Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, 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
----------------
ALABAMA NATIONAL BANCORPORATION
(Exact name of registrant as specified in its charter)
Delaware 63-1114426
(State of incorporation (I.R.S. Employer
or organization) Identification No.)
1927 First Avenue North, Birmingham, AL 35203-4009
(Address of principal executive offices) (Zip Code)
----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
----------------
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. [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
registrant at March 10, 1999 was $219,134,027.
As of March 10, 1999, the registrant had outstanding 10,971,686 shares of
its common stock.
DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:
(i) The definitive Proxy Statement for the 1999 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.
-------- --------
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS................... 2
PART I
1. Business.................................................. 3
Executive Officers........................................ 10
2. Properties................................................ 10
3. Legal Proceedings......................................... 11
4. Submission of Matters to a Vote of Security Holders....... 11
PART II
5. Market for Registrant's Common Equity and Related 12
Stockholder Matters......................................
6. Selected Financial Data................................... 13
7. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations......................
7A. Quantitative and Qualitative Disclosure About Market 44
Risk.....................................................
8. Financial Statements and Supplementary Data............... 44
9. Changes in and Disagreements with Accountants on 45
Accounting and Financial Disclosure......................
PART III
10. Directors and Executive Officers of the Registrant........ 45*
11. Compensation of Executive Officers and Directors.......... 45*
12. Security Ownership of Certain Beneficial Owners and 45*
Management...............................................
13. Certain Relationships and Related Transactions............ 45*
PART IV
14. Exhibits, Financial Statement Schedules and Reports on 46
Form 8-K.................................................
SIGNATURES.......................................................... 47
- --------
* Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on April 22, 1999 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, collectibility of
loans and the profitability of business entities;
(2) Possible changes in monetary and fiscal policies, laws and
regulations, and other activities of governments, agencies and similar
organizations;
(3) The effects of easing of restrictions on participants in the
financial services industry, such as banks, securities brokers and dealers,
investment companies and finance companies, and 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;
(5) The timely resolution of any Year 2000 issues by ANB and its
customers and vendors; and
(6) 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 four
national banks, National Bank of Commerce of Birmingham ("NBC") (Birmingham,
Alabama and the Birmingham metropolitan area), Citizens & Peoples Bank,
National Association (Escambia County, Florida), First Citizens Bank, National
Association (Talladega, Alabama), and Community Bank of Naples, National
Association (Naples, Florida); three state member banks, Alabama Exchange Bank
(Tuskegee, Alabama), Bank of Dadeville (Dadeville, Alabama) and First Gulf
Bank (Baldwin County, Alabama); and three state nonmember banks, First
American Bank (Decatur, Alabama), Public Bank (St. Cloud, Florida), and
Georgia State Bank (Mableton, Georgia) (collectively the "Banks"). In
addition, ANB is currently the ultimate parent of one securities brokerage
firm, NBC Securities, Inc. (Birmingham, Alabama); one receivables factoring
company, Corporate Billing, Inc. (Decatur, Alabama); and one insurance agency,
Ashland Insurance, Inc. (Ashland, Alabama).
Recent Developments
Community Financial Corporation Merger
Effective October 2, 1998, Community Financial Corporation ("CFC"), a
Georgia bank holding company headquartered in Mableton, Georgia, with
approximately $139 million in total assets as of September 30, 1998, merged
with and into ANB (the "CFC Merger") pursuant to that certain Agreement and
Plan of Merger dated as of June 8, 1998 (the "CFC Merger Agreement"). Pursuant
to the CFC Merger, (i) the stockholders of CFC became stockholders of ANB, and
(ii) ANB became the parent stockholder of CFC's bank subsidiary, Georgia State
Bank, a Georgia state banking corporation. The CFC Merger was accounted for as
a pooling of interests.
The CFC Merger Agreement generally provided, among other things, for the
merger of CFC with and into ANB, pursuant to which each of the 3,059,194
outstanding shares of CFC common stock were converted into the right to
receive 0.351807 shares of ANB common stock, for a total of 1,076,032 shares
of ANB common stock (excluding fractional shares) issued to former CFC
shareholders. In addition, the options held to purchase shares of CFC common
stock were converted into the right to purchase 0.351807 shares of ANB common
stock for each share of CFC common stock subject to option. As part of the CFC
Merger, W. Ray Barnes, formerly a CFC board member, was appointed to serve as
a member of the Board of Directors of ANB.
Community Bank of Naples, National Association Merger
Effective December 31, 1998, Community Bank of Naples, National Association
("CBN"), a national bank with approximately $92.6 million in total assets as
of December 31, 1998, merged with and into a banking subsidiary of ANB (the
"CBN Merger") pursuant to that certain Agreement and Plan of Merger dated as
of September 21, 1998 (the "CBN Merger Agreement"). Immediately following the
CBN Merger, the former assets and liabilities of CBN were transferred to
Community Bank of Naples, N.A., a newly formed national bank subsidiary of ANB
in Naples, Florida. The CBN Merger was accounted for as a pooling of
interests.
The CBN Merger Agreement generally provided, among other things, for the
merger of CBN with and into a banking subsidiary of ANB, pursuant to which
each of the 1,000,000 outstanding shares of CBN common stock were converted
into the right to receive 0.53271 shares of ANB common stock, for a total of
532,608 shares of ANB common stock (excluding fractional shares) issued to
former CBN shareholders. In addition, the options held to purchase shares of
CBN common stock were converted into the right to purchase 0.53271 shares of
ANB common stock for each share of CBN common stock subject to option.
3
Subsidiary Banks
ANB operates through ten subsidiary Banks which have a total of 43 banking
offices in the states of Alabama, Georgia and Florida. 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 and securities
brokerage services. In addition, the Banks offer individual retirement and
KEOGH accounts, safe deposit and night depository facilities and additional
services such as the sale of traveler's checks, money orders and cashier's
checks.
Lending Activities
General
Through the Banks, ANB offers a range of lending services, including real
estate, consumer and commercial loans, to individuals and small businesses and
other organizations that are located in or conduct a substantial portion of
their business in the Banks' market areas. ANB's total loans, net of unearned
interest, at December 31, 1998, were approximately $1.11 billion, or
approximately 74.1% of total earning assets. The interest rates charged on
loans vary with the degree of risk, maturity and amount of the loan and are
further subject to competitive pressures, money market rates, availability of
funds and government regulations. ANB has no foreign loans or loans for
"highly leveraged transactions," as such terms are defined by applicable
banking regulations.
Loan Portfolio
Real Estate Loans. Loans secured by real estate are the primary component of
ANB's loan portfolio, constituting approximately $678.4 million, or 61.3% of
total loans, net of unearned interest, at December 31, 1998. The Banks' real
estate loan portfolio is comprised of commercial and residential mortgages.
Residential mortgages held in the Banks' loan portfolio, both fixed and
variable, are made based upon amortization schedules of up to 30 years but
generally have maturity dates of five years or less. The 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. These loans usually have terms of five years, with
payments through the date of maturity generally based on a 15 or 30 year
amortization schedule.
The Banks originate residential loans for sale into the secondary market.
Such loans are made in accordance with underwriting standards set by the
purchaser of the loan, normally as to loan-to-value ratio, interest rate and
documentation. Such loans are generally made under a commitment to purchase
from a loan purchaser. The Banks generally collect from the borrower or
purchaser a combination of the origination fee, discount points and/or service
release fee. During 1998, the Banks sold approximately $276 million in loans
to such purchasers.
The Banks' nonresidential mortgage loans include commercial, industrial and
unimproved real estate loans. The Banks generally require nonresidential
mortgage loans to have an 80% loan-to-value ratio and usually underwrite their
commercial loans on the basis of the borrower's cash flow and ability to
service the debt from earnings, rather than on the basis of the value of the
collateral. Terms on construction loans are usually less than twelve months,
and the Banks typically require real estate mortgages and personal guarantees
supported by financial statements and a review of the guarantor's personal
finances.
Consumer Loans. Consumer lending includes installment lending to individuals
in the Banks' market areas and generally consists of loans to purchase
automobiles and other consumer durable goods. Consumer loans constituted $77.2
million, or 7.0% of ANB's loan portfolio at December 31, 1998. Consumer loans
are underwritten based on the borrower's income, current debt level, past
credit history and collateral. Consumer
4
rates are both variable and fixed, with terms negotiable. Terms generally
range from one to five years depending on the nature and condition of the
collateral. Periodic amortization, generally monthly, is required.
Commercial and Financial Loans. The Banks make loans for commercial purposes
in various lines of business. These loans are typically made on terms up to
five years at fixed or variable rates. The loans are secured by various types
of collateral including accounts receivable, inventory or, in the case of
equipment loans, the financed equipment. The Banks attempt to reduce their
credit risk on commercial loans by underwriting the loan based on the
borrower's cash flow and its ability to service the debt from earnings, and by
limiting the loan to value ratio. Historically, the Banks have loaned up to
80% on loans secured by accounts receivable, up to 65% on loans secured by
inventory, and up to 80% on loans secured by equipment. The Banks also make
some unsecured commercial loans. Commercial and financial loans constituted
$257.4 million, or 23.3% of ANB's loan portfolio at December 31, 1998.
