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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual report pursuant to section 13 or 15(d) of the Securities Exchange
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Act of 1934 for the fiscal year ended December 31, 1997, 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
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(Exact name of registrant as specified in its charter)
Delaware 63-1114426
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(State of incorporation (I.R.S. Employer Identification No.)
or organization)
1927 First Avenue North, Birmingham, AL 35203-4009
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(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
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par value
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), (2) has been subject to such filing requirements
for the past 90 days. Yes X No _____
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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 12, 1998 was $173,391,634.
As of March 12, 1998, the registrant had outstanding 8,648,120 shares of its
common stock.
DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:
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(i) The definitive Proxy Statement for the 1998 Annual Meeting of Alabama
National BanCorporation's stockholders is incorporated by reference
into Part III of this report.
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................................................. 17
2. Properties......................................................... 17
3. Legal Proceedings.................................................. 17
4. Submission of Matters to a Vote of Security Holders................ 18
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................ 18
6. Selected Financial Data............................................ 19
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 21
7A. Quantitative and Qualitative Disclosures About Market Risk......... 50
8. Financial Statements and Supplementary Data........................ 50
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 51
PART III
10. Directors and Executive Officers of the Registrant................. *
11. Compensation of Executive Officers and Directors................... *
12. Security Ownership of Certain Beneficial Owners and Management..... *
13. Certain Relationships and Related Transactions..................... *
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 53
SIGNATURES ..................................................................... 54
* Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on April 23, 1998 are incorporated by reference in Part
III of this Form 10-K.
1
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, other periodic reports filed by ANB under
the Securities Exchange Act of 1934, as amended, and any other written or oral
statements made by or on behalf of ANB may include "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 which
reflect ANB's current views with respect to future events and financial
performance. Such forward looking statements are based on general assumptions
and are subject to various risks, uncertainties, and other factors that may
cause actual results to differ materially from the views, beliefs and
projections expressed in such statements. These risks, uncertainties and other
factors include, but are not limited to:
(1) Possible changes in economic and business conditions that may affect
the prevailing interest rates, the prevailing rates of inflation, or the amount
of growth, stagnation, or recession in the global, U.S., and southeastern U.S.
economies, the value of investments, collectability of loans and the
profitability of business entities;
(2) Possible changes in monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and similar
organizations;
(3) The effects of easing of restrictions on participants in the financial
services industry, such as banks, securities brokers and dealers, investment
companies and finance companies, and attendant changes in patterns and effects
of competition in the financial services industry;
(4) The cost and other effects of legal and administrative cases and
proceedings, claims, settlements and judgments; 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 to ANB to
achieve the anticipated cost savings and revenue enhancements with respect to
the acquired operations, (ii) the assimilation of the acquired operations to
ANB's corporate culture, including the ability to instill ANB's credit practices
and efficient approach to the acquired operations, (iii) the continued growth of
the markets in which ANB operates consistent with recent historical experience,
(iv) the absence of material contingencies related to the acquired operations,
including asset quality and litigation contingencies, and (v) ANB's ability to
expand into new markets and to maintain profit margins in the face of pricing
pressures.
The words "believe," "expect," "anticipate," "project" and similar
expressions signify forward looking statements. Readers are cautioned not to
place undue reliance on any forward looking statements made by or on behalf of
ANB. Any such statement speaks only as of the date the statement was made. ANB
undertakes no obligation to update or revise any forward looking statements.
2
PART I
ITEM 1. BUSINESS
Alabama National BanCorporation (the "Company" or "ANB") is a Delaware bank
holding company with its principal place of business in Birmingham, Alabama, and
its main office located at 1927 First Avenue North, Birmingham, Alabama 35203
(Telephone Number: (205) 583-3600). ANB is currently the parent of 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 First Citizens Bank, National
Association (Talladega, Alabama); three state member banks, Alabama Exchange
Bank (Tuskegee, Alabama), Bank of Dadeville (Dadeville, Alabama) and First Gulf
Bank (Baldwin County, Alabama); and one state nonmember bank, First American
Bank (Decatur, 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); one insurance agency, Ashland Insurance, Inc.
(Ashland, Alabama); and two "small loan"/finance companies, Clay County Finance
Company, Inc. (Ashland, Alabama) and Tuskegee Loan Company, Inc. (Tuskegee,
Alabama).
RECENT DEVELOPMENTS
FIRST AMERICAN BANCORP MERGER
Effective November 30, 1997, First American Bancorp ("FAB"), an Alabama
bank holding company with approximately $235 million in total assets as of
November 30, 1997, merged with and into ANB (the "FAB Merger") pursuant to that
certain Agreement and Plan of Merger dated as of July 24, 1997 (the "FAB Merger
Agreement"), resulting in (i) the stockholders of FAB becoming stockholders of
ANB and (ii) ANB becoming the parent stockholder of FAB's bank subsidiary, First
American Bank, an Alabama state banking corporation. The FAB Merger was
accounted for as a pooling of interests.
The FAB Merger Agreement generally provided, among other things, for the
merger of FAB with and into ANB, pursuant to which each of the 2,878,684
outstanding shares of FAB common stock were converted into the right to receive
0.7199 shares of ANB common stock, for a total of 2,071,966 shares of ANB Common
Stock (excluding fractional shares). In addition, the options held to purchase
shares of FAB common stock were converted into the right to purchase 0.7199
shares of ANB Common Stock for each share of FAB common stock subject to option.
As part of the Merger, Dan M. David, formerly the Chairman and Chief Executive
Officer of FAB, became Vice Chairman of ANB, and was appointed to serve as a
member of the Board of Directors of ANB, along with two other former FAB Board
members, C. Lloyd Nix and William E. Sexton.
FORMATION OF CITIZENS & PEOPLES BANK, NATIONAL ASSOCIATION
On August 15, 1997, ANB completed the relocation of one of its bank
subsidiaries, First Bank of Baldwin County ("First Bank"), to Cantonment,
Florida. In connection with this relocation, First Bank was converted to a
national banking association and changed its name to Citizens & Peoples Bank,
National Association ("C&P"). This is the first banking subsidiary of ANB to be
located in Florida. Immediately prior to the relocation of First Bank to
Florida, a significant portion of the assets and liabilities of First Bank were
transferred to its affiliate, First Gulf Bank (formerly known as Gulf Bank).
3
ACQUISITION OF BRANCHES AND MERGER OF CITIZENS BANK OF TALLADEGA AND FIRST
NATIONAL BANK OF ASHLAND
As of December 11, 1997, First National Bank of Ashland ("FNB Ashland")
purchased two branches from SouthTrust Bank, National Association. One of the
branches (the "Ashland Branch") is located in Ashland, Clay County, Alabama, and
had approximately $4 million in deposit liabilities at the time of the transfer.
The other branch (the "Tuskegee Branch") is located in Tuskegee, Macon County,
Alabama, and had approximately $16 million in deposit liabilities at the time of
the transfer. Immediately upon acquiring the two branches, FNB Ashland
consolidated the Ashland Branch with its main office in Ashland, Alabama, and
donated the associated real property to the City of Ashland. In addition, FNB
Ashland transferred the Tuskegee Branch to its affiliate, Alabama Exchange Bank
("AEB"), which is headquartered in Tuskegee, Alabama. AEB has consolidated the
Tuskegee Branch with its main office in Tuskegee and donated the associated real
property to the Tuskegee Human and Civil Rights Multicultural Center.
On December 12, 1997, ANB completed a merger of two of its bank
subsidiaries, Citizens Bank of Talladega ("Citizens Bank") and FNB Ashland.
Specifically, Citizens Bank was merged with and into FNB Ashland, with FNB
Ashland surviving the merger. In connection with the merger, FNB Ashland changed
its name to First Citizens Bank, National Association ("First Citizens"),
relocated its main office to Talladega, Alabama, and established a branch at the
site of its previous main office in Ashland, Alabama.
DEFINITIVE AGREEMENT SIGNED FOR THE MERGER OF PUBLIC BANK CORPORATION WITH
AND INTO ANB
On March 5, 1998, ANB announced that it had signed a definitive agreement
for the merger of Public Bank Corporation, headquartered in St. Cloud, Florida
("PBC"), with and into ANB. PBC, which had total assets of $50 million at
December 31, 1997, is the holding company for Public Bank, a state nonmember
bank, based in St. Cloud, Florida. Public Bank serves its customer base through
two offices located at St. Cloud and Kissimmee, Florida.
