Back to GetFilings.com
1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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. Yes 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 3, 1997 was $60,851,080.
As of March 3, 1997, the registrant had outstanding 6,515,418 shares of its
common stock.
DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:
(i) The Registration Statement on Form S-1 with respect to the common stock
of Alabama National BanCorporation (Commission File No. 33-83800) is
incorporated by reference into Part IV of this report.
(ii) The Registration Statement on Form S-4 with respect to the common
stock of Alabama National BanCorporation (Commission File No. 33-97152) is
incorporated by reference into Part IV of this report.
(iii) Alabama National BanCorporation's Form 10-K for the year ended
December 31, 1994 is incorporated by reference in Part IV of this report.
(iv) Alabama National BanCorporation's Form 10-K for the year ended
December 31, 1995 is incorporated by reference into Part IV of this report.
(v) Alabama National BanCorporation's Form 8-K filed on October 10, 1996 is
incorporated by reference into Part IV of this report.
(vi) The definitive Proxy Statement for the 1997 Annual Meeting of Alabama
National BanCorporation's stockholders is incorporated by reference into Part
III of this report.
================================================================================
2
TABLE OF CONTENTS
ITEM NO. PAGE NO.
- -------- --------
FORWARD LOOKING INFORMATION........................................... 3
PART I
1. Business.................................................... 4
Executive Officers.......................................... 14
2. Properties.................................................. 15
3. Legal Proceedings........................................... 15
4. Submission of Matters to a Vote of Security Holders......... 15
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
6. Selected Financial Data..................................... 16
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
8. Financial Statements and Supplementary Data................. 40
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 40
PART III
10. Directors and Executive Officers of the Registrant.......... 41*
11. Compensation of Executive Officers and Directors............ 41*
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41*
13. Certain Relationships and Related Transactions.............. 41*
PART IV
14. Exhibits and Reports on Form 8-K............................ 42
SIGNATURES............................................................ 43
- ---------------
* Portions of the Proxy Statement for the Registrant's Annual Meeting of
Stockholders to be held on April 24, 1997 are incorporated by reference in
Part III of this Form 10-K.
2
3
FORWARD LOOKING INFORMATION
This Form 10-K contains certain forward looking information with respect to
the financial condition, results of operations and business of ANB including
statements relating to: (A) interest sensitivity; (B) noninterest income; (C)
loan losses; (D) deposits; (E) growth in various categories of loans; and (F)
sources of funding for asset growth. These forward looking statements involve
certain risks, uncertainties, estimates and assumptions by management. Factors
that may cause actual results to differ materially from those contemplated by
such forward looking statements include, among others, the following: (1) the
rate of growth of the economy, especially in the Southeast; (2) the stability of
interest rates; (3) relative strength/weakness in the consumer credit sector;
(4) ANB's ability to improve sales and service quality and to develop profitable
new products; (5) the successful implementation of technological enhancements;
(6) the strength of the real estate markets; (7) whether levels of consumer
confidence remain high; and (8) the performance of the stock and bond markets.
3
4
PART I
ITEM 1. BUSINESS
Alabama National BanCorporation ("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 two national banks, National
Bank of Commerce of Birmingham (Birmingham, Alabama and the Birmingham
metropolitan area) and First National Bank of Ashland (Ashland, Alabama); and
five state member banks, Alabama Exchange Bank (Tuskegee, Alabama), Bank of
Dadeville (Dadeville, Alabama), First Bank of Baldwin County and Gulf Bank
(Baldwin County, Alabama), and Citizens Bank of Talladega (Talladega, Alabama)
(collectively the "Banks"); one securities brokerage firm, NBC Securities, Inc.
(Birmingham, Alabama); one insurance agency, Ashland Insurance, Inc. (Ashland,
Alabama); and two "small loan"/ finance companies, Clay County Finance Company,
Inc. (Ashland, Alabama) and Tuskegee Loan Company, Inc. (Tuskegee, Alabama).
RECENT DEVELOPMENTS
FIRSTBANC Merger
Effective September 30, 1996, FIRSTBANC Holding Company, Inc., an Alabama
bank holding company with approximately $36 million in total assets
("FIRSTBANC"), merged with and into ANB pursuant to that certain Agreement and
Plan of Merger dated as of June 10, 1996 (the "Merger Agreement") resulting in
(i) the stockholders of FIRSTBANC becoming stockholders of ANB and (ii) ANB
becoming the sole stockholder of FIRSTBANC's wholly-owned subsidiary, First Bank
of Baldwin County, a state non-member bank.
The Merger Agreement generally provided, among other things, for the merger
of FIRSTBANC with and into ANB, pursuant to which each of the 42,782 outstanding
shares of FIRSTBANC's common stock were converted into the right to receive
7.12917 shares of ANB Common Stock, for a total of 305,000 shares of ANB Common
Stock.
St. Clair/NBC Merger
Effective October 17, 1996, St. Clair Federal Savings Bank, a federal
savings bank and a wholly-owned subsidiary of ANB ("St. Clair"), was merged with
and into National Bank of Commerce of Birmingham ("NBC"). As a result of the
merger, St. Clair ceased to exist and all of the assets and liabilities of St.
Clair became the assets and liabilities of NBC. Each of the three (3) branch
offices of St. Clair have been renamed as "National Bank of Commerce."
Furthermore, because St. Clair was the only thrift held by ANB, ANB is no longer
a thrift holding company and is thus no longer regulated by the Office of Thrift
Supervision which regulates thrift holding companies.
Resignation and Appointment of Executive Officers
On December 12, 1996, Frank W. Whitehead, C.P.A., resigned as Treasurer and
Chief Financial Officer of ANB. Mr. Whitehead continued to serve as Executive
Vice President of ANB until his death on February 11, 1997. On December 12,
1996, the Board of Directors appointed James S. Parks, Jr., as Senior Vice
President-Finance, Controller and Treasurer to replace Mr. Whitehead as the new
principal financial and accounting officer of ANB. The Board of Directors has
chosen not to bestow the title of Chief Financial Officer at this time.
4
5
SUBSIDIARY BANKS
ANB operates through six community banks ("Community Banks") and NBC, which
is a metropolitan bank, which are set forth in the following table:
BANKING OFFICE POPULATION
BANK CITY/COUNTY CITY/COUNTY(1) OFFICES
- ---- -------------- -------------- -------
Alabama Exchange Bank Tuskegee/Macon 12,257/24,928 1
Bank of Dadeville Dadeville/Tallapoosa 3,276/38,826 1
Camp Hill/Tallapoosa 1,415/38,826 1
Jackson's Gap/Tallapoosa 789/38,826 1
Citizens Bank of Talladega Talladega/Talladega 18,175/74,107 2
First National Bank of Ashland Ashland/Clay 2,034/13,252 2
Lineville/Clay 2,394/13,252 1
Gulf Bank Orange Beach/Baldwin 2,253/98,280 1
Gulf Shores/Baldwin 3,261/98,280 1
Foley/Baldwin 4,937/98,280 1
National Bank of Commerce Birmingham/Jefferson 265,968/651,525 2
of Birmingham Mountain Brook/Jefferson 19,810/651,525 2
Hoover/Jefferson 12,817/651,525 1
Irondale/Jefferson 9,454/651,525 1
Hueytown/Jefferson 15,280/651,525 1
Bessemer/Jefferson 30,966/651,525 1
Trussville/Jefferson 10,803/651,525 1
Center Point/Jefferson 22,658/651,525 1
Inverness/Shelby 2,518/99,358 1
Meadowbrook/Shelby 4,621/99,358 1
Pelham/Shelby 9,765/99,358 1
Alabaster/Shelby 14,627/99,358 1
Pell City/St. Clair 8,118/50,009 1
Springville/St. Clair 1,910/50,009 1
Moody/St. Clair 4,921/50,009 1
First Bank of Baldwin County Robertsdale/Baldwin 2401/98,280 1
Bay Minette/Baldwin 7,168/98,280 1
Daphne/Baldwin 11,290/98,280 1
- ---------------
(1) 1990 U.S. Census data.
The Banks focus on traditional consumer, residential mortgage, commercial
and real estate construction lending to customers in their market areas. The
Banks also offer a variety of deposit programs to individuals and small
businesses and other organizations at interest rates generally consistent with
local market conditions. NBC offers trust services and investment services
(including public finance). 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, 1996, were approximately $611.4 million, or
approximately 75.4% of total earning assets. The interest rates charged on loans
vary with the degree of risk, maturity and amount of the loan and are further
subject to competitive pressures, money market rates, availability of funds and
government regulations. ANB has no foreign loans or loans for "highly leveraged
transactions" as defined by applicable banking regulations.
