-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UrutKe4Ef8rpS+EVmfLu42+jUx1WR4z73W1dhgJPgVZCRiwBJUs/7dwzjXAZHfs/ YvUvKJB/M5vSvopc3tngXg== 0000931763-98-000817.txt : 19980401 0000931763-98-000817.hdr.sgml : 19980401 ACCESSION NUMBER: 0000931763-98-000817 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALABAMA NATIONAL BANCORPORATION CENTRAL INDEX KEY: 0000926966 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 631114426 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25160 FILM NUMBER: 98580827 BUSINESS ADDRESS: STREET 1: 1927 FIRST AVENUE NORTH CITY: BIRMINGHAM STATE: AL ZIP: 35209 BUSINESS PHONE: 2055833600 MAIL ADDRESS: STREET 1: 1927 FIRST AVENUE NORTH STREET 2: 1927 FIRST AVENUE NORTH CITY: BIRMINGHAM STATE: AL ZIP: 35209 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual report pursuant to section 13 or 15(d) of the Securities Exchange - ----- Act of 1934 for the fiscal year ended December 31, 1997, or _____ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] for the transition period from ______________ to _______________. Commission file number: 0-25160 ------- ALABAMA NATIONAL BANCORPORATION ------------------------------- (Exact name of registrant as specified in its charter) Delaware 63-1114426 - ---------------- -------------------------------------- (State of incorporation (I.R.S. Employer Identification No.) or organization) 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 12, 1998 was $173,391,634. As of March 12, 1998, the registrant had outstanding 8,648,120 shares of its common stock. DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K: ----------------------------------------------------- (i) The definitive Proxy Statement for the 1998 Annual Meeting of Alabama National BanCorporation's stockholders is incorporated by reference into Part III of this report. TABLE OF CONTENTS
ITEM NO. PAGE NO. -------- -------- SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS............................... 2 PART I 1. Business........................................................... 3 Executive Officers................................................. 17 2. Properties......................................................... 17 3. Legal Proceedings.................................................. 17 4. Submission of Matters to a Vote of Security Holders................ 18 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters................................................ 18 6. Selected Financial Data............................................ 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 21 7A. Quantitative and Qualitative Disclosures About Market Risk......... 50 8. Financial Statements and Supplementary Data........................ 50 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................ 51 PART III 10. Directors and Executive Officers of the Registrant................. * 11. Compensation of Executive Officers and Directors................... * 12. Security Ownership of Certain Beneficial Owners and Management..... * 13. Certain Relationships and Related Transactions..................... * PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 53 SIGNATURES ..................................................................... 54
* Portions of the Proxy Statement for the Registrant's Annual Meeting of Stockholders to be held on April 23, 1998 are incorporated by reference in Part III of this Form 10-K. 1 SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K, other periodic reports filed by ANB under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of ANB may include "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect ANB's current views with respect to future events and financial performance. Such forward looking statements are based on general assumptions and are subject to various risks, uncertainties, and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to: (1) Possible changes in economic and business conditions that may affect the prevailing interest rates, the prevailing rates of inflation, or the amount of growth, stagnation, or recession in the global, U.S., and southeastern U.S. economies, the value of investments, collectability of loans and the profitability of business entities; (2) Possible changes in monetary and fiscal policies, laws and regulations, and other activities of governments, agencies and similar organizations; (3) The effects of easing of restrictions on participants in the financial services industry, such as banks, securities brokers and dealers, investment companies and finance companies, and attendant changes in patterns and effects of competition in the financial services industry; (4) The cost and other effects of legal and administrative cases and proceedings, claims, settlements and judgments; and (5) The ability of ANB to achieve the expected operating results related to the acquired operations of recently-completed and future acquisitions (if any), which depends on a variety of factors, including (i) the ability to ANB to achieve the anticipated cost savings and revenue enhancements with respect to the acquired operations, (ii) the assimilation of the acquired operations to ANB's corporate culture, including the ability to instill ANB's credit practices and efficient approach to the acquired operations, (iii) the continued growth of the markets in which ANB operates consistent with recent historical experience, (iv) the absence of material contingencies related to the acquired operations, including asset quality and litigation contingencies, and (v) ANB's ability to expand into new markets and to maintain profit margins in the face of pricing pressures. The words "believe," "expect," "anticipate," "project" and similar expressions signify forward looking statements. Readers are cautioned not to place undue reliance on any forward looking statements made by or on behalf of ANB. Any such statement speaks only as of the date the statement was made. ANB undertakes no obligation to update or revise any forward looking statements. 2 PART I ITEM 1. BUSINESS Alabama National BanCorporation (the "Company" or "ANB") is a Delaware bank holding company with its principal place of business in Birmingham, Alabama, and its main office located at 1927 First Avenue North, Birmingham, Alabama 35203 (Telephone Number: (205) 583-3600). ANB is currently the parent of three national banks, National Bank of Commerce of Birmingham ("NBC") (Birmingham, Alabama and the Birmingham metropolitan area), Citizens & Peoples Bank, National Association (Escambia County, Florida) and First Citizens Bank, National Association (Talladega, Alabama); three state member banks, Alabama Exchange Bank (Tuskegee, Alabama), Bank of Dadeville (Dadeville, Alabama) and First Gulf Bank (Baldwin County, Alabama); and one state nonmember bank, First American Bank (Decatur, Alabama) (collectively the "Banks"). In addition, ANB is currently the ultimate parent of one securities brokerage firm, NBC Securities, Inc. (Birmingham, Alabama); one receivables factoring company, Corporate Billing, Inc. (Decatur, Alabama); one insurance agency, Ashland Insurance, Inc. (Ashland, Alabama); and two "small loan"/finance companies, Clay County Finance Company, Inc. (Ashland, Alabama) and Tuskegee Loan Company, Inc. (Tuskegee, Alabama). RECENT DEVELOPMENTS FIRST AMERICAN BANCORP MERGER Effective November 30, 1997, First American Bancorp ("FAB"), an Alabama bank holding company with approximately $235 million in total assets as of November 30, 1997, merged with and into ANB (the "FAB Merger") pursuant to that certain Agreement and Plan of Merger dated as of July 24, 1997 (the "FAB Merger Agreement"), resulting in (i) the stockholders of FAB becoming stockholders of ANB and (ii) ANB becoming the parent stockholder of FAB's bank subsidiary, First American Bank, an Alabama state banking corporation. The FAB Merger was accounted for as a pooling of interests. The FAB Merger Agreement generally provided, among other things, for the merger of FAB with and into ANB, pursuant to which each of the 2,878,684 outstanding shares of FAB common stock were converted into the right to receive 0.7199 shares of ANB common stock, for a total of 2,071,966 shares of ANB Common Stock (excluding fractional shares). In addition, the options held to purchase shares of FAB common stock were converted into the right to purchase 0.7199 shares of ANB Common Stock for each share of FAB common stock subject to option. As part of the Merger, Dan M. David, formerly the Chairman and Chief Executive Officer of FAB, became Vice Chairman of ANB, and was appointed to serve as a member of the Board of Directors of ANB, along with two other former FAB Board members, C. Lloyd Nix and William E. Sexton. FORMATION OF CITIZENS & PEOPLES BANK, NATIONAL ASSOCIATION On August 15, 1997, ANB completed the relocation of one of its bank subsidiaries, First Bank of Baldwin County ("First Bank"), to Cantonment, Florida. In connection with this relocation, First Bank was converted to a national banking association and changed its name to Citizens & Peoples Bank, National Association ("C&P"). This is the first banking subsidiary of ANB to be located in Florida. Immediately prior to the relocation of First Bank to Florida, a significant portion of the assets and liabilities of First Bank were transferred to its affiliate, First Gulf Bank (formerly known as Gulf Bank). 3 ACQUISITION OF BRANCHES AND MERGER OF CITIZENS BANK OF TALLADEGA AND FIRST NATIONAL BANK OF ASHLAND As of December 11, 1997, First National Bank of Ashland ("FNB Ashland") purchased two branches from SouthTrust Bank, National Association. One of the branches (the "Ashland Branch") is located in Ashland, Clay County, Alabama, and had approximately $4 million in deposit liabilities at the time of the transfer. The other branch (the "Tuskegee Branch") is located in Tuskegee, Macon County, Alabama, and had approximately $16 million in deposit liabilities at the time of the transfer. Immediately upon acquiring the two branches, FNB Ashland consolidated the Ashland Branch with its main office in Ashland, Alabama, and donated the associated real property to the City of Ashland. In addition, FNB Ashland transferred the Tuskegee Branch to its affiliate, Alabama Exchange Bank ("AEB"), which is headquartered in Tuskegee, Alabama. AEB has consolidated the Tuskegee Branch with its main office in Tuskegee and donated the associated real property to the Tuskegee Human and Civil Rights Multicultural Center. On December 12, 1997, ANB completed a merger of two of its bank subsidiaries, Citizens Bank of Talladega ("Citizens Bank") and FNB Ashland. Specifically, Citizens Bank was merged with and into FNB Ashland, with FNB Ashland surviving the merger. In connection with the merger, FNB Ashland changed its name to First Citizens Bank, National Association ("First Citizens"), relocated its main office to Talladega, Alabama, and established a branch at the site of its previous main office in Ashland, Alabama. DEFINITIVE AGREEMENT SIGNED FOR THE MERGER OF PUBLIC BANK CORPORATION WITH AND INTO ANB On March 5, 1998, ANB announced that it had signed a definitive agreement for the merger of Public Bank Corporation, headquartered in St. Cloud, Florida ("PBC"), with and into ANB. PBC, which had total assets of $50 million at December 31, 1997, is the holding company for Public Bank, a state nonmember bank, based in St. Cloud, Florida. Public Bank serves its customer base through two offices located at St. Cloud and Kissimmee, Florida. Pursuant to the terms of the definitive agreement, PBC shareholders will receive 550,000 shares of ANB common stock in the aggregate, or 0.2353134 shares of ANB common stock for each share of PBC common stock. The agreement also contains a provision for PBC shareholders to receive up to an additional 25,000 shares of ANB common stock under certain conditions tied to the ANB market share price. PBC has the right to terminate the agreement if ANB common stock suffers a significant decline in share price. The proposed merger will be accounted for as a pooling of interests and is subject to regulatory approval, PBC shareholder approval and certain other conditions. It is anticipated that the transaction will close by June 30, 1998. 4 SUBSIDIARY BANKS ANB operates through seven subsidiary Banks which have offices and locations as set forth in the following table:
Banking Office Population Bank City/County City/County (1) Offices ---- ----------- --------------- ------- Alabama Exchange Bank Tuskegee/Macon 12,257/24,928 1 Bank of Dadeville Dadeville/Tallapoosa 3,276/38,826 1 Camp Hill/Tallapoosa 1,415/38,826 1 Jackson's Gap/Tallapoosa 789/38,826 1 First Citizens Bank, N.A. Talladega/Talladega 18,175/74,107 2 Ashland/Clay 2,034/13,252 2 Lineville/Clay 2,394/13,252 1 First Gulf Bank Orange Beach/Baldwin 2,253/98,280 1 Gulf Shores/Baldwin 3,261/98,280 1 Foley/Baldwin 4,937/98,280 1 Robertsdale/Baldwin 2401/98,280 1 Bay Minette/Baldwin 7,168/98,280 1 Daphne/Baldwin 11,290/98,280 1 National Bank of Commerce Birmingham/Jefferson 265,968/651,525 2 of Birmingham Mountain Brook/Jefferson 19,810/651,525 2 Hoover/Jefferson 12,817/651,525 1 Irondale/Jefferson 9,454/651,525 1 Hueytown/Jefferson 15,280/651,525 1 Bessemer/Jefferson 30,966/651,525 1 Trussville/Jefferson 10,803/651,525 1 Center Point/Jefferson 22,658/651,525 1 Inverness/Shelby 2,518/99,358 1 Meadowbrook/Shelby 4,621/99,358 1 Pelham/Shelby 9,765/99,358 1 Alabaster/Shelby 14,627/99,358 1 Pell City/St. Clair 8,118/50,009 1 Springville,St. Clair 1,910/50,009 1 Moody/St. Clair 4,921/50,009 1 Citizens & Peoples Bank, N.A. Cantonment/Escambia 34,746/262,798 1 First American Bank Decatur/Morgan 48,761/100,043 3 Athens/Limestone 16,901/54,135 2 Madison/Madison 14,904/238,912 1 Ardmore/Madison 866/54,135 1
___________________________ (1) 1990 U.S. Census data. The Banks focus on traditional consumer, residential mortgage, commercial and real estate construction lending to customers in their market areas. The Banks also offer a variety of deposit programs to individuals and small businesses and other organizations at interest rates generally consistent with local market conditions. NBC offers trust services, investment services (including public finance) and securities brokerage services. In addition, the Banks offer individual retirement and KEOGH accounts, safe deposit and night depository facilities and additional services such as the sale of traveler's checks, money orders and cashier's checks. 5 LENDING ACTIVITIES GENERAL Through the Banks, ANB offers a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in the Banks' market areas. ANB's total loans, net of unearned interest, at December 31, 1997, were approximately $842.8 million, or approximately 76.0% of total earning assets. The interest rates charged on loans vary with the degree of risk, maturity and amount of the loan and are further subject to competitive pressures, money market rates, availability of funds and government regulations. ANB has no foreign loans or loans for "highly leveraged transactions" as defined by applicable banking regulations. LOAN PORTFOLIO Real Estate Loans. Loans secured by real estate are the primary component of ANB's loan portfolio, constituting approximately $523.5 million, or 62.1% of total loans, net of unearned interest, at December 31, 1997. The Banks' predominant real estate loans are residential mortgages. Residential mortgages, both fixed and variable, are made for terms of up to 30 years and generally require monthly amortization. The majority of the Banks' commercial mortgages are at variable rates, which approximate current market rates. Construction loans are made on a variable rate basis. Origination fees are normally charged for all loans secured by real estate. The Banks' primary type of residential mortgage loan is the single-family first mortgage, typically structured with fixed or adjustable interest rates, based on market conditions. Fixed rate loans usually have terms of five years, with payments through the date of maturity generally based on a 15 or 30 year amortization schedule. Adjustable rate loans generally have a term of 15 years. The Banks originate residential loans for sale into the secondary market. Such loans are made in accordance with underwriting standards set by the purchaser of the loan, normally as to loan-to-value ratio, interest rate and documentation. The Banks generally collect from the borrower or purchaser a combination of the origination fee, discount points and/or service release fee. During 1997, the Banks sold approximately $118.2 million in loans to such purchasers. The Banks' nonresidential mortgage loans include commercial, industrial and unimproved real estate loans. The Banks generally require nonresidential mortgage loans to have an 80% loan-to-value ratio and usually underwrite their commercial loans on the basis of the borrower's cash flow and ability to service the debt from earnings, rather than on the basis of the value of the collateral. Terms on construction loans are usually less than twelve months, and the Banks typically require real estate mortgages and personal guarantees supported by financial statements and a review of the guarantor's personal finances. Consumer Loans. Consumer lending includes installment lending to individuals in the Banks' market areas and consists of loans to purchase automobiles, appliances and other consumer durable goods. Consumer loans constituted $79.6 million, or 9.4% of ANB's loan portfolio at December 31, 1997. Consumer loans are underwritten based on the borrower's income, current debt level, past credit history and collateral. Consumer rates are both variable and fixed, with terms negotiable. Terms generally range from four to five years on automobile loans and one to ten years on loans for other consumer 6 durable goods, depending on the nature and condition of the collateral. Periodic amortization, generally monthly, is required. Commercial and Financial Loans. The Banks make loans for commercial purposes in various lines of business. These loans are typically made on terms up to five years at fixed or variable rates. The loans are secured by accounts receivable, inventory or, in the case of equipment loans, the financed equipment. The Banks attempt to reduce their credit risk on commercial loans by limiting the loan to value ratio. Historically, the Banks have loaned up to 80% on loans secured by accounts receivable, up to 65% on loans secured by inventory, and up to 80% on loans secured by equipment. The Banks also make unsecured commercial loans. Commercial and financial loans constituted $194.6 million, or 23.1% of ANB's loan portfolio at December 31, 1997. Interest rates are negotiable based upon the borrower's financial condition, credit history, management stability and collateral. CREDIT PROCEDURES AND REVIEW Loan Approval. Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectibility. ANB attempts to minimize loan losses through various means and uses standardized underwriting criteria. In particular, on larger credits, ANB generally relies on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral. In addition, ANB attempts to utilize shorter loan terms in order to reduce the risk of a decline in the value of such collateral. ANB addresses repayment risks by adhering to internal credit policies and procedures of which all of the Banks have adopted. These policies and procedures include officer and customer lending limits, a multi-layered loan approval process for larger loans, documentation examination and follow-up procedures for any exceptions to credit policies. The point in each Bank's loan approval process at which a loan is approved depends on the size of the borrower's credit relationship with such Bank. For example, at NBC, each of the lending department managers has the authority to approve loans up to $350,000. Upon approval by ANB's Board of Directors, other loan officers may be authorized to approve loans of lower amounts. Loans in excess of $50,000 are approved and ratified by the Loan Review Committee of NBC. Loans in excess of $300,000 are approved and ratified by the Executive Committee of the NBC Board of Directors. Loan Review. ANB maintains a continuous loan review system. Under this system, each loan officer is directly responsible for monitoring the risk in his portfolio and is required to maintain risk ratings for each credit assigned. The risk rating system incorporates the basic regulatory rating system as set forth in the applicable regulatory asset quality examination procedures. NBC's Loan Review Department ("LRD"), which is wholly independent of the lending function, serves as a validation of each loan officer's risk monitoring and rating system. LRD's primary function is to provide the Board of Directors, through it Loan Review Committee, with a thorough understanding of the credit quality of NBC's loan portfolio. LRD is required to review approximately 60% of the annual average loan portfolio of each of the Banks during any continuous 12 month period. The review process includes coverage of at least 50% of all loan relationships between $250,000 and $750,000 and coverage of 100% of all loan relationships over $750,000. Other review requirements are in place to 7 provide management with early warning systems for problem credits as well as compliance with stated lending policies. LRD's findings are reported monthly to the Loan Review Committee of the NBC Board of Directors. DEPOSITS The principal sources of funds for the Banks are core deposits, consisting of demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits and certificates of deposit. Transaction accounts include checking and negotiable order of withdrawal (NOW) accounts which customers use for cash management and which provide the Banks with a source of fee income and cross-marketing opportunities, as well as a low-cost source of funds. Time and savings accounts also provide a relatively stable and low-cost source of funding. The largest source of funds for the Banks are certificates of deposit. Certificates of deposit in excess of $100,000 are held primarily by customers in the Banks' market areas. The Banks have not historically funded their balance sheet with brokered certificates of deposit. Deposit rates are set weekly by senior management of each of the Banks, subject to approval by management of ANB. Management believes that the rates the Banks offer are competitive with those offered by other institutions in the Banks' market areas. ANB focuses on customer service to attract and retain deposits. INVESTMENT SERVICES NBC has operated an investment department devoted primarily to handling correspondent banks' investment needs since the mid-1980's. Because the department has been relatively small in recent years, the contribution to earnings has been moderate. In May of 1995, NBC expanded this operation significantly with a staff of investment professionals formerly employed by another financial institution. NBC also has a wholly owned subsidiary, NBC Securities, Inc. ("NBC Securities"), that is licensed as a broker-dealer. In 1995, NBC re-activated NBC Securities' broker-dealer license to provide investment services to individuals and institutions. These services include the sale of stocks, corporate bonds, mutual funds, annuities, other insurance products and financial planning. 8 COMPETITION The Banks encounter strong competition in making loans, acquiring deposits and attracting customers for investment services. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the services rendered, the convenience of banking facilities and, in the case of loans to commercial borrowers, relative lending limits. The Banks compete with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries operating in Alabama and elsewhere. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits, and may offer certain services that the Banks do not currently provide. In addition, many of ANB's non-bank competitors are not subject to the same extensive federal regulations that govern bank or thrift holding companies and federally insured banks or thrifts. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") authorized bank holding companies to acquire banks and other bank holding companies without geographic limitations beginning September 30, 1995. The arrival of interstate banking is expected to increase further the competitiveness of the banking industry. In addition, beginning on June 1, 1997, the IBBEA authorized interstate mergers and consolidations of existing banks, provided that neither bank's home state had opted out of interstate branching by May 31, 1997. The State of Alabama has opted in to interstate branching. Interstate branching provides that once a bank has established branches in a state through an interstate merger, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal or state law. Size gives the larger banks certain advantages in competing for business from large corporations. These advantages include higher lending limits and the ability to offer services in other areas of Alabama and the southeast region. Some of ANB's competitors still maintain substantially greater resources and lending limits than ANB. As a result, ANB has not generally attempted to compete for the banking relationships of large corporations, and generally concentrates its efforts on small businesses and individuals to which ANB believes it can compete effectively by offering quality, personal service. However, management believes it may be able to compete more effectively for the business of some large corporations, given its current growth pattern. Management believes that the Banks' commitment to their respective primary market areas, as well as their commitment to quality and personalized banking services, are factors that contribute to the Banks' competitiveness. Management believes that ANB's decentralized community banking strategy positions the Banks to compete successfully in their market areas. 9 MARKET AREAS AND GROWTH STRATEGY Through NBC, ANB serves the lower half of Jefferson County, the upper third of Shelby County, and St. Clair County, each of which are typically included in the Birmingham metropolitan area. ANB's First American Bank subsidiary serves Morgan, Limestone and Madison counties in north Alabama. First American's largest market presence is in Decatur, which has demonstrated a growing economic base in recent years. The Boeing Company is currently constructing a significant plant in Decatur, and Trico Steel Company, L.L.C. recently opened a steel mill operation there, each of which are expected to have a positive economic impact in this market. Through First Gulf Bank, ANB serves Baldwin County, Alabama. Located between Mobile, Alabama and Pensacola, Florida, Baldwin County has a broad base of economic activity in the retail and service, agriculture, seafood, tourism and manufacturing industries. Shelby, Baldwin and St. Clair Counties have been named in statistical surveys as three of the fastest growing counties in Alabama. In August 1997, ANB expanded outside of Alabama with the opening of C&P in Escambia County, Florida. The other Banks, First Citizens, Alabama Exchange Bank and Bank of Dadeville, are located in non- metropolitan areas. ANB's strategy is to focus on growth in profitability for these non-metropolitan banks, since market growth has not been as significant. Due to continuing consolidation within the banking industry, as well as in the State of Alabama, ANB may in the future seek to combine with other banks or thrifts (or their holding companies) that may be of smaller, equal or greater size than ANB. ANB currently intends to concentrate on acquisitions that will expand NBC's branch network in the Birmingham metropolitan area and acquisitions of additional banks or thrifts (or their holding companies) which operate in attractive market areas in Alabama and neighboring states. In addition to price and terms, the factors considered by ANB in determining the desirability of a business acquisition or combination are financial condition, earnings potential, quality of management, market area and competitive environment. Due to capital limitations associated with the long-term debt incurred by ANB in its earlier acquisitions, ANB historically did not emphasize internal growth. However, because of its strong internal rate of capital formation and because ANB now operates in some of the fastest growing areas in Alabama, management of ANB believes that the Banks could enhance growth by more aggressively pursuing additional deposits and loans in these areas. First Gulf Bank intends to further expand its presence in the Baldwin County area, and NBC intends to further expand its business in northern Shelby County, Alabama through its new branch in Meadowbrook, Alabama. Also, ANB is exploring expansion into lines of business closely related to banking and will pursue such expansion if it believes such lines could be profitable without causing undue risk to ANB. While ANB plans to continue its growth as described above, there is no assurance that its efforts will be successful. EMPLOYEES As of December 31, 1997, ANB and the Banks together had approximately 608 full-time equivalent employees. None of these employees is a party to a collective bargaining agreement. ANB considers its relations with its employees to be good. SUPERVISION AND REGULATION ANB and the Banks are subject to state and federal banking laws and regulations which impose specific requirements and restrictions on, and provide for general regulatory oversight with respect to, virtually all aspects of operations. These laws and regulations are generally intended to protect 10 depositors, not stockholders. To the extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of ANB. Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and following in December 1991 with the Federal Deposit Insurance Corporation Act ("FDICIA"), numerous additional regulatory requirements have been placed on the banking industry in the past ten years, and additional changes have been proposed. The operations of ANB and the Banks may be affected by legislative changes and the policies of various regulatory authorities. ANB is unable to predict the nature or the extent of the effect on its business and earnings that fiscal or monetary policies, economic control, or new federal or state legislation may have in the future. FEDERAL BANK HOLDING COMPANY REGULATION ANB is a bank holding company under the Bank Holding Company Act of 1956 (the "BHCA"). Under the BHCA, ANB is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. ANB's and the Banks' activities are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries, or engaging in any other activity that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Investments, Control, and Activities. With certain limited exceptions, the BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company. The IBBEA permits bank holding companies to acquire control of banks throughout the United States in compliance with the BHCA and other applicable banking laws. See "COMPETITION." In addition, and subject to certain exceptions, the BHCA and the Change in Bank Control Act ("CIBCA"), together with regulations thereunder, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a bank holding company, such as ANB. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Under Federal Reserve regulations applicable to ANB, control will be rebuttably presumed to exist if a person acquires at least 10% of the outstanding shares of any class of voting securities which are registered under the Exchange Act. The regulations provide a procedure for challenge of the rebuttable control presumption. Under the BHCA, ANB is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities unless the Federal Reserve, by order or regulation, has found those activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation to be proper incidents to the business of banking include making or servicing loans and certain types of leases, engaging in certain insurance and discount brokerage activities, performing certain data processing services, acting in certain circumstances as a 11 fiduciary or investment or financial advisor, owning savings associations and making investments in certain corporations or projects designed primarily to promote community welfare. Source of Strength; Cross-Guarantee. In accordance with Federal Reserve policy, ANB is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks in circumstances in which ANB might not otherwise do so. Under the BHCA, the Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition. Each of the Banks may be required to indemnify or cross-guarantee the Federal Deposit Insurance Corporation (the "FDIC") against losses it incurs with respect to any of the other Banks, which in effect makes the Company's equity investments in healthy bank subsidiaries available to the FDIC to assist any failing or failed subsidiary of ANB. THE BANKS ANB is the holding company for seven banks, including three national banks (First Citizens, C&P and NBC), three Alabama state banks which are members of the Federal Reserve System (Bank of Dadeville, Alabama Exchange Bank and First Gulf Bank), and one Alabama state bank that is not a member of the Federal Reserve System (First American Bank). The Office of Comptroller of the Currency (the "OCC") is the primary regulator for the national banks; the Alabama Banking Department and the Federal Reserve System are the primary regulators for the Alabama state member banks; and the Alabama Banking Department and the FDIC are the primary regulators for the Alabama state nonmember bank. These regulatory authorities regulate or monitor all areas of each Bank's operations, including security devices and procedures, adequacy of capital loan reserves, loans, investments, borrowings, deposits, mergers, issuances of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records and adequacy of staff training to carry on safe lending and deposit gathering practices. Each of the Banks must maintain certain capital ratios and is subject to limitations on aggregate investments in real estate, bank premises and furniture and fixtures. FDICIA Under FDICIA, all insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC and the appropriate agency (and state supervisor when applicable). FDICIA also directs the FDIC to develop with other appropriate agencies a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or any other report of any insured depository institution. FDICIA also requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset quality. 12 TRANSACTIONS WITH AFFILIATES AND INSIDERS The Banks are subject to the provisions of Section 23A of the Federal Reserve Act, which place limits on the amount of loans or extensions of credit to, investments in or certain other transactions with affiliates, and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. In general, the Banks' "affiliates" are ANB and ANB's non-bank subsidiaries. Section 23A limits the aggregate amount of transactions with any individual affiliate to ten percent (10%) of the capital and surplus of the bank and also limits the aggregate amount of transactions with all affiliates to twenty percent (20%) of the bank's capital and surplus. Loans and certain other extensions of credit to affiliates are required to be secured by collateral in an amount and of a type described in Section 23A, and the purchase of low quality assets from affiliates is generally prohibited. The Banks are also subject to the provisions of Section 23B of the Federal Reserve Act that, among other things, prohibit an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliated companies. In the absence of comparable transactions, such transactions may only occur under terms and circumstances, including credit standards, that in good faith would be offered to or would apply to non- affiliated companies. The Banks are subject to certain restrictions on extensions of credit to executive officers, directors, certain principal stockholders and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. BRANCHING All of the Banks domiciled in Alabama are permitted to branch freely within the State of Alabama, provided approval of the appropriate regulatory authority is obtained. The Alabama Banking Code permits statewide branching for Alabama state banks. As national banks located in Alabama, these state branch banking laws also apply to NBC and First Citizens. In addition, as of June 1, 1997 the IBBEA permits interstate branching in all states opting in to the IBBEA. As a national bank domiciled in Florida, C&P is governed by the Florida State banking statutes regarding branching within the State of Florida. Florida law permits banks domiciled in Florida to branch freely within the State of Florida, upon the approval of the appropriate regulatory authorities. See "COMPETITION." COMMUNITY REINVESTMENT ACT The Community Reinvestment Act ("CRA") requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC, the OCC or the Office of Thrift Supervision shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. These factors are considered in evaluating mergers, acquisitions and applications to open a branch or 13 facility. The CRA also requires all institutions to make public disclosure of their CRA ratings. Each of the Banks received outstanding or satisfactory ratings in its most recent evaluation. OTHER REGULATIONS Interest and certain other charges collected or contracted for by the Banks are subject to state usury and banking laws and certain federal laws concerning interest rates. The Banks' loan operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, the Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit, the Fair Credit Reporting Act of 1978 governing the use and provision of information to credit reporting agencies, the Fair Debt Collection Practices Act governing the manner in which consumer debts may be collected by collection agencies, and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The Banks' loan operations are also subject to state consumer finance laws which generally govern the amount and manner in which interest and other charges and expenses may be charged and collected by lenders. The deposit operations of the Banks are also subject to the Right of Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services. The Banks' small loan subsidiaries are subject to the Alabama Small Loan laws governing the amount of loans and interest and other charges that may be charged in connection with a small loan. DEPOSIT INSURANCE The deposits of each of the Banks are currently insured by the FDIC to a maximum of $100,000 per depositor, subject to certain aggregation rules. The FDIC establishes rates for the payment of premiums by federally insured banks and thrifts for deposit insurance. Separate insurance funds (BIF and SAIF) are maintained for commercial banks and thrifts, with insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail. Prior to 1996, due to the high rate of failures in recent years, the FDIC adopted a risk-based deposit insurance premium system for all insured depository institutions, including the Banks, which required that a depository institution pay to the Bank Insurance Fund ("BIF") or the Savings Association Insurance Fund ("SAIF") from between $-0-and $.31 per $100 of insured deposits depending on its capital levels and risk classification, as determined by its primary federal regulator on a semiannual basis. In September 1996, the FDIC enacted legislation to recapitalize the SAIF and ensure against default on Financing Corp. ("FICO") bonds. The legislation provided for a one-time payment into the BIF in an amount approximating $.68 per $100 of SAIF insured deposits. Thereafter and through December 31, 1999 the former assessment rate of between $-0- and $.31 per $100 of insured deposits is reduced to between $.0130 and $.2830 per $100, including a FICO rate of $.0130 per $100, for bank deposits and a rate of between $.0650 and $.3350 per $100, including a FICO rate of $.0650 per $100, for previously SAIF insured deposits. After December 31, 1999, the BIF rate will be approximately $.0243 per $100 for all deposits. 14 DIVIDENDS The principal source of ANB's cash revenues is derived from dividends received from the Banks. The amount of dividends that may be paid by the Banks to ANB depends on each Bank's earnings and capital position and is limited by federal and/or state law, regulations and policies. See Note 18 of the Notes to Consolidated Financial Statements of ANB and Subsidiaries included in this Annual Report. As national banks, NBC, C&P and First Citizens may not pay dividends from their paid-in surplus. All dividends must be paid out of undivided profits then on hand, after deducting expenses, including provisions for loan losses and bad debts. In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the bank's net profits for the preceding two consecutive half-year periods (in the case of an annual dividend). The approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. As Alabama state banks, Bank of Dadeville, Alabama Exchange Bank, First Gulf Bank and First American Bank are subject to restrictions on dividends under the Alabama Banking Code, which provides that an Alabama state bank must transfer to surplus each year at least 10% of its net earnings (and thus cannot declare or pay a dividend in excess of 90% of net earnings) until its surplus equals at least 20% of its capital. In addition, a state bank must obtain regulatory approval to declare dividends in any calendar year in excess of the total of its net earnings for that year combined with its retained net earnings in the preceding two years, less any required transfers to surplus. Under FDICIA, none of the Banks may pay a dividend if, after paying the dividend, the bank would be undercapitalized. CAPITAL REGULATIONS The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to account for off-balance sheet exposure, minimize disincentives for holding liquid assets and make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies. The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimums. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common stockholders' equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock and general reserves for loan and lease losses up to 1.25% of risk-weighted assets. Under these guidelines, banks' and bank holding companies' assets are given risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance sheet items are given credit conversion factors to 15 convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential construction loans, both of which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government owned agencies, which have a 0% rating. The federal bank regulatory authorities have also implemented a leverage ratio, which is Tier 1 capital as a percentage of quarterly average total assets less intangibles, to be used as a supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. The minimum required leverage ratio for top-rated institutions is 3%, but most institutions are required to maintain an additional cushion of at least 100 to 200 basis points. FDICIA established a new capital-based regulatory scheme designed to promote early intervention for troubled banks and requires the FDIC to choose the least expensive resolution for bank failures. The new capital-based regulatory framework contains five categories of compliance with regulatory capital requirements, including "well capitalized," "adequately capitaled," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." To qualify as a "well capitalized" institution, a bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6% and a total risk-based capital ratio of no less than 10%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level. As of December 31, 1996, ANB and each of the Banks qualified as "well-capitalized." See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CAPITAL." Under FDICIA, the applicable agency can treat an institution as if it were in the next lower category if the agency determines (after notice and an opportunity for hearing) that the institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Institutions that fall into one of the three undercapitalized categories may be required to (i) submit a capital restoration plan; (ii) raise additional capital; (iii) restrict their growth, deposit interest rates and other activities; (iv) improve their management; (v) eliminate management fees; or (vi) divest themselves of all or a part of their operations. Bank holding companies controlling financial institutions can be called upon to boost an institution's capital and to partially guarantee an institution's performance under their capital restoration plans. FDICIA requires the federal banking regulators to revise the risk-based capital standards to provide for explicit consideration of interest-rate risk, concentration of credit risk and the risks of non-traditional activities. It is uncertain what effect these regulations, when implemented, will have on ANB and the Banks. RECENT LEGISLATIVE DEVELOPMENTS From time to time, various bills are introduced in the United States Congress with respect to the regulation of financial institutions. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. ANB cannot predict whether any of these proposals will be adopted or, if adopted, how these proposals would affect ANB. 16 EXECUTIVE OFFICERS OF THE REGISTRANT The Executive Officers of ANB serve at the pleasure of the Board of Directors. Set forth below are the current Executive Officers of ANB and a brief explanation of their principal employment during the last five (5) years. JOHN H. HOLCOMB, III - Age 46 - Chairman and Chief Executive Officer. Mr. Holcomb has served as Chairman and Chief Executive Officer of ANB since April, 1996. Prior to such date, Mr. Holcomb served as President and Chief Operating Officer of ANB beginning December, 1995. Mr. Holcomb has been the President and Chief Executive Officer of NBC since 1990. VICTOR E. NICHOL, JR. - Age 51 - President and Chief Operating Officer. Mr. Nichol has served as President and Chief Operating Officer of ANB since April 1996. Prior to such date, Mr. Nichol served as Executive Vice President of ANB beginning December 1995. Mr. Nichol has been the Executive Vice President and Chief Financial Officer of NBC since 1994. From 1992 through 1993, Mr. Nichol served as President and Chief Executive Officer of Secor Bank. DAN M. DAVID - Age 52 - Vice Chairman. Mr. David has served as Vice Chairman of ANB since November 30, 1997 when FAB merged with and into ANB. Mr. David serves as Chairman of First American Bank, a position he has held since 1995. Mr. David served as Chairman and Chief Executive Officer of FAB from 1995 through 1997, as Vice Chairman and Chief Executive Officer during 1994 and 1995 and as President and Chief Executive Officer from 1986 through 1994. JAMES S. PARKS, JR. - Age 43 - Senior Vice President-Finance, Controller and Treasurer. Mr. Parks has served as Senior Vice President-Finance, Controller and Treasurer of ANB since December 1996. Mr. Parks has served as the Senior Vice President and Controller for NBC since 1993 and has served NBC as Controller since 1987. ITEM 2. PROPERTIES ANB currently operates 40 banking offices. Of the 40 banking offices, ANB, through the Banks, owns 31 banking offices without encumbrance and leases an additional 9 banking offices. ANB leases its principal administrative offices, which are located at 1927 First Avenue North, Birmingham, Alabama. See Notes 6 and 9 to the Consolidated Financial Statements of ANB and Subsidiaries included in this Annual Report for additional information regarding ANB's premises and equipment. ITEM 3. LEGAL PROCEEDINGS ANB, in the normal course of business, is subject to various pending and threatened litigation. Based on consultation with legal counsel, management does not anticipate that the ultimate liability, if any, resulting from such litigation will have a material effect on ANB's financial condition and results of operations. 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE FOR SECURITY-HOLDERS ANB held a special meeting of its stockholders on November 26, 1997 (the "Special Meeting") in order to vote upon the proposed merger of First American Bancorp with and into ANB, pursuant to the terms of the Agreement and Plan of Merger dated July 24, 1997. The results of the voting at the Special Meeting were as follows:
Total Shares Entitled to Vote For Approval of the Merger Against/Withhold Abstain ----------------------------- -------------------------- ---------------- ------- 6,574,942 5,048,145 4,300 1,829
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS At March 12, 1998, ANB had 966 stockholders of record (including shares held in "street" names by nominees who are record holders) and 8,648,120 shares of ANB Common Stock outstanding. ANB Common Stock is traded in the over-the- counter market and prices are quoted on NASDAQ/NMS under the symbol "ALAB." The reported price range for ANB Common Stock and the dividends declared during each calendar quarter of 1996 and 1997 are shown below:
HIGH LOW DIVIDENDS DECLARED 1996 First Quarter.......................... $14-1/4 $12-3/4 $ .05 Second Quarter......................... 13-5/8 12 .05 Third Quarter.......................... 15-1/2 12-5/8 .09 Fourth Quarter......................... 19 14-7/8 .09 1997 First Quarter.......................... 20-1/2 17-1/2 .115 Second Quarter......................... 22-1/2 17-1/2 .115 Third Quarter.......................... 26-1/8 21-3/4 .115 Fourth Quarter......................... 27 22 .115
The last reported sales price of Common Stock as reported on The Nasdaq/NMS on March 12, 1998 was $28-1/4. The prices shown do not reflect retail mark-ups and mark-downs. All share prices have been rounded to the nearest 1/64 of one dollar. The market makers for the ANB Common Stock as of December 31, 1997, were J. C. Bradford & Co., Raymond James & Associates, Inc., Herzog Heine Geduld Inc., Legg Mason Wood Walker Inc., The Robinson Humphrey Company Inc., Sterne Agee & Leach Inc., and The Chicago Corporation. 18 ITEM 6. SELECTED FINANCIAL DATA FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1997 (1) 1996 (1) 1995 (1) 1994 (1) 1993 (1) ---------------------------------------------------------------------- INCOME STATEMENT DATA: Interest income ........................................ $ 90,388 $ 83,180 $ 53,067 $ 40,970 $ 34,515 Interest expense ....................................... 42,840 38,246 26,555 17,243 13,990 ---------- ----------- ----------- ----------- ----------- Net interest income .................................... 47,548 44,934 26,512 23,727 20,525 Provision for loan losses (benefit of recoveries)...... 2,988 885 1,016 1,596 (50) ---------- ----------- ----------- ----------- ----------- Net interest income after provision for loan losses (benefit of recoveries) .............................. 44,560 44,049 25,496 22,131 20,575 Net securities gains (losses) .......................... (8) (84) 26 (52) 222 Noninterest income ..................................... 18,047 17,510 9,160 5,820 6,776 Noninterest expense .................................... 45,461 44,053 26,849 19,720 20,298 ---------- ----------- ----------- ----------- ----------- Income before income taxes ............................. 17,138 17,422 7,833 8,179 7,275 Provision for income taxes ............................. 5,458 5,281 901 736 838 Income before minority interest in earnings of ---------- ----------- ----------- ----------- ----------- consolidated subsidiary .............................. 11,680 12,141 6,932 7,443 6,437 Minority interest in earnings of consolidated subsidiary ........................................... 12 14 650 750 236 ---------- ----------- ----------- ----------- ----------- Net income ............................................. $ 11,668 $ 12,127 $ 6,282 $ 6,693 $ 6,201 ========== =========== =========== =========== =========== BALANCE SHEET DATA: Total assets ........................................... $1,274,166 $ 1,110,729 $ 1,027,099 $ 607,638 $ 545,348 Earning assets ......................................... 1,109,202 1,013,789 929,677 560,900 506,676 Securities ............................................. 214,012 182,009 199,830 128,346 128,899 Loans ................................................. 842,790 785,282 680,172 422,307 351,990 Allowance for loan losses .............................. 12,829 11,011 10,421 6,506 7,307 Deposits ............................................... 928,970 858,103 841,899 506,256 457,644 Short-term debt ........................................ 27,750 42,105 21,280 12,717 7,350 Long-term debt ......................................... 14,587 12,939 1,089 2,132 1,376 Stockholders' equity ................................... 97,933 88,803 78,144 43,520 35,496 WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED (2) ...... 8,884 8,756 4,955 4,464 4,316 Per Common Share Data: Net income - diluted (3) ............................... $ 1.31 $ 1.38 $ 1.10 $ 1.34 $ 1.27 Book value (period end) (4) ........................... 11.32 10.38 9.16 7.05 5.78 Tangible book value (period end)....................... 10.32 9.48 8.27 6.55 5.21 Dividends declared .................................... 0.46 0.28 - - - PERFORMANCE RATIOS: Return on average assets .............................. 1.01% 1.17% 0.95% 1.18% 1.22% Return on average equity .............................. 12.42 14.48 13.58 17.89 18.54 Net interest margin (5) ................................ 4.53 4.70 4.29 4.49 4.34 Net interest margin (taxable equivalent (5)............. 4.64 4.79 4.39 4.64 4.48 ASSET QUALITY RATIOS: Allowance for loan losses to period end loans........... 1.52% 1.40% 1.53% 1.54% 2.08% Allowance for loan losses to period end nonperforming loans (6) .............................. 245.48 356.92 320.55 354.36 240.28 Net charge-offs (recoveries) to a....................... 0.15 0.04 0.05 0.68 (0.11) Nonperforming assets to period end loans and foreclosed property (6) .............................. 0.79 0.46 0.57 0.54 1.18 CAPITAL AND LIQUIDITY RATIOS: Average equity to average assets........................ 8.10% 8.06% 6.98% 6.59% 6.58% Leverage (4.00% required minimum) (7)................... 7.58 8.13 10.59 8.25 6.78 Risk-based capital Tier 1 (4.00% required minimum) (7)................... 9.38 10.28 10.51 11.17 9.99 Total (8.00% required minimum) (7).................... 10.63 11.38 11.59 12.30 11.14 Average loans to average deposits....................... 89.24 87.06 82.36 81.35 75.98