Pursuant to the terms of the definitive agreement, PBC shareholders will
receive 550,000 shares of ANB common stock in the aggregate, or 0.2353134 shares
of ANB common stock for each share of PBC common stock. The agreement also
contains a provision for PBC shareholders to receive up to an additional 25,000
shares of ANB common stock under certain conditions tied to the ANB market share
price. PBC has the right to terminate the agreement if ANB common stock suffers
a significant decline in share price. The proposed merger will be accounted for
as a pooling of interests and is subject to regulatory approval, PBC shareholder
approval and certain other conditions. It is anticipated that the transaction
will close by June 30, 1998.
4
SUBSIDIARY BANKS
ANB operates through seven subsidiary Banks which have offices and
locations as set forth in the following table:
Banking Office Population
Bank City/County City/County (1) Offices
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Alabama Exchange Bank Tuskegee/Macon 12,257/24,928 1
Bank of Dadeville Dadeville/Tallapoosa 3,276/38,826 1
Camp Hill/Tallapoosa 1,415/38,826 1
Jackson's Gap/Tallapoosa 789/38,826 1
First Citizens Bank, N.A. Talladega/Talladega 18,175/74,107 2
Ashland/Clay 2,034/13,252 2
Lineville/Clay 2,394/13,252 1
First Gulf Bank Orange Beach/Baldwin 2,253/98,280 1
Gulf Shores/Baldwin 3,261/98,280 1
Foley/Baldwin 4,937/98,280 1
Robertsdale/Baldwin 2401/98,280 1
Bay Minette/Baldwin 7,168/98,280 1
Daphne/Baldwin 11,290/98,280 1
National Bank of Commerce Birmingham/Jefferson 265,968/651,525 2
of Birmingham Mountain Brook/Jefferson 19,810/651,525 2
Hoover/Jefferson 12,817/651,525 1
Irondale/Jefferson 9,454/651,525 1
Hueytown/Jefferson 15,280/651,525 1
Bessemer/Jefferson 30,966/651,525 1
Trussville/Jefferson 10,803/651,525 1
Center Point/Jefferson 22,658/651,525 1
Inverness/Shelby 2,518/99,358 1
Meadowbrook/Shelby 4,621/99,358 1
Pelham/Shelby 9,765/99,358 1
Alabaster/Shelby 14,627/99,358 1
Pell City/St. Clair 8,118/50,009 1
Springville,St. Clair 1,910/50,009 1
Moody/St. Clair 4,921/50,009 1
Citizens & Peoples Bank, N.A. Cantonment/Escambia 34,746/262,798 1
First American Bank Decatur/Morgan 48,761/100,043 3
Athens/Limestone 16,901/54,135 2
Madison/Madison 14,904/238,912 1
Ardmore/Madison 866/54,135 1
___________________________
(1) 1990 U.S. Census data.
The Banks focus on traditional consumer, residential mortgage, commercial
and real estate construction lending to customers in their market areas. The
Banks also offer a variety of deposit programs to individuals and small
businesses and other organizations at interest rates generally consistent with
local market conditions. NBC offers trust services, investment services
(including public finance) 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.
5
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, 1997, were approximately $842.8 million, or
approximately 76.0% 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 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 $523.5 million, or 62.1% of
total loans, net of unearned interest, at December 31, 1997. The Banks'
predominant real estate loans are residential mortgages. Residential mortgages,
both fixed and variable, are made for terms of up to 30 years and generally
require monthly amortization. The majority of the Banks' commercial mortgages
are at variable rates, which approximate current market rates. Construction
loans are made on a variable rate basis. Origination fees are normally charged
for all loans secured by real estate. The Banks' primary type of residential
mortgage loan is the single-family first mortgage, typically structured with
fixed or adjustable interest rates, based on market conditions. Fixed rate loans
usually have terms of five years, with payments through the date of maturity
generally based on a 15 or 30 year amortization schedule. Adjustable rate loans
generally have a term of 15 years.
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. The Banks generally collect from the borrower or purchaser a
combination of the origination fee, discount points and/or service release fee.
During 1997, the Banks sold approximately $118.2 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 consists of loans to purchase
automobiles, appliances and other consumer durable goods. Consumer loans
constituted $79.6 million, or 9.4% of ANB's loan portfolio at December 31, 1997.
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 four to five years on
automobile loans and one to ten years on loans for other consumer
6
durable goods, depending on the nature and condition of the collateral. Periodic
amortization, generally monthly, is required.
Commercial and Financial Loans. The Banks make loans for commercial
purposes in various lines of business. These loans are typically made on terms
up to five years at fixed or variable rates. The loans are secured by 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
limiting the loan to value ratio. Historically, the Banks have loaned up to 80%
on loans secured by accounts receivable, up to 65% on loans secured by
inventory, and up to 80% on loans secured by equipment. The Banks also make
unsecured commercial loans. Commercial and financial loans constituted $194.6
million, or 23.1% of ANB's loan portfolio at December 31, 1997. 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. In particular, on larger credits, ANB
generally relies on the cash flow of a debtor as the source of repayment and
secondarily on the value of the underlying collateral. In addition, ANB attempts
to utilize shorter loan terms in order to reduce the risk of a decline in the
value of such collateral.
ANB addresses repayment risks by adhering to internal credit policies and
procedures of which all of the Banks have adopted. These policies and procedures
include officer and customer lending limits, a multi-layered loan approval
process for larger loans, documentation examination and follow-up procedures for
any exceptions to credit policies. The point in each Bank's loan approval
process at which a loan is approved depends on the size of the borrower's credit
relationship with such Bank. For example, at NBC, each of the lending department
managers has the authority to approve loans up to $350,000. Upon approval by
ANB's Board of Directors, other loan officers may be authorized to approve loans
of lower amounts. Loans in excess of $50,000 are approved and ratified by the
Loan Review Committee of NBC. Loans in excess of $300,000 are approved and
ratified by the Executive Committee of the NBC Board of Directors.
Loan Review. ANB maintains a continuous loan review system. 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.
NBC'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,
through it Loan Review Committee, with a thorough understanding of the credit
quality of NBC's loan portfolio. LRD is required to review approximately 60% of
the annual average loan portfolio of each of the Banks during any continuous 12
month period. The review process includes coverage of at least 50% of all loan
relationships between $250,000 and $750,000 and coverage of 100% of all loan
relationships over $750,000. Other review requirements are in place to
7
provide management with early warning systems for problem credits as well as
compliance with stated lending policies. LRD's findings are reported monthly to
the Loan Review Committee of the NBC Board of Directors.
DEPOSITS
The principal sources of funds for the Banks are core deposits, consisting
of demand deposits, interest-bearing transaction accounts, money market
accounts, savings deposits and certificates of deposit. Transaction accounts
include checking and negotiable order of withdrawal (NOW) accounts which
customers use for cash management and which provide the Banks with a source of
fee income and cross-marketing opportunities, as well as a low-cost source of
funds. Time and savings accounts also provide a relatively stable and low-cost
source of funding. The largest source of funds for the Banks are certificates of
deposit. Certificates of deposit in excess of $100,000 are held primarily by
customers in the Banks' market areas. The Banks have not historically funded
their balance sheet with brokered certificates of deposit.
Deposit rates are set weekly by senior management of each of the Banks,
subject to approval by management of ANB. 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 has operated an investment department devoted primarily to handling
correspondent banks' investment needs since the mid-1980's. Because the
department has been relatively small in recent years, the contribution to
earnings has been moderate. In May of 1995, NBC expanded this operation
significantly with a staff of investment professionals formerly employed by
another financial institution.
NBC also has a wholly owned subsidiary, NBC Securities, Inc. ("NBC
Securities"), that is licensed as a broker-dealer. In 1995, NBC re-activated NBC
Securities' broker-dealer license to provide investment services to individuals
and institutions. These services include the sale of stocks, corporate bonds,
mutual funds, annuities, other insurance products and financial planning.