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. During 1998, ANB established a standarized
loan policy for all of the Banks that may be modified based on local market
conditions. In particular, on larger credits, ANB generally relies on the cash
flow of a debtor as the source of repayment and secondarily on the value of
the underlying collateral. In addition, ANB attempts to utilize shorter loan
terms in order to reduce the risk of a decline in the value of such
collateral.
ANB addresses repayment risks by adhering to internal credit policies and
procedures 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
loan and the borrower's credit relationship with such Bank. Each of the
lending officers at each of the Banks has the authority to approve loans up to
an approved loan authority amount as approved by each Bank's Board of
Directors. Loans in excess of the highest loan authority amount at each Bank
must be approved by the ANB Executive Vice President in charge of credit
administration. In addition, loans in excess of a particular loan officer's
approval authority must be approved by a more senior officer at the particular
Bank, the loan committee at such Bank, or both.
Loan Review. ANB maintains a continuous loan review system for each of NBC
and First American Bank and a scheduled review system for the other Banks.
Under this system, each loan officer is directly responsible for monitoring
the risk in his portfolio and is required to maintain risk ratings for each
credit assigned. The risk rating system incorporates the basic regulatory
rating system as set forth in the applicable regulatory asset quality
examination procedures.
ANB's Loan Review Department ("LRD"), which is wholly independent of the
lending function, serves as a validation of each loan officer's risk
monitoring and rating system. LRD's primary function is to provide the Board
of Directors of each Bank with a thorough understanding of the credit quality
of such Bank's loan portfolio. Other review requirements are in place to
provide management with early warning systems for problem credits as well as
compliance with stated lending policies. LRD's findings are reported, along
with an asset quality review, to the ANB Board of Directors at each bi-monthly
meeting.
5
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
relied upon brokered certificates of deposit as a funding source.
Deposit rates are reviewed weekly by senior management of each of the Banks.
Management believes that the rates the Banks offer are competitive with those
offered by other institutions in the Banks' market areas. ANB focuses on
customer service to attract and retain deposits.
Investment Services
NBC operates an investment department devoted primarily to handling
correspondent banks' investment needs. Services provided by the investment
department include sales of securities, asset/liability consulting,
safekeeping and bond accounting. NBC also has a wholly owned subsidiary, NBC
Securities, Inc. ("NBC Securities"), that is licensed as a broker-dealer. NBC
Securities provides investment services to individuals and institutions. These
services include the sale of stocks, corporate bonds, mutual funds, annuities,
other insurance products and financial planning.
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, Georgia, Florida 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 proposed Financial Services Competition Act of
1999, which recently passed the U.S. House of Representatives, would allow
banks to enter certain businesses previously prohibited or highly regulated
for banking enterprises. See "Supervision and Regulation." ANB cannot predict
the impact on competition that would occur upon the passage of this proposed
legislation.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"IBBEA") authorized bank holding companies to acquire banks and other bank
holding companies without geographic limitations beginning September 30, 1995.
The arrival of interstate banking is expected to increase further the
competitiveness of the banking industry.
In addition, beginning on June 1, 1997, the IBBEA authorized interstate
mergers and consolidations of existing banks, provided that neither bank's
home state had opted out of interstate branching by May 31, 1997. The States
of Alabama, Georgia and Florida have each 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.
6
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, Georgia, Florida and
the southeast region. Some of ANB's competitors still maintain substantially
greater resources and lending limits than ANB. As a result, ANB has not
generally attempted to compete for the banking relationships of large
corporations, and generally concentrates its efforts on small to medium-sized
businesses and individuals to which ANB believes it can compete effectively by
offering quality, personal service. However, management believes it may be
able to compete more effectively for the business of some large corporations,
given its current growth pattern.
Management believes that the Banks' commitment to their respective primary
market areas, as well as their commitment to quality and personalized banking
services, are factors that contribute to the Banks' competitiveness.
Management believes that ANB's decentralized community banking strategy
positions the Banks to compete successfully in their market areas.
Market Areas and Growth Strategy
Through NBC, ANB serves the 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, Alabama, which has
demonstrated a growing economic base in recent years. Through First Gulf Bank,
ANB serves Baldwin County, Alabama. Located between Mobile, Alabama and
Pensacola, Florida, Baldwin County has a broad base of economic activity in
the retail and service, agriculture, seafood, tourism and manufacturing
industries. Shelby, Baldwin and St. Clair Counties have been named in
statistical surveys as three of the fastest growing counties in Alabama. In
1997, ANB expanded outside of Alabama with the opening of Citizens & Peoples
Bank, N.A. in Escambia County, Florida. In 1998, ANB further expanded its
presence in markets outside of Alabama with two acquisitions in Florida and
one in Georgia. Public Bank is located in the fast-growing Kissimmee-St. Cloud
area of central Florida. Community Bank of Naples, N.A., located in Collier
County, Florida and Georgia State Bank, located in Cobb County and Paulding
County, Georgia, are located in markets that are among the fastest growing in
their respective states. The other Banks, First Citizens, Alabama Exchange
Bank and Bank of Dadeville, are located in non-metropolitan areas. ANB's
strategy is to focus on growth in profitability for these non-metropolitan
banks, since market growth has not been as significant.
Due to continuing consolidation within the banking industry, as well as in
the Southeastern United States, ANB may in the future seek to combine with
other banks or thrifts (or their holding companies) that may be of smaller,
equal or greater size than ANB. ANB currently intends to concentrate on
acquisitions of additional banks or thrifts (or their holding companies) which
operate in attractive market areas in Alabama, Florida and Georgia. In
addition to price and terms, the factors considered by ANB in determining the
desirability of a business acquisition or combination are financial condition,
earnings potential, quality of management, market area and competitive
environment.
In addition to expansion through combinations with other banks or thrifts,
ANB intends to continue to expand where possible through growth of its
existing banks in their respective market areas. During 1998, NBC formed a
commercial leasing division which currently focuses on machinery and equipment
leases to business customers. Also, ANB is exploring expansion into lines of
business closely related to banking and will pursue such expansion if it
believes such lines could be profitable without causing undue risk to ANB.
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, 1998, ANB and the Banks together had approximately 721
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.
7
Supervision and Regulation
ANB and the Banks are subject to state and federal banking laws and
regulations which impose specific requirements and restrictions on, and
provide for general regulatory oversight with respect to, virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not stockholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in applicable laws or regulations may have a material effect on the business
and prospects of ANB. Beginning with the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and
following in 1991 with the Federal Deposit Insurance Corporation Act
("FDICIA"), numerous additional regulatory requirements have been placed on
the banking industry in the past ten years, and additional changes have been
proposed. The operations of ANB and the Banks may be affected by legislative
changes and the policies of various regulatory authorities. ANB is unable to
predict the nature or the extent of the effect on its business and earnings
that fiscal or monetary policies, economic control, or new federal or state
legislation may have in the future.
As a bank holding company, ANB is subject to the regulation and supervision
of the Federal Reserve. The Banks are subject to supervision and regulation by
applicable state and federal banking agencies, including the Federal Reserve,
the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit
Insurance Corporation (the "FDIC") and applicable state banking departments.
The Banks are also subject to various requirements and restrictions under
federal and state law, including requirements to maintain allowances against
deposits, restrictions on the types and amounts of loans that may be granted
and the interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the Banks.
In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the Federal Reserve as it attempts to control
the money supply and credit availability in order to influence the economy.
Pursuant to the IBBEA, bank holding companies from any state may now acquire
banks located in any other state, subject to certain conditions, including
concentration limits. As of June 1, 1997, a bank may establish branches across
state lines by merging with a bank in another state (unless applicable state
law prohibits such interstate mergers), provided certain conditions are met. A
bank may also establish a de novo branch in a state in which the bank does not
maintain a branch if that state expressly permits such interstate de novo
branching and certain other conditions are met.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in
the event the depository institution becomes in danger of default or is in
default. For example, under a policy of the Federal Reserve with respect to
bank holding company operations, a bank holding company is required to serve
as a source of financial strength to its subsidiary depository institutions
and commit resources to support such institutions in circumstances where it
might not do so absent such policy. In addition, the "cross-guarantee"
provisions of federal law require insured depository institutions under common
control to reimburse the FDIC for any loss suffered or reasonably anticipated
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly
controlled insured depository institution in danger of default.
The federal banking agencies have broad powers under current federal law to
take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized" as such terms are defined under regulations issued by each
of the federal banking agencies. In general, the agencies measure capital
adequacy within a framework that makes capital requirements sensitive to the
risk profiles of individual banking companies. The guidelines define capital
as either Tier 1 (primarily common shareholders' equity) or Tier 2 (certain
debt instruments and a portion of the allowance for loan losses). ANB and the
Banks are subject to a minimum Tier 1 capital ratio (Tier 1 capital to
8
risk-weighted assets) of 4%, total capital ratio (Tier 1 plus Tier 2 to risk-
weighted assets) of 8% and Tier 1 leverage ratio (Tier 1 to average quarterly
assets) of 3%. To be considered a "well capitalized" institution, the Tier 1
capital ratio, the total capital ratio, and the Tier 1 leverage ratio must
equal or exceed 6%, 10% and 5%, respectively.