5
6
Loan Portfolio
Real Estate Loans. Loans secured by real estate are the primary component
of ANB's loan portfolio, constituting approximately $374.6 million, or 61.3% of
total loans, net of unearned interest, at December 31, 1996. The Banks'
predominant real estate loans are residential mortgages. Residential mortgages,
both fixed and variable, are made for terms of up to 30 years and generally
require monthly amortization. The majority of the Banks' commercial mortgages
are at variable rates, which approximate current market rates. Construction
loans are made on a variable rate basis. Origination fees are normally charged
for all loans secured by real estate. The Banks' primary type of residential
mortgage loan is the single-family first mortgage, typically structured with
fixed or adjustable interest rates, based on market conditions. Fixed rate loans
usually have terms of five years, with payments through the date of maturity
generally based on a 15 or 30 year amortization schedule. Adjustable rate loans
generally have a term of 15 years.
The Banks originate residential loans for sale into the secondary market.
Such loans are made in accordance with underwriting standards set by the
purchaser of the loan, normally as to loan-to-value ratio, interest rate and
documentation. The Banks generally collect from the borrower or purchaser a
combination of the origination fee, discount points and/or service release fee.
During 1996, the Banks sold approximately $30.1 million in loans to such
purchasers.
The Banks' nonresidential mortgage loans include commercial, industrial and
unimproved real estate loans. The Banks generally require nonresidential
mortgage loans to have an 80% loan-to-value ratio and usually underwrite their
commercial loans on the basis of the borrower's cash flow and ability to service
the debt from earnings, rather than on the basis of the value of the collateral.
Terms on construction loans are usually less than twelve months, and the Banks
typically require real estate mortgages and personal guarantees supported by
financial statements and a review of the guarantor's personal finances.
Consumer Loans. Consumer lending includes installment lending to
individuals in the Banks' market areas and consists of loans to purchase
automobiles, appliances and other consumer durable goods. Consumer loans
constituted $46.9 million, or 7.7% of ANB's loan portfolio at December 31, 1996.
Consumer loans are underwritten based on the borrower's income, current debt
level, past credit history and collateral. Consumer rates are both variable and
fixed, with terms negotiable. At the Community Banks, terms generally range from
four to five years on automobile loans and one to ten years on loans for other
consumer durable goods, depending on the nature and condition of the collateral.
Periodic amortization, generally monthly, is required.
Two of the Community Banks have subsidiaries that operate as "small loan
companies" under the Alabama banking laws. Small loan companies are authorized
to make loans not exceeding $750. The majority of these loans are unsecured and
have maturities of one year or less. The principal advantage for operating small
loan companies is the ability to charge higher interest rates than those
otherwise allowed under Alabama law. Both of these small loan companies are in
the process of winding down operations.
Commercial, Financial and Agricultural Loans. The Banks make loans for
commercial purposes in various lines of business. These loans are typically made
on terms up to five years at fixed or variable rates. The loans are secured by
accounts receivable, inventory or, in the case of equipment loans, the financed
equipment. The Banks attempt to reduce their credit risk on commercial loans by
limiting the loan to value ratio. Historically, the Community Banks and NBC have
loaned up to 65% and up to 80%, respectively, on loans secured by accounts
receivable, up to 65% and up to 50%, respectively, on loans secured by
inventory, and up to 75% and up to 80%, respectively, on loans secured by
equipment. The Banks also make unsecured commercial loans. Commercial, financial
and agricultural loans constituted $162.5 million, or 26.6% of ANB's loan
portfolio at December 31, 1996. 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
6
7
industry conditions and risks inherent in dealing with individual borrowers. In
particular, longer maturities increase the risk that economic conditions will
change and adversely affect collectibility.
ANB attempts to minimize loan losses through various means and uses
standardized underwriting criteria. In particular, on larger credits, ANB
generally relies on the cash flow of a debtor as the source of repayment and
secondarily on the value of the underlying collateral. In addition, ANB attempts
to utilize shorter loan terms in order to reduce the risk of a decline in the
value of such collateral.
ANB addresses repayment risks by adhering to internal credit policies
and procedures of which all of the Banks have adopted. These policies and
procedures include officer and customer lending limits, a multi-layered loan
approval process for larger loans, documentation examination and follow-up
procedures for any exceptions to credit policies. The point in each Bank's loan
approval process at which a loan is approved depends on the size of the
borrower's credit relationship with such Bank. For example, at NBC, each of the
lending department managers has the authority to approve loans up to $350,000.
Upon approval by ANB's Board of Directors, other loan officers may be
authorized to approve loans of lower amounts. Loans in excess of $50,000 are
approved and ratified by the Senior Loan Committee of NBC. Loans in excess of
$300,000 are approved and ratified by the Executive Committee of the NBC Board
of Directors.
Loan Review. ANB maintains a continuous loan review system. Under this
system, each loan officer is directly responsible for monitoring the risk in his
portfolio and is required to maintain risk ratings for each credit assigned. The
risk rating system incorporates the basic regulatory rating system as set forth
in the applicable regulatory asset quality examination procedures.
NBC's Loan Review Department ("LRD"), which is wholly independent of the
lending function, serves as a validation of each loan officer's risk monitoring
and rating system. LRD's primary function is to provide the Board of Directors,
through it Loan Review Committee, with a thorough understanding of the credit
quality of NBC's loan portfolio. LRD is required to review approximately 60% of
the annual average loan portfolio of each of the Banks during any continuous 12
month period. The review process includes coverage of at least 50% of all loan
relationships between $250,000 and $750,000 and coverage of 100% of all loan
relationships over $750,000. Other review requirements are in place to provide
management with early warning systems for problem credits as well as compliance
with stated lending policies. LRD's findings are reported monthly to the Loan
Review Committee of the NBC Board of Directors.
DEPOSITS
The principal sources of funds for the Banks are core deposits, consisting
of demand deposits, interest-bearing transaction accounts, money market
accounts, savings deposits and certificates of deposit. Transaction accounts
include checking and negotiable order of withdrawal (NOW) accounts which
customers use for cash management and which provide the Banks with a source of
fee income and cross-marketing opportunities, as well as a low-cost source of
funds. Time and savings accounts also provide a relatively stable and low-cost
source of funding. The largest source of funds for the Banks are certificates of
deposit. Certificates of deposit in excess of $100,000 are held primarily by
customers in the Banks' market areas. The Banks have not historically funded
their balance sheet with brokered certificates of deposit.
Deposit rates are set weekly by senior management of each of the Banks,
subject to approval by management of ANB. Management believes that the rates the
Banks offer are competitive with those offered by other institutions in the
Banks' market areas. ANB focuses on customer service to attract and retain
deposits.
INVESTMENT SERVICES
NBC has operated an investment department devoted primarily to handling
correspondent banks' investment needs since the mid-1980's. Because the
department has been relatively small in recent years, the contribution to
earnings has been moderate. In May of 1995, NBC expanded this operation
significantly with a staff of investment professionals formerly employed by
another financial institution. It is anticipated that the
7
8
expanded investment department and ancillary business associated with servicing
this market will contribute to bank earnings at a higher rate than has
historically been the case.
NBC also has a wholly-owned subsidiary, NBC Securities, Inc. ("NBC
Securities"), that is licensed as a brokerdealer. In 1995, NBC re-activated NBC
Securities' broker-dealer license to provide investment services to individuals
and institutions. These services include the sale of stocks, corporate bonds,
mutual funds, annuities, other insurance products and financial planning.
COMPETITION
The Banks encounter strong competition in making loans, acquiring deposits
and attracting customers for investment services. Competition among financial
institutions is based upon interest rates offered on deposit accounts, interest
rates charged on loans, other credit and service charges relating to loans, the
quality and scope of the services rendered, the convenience of banking
facilities and, in the case of loans to commercial borrowers, relative lending
limits. The Banks compete with other commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, brokerage and investment banking companies, and other financial
intermediaries operating in Alabama and elsewhere. Many of these competitors,
some of which are affiliated with large bank holding companies, have
substantially greater resources and lending limits, and may offer certain
services that the Banks do not currently provide. In addition, many of ANB's
non-bank competitors are not subject to the same extensive federal regulations
that govern bank or thrift holding companies and federally insured banks or
thrifts.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "IBBEA") authorized bank holding companies to acquire banks and other bank
holding companies without geographic limitations beginning September 30, 1995.
The arrival of interstate banking is expected to increase further the
competitiveness of the banking industry.
In addition, beginning on June 1, 1997, the IBBEA will authorize interstate
mergers and consolidations of existing banks, provided that neither bank's home
state has opted out of interstate branching by May 31, 1997. The State of
Alabama has opted in to interstate branching effective on or before June 1,
1997. Once a bank has established branches in a state through an interstate
merger, the bank may establish and acquire additional branches at any location
in the state where any bank involved in the interstate merger could have
established or acquired branches under applicable federal or state law.
Size gives the larger banks certain advantages in competing for business
from large corporations. These advantages include higher lending limits and the
ability to offer services in other areas of Alabama and the southeast region.