8
COMPETITION
The Banks encounter strong competition in making loans, acquiring deposits
and attracting customers for investment services. Competition among financial
institutions is based upon interest rates offered on deposit accounts, interest
rates charged on loans, other credit and service charges relating to loans, the
quality and scope of the services rendered, the convenience of banking
facilities and, in the case of loans to commercial borrowers, relative lending
limits. The Banks compete with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies, and other financial
intermediaries operating in Alabama and elsewhere. Many of these competitors,
some of which are affiliated with large bank holding companies, have
substantially greater resources and lending limits, and may offer certain
services that the Banks do not currently provide. In addition, many of ANB's
non-bank competitors are not subject to the same extensive federal regulations
that govern bank or thrift holding companies and federally insured banks or
thrifts.
The 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 State of
Alabama has 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 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.
9
MARKET AREAS AND GROWTH STRATEGY
Through NBC, ANB serves the lower half of Jefferson County, the upper third
of Shelby County, and St. Clair County, each of which are typically included in
the Birmingham metropolitan area. ANB's First American Bank subsidiary serves
Morgan, Limestone and Madison counties in north Alabama. First American's
largest market presence is in Decatur, which has demonstrated a growing economic
base in recent years. The Boeing Company is currently constructing a
significant plant in Decatur, and Trico Steel Company, L.L.C. recently opened a
steel mill operation there, each of which are expected to have a positive
economic impact in this market. Through First Gulf Bank, ANB serves Baldwin
County, Alabama. Located between Mobile, Alabama and Pensacola, Florida,
Baldwin County has a broad base of economic activity in the retail and service,
agriculture, seafood, tourism and manufacturing industries. Shelby, Baldwin and
St. Clair Counties have been named in statistical surveys as three of the
fastest growing counties in Alabama. In August 1997, ANB expanded outside of
Alabama with the opening of C&P in Escambia County, Florida. The other Banks,
First Citizens, Alabama Exchange Bank and Bank of Dadeville, are located in non-
metropolitan areas. ANB's strategy is to focus on growth in profitability for
these non-metropolitan banks, since market growth has not been as significant.
Due to continuing consolidation within the banking industry, as well as in
the State of Alabama, 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 that will
expand NBC's branch network in the Birmingham metropolitan area and acquisitions
of additional banks or thrifts (or their holding companies) which operate in
attractive market areas in Alabama and neighboring states. In addition to price
and terms, the factors considered by ANB in determining the desirability of a
business acquisition or combination are financial condition, earnings potential,
quality of management, market area and competitive environment.
Due to capital limitations associated with the long-term debt incurred by
ANB in its earlier acquisitions, ANB historically did not emphasize internal
growth. However, because of its strong internal rate of capital formation and
because ANB now operates in some of the fastest growing areas in Alabama,
management of ANB believes that the Banks could enhance growth by more
aggressively pursuing additional deposits and loans in these areas. First Gulf
Bank intends to further expand its presence in the Baldwin County area, and NBC
intends to further expand its business in northern Shelby County, Alabama
through its new branch in Meadowbrook, Alabama. Also, ANB is exploring
expansion into lines of business closely related to banking and will pursue such
expansion if it believes such lines could be profitable without causing undue
risk to ANB. While ANB plans to continue its growth as described above, there
is no assurance that its efforts will be successful.
EMPLOYEES
As of December 31, 1997, ANB and the Banks together had approximately 608
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
10
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.
FEDERAL BANK HOLDING COMPANY REGULATION
ANB is a bank holding company under the Bank Holding Company Act of 1956
(the "BHCA"). Under the BHCA, ANB is subject to periodic examination by the
Federal Reserve and is required to file periodic reports of its operations and
such additional information as the Federal Reserve may require. ANB's and the
Banks' activities are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries, or engaging
in any other activity that the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
Investments, Control, and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company. The IBBEA permits bank holding companies to acquire control of banks
throughout the United States in compliance with the BHCA and other applicable
banking laws. See "COMPETITION."
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act ("CIBCA"), together with regulations thereunder, require
Federal Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as ANB. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities of
the bank holding company. Under Federal Reserve regulations applicable to ANB,
control will be rebuttably presumed to exist if a person acquires at least 10%
of the outstanding shares of any class of voting securities which are registered
under the Exchange Act. The regulations provide a procedure for challenge of
the rebuttable control presumption.
Under the BHCA, ANB is generally prohibited from engaging in, or acquiring
direct or indirect control of more than 5% of the voting shares of any company
engaged in nonbanking activities unless the Federal Reserve, by order or
regulation, has found those activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation to be proper
incidents to the business of banking include making or servicing loans and
certain types of leases, engaging in certain insurance and discount brokerage
activities, performing certain data processing services, acting in certain
circumstances as a
11
fiduciary or investment or financial advisor, owning savings associations and
making investments in certain corporations or projects designed primarily to
promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, ANB is expected to act as a source of financial strength to the Banks
and to commit resources to support the Banks in circumstances in which ANB might
not otherwise do so. Under the BHCA, the Federal Reserve may require a bank
holding company to terminate any activity or relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness or stability of any subsidiary depository institution
of the bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or nonbank subsidiary if the agency determines that divestiture may aid the
depository institution's financial condition. Each of the Banks may be required
to indemnify or cross-guarantee the Federal Deposit Insurance Corporation (the
"FDIC") against losses it incurs with respect to any of the other Banks, which
in effect makes the Company's equity investments in healthy bank subsidiaries
available to the FDIC to assist any failing or failed subsidiary of ANB.
THE BANKS
ANB is the holding company for seven banks, including three national banks
(First Citizens, C&P and NBC), three Alabama state banks which are members of
the Federal Reserve System (Bank of Dadeville, Alabama Exchange Bank and First
Gulf Bank), and one Alabama state bank that is not a member of the Federal
Reserve System (First American Bank). The Office of Comptroller of the Currency
(the "OCC") is the primary regulator for the national banks; the Alabama Banking
Department and the Federal Reserve System are the primary regulators for the
Alabama state member banks; and the Alabama Banking Department and the FDIC are
the primary regulators for the Alabama state nonmember bank. These regulatory
authorities regulate or monitor all areas of each Bank's operations, including
security devices and procedures, adequacy of capital loan reserves, loans,
investments, borrowings, deposits, mergers, issuances of securities, payment of
dividends, interest rates payable on deposits, interest rates or fees chargeable
on loans, establishment of branches, corporate reorganizations, maintenance of
books and records and adequacy of staff training to carry on safe lending and
deposit gathering practices. Each of the Banks must maintain certain capital
ratios and is subject to limitations on aggregate investments in real estate,
bank premises and furniture and fixtures.
FDICIA
Under FDICIA, all insured institutions must undergo regular on-site
examinations by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition
or any other report of any insured depository institution. FDICIA also requires
the federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding
companies relating, among other things, to (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; and (v) asset quality.
12
TRANSACTIONS WITH AFFILIATES AND INSIDERS
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. Section 23A limits the aggregate amount of transactions
with any individual affiliate to ten percent (10%) of the capital and surplus of
the bank and also limits the aggregate amount of transactions with all
affiliates to twenty percent (20%) of the bank's capital and surplus. Loans and
certain other extensions of credit to affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A, and the purchase
of low quality assets from affiliates is generally prohibited.
The Banks are also subject to the provisions of Section 23B of the Federal
Reserve Act that, among other things, prohibit an institution from engaging in
certain transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable to such institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with non-affiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to non-
affiliated companies.
The Banks are 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.
BRANCHING
All of the Banks domiciled in Alabama are permitted to branch freely within
the State of Alabama, provided approval of the appropriate regulatory authority
is obtained. The Alabama Banking Code permits statewide branching for Alabama
state banks. As national banks located in Alabama, these state branch banking
laws also apply to NBC and First Citizens. In addition, as of June 1, 1997 the
IBBEA permits interstate branching in all states opting in to the IBBEA. As a
national bank domiciled in Florida, C&P is governed by the Florida State banking
statutes regarding branching within the State of Florida. Florida law permits
banks domiciled in Florida to branch freely within the State of Florida, upon
the approval of the appropriate regulatory authorities. See "COMPETITION."
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the Federal Reserve, the FDIC, the OCC or the Office of Thrift Supervision 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
13
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.