The Banks are subject to the provisions of Section 23A of the Federal
Reserve Act, which place limits on the amount of loans or extensions of credit
to, investments in or certain other transactions with affiliates, and on the
amount of advances to third parties collateralized by the securities or
obligations of affiliates. In general, the Banks' "affiliates" are ANB and
ANB's non-bank subsidiaries.
The Banks are also subject to the provisions of Section 23B of the Federal
Reserve Act that, among other things, prohibit a bank from engaging in certain
transactions with affiliates unless the transactions are on terms
substantially the same, or at least as favorable to the bank, as those
prevailing at the time for comparable transactions with non-affiliated
companies.
The Banks are also subject to certain restrictions on extensions of credit
to executive officers, directors, certain principal stockholders and their
related interests. Such extensions of credit (i) must be made on substantially
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with third parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable
features.
The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the Federal Reserve, the FDIC or the OCC shall evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those institutions. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community, consistent with the
CRA. These factors are considered in evaluating mergers, acquisitions and
applications to open a branch or facility. The CRA also requires all
institutions to make public disclosure of their CRA ratings. Each of the Banks
received outstanding or satisfactory ratings in its most recent evaluation.
There are various legal and regulatory limits on the extent to which the
Banks may pay dividends or otherwise supply funds to ANB. In addition, federal
and state regulatory agencies also have the authority to prevent a bank or
bank holding company from paying a dividend or engaging in any other activity
that, in the opinion of the agency, would constitute an unsafe or unsound
practice.
FDIC regulations require that management report on its responsibility for
preparing its institution's financial statements and for establishing and
maintaining an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning
safety and soundness.
There have been a number of legislative and regulatory proposals that would
have an impact on the operation of bank holding companies and their banks. It
is impossible to predict whether or in what form these proposals may be
adopted in the future and, if adopted, what their effect will be on ANB and
the Banks. For example, on May 13, 1998, the U.S. House of Representatives
passed H.R. 10, the "Financial Services Competition Act of 1998," which calls
for a sweeping modernization of the banking system that would permit
affiliations between commercial banks, securities firms, insurance companies
and, subject to certain limitations, other commercial enterprises. The stated
purposes of H.R. 10 are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition. H.R. 10 removes many of the statutory restrictions
contained in current laws regulating the financial services industry and calls
for a new regulatory framework of financial institutions and their holding
companies. Although H.R. 10 failed to reach the voting stage in the U.S.
Senate before the adjournment of the 105th Congress in 1998, H.R. 10 was
reintroduced in the House of Representatives on January 6, 1999, and is
currently under consideration. At this time, it is unknown whether H.R. 10
will be enacted into law, or if enacted, what form the
9
final version of such legislation might take and how such legislation may
affect ANB's business and operations. One consequence may be increased
competition from large financial services companies that, under the bill,
would be permitted to provide many types of financial services to customers.
NBC Securities is a broker-dealer registered with the Securities and
Exchange Commission and is a member of the National Association of Securities
Dealers, Inc.
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 47--Chairman and Chief Executive Officer. Mr.
Holcomb has served as Chairman and Chief Executive Officer of ANB since April,
1996. Prior to such date, Mr. Holcomb served as President and Chief Operating
Officer of ANB beginning December, 1995. Mr. Holcomb has been President and
Chief Executive Officer of NBC since 1990.
Victor E. Nichol, Jr.--Age 52--President and Chief Operating Officer. Mr.
Nichol has served as President and Chief Operating Officer of ANB since April
1996. Prior to such date, Mr. Nichol served as Executive Vice President of ANB
beginning December 1995. Mr. Nichol has been Executive Vice President of NBC
since 1994.
Dan M. David--Age 53--Vice Chairman. Mr. David has served as Vice Chairman
of ANB since November 30, 1997 when FAB merged with and into ANB. Mr. David
serves as Chairman of First American Bank, a position he has held since 1995.
Mr. David served as Chairman and Chief Executive Officer of FAB from 1995
through 1997, as Vice Chairman and Chief Executive Officer during 1994 and
1995 and as President and Chief Executive Officer from 1986 through 1994.
John R. Bragg--Age 37--Executive Vice President. Mr. Bragg has served as
Executive Vice President of ANB since April 1998 and Executive Vice President
of NBC since 1997. Mr. Bragg served as Senior Vice President of NBC from 1992
until 1997.
Richard Murray, IV--Age 37--Executive Vice President. Mr. Murray has served
as Executive Vice President of ANB since April 1998 and Executive Vice
President of NBC since 1997. Mr. Murray served as Senior Vice President of NBC
from 1990 until 1997.
William G. Sanders, Jr.--Age 35--Executive Vice President. Mr. Sanders has
served as Executive Vice President of ANB since April 1998 and Executive Vice
President of NBC since 1997. Mr. Sanders served as Senior Vice President of
NBC from 1993 until 1997.
William E. Matthews, V--Age 34--Executive Vice President and Chief Financial
Officer. Mr. Matthews has served as Executive Vice President and Chief
Financial Officer of ANB and NBC since April 1998. Prior to that date, Mr.
Matthews served as Senior Vice President of NBC beginning in 1996, and Vice
President of NBC from 1992 through 1996.
ITEM 2. PROPERTIES
ANB currently operates 43 banking offices. Of the 43 banking offices, ANB,
through the Banks, owns 34 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 on Form 10-K for additional information
regarding ANB's premises and equipment.
10
ITEM 3. LEGAL PROCEEDINGS
ANB, in the normal course of business, is subject to various pending and
threatened litigation. Although it is not possible to determine at this point
in time, based on consultation with legal counsel, management does not
anticipate that the ultimate liability, if any, resulting from such litigation
will have a material effect on ANB's financial condition and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE FOR SECURITY-HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At March 10, 1999, ANB had 1,591 stockholders of record (including shares
held in "street" names by nominees who are record holders) and 10,971,686
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 1997 and 1998 are shown below:
Dividends
High Low Declared
------- ------- ---------
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
1998
First Quarter...................................... 33 3/4 25 3/4 .15
Second Quarter..................................... 37 5/8 31 1/2 .15
Third Quarter...................................... 39 1/2 24 7/8 .15
Fourth Quarter..................................... 28 24 1/8 .15
The last reported sales price of Common Stock as reported on The Nasdaq/NMS
on March 10, 1999 was $24.50. The prices shown do not reflect retail mark-ups
and mark-downs. All share prices have been rounded to the nearest 1/64 of one
dollar. The market makers for ANB Common Stock as of December 31, 1998, were
J. C. Bradford & Co., Raymond James & Associates, Inc., Legg Mason Wood Walker
Inc., The Robinson Humphrey Company, LLC, ABN AMRO Securities (USA), Inc., and
Troster Singer Corporation.
ANB expects to continue its policy of paying quarterly cash dividends
although there is no assurance that such dividends will continue to be paid in
the future. The payment of dividends in the future is dependent on future
income of the Banks, financial position, capital requirements and other
considerations. In addition, the payment of dividends is subject to the
regulatory restrictions described in Item 1 of this Form 10-K under
"Supervision and Regulation."