19 (1) On November 30, 1997, FAB merged with and into the Company ("the FAB Merger"). Pursuant to the terms of the FAB Merger, each share of FAB common stock was converted into .7199 shares of the Company's common stock. The FAB Merger was accounted for as a pooling of interests. On September 30, 1996, FIRSTBANC Holding Company, Inc. ("FIRSTBANC") was merged with and into the Company, with each share of common stock of FIRSTBANC being converted into 7.12917 shares of the Company's common stock. The FIRSTBANC merger was accounted for as a pooling of interests. On December 29, 1995, National Commerce Corporation ("NCC") and Commerce Bankshares, Inc. ("CBS") merged with and into the Company ("the NCC Merger"). Pursuant to the terms of the NCC Merger, each share of NCC common stock was converted into 348.14 shares of the Company's common stock and each share of CBS common stock was converted into 7.0435 shares of the Company's common stock for a total of 3,106,981 shares (or 50.1%) of Company common stock. The NCC Merger was accounted for as a "reverse acquisition," whereby NCC is deemed to have acquired ANB for financial reporting purposes. However, ANB remained as the continuing legal entity and registrant for Securities and Exchange Commission filing purposes. Consistent with the reverse acquisition accounting treatment, the historical income statement information included in the Five-Year Summary of Selected Financial Data of the Company is that of NCC for years prior to 1996. The balance sheet information included in the historical Five-Year Summary of Selected Financial Data of the Company is that of NCC for years prior to 1995, as adjusted for subsequent poolings of interest. The historical Five-Year Summary of Selected Financial Data for all periods have been restated to include the results of operations of FAB and FIRSTBANC from the earliest period presented, except for dividends per common share. (See Note 1 to the Company's consolidated financial statements included in this Annual Report). (2) The weighted average common share and common equivalent shares outstanding are those of NCC, CBS, FAB, and FIRSTBANC converted into ANB common and common equivalents at the applicable exchange ratios. (3) Net income per common share - diluted is calculated based upon net income as adjusted for minority interests in earnings of consolidated subsidiaries and cash dividends on preferred stock. (4) Book value and tangible book value at December 31, 1994 and 1993 are calculated on the outstanding common shares of NCC, CBS, FAB, and FIRSTBANC converted at the exchange ratio. (5) Net interest income divided by average earning assets. (6) Nonperforming loans and nonperforming assets includes loans past due 90 days or more that are still accruing interest. (7) Based upon fully phased-in requirements. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BASIS OF PRESENTATION The following is a discussion and analysis of the consolidated financial condition of the Company and results of operations as of the dates and for the periods indicated. On November 30, 1997, First American Bancorp ("FAB"), a one bank holding company headquartered in Decatur, Alabama, was merged with and into the Company, pursuant to which each share of FAB common stock was converted into .7199 shares of the Company's common stock for a total of 2,071,966 shares. The FAB Merger was accounted for as a pooling of interests. On September 30, 1996, FIRSTBANC Holding Company ("FIRSTBANC"), a one bank holding company headquartered in Robertsdale, Alabama, was merged into the Company. The Company acquired all of the outstanding common stock of FIRSTBANC in exchange for 305,000 shares of the Company's common stock. The FIRSTBANC merger was accounted for as a pooling of interests. On December 29, 1995, National Commerce Corporation ("NCC") and its wholly-owned subsidiary, Commerce Bankshares, Inc. ("CBS") a one bank holding company located in Birmingham, Alabama, was merged with and into the Company ("the NCC Merger"). Pursuant to terms of the NCC Merger, each share of NCC common stock was converted into 348.14 shares of ANB common stock and each share of CBS common stock was converted into 7.0435 shares of ANB common stock for a total of 3,106,981 shares (or 50.1%) of ANB's common stock. The NCC Merger was accounted for as a "reverse acquisition," whereby NCC is deemed to have acquired ANB for financial reporting purposes. However, ANB remained as the continuing legal entity and registrant for Securities and Exchange Commission purposes. Consistent with the reverse acquisition accounting treatment, the historical financial statements of the Company presented for 1995 are the consolidated financial statements of NCC, adjusted for subsequent poolings of interest, and differ from the consolidated financial statements of ANB as previously reported. The operations of ANB are included in the financial statements from the date of acquisition. The historical consolidated financial statements of the Company and the "FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA" derived from the historical consolidated financial statements of the Company are set forth elsewhere herein. This discussion should be read in conjunction with those consolidated financial statements and selected consolidated financial data and the other financial information included in this Annual Report. 21 SELECTED BANK FINANCIAL DATA The Company's success is dependent upon the financial performance of the Banks. The Company, with input from the management of each Bank, establishes operating goals for each Bank. The following tables summarize selected financial information for 1997 and 1996 for each of the Banks operated by the Company. SELECTED BANK FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED)
DECEMBER 31, 1997 ---------------------------------------------------------------------------------------- NATIONAL ALABAMA BANK CITIZENS & FIRST FIRST FIRST BANK OF EXCHANGE OF PEOPLES AMERICAN CITIZENS GULF COMMERCE BANK DADEVILLE BANK, N.A.(1) BANK BANK, N.A.(2) BANK (1) ---------------------------------------------------------------------------------------- Summary of Operations: Interest income....................... $ 48,401 $ 3,976 $ 5,144 $ 1,896 $ 20,250 $ 6,842 $ 5,068 Interest expense...................... 24,998 1,089 2,205 748 8,686 3,025 2,005 Net interest income................... 23,403 2,887 2,939 1,148 11,564 3,817 3,063 Provision for loan losses............. - 10 - 76 2,811 41 50 Securities gains (losses)............. - - 4 - (15) 3 - Noninterest income.................... 14,048 425 733 225 1,901 664 645 Noninterest expense................... 25,197 1,715 1,887 1,146 9,528 2,414 2,413 Net income............................ 8,215 1,084 1,250 126 792 1,473 808 Balance Sheet Highlights: At Period-End: Total assets......................... $714,725 $64,563 $62,307 $14,677 $239,931 $89,816 $92,779 Securities........................... 103,153 15,634 10,977 8,366 29,041 31,670 15,124 Loans, net of unearned income............................... 457,605 33,111 43,028 2,734 188,473 48,936 67,426 Allowance for loan losses............ 7,398 363 494 20 3,086 715 753 Deposits............................. 456,843 59,015 51,292 10,354 196,596 78,531 82,253 Short-term debt...................... 5,880 - - - 12,500 - - Long-term debt....................... 10,274 - 4,200 - - - - Stockholders' equity................. 50,247 5,025 5,915 4,328 20,401 8,565 6,730 Performance Ratios: Return on average assets.............. 1.30% 2.21% 1.98% 0.49% 0.35% 1.70% 1.26% Return on average equity.............. 16.87 23.81 21.34 3.51 3.39 17.93 16.15 Net interest margin................... 3.95 6.35 5.07 4.97 5.51 4.80 5.35 Capital and Liquidiy Ratios: Average equity to average assets...... 7.69 9.29 9.28 13.90 10.19 9.47 7.80 Leverage (4.00% required minimum)..... 7.41 7.48 9.16 34.69 8.50 9.27 7.36 Risk-based capital.... Tier 1 (4.00% required minimum)....... 9.12 10.09 12.70 69.88 10.15 15.27 9.24 Total (8.00% required minimum)........ 10.37 11.03 13.79 70.20 11.40 16.52 10.27 Average loans to average deposits...... 95.64 70.37 85.08 63.44 93.69 66.86 78.84
22 SELECTED BANK FINANCIAL DATA (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT RATIOS) (UNAUDITED)
DECEMBER 31, 1996 -------------------------------------------------------------------------------------- NATIONAL ALABAMA BANK CITIZENS & FIRST FIRST FIRST BANK OF EXCHANGE OF PEOPLES AMERICAN CITIZENS GULF COMMERCE BANK DADEVILLE BANK, N.A.(1) BANK BANK, N.A.(2) BANK (1) -------------------------------------------------------------------------------------- Summary of Operations: Interest income............................ $ 43,444 $ 3,763 $ 4,918 $ 2,667 $ 18,055 $ 7,260 $ 3,607 Interest expense........................... 21,219 959 1,998 996 7,881 3,058 1,158 Net interest income........................ 22,225 2,804 2,920 1,671 10,174 4,202 2,449 Provision for loan losses.................. (198) 103 - 30 646 238 68 Securities gains (losses).................. (42) 5 - - (51) (1) 5 Noninterest income......................... 13,415 422 767 365 1,732 916 204 Noninterest expense........................ 24,015 1,756 1,862 1,387 7,667 2,804 1,645 Net income................................. 7,923 982 1,260 394 2,402 1,599 612 Balance Sheet Highlights: At Period-End: Total assets.............................. $623,368 $43,868 $58,643 $34,839 $223,081 $83,999 $39,972 Securities................................ 106,722 8,633 9,119 8,579 29,248 17,779 1,867 Loans, net of unearned income............. 430,159 31,347 43,929 21,031 173,970 55,189 30,877 Allowance for loan losses................. 6,768 522 510 276 1,689 828 418 Deposits.................................. 449,083 38,923 47,266 31,085 183,827 75,304 35,745 Short-term debt........................... 19,000 - 5,000 - 12,500 - - Long-term debt............................ 300 - - - 139 - - Stockholders' equity...................... 46,555 4,218 5,523 3,169 22,320 7,804 4,020 Performance Ratios: Return on average assets................... 1.42% 2.25% 2.14% 1.14% 1.16% 1.83% 1.51% Return on average equity................... 17.46 23.31 21.72 12.15 11.56 21.32 15.27 Net interest margin........................ 4.28 6.97 5.47 5.42 5.38 5.26 6.87 Capital and Liquidiy Ratios: Average equity to average assets........... 8.12 9.64 9.86 9.37 10.01 8.56 9.89 Leverage (4.00% required minimum).......... 8.10 9.33 9.28 9.13 10.70 9.15 9.96 Risk-based capital......................... Tier 1 (4.00% required minimum)........... 10.47 13.17 12.24 13.87 12.53 14.50 12.32 Total (8.00% required minimum)............ 11.72 14.42 13.38 15.07 12.58 15.70 13.57 Average loans to average deposits.......... 90.14 79.37 89.10 65.07 88.63 70.79 90.88
____________ (1) In August 1997, First Bank, a subsidiary of the Company, transferred a significant portion of its assets and liabilities to First Gulf Bank, also a subsidiary of the Company. Concurrent with this transfer, First Bank converted to a national bank, changed its name to Citizens & Peoples Bank, National Association, and relocated its headquarters from Robertsdale, Alabama to Cantonment, Florida. This is the first bank to be operated by the Company outside of Alabama. (2) In December 1997, First Citizens Bank, National Association ("First Citizens"), formerly First National Bank of Ashland, a subsidiary of the Company, was merged with Citizens Bank of Talladega, also a subsidiary of the Company. Concurrent with the consummation of this merger, First Citizens relocated its headquarters from Ashland, Alabama to Talladega, Alabama. 23 RESULTS OF OPERATIONS Year ended December 31, 1997, compared with year ended December 31, 1996 The Company's net income decreased by $459,000, or 3.8%, to $11.7 million in the year ended December 31, 1997, from $12.1 million in the year ended December 31, 1996. Return on average assets during 1997 was 1.01%, compared with 1.17% during 1996, and return on average equity was 12.42% during 1997, compared with 14.48% during 1996. Net interest income increased $2.6 million, or 5.8%, to $47.5 million in 1997 from $44.9 million in 1996, as interest income increased by $7.2 million and interest expense increased $4.6 million. The increase in net interest income is primarily attributable to a $75.9 million increase in average loans to $801.4 million during 1997, from $725.5 million during 1996, as a result of management emphasis on loan growth. The increase in interest expense is primarily attributable to an increase in average time deposits of $65.1 million to $425.2 million in 1997, from $360.1 million in 1996. In general, loans are the Company's highest yielding earning asset and time deposits are one of the Company's highest cost interest-bearing liabilities. The Company's net interest spread and net interest margin were 3.97% and 4.53%, respectively, in 1997, decreasing by 14 and 17 basis points, respectively, from 1996. These decreases reflect declining yield on average loans and an increasing cost of interest-bearing liabilities, both attributable to competition from banks and other financial institutions. The Company recorded a provision for loan losses of $3.0 million during 1997, $2.8 million of which was recorded at FAB. The FAB provision was primarily associated with higher loss experience in FAB's indirect automobile lending and sub-prime mortgage lending portfolios (which lending businesses have been discontinued). The 1997 provision of $3.0 million compares with a provision for loan losses of $885,000 during 1996, an increase of $2.1 million, or 237.6%. Following the 1997 provision, management believes that both loan loss experience and asset quality indicate that the allowance for loan losses is maintained at an adequate level. The Company's allowance for loan losses as a percentage of period-end loans was 1.52% at December 31, 1997, compared to 1.40% at December 31, 1996, and the allowance for loan losses as a percentage of period-end nonperforming assets was 191.8% at December 31, 1997, compared with 303.1% at December 31, 1996. The Company experienced net charge-offs of $1.2 million in 1997 equating to a ratio of net charge-offs to average loans of 0.15%. See "-- PROVISION AND ALLOWANCE FOR LOAN LOSSES." Noninterest income increased $537,000, or 3.1%, to $18.0 million in 1997, compared with $17.5 million in 1996. The Company experienced increases in its fee-based divisions (investment services, trust, and mortgage lending) of $1.1 million, or 10.5%, to $11.5 million in 1997 from $10.4 million in 1996. These increases were offset by a charge to provide for the consolidation of FAB's data processing facilities into the existing Company facility and by losses resulting from abandonment of certain leasehold improvements, all which total $499,000 in 1997 compared to a net gain of $148,000 in 1996, a decrease of $647,000. Noninterest expense increased $1.4 million, or 3.2%, to $45.5 million during 1997, compared with $44.1 million during 1996. Income before the provision for income taxes decreased $284,000, or 1.6%, to $17.1 million in 1997, from $17.4 million in 1996. Income before minority interest in earnings of consolidated subsidiary and net income decreased $461,000 and $459,000, respectively, during 1997. Year ended December 31, 1996, compared with year ended December 31, 1995 The Company's net income increased by $5.8 million, or 93.0%, to $12.1 million in the year ended December 31, 1996, from $6.3 million in the year ended December 31, 1995. Return on average assets during 1996 was 1.17%, compared with 0.95% during 1995, and return on average equity was 14.48% during 1996, compared with 13.58% during 1995. 24 Net interest income increased $18.4 million, or 69.5%, to $44.9 million in 1996 from $26.5 million in 1995, as interest income increased by $30.1 million and interest expense increased $11.7 million. The increase in net interest income is primarily attributable to a $275.8 million increase in average loans to $725.5 million during 1996, from $449.8 million during 1995, as a result of the NCC Merger and an increased management emphasis on loan growth. The increase in interest expense is primarily attributable to an increase in average time deposits of $127.7 million to $360.1 million in 1996, from $232.4 million in 1995. The Company's net interest spread and net interest margin were 4.11% and 4.70%, respectively, in 1996, increasing by 43 and 41 basis points, respectively, from 1995. These increases reflect the increase in average loans, relative to other earning assets. The Company recorded a provision for loan losses of $885,000 during 1996, compared with a provision for loan losses of $1.0 million during 1995, a decline of $131,000, or 12.9%. The Company's allowance for loan losses as a percentage of period-end loans was 1.40% at December 31, 1996, compared to 1.53% at December 31, 1995, and the allowance for loan losses as a percentage of period- end nonperforming assets was 303.1% at December 31, 1996, compared with 266.4% at December 31, 1995. The Company experienced net charge-offs of $295,000 in 1996 equating to a ratio of net charge-offs to average loans of 0.04%. See "-- PROVISION AND ALLOWANCE FOR LOAN LOSSES." Noninterest income increased $8.4 million, or 91.2%, to $17.5 million in 1996, compared with $9.2 million in 1995. The increase is partly attributable to an increase in investment services income of $4.0 million, or 100.5%, to $7.9 million in 1996, compared with $3.9 million in 1995, with the remainder of the increase being attributed to the NCC Merger. The 1996 increase in investment services income resulted from expansion of the sales forces in mid-1995. Noninterest expense increased $17.2 million, or 64.1%, to $44.1 million during 1996, compared with $26.8 million during 1995. Of the $17.2 million increase in noninterest expense, approximately $4.3 million is attributable to expansion of the investment services division of the Company, with the remaining increase being attributed to NCC Merger. Income before the provision for income taxes increased $9.6 million, or 122.4%, to $17.4 million in 1996, from $7.8 million in 1995. Income before minority interest in earnings of consolidated subsidiary and net income increased $5.2 million and $5.8 million, respectively, during 1996. NET INTEREST INCOME The largest component of the Company's net income is its net interest income -- the difference between the income earned on assets and interest paid on deposits and borrowed funds used to support its assets. Net interest income is determined by the yield earned on the Company's earning assets and rates paid on its interest-bearing liabilities, the relative amounts of earning assets and interest-bearing liabilities and the maturity and repricing characteristics of its earning assets and interest-bearing liabilities. Net interest income divided by average earning assets represents the Company's net interest margin. Average Balances, Income, Expenses and Rates The following table depicts, on a taxable equivalent basis for the periods indicated, certain information related to the Company's average balance sheet and its average yields on assets and average costs of liabilities. Such yields or costs are derived by dividing income or expense by the average daily balances of the associated assets or liabilities. 25 AVERAGE BALANCES, INCOME AND EXPENSES AND RATES (AMOUNTS IN THOUSANDS, EXCEPT YIELDS AND RATES)
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- 1997 1996 ---------------------------------------------------------------------------------- AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE ASSETS: BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE ---------------------------------------------------------------------------------- EARNING ASSETS: Loans (1) (3).......................... $ 801,435 $75,323 9.40% $ 725,537 $69,452 9.57% $449,783 Securities: Taxable............................... 164,850 10,735 6.51 162,283 10,358 6.38 106,525 Tax exempt............................ 32,065 2,567 8.01 28,919 2,233 7.72 29,307 Cash balances in other banks........... 1,042 55 5.28 4,060 240 5.91 3,681 Funds sold............................. 46,176 2,594 5.62 32,684 1,621 4.96 27,586 Trading account securities............. 3,488 193 5.53 2,814 183 6.50 1,097 ---------- ------- ---------- ------- -------- Total earning assets (2)........... 1,049,056 91,467 8.72 956,297 84,087 8.79 617,979 ---------- ------- ---------- ------- -------- Cash and due from banks.................. 39,472 36,842 25,822 Premises and equipment................... 29,934 29,916 14,860 Other assets............................. 52,311 26,675 10,433 Allowance for loan losses................ (11,580) (10,792) (6,614) ---------- ---------- -------- Total assets...................... $1,159,193 $1,038,938 $662,480 ========== ========== ======== LIABILITIES: Interest-bearing liabilities: Interest-bearing transaction accounts.. $ 113,593 3,169 2.79 $ 147,133 4,744 3.22 $107,712 Savings and money market deposits...... 226,828 8,464 3.73 201,071 7,194 3.58 132,953 Time deposits.......................... 425,186 23,708 5.58 360,100 20,225 5.62 232,373 Funds purchased........................ 85,533 4,464 5.22 71,640 3,623 5.06 38,585 Other short-term borrowings............ 41,236 2,548 6.18 29,813 2,056 6.90 17,467 Long-term debt......................... 8,583 487 5.67 7,831 404 5.16 1,160 ---------- ------- ---------- ------- -------- Total interest-bearing............ 900,959 42,840 4.75 817,588 38,246 4.68 530,250 liabilities...................... ---------- ------- ---- ---------- ------- ---- -------- Demand deposits.......................... 132,419 125,118 75,990 Accrued interest and other liabilities... 31,898 12,506 9,977 Stockholders' equity..................... 93,917 83,726 46,263 Total liabilities and................ ---------- ---------- -------- stockholders' equity................ $1,159,193 $1,038,938 $662,480 ========== ========== ======== Net interest spread...................... 3.97% 4.11% ==== ==== Net interest income/margin on a taxable equivalent basis............. 48,627 4.64% 45,841 4.79% ==== ==== Tax equivalent adjustment (2)............ 1,079 907 ------- ------- Net interest income/margin............... $47,548 4.53% $44,934 4.70% ======= ==== ======= ==== ---------------------- 1995 ---------------------- INCOME/ YIELD/ EXPENSE RATE ----------------------- ASSETS: EARNING ASSETS: Loans (1) (3).......................... $42,706 9.49% Securities: Taxable............................... 7,692 7.22 Tax exempt............................ 1,401 4.78 Cash balances in other banks........... 216 5.87 Funds sold............................. 1,623 5.88 Trading account securities............. 67 6.11 ------- Total earning assets (2)........... 53,705 8.69 ------- Cash and due from banks.................. Premises and equipment................... Other assets............................. Allowance for loan losses................ Total assets...................... LIABILITIES: Interest-bearing liabilities: Interest-bearing transaction accounts.. 3,576 3.32 Savings and money market deposits...... 5,569 4.19 Time deposits.......................... 13,840 5.96 Funds purchased........................ 2,303 5.97 Other short-term borrowings............ 1,163 6.66 Long-term debt......................... 104 8.97 ------- Total interest-bearing............ 26,555 5.01 liabilities...................... ------- ---- Demand deposits.......................... Accrued interest and other liabilities... Stockholders' equity..................... Total liabilities and................ stockholders' equity................ Net interest spread...................... 3.68% ==== Net interest income/margin on a taxable equivalent basis............. 27,150 4.39% ==== Tax equivalent adjustment (2)............ 638 ------- Net interest income/margin............... $26,512 4.29% ======= ====
_________ (1) Average loans include nonaccrual loans. All loans and deposits are domestic. (2) Tax equivalent adjustments are based on the assumed rate of 34%, and do not give effect to the disallowance for Federal income tax purposes of interest expense related to certain tax-exempt assets. (3) Fees in the amount of $2,744,000, $2,508,000, and $1,336,000 are included in interest and fees on loans for 1997, 1996, and 1995, respectively. During 1997, with little change in the overall interest rate levels from that in 1996, the Company experienced an increase in net interest income of $2.6 million, or 5.8%, to $47.5 million, compared with $44.9 million in 1996. Net interest income increased despite a decrease in the net interest spread of 14 basis points to 3.97% in 1997 from 4.11% in 1996, and a decrease in the net interest margin of 17 basis points to 4.53% in 1997, compared with 4.70% in 1996. Because the relative yield on loans exceeds that of all other earnings assets, the primary reason for the increased net interest income was a 10.5% increase in average loan volume. The primary reason for the decrease in the net interest spread and net interest margin was "spread-compression" resulting from, generally, lower rates on loans, and higher rates on marginal funding sources, such as time deposits, Federal funds purchased, and Federal Home Loan Bank borrowings, as well as an increase in higher cost time deposits as a percentage of total deposits, which are among the highest cost funding sources available to the Company. During 1997, net average earning assets increased by $92.8 million, or 9.7%, to $1,049.1 million from $956.3 million in 1996, while average loans increased $75.9 million, or 10.5%, to $801.4 million in 1997 from $725.5 million in 1996. 26 Analysis of Changes in Net Interest Income The following table sets forth, on a taxable equivalent basis, the effect which varying levels of earning assets and interest-bearing liabilities and the applicable rates had on changes in net interest income for 1997 and 1996. For the purposes of this table, changes which are not solely attributable to volume or rate are allocated to volume and rate on a pro rata basis. ANALYSIS OF CHANGES IN NET INTEREST INCOME (AMOUNTS IN THOUSANDS)
DECEMBER 31, -------------------------------------------------------------- 1997 COMPARED TO 1996 1996 COMPARED TO 1995 VARIANCE DUE TO VARIANCE DUE TO -------------------------------------------------------------- VOLUME YIELD/RATE TOTAL VOLUME YIELD/RATE TOTAL -------------------------------------------------------------- EARNING ASSETS: Loans ...................................... $ 7,127 $ (1,256) $ 5,871 $ 26,383 $ 363 $ 26,746 Securities: Taxable .................................. 165 212 377 3,646 (980) 2,666 Tax exempt ............................... 248 86 334 (19) 851 832 Cash balances in other banks ............... (161) (24) (185) 23 1 24 Funds sold ................................. 736 237 973 274 (276) (2) Trading account securities ................. 40 (30) 10 112 4 116 --------- --------- -------- --------- -------- -------- Total interest income ................. 8,155 (775) 7,380 30,419 (37) 30,382 INTEREST-BEARING LIABILITIES: Interest-bearing transaction accounts ...... (993) (582) (1,575) 1,279 (111) 1,168 Savings and money market deposits .......... 957 313 1,270 2,529 (904) 1,625 Time deposits .............................. 3,628 (145) 3,483 7,216 (831) 6,385 Funds purchased ............................ 723 118 841 1,717 (397) 1,320 Other short-term borrowings ................ 724 (232) 492 850 43 893 Long-term debt ............................. 41 42 83 361 (61) 300 --------- ---------- --------- --------- -------- --------- Total interest expense ................ 5,080 (486) 4,594 13,952 (2,261) 11,691 --------- ---------- --------- --------- -------- --------- Net interest income on a taxable equivalent basis .................... $ 3,075 $ (289) 2,786 $ 16,467 $(2,224) 18,691 ========= ========== ========= ======= Taxable equivalent adjustment .............. (172) (269) ========= ========= Net interest income ........................ $ 2,614 $ 18,422 ========= =========
INTEREST SENSITIVITY AND MARKET RISK Interest Sensitivity The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The principal monitoring technique employed by the Company is the measurement of the interest sensitivity "gap," which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets and liabilities, selling securities available for sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability. 27 The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, and sources and prices of off-balance sheet commitments in order to decrease interest sensitivity risk. The Company uses computer simulations to measure the net income effect of various interest rate scenarios. The modeling reflects interest rate changes and the related impact on net income over specified periods of time. The following table illustrates the Company's interest rate sensitivity at December 31, 1997, assuming the relevant assets and liabilities are collected and paid, respectively, based upon historical experience rather than their stated maturities. INTEREST SENSITIVITY ANALYSIS (AMOUNTS IN THOUSANDS, EXCEPT RATIOS)
DECEMBER 31, 1997 -------------------------------------------------------------------------------- AFTER ONE AFTER THREE THROUGH THROUGH WITHIN ONE THREE TWELVE WTIHIN ONE GREATER THAN MONTH MONTHS MONTHS YEAR ONE YEAR TOTAL ------------ ------------ ------------- ------------- -------------- ----------- ASSETS: Earning assets: Loans (1) ................................ $ 391,277 $ 45,285 $ 117,211 $ 553,773 $ 284,844 $ 838,617 Securities (2) ........................... 14,051 7,926 31,213 53,190 155,145 208,335 Interest-bearing deposits in other banks ............................ 2,391 - - 2,391 - 2,391 Funds sold ............................... 50,009 - - 50,009 - 50,009 ----------- ---------- ----------- ----------- ----------- ----------- Total interest-earning assets ....... $ 457,728 $ 53,211 $ 148,424 $ 659,363 $ 439,989 $ 1,099,352 LIABILITIES: Interest-bearing liabilities: Interest-bearing deposits: Demand deposits ...................... $ - $ - $ 121,884 $ 121,884 $ - $ 121,884 Savings and money market deposits .... 240,581 - - 240,581 - 240,581 Time deposits (3) .................... 84,785 80,038 112,751 277,574 142,925 420,499 Funds purchased .......................... 139,118 - - 139,118 - 139,118 Short-term borrowings (4) ................ 34,512 - - 34,512 - 34,512 Long-term debt ........................... 14,202 4 18 14,224 363 14,587 ----------- ---------- ----------- ----------- ----------- ----------- Total interest-bearing liabilities ... $ 513,198 $ 80,042 $ 234,653 $ 827,893 $ 143,288 $ 971,181 ----------- ---------- ----------- ----------- ----------- ----------- Period gap ................................... $ (55,470) $ (26,831) $ (86,229) $ (168,530) $ 296,701 =========== ========== =========== =========== =========== Cumulative gap ............................... $ (55,470) $ (82,301) $ (168,530) $ (168,530) $ 128,171 $ 128,171 =========== ========== =========== =========== =========== =========== Ratio of cumulative gap to total earning assets ............................... (5.05)% (7.49)% (15.33)% (15.33)% 11.66%