OTHER REGULATIONS
Interest and certain other charges collected or contracted for by the Banks
are subject to state usury and banking laws and certain federal laws concerning
interest rates. The Banks' loan operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Home Mortgage
Disclosure Act of 1975 requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed or other prohibited factors in extending credit, the
Fair Credit Reporting Act of 1978 governing the use and provision of information
to credit reporting agencies, the Fair Debt Collection Practices Act governing
the manner in which consumer debts may be collected by collection agencies, and
the rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. The Banks' loan operations
are also subject to state consumer finance laws which generally govern the
amount and manner in which interest and other charges and expenses may be
charged and collected by lenders. The deposit operations of the Banks are also
subject to the Right of Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and the Electronic
Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that Act, which governs automatic deposits to and withdrawals from
deposit accounts and customers' rights and liabilities arising from the use of
automated teller machines and other electronic banking services. The Banks'
small loan subsidiaries are subject to the Alabama Small Loan laws governing the
amount of loans and interest and other charges that may be charged in connection
with a small loan.
DEPOSIT INSURANCE
The deposits of each of the Banks are currently insured by the FDIC to a
maximum of $100,000 per depositor, subject to certain aggregation rules. The
FDIC establishes rates for the payment of premiums by federally insured banks
and thrifts for deposit insurance. Separate insurance funds (BIF and SAIF) are
maintained for commercial banks and thrifts, with insurance premiums from the
industry used to offset losses from insurance payouts when banks and thrifts
fail. Prior to 1996, due to the high rate of failures in recent years, the FDIC
adopted a risk-based deposit insurance premium system for all insured depository
institutions, including the Banks, which required that a depository institution
pay to the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund
("SAIF") from between $-0-and $.31 per $100 of insured deposits depending on its
capital levels and risk classification, as determined by its primary federal
regulator on a semiannual basis. In September 1996, the FDIC enacted
legislation to recapitalize the SAIF and ensure against default on Financing
Corp. ("FICO") bonds. The legislation provided for a one-time payment into the
BIF in an amount approximating $.68 per $100 of SAIF insured deposits.
Thereafter and through December 31, 1999 the former assessment rate of between
$-0- and $.31 per $100 of insured deposits is reduced to between $.0130 and
$.2830 per $100, including a FICO rate of $.0130 per $100, for bank deposits and
a rate of between $.0650 and $.3350 per $100, including a FICO rate of $.0650
per $100, for previously SAIF insured deposits. After December 31, 1999, the
BIF rate will be approximately $.0243 per $100 for all deposits.
14
DIVIDENDS
The principal source of ANB's cash revenues is derived from dividends
received from the Banks. The amount of dividends that may be paid by the Banks
to ANB depends on each Bank's earnings and capital position and is limited by
federal and/or state law, regulations and policies. See Note 18 of the Notes to
Consolidated Financial Statements of ANB and Subsidiaries included in this
Annual Report.
As national banks, NBC, C&P and First Citizens may not pay dividends from
their paid-in surplus. All dividends must be paid out of undivided profits then
on hand, after deducting expenses, including provisions for loan losses and bad
debts. In addition, a national bank is prohibited from declaring a dividend on
its shares of common stock until its surplus equals its stated capital, unless
there has been transferred to surplus no less than one-tenth of the bank's net
profits for the preceding two consecutive half-year periods (in the case of an
annual dividend). The approval of the OCC is required if the total of all
dividends declared by a national bank in any calendar year exceeds the total of
its net profits for that year combined with its retained net profits for the
preceding two years, less any required transfers to surplus.
As Alabama state banks, Bank of Dadeville, Alabama Exchange Bank, First
Gulf Bank and First American Bank are subject to restrictions on dividends under
the Alabama Banking Code, which provides that an Alabama state bank must
transfer to surplus each year at least 10% of its net earnings (and thus cannot
declare or pay a dividend in excess of 90% of net earnings) until its surplus
equals at least 20% of its capital. In addition, a state bank must obtain
regulatory approval to declare dividends in any calendar year in excess of the
total of its net earnings for that year combined with its retained net earnings
in the preceding two years, less any required transfers to surplus.
Under FDICIA, none of the Banks may pay a dividend if, after paying the
dividend, the bank would be undercapitalized.
CAPITAL REGULATIONS
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to account for
off-balance sheet exposure, minimize disincentives for holding liquid assets and
make regulatory capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies. The resulting capital ratios
represent qualifying capital as a percentage of total risk-weighted assets and
off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums. The
current guidelines require all bank holding companies and federally-regulated
banks to maintain a minimum risk-based total capital ratio equal to 8%, of which
at least 4% must be Tier 1 capital. Tier 1 capital includes common
stockholders' equity, qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, but excludes goodwill
and most other intangibles and excludes the allowance for loan and lease losses.
Tier 2 capital includes the excess of any preferred stock not included in Tier 1
capital, mandatory convertible securities, hybrid capital instruments,
subordinated debt and intermediate term-preferred stock and general reserves for
loan and lease losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance sheet
items are given credit conversion factors to
15
convert them to asset equivalent amounts to which an appropriate risk-weight
will apply. These computations result in the total risk-weighted assets. Most
loans are assigned to the 100% risk category, except for first mortgage loans
fully secured by residential property and, under certain circumstances,
residential construction loans, both of which carry a 50% rating. Most
investment securities are assigned to the 20% category, except for municipal or
state revenue bonds, which have a 50% rating, and direct obligations of or
obligations guaranteed by the United States Treasury or United States Government
owned agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a leverage
ratio, which is Tier 1 capital as a percentage of quarterly average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution for bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitaled,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6% and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1996, ANB and
each of the Banks qualified as "well-capitalized." See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CAPITAL."
Under FDICIA, the applicable agency can treat an institution as if it were
in the next lower category if the agency determines (after notice and an
opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or a part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost an institution's capital and to partially guarantee an
institution's performance under their capital restoration plans.
FDICIA requires the federal banking regulators to revise the risk-based
capital standards to provide for explicit consideration of interest-rate risk,
concentration of credit risk and the risks of non-traditional activities. It is
uncertain what effect these regulations, when implemented, will have on ANB and
the Banks.
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. ANB cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect ANB.
16
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 46 - 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 the President and
Chief Executive Officer of NBC since 1990.
VICTOR E. NICHOL, JR. - Age 51 - 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 the Executive Vice President
and Chief Financial Officer of NBC since 1994. From 1992 through 1993, Mr.
Nichol served as President and Chief Executive Officer of Secor Bank.
DAN M. DAVID - Age 52 - 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.
JAMES S. PARKS, JR. - Age 43 - Senior Vice President-Finance, Controller
and Treasurer. Mr. Parks has served as Senior Vice President-Finance, Controller
and Treasurer of ANB since December 1996. Mr. Parks has served as the Senior
Vice President and Controller for NBC since 1993 and has served NBC as
Controller since 1987.
ITEM 2. PROPERTIES
ANB currently operates 40 banking offices. Of the 40 banking offices, ANB,
through the Banks, owns 31 banking offices without encumbrance and leases an
additional 9 banking offices. ANB leases its principal administrative offices,
which are located at 1927 First Avenue North, Birmingham, Alabama. See Notes 6
and 9 to the Consolidated Financial Statements of ANB and Subsidiaries included
in this Annual Report 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. 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.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE FOR SECURITY-HOLDERS
ANB held a special meeting of its stockholders on November 26, 1997 (the
"Special Meeting") in order to vote upon the proposed merger of First American
Bancorp with and into ANB, pursuant to the terms of the Agreement and Plan of
Merger dated July 24, 1997. The results of the voting at the Special Meeting
were as follows:
Total Shares Entitled to Vote For Approval of the Merger Against/Withhold Abstain
----------------------------- -------------------------- ---------------- -------
6,574,942 5,048,145 4,300 1,829
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At March 12, 1998, ANB had 966 stockholders of record (including shares
held in "street" names by nominees who are record holders) and 8,648,120 shares
of ANB Common Stock outstanding. ANB Common Stock is traded in the over-the-
counter market and prices are quoted on NASDAQ/NMS under the symbol "ALAB."