12
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,
--------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
---------- ---------- ---------- ---------- --------
Income Statement Data:
Interest income......... $ 115,704 $ 104,508 $ 93,178 $ 62,090 $ 48,337
Interest expense........ 56,555 48,379 42,174 30,079 19,812
---------- ---------- ---------- ---------- --------
Net interest income..... 59,149 56,129 51,004 32,011 28,525
Provision for loan
losses................. 1,796 3,421 1,035 1,171 1,770
---------- ---------- ---------- ---------- --------
Net interest income
after provision for
loan losses............ 57,353 52,708 49,969 30,840 26,755
Net securities gains
(losses)............... 174 (2) (84) 21 (52)
Noninterest income...... 29,176 20,296 19,214 10,749 7,328
Noninterest expense..... 61,154 52,788 50,175 32,141 24,671
---------- ---------- ---------- ---------- --------
Income before income
taxes.................. 25,549 20,214 18,924 9,469 9,360
Provision for income
taxes.................. 8,154 6,086 5,279 951 736
---------- ---------- ---------- ---------- --------
Income before minority
interest in earnings of
consolidated
subsidiary............. 17,395 14,128 13,645 8,518 8,624
Minority interest in
earnings of
consolidated
subsidiary............. 23 12 14 650 750
---------- ---------- ---------- ---------- --------
Net income.............. $ 17,372 $ 14,116 $ 13,631 $ 7,868 $ 7,874
========== ========== ========== ========== ========
Balance Sheet Data:
Total assets............ $1,672,049 $1,495,814 $1,260,635 $1,142,064 $714,356
Earning assets.......... 1,493,122 1,313,097 1,149,038 1,035,396 656,936
Securities.............. 329,747 265,501 225,737 231,482 160,132
Loans................... 1,106,074 966,370 868,307 745,961 482,639
Allowance for loan
losses................. 16,540 14,844 12,633 11,621 7,597
Deposits................ 1,275,175 1,125,479 988,876 945,544 604,111
Short-term debt......... 21,700 29,087 42,205 21,280 12,717
Long-term debt.......... 32,328 16,587 12,939 1,089 2,132
Stockholders' equity.... 130,993 116,888 105,204 88,230 51,738
Weighted Average Shares
Outstanding--
Diluted(2)............. 11,173 10,999 10,490 6,429 5,870
Per Common Share Data:
Net income--diluted(3).. $ 1.55 $ 1.28 $ 1.30 $ 1.09 $ 1.22
Book value (period
end)(4)................ 11.94 11.02 10.43 9.04 6.92
Tangible book value
(period end)(4)........ 11.19 10.20 9.66 8.24 6.51
Dividends declared...... 0.60 0.46 0.28 -- --
Performance Ratios:
Return on average
assets................. 1.10% 1.05% 1.17% 1.02% 1.18%
Return on average
equity................. 13.81 12.73 14.22 14.30 17.59
Net interest margin(5).. 4.24 4.62 4.75 4.44 4.66
Net interest margin
(taxable
equivalent)(5)......... 4.31 4.71 4.83 4.53 4.79
Asset Quality Ratios:
Allowance for loan
losses to period end
loans.................. 1.50% 1.54% 1.45% 1.56% 1.57%
Allowance for loan
losses to period end
nonperforming
loans(6)............... 340.61 281.14 377.22 396.61 406.91
Net charge-offs to
average loans.......... 0.01 0.13 0.00 0.05 0.64
Nonperforming assets to
period end loans and
foreclosed
property(6)............ 0.55 0.73 0.48 0.63 0.57
Capital and Liquidity
Ratios:
Average equity to
average assets......... 7.95% 8.27% 8.21% 7.11% 6.68%
Leverage (4.00% required
minimum)(7)............ 7.41 7.75 8.64 10.33 8.26
Risk-based capital
Tier 1 (4.00% required
minimum)(7)........... 10.03 9.89 10.91 10.83 11.36
Total (8.00% required
minimum)(7)........... 11.28 11.14 12.16 12.08 12.61
Average loans to average
deposits............... 83.02 85.44 84.08 78.81 77.65
13
- --------
(1) On December 31, 1998, Community Bank of Naples, N.A. ("Naples") merged
with and into a subsidiary of ANB ("the Naples Merger"). Pursuant to the
terms of the Naples Merger, each share of Naples common stock was
converted into 0.53271 shares of the Company's common stock. On October 2,
1998, Community Financial Corporation ("CFC") merged with and into the
Company ("the CFC Merger"). Pursuant to the terms of the CFC Merger, each
share of CFC common stock was converted into 0.351807 shares of the
Company's common stock. On May 29, 1998, Public Bank Corporation ("PBC")
merged with and into the Company ("the PBC Merger"). Pursuant to the terms
of the PBC Merger, each share of PBC common stock was converted into
0.2353134 shares of the Company's common stock. On November 30, 1997,
First American Bancorporation ("FAB") merged with and into the Company
("the FAB Merger"). Pursuant to the terms of the FAB Merger, each share of
FAB common stock was converted into 0.7199 shares of the Company's common
stock. On September 30, 1996, FIRSTBANC Holding Company, Inc.
("FIRSTBANC") was merged with and into the Company, with each share of
common stock of FIRSTBANC being converted into 7.12917 shares of the
Company's common stock. Each of the aforementioned mergers was accounted
for as pooling of interests. On December 29, 1995, National Commerce
Corporation ("NCC") and Commerce Bankshares, Inc. ("CBS") merged with and
into the Company ("the NCC Merger"). Pursuant to the terms of the NCC
Merger, each share of NCC common stock was converted into 348.14 shares of
the Company's common stock and each share of CBS common stock was
converted into 7.0435 shares of the Company's common stock for a total of
3,106,981 shares (or 50.1%) of the then outstanding Company common stock.
The NCC Merger was accounted for as a "reverse acquisition," whereby NCC
is deemed to have acquired ANB for financial reporting purposes. However,
ANB remained as the continuing legal entity and registrant for Securities
and Exchange Commission filing purposes. Consistent with the reverse
acquisition accounting treatment, the historical income statement
information included in the Five-Year Summary of Selected Financial Data
of the Company is that of NCC for 1995 and 1994. The balance sheet
information included in the historical Five-Year Summary of Selected
Financial Data of the Company is that of NCC for 1994, 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 Naples, CFC, PBC, 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, Naples, CFC, PBC, 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 cash dividends on preferred stock.
(4) Book value and tangible book value at December 31, 1994 are calculated on
the outstanding common shares of NCC, CBS, Naples, CFC, PBC, 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.
14
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 December 31, 1998, Community Bank of Naples, National
Association ("Naples'), a bank headquartered in Naples, Florida, was merged
with and into the Company, pursuant to which each share of Naples common stock
was converted into 0.53271 shares of the Company's common stock for a total of
532,608 shares. On October 2, 1998, Community Financial Corporation ("CFC'), a
one bank holding company headquartered in Mabelton, Georgia, was merged with
and into the Company, pursuant to which each share of CFC common stock was
converted into 0.351807 shares of the Company's common stock for a total of
1,076,032 shares. On May 29, 1998, Public Bank Corporation ("PBC'), a one bank
holding company headquartered in St. Cloud, Florida, was merged with and into
the Company, pursuant to which each share of PBC common stock was converted
into 0.2353134 shares of the Company's common stock for a total of 549,913
shares. The historical consolidated financial statements of the Company
reflect adjustments for 1998 mergers accounted for as poolings of interests
and differ from consolidated financial statements of the Company as previously
reported.
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.
15
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 1998 and 1997 for each of the Banks operated by the
Company.
SELECTED BANK FINANCIAL DATA
(Amounts in thousands, except ratios)
(Unaudited)
December 31, 1998
--------------------------------------------------------------------------------------------------------
National Alabama Citizens & First First First Georgia Community
Bank of Exchange Bank of Peoples American Citizens Gulf Public State Bank of
Commerce Bank Dadeville Bank, N.A. Bank Bank, N.A. Bank Bank Bank Naples, N.A.
-------- -------- --------- ---------- -------- ---------- -------- ------- -------- ------------
Summary of
Operations:
Interest income..... $ 51,527 $ 4,958 $ 5,143 $ 1,621 $ 20,014 $ 6,607 $ 7,945 $ 3,917 $ 9,764 $ 5,415
Interest expense.... 27,550 1,726 2,232 1,110 9,293 3,143 3,397 1,356 4,334 2,657
Net interest
income.............. 23,977 3,232 2,911 511 10,721 3,464 4,548 2,561 5,430 2,758
Provision for loan
losses.............. -- 283 21 183 509 16 387 44 10 343
Securities gains
(losses)............ -- -- 3 -- 28 -- 4 -- -- --
Noninterest
income.............. 19,374 708 747 132 3,505 777 1,329 841 1,644 244
Noninterest
expense............. 29,509 1,932 1,706 882 8,685 2,134 3,953 1,919 4,544 2,353
Net income.......... 9,428 1,186 1,343 (266) 3,665 1,509 1,053 966 1,651 43
Balance Sheet
Highlights:
At Period-End:
Total assets...... $767,245 $66,779 $67,958 $40,007 $268,460 $88,465 $112,453 $57,713 $131,294 $92,639
Securities........ 93,863 21,198 18,076 20,714 30,423 34,189 13,035 13,320 46,075 32,952
Loans, net of
unearned income... 528,176 38,488 43,977 13,503 199,302 46,567 87,756 34,457 72,104 40,365
Allowance for loan
losses............ 8,271 521 467 203 2,982 647 1,100 498 1,245 606
Deposits.......... 482,339 59,938 54,550 35,743 229,682 77,811 98,376 51,860 114,468 73,609
Short-term debt... 5,000 -- 5,200 -- -- -- -- -- 4,550 --
Long-term debt.... 20,244 -- -- -- 10,084 -- -- -- -- 2,000
Stockholders'
equity............ 57,348 6,239 6,055 4,129 23,511 7,711 7,776 5,371 10,062 6,241
Performance Ratios:
Return on average
assets.............. 1.27% 1.76% 2.07% (1.02)% 1.50% 1.69% 1.01% 1.82% 1.33% 0.05%
Return on average
equity.............. 17.44 20.83 22.23 (6.28) 16.64 18.07 14.38 18.71 17.05 0.85
Net interest
margin.............. 3.74 5.27 4.85 2.22 4.87 4.26 4.92 5.23 4.77 3.76
Capital and Liquidiy
Ratios:
Average equity to
average assets...... 7.30 8.44 9.31 16.31 9.03 9.37 7.04 9.71 7.82 6.42
Leverage (4.00%
required minimum)... 7.33 7.80 9.02 11.37 9.00 8.06 7.20 9.55 7.24 7.44
Risk-based capital
Tier 1 (4.00%
required
minimum).......... 9.65 12.47 12.76 20.11 10.59 13.60 8.74 14.92 12.30 13.70
Total (8.00%
required
minimum).......... 10.90 13.72 13.76 21.11 11.84 14.82 9.97 16.17 13.55 14.95
Average loans to
average deposits.... 99.15 58.33 80.68 35.83 91.85 61.46 82.08 66.63 63.62 47.20
16
SELECTED BANK FINANCIAL DATA
(Amounts in thousands, except ratios)
(Unaudited)
December 31, 1997
------------------------------------------------------------------------------------------------------
National Alabama Citizens & First First First Georgia Community
Bank of Exchange Bank of Peoples American Citizens Gulf Public State Bank of
Commerce Bank Dadeville Bank, N.A. Bank Bank, N.A. Bank Bank Bank Naples, N.A.