______________________ (1) Excludes nonaccrual loans of $4,174,000. (2) Excludes investment equity securities of $5,677,000. (3) Excludes matured certificates which have not been redeemed by the customer and on which no interest is accruing. (4) Includes treasury, tax and loan account of $6,762,000. 28 The Company generally benefits from increasing market rates of interest when it has an asset-sensitive gap and generally benefits from decreasing market interest rates when it is liability sensitive. The Company is liability sensitive throughout one year. The analysis presents only a static view of the timing and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those are viewed by management as significantly less interest sensitive than market-based rates such as those paid on non-core deposits. Accordingly, management believes that a liability-sensitive gap position is not as indicative of the Company's true interest sensitivity as it would be for an organization which depends to a greater extent on purchased funds to support earning assets. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities. Market Risk The Company's earnings are dependent on its net interest income which is the difference between interest income earned on all earning assets, primarily loans and securities, and interest paid on all interest bearing liabilities, primarily deposits. Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from inherent interest rate risk in its lending, investing and deposit gathering activities. The Company seeks to reduce its exposure to market risk through actively monitoring and managing its interest rate risk. Management relies upon static "gap" analysis to determine the degree of mismatch in the maturity and repricing distribution of interest earning assets and interest bearing liabilities which quantifies, to a large extent, the degree of market risk inherent in the Company's balance sheet. Gap analysis is further augmented by simulation analysis to evaluate the impact of varying levels of prevailing interest rates and the sensitivity of specific earning assets and interest bearing liabilities to changes in those prevailing rates. Simulation analysis consists of evaluating the impact on net interest income given changes from 200 basis points below to 200 basis points above the current prevailing rates. Management makes certain assumptions as to the effect varying levels of interest rates have on certain earning assets and interest bearing liabilities, which assumptions consider both historical experience and consensus estimates of outside sources. With respect to the primary earning assets, loans and securities, certain features of individual types of loans and specific securities introduce uncertainty as to their expected performance at varying levels of interest rates. In some cases, imbedded options exist whereby the borrower may elect to repay the obligation at any time. These imbedded prepayment options make anticipating the performance of those instruments difficult given changes in prevailing rates. At December 31, 1997, mortgage backed securities totaling $123.4 million, or 9.7% of total assets and essentially every loan, net of unearned income, (totaling $842.8 million, or 66.1% of total assets), carry such imbedded options. Management believes that assumptions used in its simulation analysis about the performance of financial instruments with such imbedded options are appropriate. However, the actual performance of these financial instruments may differ from management's estimates due to several factors, including the diversity and sophistication of the customer base, the general level of prevailing interest rates and the relationship to their historical levels, and general economic conditions. The difference between those assumptions and actual results, if significant, could cause the actual results to differ from those indicated by the simulation analysis. Deposits totaled $929.0 million, or 72.9%, of total assets at December 31, 1997. Since deposits are the primary funding source for earning assets, the associated market risk is considered by management in its simulation analysis. Generally, it is anticipated that deposits will be sufficient to support funding requirements. However, the rates paid for deposits at varying levels of prevailing interest rates have a significant impact on net interest income and therefore, must be quantified by the Company in its simulation analysis. Specifically, the Company's spread, the difference between the rates earned on earning assets and rates paid on interest bearing liabilities, is generally higher when prevailing rates are higher. As prevailing rates reduce, the spread tends to compress, with severe compression at very low prevailing interest rates. This characteristic is called "spread compression" and adversely effects net interest income in the simulation analysis when anticipated prevailing rates are reduced from current rates. Management relies upon historical experience to estimate the degree of spread compression in its simulation analysis. Management believes that such estimates of possible spread compression are reasonable. However, if the 29 degree of spread compression varies from that expected, the actual results could differ from those indicated by the simulation analysis. The following table illustrates the results of simulation analysis used by the Company to determine the extent to which market risk would have effected the net interest margin if prevailing interest rates differed from actual rates during 1997. Because of the inherent use of estimates and assumptions in the simulation model used to derive this information, the actual results for 1997 and, certainly, the future impact of market risk on the Company's net interest margin, may differ from that found in the table. MARKET RISK (AMOUNTS IN THOUSANDS)
Change in Change from Prevailing Interest Net Interest 1997 Net Interest Rates Income Amount Income Amount - -------------------- --------------- ----------------- +200 basis points $ 50,971 7.20% +100 basis points 49,260 3.60 0 basis points 47,548 - -100 basis points 45,879 (3.51) -200 basis points 44,205 (7.03)
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 48 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. Due to an increase in the loss experience in FAB's indirect automobile lending and sub-prime lending portfolios, management deemed it prudent to increase FAB's provision for loan losses during 1997. This indirect automobile lending and sub-prime mortgage lending businesses have been discontinued and management believes the allowance for loan losses adequately covers the Company's exposure to loan losses. Management's judgment as to the adequacy of the allowance for loan losses is also based upon assumptions about future events which it believes to be reasonable. These assumptions include consistent application of sound underwriting standards, continued low turnover among lending staff, general economic conditions including stable interest rates, and stable levels of nonperforming loans. Should these assumptions change, there is no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional loan loss provisions will not be required. 30 Additions to the allowance for loan losses, which are expensed as the provision for loan losses on the Company's income statement, are made periodically to maintain the allowance for loan losses at an appropriate level as determined by management. Loan losses and recoveries are charged or credited directly to the allowance for loan losses. ALLOWANCE FOR LOAN LOSSES (Amounts in thousands, except percentages)
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- --------- --------- --------- ---------- Total loans outstanding at end of period, net of unearned income ......................... $ 842,790 $ 785,282 $ 680,172 $ 422,307 $ 351,990 ========= ========= ========= ========= ========== Average amount of loans outstanding, net of unearned income ......................... $ 801,435 $ 725,537 $ 449,783 $ 383,800 $ 333,278 ========= ========= ========= ========= ========== Allowance for loan losses at beginning of period ........................ $ 11,011 $ 10,421 $ 6,506 $ 7,307 $ 7,006 Charge-offs: Commercial, financial and agricultural ..... 396 754 1,105 2,924 498 Real estate - mortgage ..................... 522 120 269 231 914 Consumer ................................... 1,831 1,019 504 293 314 --------- --------- --------- --------- ---------- Total charge-offs ..................... 2,749 1,893 1,878 3,448 1,726 --------- --------- --------- --------- ---------- Recoveries: Commercial, financial and agricultural ..... 975 1,190 1,018 429 1,408 Real estate - mortgage ..................... 190 150 289 119 446 Consumer ................................... 414 258 346 276 223 --------- --------- --------- --------- ---------- Total recoveries ...................... 1,579 1,598 1,653 824 2,077 --------- --------- --------- --------- ---------- Net charge-offs (recoveries) ......... 1,170 295 225 2,624 (351) Provision for (benefit of) loan losses ............. 2,988 885 1,016 1,596 (50) Changes incidental to acquisitions ................. - - 3,124 227 - --------- --------- --------- --------- ---------- Allowance for loan losses at period-end ................................. $ 12,829 $ 11,011 $ 10,421 $ 6,506 $ 7,307 ========= ========= ========= ========= ========== Allowance for loan losses to period-end loans ...... 1.52% 1.40% 1.53% 1.54% 2.08% Net charge-offs (recoveries) to average loans ...... 0.15 0.04 0.05 0.68 (0.11)
Allocation of Allowance There is no formal allocation of the allowance for loan losses by loan category. 31 Nonperforming Assets The following table presents the Company's nonperforming assets for the dates indicated. NONPERFORMING ASSETS (Amounts in thousands, except percentages)
AT DECEMBER 31, ------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Nonaccrual loans ........................................... $ 4,174 $ 2,480 $ 2,176 $ 1,539 $ 1,492 Restructured loans ......................................... 1,052 605 949 297 1,549 Loans past due 90 days or more and still accruing .......... - - 126 - - ------- ------- ------- ------- ------- Total nonperforming loans .......................... 5,226 3,085 3,251 1,836 3,041 Other real estate owned .................................... 1,462 548 661 455 1,135 ------- ------- ------- ------- ------- Total nonperforming assets ......................... $ 6,688 $ 3,633 $ 3,912 $ 2,291 $ 4,176 ======= ======= ======= ======= ======= Allowance for loan losses to period-end loans .............. 1.52% 1.40% 1.53% 1.54% 2.08% Allowance for loan losses to period-end nonperforming loans ................................ 245.48 356.92 320.55 354.36 240.28 Allowance for loan losses to period-end nonperforming assets ............................... 191.82 303.08 266.39 283.98 174.98 Net charge-offs (recoveries) to average loans ............. 0.15 0.04 0.05 0.68 (0.11) Nonperforming assets to period-end loans and foreclosed property ............................ 0.79 0.46 0.57 0.54 1.18 Nonperforming loans to period-end loans .................... 0.62 0.39 0.48 0.43 0.86
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, 1997, 1996 and 1995, approximately $125,000, $118,000, and $67,000, respectively, in additional interest income would have been recognized in earnings if the Company's nonaccrual loans had been current in accordance with their original terms. Total nonperforming assets increased $3.1 million to $6.7 million at December 3l, 1997, from $3.6 million at December 31, 1996. The allowance for loan losses to period-end nonperforming assets was 191.8% at December 31, 1997, compared with 303.1% at December 31, 1996. This ratio will generally fluctuate from period to period depending upon nonperforming asset levels at period end. The nonperforming assets increased at year end 1997 compared with 1996 primarily due to the discontinued indirect automobile and sub-grade mortgage loan portfolios at FAB. 32 Potential Problem Loans A potential problem loan is one that management has serious doubts as to the borrower's future performance under terms of the loan contract. These loans are current as to principal and interest, and accordingly, they are not included in the nonperforming asset categories. Management monitors these loans closely in order to ensure that the Company's interests are protected. At December 31, 1997, the Company had certain loans considered by management to be potential problem loans totaling $17.9 million. The level of potential problem loans is factored into the determination of the adequacy of the allowance for loan losses. NONINTEREST INCOME AND EXPENSE Noninterest income The Company relies on four distinct product lines for the production of recurring noninterest income: traditional retail and commercial banking, mortgage banking, trust services and investment services. Combined fees associated with these product lines totaled $16.6 million in 1997, compared with $15.4 million in 1996, an increase of $1.2 million, or 8.0%. Non-recurring losses in 1997 totaled $499,000, resulting from a charge to provide for the consolidation of FAB's data processing facility into the existing Company facility and by losses resulting from the abandonment of certain leasehold improvements. The net gain on disposal of assets in 1996 of $148,000 resulted from sale of a branch facility, along with its related deposits of $274,000, as reduced by a loss of $126,000 resulting from abandonment of computer equipment due to consolidation of the Company's data processing center. Other noninterest income was $1.9 million in 1997, compared with $2.0 million in 1996, a decrease of $42,000, or 2.1%. Noninterest income increased by $8.2 million, or 89.7%, in 1996, $4.0 million being attributed to expansion of the Company's investment services sales force, with the remainder of the increase being attributed to the NCC Merger. The following table sets forth, for the periods indicated, the principal components of noninterest income. NONINTEREST INCOME (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ---- ---- ---- Service charges on deposit accounts ................. $ 5,070 $ 4,944 $ 2,549 Investment services income .......................... 8,152 7,889 3,934 Trust fees .......................................... 1,799 1,550 1,320 Origination and sale of mortgage loans .............. 1,579 991 811 Gain on disposal of assets and deposits ............. (499) 148 179 Securities gains (losses) ........................... (8) (84) 26 Other ............................................... 1,946 1,988 367 --------- -------- ------- Total noninterest income .................... $ 18,039 $ 17,426 $ 9,186 ========= ======== =======
33 Noninterest Expense The following table sets forth, for the periods indicated, the principal components of noninterest expense. NONINTEREST EXPENSE (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 1997 ---- ---- ---- Salaries and employee benefits ................ $ 26,218 $ 25,655 $ 14,628 Net occupancy expense ......................... 5,473 5,628 3,677 Amortization of goodwill ...................... 298 305 89 Advertising ................................... 1,224 1,045 921 Banking assessments ........................... 364 1,076 730 Data processing expenses ...................... 1,714 1,413 902 Legal and professional fees ................... 1,752 1,879 1,673 Non-credit losses (recoveries) ................ 283 (24) 1,219 Other ......................................... 8,135 7,076 3,010 -------- -------- -------- Total noninterest expense .................. $ 45,461 $ 44,053 $ 26,849 ======== ======== ========
Noninterest expenses increased $1.4 million, or 3.2%, to $45.4 million in 1997, from $44.1 million in 1996. Banking assessments decreased by $712,000, or 66.2%, to $364,000 in 1997, from $1.1 million in 1996. The 1996 amount includes a one-time charge of $677,000 relating to recapitalization of the SAIF fund through a FDIC assessment. Noninterest expenses increased $17.2 million, or 64.1%, to $44.1 million in 1996 from $26.8 in 1995 due to expansion of the Company's investment services sales force and the NCC Merger. Investment Services The following table sets forth, for the periods indicated, the summary of operations for the investment services departments of the Company: INVESTMENT SERVICES DIVISION (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 ---- ---- ---- Investment services income .................... $ 8,152 $ 7,889 $ 3,934 Other revenue ................................. 1,311 1,354 422 ------- ------- ------- Total revenue .............................. 9,463 9,243 4,356 Expenses and allocated charges ................ 8,479 8,551 4,267 ------- ------- ------- Net investment services revenue ............ $ 984 $ 692 $ 89 ======= ======= =======
34 Investment services revenues increased $220,000, or 2.4%, to $9.5 million in 1997 from $9.2 million in 1996, primarily as a result continued favorable market conditions. Other investment services 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. The increase in investment services revenues of $4.9 million, or 112.2%, to $9.2 million in 1996 from $4.4 million in 1995 was attributable to staff additions, new customer relationships and favorable market conditions. The $4.3 million, or 100.4%, increase in expenses and allocated charges to $8.6 million in 1996 from $4.3 million in 1996 is consistent with additional revenue generation. These results are not necessarily the same as would be expected if these activities were conducted by a stand-alone entity because certain corporate overhead expenses are not allocated directly to this division. Trust Division The following table sets forth, for the periods indicated, the summary of operations for the trust division of the Company: TRUST DIVISION (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 ---- ---- ---- Trust division income ......................... $ 1,799 $ 1,550 $ 1,320 Expenses and allocated charges................. 1,105 1,175 813 -------- -------- -------- Net trust division revenue.................. $ 694 $ 375 $ 507 ======== ======== ========
Trust division income increased $249,000, or 16.1%, to $1.8 million in 1997 from $1.6 million in 1996 from new customer relationships and growth of existing assets managed. Similar conditions resulted in a 17.4% increase in trust department fees to $1.6 million in 1996 from $1.3 million in 1995. Despite the increase in Trust division income, Trust division expenses and allocated charges decreased 6.0% in 1997 versus 1996, from $1.2 million to $1.1 million. This $70,000 decrease resulted from operating changes initiated during 1996. The $362,000 increase, or 44.5%, in expenses and allocated charges to $1.2 million in 1996 from $813,000 in 1995 resulted from a combination of growth and reorganization of the operations section of the trust division. These results are not necessarily the same as would be expected if these activities were conducted by a stand-alone entity because certain corporate overhead expenses are not allocated directly to this division. 35 Mortgage Lending Division The following table sets forth, for the periods indicated, the summary of operations for the mortgage lending division of the Company. MORTGAGE LENDING DIVISION (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------- 1997 1996 1995 ---- ---- ---- Origination and sale of mortgage loans ............ $ 1,579 $ 991 $ 811 Interest income ................................... 455 293 304 -------- ------ ------ Total revenue ............................. 2,034 1,284 1,115 Expenses and allocated charges .................... 1,553 1,010 838 -------- ------ ------ Net mortgage lending division revenue ..... $ 481 $ 274 $ 277 ======== ====== ======
Fees charged in connection with the origination and resale of mortgage loans totaled $1.6 million in 1997 and $991,000 in 1996, an increase of $588,000, or 59.3%, resulting from staff additions, expansion of services into different geographic areas serviced by the Company, and a favorable interest rate environment. Expenses and allocated charges in the mortgage lending division grew 53.8% to $1.5 million in 1997 from $1.0 million in 1996, an increase if $543,000. In spite of this 53.8% increase, these expenses grew at a lower rate than revenues as a result of more efficient operations and leveraging the available fixed cost structure. These results are not necessarily the same as would be expected if these activities were conducted by a stand-alone entity because certain corporate overhead expenses are not allocated directly to this division. EARNING ASSETS Loans Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks which management attempts to control and counterbalance. Loans averaged $801.4 million in 1997 compared to $725.6 million in 1996, an increase of $75.9 million, or 10.5%. At December 31, 1997, total loans, net of unearned income, were $842.8 million compared to $785.3 million at the end of 1996, an increase of $57.5 million, or 7.3%. The growth in the Company's loan portfolio is attributable to general economic conditions that resulted in increased loan demand from existing customers and the Company's ability to attract new customers while maintaining consistent underwriting standards. The following table details the composition of the loan portfolio by category at the dates indicated. 36 COMPOSITION OF LOAN PORTFOLIO (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
December 31, ------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------------------------- Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ------------------------------------------------------------------------------------------------- Commercial and financial .......... $ 194,636 23.04% $195,128 24.71% $172,057 25.11% $119,015 28.02% $ 99,148 28.08% Real estate: Construction .................... 54,824 6.49 51,168 6.48 39,916 5.82 28,754 6.77 18,903 5.35 Mortgage - residential .......... 253,668 30.02 244,344 30.96 195,609 28.54 90,312 21.27 76,793 21.76 Mortgage - commercial ........... 213,482 25.27 173,102 21.92 166,675 24.32 124,330 29.27 113,160 32.05 Mortgage - other ................ 1,519 .18 3,064 .39 3,894 .57 981 .23 1,307 .37 Consumer .......................... 79,598 9.42 88,036 11.15 87,903 12.83 52,397 12.34 35,016 9.92 Other ............................. 47,138 5.58 34,685 4.39 19,267 2.81 8,925 2.10 8,733 2.47 ---------- ------- --------- ------- -------- ------- -------- ------- -------- ------- Total gross loans ............... 844,865 100.00% 789,527 100.00% 685,321 100.00% 424,714 100.00% 353,060 100.00% ======= ======= ======= ======= ======= Unearned income ................... (2,075) (4,245) (5,149) (2,407) (1,070) ---------- --------- -------- --------- -------- Total loans, net of unearned income ............... 842,790 785,282 680,172 422,307 351,990 Allowance for loan losses ......... (12,829) (11,011) (10,421) (6,506) (7,307) --------- -------- -------- -------- -------- Total net loans ................. $ 829,961 $774,271 $669,751 $415,801 $344,683 ========= ======== ======== ======== ========
In the context of this discussion, a "real estate mortgage loan" is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. It is common practice for financial institutions in the Company's market areas to obtain a security interest or lien in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. The principal component of the Company's loan portfolio is real estate mortgage loans. At year-end 1997, this category totaled $523.5 million and represented 62.1% of the total loan portfolio, compared to $471.7 million, or 60.1%, of the total loan portfolio, at year-end 1996. Commercial mortgage loans increased $40.4 million, or 23.3%, to $213.5 million at December 31, 1997. Residential mortgage loans increased $9.4 million, or 3.8%, to $253.7 million at December 31, 1997, compared with $244.3 million at December 31, 1996, due primarily to an increased emphasis in residential lending, especially home equity lines of credit. The growth of commercial and financial loans was flat in 1997, reflecting increased competition from banks and other financial institutions in this segment of the market. Consumer loans decreased $8.4 million, or 9.6%, during 1997 to $79.6 million from $88.0 million in 1996 as a result of reduced emphasis on certain areas of consumer lending (such as indirect automobile loans). Other categories of loans comprised less than 10% of total loans at December 31, 1997 and 1996. The Company's loan portfolio represents diversification within its Alabama markets, and is represented in the higher growth Shelby, Baldwin, Morgan, Madison, and St. Clair Counties. The Company engages in no foreign lending operations. The repayment of loans is a source of additional liquidity for the Company. The following table sets forth the Company's loans maturing within specific intervals at December 31, 1997. 37 LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES (AMOUNTS IN THOUSANDS)
DECEMBER 31, 1997 --------------------------------------------------------- OVER ONE YEAR ONE YEAR OR LESS THROUGH FIVE OVER FIVE YEARS TOTAL YEARS -------------------- ---------- ---------------- -------- Commercial, financial and agricultural ...... $ 121,196 $ 60,822 $ 12,618 $194,636 Real estate - construction .................. 35,343 17,168 2,313 54,824 Real estate - residential ................... 54,876 81,336 117,456 253,668 Real estate - commercial .................... 74,917 97,223 41,342 213,482 Consumer .................................... 39,776 37,591 2,231 79,598 PREDETERMINED FLOATING RATES RATES -------------------- ----------------- Maturing after one year but within five years .................... $ 107,039 $ 187,101 Maturing after five years ........................................ 39,259 136,701 --------- --------- $ 146,298 $ 323,802 ========= =========
The information presented in the above table is based upon the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity and repricing structure of the loan portfolio. Securities Securities, including securities classified as held to maturity (or investment securities) and available for sale, represent a significant portion of the Company's earning assets. Securities averaged $196.9 million during 1997, compared with $191.2 million during 1996, an increase of $5.7 million, or 3.0%. At December 31, 1997, the securities portfolio totaled $213.6 million, including securities held to maturity with an amortized cost of $56.5 million and securities available for sale with a market value of $157.1 million. 38 The following tables set forth the carrying value of securities held by the Company at the dates indicated. INVESTMENT SECURITIES (AMOUNTS IN THOUSANDS)
December 31, ---------------------------------------------------- 1997 1996 ---------------------------------------------------- Cost Market Cost Market ---------------------------------------------------- U.S. Government Agencies ............. $ 2,559 $ 2,560 $ 3,446 $ 3,442 State and political subdivisions ..... 10,067 10,431 10,786 10,964 Mortgage backed securities ........... 43,893 44,006 60,513 60,366 ---------- ---------- ---------- ---------- Total ....................... $ 56,519 $ 56,997 $ 74,745 $ 74,772 ========== ========== ========== ==========
AVAILABLE FOR SALE SECURITIES (AMOUNTS IN THOUSANDS)
December 31, ---------------------------------------------------- 1997 1996 ---------------------------------------------------- Cost Market Cost Market ---------------------------------------------------- U.S. Treasury ........................ $ 3,035 $ 3,041 $ 13,349 $ 13,339 U.S. Government Agencies ............. 44,299 44,270 7,016 6,845 State and political subdivisions ..... 24,075 24,589 19,371 19,428 Mortgage backed securities ........... 79,308 79,517 61,153 60,585 Other ................................ 5,677 5,677 5,131 5,131 -------- -------- --------- ---------- Total ....................... $156,394 $157,094 $106,020 $105,328 ======== ======== ========= ==========
39 The following tables show the scheduled maturity and average yields of securities owned by the Company at December 31, 1997.