Some of ANB's competitors still maintain substantially greater resources and
lending limits than ANB. As a result, ANB has not generally attempted to compete
for the banking relationship of large corporations, and generally concentrates
its efforts on small businesses and individuals to which ANB believes it has
competed effectively by offering quality, personal service. Nonetheless, due to
the merger whereby NBC became a wholly-owned subsidiary, management believes it
may be able to compete more effectively for the business of some large
corporations.
Management believes that NBC's commitment to an involvement in its primary
market areas, as well as its commitment to quality and personalized banking
services, are factors that contribute to NBC's competitiveness. Management
believes that, with regard to the Community Banks, as a result of ANB's
decentralized community banking strategy and its emphasis on non-metropolitan
markets, the Community Banks are well positioned to compete successfully in
their market areas. Management believes that the Community Banks' commitment to
and involvement in their primary market areas, as well as their commitment to
quality and personalized banking services, are factors that contribute to ANB's
competitiveness.
MARKET AREAS AND GROWTH STRATEGY
Through NBC, ANB serves the lower half of Jefferson County, the upper third
of Shelby County, and western St. Clair County, primarily in the Birmingham
metropolitan area. The Community Banks generally operate in less competitive,
non-metropolitan areas with a decentralized approach to banking. The Commu-
8
9
nity Banks are located in central and southern Alabama. Through Gulf Bank and
First Bank of Baldwin County, ANB serves Baldwin County, Alabama. Located
between Mobile, Alabama and Pensacola, Florida, Baldwin County has a broad base
of economic activity in retail and service industries, agriculture, seafood,
aquaculture, tourism and manufacturing. Shelby, Baldwin and St. Clair Counties
have been named in statistical surveys as three of the fastest growing counties
in Alabama.
Due to continuing consolidation within the banking industry, as well as in
the state of Alabama, ANB may in the future seek to combine with other banks or
thrifts (or their holding companies) that may be of equal or greater size than
ANB in order to make ANB more attractive to potential acquisition or business
combination candidates and to provide capital for internal growth so that ANB
will be less dependent on business acquisitions or combinations for its growth.
ANB currently intends to concentrate on acquisitions that will expand NBC's
branch network in the Birmingham metropolitan area and acquisitions of
additional banks or thrifts (or their holding companies) which operate in rural
areas. In addition to price and terms, the factors considered by ANB in
determining the desirability of a business acquisition or combination are
financial condition, earnings potential, quality of management, market area and
competitive environment.
Due to capital limitations associated with the long-term debt incurred by
ANB in its acquisitions, ANB has historically not emphasized internal growth.
However, because ANB now operates in three of the fastest growing counties in
Alabama, management of ANB believes that the Banks could enhance growth by more
aggressively pursuing additional deposits and loans in these counties. Gulf Bank
has recently completed construction of a new branch in Gulf Shores, Alabama and
intends to further expand its presence in the Baldwin County area. NBC intends
to further expand its business in northern Shelby County, Alabama through its
recently completed construction of a new branch in Meadowbrook, Alabama. Also,
ANB intends to expand into lines of business closely related to banking if it
believes these lines could be profitable without undue risk to ANB.
There is no assurance that any further business combinations, internal
growth or establishment of new offices or lines of business will occur.
EMPLOYEES
As of December 31, 1996, ANB and the Banks together had approximately 450
full-time equivalent employees. None of these employees is a party to a
collective bargaining agreement. ANB considers its relations with its employees
to be good.
SUPERVISION AND REGULATION
ANB and the Banks are subject to state and federal banking laws and
regulations which impose specific requirements and restrictions on, and provide
for general regulatory oversight with respect to, virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not stockholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
ANB. Beginning with the enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and following in December 1991 with the
Federal Deposit Insurance Corporation Act ("FDICIA"), numerous additional
regulatory requirements have been placed on the banking industry in the past
seven years, and additional changes have been proposed. The operations of ANB
and the Banks may be affected by legislative changes and the policies of various
regulatory authorities. ANB is unable to predict the nature or the extent of the
effect on its business and earnings that fiscal or monetary policies, economic
control, or new federal or state legislation may have in the future.
Federal Bank Holding Company Regulation
ANB is a bank holding company under the Bank Holding Company Act of 1956
(the "BHCA"). Under the BHCA, ANB is subject to periodic examination by the
Federal Reserve and is required to file periodic reports of its operations and
such additional information as the Federal Reserve may require. ANB's and the
9
10
Banks' activities are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries, or engaging
in any other activity that the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
Investments, Control, and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company. The IBBEA permits bank holding companies to acquire control of banks
throughout the United States in compliance with the BHCA and other applicable
banking laws. See "Competition".
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act ("CIBCA"), together with regulations thereunder, require
Federal Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as ANB. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities of
the bank holding company. Under Federal Reserve regulations applicable to ANB,
control will be rebuttably presumed to exist if a person acquires at least 10%
of the outstanding shares of any class of voting securities once ANB registers
the Common Stock under the Exchange Act. The regulations provide a procedure for
challenge of the rebuttable control presumption.
Under the BHCA, ANB is generally prohibited from engaging in, or acquiring
direct or indirect control of more than 5% of the voting shares of any company
engaged in nonbanking activities unless the Federal Reserve, by order or
regulation, has found those activities to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. Some of the
activities that the Federal Reserve has determined by regulation to be proper
incidents to the business of banking include making or servicing loans and
certain types of leases, engaging in certain insurance and discount brokerage
activities, performing certain data processing services, acting in certain
circumstances as a fiduciary or investment or financial advisor, owning savings
associations and making investments in certain corporations or projects designed
primarily to promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, ANB is expected to act as a source of financial strength to the Banks
and to commit resources to support the Banks in circumstances in which ANB might
not otherwise do so. Under the BHCA, the Federal Reserve may require a bank
holding company to terminate any activity or relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness or stability of any subsidiary depository institution
of the bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or nonbank subsidiary if the agency determines that divestiture may aid the
depository institution's financial condition. Each of the Banks may be required
to indemnify or cross-guarantee the FDIC against losses it incurs with respect
to any of the other Banks, which in effect makes the Company's equity
investments in healthy bank subsidiaries available to the FDIC to assist any
failing or failed subsidiary of ANB.
The Banks
ANB is the holding company for seven banks, including two national banks
(First National Bank of Ashland and NBC), four Alabama state banks which are
members of the Federal Reserve System (Bank of Dadeville, Alabama Exchange Bank,
Gulf Bank, and Citizens Bank of Talladega) and one Alabama state bank which is
not a member of the Federal Reserve System (First Bank of Baldwin County). The
Office of Comptroller of the Currency (the "OCC") is the primary regulator for
First National Bank of Ashland and NBC, the Alabama Banking Department and the
Federal Reserve are the primary regulators for the Alabama state member banks,
and the Alabama Banking Department and the FDIC are the primary regulators for
First Bank of Baldwin County. These regulatory authorities regulate or monitor
all areas of each Bank's operations, including security devices and procedures,
adequacy of capital loan reserves, loans, investments, borrowings,
10
11
deposits, mergers, issuances of securities, payment of dividends, interest rates
payable on deposits, interest rates or fees chargeable on loans, establishment
of branches, corporate reorganizations, maintenance of books and records and
adequacy of staff training to carry on safe lending and deposit gathering
practices. Each of the Banks must maintain certain capital ratios and is subject
to limitations on aggregate investments in real estate, bank premises and
furniture and fixtures.
FDICIA
Under FDICIA, all insured institutions must undergo regular on-site
examinations by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to the extent feasible
and practicable, in any balance sheet, financial statement, report of condition
or any other report of any insured depository institution. FDICIA also requires
the federal banking regulatory agencies to prescribe, by regulation, standards
for all insured depository institutions and depository institution holding
companies relating, among other things, to (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; and (v) asset quality.
Transactions With Affiliates and Insiders
The Banks are subject to the provisions of Section 23A of the Federal
Reserve Act, which place limits on the amount of loans or extensions of credit
to, investments in or certain other transactions with affiliates, and on the
amount of advances to third parties collateralized by the securities or
obligations of affiliates. In general, the Banks' "affiliates" are ANB and ANB's
non-bank subsidiary. Section 23A limits the aggregate amount of transactions
with any individual affiliate to ten percent (10%) of the capital and surplus of
the bank and also limits the aggregate amount of transactions with all
affiliates to twenty percent (20%) of the bank's capital and surplus. Loans and
certain other extensions of credit to affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A, and the purchase
of low quality assets from affiliates is generally prohibited.
The Banks are also subject to the provisions of Section 23B of the Federal
Reserve Act that, among other things, prohibit an institution from engaging in
certain transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable to such institution or
its subsidiaries, as those prevailing at the time for comparable transactions
with non-affiliated companies. In the absence of comparable transactions, such
transactions may only occur under terms and circumstances, including credit
standards, that in good faith would be offered to or would apply to
non-affiliated companies.