-------- -------- --------- ---------- -------- ---------- ------- ------- -------- ------------
Summary of Operations:
Interest income...... $ 48,401 $ 3,976 $ 5,144 $ 1,896 $ 20,250 $ 6,842 $ 5,068 $ 3,578 $ 7,774 $ 2,758
Interest expense..... 24,998 1,089 2,205 748 8,686 3,025 2,005 1,168 3,107 1,262
Net interest
income.............. 23,403 2,887 2,939 1,148 11,564 3,817 3,063 2,410 4,667 1,496
Provision for loan
losses.............. -- 10 -- 76 2,811 41 50 60 150 223
Securities gains
(losses)............ -- -- 4 -- (15) 3 -- -- 6 --
Noninterest income... 14,048 425 680 225 1,235 664 645 750 1,353 107
Noninterest
expense............. 25,197 1,715 1,887 1,146 9,528 2,414 2,413 1,880 4,046 1,347
Net income........... 8,215 1,084 1,250 126 792 1,473 808 833 1,610 9
Balance Sheet
Highlights:
At Period-End:
Total assets....... $714,725 $64,563 $62,307 $14,677 $239,931 $89,816 $92,779 $49,187 $100,975 $71,790
Securities......... 103,153 15,634 10,977 8,366 29,041 31,670 15,124 8,505 26,385 16,209
Loans, net of
unearned income... 457,605 33,111 43,028 2,734 188,473 48,936 67,426 30,538 65,341 27,701
Allowance for loan
losses............ 7,398 363 494 20 3,086 715 753 469 1,233 313
Deposits........... 456,843 59,015 51,292 10,354 196,596 78,531 82,253 44,127 87,265 64,601
Short-term debt.... 5,880 -- -- -- 12,500 -- -- -- -- --
Long-term debt..... 10,274 -- 4,200 -- -- -- -- -- -- 2,000
Stockholders'
equity............ 50,247 5,025 5,915 4,328 20,401 8,565 6,730 4,797 8,658 4,685
Performance Ratios:
Return on average
assets.............. 1.30% 2.21% 1.98% 0.49% 0.35% 1.70% 1.26% 1.75% 1.72% 0.02%
Return on average
equity.............. 16.87 23.81 21.34 3.51 3.39 17.93 16.15 18.34 20.33 0.20
Net interest
margin.............. 3.95 6.35 5.07 4.97 5.51 4.80 5.35 5.53 5.49 4.04
Capital and Liquidiy
Ratios:
Average equity to
average assets...... 7.69 9.29 9.28 13.90 10.19 9.47 7.80 9.52 8.47 11.22
Leverage (4.00%
required minimum)... 7.41 7.48 9.16 34.69 8.50 9.27 7.36 9.50 7.90 8.06
Risk-based capital...
Tier 1 (4.00%
required
minimum).......... 9.12 10.09 12.70 69.88 10.15 15.27 9.24 10.80 13.10 15.40
Total (8.00%
required
minimum).......... 10.37 11.03 13.79 70.20 11.40 16.52 10.27 11.80 14.30 16.45
Average loans to
average deposits.... 95.64 70.37 85.08 63.44 93.69 66.86 78.84 67.59 68.89 48.38
17
RESULTS OF OPERATIONS
Year ended December 31, 1998, compared with year ended December 31, 1997
The Company's net income increased by $3.3 million, or 23.1%, to $17.4
million in the year ended December 31, 1998, from $14.1 million in the year
ended December 31, 1997. Return on average assets during 1998 was 1.10%,
compared with 1.05% during 1997, and return on average equity was 13.81%
during 1998, compared with 12.73% during 1997.
Net interest income increased $3.0 million, or 5.4%, to $59.1 million in
1998 from $56.1 million in 1997, as interest income increased by $11.2 million
and interest expense increased $8.2 million. The increase in net interest
income is primarily attributable to a $103.8 million increase in average loans
to $1.0 billion during 1998, from $903.9 million during 1997, as a result of
management emphasis on loan growth. The increase in interest expense is
primarily attributable to an increase in average interest-bearing deposits of
$125.5 million to $1.0 billion in 1998, from $895.9 million in 1997. In
general, loans are the Company's highest yielding earning asset.
The Company's net interest spread and net interest margin were 3.67% and
4.24%, respectively, in 1998, decreasing by 34 and 38 basis points,
respectively, from 1997. These decreases reflect declining yield on average
loans and an increasing cost of interest-bearing liabilities, both
attributable to competition from banks and other financial institutions, a
flattening yield curve, and rate compression from recent reductions in the
prime rate.
The Company recorded a provision for loan losses of $1.8 million during 1998
compared with $3.4 million one year ago. $509,000 of the 1998 provision for
loan losses and $2.8 million of the 1997 provision for loan losses was
recorded at FAB, primarily associated with higher loss experience in FAB's
indirect automobile lending and sub-prime mortgage lending portfolios (which
lending businesses were discontinued during 1997). 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 1.50% at December 31,
1998, compared to 1.54% at December 31, 1997, and the allowance for loan
losses as a percentage of period-end nonperforming assets was 271.6% at
December 31, 1998, compared with 211.0% at December 31, 1997. The Company
experienced net charge-offs of $100,000 in 1998 equating to a ratio of net
charge-offs to average loans of 0.01% compared with net charge-offs of $1.2
million in 1997 equating to a ratio of net charge-offs to average loans of
0.13%. See "--Provision and Allowance for Loan Losses."
Noninterest income, including net securities gains and losses, increased
$9.1 million, or 44.6%, to $29.4 million in 1998, compared with $20.3 million
in 1997. The Company experienced increases in its fee-based divisions
(investment services, trust, and mortgage lending) of $6.3 million, or 54.3%,
to $17.9 million in 1998 from $11.6 million in 1997. Service charges increased
by $660,000, or 10.0%, to $7.3 million in 1998 from $6.6 million in 1997.
Earnings on bank owned life insurance policies totaled $1.2 million in 1998
compared with $39,000 in 1997. These policies were purchased in December of
1997 and, accordingly, 1998's earnings on these policies are substantially
higher as they reflect a full year's earnings. Non-recurring sales of assets
netted $247,000 in 1998 and included a gain of $310,000 resulting from the
sale of a certain portion of FAB's loan portfolio. In 1997, non-recurring
sales of assets included a charge to provide for the consolidation of FAB's
data processing facilities into the existing Company facility and included
losses resulting from abandonment of certain leasehold improvements, which
totaled $499,000. Noninterest expense increased $8.4 million, or 15.8%, to
$61.2 million during 1998, compared with $52.8 million during 1997. See "--
Noninterest Income and Expense."
Income before the provision for income taxes increased $5.3 million, or
26.4%, to $25.5 million in 1998, from $20.2 million in 1997. Net income
increased $3.3 million during 1998.
18
Year ended December 31, 1997, compared with year ended December 31, 1996
The Company's net income increased by $485,000, or 3.6%, to $14.1 million in
the year ended December 31, 1997, from $13.6 million in the year ended
December 31, 1996. Return on average assets during 1997 was 1.05%, compared
with 1.17% during 1996, and return on average equity was 12.73% during 1997,
compared with 14.22% during 1996.
Net interest income increased $5.1 million, or 10.0%, to $56.1 million in
1997 from $51.0 million in 1996, as interest income increased by $11.3 million
and interest expense increased $6.2 million. The increase in net interest
income was primarily attributable to a $107.3 million increase in average
loans to $903.9 million during 1997, from $796.6 million during 1996, as a
result of management emphasis on loan growth. The increase in interest expense
was primarily attributable to an increase in average time deposits of $79.5
million to $491.8 million in 1997, from $412.8 million in 1996. All other
funding sources increased a total of $43.8 million, or 8.8% from 1996 to 1997.
The Company's net interest spread and net interest margin were 4.01% and
4.62%, respectively, in 1997, decreasing by 12 and 13 basis points,
respectively, from 1996. These decreases reflected the Company's operation in
competitive loan and deposit markets.
The Company recorded a provision for loan losses of $3.4 million during
1997, compared with a provision for loan losses of $1.0 million during 1996,
an increase of $2.4 million, or 230.5%, resulting from higher loss experience
at FAB in its indirect automobile lending and sub-prime mortgage lending
portfolios, both of which were discontinued in 1997. The Company's allowance
for loan losses as a percentage of period-end loans was 1.54% at December 31,
1997, compared to 1.45% at December 31, 1996, and the allowance for loan
losses as a percentage of period-end nonperforming assets was 211.0% at
December 31, 1997, compared with 301.3% 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 0.13%. See "-- Provision and Allowance for
Loan Losses."