The reported price range for ANB Common Stock and the dividends declared
during each calendar quarter of 1996 and 1997 are shown below:
HIGH LOW DIVIDENDS
DECLARED
1996
First Quarter.......................... $14-1/4 $12-3/4 $ .05
Second Quarter......................... 13-5/8 12 .05
Third Quarter.......................... 15-1/2 12-5/8 .09
Fourth Quarter......................... 19 14-7/8 .09
1997
First Quarter.......................... 20-1/2 17-1/2 .115
Second Quarter......................... 22-1/2 17-1/2 .115
Third Quarter.......................... 26-1/8 21-3/4 .115
Fourth Quarter......................... 27 22 .115
The last reported sales price of Common Stock as reported on The Nasdaq/NMS
on March 12, 1998 was $28-1/4. 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 the ANB Common Stock as of December 31, 1997,
were J. C. Bradford & Co., Raymond James & Associates, Inc., Herzog Heine Geduld
Inc., Legg Mason Wood Walker Inc., The Robinson Humphrey Company Inc., Sterne
Agee & Leach Inc., and The Chicago Corporation.
18
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,
----------------------------------------------------------------------
1997 (1) 1996 (1) 1995 (1) 1994 (1) 1993 (1)
----------------------------------------------------------------------
INCOME STATEMENT DATA:
Interest income ........................................ $ 90,388 $ 83,180 $ 53,067 $ 40,970 $ 34,515
Interest expense ....................................... 42,840 38,246 26,555 17,243 13,990
---------- ----------- ----------- ----------- -----------
Net interest income .................................... 47,548 44,934 26,512 23,727 20,525
Provision for loan losses (benefit of recoveries)...... 2,988 885 1,016 1,596 (50)
---------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses
(benefit of recoveries) .............................. 44,560 44,049 25,496 22,131 20,575
Net securities gains (losses) .......................... (8) (84) 26 (52) 222
Noninterest income ..................................... 18,047 17,510 9,160 5,820 6,776
Noninterest expense .................................... 45,461 44,053 26,849 19,720 20,298
---------- ----------- ----------- ----------- -----------
Income before income taxes ............................. 17,138 17,422 7,833 8,179 7,275
Provision for income taxes ............................. 5,458 5,281 901 736 838
Income before minority interest in earnings of ---------- ----------- ----------- ----------- -----------
consolidated subsidiary .............................. 11,680 12,141 6,932 7,443 6,437
Minority interest in earnings of consolidated
subsidiary ........................................... 12 14 650 750 236
---------- ----------- ----------- ----------- -----------
Net income ............................................. $ 11,668 $ 12,127 $ 6,282 $ 6,693 $ 6,201
========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Total assets ........................................... $1,274,166 $ 1,110,729 $ 1,027,099 $ 607,638 $ 545,348
Earning assets ......................................... 1,109,202 1,013,789 929,677 560,900 506,676
Securities ............................................. 214,012 182,009 199,830 128,346 128,899
Loans ................................................. 842,790 785,282 680,172 422,307 351,990
Allowance for loan losses .............................. 12,829 11,011 10,421 6,506 7,307
Deposits ............................................... 928,970 858,103 841,899 506,256 457,644
Short-term debt ........................................ 27,750 42,105 21,280 12,717 7,350
Long-term debt ......................................... 14,587 12,939 1,089 2,132 1,376
Stockholders' equity ................................... 97,933 88,803 78,144 43,520 35,496
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (2) ...... 8,884 8,756 4,955 4,464 4,316
Per Common Share Data:
Net income - diluted (3) ............................... $ 1.31 $ 1.38 $ 1.10 $ 1.34 $ 1.27
Book value (period end) (4) ........................... 11.32 10.38 9.16 7.05 5.78
Tangible book value (period end)....................... 10.32 9.48 8.27 6.55 5.21
Dividends declared .................................... 0.46 0.28 - - -
PERFORMANCE RATIOS:
Return on average assets .............................. 1.01% 1.17% 0.95% 1.18% 1.22%
Return on average equity .............................. 12.42 14.48 13.58 17.89 18.54
Net interest margin (5) ................................ 4.53 4.70 4.29 4.49 4.34
Net interest margin (taxable equivalent (5)............. 4.64 4.79 4.39 4.64 4.48
ASSET QUALITY RATIOS:
Allowance for loan losses to period end loans........... 1.52% 1.40% 1.53% 1.54% 2.08%
Allowance for loan losses to period end
nonperforming loans (6) .............................. 245.48 356.92 320.55 354.36 240.28
Net charge-offs (recoveries) to a....................... 0.15 0.04 0.05 0.68 (0.11)
Nonperforming assets to period end loans and
foreclosed property (6) .............................. 0.79 0.46 0.57 0.54 1.18
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets........................ 8.10% 8.06% 6.98% 6.59% 6.58%
Leverage (4.00% required minimum) (7)................... 7.58 8.13 10.59 8.25 6.78
Risk-based capital
Tier 1 (4.00% required minimum) (7)................... 9.38 10.28 10.51 11.17 9.99
Total (8.00% required minimum) (7).................... 10.63 11.38 11.59 12.30 11.14
Average loans to average deposits....................... 89.24 87.06 82.36 81.35 75.98
19
(1) On November 30, 1997, 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 .7199 shares of the Company's common stock. The
FAB Merger was accounted for as a pooling of interests. 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. The FIRSTBANC
merger was accounted for as a 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 Company common stock. The NCC Merger was
accounted for as a "reverse acquisition," whereby NCC is deemed to have
acquired ANB for financial reporting purposes. However, ANB remained as the
continuing legal entity and registrant for Securities and Exchange
Commission filing purposes. Consistent with the reverse acquisition
accounting treatment, the historical income statement information included
in the Five-Year Summary of Selected Financial Data of the Company is that
of NCC for years prior to 1996. The balance sheet information included in
the historical Five-Year Summary of Selected Financial Data of the Company
is that of NCC for years prior to 1995, as adjusted for subsequent poolings
of interest. The historical Five-Year Summary of Selected Financial Data
for all periods have been restated to include the results of operations of
FAB and FIRSTBANC from the earliest period presented, except for dividends
per common share. (See Note 1 to the Company's consolidated financial
statements included in this Annual Report).
(2) The weighted average common share and common equivalent shares outstanding
are those of NCC, CBS, FAB, and FIRSTBANC converted into ANB common and
common equivalents at the applicable exchange ratios.
(3) Net income per common share - diluted is calculated based upon net income
as adjusted for minority interests in earnings of consolidated subsidiaries
and cash dividends on preferred stock.
(4) Book value and tangible book value at December 31, 1994 and 1993 are
calculated on the outstanding common shares of NCC, CBS, FAB, and FIRSTBANC
converted at the exchange ratio.
(5) Net interest income divided by average earning assets.
(6) Nonperforming loans and nonperforming assets includes loans past due 90
days or more that are still accruing interest.
(7) Based upon fully phased-in requirements.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BASIS OF PRESENTATION
The following is a discussion and analysis of the consolidated financial
condition of the Company and results of operations as of the dates and for the
periods indicated. On November 30, 1997, First American Bancorp ("FAB"), a one
bank holding company headquartered in Decatur, Alabama, was merged with and into
the Company, pursuant to which each share of FAB common stock was converted into
.7199 shares of the Company's common stock for a total of 2,071,966 shares. The
FAB Merger was accounted for as a pooling of interests. On September 30, 1996,
FIRSTBANC Holding Company ("FIRSTBANC"), a one bank holding company
headquartered in Robertsdale, Alabama, was merged into the Company. The Company
acquired all of the outstanding common stock of FIRSTBANC in exchange for
305,000 shares of the Company's common stock. The FIRSTBANC merger was
accounted for as a pooling of interests. On December 29, 1995, National Commerce
Corporation ("NCC") and its wholly-owned subsidiary, Commerce Bankshares, Inc.
("CBS") a one bank holding company located in Birmingham, Alabama, was merged
with and into the Company ("the NCC Merger"). Pursuant to terms of the NCC
Merger, each share of NCC common stock was converted into 348.14 shares of ANB
common stock and each share of CBS common stock was converted into 7.0435 shares
of ANB common stock for a total of 3,106,981 shares (or 50.1%) of ANB's common
stock. The NCC Merger was accounted for as a "reverse acquisition," whereby NCC
is deemed to have acquired ANB for financial reporting purposes. However, ANB
remained as the continuing legal entity and registrant for Securities and
Exchange Commission purposes. Consistent with the reverse acquisition
accounting treatment, the historical financial statements of the Company
presented for 1995 are the consolidated financial statements of NCC, adjusted
for subsequent poolings of interest, and differ from the consolidated financial
statements of ANB as previously reported. The operations of ANB are included in
the financial statements from the date of acquisition.