The Banks are subject to certain restrictions on extensions of credit to
executive officers, directors, certain principal stockholders and their related
interests. Such extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.
Branching
All of the Banks are permitted to branch freely within the state of
Alabama, provided approval of the appropriate regulatory authority is obtained.
The Alabama Banking Code permits statewide branching for Alabama state banks. As
national banks located in Alabama, these state branch banking laws also apply to
First National Bank of Ashland and NBC. In addition, the IBBEA will permit
interstate branching beginning June 1, 1997. See "Competition".
11
12
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the Federal Reserve, the FDIC, the OCC or the OTS 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.
Other Regulations
Interest and certain other charges collected or contracted for by the Banks
are subject to state usury and banking laws and certain federal laws concerning
interest rates. The Banks' loan operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Home Mortgage
Disclosure Act of 1975 requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed or other prohibited factors in extending credit, the
Fair Credit Reporting Act of 1978 governing the use and provision of information
to credit reporting agencies, the Fair Debt Collection Practices Act governing
the manner in which consumer debts may be collected by collection agencies, and
the rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. The Banks' loan operations are
also subject to the Alabama Consumer Finance laws which generally govern the
amount and manner in which interest and other charges and expenses may be
charged and collected by lenders in Alabama. The deposit operations of the Banks
are also subject to the Right of Financial Privacy Act which imposes a duty to
maintain confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records and the
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve
Board to implement that Act which governs automatic deposits to and withdrawals
from deposit accounts and customers' rights and liabilities arising from the use
of automated teller machines and other electronic banking services. The Banks'
small loan subsidiaries are subject to the Alabama Small Loan laws governing the
amount of loans and interest and other charges that may be charged in connection
with a small loan.
Deposit Insurance
The deposits of each of the Banks are currently insured by the FDIC to
a maximum of $100,000 per depositor, subject to certain aggregation rules. The
FDIC establishes rates for the payment of premiums by federally insured banks
and thrifts for deposit insurance. Separate insurance funds (BIF and SAIF)
are maintained for commercial banks and thrifts, with insurance premiums from
the industry used to offset losses from insurance payouts when banks and
thrifts fail. Prior to 1996, due to the high rate of failures in recent years,
the FDIC adopted a risk-based deposit insurance premium system for all
insured depository institutions, including the Banks, which required that a
depository institution pay to the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF") from between $-0- and $.31 per $100 of
insured deposits depending on its capital levels and risk classification, as
determined by its primary federal regulator on a semiannual basis. In September
1996, the FDIC enacted legislation to recapitalize the SAIF and ensure against
default on Financing Corp. ("FICO") bonds. The legislation provided for a
one-time payment into the BIF in an amount approximating $.68 per $100 of SAIF
insured deposits. Thereafter and through December 31, 1999 the former
assessment rate of between $-0- and $.31 per $100 of insured deposits is
reduced to between $.0130 and $.2830 per $100, including a FICO rate of $.0130
per $100, for bank deposits and a rate of between $.0650 and $.3350
12
13
per $100, including a FICO rate of $.0650 per $100, for previously SAIF insured
deposits. After December 31, 1999, the BIF rate will be approximately $.0243
per $100 for all deposits.
Dividends
The principal source of ANB's cash revenues is derived from dividends
received from the Banks. The amount of dividends that may be paid by the Banks
to ANB depends on each Bank's earnings and capital position and is limited by
federal and/or state law, regulations and policies. See Note 3 of the Notes to
Consolidated Financial Statements of ANB and Subsidiaries.
As national banks, NBC and First National Bank of Ashland may not pay
dividends from their paid in surplus. All dividends must be paid out of
undivided profits then on hand, after deducting expenses, including provisions
for loan losses and bad debts. In addition, a national bank is prohibited from
declaring a dividend on its shares of common stock until its surplus equals its
stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of the preceding two consecutive half-year
periods (in the case of an annual dividend). The approval of the OCC is required
if the total of all dividends declared by a national bank in any calendar year
exceeds the total of its net profits for that year combined with its retained
net profits for the preceding two years, less any required transfers to surplus.
As Alabama state banks, Bank of Dadeville, Alabama Exchange Bank, Gulf
Bank, First Bank of Baldwin County and Citizens Bank of Talladega are subject to
restrictions on dividends under the Alabama Banking Code, which provides that an
Alabama state bank must transfer to surplus each year at least 10% of its net
earnings (and thus cannot declare or pay a dividend in excess of 90% of net
earnings) until its surplus equals at least 20% of its capital. In addition, a
state bank must obtain regulatory approval to declare dividends in any calendar
year in excess of the total of its net earnings for that year combined with its
retained net earnings in the preceding two years, less any required transfers to
surplus.
Under FDICIA, none of the Banks may pay a dividend if, after paying the
dividend, the bank would be undercapitalized.
Capital Regulations
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to account for
off-balance sheet exposure, minimize disincentives for holding liquid assets and
make regulatory capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies. The resulting capital ratios
represent qualifying capital as a percentage of total risk-weighted assets and
off-balance sheet items. The guidelines are minimums, and the federal regulators
have noted that banks and bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimums. The current
guidelines require all bank holding companies and federally-regulated banks to
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
4% must be Tier 1 capital. Tier 1 capital includes common stockholders' equity,
qualifying perpetual preferred stock and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other intangibles
and excludes the allowance for loan and lease losses. Tier 2 capital includes
the excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock and general reserves for loan and lease losses
up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance sheet
items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. These computations
result in the total risk-weighted assets. Most loans are assigned to the 100%
risk category, except for first mortgage loans fully secured by residential
property and, under certain circumstances, residential construction loans, both
of which carry a 50% rating. Most investment securities are assigned to the 20%
category, except for municipal or state revenue bonds, which have a 50% rating,
and direct obligations of or obligations guaranteed by the United States
Treasury or United States Government agencies, which have a 0% rating.
13
14
The federal bank regulatory authorities have also implemented a leverage
ratio, which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution for bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6% and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1996, ANB and
each of the Banks qualified as "well-capitalized." See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital."
Under FDICIA, the applicable agency can treat an institution as if it were
in the next lower category if the agency determines (after notice and an
opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or a part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
FDICIA requires the federal banking regulators to revise the risk-based
capital standards to provide for explicit consideration of interest-rate risk,
concentration of credit risk and the risks of non-traditional activities. It is
uncertain what effect these regulations, when implemented, will have on ANB and
the Banks.
Recent Legislative Developments
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. ANB cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect ANB.
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 45 -- Chairman and Chief Executive Officer. Mr.
Holcomb has served as Chairman and Chief Executive Officer of ANB since April
30, 1996. Prior to such date, Mr. Holcomb served as President and Chief
Operating Officer of ANB beginning December 29, 1995. Mr. Holcomb has been the
President and Chief Executive Officer of NBC since July 1990.
VICTOR E. NICHOL, JR. -- Age 50 -- President and Chief Operating Officer.
Mr. Nichol has served as President and Chief Operating Officer of ANB since
April 30, 1996. Prior to such date, Mr. Nichol served as Executive Vice
President of ANB beginning December 29, 1995. Mr. Nichol has been the Executive
Vice President and Chief Financial Officer of NBC since 1994. From 1992 through
1993, Mr. Nichol served as
14
15
President and Chief Executive Officer of Secor Bank. Prior to 1992, Mr. Nichol
served as Senior Executive Vice President and head of Corporate Banking at
AmSouth Bank, N.A.
JAMES S. PARKS, JR. -- Age 42 -- Senior Vice President -- Finance,
Controller and Treasurer. Mr. Parks has served as Senior Vice
President -- Finance, Controller and Treasurer of ANB since December 12, 1996.
Mr. Parks has served as the Senior Vice President and Controller for NBC since
1993 and has served NBC as Controller since 1990.
ITEM 2. PROPERTIES
ANB currently operates 32 banking offices. Of the 32 banking offices, ANB,
through the Banks, owns 23 banking offices without encumbrance and leases an
additional nine banking offices. The principal administrative offices of ANB are
located at 1927 First Avenue North, Birmingham, Alabama. See Notes 7 and 10 to
the Consolidated Financial Statements of ANB and Subsidiaries for additional
information regarding ANB's premises and equipment.