Noninterest income, including securities gains and losses, increased $1.2
million, or 6.1%, to $20.3 million in 1997, compared with $19.1 million in
1996. The increase was attributable to steady growth in all fee-based business
lines of the Company. Noninterest expense increased $2.6 million, or 5.2%, to
$52.8 million in 1997 from $50.2 million in 1996.
Income before the provision for income taxes increased $1.3 million, or
6.8%, to $20.2 million in 1997, from $18.9 million in 1996. Income before
minority interest in earnings of consolidated subsidiary and net income
increased $483,000 and $485,000, respectively, during 1997.
Net Interest Income
The largest component of the Company's net income is its net interest income
- -- the difference between the interest 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.
19
AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
(Amounts in thousands, except yields and rates)
Year ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ------ ---------- -------- ------ ---------- ------- ------
ASSETS:
-------
Earning assets:
Loans(1)(3)............ $1,007,695 $ 92,343 9.16% $ 903,930 $ 85,549 9.46% $ 796,556 $76,664 9.62%
Securities:
Taxable................ 273,782 17,213 6.29 213,533 13,829 6.48 197,120 12,488 6.34
Tax exempt............. 33,182 2,510 7.56 32,939 2,628 7.98 29,246 2,255 7.71
Cash balances in other
banks................. 2,019 106 5.25 1,042 55 5.28 4,060 240 5.91
Funds sold............. 75,039 4,256 5.67 59,683 3,353 5.62 44,653 2,263 5.07
Trading account
securities............ 4,352 264 6.07 3,488 193 5.53 2,814 183 6.50
---------- -------- ---------- -------- ---------- -------
Total earning
assets(2)............ 1,396,069 116,692 8.36 1,214,615 105,607 8.69 1,074,449 94,093 8.76
---------- -------- ---------- -------- ---------- -------
Cash and due from
banks.................. 56,529 49,004 42,261
Premises and equipment.. 37,404 35,142 33,717
Other assets............ 108,715 55,822 28,798
Allowance for loan
losses................. (15,608) (13,329) (12,081)
---------- ---------- ----------
Total assets.......... $1,583,109 $1,341,254 $1,167,144
========== ========== ==========
LIABILITIES:
------------
Interest-bearing
liabilities:
Interest-bearing
transaction accounts.. $ 167,034 4,271 2.56 $ 141,830 3,703 2.61 $ 163,873 5,017 3.06
Savings and money
market deposits....... 313,254 11,678 3.73 262,356 9,509 3.62 225,579 7,834 3.47
Time deposits.......... 541,142 30,466 5.63 491,751 27,477 5.59 412,280 23,231 5.63
Funds purchased........ 127,856 6,807 5.32 85,956 4,491 5.22 71,660 3,624 5.06
Other short-term
borrowings............ 26,323 1,613 6.13 43,988 2,712 6.17 29,980 2,064 6.88
Long-term debt......... 30,548 1,720 5.63 8,583 487 5.67 7,831 404 5.16
---------- -------- ---------- -------- ---------- -------
Total interest-bearing
liabilities.......... 1,206,157 56,555 4.69 1,034,464 48,379 4.68 911,203 42,174 4.63
---------- -------- ---------- -------- ---------- -------
Demand deposits........ 192,427 162,081 145,680
Accrued interest and
other liabilities..... 58,696 33,827 14,398
Stockholders' equity... 125,829 110,882 95,863
---------- ---------- ----------
Total liabilities and
stockholders'
equity............... $1,583,109 $1,341,254 $1,167,144
========== ========== ==========
Net interest spread..... 3.67% 4.01% 4.13%
==== ==== ====
Net interest
income/margin on a
taxable equivalent
basis.................. 60,137 4.31% 57,228 4.71% 51,919 4.83%
==== ==== ====
Tax equivalent
adjustment(2).......... 988 1,099 915
-------- -------- -------
Net interest
income/margin.......... $ 59,149 4.24% $ 56,129 4.62% $51,004 4.75%
======== ==== ======== ==== ======= ====
- --------
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax equivalent adjustments are based on the assumed rate of 34%, and do
not give effect to the disallowance for Federal income tax purposes of
interest expense related to certain tax-exempt assets.
(3) Fees in the amount of $3,273,000, $3,244,000, and $2,943,000 are included
in interest and fees on loans for 1998, 1997, and 1996, respectively.
20
During 1998, the Company experienced an increase in net interest income of
$3.0 million, or 5.4%, to $59.1 million, compared with $56.1 million in 1997.
Net interest income increased despite a decrease in the net interest spread of
34 basis points to 3.67% in 1998 from 4.01% in 1997, and a decrease in the net
interest margin of 38 basis points to 4.24% in 1998, compared with 4.62% in
1997. Because the relative yield on loans exceeds that of all other earning
assets, the primary reason for the increased net interest income was a 11.5%
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, and Federal funds purchased, 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
1998, net average earning assets increased by $181.5 million, or 14.9%, to
$1.40 billion from $1.21 billion in 1997. The major components of this
increase included average loans which increased $103.8 million, or 11.5%, to
$1.01 billion in 1998 from $903.9 million in 1997, and securities which
increased $60.5 million, or 24.5%, to $307.0 million in 1998 from $246.5
million in 1997.
Analysis of Changes in Net Interest Income
The following table sets forth, on a taxable equivalent basis, the effect
that varying levels of earning assets and interest-bearing liabilities and the
applicable rates had on changes in net interest income for 1998 and 1997. 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,
--------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
Variance Due to Variance Due to
--------------------------- ---------------------------
Volume Yield/Rate Total Volume Yield/Rate Total
------- ---------- ------- ------- ---------- -------
Earning assets:
Loans................... $ 9,573 $(2,779) $ 6,794 $10,178 $(1,293) $ 8,885
Securities:
Taxable............... 3,801 (417) 3,384 1,060 281 1,341
Tax exempt............ 19 (137) (118) 292 81 373
Cash balances in other
banks.................. 51 -- 51 (161) (24) (185)
Funds sold.............. 873 30 903 824 266 1,090
Trading account
securities............. 51 20 71 40 (30) 10
------- ------- ------- ------- ------- -------
Total interest
income............. 14,368 (3,283) 11,085 12,233 (719) 11,514
Interest-bearing
liabilities:
Interest-bearing
transaction accounts... 641 (73) 568 (628) (686) (1,314)
Savings and money market
deposits............... 1,875 294 2,169 1,324 351 1,675
Time deposits........... 2,790 199 2,989 4,413 (167) 4,246
Funds purchased......... 2,228 88 2,316 748 119 867
Other short-term
borrowings............. (1,081) (18) (1,099) 880 (232) 648
Long-term debt.......... 1,236 (3) 1,233 41 42 83
------- ------- ------- ------- ------- -------
Total interest
expense............ 7,689 487 8,176 6,778 (573) 6,205
------- ------- ------- ------- ------- -------
Net interest income
on a taxable
equivalent basis... $ 6,679 $(3,770) 2,909 $ 5,455 $ (146) 5,309
======= ======= ======= =======
Taxable equivalent
adjustment............. 111 (184)
------- -------
Net interest income..... $ 3,020 $ 5,125
======= =======
21
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.
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, 1998, 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, 1998
-------------------------------------------------------------------
After One After Three
Within Through Through Greater
One Three Twelve Within One Than One
Month Months Months Year Year Total
-------- --------- ----------- ---------- -------- ----------
ASSETS:
-------
Earning assets:
Loans(1).............. $466,784 $ 97,510 $ 177,025 $ 741,319 $360,398 $1,101,717
Securities(2)......... 20,458 30,020 103,166 153,644 169,074 322,718
Interest-bearing
deposits in other
banks................ 225 -- -- 225 -- 225
Funds sold............ 57,076 -- -- 57,076 -- 57,076
-------- -------- --------- ---------- -------- ----------
Total interest-
earning assets...... $544,543 $127,530 $ 280,191 $ 952,264 $529,472 $1,481,736
LIABILITIES:
------------
Interest-bearing
liabilities:
Interest-bearing
deposits:
Demand deposits...... $ -- $ -- $ 187,481 $ 187,481 $ -- $ 187,481
Savings and money
market deposits..... 298,817 -- -- 298,817 -- 298,817
Time deposits(3)..... 62,166 118,530 283,877 464,573 91,854 556,427
Funds purchased....... 158,083 158,083 158,083
Short-term
borrowings(4)........ 18,556 9,200 27,756 27,756
Long-term debt........ 2 4 18 24 32,304 32,328
-------- -------- --------- ---------- -------- ----------
Total interest-
bearing
liabilities......... $537,624 $127,734 $ 471,376 $1,136,734 $124,158 $1,260,892
-------- -------- --------- ---------- -------- ----------
Period gap.............. $ 6,919 $ (204) $(191,185) $ (184,470) $405,314
======== ======== ========= ========== ========
Cumulative gap.......... $ 6,919 $ 6,715 $(184,470) $ (184,470) $220,844 $ 220,844
======== ======== ========= ========== ======== ==========
Ratio of cumulative gap
to total earning
assets................. 0.47% 0.45% (12.45)% (12.45)% 14.90%
22
- --------
(1) Excludes nonaccrual loans of $4,357,000.