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.
21
SELECTED BANK FINANCIAL DATA
The Company's success is dependent upon the financial performance of the
Banks. The Company, with input from the management of each Bank, establishes
operating goals for each Bank. The following tables summarize selected
financial information for 1997 and 1996 for each of the Banks operated by the
Company.
SELECTED BANK FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
(UNAUDITED)
DECEMBER 31, 1997
----------------------------------------------------------------------------------------
NATIONAL ALABAMA BANK CITIZENS & FIRST FIRST FIRST
BANK OF EXCHANGE OF PEOPLES AMERICAN CITIZENS GULF
COMMERCE BANK DADEVILLE BANK, N.A.(1) BANK BANK, N.A.(2) BANK (1)
----------------------------------------------------------------------------------------
Summary of Operations:
Interest income....................... $ 48,401 $ 3,976 $ 5,144 $ 1,896 $ 20,250 $ 6,842 $ 5,068
Interest expense...................... 24,998 1,089 2,205 748 8,686 3,025 2,005
Net interest income................... 23,403 2,887 2,939 1,148 11,564 3,817 3,063
Provision for loan losses............. - 10 - 76 2,811 41 50
Securities gains (losses)............. - - 4 - (15) 3 -
Noninterest income.................... 14,048 425 733 225 1,901 664 645
Noninterest expense................... 25,197 1,715 1,887 1,146 9,528 2,414 2,413
Net income............................ 8,215 1,084 1,250 126 792 1,473 808
Balance Sheet Highlights:
At Period-End:
Total assets......................... $714,725 $64,563 $62,307 $14,677 $239,931 $89,816 $92,779
Securities........................... 103,153 15,634 10,977 8,366 29,041 31,670 15,124
Loans, net of unearned
income............................... 457,605 33,111 43,028 2,734 188,473 48,936 67,426
Allowance for loan losses............ 7,398 363 494 20 3,086 715 753
Deposits............................. 456,843 59,015 51,292 10,354 196,596 78,531 82,253
Short-term debt...................... 5,880 - - - 12,500 - -
Long-term debt....................... 10,274 - 4,200 - - - -
Stockholders' equity................. 50,247 5,025 5,915 4,328 20,401 8,565 6,730
Performance Ratios:
Return on average assets.............. 1.30% 2.21% 1.98% 0.49% 0.35% 1.70% 1.26%
Return on average equity.............. 16.87 23.81 21.34 3.51 3.39 17.93 16.15
Net interest margin................... 3.95 6.35 5.07 4.97 5.51 4.80 5.35
Capital and Liquidiy Ratios:
Average equity to average assets...... 7.69 9.29 9.28 13.90 10.19 9.47 7.80
Leverage (4.00% required minimum)..... 7.41 7.48 9.16 34.69 8.50 9.27 7.36
Risk-based capital....
Tier 1 (4.00% required minimum)....... 9.12 10.09 12.70 69.88 10.15 15.27 9.24
Total (8.00% required minimum)........ 10.37 11.03 13.79 70.20 11.40 16.52 10.27
Average loans to average deposits...... 95.64 70.37 85.08 63.44 93.69 66.86 78.84
22
SELECTED BANK FINANCIAL DATA (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
(UNAUDITED)
DECEMBER 31, 1996
--------------------------------------------------------------------------------------
NATIONAL ALABAMA BANK CITIZENS & FIRST FIRST FIRST
BANK OF EXCHANGE OF PEOPLES AMERICAN CITIZENS GULF
COMMERCE BANK DADEVILLE BANK, N.A.(1) BANK BANK, N.A.(2) BANK (1)
--------------------------------------------------------------------------------------
Summary of Operations:
Interest income............................ $ 43,444 $ 3,763 $ 4,918 $ 2,667 $ 18,055 $ 7,260 $ 3,607
Interest expense........................... 21,219 959 1,998 996 7,881 3,058 1,158
Net interest income........................ 22,225 2,804 2,920 1,671 10,174 4,202 2,449
Provision for loan losses.................. (198) 103 - 30 646 238 68
Securities gains (losses).................. (42) 5 - - (51) (1) 5
Noninterest income......................... 13,415 422 767 365 1,732 916 204
Noninterest expense........................ 24,015 1,756 1,862 1,387 7,667 2,804 1,645
Net income................................. 7,923 982 1,260 394 2,402 1,599 612
Balance Sheet Highlights:
At Period-End:
Total assets.............................. $623,368 $43,868 $58,643 $34,839 $223,081 $83,999 $39,972
Securities................................ 106,722 8,633 9,119 8,579 29,248 17,779 1,867
Loans, net of unearned income............. 430,159 31,347 43,929 21,031 173,970 55,189 30,877
Allowance for loan losses................. 6,768 522 510 276 1,689 828 418
Deposits.................................. 449,083 38,923 47,266 31,085 183,827 75,304 35,745
Short-term debt........................... 19,000 - 5,000 - 12,500 - -
Long-term debt............................ 300 - - - 139 - -
Stockholders' equity...................... 46,555 4,218 5,523 3,169 22,320 7,804 4,020
Performance Ratios:
Return on average assets................... 1.42% 2.25% 2.14% 1.14% 1.16% 1.83% 1.51%
Return on average equity................... 17.46 23.31 21.72 12.15 11.56 21.32 15.27
Net interest margin........................ 4.28 6.97 5.47 5.42 5.38 5.26 6.87
Capital and Liquidiy Ratios:
Average equity to average assets........... 8.12 9.64 9.86 9.37 10.01 8.56 9.89
Leverage (4.00% required minimum).......... 8.10 9.33 9.28 9.13 10.70 9.15 9.96
Risk-based capital.........................
Tier 1 (4.00% required minimum)........... 10.47 13.17 12.24 13.87 12.53 14.50 12.32
Total (8.00% required minimum)............ 11.72 14.42 13.38 15.07 12.58 15.70 13.57
Average loans to average deposits.......... 90.14 79.37 89.10 65.07 88.63 70.79 90.88
____________
(1) In August 1997, First Bank, a subsidiary of the Company, transferred a
significant portion of its assets and liabilities to First Gulf Bank, also a
subsidiary of the Company. Concurrent with this transfer, First Bank
converted to a national bank, changed its name to Citizens & Peoples Bank,
National Association, and relocated its headquarters from Robertsdale,
Alabama to Cantonment, Florida. This is the first bank to be operated by the
Company outside of Alabama.
(2) In December 1997, First Citizens Bank, National Association ("First
Citizens"), formerly First National Bank of Ashland, a subsidiary of the
Company, was merged with Citizens Bank of Talladega, also a subsidiary of
the Company. Concurrent with the consummation of this merger, First Citizens
relocated its headquarters from Ashland, Alabama to Talladega, Alabama.
23
RESULTS OF OPERATIONS
Year ended December 31, 1997, compared with year ended December 31, 1996
The Company's net income decreased by $459,000, or 3.8%, to $11.7 million
in the year ended December 31, 1997, from $12.1 million in the year ended
December 31, 1996. Return on average assets during 1997 was 1.01%, compared
with 1.17% during 1996, and return on average equity was 12.42% during 1997,
compared with 14.48% during 1996.
Net interest income increased $2.6 million, or 5.8%, to $47.5 million in
1997 from $44.9 million in 1996, as interest income increased by $7.2 million
and interest expense increased $4.6 million. The increase in net interest
income is primarily attributable to a $75.9 million increase in average loans to
$801.4 million during 1997, from $725.5 million during 1996, as a result of
management emphasis on loan growth. The increase in interest expense is
primarily attributable to an increase in average time deposits of $65.1 million
to $425.2 million in 1997, from $360.1 million in 1996. In general, loans are
the Company's highest yielding earning asset and time deposits are one of the
Company's highest cost interest-bearing liabilities.
The Company's net interest spread and net interest margin were 3.97% and
4.53%, respectively, in 1997, decreasing by 14 and 17 basis points,
respectively, from 1996. These decreases reflect declining yield on average
loans and an increasing cost of interest-bearing liabilities, both attributable
to competition from banks and other financial institutions.