ITEM 3. LEGAL PROCEEDINGS
ANB, in the normal course of business, is subject to various pending and
threatened litigation. Based on legal counsel's opinion, 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
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
At March 3, 1997, ANB had 299 stockholders of record (including shares
held in "street" names by nominees who are record holders) and 6,515,418 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 1995 and 1996 are shown below:
DIVIDENDS
HIGH LOW DECLARED
---- --- ---------
1995
First Quarter........................................ $12 1/4 $ 8 3/64 $.05
Second Quarter....................................... 14 1/2 11 .05
Third Quarter........................................ 13 11 .05
Fourth Quarter....................................... 14 3/4 11 7/8 .05
1996
First Quarter........................................ 14 1/4 12 3/4 .05
Second Quarter....................................... 13 5/8 12 .05
Third Quarter........................................ 15 1/2 12 5/8 .09
Fourth Quarter....................................... 19 14 7/8 .09
The last reported sales price of Common Stock as reported on The Nasdaq-NMS
on March 3, 1997 was $19 5/8. The prices shown do not reflect retail mark-ups
and mark-downs. All share prices have been rounded to the nearest 1/64 of one
dollar. The market makers for the ANB Common Stock as of December 31, 1996, were
J. C. Bradford & Co.; Raymond James & Associates, Inc.; Herzog Heine Geduld
Inc.; Keefe Bruyette &
15
16
Woods Inc.; Legg Mason Wood Walker Incorporated; The Robinson Humphrey Company
Inc.; Sterne Agee & Leach Inc.; and The Chicago Corporation.
Sale of Unregistered Securities. Effective September 30, 1996, ANB
issued 304,993 shares of its Common Stock to the former stockholders of
FIRSTBANC in connection with the merger of FIRSTBANC into ANB (the
"FIRSTBANC Merger Shares"). ANB relied on the exemption from registration
provided by Sections 3(b) and 4(2) of the Securities Act of 1933 and Regulation
D promulgated thereunder for the issuance of such shares to the FIRSTBANC
stockholders. The FIRSTBANC Merger Shares are currently unregistered for
purposes of the Securities Act of 1933. In accordance with the terms of the
Merger Agreement between ANB and FIRSTBANC, ANB has agreed to register the
FIRSTBANC Merger Shares, and such shares are scheduled to be registered in the
1997 second quarter.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996(1) 1995(1) 1994(1) 1993(1) 1992(1)
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT RATIOS AND PER SHARE
DATA)
INCOME STATEMENT DATA:
Interest income............................. $ 65,125 $ 37,967 $ 29,344 $ 25,074 $ 26,574
Interest expense............................ 30,365 19,172 12,093 10,072 12,289
-------- -------- -------- -------- --------
Net interest income......................... 34,760 18,795 17,251 15,002 14,285
Provision for loan losses (benefit of
recoveries)............................... 239 409 1,279 (520) 3,110
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses (benefit of recoveries)............ 34,521 18,386 15,972 15,522 11,175
Net securities gains (losses)............... (33) 3 (17) 85 503
Noninterest income.......................... 15,778 7,739 4,542 5,601 5,185
Noninterest expense......................... 36,386 20,898 14,247 15,845 15,406
-------- -------- -------- -------- --------
Income before income taxes.................. 13,880 5,230 6,250 5,363 1,457
Provision for income taxes.................. 4,141 354 275 260 20
-------- -------- -------- -------- --------
Income before minority interest in earnings
of consolidated subsidiary................ 9,739 4,876 5,975 5,103 1,437
Minority interest in earnings of
consolidated subsidiary................... 14 650 750 236 --
-------- -------- -------- -------- --------
Net income.................................. $ 9,725 $ 4,226 $ 5,225 $ 4,867 $ 1,437
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets................................ $887,712 $839,723 $426,484 $395,985 $401,721
Earnings assets............................. 810,651 760,373 396,541 368,112 371,221
Securities.................................. 152,761 158,266 86,689 82,057 75,858
Loans....................................... 611,441 553,119 301,876 265,965 242,078
Allowance for loan losses................... 9,322 8,909 5,261 6,268 6,214
Deposits.................................... 674,681 676,536 348,419 320,754 333,791
Short-term debt............................. 41,000 21,280 7,150 7,350 7,350
Long-term debt.............................. 300 821 945 1,065 1,183
Stockholders' equity........................ 66,121 58,189 27,474 24,313 20,764
WEIGHTED AVERAGE SHARES OUTSTANDING(2)...... 6,725 2,874 2,834 2,742 2,742
PER COMMON SHARE DATA:
Net income(3)............................... $ 1.45 $ 1.17 $ 1.59 $ 1.51 $ 0.52
Book value (period end)(4).................. 10.15 8.94 6.09 5.00 3.66
Tangible book value (period end)(4)......... 9.03 7.78 5.26 4.16 2.74
Dividends declared.......................... 0.28 -- -- -- --
16
17
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996(1) 1995(1) 1994(1) 1993(1) 1992(1)
-------- -------- -------- -------- --------
PERFORMANCE RATIOS:
Return on average assets.................... 1.17% 0.89% 1.30% 1.29% 0.38%
Return on average equity.................... 15.58 15.12 20.31 21.26 7.99
Net interest margin(5)...................... 4.54 4.23 4.56 4.28 4.04
ASSET QUALITY RATIOS:
Allowance for loan losses to period end
loans..................................... 1.52% 1.61% 1.74% 2.36% 2.57%
Allowance for loan losses to period end
nonperforming loans(6).................... 543.24 384.01 328.61 207.96 137.11
Net loan losses (recoveries) to average
loans..................................... (0.03) (0.04) 0.90 (0.23) 1.06
Nonperforming assets to period end loans and
foreclosed property(6).................... 0.36 0.53 0.66 1.47 2.43
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets............ 7.53% 5.91% 6.39% 6.08% 4.72%
Leverage (4.00% required minimum)(7)........ 7.09 10.47 7.49 6.45 4.83
Risk-based capital
Tier 1 (4.00% required minimum)(7)........ 9.36 9.01 10.43 9.59 7.78
Total (8.00% required minimum)(7)......... 10.61 10.26 11.68 10.84 9.03
Average loans to average deposits......... 86.52 82.62 84.63 78.25 77.52
- ---------------
(1) On December 29, 1995, Alabama National BanCorporation ("ANB") merged, ("the
Merger") with National Commerce Corporation ("NCC") and Commerce Bankshares,
Inc. ("CBS"), (collectively the "Company"). The Merger was accomplished,
among other things, by converting each share of NCC stock into 348.14 shares
of ANB stock and each share of CBS stock into 7.0435 shares of ANB stock for
a total of 3,106,981 shares, (or 50.1%) of the Company stock. The Merger was
accounted for as a "reverse acquisition," whereby NCC is deemed to have
acquired ANB for financial reporting purposes. However, ANB remains the
continuing legal entity and registrant for Securities and Exchange
Commission filing purposes. Consistent with the reverse acquisition
accounting treatment, the historical income statement information included
in the Five-Year Summary of Selected Financial Data of the Company presented
is that of NCC for years prior to 1996. The balance sheet information
included in the historical Five-Year Summary of Selected Financial Data of
the Company presented is that of NCC for years prior to 1995. On September
30, 1996, Firstbanc Holding Company, Inc. ("FIRSTBANC") was merged into the
Company with each common share of FIRSTBANC stock being converted into
7.12917 shares of the Company stock. The FIRSTBANC merger was accounted for
as a pooling of interests. Accordingly, the historical Five-Year Summary of
Selected Financial Data for all periods have been restated to reflect the
results of operations of the combined companies from the earliest period
presented, except for dividends per common share. (See Note 1 to the
Company's consolidated financial statements).
(2) The weighted average common share and common equivalent shares outstanding
are those of NCC and FIRSTBANC converted into ANB common and common
equivalents at the exchange ratio.
(3) Net income per common share is calculated based upon net income as adjusted
for minority interests in earnings of consolidated subsidiaries and cash
dividends on preferred stock.
(4) Book value and tangible book value at December 31, 1996 and 1995 are
calculated on the total common shares of the company outstanding after the
Merger. For other years presented, the calculation is based on the
outstanding common shares of NCC 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.
17
18
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 29, 1995, Alabama National BanCorporation ("ANB")
merged ("the Merger") with National Commerce Corporation ("NCC") and Commerce
Bankshares, Inc. ("CBS") (collectively the "Company"), The Merger was
accomplished, among other things, by converting each share of NCC stock into
348.14 shares of ANB stock and each share of CBS stock into 7.0435 shares of ANB
stock for a total of 3,106,981 shares (or 50.1%) of the Company stock. The
Merger was accounted for as a "reverse acquisition," whereby NCC is deemed to
have acquired ANB for financial reporting purposes. However, ANB remains the
continuing legal entity and registrant for Securities and Exchange Commission
purposes. Consistent with the reverse acquisition accounting treatment, the
historical financial statements of the Company presented for 1995 and 1994
are the consolidated financial statements of NCC and differ from the
consolidated financial statements of ANB as previously reported. The operations
of ANB are included in the financial statements from the date of acquisition. On
September 30, 1996, FirstBanc Holding Company ("FIRSTBANC"), a one bank holding
company headquartered in Robertsdale, Alabama, was merged into the Company. The
Company acquired all of the outstanding common stock of FIRSTBANC in exchange
for 305,000 shares of the Company's common stock. The Company recorded the
FIRSTBANC merger as a pooling-of-interests and, accordingly, financial
statements for all periods have been restated to reflect the results of
operations of the companies on a combined basis from the earliest period
presented, except for dividends per share. On April 15, 1994, NCC acquired First
American Bank of Pelham ("FAB"). The acquisition of FAB was accounted for as a
purchase. On August 1, 1995, NCC acquired Talladega Federal Savings and Loan
Association ("TFSLA"). The acquisition of TFSLA was accounted for as a purchase.