(2) Excludes investment equity securities with a market value of $7,029,000.
(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 $1,506,000.
The Company generally benefits from increasing market rates of interest when
it has an asset-sensitive gap and generally benefits from decreasing market
interest rates when it is liability sensitive. The Company is liability
sensitive throughout one year after one month. 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 changes from
200 basis points below to 200 basis points above the current prevailing rates.
Management makes certain assumptions as to the effect varying levels of
interest rates have on certain earning assets and interest bearing
liabilities, which assumptions consider both historical experience and
consensus estimates of outside sources.
With respect to the primary earning assets, loans and securities, certain
features of individual types of loans and specific securities introduce
uncertainty as to their expected performance at varying levels of interest
rates. In some cases, imbedded options exist whereby the borrower may elect to
repay the obligation at any time. These imbedded prepayment options make
anticipating the performance of those instruments difficult given changes in
prevailing rates. At December 31, 1998, mortgage backed securities totaling
$183.0 million, or 10.9% of total assets and essentially every loan, net of
unearned income, (totaling $1.11 billion, or 66.2% of total assets), carry
such imbedded options. Management believes that assumptions used in its
simulation analysis about the performance of financial instruments with such
imbedded options are appropriate. However, the actual performance of these
financial instruments may differ from management's estimates due to several
factors, including the diversity and sophistication of the customer base, the
general level of prevailing interest rates and the relationship to their
historical levels, and general economic conditions. The difference between
those assumptions and actual results, if significant, could cause the actual
results to differ from those indicated by the simulation analysis.
Deposits totaled $1.28 billion, or 76.3% of total assets, at December 31,
1998. Since deposits are the primary funding source for earning assets, the
associated market risk is considered by management in its simulation analysis.
Generally, it is anticipated that deposits will be sufficient to support
funding requirements.
23
However, the rates paid for deposits at varying levels of prevailing interest
rates have a significant impact on net interest income and therefore, must be
quantified by the Company in its simulation analysis. Specifically, the
Company's spread, the difference between the rates earned on earning assets
and rates paid on interest bearing liabilities, is generally higher when
prevailing rates are higher. As prevailing rates reduce, the spread tends to
compress, with severe compression at very low prevailing interest rates. This
characteristic is called "spread compression" and adversely effects net
interest income in the simulation analysis when anticipated prevailing rates
are reduced from current rates. Management relies upon historical experience
to estimate the degree of spread compression in its simulation analysis.
Management believes that such estimates of possible spread compression are
reasonable. However, if the degree of spread compression varies from that
expected, the actual results could differ from those indicated by the
simulation analysis.
The following table illustrates the results of simulation analysis used by
the Company to determine the extent to which market risk would have effected
the net interest margin if prevailing interest rates differed from actual
rates during 1998 and 1997. Because of the inherent use of estimates and
assumptions in the simulation model used to derive this information, the
actual results for 1998 and, certainly, the future impact of market risk on
the Company's net interest margin, may differ from that found in the table.
MARKET RISK
(Amounts in thousands)
Year ended December 31, 1998 Year ended December 31, 1997
Change in --------------------------------- ---------------------------------
Prevailing Net Interest Change from Net Interest Change from
Interest Rates Income Amount Income Amount Income Amount Income Amount
- -------------- --------------- -------------- --------------- --------------
+200 basis points....... $ 63,238 6.91% $ 59,813 6.56%
+100 basis points....... 61,194 3.46 57,971 3.28
0 basis points.......... 59,149 -- 56,129 --
- -100 basis points....... 57,063 (3.53) 54,146 (3.53)
- -200 basis points....... 54,977 (7.05) 52,158 (7.07)
Provision and Allowance for Loan Losses
The Company has policies and procedures for evaluating the overall credit
quality of its loan portfolio including timely identification of potential
problem credits. On a monthly basis, management reviews the appropriate level
for the allowance for loan losses based on the results of the internal
monitoring and reporting system, analysis of economic conditions in its
markets and a review of historical statistical data, current trends regarding
the volume and severity of past due and problem loans and leases, the
existence and effect of concentrations of credit, and changes in national and
local economic conditions for both the Company and other financial
institutions. Also considered in management's evaluation of the adequacy of
the allowance for loan losses are the results of regulatory examinations
conducted for each bank, including evaluation of the Company's policies and
procedures and findings from the Company's independent loan review department.
The provision for loan losses decreased by $1.6 million, or 47.5%, to $1.8
million in 1998 from $3.4 million in 1997. Due to an increase during 1997 in
the loss experience in FAB's indirect automobile lending and sub-prime lending
portfolios, management deemed it prudent to increase FAB's provision for loan
losses during 1997. These indirect automobile lending and sub-prime mortgage
lending businesses were discontinued in late 1997, and management believes the
allowance for loan losses, at its current level, adequately covers the
Company's exposure to loan losses.
Management's judgment as to the adequacy of the allowance for loan losses is
also based upon assumptions about future events which it believes to be
reasonable. These assumptions include consistent application of sound
underwriting standards, continued low turnover among lending staff, general
economic conditions including stable interest rates, and stable levels of
nonperforming loans. Should these assumptions change, there is no assurance
that charge-offs in future periods will not exceed the allowance for loan
losses or that additional loan loss provisions will not be required.
24
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance for loan losses at an appropriate level
as determined by management. Loan losses and recoveries are charged or
credited directly to the allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
(Amounts in thousands, except percentages)
Year ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
Total loans outstanding at
end of period, net of
unearned income.......... $1,106,074 $966,370 $868,307 $745,961 $482,639
========== ======== ======== ======== ========
Average amount of loans
outstanding, net of
unearned income.......... $1,007,695 $903,930 $796,556 $512,739 $439,216
========== ======== ======== ======== ========
Allowance for loan losses
at beginning of period... $ 14,844 $ 12,633 $ 11,621 $ 7,597 $ 8,418
Charge-offs:
Commercial, financial
and agricultural....... 418 516 809 1,247 3,316
Real estate--mortgage... 200 531 160 454 282
Consumer................ 1,246 1,880 1,027 543 366
---------- -------- -------- -------- --------
Total charge-offs..... 1,864 2,927 1,996 2,244 3,964
---------- -------- -------- -------- --------
Recoveries:
Commercial, financial
and agricultural....... 1,012 1,068 1,525 1,294 715
Real estate--mortgage... 296 200 152 296 125
Consumer................ 456 449 296 383 306
---------- -------- -------- -------- --------
Total recoveries...... 1,764 1,717 1,973 1,973 1,146
---------- -------- -------- -------- --------
Net charge-offs....... 100 1,210 23 271 2,818
Provision for loan
losses................... 1,796 3,421 1,035 1,171 1,770
Changes incidental to
acquisitions............. -- -- -- 3,124 227
---------- -------- -------- -------- --------
Allowance for loan losses
at period-end............ $ 16,540 $ 14,844 $ 12,633 $ 11,621 $ 7,597
========== ======== ======== ======== ========
Allowance for loan losses
to period-end loans...... 1.50% 1.54% 1.45% 1.56% 1.57%
Net charge-offs to average
loans ................... 0.01 0.13 0.00 0.05 0.64
Allocation of Allowance
There is no formal allocation of the allowance for loan losses by loan
category.
25
Nonperforming Assets
The following table presents the Company's nonperforming assets for the
dates indicated.
NONPERFORMING ASSETS
(Amounts in thousands, except percentages)
At December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Nonaccrual loans...................... $4,357 $4,228 $2,735 $2,843 $1,570
Restructured loans.................... 499 1,052 605 949 297
Loans past due 90 days or more and
still accruing....................... -- -- 9 126 --
------ ------ ------ ------ ------
Total nonperforming loans........... 4,856 5,280 3,349 3,918 1,867
Other real estate owned............... 1,234 1,756 842 780 883
------ ------ ------ ------ ------
Total nonperforming assets.......... $6,090 $7,036 $4,191 $4,698 $2,750
====== ====== ====== ====== ======
Allowance for loan losses to period-
end loans............................ 1.50% 1.54% 1.45% 1.56% 1.57%
Allowance for loan losses to period-
end nonperforming loans.............. 340.61 281.14 377.22 296.61 406.91
Allowance for loan losses to period-
end nonperforming assets............. 271.59 210.97 301.43 247.36 276.25
Net charge-offs to average loans...... 0.01 0.13 0.00 0.05 0.64
Nonperforming assets to period-end
loans and foreclosed property........ 0.55 0.73 0.48 0.63 0.57
Nonperforming loans to period-end
loans................................ 0.44 0.55 0.39 0.53 0.39
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions and collection efforts,
that the borrower's financial condition is such that collection of interest is
doubtful. A delinquent loan is generally placed on nonaccrual status when it
becomes 90 days or more past due. When a loan is placed on nonaccrual status,
all interest which is accrued on the loan is reversed and deducted from
earnings as a reduction of reported interest. No additional interest is
accrued on the loan balance until collection of both principal and interest
becomes reasonably certain. When a problem loan is finally resolved, there may
ultimately be an actual writedown or charge-off of the principal balance of
the loan which would necessitate additional charges to the allowance for loan
losses. During the years ending December 31, 1998, 1997 and 1996,
approximately $384,000, $371,000, and $279,000, respectively, in additional
interest income would have been recognized in earnings if the Company's
nonaccrual loans had been current in accordance with their original terms.