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS (Amounts in thousands, except yields) December 31, 1997 ----------------------------------------------------------------------------------- After one but After five but Within one year Within five years Within ten years After ten years ----------------------------------------------------------------------------------- Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) ----------------------------------------------------------------------------------- U.S. Government Agencies ............... $ 2,062 5.92% $ 497 6.44% $ - -% $ - -% State and political subdivisions ....... 859 8.85 6,819 7.68 2,389 7.66 - - Mortgage backed securities ............. - - - - - - - - ------- ------- ------- ------ Total ......................... $ 2,921 6.78% $ 7,316 7.62% $ 2,389 7.66% $ - -% ======= ==== ======= ==== ======= ==== ====== ==== Other securities --------------------- Amount Yield(1) --------------------- U.S. Government Agencies ............... State and political subdivisions ....... $ - -% Mortgage backed securities ............. - - 43,893 6.57 -------- Total ......................... $ 43,893 6.57% ======== ====
__________________ (1) Computed on a tax-equivalent basis utilizing a 34% tax rate, without giving effect to the disallowance for Federal income tax purposes of interest related to certain tax-exempt assets.
SECURITIES AVAILABLE FOR SALE MATURITY DISTRIBUTION AND YIELDS (Amounts in thousands, except yields) December 31, 1997 ----------------------------------------------------------------------------------- After one but After five but Within one year Within five years Within ten years After ten years ----------------------------------------------------------------------------------- Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) ----------------------------------------------------------------------------------- U.S. Treasury .......................... $ 1,427 5.59% $ 1,614 5.79% $ - -% $ - -% U.S. Government Agencies ............... 29,957 6.35 13,431 6.60 882 4.84 - - State and political subdivisions ....... 2,365 7.92 12,639 7.33 8,435 7.19 $ 1,150 7.19 Mortgage backed securities ............. - - - - - - - - Equity securities ...................... - - - - - - - - -------- -------- ------- ------- Total ......................... $ 33,749 6.43% $ 27,684 6.88% $ 9,317 6.94% $ 1,150 7.19% ======== ==== ======== ==== ======= ==== ======= ==== Other securities --------------------- Amount Yield(1) --------------------- U.S. Treasury .......................... $ - -% U.S. Government Agencies ............... - - State and political subdivisions ....... - - Mortgage backed securities ............. 79,517 6.67 Equity securities ...................... 5,677 6.96 ------- Total ......................... $85,194 6.69% ======= ====
__________________ (1) Computed on a tax-equivalent basis utilizing a 34% tax rate, without giving effect to the disallowance for Federal income tax purposes of interest related to certain tax-exempt assets. At December 31, 1997, mortgage-backed securities consisting of collateralized mortgage obligations and pass-through mortgage obligations totaled $123.4 million, classified as investment securities of $43.9 million and securities available for sale of $79.5 million. Management expects the annual repayment of the underlying mortgages to vary as a result of monthly repayment of principal and/or interest required under terms of the underlying promissory notes. Further, the actual rate of repayment is subject to changes depending upon both terms of the underlying mortgages and the relative level of mortgage interest rates. When relative interest rates decline to levels below that of the underlying mortgages, acceleration of principal repayment is expected as some borrowers on the underlying mortgages refinance to lower rates. When the underlying rates on mortgage loans are comparable to, or in excess of, market rates, repayment more closely conforms to scheduled amortization in accordance with terms of the promissory note. Accordingly, management expects repayment of the collateralized mortgage obligations in three to five years, and repayment of the pass-through mortgage obligations in five to seven years. Other attributes of securities are discussed in "- INTEREST SENSITIVITY AND MARKET RISK." 40 Short-Term Investments The Company utilizes overnight investment of funds in Federal funds sold and securities purchased under agreements to resell to ensure that adequate liquidity will be maintained, while at the same time minimizing the level of uninvested cash reserves. Short-term investments are also utilized by the Company when the level of funds committed to lending and investment portfolio programs changes or the level of deposit generation changes. During 1997, Federal funds sold and securities purchased under agreements to resell averaged $46.2 million, compared to $32.7 million during 1996, representing a $13.5 million, or 41.3%, increase as the Company experienced growth in both loans and investment securities. Trading Account Securities An important aspect of investment department operations, but less so to the Company in total, are trading account securities, which represent securities owned by the Company prior to delivery to the Company's customers. Trading account securities averaged $3.5 million in 1997 and $2.8 million in 1996; this small dollar amount reflects management's policy of limiting positions in such securities to reduce its exposure to market and interest rate changes. DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES Average interest-bearing liabilities increased $83.4 million, or 10.2%, to $901.0 million in 1997, from $817.6 million in 1996. Average interest-bearing deposits increased $57.3 million, or 8.1%, to $765.6 million in 1997, from $708.3 million in 1996. Average Federal funds purchased and securities sold under agreements to repurchase increased $13.9 million, or 19.4%, to $85.5 million in 1997, from $71.6 million in 1996. Average short-term borrowings increased by $11.4 million, or 38.3%, to $41.2 million in 1997, compared to $29.8 million is 1996. Deposits Average total deposits increased $64.6 million, or 7.8%, to $898.0 million during 1997, from $833.4 million during 1996. At December 31, 1997, total deposits were $929.0 million, compared with $858.1 million at December 31, 1996, an increase of $70.9 million, or 8.3%. The following table sets forth the deposits of the Company by category at the dates indicated. DEPOSITS (Amounts in thousands, except percentages)
December 31, -------------------------------------------------------------------------------- 1997 1996 1995 ---------------------------- ------------------------ ------------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------------- ------------- ---------- ------------ ----------- ------------ Demand ............................ $146,006 15.72% $133,005 15.50% $130,534 15.50% NOW .............................. 121,884 13.12 114,782 13.38 142,264 16.90 Savings and money market .......... 240,581 25.90 222,645 25.95 217,089 25.79 Time less than $100,000 ........... 317,345 34.17 285,408 33.26 267,538 31.78 Time greater than $100,000 ........ 103,154 11.09 102,263 11.91 84,474 10.03 ------------- ------------- ---------- ------------ ----------- ------------ Total deposits .................. $928,970 100.00% $858,103 100.00% $841,899 100.00% ============= ============= ========== ============ =========== ============ ------------------------------------------------------- 1994 1993 ---------------------------- ------------------------ Percent Percent Amount of Total Amount of Total ------------- ------------- ---------- ------------ Demand ............................ $ 79,742 15.75% $ 70,156 15.33% NOW .............................. 69,319 13.69 60,240 13.16 Savings and money market .......... 168,423 33.27 197,811 43.23 Time less than $100,000 ........... 137,702 27.20 87,087 19.03 Time greater than $100,000 ........ 51,070 10.09 42,350 9.25 ------------- ------------ ----------- ----------- Total deposits .................. $506,256 100.00% $457,644 100.00% ============= ============ =========== ===========
Core deposits, which exclude time deposits of $100,000 or more, provide for a relatively stable funding source that supports earning assets. The Company's core deposits totaled $825.9 million, or 88.9%, of total deposits at December 31, 1997 and totaled $755.8 million, or 88.1%, of total deposits at December 31, 1996. 41 Deposits, in particular core deposits, have historically been the Company's primary source of funding and have enabled the Company to meet successfully both short-term and long-term liquidity needs. Management anticipates that such deposits will continue to be the Company's primary source of funding in the future. The Company's loan-to-deposit ratio was 90.7% at December 31, 1997, and 91.5% at the end of 1996, and the end of 1996, and the ratio averaged 89.2% during 1997. The maturity distribution of the Company's time deposits in excess of $100,000 at December 31, 1997, is shown in the following table. MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS OF $100,000 OR MORE (AMOUNTS IN THOUSANDS)
December 31, 1997 ----------------------------------------------------------------------------- After One After Three After Six Through Through Through After Within One Three Six Twelve Twelve Month Months Months Months Months Total ----------- --------- ----------- ---------- --------- ---------- Certificates of deposit of $100,000 or more ...... $ 13,209 $ 16,317 $ 14,439 $ 22,484 $ 14,460 $ 80,909 Other time deposits of $100,000 or more .......... 20,005 2,240 - - - 22,245 ---------- ---------- ------------ --------- ---------- ---------- Total ................................... $ 33,214 $ 18,557 $ 14,439 $ 22,484 $ 14,460 $ 103,154 ========== ========== ============ ========= ========== ==========
Approximately 32.20% of the Company's time deposits over $100,000 had scheduled maturities within three months. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. Some financial institutions partially fund their balance sheets with large certificates of deposit obtained through brokers. The Company has not historically used broker deposits. Borrowed Funds Borrowed funds include four broad categories; (i) Federal funds purchased and securities sold under agreements to repurchase, (ii) treasury, tax and loan balances, (iii) Federal Home Loan Bank ("FHLB") borrowings, and (iv) borrowings from an independent bank. Because of a relatively high loan-to-deposit ratio, the existence and stability of these funding sources are critical to the Company's maintenance of short-term and long-term liquidity. Federal funds purchased and securities sold under agreements to repurchase represent both an input of excess funds from correspondent bank customers of the Company as well as a cash management tool offered to corporate customers. At December 31, 1997, these funds totaled $139.1 million, compared with $93.2 million at December 31, 1996. At December 31, 1997 Treasury, tax and loan balances totaled $6.8 million, compared to $3.0 million at December 31, 1996. The Company collects tax deposits from customers and is permitted to retain these balances until established collateral limits are exceeded or until the U.S. Treasury withdraws its balances. The Company's average borrowing from an independent bank under a $20 million credit facility ("the Credit Facility") was $17.9 million during 1997, compared with $19.8 million during 1996. As of December 31, 1997, the remaining availability under the Credit Facility was $4.7 million. The Credit Facility bears interest at a rate that varies with LIBOR and is secured by stock in the Banks. Effective January 19, 1998, the Credit Facility was renegotiated and renewed providing for a current due date of May 31, 1999. Three of the Banks are members of the FHLB. At December 31, 1997, these Banks had available FHLB lines of $78.2 million, under which $26.7 million was outstanding, including advances classified as short-term of $12.5 million and advances classified as long-term of $14.2 million. This compares to borrowings of $36.5 million at December 31, 1996, of which $24.0 million was short-term and $12.5 million was long-term. 42 The following table sets forth, for the periods indicated, the principal components of borrowed funds. 43 BORROWED FUNDS (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
DECEMBER 31, -------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Federal funds purchased and securities sold under agreements to repurchase : Balance at end of period .................................... $ 139,118 $ 93,196 $ 59,746 Average balance outstanding ................................. 85,533 71,640 38,585 Maximum outstanding at any month's end ...................... 139,118 93,196 59,746 Weighted average interest rate at period-end ................ 6.15% 5.93% 5.65% Weighted average interest rate during the period ............ 5.22 5.15 5.97 Treasury, tax and loan: Balance at end of period .................................... $ 6,762 $ 2,968 $ 2,441 Average balance outstanding ................................. 2,506 2,767 3,757 Maximum outstanding at any month's end ...................... 6,762 6,242 6,662 Weighted average interest rate at period-end ................ 5.90% 5.15% 5.40% Weighted average interest rate during the period ............ 4.97 4.01 5.36 Notes Payable: Balance at end of period .................................... $ 15,250 $ 18,000 $ 15,280 Average balance outstanding ................................. 17,943 19,785 9,934 Maximum outstanding at any month's end ...................... 19,250 22,376 15,280 Weighted average interest rate at period-end ................ 6.69% 6.78% 6.94% Weighted average interest rate during the period ............ 6.62 7.19% 5.72 Short-term advances from the Federal Home Loan Bank: Balance at end of period .................................... $ 12,500 $ 24,000 $ 6,000 Average balance outstanding ................................. 20,787 7,261 3,776 Maximum outstanding at any month's end ...................... 30,000 24,000 6,000 Weighted average interest rate at period-end ................ 5.78% 6.01% 5.98% Weighted average interest rate during the period ............ 5.80% 5.70 6.17 Long-term advances from the Federal Home Loan Bank: Balance at end of period .................................... $ 14,200 $ 12,500 $ - Average balance outstanding ................................. 8,157 7,263 - Maximum outstanding at any month's end ...................... 26,700 12,500 - Weighted average interest rate at period-end ................ 5.64% 5.53% -% Weighted average interest rate during the period ............ 5.50 5.70 - Convertible debentures: Balance at end of period .................................... $ - $ 105 $ 105 Average balance outstanding ................................. 14 105 105 Maximum outstanding at any month's end ...................... 105 105 105 Weighted average interest rate at period-end ................ -% 8.25% 8.25% Weighted average interest rate during the period ............ 8.25 8.25 8.25 Capital leases: Balance at end of period .................................... $ 387 $ 439 $ 984 Average balance outstanding ................................. 412 463 1,055 Maximum outstanding at any month's end ...................... 439 487 1,200 Weighted average interest rate at period-end ................ 8.98% 8.98% 8.98% Weighted average interest rate during the period ............ 8.98 8.98% 8.97
44 CAPITAL RESOURCES AND LIQUIDITY MANAGEMENT Capital Resources The Company's stockholders' equity increased $9.1 million, or 10.3%, to $97.9 million at December 31, 1997, from $88.8 million at December 31, 1996. This net increase was primarily attributable to net income for 1997 of $11.7 million, less dividends paid of $3.2 million. Under the capital guidelines of their regulators, the Company and the Banks are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier I capital. Tier I capital consists of common stockholders' equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill. In addition, under the guidelines, the Company and the Banks must maintain a minimum Tier I leverage ratio of Tier I capital to total assets of at least 3%, but this minimum ratio is typically increased by 100 to 200 basis points for other than the highest rated institutions. The Company exceeded its fully phased-in regulatory capital ratios at December 31, 1997, 1996 and 1995, as set forth in the following table. ANALYSIS OF CAPITAL (AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGES)
DECEMBER 31, ---------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Tier 1 Capital ............................................... $ 90,831 $ 82,398 $ 71,415 Tier 2 Capital ............................................... 12,099 8,817 7,431 --------- --------- --------- Total qualifying capital (1) ............................... $ 102,930 $ 91,215 $ 78,846 ========= ========= ========= Risk-adjusted total assets (including off-balance sheet exposures) ................................................. $ 967,886 $ 801,537 $ 679,695 Tier 1 risk-based capital ratio (4.00% required minimum) ................................... 9.38% 10.28% 10.51% Total risk-based capital ratio (8.00% required minimum) ................................... 10.63 11.38 11.59 Tier 1 leverage ratio (4.00% required minimum) ................................... 7.58 8.13 10.59
____________ (1) Does not include $730,000, $2,194,000 and $2,990,000 of the Company's allowance for loan losses at December 31, 1997, 1996 and 1995, respectively, in excess of 1.25% of risk-adjusted total assets. 45 Each of the Banks is required to maintain risk-based and leverage ratios similar to those required for the Company. Each of the Banks exceeded these regulatory capital ratios at December 31, 1997, as set forth in the following table. BANK CAPITAL RATIOS
TIER 1 RISK TOTAL RISK TIER 1 BASED BASED LEVERAGE ----- ----- -------- Alabama National BanCorporation ............ 9.38% 10.63% 7.58% National Bank of Commerce of Birmingham .... 9.12 10.37 7.41 Alabama Exchange Bank ...................... 10.09 11.03 7.48 Bank of Dadeville .......................... 12.70 13.79 9.16 Citizens & Peoples Bank, N.A. .............. 69.88 70.20 34.69 First American Bank ........................ 10.15 11.40 8.50 First Citizens Bank, N.A. .................. 15.27 16.52 9.27 First Gulf Bank ............................ 9.24 10.27 7.36 Required minimums .......................... 4.00 8.00 4.00
Liquidity Management Liquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of an entity to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Without proper liquidity management, the Company will not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. Increased liquidity in typical interest rate environments often involves decreasing profits by investing in earning assets with shorter maturities. Liquidity management is made more complex because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. Assets included in the Company's Consolidated Statements of Condition contribute to liquidity management. Federal funds sold and securities purchased under agreements to resell position, including interest-bearing deposits in other banks, its primary source of liquidity, averaged $47.2 million during 1997 and was $52.4 million at December 31, 1997, and averaged $36.7 million during 1996 and was $46.5 million at December 31, 1996. If required in short-term liquidity management, these assets could be converted to cash immediately. Cash received from the repayment of investment securities and loans provide a constant source of cash that contributes to liquidity management. Unpledged securities, with a carrying value of approximately $80.5 million at December 31, 1997 provide the Company an opportunity to generate cash by, 1) providing additional collateral by selling securities under agreements to repurchase, 2) providing collateral to obtain public funds or 3) providing collateral to borrow directly from the Federal Reserve Bank or the Federal Home Loan Bank. See "-- LOANS" AND "SECURITIES." 46 Liquidity can also be managed using liabilities included in the Company's Consolidated Statement of Condition, such as Federal funds purchased and securities sold under agreements to repurchase and short-term borrowing. Combined Federal funds purchased and securities sold under agreements to repurchase, Treasury, tax and loan, and short-term borrowings averaged $126.8 million during 1997 and was $166.9 million at December 31, 1997, and averaged $101.5 million during 1996 and was $135.3 million at December 31, 1996. Overnight borrowing lines with upstream correspondent banks, $42 million at December 31, 1997, of which $54.0 million was unused, provide additional sources of liquidity to the Company on an unsecured basis. The Federal Home Loan Bank provides secured and unsecured credit lines to three of the Company's banks totaling approximately $78.2 million. At December 31, 1997, advances under these lines totaled $26.7 million, including $12.5 million classified as short- term and $14.2 million classified as long-term. Long-term liquidity needs are met through the Company's deposit base (approximately 90% of the Company's deposits at December 31, 1997, are considered core deposits), and the repayment of loans and other investments as they mature. The Company is able to manage its long-term liquidity needs by adjusting the rates it pays on longer-term deposits and the amount and mix of longer-term investments in its portfolio. The Company, as a stand alone corporation, has more limited access to liquidity sources than its banks and depends on dividends from its subsidiaries as its primary source of liquidity. The Company's liquidity is diminished by required payments on its outstanding short-term debt. The ability of its subsidiaries to pay dividends is subject to general regulatory restrictions which may, but are not expected to, have a material negative impact on the liquidity available to the Company. (See Note 18 to the Company's Consolidated Financial Statements included in this Annual Report.) If circumstances warrant, the Company's short-term liquidity needs can also be met by additional borrowings of approximately $4.7 million representing the unused portion of the Company's credit facility with an unrelated bank. See "--BORROWED FUNDS." ACCOUNTING RULE CHANGES Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities In June 1996, the FASB issued Statement of Financial Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("Statement 125"), as amended by Statement of Financial Standards No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 ("Statement 127"), establishing standards for accounting for certain transfers of assets and extinguishments of liabilities. It requires that an entity recognize the financial and servicing assets it controls and the liabilities it has incurred and derecognize financial assets when control has been surrendered, and derecognize liabilities when extinguished. Certain guidelines set forth in the Statement must be met before an asset can be considered transferred or a liability extinguished. This Statement is applied prospectively for transfers of financial assets and extinguishments of liabilities occurring after December 31, 1996. The adoption of Statement 125, as amended by Statement 127, did not have a material effect on the consolidated financial statements of the Company. Comprehensive Income In June 1997, the FASB issued Statement of Financial Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes all changes in equity during a period, excluding investments by and distributions to stockholders. Under Statement 130, the Company will report changes in realized gains and losses attributable to available for sale securities, as well as the amortization of unearned restricted stock, as components of comprehensive income. This Statement is effective for fiscal years beginning after December 15, 1997, and requires comparative financial information presented for prior periods to be reclassified to conform to the requirements of the statement. Although early application is permitted, the Company has chosen not to do so. 47 Segment Reporting In June 1997, the FASB issued Statement of Financial Standards No. 131, Disclosures About Segments of a Business Enterprise and Related Information ("Statement 131"). Statement 131, effective for fiscal years beginning after December 15, 1997, establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Early application is permitted, but is not required, and comparative information for interim periods in the initial year of application must be reported in statements for interim periods in the second year of application. Pensions and Other Postretirement Benefits In February 1998, the FASB issued Statement of Financial Standards No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits ("Statement 132"). Statement 132, effective for fiscal years beginning after December 15, 1997, standardizes the disclosure requirements for pensions and other postretirement benefits, eliminates certain disclosures, and requires additional information on changes in the benefit obligations and fair values of plan assets. Restatement of disclosures for previous periods is required. IMPACT OF INFLATION Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and its subsidiaries are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Management seeks to manage the relationships between interest- sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation. See "- INTEREST SENSITIVITY AND MARKET RISK." INDUSTRY DEVELOPMENTS Certain recently enacted and proposed legislation could have an effect on both the costs of doing business and the competitive factors facing the financial institutions industry. The Company is unable at this time to assess the impact of this legislation on its financial condition or results of operations. YEAR 2000 - TECHNOLOGY CONSIDERATIONS During 1997, the Company began analyzing all systems used by the Company that could require modification to accommodate the turn of the century. The Company uses vendor-purchased software to process information relating to its operations and financial reporting, and it has contacted its hardware and software vendors to ascertain each vendor's ability to function into the next century. Management has assigned a priority weighting to each of the Company's systems. Management believes that the Company's most critical software system is the Company's core operating software, which is provided by Jack Henry & Associates, Inc. ("JHA"). JHA has provided documentation to management that its software is Year 2000 compliant, although it will continue to test its systems to verify compliance. Most other software vendors of the Company have indicated to management that programming and testing will continue through the end of 1998. The Company has also developed a Year 2000 compliance policy to provide a process for its subsidiary banks to address Year 2000 issues with larger commercial customers whose business might be impacted by the century change. The Company has not completed its analysis of its commercial customers with respect to their Year 2000 compliance. Although the Company's analysis of the impact of the Year 2000 issue is not complete, the Company has developed a preliminary estimated budget for total expenditures related to the Year 2000 compliance issue. The Company currently estimates these total expenditures to be approximately $460,000, $300,000 of which represents capital expenditures. Although this represents the Company's current best estimate of Year 2000 expenditures, this 48 figure could change if vendor estimates change. In addition to this amount, approximately $1,200,000 in capital expenditures were made during 1997 relating to the purchase of a new document imaging and transport system. 49 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is contained in Item 7 herein under the heading "INTEREST SENSITIVITY AND MARKET RISK". ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS The Consolidated Financial Statements and Financial Statement Schedules of ANB and subsidiaries listed in ITEM 14(a) have been included in this Annual Report and should be referred to in their entirety. The Supplementary Financial Information required by Item 302 of Regulation S-K is set forth below. The information for the first three quarters in 1997 and each quarter in 1996 differs from that previously reported in ANB's Quarterly Reports on Form 10-Q for the first three quarters of 1997 and 1996 and in ANB's Annual Report on Form 10-K for the year ended December 31, 1996, because the merger with First American Bancorp was accounted for as a pooling of interests. SELECTED QUARTERLY FINANCIAL DATA (Amounts in thousands, except per share data) (Unaudited)