The operations of FAB and TFSLA are included in the consolidated financial
statements of the Company from the dates of their acquisitions. Because the
Merger occurred on the last business day of 1995, the results of operations of
ANB are not reflected in the consolidated financial statements of the Company in
1995.
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 the annual report.
ANB, as it was constituted before the Merger, constitutes a significant
portion of the consolidated post-Merger Company, with 36.4% of the consolidated
assets of the Company having been acquired in the Merger. The following
summarizes the assets acquired and liabilities assumed in the Merger (in
thousands):
Cash and equivalents........................................ $ 16,823
Federal funds sold.......................................... 10,965
Investment securities:
Held to maturity.......................................... 19,954
Available for sale........................................ 27,821
Loans, net of unearned interest and allowance for loan
losses.................................................... 204,485
Bank premises and equipment................................. 11,734
Intangible assets........................................... 5,423
Other assets................................................ 8,354
Deposit liabilities......................................... (253,611)
Short-term borrowings....................................... (6,000)
Other liabilities........................................... (9,194)
---------
Net assets acquired......................................... $ 36,754
=========
18
19
RESULTS OF OPERATIONS
Year ended December 31, 1996, compared with year ended December 31, 1995
The Company's net income increased by $5.5 million, or 130.0%, to $9.7
million in the year ended December 31, 1996, from $4.2 million in the year ended
December 31, 1995. Return on average assets during 1996 was 1.17%, compared with
0.89% during 1995 and return on average equity was 15.58% during 1996, compared
with 15.12% during 1995.
Net interest income increased $16.0 million, or 84.9%, to $34.8 million in
1996 from $18.8 million in 1995, as interest income increased by $27.2 million
and interest expense increased $11.2 million. The increase in net interest
income is primarily attributable to a $252.1 million increase in average loans
to $570.8 million during 1996, from $318.7 million during 1995 as a result of
the Merger and an increased management emphasis on loan growth. The increase in
interest expense is primarily attributable to an increase in average time
deposits of $116.0 million to $276.9 million in 1996, from $160.9 million in
1995.
The Company's net interest spread and net interest margin were 3.94% and
4.54%, respectively, in 1996, increasing by 43 and 31 basis points from 1995.
These increases reflect the increase in average loans, relative to other earning
assets.
The Company recorded a provision for loan losses of $239,000 during 1996,
compared with a provision for loan losses of $409,000 during 1995, a decline of
$170,000, or 41.6%. Management believes that both loan loss experience and asset
quality indicate that the allowance for loan losses is maintained at an adequate
level. The Company's allowance for loan losses as a percentage of period-end
loans was 1.52% at December 31, 1996, compared to 1.61% at December 31, 1995,
and the allowance for loan losses as a percentage of period-end nonperforming
assets was 426.8% at December 31, 1996, compared with 302.5% at December 31,
1995. The Company experienced net recoveries of $174,000 in 1996 -- a ratio of
net recoveries to average loans of 0.03%. See "-- Provision and Allowance for
Loan Losses."
Noninterest income increased $8.0 million, or 103.4%, to $15.7 million in
1996, compared with $7.7 million in 1995. The increase is attributable to an
increase in investment services income of $4.0 million, or 100.5%, to $7.9
million in 1996, compared with $3.9 million in 1995. Noninterest expense
increased $15.5 million, or 74.1%, to $36.4 million during 1996, compared with
$20.9 million during 1995. Salaries and employee benefits increased by $10.1
million, or 89.3%, due in part to increased investment service compensation and
the Merger. Other expenses, generally resulting from the Merger, increased by
$5.4 million, or 56.1%, during 1996, compared with 1995.
Income before the provision for income taxes increased $8.7 million, or
165.4%, to $13.9 million in 1996, from $5.2 million in 1995. Income before
minority interest in earnings of consolidated subsidiary and net income
increased $4.9 million and $5.5 million, respectively, during 1996.
Year ended December 31, 1995, compared with year ended December 31, 1994
Net income decreased $1.0 million, or 19.1%, to $4.2 million in the year
ended December 31, 1995, from $5.2 million in the year ended December 31, 1994.
Return on average assets during 1995 was 0.89%, compared with 1.30% during 1994,
and return on average equity was 15.12% during 1995, compared with 20.31% during
1994.
Net interest income increased $1.5 million, or 9.0%, to $18.8 million in
1995, from $17.3 million in 1994, as interest income increased by $8.6 million
and interest expense increased by $7.1 million. The increase in net interest
income resulted primarily from a $39.5 million increase during 1995 in average
loans.
The Company's net interest spread and net interest margin were 3.51% and
4.23%, respectively, in 1995, decreasing 45 and 33 basis points from 1994. The
decline is attributable to competition among banks, and other financial
institutions, for resources, primarily time deposits, to fund increases in
earning assets.
19
20
The Company recorded a provision for loan losses of $409,000 during 1995,
compared with $1.3 million in 1994, a decrease of $870,000. Net recoveries were
$115,000, or 0.04% of average loans, during 1995, compared with net charge-offs
of $2.5 million, or 0.90% of average loans, during 1994.
The Company's allowance for loan losses as a percentage of period-end loans
was 1.61% at December 31, 1995, compared with 1.74% at December 31, 1994, and
the allowance for loan losses as a percentage of nonperforming loans was 384.01%
at December 31, 1995, compared with 328.61% at December 31, 1994. See
"-- Provision and Allowance for Loan Losses."
Noninterest income increased by $3.2 million to $7.7 million in 1995.
Investment services income increased by approximately $3.0 million. Noninterest
expense increased by $6.7 million to $20.9 million in 1995. An increase in
salaries and benefits of $3.2 million relating to increased investment services
income and a $1.2 million non-credit loss, principally litigation expenses, were
the primary factors for the increase.
Minority interest in earnings of consolidated subsidiaries decreased by
$100,000 in 1995 to $650,000, from $750,000 in 1994, resulting from a decrease
in net income of $1.0 million.
NET INTEREST INCOME
The largest component of the Company's net income is its net interest
income -- the difference between the income earned on assets and interest paid
on deposits and borrowed funds used to support its assets. Net interest income
is determined by the yield earned on the Company's earning assets and rates paid
on its interest-bearing liabilities, the relative amounts of earning assets and
interest-bearing liabilities and the maturity and repricing characteristics of
its earning assets and interest-bearing liabilities. Net interest income divided
by average earning assets represents the Company's net interest margin.
Average Balances, Income, Expenses and Rates
The following table depicts, on a taxable equivalent basis for the periods
indicated, certain information related to the Company's average balance sheet
and its average yields on assets and average costs of liabilities. Such yields
or costs are derived by dividing income or expense by the average daily balances
of the associated assets or liabilities.
20
21
AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ -------- ------- ------ -------- ------- ------
(AMOUNTS IN THOUSANDS, EXCEPT YIELDS AND RATES)
ASSETS
Earning assets:
Loans(1)(3)........................ $570,816 $53,495 9.37% $318,674 $30,126 9.45% $279,180 $23,410 8.39%
Securities:
Taxable.......................... 138,269 8,875 6.42 91,935 6,059 6.59 87,176 5,678 6.51
Tax exempt....................... 18,033 1,456 8.07 2,509 189 7.53 1,834 133 7.25
Cash balances in other banks....... 3,926 233 5.93 3,558 207 5.82 -- -- --
Funds sold......................... 32,005 1,587 4.96 26,037 1,532 5.88 9,758 399 4.09
Trading account securities......... 2,814 183 6.50 1,097 67 6.11 284 15 5.28
-------- ------- -------- ------- -------- -------
Total earning assets(2)...... 765,863 65,829 8.60 443,810 38,180 8.60 378,232 29,635 7.84
-------- ------- -------- ------- -------- -------
Cash and due from banks.............. 29,010 18,041 16,396
Premises and equipment............... 29,620 8,013 6,749
Other assets......................... 15,918 7,956 7,183
Allowance for loan losses............ (9,248) (5,290) (6,043)
-------- -------- --------
Total assets..................... $831,163 $472,530 $402,517
======== ======== ========
LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction
accounts......................... $ 80,381 2,323 2.89 $ 36,427 1,127 3.09 $ 34,508 949 2.75
Savings deposits................... 197,102 7,087 3.60 129,747 5,483 4.23 133,209 4,723 3.55
Time deposits...................... 276,884 15,498 5.60 160,916 9,604 5.97 104,916 4,724 4.50
Funds purchased.................... 65,380 3,365 5.15 35,921 2,143 5.97 27,893 1,111 3.98
Other short-term borrowings........ 31,610 2,032 6.43 12,994 732 5.63 10,028 503 5.02
Long-term debt..................... 659 60 9.10 882 83 9.41 1,017 83 8.16
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities................ 652,016 30,365 4.66 376,887 19,172 5.09 311,571 12,093 3.88
-------- ------- ---- -------- ------- ---- -------- ------- ----
Demand deposits...................... 105,362 58,614 57,267
Accrued interest and other
liabilities........................ 11,346 9,086 7,956
Stockholders' equity................. 62,439 27,943 25,723
-------- -------- --------
Total liabilities and
stockholders' equity....... $831,163 $472,530 $402,517
-------- -------- --------
Net interest spread.................. 3.94% 3.51% 3.96%
==== ==== ====
Net interest income/margin on a
taxable equivalent basis........... 35,464 4.63% 19,008 4.28% 17,542 4.64%
==== ==== ====
Tax equivalent adjustment(2)......... 704 213 291
------- ------- -------
Net interest income/margin........... $34,760 4.54% $18,795 4.23% $17,251 4.56%
======= ==== ======= ==== ======= ====
- ---------------
(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 $1,768,000, $760,000 and $674,000 are included in
interest and fees on loans for 1996, 1995 and 1994, respectively.
