan is one that management has concerns as to the
borrower's future performance under terms of the loan contract. These loans
are current as to principal and interest, and accordingly, they are not
included in the nonperforming asset categories. Management monitors these
loans closely in order to ensure that the Company's interests are protected.
At December 31, 1999, the Company had certain loans considered by management
to be potential problem loans totaling $21.2 million. The level of potential
problem loans is factored into the determination of the adequacy of the
allowance for loan losses.
25
Noninterest Income and Expense
Noninterest income
The Company relies on five distinct product lines for the production of
recurring noninterest income: traditional retail and commercial banking, and
operating segments including mortgage banking, trust services, investment
services and insurance services. Combined fees associated with these product
lines totaled $24.8 million in 1999, compared with $25.2 million in 1998, a
decrease of $344,000, or 1.4%.
The following table sets forth, for the periods indicated, the principal
components of noninterest income.
NONINTEREST INCOME
(Amounts in thousands)
Year ended December 31,
-----------------------
1999 1998 1997
------- ------- -------
Service charges on deposit accounts.................... $ 7,479 $ 7,259 $ 6,599
Investment services income............................. 10,097 11,508 8,162
Trust fees............................................. 2,190 2,101 1,799
Origination and sale of mortgage loans................. 3,993 4,303 1,644
Gain on disposal of assets and deposits................ 249 247 (497)
Securities gains (losses).............................. 190 174 (2)
Bank owned life insurance.............................. 1,504 1,167 39
Insurance commissions.................................. 1,068 -- --
Gain on pension curtailment............................ 819 -- --
Other.................................................. 2,968 2,591 2,550
------- ------- -------
Total noninterest income............................. $30,557 $29,350 $20,294
======= ======= =======
Noninterest Expense
The following table sets forth, for the periods indicated, the principal
components of noninterest expense.
NONINTEREST EXPENSE
(Amounts in thousands)
Year ended December 31,
-----------------------
1999 1998 1997
------- ------- -------
Salaries and employee benefits......................... $37,452 $36,021 $29,992
Net occupancy expense.................................. 7,265 6,724 6,623
Amortization of goodwill............................... 387 302 298
Advertising............................................ 1,028 976 1,445
Banking assessments.................................... 482 473 411
Data processing expenses............................... 1,442 2,435 2,151
Legal and professional fees............................ 2,911 3,609 1,947
Non-credit losses (recoveries)......................... 206 129 283
Other.................................................. 11,282 10,485 9,638
------- ------- -------
Total noninterest expense............................ $62,455 $61,154 $52,788
======= ======= =======
Salaries and employee benefits increased $1.4 million, or 4.0%, in 1999.
This increase reflects the Company's general growth in employment concurrent
with its asset and revenue growth as well as salary increases reflecting
employee performance, job duties, and competitive employment market
conditions. These factors were somewhat offset by reduced commission
compensation in the some of the Company's commission based businesses, such as
mortgage origination and investment services, where revenue declined.
26
Noninterest expenses increased $1.3 million, or 2.1%, to $62.5 million in
1999, from $61.2 million in 1998. Data processing fees decreased $993,000, or
68.9%, in 1999 to $1.4 million, in part due to costs associated with
conversion costs related to completed mergers during 1998 as well as operating
efficiencies from consolidating such operations in 1999. Legal and
professional fees, $2.9 million in 1999, decreased $698,000, or 27.7%, from
$3.6 million in 1998 as a result of costs associated with mergers completed
during 1998. The Company completed three mergers during 1998 and one during
1999.
Investment Services
The following table sets forth, for the periods indicated, the summary of
operations for the investment services departments of the Company:
INVESTMENT SERVICES DIVISION
(Amounts in thousands)
Year ended December
31,
----------------------
1999 1998 1997
------- ------- ------
Investment services revenue............................. $10,097 $11,508 $8,162
Other revenue........................................... 2,765 1,409 1,311
------- ------- ------
Total investment revenue.............................. 12,862 12,917 9,473
Expenses and allocated charges.......................... 11,193 10,500 8,479
------- ------- ------
Net investment services revenue....................... $ 1,669 $ 2,417 $ 994
======= ======= ======
National Bank of Commerce of Birmingham ("NBC") operates an investment
department devoted primarily to handling correspondent banks' investment
needs. NBC has a wholly owned subsidiary, NBC Securities, Inc. ("NBC
Securities"), that is licensed as a broker-dealer. Together, NBC's investment
department and NBC Securities comprise the Investment Service Division.
Investment services revenues consist primarily of commission income from the
sale of investment securities. Investment services revenue decreased $1.4
million, or 12.3%, to 10.1 million in 1999 from $11.5 million in 1998. This
decrease occurred in the fixed income division of NBC's investment services
department, whose customers are primarily correspondent banks. The rising
interest rate environment in 1999 combined with strong loan demand in the
economy reduced these investors' demand for fixed income securities. In
addition, many of these customers elected to retain greater liquidity at year
end 1999 in preparation for potential Year 2000 liquidity needs, resulting in
further reduced demand in the 1999 fourth quarter. NBC Securities experienced
a $1.2 million increase in its investment services revenue due to the addition
of additional investment advisors as well as favorable market conditions. The
total of these two areas was a net decrease in investment services revenue,
which decrease was partially offset by an increase in other revenue of $1.4
million, or 96.2%, to $2.8 million in 1999 compared to $1.4 million in 1998.
This other revenue consists primarily of net interest income earned on margin
loans at NBC Securities but also includes interest and dividends on trading
assets and fee based services including asset/liability consulting, bond
accounting and security safekeeping. Investment services revenues increased
$3.3 million, or 41.0%, to $11.5 million in 1998 from $8.2 million in 1997,
primarily as a result of favorable market conditions. These results include
certain income and expense items that are allocated by management to the
investment services areas of the Company.
These results are not necessarily the same as would be expected if these
activities were conducted by a stand-alone entity because certain corporate
overhead expenses are not allocated directly to this division.
27
Trust Division
The following table sets forth, for the periods indicated, the summary of
operations for the trust division of the Company:
TRUST DIVISION
(Amounts in thousands)
Year ended December
31,
--------------------
1999 1998 1997
------ ------ ------
Trust division income..................................... $2,190 $2,101 $1,799
Expenses and allocated charges............................ 1,149 1,169 1,105
------ ------ ------
Net trust division revenue.............................. $1,041 $ 932 $ 694
====== ====== ======
Trust division income increased $89,000, or 4.2%, to $2.2 million in 1999
from $2.1 million in 1998 due to new customer relationships and growth of
existing assets managed. Similar conditions resulted in a 16.8% increase in
trust department fees to $2.1 million in 1998 from $1.8 million in 1997.
Despite the increase in Trust division income, Trust division expenses and
allocated charges decreased $20,000, or 1.7% in 1999 versus 1998, from $1.2
million to $1.1 million due to tight expense control, resulting in an 11.7%
increase in net trust division revenue