1997 Quarters -------------------------------------------------------------- First Second Third Fourth -------------------------------------------------------------- Summary of Operations: Interest income .................... $ 21,650 $ 22,412 $ 23,022 $ 23,304 Interest expense ................... 10,084 10,599 10,820 11,337 Net interest income ................ 11,566 11,813 12,202 11,967 Provision for loan losses .......... 486 1,233 349 920 Securities gains (losses) .......... 11 1 9 (29) Noninterest income ................. 4,472 4,181 4,735 4,659 Noninterest expense ................ 10,891 10,708 11,419 12,443 Net income ......................... 3,125 2,837 3,356 2,350 Dividends on preferred stock ....... - - - - Dividends on common stock .......... 741 743 748 988 Per Common Share Data: Book Value ......................... $ 10.58 $ 10.90 $ 11.14 $ 11.32 Tangible book value ................ 9.68 10.01 10.28 10.32 Net income (1) ..................... 0.35 0.32 0.38 0.26 Dividends declared ................. 0.115 0.115 0.115 0.115 Balance Sheet Highlights At Period-End: Total assets ................... $ 1,135,609 $ 1,160,883 $ 1,174,637 $ 1,247,166 Securities ..................... 186,384 197,983 203,556 214,012 Loans, net of unearned income ....................... 791,640 804,479 810,302 842,790 Allowance for loan losses ...... 11,206 12,326 12,348 12,829 Deposits ....................... 907,259 936,767 907,136 928,970 Short-term debt ................ 20,500 30,000 31,773 27,750 Long-term debt ................. 12,927 9,613 14,599 14,587 Stockholders' equity ........... 90,928 93,668 96,345 97,933 1996 Quarters -------------------------------------------------------------- First Second Third Fourth -------------------------------------------------------------- Summary of Operations: Interest income .................... $ 20,090 $ 20,580 $ 20,988 $ 21,522 Interest expense ................... 9,701 9,378 9,412 9,755 Net interest income ................ 10,389 11,202 11,576 11,767 Provision for loan losses .......... 197 238 215 235 Securities gains (losses) .......... 31 (11) (21) (83) Noninterest income ................. 4,522 4,386 4,282 4,320 Noninterest expense ................ 10,327 11,386 11,155 11,185 Net income ......................... 2,863 2,609 3,240 3,415 Dividends on preferred stock ....... - - - - Dividends on common stock .......... 307 307 554 579 Per Common Share Data: Book Value ......................... $ 9.40 $ 9.65 $ 9.96 $ 10.38 Tangible book value ................ 8.46 8.78 9.04 9.48 Net income (1) ..................... 0.33 0.30 0.37 0.39 Dividends declared ................. 0.05 0.05 0.09 0.09 Balance Sheet Highlights At Period-End: Total assets ................... $ 1,029,030 $ 1,039,244 $ 1,060,704 $ 1,110,729 Securities ..................... 200,514 192,825 183,829 182,009 Loans, net of unearned income ....................... 694,585 726,370 757,951 785,282 Allowance for loan losses ...... 10,267 10,590 10,864 11,011 Deposits ....................... 839,899 846,296 847,457 858,103 Short-term debt ................ 21,355 19,201 41,539 42,105 Long-term debt ................. 952 13,524 12,952 12,939 Stockholders' equity ........... 80,278 82,342 85,172 88,803
___________ (1) Per common share net income is calculated based upon net income as adjusted for cash dividends on preferred stock. 50 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE None. 51 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item regarding Executive Officers is included in Part I of this Form 10-K under the caption "Executive Officers of the Registrant" in accordance with Instruction 3 of the Instructions to Paragraph (b) of Item 401 of Regulation S-K. The information required by this Item regarding directors is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from ANB's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before April 1, 1998. ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from ANB's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before April 1, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from ANB's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A on or before April 1, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from ANB's definitive Proxy Statement for the 1998 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A or before April 1, 1998. 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (A)(1) AND (2) AND (D) - FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. Financial Statements: The Consolidated Financial Statements of -------------------- ANB and subsidiaries, included herein (pages 60 to 87) are as follows: Reports of Independent Auditors Coopers & Lybrand L.L.P. Ernst & Young LLP Consolidated Statements of Condition -- December 31, 1997 and 1996 Consolidated Statements of Income -- Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity -- Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Financial Statement Schedules: All schedules to the consolidated ----------------------------- financial statements required by Article 9 of Regulation S-X are inapplicable and therefore have been omitted. (B) REPORTS ON FORM 8-K. Report on Form 8-K filed December 11, 1997 to report ANB's merger with FAB, effective November 30, 1997. (C) EXHIBITS. The exhibits listed on the exhibit index on page 56 of this Form 10-K are filed herewith or are incorporated herein by reference. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this the 19th day of March, 1998. ALABAMA NATIONAL BANCORPORATION By: /s/ John H. Holcomb, III ---------------------------------------- John H. Holcomb, III, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ John H. Holcomb, III Chairman and Chief Executive March 19, 1998 - --------------------------- John H. Holcomb, III Officer (principal executive officer) /s/ Victor E. Nichol, Jr. President and Chief Operating March 19, 1998 - --------------------------- Victor E. Nichol, Jr. Officer and Director /s/ James S. Parks, Jr. Senior Vice President-Finance, March 19, 1998 - --------------------------- James S. Parks, Jr. Controller and Treasurer (principal financial and accounting officer) /s/ T. Morris Hackney Director March 17, 1998 - --------------------------- T. Morris Hackney /s/ John D. Johns Director March 19, 1998 - --------------------------- John D. Johns /s/ John J. McMahon, Jr. Director March 19, 1998 - --------------------------- John J. McMahon, Jr.
54 /s/ C. Phillip McWane Director March 19, 1998 - --------------------------- C. Phillip McWane /s/ Drayton Nabers, Jr. Director March 19, 1998 - --------------------------- Drayton Nabers, Jr. /s/ G. Ruffner Page, Jr. Director March 19, 1998 - --------------------------- G. Ruffner Page, Jr. /s/ W. Stancil Starnes Director March 23, 1998 ___________________________ W. Stancil Starnes /s/ William D. Montgomery Director March 20, 1998 - --------------------------- William D. Montgomery /s/ Dan M. David Vice Chairman and Director March 23, 1998 ___________________________ Dan M. David /s/ C. Lloyd Nix Director March 18, 1998 - -------------------------- C. Lloyd Nix /s/ William E. Sexton Director March 18, 1998 - --------------------------- William E. Sexton
55 EXHIBIT INDEX
Exhibit Number Description Reference - --------- ----------- --------- 3.1 Certificate of Incorporation................................ (1) 3.1A Certificate of Amendment of Certificate of Incorporation.... (2) 3.1B Certificate of Merger....................................... (9) 3.2 Bylaws...................................................... (1) 4.1 Provisions of the Certificate of Incorporation and the Bylaws of Alabama National BanCorporation which Define the Rights of Securityholders................ (1) 4.2 Certificate of Merger filed with the Secretary of State of the State of Delaware on December 29, 1995.. 10.1 Alabama National BanCorporation 1994 Stock Option Plan...... (1) 10.2 Form of Stock Option Agreement utilized in connection with the 1994 Stock Option Plan................................ (2) 10.3 Agreement dated September 18, 1995, by and among James A. Taylor and Frank W. Whitehead, Alabama National BanCorporation, National Commerce Corporation and Commerce Bankshares, Inc........................................... (3) 10.3A Amendment to Agreement dated September 18, 1995 executed by James A. Taylor, Alabama National BanCorporation, National Commerce Corporation and Commerce Bankshares, Inc. on November 17, 1995........ (3) 10.4 Commerce Bankshares, Inc. Long Term Incentive Compensation Plan............................... (3) 10.4A Form of Incentive Stock Option Agreement.................... (3) 10.4B Form of Restricted Stock Agreement.......................... (3) 10.5 Lease Agreement between Woodward Properties and NBC......... (3) 10.6 NBC Pension Plan............................................ (4)
56 10.7 Credit Agreement between Alabama National BanCorporation and AmSouth Bank of Alabama dated as of December 29, 1995 relating to a $23,000,000 Revolving Loan............... (4) 10.7A Promissory Note between Alabama National BanCorporation and AmSouth Bank of Alabama dated as of December 29, 1995 relating to a $23,000,000 Revolving Loan............... (4) 10.7B Pledge Agreement between Alabama National BanCorporation and AmSouth Bank of Alabama dated as of December 29, 1995 relating to a $23,000,000 Revolving Loan............... (4) 10.7C First Amendment to Credit Agreement between Alabama National BanCorporation and AmSouth Bank dated February 10, 1997..... (7) 10.7D Second Amendment to Credit Agreement between Alabama National BanCorporation and AmSouth Bank dated January 19, 1998...... (9) 10.8 Agreement and Plan of Merger dated as of June 10, 1996 between Alabama National BanCorporation and FIRSTBANC....... (5) 10.9 Alabama National BanCorporation Performance Share Plan......... (6) 10.10 Alabama National BanCorporation Deferred Compensation Plan for Directors Who Are Not Employees of the Company..... (6) 10.11 Agreement and Plan of Merger dated as of July 24, 1997 between Alabama National BanCorporation and First American Bancorp............................................ (8) 10.12 Employment Agreement dated November 30, 1997 between Dan M. David and Alabama National BanCorporation................... (9) 10.13 First American Bancorp Stock Option Plan dated October 20, 1992 (9) 10.14 First American Bancorp 1994 Stock Option Plan.................. (9) 10.15 First American Bancorp Nonqualified Stock Option Agreement with Dan M. David dated March 7, 1997....................... (9) 21 Subsidiaries of Alabama National BanCorporation................ (9) 23.1 Consent of Ernst & Young LLP................................... (9) 23.2 Consent of Coopers & Lybrand L.L.P............................. (9) 27 Financial Data Schedule........................................ (9)
57 _____________________ (1) Filed as an Exhibit to ANB's Annual Report on Registration Statement on Form S-1 (Registration No. 33-83800) and is incorporated herein by reference. (2) Filed as an Exhibit to ANB's Annual Report on Form 10-K for the year ended December 31, 1994 and is incorporated herein by reference. (3) Filed as an Exhibit to ANB's Registration Statement on Form S-4 (Registration No. 33-97152) and is incorporated herein by reference. (4) Filed as an Exhibit to ANB's Annual Report on Form 10-K for the year ended December 31, 1995 and is incorporated herein by reference. (5) Filed as an Exhibit to ANB's Report on Form 8-K filed on October 10, 1996 and is incorporated herein by reference. (6) Filed as an Exhibit to ANB's Annual Report on Form 10-K for the year ended December 31, 1996 and is incorporated herein by reference. (7) Filed as an Exhibit to ANB's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 and is incorporated herein by reference. (8) Filed as Appendix A to ANB's Registration Statement on Form S-4 (Registration No. 333-36565) and is incorporated herein by reference. (9) Filed as an Exhibit to ANB's Annual Report on Form 10-K for the year ended December 31, 1997. 58 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 AND THE THREE YEARS ENDED DECEMBER 31, 1997 ANNUAL REPORT ON FORM 10-K ITEM 14(A)(1) AND (2) AND (D) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1997 ALABAMA NATIONAL BANCORPORATION BIRMINGHAM, ALABAMA ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 and the three years ended December 31, 1997
PAGE Audited Consolidated Financial Statements Report of Independent Accountants......................................60, 61 Consolidated Statements of Condition................................... 61 Consolidated Statements of Income...................................... 62 Consolidated Statements of Changes in Stockholders' Equity............. 63 Consolidated Statements of Cash Flows.................................. 64 Notes to Consolidated Financial Statements............................. 66
REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors Alabama National BanCorporation We have audited the consolidated statements of condition of Alabama National BanCorporation and Subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The accompanying consolidated statements of income, changes in stockholders' equity, and cash flows for the year ended December 31, 1995 (prior to restatement) were audited by other auditors whose report dated February 29, 1996 expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. We also audited the combination of the consolidated statements of income, changes in stockholders' equity, and cash flows for the year ended December 31, 1995, after restatement for the 1997 and 1996 poolings of interests; in our opinion, such consolidated statements have been properly combined on the basis described in Note 2 of the notes to the consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation in 1996. /S/ Coopers & Lybrand L.L.P. Birmingham, Alabama January 15, 1998, except for Notes 8 and 19 as to which the dates are January 19, 1998 and March 5, 1998, respectively 60 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (in thousands, except share data) December 31, 1997 and 1996
1997 1996 ASSETS Cash and due from banks $ 42,438 $ 45,001 Interest-bearing deposits in other banks 2,391 249 Investment securities (market value $56,997 and $74,772 for 1997 and 1996, respectively) 56,519 74,745 Securities available for sale 157,094 105,328 Trading securities 399 1,936 Federal funds sold and securities purchased under agreements to resell 50,009 46,249 Loans 844,865 789,527 Unearned income (2,075) (4,245) ----------------- --------------- Loans, net of unearned income 84,2790 785,282 Allowance for loan losses (12,829) (11,011) --------------- --------------- Net loans 829,961 774,271 --------------- --------------- Property, equipment, and leasehold improvements, net 31,539 28,723 Intangible assets 8,726 7,761 Cash surrender value of life insurance 25,842 3,901 Other assets 69,248 22,565 --------------- --------------- $ 1,274,166 $ 1,110,729 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Noninterest bearing $ 146,006 $ 133,005 Interest bearing 782,964 725,098 --------------- --------------- Total deposits 928,970 858,103 --------------- --------------- Federal funds purchased and securities sold under agreements to repurchase 139,118 93,196 Treasury, tax and loan accounts 6,762 2,968 Short-term borrowings 27,750 42,105 Accrued expenses and other liabilities 59,046 12,615 Long-term debt 14,587 12,939 --------------- --------------- Total liabilities 1,176,233 1,021,926 --------------- --------------- Commitments and contingencies (see Notes 9 and 10) Stockholders' equity: Common stock, $1 par; authorized 10,000,000 shares; issued and out- standing 8,648,120 and 8,145,189 shares in 1997 and 1996, respectively 8,648 8,145 Additional paid-in capital 61,551 62,342 Retained earnings 27,369 18,930 Unearned restricted stock (92) (185) Unrealized gain (loss) on securities available for sale, net of taxes 457 (429) --------------- ---------------- Total stockholders' equity 97,933 88,803 --------------- --------------- $ 1,274,166 $ 1,110,729 =============== ================
The accompanying notes are an integral part of these consolidated financial statements. 61 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share data) for the years ended December 31, 1997, 1996, and 1995
1997 1996 1995 Interest income: Interest and fees on loans $ 75,117 $ 69,236 $ 42,544 Interest on securities (other than trading) 12,429 11,900 8,617 Interest on deposits in other banks 55 240 216 Interest on trading securities 193 183 67 Interest on federal funds sold and securities purchased under agreements to resell 2,594 1,621 1,623 ---------- --------- --------- Total interest income 90,388 83,180 53,067 ---------- --------- --------- Interest expense: Interest on deposits 35,341 32,163 22,985 Interest on federal funds purchased and securities sold under agreements to repurchase 4,464 3,623 2,303 Interest on short- and long-term borrowings 3,035 2,460 1,267 ---------- --------- --------- Total interest expense 42,840 38,246 26,555 ---------- --------- --------- Net interest income 47,548 44,934 26,512 Provision for loan losses 2,988 885 1,016 ---------- --------- --------- Net interest income after provision for loan losses 44,560 44,049 25,496 ---------- --------- --------- Noninterest income: Securities (losses) gains (8) (84) 26 Gain on disposition of assets and deposits 619 461 550 Service charges on deposit accounts 5,070 4,944 2,549 Investment services 8,152 7,889 3,934 Trust department income 1,799 1,550 1,320 Other 2,407 2,666 807 ---------- --------- --------- Total noninterest income 18,039 17,426 9,186 ---------- --------- --------- Noninterest expense: Salaries and employee benefits 26,218 25,655 14,628 Occupancy and equipment expense 5,473 5,628 3,677 Other 13,770 12,770 8,544 ---------- --------- --------- Total noninterest expense 45,461 44,053 26,849 ---------- --------- --------- Income before provision for income taxes and minority interest in earnings of consolidated subsidiaries 17,138 17,422 7,833 Provision for income taxes 5,458 5,281 901 ---------- --------- --------- Income before minority interest in earnings of consolidated subsidiaries 11,680 12,141 6,932 Minority interest in earnings of consolidated subsidiaries 12 14 650 ---------- --------- --------- Net income 11,668 12,127 6,282 Less cash dividends on preferred stock 4 854 ---------- --------- --------- Net income available for common shares $ 11,668 $ 12,123 $ 5,428 ========== ========= ========= Net income per common share (basic) $ 1.36 $ 1.42 $ 1.14 ========== ========== ========= Weighted average common shares outstanding (basic) 8,609 8,483 4,751 ========== ========= ========= Net income per common share (diluted) $ 1.31 $ 1.38 $ 1.10 ========== ========= ========= Weighted average common and common equivalent shares outstanding (diluted) 8,884 8,756 4,955 ========== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 62 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except share data) for the years ended December 31, 1997, 1996, and 1995
SENIOR NONCUMULATIVE FLOATING NONCUMULATIVE FLOATING RATE FLOATING RATE CUMULATIVE RATE PREFERRED PREFERRED PREFERRED COMMON STOCK STOCK STOCK STOCK -------------- ------------ ------------- -------- Balance, December 31, 1994 $ 2,500 $ 2,565 $ 5,416 $ 1,231 Net income Stock split 1.531 for 1 492 Distribution for fractional shares Preferred stock dividends declared Issue 56,108 shares of common stock by merged bank prior to pooling 56 Redemption of preferred stock (2,500) (2,565) (5,416) Merger of Alabama National BanCorporation and Commerce Bankshares, Inc. into the Company 6,200 Change in unrealized gain (loss) in securities available for sale, net of taxes -------- --------- --------- ------- Balance, December 31, 1995 7,979 Net income Stock split 1.018 for 1 147 Distribution for fractional shares Issue restricted stock 9 Preferred stock dividends declared by a merged bank prior to pooling Common stock dividends declared ($0.28 per share) Redemption of FirstBanc Holding Company, Inc. preferred stock Exercise of stock options 10 Amortization of unearned restricted stock Change in unrealized gain (loss) in securities available for sale, net of taxes -------- --------- --------- ------- Balance, December 31, 1996 8,145 Net income Stock split 1.051 for 1 414 Distribution for fractional shares Conversion of debentures 25 Issue restricted stock 1 Common stock dividends declared ($0.46 per share) Amortization of unearned restricted stock Change in unrealized gain (loss) in securities available for sale, net of taxes Exercise of stock options 58 Issue 4,379 shares associated with director deferred compensation plans 5 Distribution for fractional shares Proportional reduction in consolidated subsidiary -------- --------- --------- ------- Balance, December 31, 1997 $ 0 $ 0 $ 0 $ 8,648 ======== ========= ========= ======= COMMON COMMON STOCK STOCK ADDITIONAL CLASS A CLASS B PAID-IN RETAINED (VOTING) (VOTING) CAPITAL EARNINGS ---------- --------- ----------- -------- Balance, December 31, 1994 $ 25 $ 325 $ 27,543 $ 6,104 Net income 6,282 Stock split 1.531 for 1 (484) (7) Distribution for fractional shares (2) Preferred stock dividends declared (854) Issue 56,108 shares of common stock by merged bank prior to pooling 1,292 Redemption of preferred stock (230) Merger of Alabama National BanCorporation and Commerce Bankshares, Inc. into the Company (25) (325) 31,182 Change in unrealized gain (loss) in securities available for sale, net of taxes ---------- ----------- ------------ ----------- Balance, December 31, 1995 59,303 11,523 Net income 12,127 Stock split 1.018 for 1 2,819 (2,966) Distribution for fractional shares (3) Issue restricted stock 183 Preferred stock dividends declared by a merged bank prior to pooling (4) Common stock dividends declared ($0.28 per share) (1,747) Redemption of FirstBanc Holding Company, Inc. preferred stock (53) Exercise of stock options 90 Amortization of unearned restricted stock Change in unrealized gain (loss) in securities available for sale, net of taxes -------- --------- --------- ------- Balance, December 31, 1996 62,342 18,930 Net income 11,668 Stock split 1.051 for 1 (408) (6) Distribution for fractional shares (3) Conversion of debentures 80 Issue restricted stock 33 Common stock dividends declared ($0.46 per share) (3,220) Amortization of unearned restricted stock Change in unrealized gain (loss) in securities available for sale, net of taxes Exercise of stock options (496) Issue 4,379 shares associated with director deferred compensation plans 80 Distribution for fractional shares (11) Proportional reduction in consolidated subsidiary (69) -------- --------- --------- ------- Balance, December 31, 1997 $ 0 $ 0 $ 61,551 27,369 ======== ========= ========= ======= The accompanying notes are an integral part of these consolidated financial statements. UNREALIZED GAIN LOSS UNEARNED ON AVAILABLE RESTRICTED FOR SALE STOCK SECURITIES ---------- ----------- Balance, December 31, 1994 $ (2,189) Net income Stock split 1.531 for 1 Distribution for fractional shares Preferred stock dividends declared Issue 56,108 shares of common stock by merged bank prior to pooling Redemption of preferred stock Merger of Alabama National BanCorporation and Commerce Bankshares, Inc. into the Company $ (278) Change in unrealized gain (loss) in securities available for sale, net of taxes 1,807 -------- --------- Balance, December 31, 1995 (278) (382) Net income Stock split 1.018 for 1 Distribution for fractional shares Issue restricted stock Preferred stock dividends declared by a merged bank prior to pooling Common stock dividends declared ($0.28 per share) Redemption of FirstBanc Holding Company, Inc. preferred stock Exercise of stock options Amortization of unearned restricted stock 93 Change in unrealized gain (loss) in securities available for sale, net of taxes (47) -------- -------- Balance, December 31, 1996 (185) (429) Net income Stock split 1.051 for 1 Distribution for fractional shares Conversion of debentures Issue restricted stock Common stock dividends declared ($0.46 per share) Amortization of unearned restricted stock 93 Change in unrealized gain (loss) in securities available for sale, net of taxes 886 Exercise of stock options Issue 4,379 shares associated with director deferred compensation plans Distribution for fractional shares Proportional reduction in consolidated subsidiary -------- --------- Balance, December 31, 1997 $ (92) $ 457 ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 63 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) for the years ended December 31, 1997, 1996, and 1995