During 1996, with little change in the overall interest rate levels from
that in 1995, the Company experienced an increase in net interest income of
$16.0 million, or 84.9%, to $34.8 million, compared with $18.8 million in 1995,
as well as increases in the net interest spread of 43 basis points to 3.94% in
1996 from 3.51% in 1995, and the net interest margin of 31 basis points to 4.54%
in 1996, compared with 4.23% in 1995. The primary reason for the increase in net
interest income is the Merger. The primary reason for the increase in the net
interest spread and net interest margin was an increase in the proportion of
loans to other earnings assets. During 1996, net average earning assets
increased by $46.9 million, or 70.1%, to $113.8 million from $66.9 million in
1995, while average loans increased $252.1 million to $570.8 million in 1996
from $318.7 million in 1995.
21
22
Analysis of Changes in Net Interest Income
The following table sets forth, on a taxable equivalent basis, the effect
which varying levels of earning assets and interest-bearing liabilities and the
applicable rates had on changes in net interest income for 1996 and 1995. 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
DECEMBER 31,
-------------------------------------------------------------
1996 COMPARED TO 1995 1995 COMPARED TO 1994
VARIANCE DUE TO VARIANCE DUE TO
------------------------------ ----------------------------
VOLUME YIELD/RATE TOTAL VOLUME YIELD/RATE TOTAL
------- ---------- ------- ------ ---------- ------
(AMOUNTS IN THOUSANDS)
EARNING ASSETS:
Loans.................................................. $23,626 ($ 257) $23,369 $3,548 $3,168 $6,716
Securities:
Taxable.............................................. 2,976 (160) 2,816 311 70 381
Tax exempt........................................... 1,252 15 1,267 51 5 56
Cash balances in other banks........................... 22 4 26 207 -- 207
Funds sold............................................. 318 (263) 55 897 236 1,133
Trading account securities............................. 112 4 116 50 2 52
------- ------- ------- ------ ------ ------
Total interest income......................... 28,306 (657) 27,649 5,064 3,481 8,545
INTEREST-BEARING LIABILITIES:
Interest-bearing transaction accounts.................. 1,274 (78) 1,196 55 123 178
Savings and money market deposits...................... 2,516 (912) 1,604 (126) 886 760
Time deposits.......................................... 6,523 (629) 5,894 3,027 1,853 4,880
Funds purchased........................................ 1,552 (330) 1,222 377 655 1,032
Other short-term borrowings............................ 1,183 117 1,300 162 67 229
Long-term debt......................................... (20) (3) (23) (12) 12 --
------- ------- ------- ------ ------ ------
Total interest expense........................ 13,028 (1,835) 11,193 3,483 3,596 7,079
------- ------- ------- ------ ------ ------
Net interest income on a taxable equivalent
basis....................................... $15,278 $ 1,178 16,456 $1,581 $ (115) 1,466
======= ======= ====== ======
Taxable equivalent adjustment.......................... (491) 78
------- ------
Net interest income.................................... $15,965 $1,544
======= ======
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.
22
23
The following table illustrates the Company's interest rate sensitivity at
December 31, 1996, assuming the relevant assets and liabilities are collected
and paid, respectively, based upon historical experience rather than their
stated maturities.
INTEREST SENSITIVITY ANALYSIS
DECEMBER 31, 1996
-------------------------------------------------------------------------------------
AFTER ONE AFTER THREE
THROUGH THROUGH
WITHIN ONE THREE TWELVE WITHIN ONE GREATER THAN
MONTH MONTHS MONTHS YEAR ONE YEAR TOTAL
---------- --------- ----------- ---------- ------------ --------
(AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
ASSETS
Earning assets:
Loans(1)............. $ 262,877 $ 54,702 $ 93,894 $ 411,473 $198,857 $610,330
Securities(2)........ 10,992 4,400 5,526 20,918 128,337 149,255
Interest-bearing
deposits in other
banks.............. 200 -- -- 200 -- 200
Funds sold........... 46,249 -- -- 46,249 -- 46,249
--------- --------- --------- --------- -------- --------
Total
interest-
earning
assets...... $ 320,318 $ 59,102 $ 99,420 $ 478,840 $327,194 $806,034
LIABILITIES
Interest-bearing
liabilities:
Interest-bearing
deposits:
Demand deposits.... $ -- $ -- $ 84,714 $ 84,714 $ -- $ 84,714
Savings deposits... 137,918 -- -- 137,918 44,099 182,017
Time deposits(3)... 41,356 54,360 143,853 239,569 57,419 296,988
Funds purchased...... 91,871 -- -- 91,871 -- 91,871
Short-term
borrowings(4)...... 43,968 -- -- 43,968 -- 43,968
Long-term debt....... 2 4 18 24 276 300
--------- --------- --------- --------- -------- --------
Total
interest-
bearing
liabilities... $ 315,115 $ 54,364 $ 228,585 $ 598,064 $101,794 $699,858
--------- --------- --------- --------- -------- --------
Period gap............. $ 5,203 $ 4,738 $(129,165) $ (119,224) $225,400
========= ========= ========= ========= ========
Cumulative gap......... $ 5,203 $ 9,941 $(119,224) $(119,224) $106,176 $106,176
========= ========= ========= ========= ======== ========
Ratio of cumulative gap
to total earning
assets............... 0.65% 1.23% (14.79)% (14.79)% 13.17%
- ---------------
(1) Excludes nonaccrual loans of $1,111,000.
(2) Excludes investment equity securities of $3,506,000.
(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 $2,968,000.
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, except for the one to three-month and
three-through twelve-month periods. 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
23
24
significant factors in a given interest rate environment, including changes in
the volume and mix of earning assets and interest-bearing liabilities.
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, through an independent loan
review function, 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 for both the Company and other financial institutions. Loan review
evaluates the loan portfolio in accordance with regulatory guidelines and
monitors those loans classified as doubtful, substandard and special mention.
Internal classification combined with migration analysis of those
classifications, currently covering 45 months, are tools utilized by loan review
to make specific evaluations as to the level of allowance for loan losses
necessary to reserve for expected loan losses in the portfolio. Also considered
in management's evaluation of the adequacy of the allowance for loan losses are
the level of nonperforming loans and the results of regulatory examinations
conducted for each bank, including their evaluation of the Company's policies
and procedures and classification of loans.
Prior to the Merger, ANB and its banks observed a similar overall approach
to determining the adequacy of the allowance for loan losses, except for an
independent loan review function and its historical migration analysis.
Management believes that required inspections conducted as a result of the
Merger, as well as review of historical information, provide reliable
indications of the adequacy of the allowance for loan losses maintained by ANB
at the time of the acquisition. Complete adoption of the Company's procedures is
expected to continue throughout much of 1997.
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.
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. Nonperforming loans as a percentage
of period-end loans were 0.28%, 0.42%, 0.53%, 1.13% and 1.87% at December 31,
1996, 1995, 1994, 1993 and 1992, respectively. Loan loss provisions (recoveries)
were $239,000, $409,000, $1,279,000, $(520,000) and $3,110,000 in 1996, 1995,
1994, 1993 and 1992, respectively.