Total nonperforming assets decreased $946,000 to $6.1 million at December
31, 1998, from $7.0 million at December 31, 1997. The allowance for loan
losses to period-end nonperforming assets was 271.59% at December 31, 1998,
compared with 210.97% at December 31, 1997. This ratio will generally
fluctuate from period to period depending upon nonperforming asset levels at
period end. The nonperforming assets decreased at year end 1998 compared with
1997 primarily due to the discontinuance of new originations in the indirect
automobile and sub-grade mortgage loan portfolios at FAB.
26
Potential Problem Loans
A potential problem loan is one that management has serious doubts as to the
borrower's future performance under terms of the loan contract. These loans
are current as to principal and interest, and accordingly, they are not
included in the nonperforming asset categories. Management monitors these
loans closely in order to ensure that the Company's interests are protected.
At December 31, 1998, the Company had certain loans considered by management
to be potential problem loans totaling $25.4 million. The level of potential
problem loans is factored into the determination of the adequacy of the
allowance for loan losses.
Noninterest Income and Expense
Noninterest income
The Company relies on four distinct product lines for the production of
recurring noninterest income: traditional retail and commercial banking and
operating segments including mortgage banking, trust services and investment
services. Combined fees associated with these product lines totaled $25.2
million in 1998, compared with $18.2 million in 1997, an increase of $7.0
million, or 38.3%. Non-recurring gains netted $247,000 in 1998 resulting
primarily from the gain on sale of certain portions of FAB's loan portfolio in
early 1998 totaling $391,000 and in 1997 non-recurring losses totaled
$499,000, resulting from a charge to provide for the consolidation of FAB's
data processing facility into the existing Company facility and by losses
resulting from the abandonment of certain leasehold improvements.
The following table sets forth, for the periods indicated, the principal
components of noninterest income.
NONINTEREST INCOME
(Amounts in thousands)
Year ended December 31,
------------------------
1998 1997 1996
------- ------- -------
Service charges on deposit accounts................... $ 7,259 $ 6,599 $ 6,238
Investment services income............................ 11,508 8,162 7,889
Trust fees............................................ 2,101 1,799 1,550
Origination and sale of mortgage loans................ 4,303 1,644 1,187
Gain on disposal of assets and deposits............... 247 (497) 148
Securities gains (losses)............................. 174 (2) (84)
Bank owned life insurance............................. 1,167 39 35
Other................................................. 2,591 2,550 2,167
------- ------- -------
Total noninterest income.......................... $29,350 $20,294 $19,130
======= ======= =======
27
Noninterest Expense
The following table sets forth, for the periods indicated, the principal
components of noninterest expense.
NONINTEREST EXPENSE
(Amounts in thousands)
Year ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
Salaries and employee benefits......................... $36,021 $29,992 $28,756
Net occupancy expense.................................. 6,724 6,623 6,481
Amortization of goodwill............................... 302 298 305
Advertising............................................ 976 1,445 1,218
Banking assessments.................................... 298 411 1,090
Data processing expenses............................... 2,435 2,151 1,770
Legal and professional fees............................ 3,609 1,947 2,057
Non-credit losses (recoveries)......................... 129 283 (24)
Other.................................................. 10,660 9,638 8,522
------- ------- -------
Total noninterest expense............................ $61,154 $52,788 $50,175
======= ======= =======
Salaries and employee benefits increased $6.0 million, or 20.1%, in 1998.
Revenue in the investment services and mortgage lending divisions increased
significantly during 1998, and compensation of employees in these areas is
largely commission based.
Noninterest expenses increased $8.4 million, or 15.8%, to $61.2 million in
1998, from $52.8 million in 1997. Advertising decreased by $469,000, or 32.5%,
to $976,000 in 1998, from $1.4 million in 1997. Data processing fees increased
$284,000, or 13.2%, in 1998 to $2.4 million, in part, due to approximately
$300,000 in conversion costs related to the mergers completed by the Company
in 1998, part of which was offset by operating cost reductions attributable to
consolidation of data processing operations. Legal and professional fees,
$3.6 million in 1998, increased $1.7 million, or 85.4%, from $1.9 million in
1997 as a result of costs associated with mergers completed during 1998.
The 1996 banking assessment amount includes a one-time charge of $677,000
relating to recapitalization of the SAIF fund through a FDIC assessment.
Investment Services
The following table sets forth, for the periods indicated, the summary of
operations for the investment services departments of the Company:
INVESTMENT SERVICES DIVISION
(Amounts in thousands)
Year ended December
31,
---------------------
1998 1997 1996
------- ------ ------
Investment services revenue.............................. $11,508 $8,162 $7,889
Other revenue............................................ 1,409 1,311 1,354
------- ------ ------
Total investment revenue............................... 12,917 9,473 9,243
Expenses and allocated charges........................... 10,500 8,479 8,551
------- ------ ------
Net investment services revenue........................ $ 2,417 $ 994 $ 692
======= ====== ======
28
National Bank of Commerce of Birmingham ("NBC") operates an investment
department devoted primarily to handling correspondent banks' investment
needs. NBC has a wholly owned subsidiary, NBC Securities, Inc. ("NBC
Securities"), that is licensed as a broker-dealer. Together, NBC's investment
department and NBC Securities comprise the Investment Service Division.
Investment services revenues consist primarily of commission income from the
sale of investment securities. Investment services revenues increased $3.3
million, or 41.0%, to $11.5 million in 1998 from $8.2 million in 1997,
primarily as a result continued favorable market conditions. Investment
services revenues increased $273,000, or 3.5%, to $8.2 million in 1997 from
$7.9 million in 1996. Other investment services revenue consists of interest
and dividends on trading assets and fee based services including
asset/liability consulting, bond accounting and security safekeeping. These
results include certain income and expense items that are allocated by
management to the investment services areas of the Company.
These results are not necessarily the same as would be expected if these
activities were conducted by a stand-alone entity because certain corporate
overhead expenses are not allocated directly to this division.
Trust Division
The following table sets forth, for the periods indicated, the summary of
operations for the trust division of the Company:
TRUST DIVISION
(Amounts in thousands)
Year ended December
31,
--------------------
1998 1997 1996
------ ------ ------
Trust division income..................................... $2,101 $1,799 $1,550
Expenses and allocated charges............................ 1,169 1,105 1,175
------ ------ ------
Net trust division revenue.............................. $ 932 $ 694 $ 375
====== ====== ======
Trust division income increased $302,000, or 16.8%, to $2.1 million in 1998
from $1.8 million in 1997 due to new customer relationships and growth of
existing assets managed. Similar conditions resulted in a 16.1% increase in
trust department fees to $1.8 million in 1997 from $1.6 million in 1996.
Despite the increase in Trust division income, Trust division expenses and
allocated charges decreased 6.0% in 1997 versus 1996, from $1.2 million to
$1.1 million
These results are not necessarily the same as would be expected if these
activities were conducted by a stand-alone entity because certain corporate
overhead expenses are not allocated directly to this division.
29
Mortgage Lending Division
The following table sets forth, for the periods indicated, the summary of
operations for the mortgage lending division of the Company.
MORTGAGE LENDING DIVISION
(Amounts in thousands)
Year ended December
31,
--------------------
1998 1997 1996
------ ------ ------
Origination and sale of mortgage loans................. $4,303 $1,644 $1,187
Interest income........................................ 474 545 293
------ ------ ------
Total revenue........................................ 4,777 2,189 1,480
Expenses and allocated charges......................... 2,635 1,643 1,010
------ ------ ------
Net mortgage lending division revenue................ $2,142 $ 546 $ 470
====== ====== ======
Fees charged in connection with the origination and resale of mortgage loans
totaled $4.3 million in 1998 and $1.6 million in 1997, an increase of $2.7
million, or 161.7%, resulting from a favorable interest rate environment,
staff additions, and expansion of services into different geographic areas
serviced by the Company. Expenses and allocated charges in the mortgage
lending division grew 60.4% to $2.6 million in 1998 from $1.6 million in 1997,
an increase if $992,000. In spite of this 60.4% increase, these expenses grew
at a lower rate than revenues as a result of more efficient operations and
leveraging the available fixed cost structure.
These results are not necessarily the same as would be expected if these
activities were conducted by a stand-alone entity because certain corporate
overhead expenses are not allocated directly to this division.
Earning Assets
Loans
Loans are the largest category of earning assets and typically provide
higher yields than the other types of earning assets. Associated with the
high