1997 1996 1995 Cash flows from operating activities: Net income $ 11,668 $ 12,127 $ 6,282 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,988 885 1,016 Deferred tax benefit (1,140) (313) (1,591) Depreciation and amortization 2,365 2,787 1,635 Loss (gain) on disposal of property and equipment 498 486 (12) Securities (gain) loss 8 84 (26) Other real estate (gains) losses (65) 2 252 Net amortization of securities 63 (5) 89 Net increase (decrease) in trading securities 1,537 2,466 (4,402) Minority interest in earnings of consolidated subsidiaries 12 14 650 (Increase) decrease in other assets (45,096) (2,390) 135 Increase (decrease) in other liabilities 46,458 (4,729) 5,379 Other 104 9 ----------- ---------- ----------- Net cash provided by operating activities 19,400 11,423 9,407 ----------- ---------- ----------- Cash flows from investing activities: Purchases of investment securities (30,896) (8,567) Proceeds from calls and maturities of investment securities 18,198 13,009 5,650 Purchases of securities available for sale (83,121) (46,939) (32,189) Proceeds from sales of securities available for sale 4,831 23,516 19,330 Proceeds from calls and maturities of securities available for sale 27,873 56,343 5,441 Net (increase) decrease in interest-bearing deposits in other banks (2,142) 10,968 (8,919) Net increase in federal funds sold and securities purchased under agreements to resell (3,760) (8,429) (18,880) Net increase in loans (54,451) (105,953) (34,604) Purchases of property, equipment, and leasehold improvements (5,953) (4,982) (2,581) Proceeds from sale of property and equipment 767 977 2 Proceeds from sale of other real estate owned 1,537 1,059 1,308 Costs capitalized on other real estate owned (514) Purchase acquisitions, net of cash acquired 14,483 18,047 Cash paid for bank-owned life insurance (21,900) ----------- ---------- ----------- Net cash used in investing activities (104,152) (91,327) (55,962) ----------- ---------- ----------- Cash flows from financing activities: Net increase in deposits 48,747 24,705 49,075 Sale of deposits (8,500) Increase in federal funds purchased, securities sold under agreements to repurchase, and treasury, tax and loan account 45,922 33,977 25,082 Net (decrease) increase in short-term and long-term borrowings (8,808) 32,674 1,521 Proceeds from issuance of common stock 143 1,348 Exercise of stock options (438) 100 Dividends on preferred stock (4) (854) Dividends on common stock (3,220) (1,747) Redemption of preferred stock (53) (10,711) Distribution for fractional shares (14) (3) (2) Change in other liabilities (5,023) ----------- ---------- ----------- Net cash provided by financing activities 82,189 76,269 65,459 ----------- ---------- ----------- (Decrease) increase in cash and cash equivalents (2,563) (3,635) 18,904 Cash and cash equivalents, beginning of year 45,001 48,636 29,732 ----------- ---------- ----------- Cash and cash equivalents, end of year $ 42,438 $ 45,001 $ 48,636 =========== ========== ===========
64 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands) for the years ended December 31, 1997, 1996, and 1995
1997 1996 1995 Supplemental disclosures of cash flow information: Cash paid for interest $ 43,445 $ 38,036 $ 26,332 ========== ========== =========== Cash paid for income taxes $ 6,514 $ 3,420 $ 1,617 ========== ========== =========== Supplemental schedule of noncash investing activities: Transfer of investment securities to securities available for sale $ 4,770 $ 34,111 ========== =========== Foreclosure of other real estate owned $ 676 $ 1,238 ========== =========== Transfer of property to other real estate owned $ 198 ========== Reduction in proportional interest in consolidated subsidiary $ 69 ========== Increase in unrealized holding gain (loss) on securities available for sale $ 1,392 $ (71) $ 2,738 ========== ========== =========== Unearned restricted stock and performance plan awards $ 178 $ 184 $ (278) ========== ========== =========== Assets acquired and liabilities assumed in merger transactions (Note 1): Assets acquired, net of cash $ 6,290 $ 2,154 $ 325,217 ========== ========== =========== Liabilities assumed $ 22,120 $ 8,950 $ 307,170 ========== ========== =========== Supplemental schedule of noncash financing activities: Conversion of debentures $ 105 ==========
The accompanying notes are an integral part of these consolidated financial statements. 65 ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS COMBINATIONS On November 30, 1997, First American Bancorp (FAB), a one bank holding company headquartered in Decatur, Alabama, was merged (the FAB Merger) into Alabama National BanCorporation and Subsidiaries (the Company). All of the common stock of FAB was exchanged for 2,071,966 shares of the Company's common stock. At the merger date, FAB had approximately $235 million in total assets, year-to-date net interest income of approximately $10.6 million and year-to-date net income of approximately $754,000. On September 30, 1996, FirstBank Holding Company, Inc. (FirstBanc), a one bank holding company headquartered in Robertsdale, Alabama, was merged into the Company. The Company acquired all of the outstanding common stock of FirstBanc in exchange for 305,000 shares of the Company's common stock. At the merger date, FirstBanc had approximately $36 million in total assets, year-to-date net interest income of approximately $1.2 million and year-to- date net income of approximately $325,000. On December 29, 1995, ANB merged (the NCC Merger) with National Commerce Corporation (NCC) and Commerce Bankshares, Inc. (CBS) (collectively the Company). The NCC Merger was accomplished by converting each share of NCC common stock into 348.14 shares of ANB common stock and each share of CBS common stock into 7.0435 shares of ANB common stock for a total of 3,106,981 shares of ANB common stock and the repurchase of 360,400 shares of previously outstanding ANB common stock. The NCC Merger was accounted for as a "reverse acquisition", whereby NCC acquired ANB for financial reporting purposes. ANB remains the registrant for Securities and Exchange Commission filing purposes and, consistent with the reverse acquisition accounting treatment, the historical financial statements of Alabama National BanCorporation presented for 1995 are the consolidated financial statements of NCC. The operations of ANB have been included in the financial statements from the date of acquisition. The historical stockholders' equity of NCC prior to the Merger has been retroactively restated for the equivalent number of shares received in the Merger after giving effect to any difference in par value of ANB's and NCC's stock by an offset to additional paid-in capital. The consolidated financial statements of the Company give effect to the FirstBanc and FAB mergers, which were accounted for as poolings of interests and, accordingly, financial statements for all periods have been restated to reflect the results of operations of the companies on a combined basis from the earliest period presented, except for dividends per share. The Company's consolidated financial data for the years ended December 31, 1996 and 1995 have been restated as follows (in thousands, except per share amounts)
AS AS PREVIOUSLY EFFECT OF CURRENTLY REPORTED POOLINGS REPORTED ------------ ------------ ------------ As of and for the year ended December 31, 1996: Net interest income $ 34,760 $ 10,174 $ 44,934 Net income $ 9,725 $ 2,402 $ 12,127 Stockholders' equity $ 66,121 $ 22,682 $ 88,803 Net income per share (diluted) $ 1.45 $ (.07) $ 1.38
66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
AS AS PREVIOUSLY EFFECT OF CURRENTLY REPORTED POOLINGS REPORTED ------------ ----------- ----------- As of and for the year ended December 31, 1996: Net interest income $ 18,795 $ 7,717 $ 26,512 Net income $ 4,226 $ 2,056 $ 6,282 Stockholders' equity $ 58,189 $ 19,955 $ 78,144 Net income per share (diluted) $ 1.16 $ (.06) $ 1.10
2. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS SEGMENT - The accounting and reporting policies of the Company conform with generally accepted accounting principles and with general financial service industry practices. The Company provides a full range of banking and bank-related services to individual and corporate customers through its seven subsidiary banks located in Alabama and Florida. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES - In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the statement of condition dates and revenues and expenses for the periods shown. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash equivalents include cash on hand and due from banks. SECURITIES - Investment securities are stated at amortized cost as a result of management's ability and intent to hold the securities until maturity. Related premiums are amortized and discounts are accreted on the straight- line method. Securities available for sale are those securities intended to be held for an indefinite period of time. The Company may sell these securities as part of its asset/liability strategy in response to changes in interest rates, changes in prepayment risk, or similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses on securities classified as available for sale are carried as a separate component of stockholders' equity. Trading securities, principally obligations of U.S. government agencies, are securities held for sale and are stated at market. Bond purchases and sales are recorded on trade date. Accounts receivable from and accounts payable to bond customers and dealers are included in other assets and liabilities and represent security transactions entered into for which the securities have not been delivered. Unrealized holding gains and losses on securities classified as trading are reported in earnings. Gains and losses on the sale of securities are computed using the specific identification method. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED LOANS AND ALLOWANCE FOR LOAN LOSSES - Interest income with respect to loans is accrued on the principal amount outstanding, except for interest on certain consumer loans which is recognized over the term of the loan using a method which approximates level yields. Certain impaired loans are reported at the present value of expected future cash flows using the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes the collection of principal is unlikely. The allowance is the amount that management believes will be adequate to absorb possible losses on existing loans which may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific loan problems, and current economic conditions which may affect the borrower's ability to pay. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that the collection of interest is doubtful. Payments received on such loans are applied first to principle until the obligation is satisfied. Any remaining payments are then recorded as interest income. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS - Property, equipment, and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is principally computed using the straight-line method over the estimated useful life of each type of asset. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the improvements or the terms of the related leases. Maintenance and repairs are expensed as incurred; improvements and betterments are capitalized. When items are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gains or losses are credited or charged to income. Estimated useful lives generally are as follows: Buildings 5 - 45 years Leasehold improvements 10 - 30 years Furniture, equipment, and vault 3 - 30 years
OTHER REAL ESTATE - Other real estate, primarily property acquired by foreclosure, is capitalized at the lower of fair value less estimated selling costs or cost of the property or loan immediately prior to its classification as other real estate. Other real estate is not depreciated and is carried at the lower of cost or fair value less estimated selling costs. Losses, representing the difference between the sales price and the carrying value of the property, are recorded immediately, while gains on sales financed by the Company are deferred until the initial and continuing investment by the borrower equals or exceeds specified equity percentages. Gains on all other sales are recorded immediately. INTANGIBLE ASSETS - Intangible assets consist of the excess of cost over the fair value of net assets of acquired businesses and core deposit intangibles. The excess of cost over the fair value of net assets of acquired businesses, which totaled $6,609,000 and $6,907,000 at December 31, 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1997 and 1996, respectively, is being amortized over a period of 20 years, principally using the straight-line method of amortization. Core deposit intangibles, which totaled $2,117,000 and $854,000 at December 31, 1997 and 1996, respectively, are being amortized over 10 years using the straight- line method of amortization. The carrying value of excess of cost over net assets of subsidiaries acquired is reviewed if facts and circumstances suggest that it may be impaired. If warranted, analysis, including undiscounted income projections, are made to determine if adjustments to the carrying value or amortization periods are necessary. MORTGAGE SERVICING RIGHTS - The total cost of mortgage loans held for sale is allocated to mortgage servicing rights and mortgage loans held for sale (without mortgage servicing rights) based on their relative fair values. The aggregate basis is used to determine the lower of cost or market value when capitalizing mortgage servicing rights. Mortgage servicing rights are being amortized primarily using an accelerated method in proportion to the estimated net servicing income from the related loans, which approximates a level yield method. The amortization period represents management's best estimate of the remaining loan lives. The carrying values of the mortgage servicing rights are evaluated for impairment based on their fair values categorized by coupon rate. Fair values of servicing rights are determined by estimating the present value of future net servicing income considering the average interest rate and the average remaining lives of the related mortgage loans being serviced. EARNINGS PER SHARE - At December 31, 1997, the Company adopted the provisions of Statement of Financial Standards No. 128, Earnings Per Share (Statement 128). Statement 128 specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This statement replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with a complex capital structure. The Statement also requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. All prior year earnings per share data has been restated to reflect the presentation required under Statement 128. INCOME TAXES - Deferred income taxes are provided on all temporary differences between the financial reporting basis and the income tax basis of assets and liabilities. STOCK-BASED EMPLOYEE COMPENSATION - In 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement 123), which calls for a value based method. Beginning in 1996, compensation cost for stock-based employee compensation arrangements is measured at the grant date based on the value of the award and is recognized over the service period. The effects of applying this statement during the initial phase-in period are not necessarily representative of the effects on future years. ADVERTISING COSTS - The Company expenses the costs of advertising when those costs are incurred. 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED RECLASSIFICATIONS - Certain reclassifications have been made to the prior year financial statements to conform with the 1997 presentation. RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended by Statement of Financial Accounting Standards No. 127, (Statement 127), Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 (Statement 125), establishing standards for accounting for certain transfers of assets and extinguishment of liabilities. It requires that an entity recognize the financial and servicing assets it controls and the liabilities it has incurred and derecognize financial assets when control has been surrendered, and derecognize liabilities when extinguished. Certain guidelines set forth in the Statement must be met before an asset can be considered transferred or a liability extinguished. This Statement is applied prospectively for transfers of financial assets and extinguishments of liabilities occurring after December 31, 1996. The adoption of Statement 125, as amended by Statement 127, did not have a material effect on the consolidated financial statements of the Company. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (Statement 130). Statement 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes all changes in equity during a period, excluding investments by and distributions to stockholders. Under Statement 130, the Company will report changes in unrealized gains and losses attributable to securities available for sale, as well as the amortization of unearned restricted stock, as components of comprehensive income. This statement is effective for fiscal years beginning after December 15, 1997, and requires comparative financial information presented for prior periods to be reclassified to conform to the requirements of the statement. Although earlier application is permitted, the Company has chosen not to adopt early. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures About Segments of a Business Enterprise and Related Information (Statement 131). Statement 131, effective for fiscal years beginning after December 15, 1997, establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Early application is permitted, but is not required, and comparative information for interim periods in the initial year of application must be reported in financial statements for interim periods in the second year of application. The Company is evaluating the impact of implementing this statement on their consolidated financial statements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, Employers' Disclosures About Pensions and Other Postretirement Benefits (Statement 132). Statement 132, effective for fiscal years beginning after December 15, 1997, standardizes the disclosure requirements for pensions and other postretirement benefits, eliminates certain 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED disclosures, and requires additional information on changes in the benefit obligations and fair values of plan assets. Restatement of disclosures for previous periods is required. The Company does not expect the implementation of this statement to have a material impact on its consolidated financial statements. 3. SECURITIES The amortized costs and estimated market values of investment securities (carried at amortized cost) and securities available for sale (carried at market value) are as follows (in thousands):
DECEMBER 31, 1997 ----------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ----------- ----------- ----------- Investment securities: U.S. treasury securities and obligations of U.S. government corporations and agencies $ 2,559 $ 5 $ (4) $ 2,560 Obligations of states and political subdivisions 10,067 364 10,431 Mortgage-backed securities issued or guaranteed by U.S. government agencies 43,893 204 (91) 44,006 ----------- ----------- ----------- ----------- Totals $ 56,519 $ 573 $ (95) $ 56,997 =========== =========== =========== =========== Securities available for sale: U.S. treasury securities and obligations of U.S. government corporations and agencies $ 47,334 $ 146 $ (169) $ 47,311 Obligations of states and political subdivisions 24,075 518 (4) 24,589 Mortgage-backed securities issued or guaranteed by U.S. government agencies 79,308 612 (403) 79,517 Equity securities 5,677 5,677 ----------- ----------- ----------- ----------- Totals $ 156,394 $ 1,276 $ (576) $ 157,094 =========== =========== =========== ===========
DECEMBER 31, 1996 ----------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ----------- ----------- ----------- Investment securities: U.S. treasury securities and obligations of U.S. government corporations and agencies $ 3,446 $ 2 $ (6) $ 3,442 Obligations of states and political subdivisions 10,786 222 (44) 10,964 Mortgage backed securities issued or guaranteed by U.S. government agencies 60,513 122 (269) 60,366 ----------- ----------- ----------- ----------- Totals $ 74,745 $ 346 $ (319) $ 74,772 =========== =========== =========== =========== Securities available for sale: U.S. treasury securities and obligations of U.S. government corporations and agencies $ 20,365 $ 4 $ (185) $ 20,184 Obligations of states and political subdivisions 19,371 187 (130) 19,428 Mortgage backed securities issued or guaranteed by U.S. government agencies 61,153 285 (853) 60,585 Equity securities 5,131 5,131 ----------- ----------- ----------- ----------- Totals $ 106,020 $ 476 $ (1,168) $ 105,328 =========== =========== =========== ===========
71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Maturities of securities at December 31, 1997 are summarized as follows (in thousands):
INVESTMENT SECURITIES AVAILABLE FOR SALE ------------------------- ------------------------- ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ----------- ----------- ----------- ----------- Due in one year or less $ 2,921 $ 2,933 $ 33,730 $ 33,749 Due after one year through five years 7,316 7,547 27,390 27,684 Due after five years through ten years 2,389 2,511 9,162 9,317 Due after ten years 1,127 1,150 Mortgage-backed securities 43,893 44,006 79,308 79,517 Equity securities 5,677 5,677 ----------- ----------- ----------- ----------- Totals $ 56,519 $ 56,997 $ 156,394 $ 157,094 =========== =========== =========== ===========
During 1997, gross gains of $6,000 and gross losses of $14,000 were realized. In 1996, gross gains of $95,000 and gross losses of $179,000 were realized In 1995, gross gains of $480,000 and gross losses of $454,000 were realized. During 1996, the Company sold investment securities with an amortized cost of $3,502,000, resulting in realized losses of $42,000. These securities were transferred to NBC pursuant to the 1996 merger of a former ANB subsidiary and NBC. The securities did not meet the criteria of NBC's formal investment policy. Equity securities are comprised primarily of Federal Home Loan Bank and Federal Reserve Bank stock; these holdings are required under regulatory guidelines. 4. LOANS AND OTHER REAL ESTATE Major classification of loans at December 31, 1997 and 1996 are summarized as follows (in thousands):
1997 1996 Commercial, financial, and agricultural $ 194,636 $ 195,128 Real estate 523,493 471,678 Consumer 79,598 88,036 Other 47,138 34,685 ------------ ----------- Gross loans 844,865 789,527 Less unearned income (2,075) (4,245) ------------ ----------- Loans, net of unearned income 842,790 785,282 Less allowance for loan losses (12,829) (11,011) ------------ ----------- Net loans $ 829,961 $ 774,271 ============ ===========
72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In the normal course of business, loans are made to directors, officers, and their affiliates. Such loans are made on substantially the same terms as to other customers of the banks. The aggregate of such loans was $33,748,000 and $31,743,000 at December 31, 1997 and 1996, respectively. During 1997 and 1996, new loans of $35,546,0000 and $31,784,000 were funded and repayments totaled $33,541,000 and $31,739,000, respectively. Loans on which the accrual of interest has been discontinued or reduced amounted to approximately $4,174,000 and $3,085,000 at December 31, 1997 and 1996, respectively. If the loans of the Company had been current throughout their terms, gross interest income for the years ended December 31, 1997 and 1996, respectively, would have increased by approximately $125,000 and $118,000. Other real estate at December 31, 1997 and 1996 totaled $1,462,000 and $548,000, respectively. At December 31, 1997 and 1996, the recorded investment in loans for which impairment has been recognized totaled $5,169,000 and $2,721,000, respectively, and these loans had a corresponding valuation allowance of $249,000 and $259,000. The Company recognized no interest on impaired loans during the portion of the year that they were impaired. The impaired loans at December 31, 1997 and 1996 were measured for impairment primarily using the fair value of the collateral. The Company grants real estate, commercial, and consumer loans to customers primarily in Alabama. Although the Company has a diversified loan portfolio, significant concentrations include loans collateralized by improved and undeveloped commercial and residential real estate. 5. ALLOWANCE FOR LOAN LOSSES A summary of the allowance for loan losses for the years ended December 31, 1997, 1996, and 1995 is as follows (in thousands):