24
25
ALLOWANCE FOR LOAN LOSSES
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
Total loans outstanding at end of
period, net of unearned
income......................... $611,441 $553,119 $301,876 $265,965 $242,078
======== ======== ======== ======== ========
Average amount of loans
outstanding, net of unearned
income......................... $570,816 $318,674 $279,180 $249,247 $253,072
======== ======== ======== ======== ========
Allowance for loan losses at
beginning of period............ $ 8,909 $ 5,261 $ 6,268 $ 6,214 $ 5,799
Charge-offs:
Commercial, financial and
agricultural................ 691 1,073 2,924 498 3,453
Real estate -- mortgage........ 120 221 225 849 470
Consumer....................... 532 132 104 99 387
-------- -------- -------- -------- --------
Total charge-offs...... 1,343 1,426 3,253 1,446 4,310
-------- -------- -------- -------- --------
Recoveries:
Commercial, financial and
agricultural................ 1,184 1,014 429 1,408 1,202
Real estate -- mortgage........ 145 289 119 446 148
Consumer....................... 188 238 192 166 265
-------- -------- -------- -------- --------
Total recoveries....... 1,517 1,541 740 2,020 1,615
-------- -------- -------- -------- --------
Net charge-offs
(recoveries)......... (174) (115) 2,513 (574) 2,695
Provision for (benefit of) loan
losses......................... 239 409 1,279 (520) 3,110
Changes incidental to
acquisitions................... -- 3,124 227 -- --
-------- -------- -------- -------- --------
Allowance for loan losses at
period-end..................... $ 9,322 $ 8,909 $ 5,261 $ 6,268 $ 6,214
======== ======== ======== ======== ========
Allowance for loan losses to
period-end loans............... 1.52% 1.61% 1.74% 2.36% 2.57%
Net charge-offs (recoveries) to
average loans.................. (0.03) (0.04) 0.90 (0.23) 1.06
Allocation of allowance
There is no formal allocation of the allowance for loan losses by loan
category.
25
26
Nonperforming Assets
The following table presents the Company's nonperforming assets for the
dates indicated.
NONPERFORMING ASSETS
AT DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
Nonaccrual loans................................. $ 1,111 $ 1,245 $ 1,304 $ 1,465 $ 2,721
Restructured loans............................... 605 949 297 1,549 1,811
Loans past due 90 days or more and still
accruing....................................... -- 126 -- -- --
------- ------- ------- ------- -------
Total nonperforming loans.............. 1,716 2,320 1,601 3,014 4,532
Other real estate owned.......................... 468 625 402 919 1,388
------- ------- ------- ------- -------
Total nonperforming assets............. $ 2,184 $ 2,945 $ 2,003 $ 3,933 $ 5,920
======= ======= ======= ======= =======
Allowance for loan losses to period-end loans.... 1.52% 1.61% 1.74% 2.36% 2.57%
Allowance for loan losses to period-end
nonperforming loans............................ 543.24 384.01 328.61 207.96 137.11
Allowance for loan losses to period-end
nonperforming assets........................... 426.83 302.51 262.66 158.37 104.97
Net losses (recoveries) to average loans......... (0.03) (0.04) 0.90 (0.23) 1.06
Nonperforming assets to period-end loans and
foreclosed property............................ 0.36 0.53 0.66 1.47 2.43
Nonperforming loans to period-end loans.......... 0.28 0.42 0.53 1.13 1.87
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, 1996, 1995 and 1994, approximately $118,000, $67,000
and $178,000, 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. In addition, during 1996, 1995 and 1994,
interest income on nonaccrual and restructured loans of $79,000, $111,000 and
$104,000, respectively, was actually included in the Company's net income.
Total nonperforming assets decreased $761,000 to $2.2 million at December
31, 1996, from $2.9 million at December 31, 1995. The allowance for loan losses
to period-end nonperforming assets was 426.8% at December 31, 1996, compared
with 302.5% at December 31, 1995.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan"
as amended by Statement of Financial Accounting Standards No. 118 "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures." The
adoption of these statements did not have a material impact on the Company's
nonperforming assets or comparability of classifications of nonperforming
assets. See "Notes to the Consolidated Financial Statements" of the Company as
of December 31, 1996.
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
26
27
closely in order to ensure that the Company's interests are protected. At
December 31, 1996, the Company had 14 loans considered by management to be
potential problem loans totaling $1,805,000. 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
noninterest income: traditional retail and commercial banking, mortgage banking,
trust services and investment services. Service charges on deposit accounts
increased $2.2 million, or 129.2%, to $3.9 million for 1996, as compared to
1995. Gain on disposal of assets and deposits increased $332,000, or 89.5%, to
$703,000 in 1996, compared with $371,000 in 1995, as a one-time gain on disposal
of a branch and its related deposits of $274,000 and recurring gains on sale of
mortgage loans of $509,000 were reduced by a one-time loss of $126,000 resulting
from abandonment of computer equipment due to consolidation of the Company's
data processing center. Trust fees grew 17.4% to $1.6 million for 1996.
Investment services income increased $4.0 million, or 100.5%, to $7.9 million
for 1996, compared with $3.9 million in 1995 as a result of significant
increases in the investment services activity. Management anticipates activity
to continue in the investment service division, but is unable to predict the
impact on the future results of operations.
The following table sets forth, for the periods indicated, the principal
components of noninterest income.
NONINTEREST INCOME
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------ ------
(AMOUNTS IN THOUSANDS)
Service charges on deposit accounts......................... $ 3,853 $1,681 $1,528
Investment services income.................................. 7,889 3,934 975
Trust fees.................................................. 1,550 1,320 1,128
Gain on disposal of assets and deposits(1).................. 703 371 525
Securities gains (losses)................................... (33) 3 (17)
Other....................................................... 1,783 433 386
------- ------ ------
Total noninterest income.......................... $15,745 $7,742 $4,525
======= ====== ======
- ---------------
(1) The year ended December 31, 1996 includes the gain on the sale of a branch
building and the related deposits of approximately $274,000 and the loss on
the abandonment of computer equipment of approximately $126,000.
27
28
Noninterest Expense
The following table sets forth, for the periods indicated, the principal
components of noninterest expense.
NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
(AMOUNTS IN THOUSANDS)
Salaries and employee benefits.............................. $21,466 $11,337 $ 8,172
Net occupancy expense....................................... 2,573 1,979 1,632
Furniture and equipment expense............................. 1,885 818 942
Amortization of goodwill.................................... 272 56 56
Advertising................................................. 657 594 336
Banking assessments......................................... 1,028 500 876
Data processing expenses.................................... 1,125 703 499
Legal and professional fees................................. 1,424 1,396 422
Non-credit losses (recoveries).............................. (24) 1,219 36
Other....................................................... 5,980 2,296 1,276
------- ------- -------
Total noninterest expense......................... $36,386 $20,898 $14,247
======= ======= =======
Overall salaries and employee benefits increased $10.1 million, or 89.3%,
to $21.5 million in 1996, compared with $11.3 million in 1995. The majority of
this increase is attributable to the Merger and commissions associated with
additional sales volume in the investment services division of the Company. In
addition, the Company recorded a $976,000 one-time charge connected with the
settlement of employment contracts with the former Chairman and CEO of ANB, and
one of the subsidiary bank presidents. Net occupancy expense increased $594,000,
or 30.0%, to $2.6 million during 1996, attributable primarily to the Merger.
Furniture and equipment expense, $1.9 million in 1996; amortization of
goodwill, $272,000; advertising, $657,000 and data processing fees, $1.1 million
in 1996, increased 130.4%, 385.7%, 10.6% and 60.0%, respectively, from 1995 as a
result of the Merger.
Banking assessments increased by $528,000, or 105.6%, to $1.0 million in
1996, from $500,000 in 1995. The increase is due, in part, to the Merger and to
a one-time charge of $677,000 relating to recapitalization of the SAIF fund
through a FDIC assessment.
Other non-credit losses decreased by $1.2 million in 1996. The 1995 amount
is attributable to three adverse judgments against the Company which were
resolved during 1996. Legal and professional fees remained high in 1996, $1.4
million, as a result of continued litigation support and expenses related to the
FIRSTBANC merger. Legal and professional fees totaled $1.5 million in 1995.
28
29
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
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -----
(AMOUNTS IN THOUSANDS)
Investment services income.................................. $7,889 $3,934 $975
Other revenue............................................... 1,354 422 21
------ ------ ----
Total revenue..................................... 9,243 4,356 996
Expenses and allocated charges.............................. 8,551 4,267 980
------ ------ ----
Net investment services revenue............................. $ 692 $ 89 $ 16
====== ====== ====
Investment services revenues have increased $4.8 million, or 112.2%, to
$9.2 million in 1996 from $4.4 million in 1995 as a result of additional staff,
new customer relations and favorable economic conditions. Other revenue consists
of interest and dividends on trading assets and fee based services including,
asset and liability reporting, 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 an unrelated company.
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 higher
loan yields are the inherent credit and liquidity risks which management
attempts to control and counterbalance. Loans averaged $570.8 million in 1996
compared to $318.7 million in 1995, an increase of $252.1 million, or 79.1%. At
December 31, 1996, total loans were $611.4 million,