The Company recorded a provision for loan losses of $3.0 million during
1997, $2.8 million of which was recorded at FAB. The FAB provision was
primarily associated with higher loss experience in FAB's indirect automobile
lending and sub-prime mortgage lending portfolios (which lending businesses have
been discontinued). The 1997 provision of $3.0 million compares with a
provision for loan losses of $885,000 during 1996, an increase of $2.1 million,
or 237.6%. Following the 1997 provision, management believes that both loan
loss experience and asset quality indicate that the allowance for loan losses is
maintained at an adequate level. The Company's allowance for loan losses as a
percentage of period-end loans was 1.52% at December 31, 1997, compared to 1.40%
at December 31, 1996, and the allowance for loan losses as a percentage of
period-end nonperforming assets was 191.8% at December 31, 1997, compared with
303.1% at December 31, 1996. The Company experienced net charge-offs of $1.2
million in 1997 equating to a ratio of net charge-offs to average loans of
0.15%. See "-- PROVISION AND ALLOWANCE FOR LOAN LOSSES."
Noninterest income increased $537,000, or 3.1%, to $18.0 million in 1997,
compared with $17.5 million in 1996. The Company experienced increases in its
fee-based divisions (investment services, trust, and mortgage lending) of $1.1
million, or 10.5%, to $11.5 million in 1997 from $10.4 million in 1996. These
increases were offset by a charge to provide for the consolidation of FAB's data
processing facilities into the existing Company facility and by losses resulting
from abandonment of certain leasehold improvements, all which total $499,000 in
1997 compared to a net gain of $148,000 in 1996, a decrease of $647,000.
Noninterest expense increased $1.4 million, or 3.2%, to $45.5 million during
1997, compared with $44.1 million during 1996.
Income before the provision for income taxes decreased $284,000, or 1.6%,
to $17.1 million in 1997, from $17.4 million in 1996. Income before minority
interest in earnings of consolidated subsidiary and net income decreased
$461,000 and $459,000, respectively, during 1997.
Year ended December 31, 1996, compared with year ended December 31, 1995
The Company's net income increased by $5.8 million, or 93.0%, to $12.1
million in the year ended December 31, 1996, from $6.3 million in the year ended
December 31, 1995. Return on average assets during 1996 was 1.17%, compared
with 0.95% during 1995, and return on average equity was 14.48% during 1996,
compared with 13.58% during 1995.
24
Net interest income increased $18.4 million, or 69.5%, to $44.9 million in
1996 from $26.5 million in 1995, as interest income increased by $30.1 million
and interest expense increased $11.7 million. The increase in net interest
income is primarily attributable to a $275.8 million increase in average loans
to $725.5 million during 1996, from $449.8 million during 1995, as a result of
the NCC Merger and an increased management emphasis on loan growth. The
increase in interest expense is primarily attributable to an increase in average
time deposits of $127.7 million to $360.1 million in 1996, from $232.4 million
in 1995.
The Company's net interest spread and net interest margin were 4.11% and
4.70%, respectively, in 1996, increasing by 43 and 41 basis points,
respectively, from 1995. These increases reflect the increase in average loans,
relative to other earning assets.
The Company recorded a provision for loan losses of $885,000 during 1996,
compared with a provision for loan losses of $1.0 million during 1995, a decline
of $131,000, or 12.9%. The Company's allowance for loan losses as a percentage
of period-end loans was 1.40% at December 31, 1996, compared to 1.53% at
December 31, 1995, and the allowance for loan losses as a percentage of period-
end nonperforming assets was 303.1% at December 31, 1996, compared with 266.4%
at December 31, 1995. The Company experienced net charge-offs of $295,000 in
1996 equating to a ratio of net charge-offs to average loans of 0.04%. See "--
PROVISION AND ALLOWANCE FOR LOAN LOSSES."
Noninterest income increased $8.4 million, or 91.2%, to $17.5 million in
1996, compared with $9.2 million in 1995. The increase is partly attributable
to an increase in investment services income of $4.0 million, or 100.5%, to $7.9
million in 1996, compared with $3.9 million in 1995, with the remainder of the
increase being attributed to the NCC Merger. The 1996 increase in investment
services income resulted from expansion of the sales forces in mid-1995.
Noninterest expense increased $17.2 million, or 64.1%, to $44.1 million during
1996, compared with $26.8 million during 1995. Of the $17.2 million increase in
noninterest expense, approximately $4.3 million is attributable to expansion of
the investment services division of the Company, with the remaining increase
being attributed to NCC Merger.
Income before the provision for income taxes increased $9.6 million, or
122.4%, to $17.4 million in 1996, from $7.8 million in 1995. Income before
minority interest in earnings of consolidated subsidiary and net income
increased $5.2 million and $5.8 million, respectively, during 1996.
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.
25
AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
(AMOUNTS IN THOUSANDS, EXCEPT YIELDS AND RATES)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996
----------------------------------------------------------------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE
ASSETS: BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE
----------------------------------------------------------------------------------
EARNING ASSETS:
Loans (1) (3).......................... $ 801,435 $75,323 9.40% $ 725,537 $69,452 9.57% $449,783
Securities:
Taxable............................... 164,850 10,735 6.51 162,283 10,358 6.38 106,525
Tax exempt............................ 32,065 2,567 8.01 28,919 2,233 7.72 29,307
Cash balances in other banks........... 1,042 55 5.28 4,060 240 5.91 3,681
Funds sold............................. 46,176 2,594 5.62 32,684 1,621 4.96 27,586
Trading account securities............. 3,488 193 5.53 2,814 183 6.50 1,097
---------- ------- ---------- ------- --------
Total earning assets (2)........... 1,049,056 91,467 8.72 956,297 84,087 8.79 617,979
---------- ------- ---------- ------- --------
Cash and due from banks.................. 39,472 36,842 25,822
Premises and equipment................... 29,934 29,916 14,860
Other assets............................. 52,311 26,675 10,433
Allowance for loan losses................ (11,580) (10,792) (6,614)
---------- ---------- --------
Total assets...................... $1,159,193 $1,038,938 $662,480
========== ========== ========
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing transaction accounts.. $ 113,593 3,169 2.79 $ 147,133 4,744 3.22 $107,712
Savings and money market deposits...... 226,828 8,464 3.73 201,071 7,194 3.58 132,953
Time deposits.......................... 425,186 23,708 5.58 360,100 20,225 5.62 232,373
Funds purchased........................ 85,533 4,464 5.22 71,640 3,623 5.06 38,585
Other short-term borrowings............ 41,236 2,548 6.18 29,813 2,056 6.90 17,467
Long-term debt......................... 8,583 487 5.67 7,831 404 5.16 1,160
---------- ------- ---------- ------- --------
Total interest-bearing............ 900,959 42,840 4.75 817,588 38,246 4.68 530,250
liabilities...................... ---------- ------- ---- ---------- ------- ---- --------
Demand deposits.......................... 132,419 125,118 75,990
Accrued interest and other liabilities... 31,898 12,506 9,977
Stockholders' equity..................... 93,917 83,726 46,263
Total liabilities and................ ---------- ---------- --------
stockholders' equity................ $1,159,193 $1,038,938 $662,480
========== ========== ========
Net interest spread...................... 3.97% 4.11%
==== ====
Net interest income/margin on
a taxable equivalent basis............. 48,627 4.64% 45,841 4.79%
==== ====
Tax equivalent adjustment (2)............ 1,079 907
------- -------
Net interest income/margin............... $47,548 4.53% $44,934 4.70%
======= ==== ======= ====
----------------------
1995
----------------------
INCOME/ YIELD/
EXPENSE RATE
-----------------------
ASSETS:
EARNING ASSETS:
Loans (1) (3).......................... $42,706 9.49%
Securities:
Taxable............................... 7,692 7.22
Tax exempt............................ 1,401 4.78
Cash balances in other banks........... 216 5.87
Funds sold............................. 1,623 5.88
Trading account securities............. 67 6.11
-------
Total earning assets (2)........... 53,705 8.69
-------
Cash and due from banks..................
Premises and equipment...................
Other assets.............................
Allowance for loan losses................
Total assets......................
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing transaction accounts.. 3,576 3.32
Savings and money market deposits...... 5,569 4.19
Time deposits.......................... 13,840 5.96
Funds purchased........................ 2,303 5.97
Other short-term borrowings............ 1,163 6.66
Long-term debt......................... 104 8.97
-------
Total interest-bearing............ 26,555 5.01
liabilities...................... ------- ----
Demand deposits..........................
Accrued interest and other liabilities...
Stockholders' equity.....................
Total liabilities and................
stockholders' equity................
Net interest spread...................... 3.68%
====
Net interest income/margin on
a taxable equivalent basis............. 27,150 4.39%
====
Tax equivalent adjustment (2)............ 638
-------
Net interest income/margin............... $26,512 4.29%
======= ====
_________
(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 $2,744,000, $2,508,000, and $1,336,000 are included
in interest and fees on loans for 1997, 1996, and 1995, respectively.
During 1997, with little change in the overall interest rate levels from
that in 1996, the Company experienced an increase in net interest income of $2.6
million, or 5.8%, to $47.5 million, compared with $44.9 million in 1996. Net
interest income increased despite a decrease in the net interest spread of 14
basis points to 3.97% in 1997 from 4.11% in 1996, and a decrease in the net
interest margin of 17 basis points to 4.53% in 1997, compared with 4.70% in
1996. Because the relative yield on loans exceeds that of all other earnings
assets, the primary reason for the increased net interest income was a 10.5%
increase in average loan volume. The primary reason for the decrease in the net
interest spread and net interest margin was "spread-compression" resulting from,
generally, lower rates on loans, and higher rates on marginal funding sources,
such as time deposits, Federal funds purchased, and Federal Home Loan Bank
borrowings, as well as an increase in higher cost time deposits as a percentage
of total deposits, which are among the highest cost funding sources available to
the Company. During 1997, net average earning assets increased by $92.8 million,
or 9.7%, to $1,049.1 million from $956.3 million in 1996, while average loans
increased $75.9 million, or 10.5%, to $801.4 million in 1997 from $725.5 million
in 1996.
26
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 1997 and 1996. 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,
--------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
VARIANCE DUE TO VARIANCE DUE TO
--------------------------------------------------------------
VOLUME YIELD/RATE TOTAL VOLUME YIELD/RATE TOTAL
--------------------------------------------------------------
EARNING ASSETS:
Loans ...................................... $ 7,127 $ (1,256) $ 5,871 $ 26,383 $ 363 $ 26,746
Securities:
Taxable .................................. 165 212 377 3,646 (980) 2,666
Tax exempt ............................... 248 86 334 (19) 851 832
Cash balances in other banks ............... (161) (24) (185) 23 1 24
Funds sold ................................. 736 237 973 274 (276) (2)
Trading account securities ................. 40 (30) 10 112 4 116
--------- --------- -------- --------- -------- --------
Total interest income ................. 8,155 (775) 7,380 30,419 (37) 30,382
INTEREST-BEARING LIABILITIES:
Interest-bearing transaction accounts ...... (993) (582) (1,575) 1,279 (111) 1,168
Savings and money market deposits .......... 957 313 1,270 2,529 (904) 1,625
Time deposits .............................. 3,628 (145) 3,483 7,216 (831) 6,385
Funds purchased ............................ 723 118 841 1,717 (397) 1,320
Other short-term borrowings ................ 724 (232) 492 850 43 893
Long-term debt ............................. 41 42 83 361 (61) 300
--------- ---------- --------- --------- -------- ---------
Total interest expense ................ 5,080 (486) 4,594 13,952 (2,261) 11,691
--------- ---------- --------- --------- -------- ---------
Net interest income on a taxable
equivalent basis .................... $ 3,075 $ (289) 2,786 $ 16,467 $(2,224) 18,691
========= ========== ========= =======
Taxable equivalent adjustment .............. (172) (269)
========= =========
Net interest income ........................ $ 2,614 $ 18,422
========= =========
INTEREST SENSITIVITY AND MARKET RISK
Interest Sensitivity
The Company monitors and manages the pricing and maturity of its assets and
liabilities in order to diminish the potential adverse impact that changes in
interest rates could have on net interest income. The principal monitoring
technique employed by the Company is the measurement of the interest sensitivity
"gap," which is the positive or negative dollar difference between assets and
liabilities that are subject to interest rate repricing within a given period of
time. Interest rate sensitivity can be managed by repricing assets and
liabilities, selling securities available for sale, replacing an asset or
liability at maturity or by adjusting the interest rate during the life of an
asset or liability.
27
The Company evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation and repricing, and sources and prices of
off-balance sheet commitments in order to decrease interest sensitivity risk.
The Company uses computer simulations to measure the net income effect of
various interest rate scenarios. The modeling reflects interest rate changes
and the related impact on net income over specified periods of time.
The following table illustrates the Company's interest rate sensitivity at
December 31, 1997, 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, 1997
--------------------------------------------------------------------------------
AFTER ONE AFTER THREE
THROUGH THROUGH
WITHIN ONE THREE TWELVE WTIHIN ONE GREATER THAN
MONTH MONTHS MONTHS YEAR ONE YEAR TOTAL
------------ ------------ ------------- ------------- -------------- -----------
ASSETS:
Earning assets:
Loans (1) ................................ $ 391,277 $ 45,285 $ 117,211 $ 553,773 $ 284,844 $ 838,617
Securities (2) ........................... 14,051 7,926 31,213 53,190 155,145 208,335
Interest-bearing deposits in
other banks ............................ 2,391 - - 2,391 - 2,391
Funds sold ............................... 50,009 - - 50,009 - 50,009
----------- ---------- ----------- ----------- ----------- -----------
Total interest-earning assets ....... $ 457,728 $ 53,211 $ 148,424 $ 659,363 $ 439,989 $ 1,099,352
LIABILITIES:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits ...................... $ - $ - $ 121,884 $ 121,884 $ - $ 121,884
Savings and money market deposits .... 240,581 - - 240,581 - 240,581
Time deposits (3) .................... 84,785 80,038 112,751 277,574 142,925 420,499
Funds purchased .......................... 139,118 - - 139,118 - 139,118
Short-term borrowings (4) ................ 34,512 - - 34,512 - 34,512
Long-term debt ........................... 14,202 4 18 14,224 363 14,587
----------- ---------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities ... $ 513,198 $ 80,042 $ 234,653 $ 827,893 $ 143,288 $ 971,181
----------- ---------- ----------- ----------- ----------- -----------
Period gap ................................... $ (55,470) $ (26,831) $ (86,229) $ (168,530) $ 296,701
=========== ========== =========== =========== ===========
Cumulative gap ............................... $ (55,470) $ (82,301) $ (168,530) $ (168,530) $ 128,171 $ 128,171
=========== ========== =========== =========== =========== ===========
Ratio of cumulative gap to total
earning assets ............................... (5.05)% (7.49)% (15.33)% (15.33)% 11.66%
______________________
(1) Excludes nonaccrual loans of $4,174,000.
(2) Excludes investment equity securities of $5,677,000.
(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 $6,762,000.
28
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. The analysis presents only a static view of the
timing and repricing opportunities, without taking into consideration that
changes in interest rates do not affect all assets and liabilities equally. For
example, rates paid on a substantial portion of core deposits may change
contractually within a relatively short time frame, but those are viewed by
management as significantly less interest sensitive than market-based rates such
as those paid on non-core deposits. Accordingly, management believes that a
liability-sensitive gap position is not as indicative of the Company's true
interest sensitivity as it would be for an organization which depends to a
greater extent on purchased funds to support earning assets. Net interest
income may be impacted by other significant factors in a given interest rate
environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.
Market Risk
The Company's earnings are dependent on its net interest income which is
the difference between interest income earned on all earning assets, primarily
loans and securities, and interest paid on all interest bearing liabilities,
primarily deposits. Market risk is the risk of loss from adverse changes in
market prices and rates. The Company's market risk arises primarily from
inherent interest rate risk in its lending, investing and deposit gathering
activities. The Company seeks to reduce its exposure to market risk through
actively monitoring and managing its interest rate risk. Management relies upon
static "gap" analysis to determine the degree of mismatch in the maturity and
repricing distribution of interest earning assets and interest bearing
liabilities which quantifies, to a large extent, the degree of market risk
inherent in the Company's balance sheet. Gap analysis is further augmented by
simulation analysis to evaluate the impact of varying levels of prevailing
interest rates and the sensitivity of specific earning assets and interest
bearing liabilities to changes in those prevailing rates. Simulation analysis
consists of evaluating the impact on net interest income given cha