1997 1996 1995 Balance, beginning of year $ 11,011 $ 10,421 $ 6,506 Provision charged to operations 2,988 885 1,016 Addition due to acquisitions 3,124 ----------- ----------- ----------- 13,999 11,306 10,646 ----------- ----------- ----------- Loans charged off (2,749) (1,893) (1,877) Less recoveries 1,579 1,598 1,652 ----------- ----------- ----------- Net charge-offs (1,170) (295) (225) ----------- ----------- ----------- Balance, end of year $ 12,829 $ 11,011 $ 10,421 =========== =========== ===========
73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 6. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS Major classifications of property, equipment, and leasehold improvements at December 31, 1997 and 1996 are summarized as follows (in thousands):
1997 1996 Land $ 6,079 $ 5,335 Buildings and improvements 19,312 17,463 Leasehold improvements 4,842 4,448 Furniture, equipment, and vault 12,551 11,553 Construction in progress 1,859 1,187 ----------- ----------- 44,643 39,986 Less accumulated depreciation and amortization 13,104 11,263 ----------- ----------- Property, equipment, and leasehold improvements, net $ 31,539 $ 28,723 =========== ===========
7. DEPOSITS Deposits at December 31, 1997 and 1996 are summarized as follows (in thousands):
1997 1996 Demand deposit accounts $ 146,006 $ 133,005 NOW accounts 121,884 114,782 Savings and money market accounts 240,581 222,645 Time deposits less than $100,000 317,345 285,408 Time deposits of $100,000 or more 103,154 102,263 ----------- ----------- Total deposits $ 928,970 $ 858,103 =========== ===========
Certain directors of the Company, including their families and affiliated companies, are deposit customers. Total deposits of these persons at December 31, 1997 and 1996 were approximately $33,830,000 and $33,924,000, respectively. 8. SHORT- AND LONG-TERM BORROWINGS Short-term debt is summarized as follows (in thousands):
1997 1996 Federal Home Loan Bank (FHLB) debt due June 5, 1998; rate varies with LIBOR (London Interbank Offered Rate) and was 5.783% at December 31, 1997; collateralized by FHLB stock and certain first mortgage loans. $ 12,500 Various FHLB advances due between January 2, 1997 and January 21, 1997 at a weighted average interest rate of 6.01% at December 31, 1996; collateralized by FHLB stock and certain first mortgage loans. $ 24,000 Note payable to independent bank under secured master note agreement; rate varies with LIBOR and was 6.6875% and 6.75% at December 31, 1997 and 1996, respectively; collateralized by the Company's stock in subsidiary banks. 15,250 17,000
74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1997 1996 Short-term borrowings with a large regional financial institution due September 25, 1997; rate varies with LIBOR and was 7.275% at December 31, 1996; collateralized by accounts receivable. 1,000 Convertible debentures payable to stockholder, due February 18, 1997; 8.25% at December 31, 1996. 105 ------------- ------------- Total short-term borrowings $ 27,750 $ 42,105 ============= =============
Long-term debt is summarized as follows (in thousands):
1997 1996 FHLB debt due June 5, 1998; rate varies with LIBOR and was 5.5325% at December 31, 1996; collateralized by FHLB stock and certain first mortgage loans. $ 12,500 FHLB debt due May 24, 1999; rate varies with LIBOR and was 5.569% at December 31, 1997; collateralized by FHLB stock and certain first mortgage loans. $ 9,200 FHLB debt due July 11, 2002; interest at fixed rate of 5.78%; convertible at the option of the FHLB on July 12, 1999 to a three month LIBOR advance; collateralized by FHLB stock and certain first mortgage loans. 5,000 Capital leases payable, various 387 439 ------------- ------------- Total long-term debt $ 14,587 $ 12,939 ============= =============
The note payable to an independent bank at December 31, 1997 is payable in full on January 20, 1998. Maximum borrowings under the secured master note agreement is $20,000,000 and interest is payable quarterly. Total interest expense paid on the note was $1,156,000 in 1997 and $1,343,000 in 1996. On January 19, 1998, the master note agreement was renewed, under the same payment, interest, and collateral terms, for $20,000,000 and will mature May 31, 1999. At December 31, 1997 the Company has $51,500,000 of available credit with the FHLB in addition to the $26,700,000 above, $4,700,000 of available credit with a large regional financial institution, and federal funds lines of $95,950,000 with various correspondent banks, of which $53,950,000 remains available. The FHLB has a blanket lien on the Company's 1-4 family mortgage loans in the amount of the outstanding debt. Additional details regarding short-term debt are shown below (in thousands):
1997 1996 1995 Average amount outstanding during the year $ 41,236 $ 29,813 $ 17,467 Maximum amount outstanding at any month end $ 55,348 $ 52,618 $ 27,942 Weighted average interest rate: During year 6.18% 6.90% 6.66% End of year 6.21% 6.26% 6.54%
75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. LEASES One of the Company's subsidiary banks leases its main office building from a partnership, which includes a director and a stockholder of the Company, under a noncancelable operating lease expiring in 2013. Leases classified as capital leases include branch offices with a net book value of approximately $357,000 at December 31, 1997. Additionally, this subsidiary bank leases other branch offices and equipment under operating leases. Minimum future rental payments for the capital and operating leases are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ------------ ------------ 1998 $ 90 $ 919 1999 90 929 2000 90 921 2001 75 887 2002 54 873 Thereafter 106 9,523 ------------ ------------ Total minimum payments 505 $ 14,052 ============ Less amount representing interest (118) ------------ Net capital lease obligation $ 387 ============
Rents charged to operations under operating lease agreements for the years ended December 31, 1997, 1996, and 1995 were approximately $1,181,000, $1,135,000, and $1,052,000, respectively, of which $942,000, $870,000, and $803,000, respectively, during 1997, 1996, and 1995 relate to leases with related parties. 10. COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company makes commitments to meet the financing needs of its customers. These commitments include commitments to extend credit and standby letters of credit. These instruments include, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of condition. The Company's exposure to credit risk is the extent of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit and is represented by the contractual amount of those instruments. The Company uses the same credit policies and procedures in making commitments and conditional obligations as it does for loans. At December 31, 1997 and 1996, unused commitments under lines of credit aggregated approximately $202,475,000 and $171,371,000, of which $14,898,000 and $12,131,000 pertained to related parties, respectively. The Company evaluates each customer's credit worthiness on a one-by-one basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, residential real estate and income-producing commercial properties. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Company had approximately $2,422,000 and $1,272,000 in irrevocable standby letters of credit outstanding at December 31, 1997 and 1996, of which $204,000 and $226,000, respectively, pertained to related parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The collateral varies but may include accounts receivable, inventory, property, plant, and equipment, and residential real estate for those commitments for which collateral is deemed necessary. The Company, 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 adverse effect on the Company's financial condition or results of operations. 11. EMPLOYEE BENEFIT PLANS One of the subsidiary banks, NBC, has a defined benefit pension plan covering substantially all employees. Benefits are based on years of service and the average monthly earnings for the last sixty months of employment. The Company's policy is to use the "projected unit credit" actuarial method for financial reporting purposes and the "frozen entry age" actuarial method for funding purposes. The components of net pension expense for the years ended December 31, 1997, 1996, and 1995 are as follows (in thousands):
1997 1996 1995 Service cost $ 411 $ 342 $ 183 Interest cost 210 167 126 Return on assets (292) (186) (358) Net amortization and deferral 96 43 234 ---------- ---------- ---------- Net pension cost $ 425 $ 366 $ 185 ========== ========== ==========
The reconciliation of the funding status of the plan for the years ended December 31, 1997, 1996, and 1995 is as follows (in thousands):
1997 1996 1995 Vested benefits $ 2,276 $ 1,652 $ 1,504 Nonvested benefits 374 239 180 ---------- ---------- ---------- Accumulated benefit obligation 2,650 1,891 1,684 Effects of salary progression 1,124 688 610 ---------- ---------- ---------- Projected benefit obligation 3,774 2,579 2,294 Fair value of plan assets, consisting primarily of debt securities 3,041 2,398 1,979 ---------- ---------- ---------- Plan assets less than projected benefit obligation 733 181 315 Unrecognized net loss (761) (228) (432) Unrecognized prior service cost (17) (19) (22) Unrecognized net asset at date of initial application 13 16 18 ---------- ---------- ---------- Accrued pension cost $ (32) $ (50) $ (121) ========== ========== ==========
77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Primary assumptions used to actuarially determine net pension expense are as follows:
1997 1996 1995 Settlement (discount rate) 7.50% 7.00% 8.25% Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% Salary increase rate 4.25% 4.25% 4.25%
The Company has a qualified employee benefit plan under Section 401(k) of the Internal Revenue Code covering substantially all employees. Employees can contribute up to 10% of their salary to the plan on a pre-tax basis and the Company matches participants' contributions up to the first 2% of each participant's salary. The Company's matching contribution charged to operations related to this plan, as well as other plans of merged banks, was $313,000, $247,000, and $170,000 for the years ended December 31, 1997, 1996, and 1995, respectively. Several of the subsidiary banks acquired in the NCC Merger (see Note 1) have deferred compensation plans for the benefit of the Company's former chief executive officer. Payments under the plans are scheduled to begin March 15, 1997 and March 15, 2002, or at his death, if earlier, and continue for a period of 15 years. In connection with the plans, the banks purchased single premium life insurance policies on the life of the officer. The insurance company has left the premiums, together with the interest earned thereon, on deposit with one of the banks at interest rates 2% higher than the guaranteed increase in cash value of the policies. At December 31, 1997, the cash surrender value of the policies was $2,077,000 and the premiums, together with interest thereon, on deposit with the bank was $906,000. Additionally, ANB and six of its subsidiary banks have deferred compensation plans that cover certain former directors of ANB and the presidents of certain subsidiary banks. In connection with the plans, ANB and each subsidiary have purchased single premium life insurance policies on all participants, except one. At December 31, 1997, the cash surrender value of these policies was $1,826,000. The Company has fixed stock options outstanding which were granted under separate stock option plans of the different parties to the NCC Merger and the FAB Merger. No future stock option awards are anticipated under any of these plans. Under the terms of stock option plans related to FAB, options to purchase shares of FAB's common stock were granted in 1996 and 1997. As a result of the FAB Merger, all of the options previously issued under these stock option plans became immediately exercisable on November 30, 1997. In 1996, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for the grants: cash dividend yield of 0%; expected volatility of 11.4%, risk-free interest rate of 5.5%; and expected life of 7 years. The weighted average grant date fair value of 1996 option grants was $5.21. In 1997, the fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions used for the grants: cash dividend yield of 0%; expected volatility of 17%; risk-free interest rate of 6.5%; and expected life of 10 years. The weighted average grant date fair value of 1997 option grants was $9.86. Compensation expense recorded in 1997 and 1996 related to these options was $325,000 and $5,000, respectively. A summary of the status of the Company's fixed stock options as of 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED December 31, 1997, 1996, and 1995 and changes during each of the three years then ended is presented below:
1997 1996 1995 ------------------------- --------------------------- --------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ------------ ------------ ------------- ----------- ------------ Outstanding, beginning of year 519,373 $ 8.05 576,986 $ 8.07 526,418 $ 7.60 Granted 26,996 15.56 4,949 14.64 50,568 13.00 Exercised (135,300) (10.88) (10,000) (10.00) Forfeited (52,562) (8.50) ---------- ------------ ------------ ------------- ----------- ------------ Outstanding, end of year 411,069 $ 7.62 519,373 $ 8.05 576,986 $ 8.07 ========== ============ ============ ============== =========== ============ Options exercisable, end of year 206,806 271,387 183,028 ========== ============ ===========
The following table summarizes information about fixed stock options outstanding at December 31, 1997:
OPTIONS OPTIONS OUTSTANDING EXERCISABLE ---------------------------------- ----------- EXERCISE NUMBER REMAINING PRICE OUTSTANDING CONTRACTUAL LIFE -------- ----------- ---------------- $ 5.68 204,263 8/31/2003 $ 6.39 80,848 10/20/2002 80,848 $10.00 72,333 11/20/2004 72,333 $10.10 14,848 10/18/2004 14,848 $13.00 6,833 11/18/2005 6,833 $14.64 4,949 2/20/2006 4,949 $15.56 26,995 3/7/2007 26,995 ----------- ---------- 411,069 206,806 =========== ==========
The Company has 64,979 restricted shares of stock outstanding pursuant to a Restricted Stock Agreement (RSA) originated in 1994. The RSA provides for employees covered by the plan to elect a cash award equal to an amount of personal income tax liability resulting from the award. RSA participants are entitled to vote their respective shares. No dividends are permitted, and the sale or transfer of shares is restricted for five years. Shares awarded to participants that leave NBC prior to the completion of five years of service following the award are required to be surrendered and are ratably awarded to remaining participants. During the years ending December 31, 1997, 1996 and 1995, total expense for the RSA was $93,000 for each year. During 1996, the Company adopted a Performance Share Plan to offer long- term incentives in addition to current compensation to key executives. The criteria for payment of performance share awards is based upon a comparison of the Company's average return on average equity over an award period to that of a comparison group of bank holding companies. If the Company's results are below the median of the comparison group, no portion of the award is earned. If the Company's results are at or above the 90th percentile, the award maximum is earned. The vesting period for the awards is four years. Under the plan, 400,000 shares have been reserved for issuances. The number of shares granted in 1996 was 16,750 shares with an 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED approximate market value at the date of grant of $222,000. In 1997, 16,000 shares were granted under the plan with an approximate market value at the date of grant of $308,000. At December 31, 1997, outstanding awards of expected and maximum payouts were 25,750 and 47,000 shares, respectively. Expense recorded for the Performance Share Plan was $105,000 and $55,500 in 1997 and 1996, respectively. During October 1997, the Company adopted a Performance Share Plan to offer long-term incentives to key executives at one of the Company's subsidiary banks (the Subsidiary PSP). Under the plan, non-employee directors of that bank who are not also directors of the Company will be eligible to receive performance share awards providing certain criteria are met. Those criteria are that the director purchase a prescribed number of shares of the Company's stock (as provided in the Subsidiary PSP) and that the director continues to serve as a member of the board of directors of that bank until December 31, 2002. The amount of actual shares to be paid, assuming the preceding conditions are met, will be based on the net income of that bank for the year ended December 31, 2002. The maximum number of shares of common stock which may be awarded under the Subsidiary PSP is approximately 20,000 shares, which vest over a sixty-three month period. During 1997, the maximum number of shares were assumed to be granted, with an approximate market value on the date of grant of $503,000. Expense recorded for the Subsidiary PSP 1997 was approximately $24,000. During 1996, the Company adopted a Deferred Compensation Plan for directors who are not employees of the Company. Under the plan, a non-employee director may choose to have all or part of the cash and/or stock equivalents he would normally receive as compensation deferred for future payment at such time and in such manner as the director specifies at the time of the election, so long as any annuity payment period does not exceed ten years. The cash portion of the deferred compensation account earns interest at a rate which approximates the Company's short-term borrowing rate. Dividends earned on the stock equivalent portion are credited to the deferred compensation account in the form of additional stock equivalents. At December 31, 1997, the amount payable under terms of the plan totaled $156,712. For the years ending December 31, 1997 and 1996, approximately $136,000 and $64,000, respectively, was expensed under the plan. 12. INCOME TAXES The components of the provision for income taxes consist of the following for the years ended December 31, 1997, 1996, and 1995 (in thousands):
1997 1996 1995 Current: Federal $ 5,848 $ 4,794 $ 2,069 State 750 800 423 -------- -------- -------- Total current expense 6,598 5,594 2,492 Deferred: Federal (1,037) (275) (1,581) State (103) (38) (10) -------- -------- -------- Total deferred benefit (1,140) (313) (1,591) -------- -------- -------- Total provision for income taxes $ 5,458 $ 5,281 $ 901 ======== ======== ========
80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities for the years ended December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 Deferred tax assets: Loan loss reserve $ 3,268 $ 2,265 Other real estate owned basis difference 89 98 Unrealized loss on securities 270 Other nondeductible reserves 1,119 1,220 Other 15 116 -------- -------- Total deferred tax asset 4,491 3,969 Deferred tax liabilities: Depreciation and basis difference 369 2,557 Unrealized gains on securities 263 Other 259 120 Core deposits 213 242 -------- -------- Total deferred tax liabilities 1,104 2,919 -------- -------- Net deferred tax asset $ 3,387 $ 1,050 ======== ========
Total provision for income taxes differs from the amount which would be provided by applying the statutory federal income tax rate to pretax earnings as illustrated below for the years ended December 31, 1997, 1996, and 1995 (in thousands):
1997 1996 1995 Provision for income taxes at statutory federal income tax rate $ 5,827 $ 5,923 $ 2,663 Increase (decrease) resulting from: State income 427 503 273 taxes, net of federal income tax benefit 427 503 273 Change in valuation allowance (2,300) Tax free interest income (676) (660) (422) Nondeductible meals and entertainment 99 78 484 Disallowed interest expense deduction 79 85 61 Goodwill and core deposit amortization 105 98 25 Bad debt recapture (113) 136 General business and other credits (614) (244) Other, net 211 (389) (19) --------- --------- --------- Total provision for income taxes $ 5,458 $ 5,281 $ 901 ========= ========= =========
81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. NONINTEREST EXPENSE The following table sets forth, for the years ended December 31, 1997, 1996, and 1995, the principal components of noninterest expense (in thousands):
1997 1996 1995 Salaries and employee benefits $ 26,218 $ 25,655 $ 14,628 Occupancy and equipment 5,473 5,628 3,677 Amortization of goodwill 298 305 89 Advertising 1,224 1,045 921 Banking assessments 364 1,076 730 Data processing expense 1,714 1,413 902 Legal and professional fees 1,752 1,879 1,673 Other noncredit losses (recoveries) 283 (24) 1,219 Other 8,135 7,076 3,010 ---------- ---------- ---------- Total noninterest expense $ 45,461 $ 44,053 $ 26,849 ========== ========== ==========
14. EARNINGS PER SHARE The Company adopted SFAS No. 128, Earnings Per Share, on December 31, 1997. This statement requires all entities with complex capital structures to present a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. The following table reflects this reconciliation, after adjusting for stock splits (in thousands, except per share data):
PER SHARE INCOME SHARES AMOUNT ------------ ------------- ----------- 1997 Basic EPS net income $ 11,688 8,609 $ 1.36 =========== Effect of dilutive securities options 275 ------------ ----------- Diluted EPS $ 11,688 8,884 $ 1.31 ============ =========== =========== 1996 Basic EPS net income $ 12,123 8,483 $ 1.42 =========== Effect of dilutive securities options 248 Convertible debentures, net of taxes 5 25 ------------ ----------- Diluted EPS $ 12,128 8,756 $ 1.38 ============ =========== =========== 1995 Basic EPS net income /(1)/ $ 5,428 4,751 $ 1.14 =========== Effect of dilutive securities options 179 Convertible debentures, net of taxes 5 25 ------------ ----------- Diluted EPS $ 5,433 4,955 $ 1.10 ============ =========== ===========
/(1)/ Basic EPS net income excludes cash dividends on preferred stock. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED As discussed in Note 19, subsequent to December 31, 1997, the Company entered into a definitive agreement to issue up to 575,000 shares in a proposed business combination expected to be accounted for as a pooling of interests. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. CASH, DUE FROM BANKS, INTEREST-BEARING CASH BALANCES, AND FEDERAL FUNDS SOLD -The carrying amount is a reasonable estimate of fair value. INVESTMENT, AVAILABLE FOR SALE, AND TRADING SECURITIES - Fair value is based on quoted market prices or dealer quotes. LOANS - The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSITS - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. FEDERAL FUNDS PURCHASED, SHORT-TERM BORROWINGS, AND LONG-TERM DEBT - The carrying amount is a reasonable estimate of fair value. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - All commitments to extend credit and standby letters of credit have original terms, at their issuance, of one year or less; therefore, the fair value of these instruments does not materially differ from their stated value. The estimated fair values of financial instruments at December 31, 1997 and 1996 are as follows (in thousands):
1997 1996 ---------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- --------- -------- -------- Financial assets: Cash and due from banks $ 42,438 $ 42,438 $ 45,001 $ 45,001 Interest-bearing deposits 2,391 2,391 249 249 in other banks Federal funds sold and securities purchased under agreements to resell 50,009 50,009 46,249 46,249 Investment securities and securities available for sale 213,613 214,091 180,073 180,100 Trading securities 399 399 1,936 1,936 Loans 829,961 868,296 774,271 786,826 Financial liabilities: Deposits 928,970 942,575 858,103 858,344 Federal funds purchased; securities sold under repurchase agreement; and treasury, tax, and loan account 145,880 145,880 96,164 96,164 Short-term borrowings 27,750 27,750 42,105 42,105 Long-term debt 14,587 14,587 12,939 12,939
83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. PARENT COMPANY The condensed financial information of the parent company only for the years ended December 31, 1997, 1996, and 1995 is presented as follows (in thousands):
1997 1996 BALANCE SHEETS Assets: Cash $ 2,346 $ 979 Investments in subsidiaries 104,471 97,033 Intangibles 7,003 7,371 Other assets 1,168 1,409 ---------- ---------- Total assets $ 114,988 $ 106,792 ========== ========== Liabilities and stockholders' equity: Accounts payable $ 1,569 $ 628 Accrued interest payable 236 256 Short- and long-term debt 15,250 17,105 ---------- ---------- Total liabilities 17,055 17,989 ---------- ---------- Stockholders' equity: Preferred Stock Common stock 8,648 8,145 Additional paid-in capital 61,551 62,342 Retained earnings 27,369 18,930 Unearned restricted stock (92) (185) Unrealized gain (loss) on securities available for sale, net of taxes 457 (429) ---------- ---------- Total stockholders' equity 97,933 88,803 ---------- ---------- Total liabilities and stockholders' equity $ 114,988 $ 106,792 ========== ==========
1997 1996 1995 STATEMENTS OF INCOME Income: Dividends from subsidiaries $ 10,025 $ 8,266 $ 2,641 Other 15 19 7 ---------- --------- --------- 10,040 8,285 2,648 ---------- --------- --------- Expenses: Interest expense 1,156 1,393 771 Other expenses 1,924 3,384 105 ---------- --------- --------- Total expenses 3,080 4,777 876 ---------- --------- --------- Income before equity in undistributed earnings of subsidiaries 6,960 3,508 1,772 Equity in undistributed earnings of subsidiaries 3,760 6,907 4,360 ---------- --------- --------- Income before income taxes 10,720 10,415 6,132 Income tax benefit 948 1,712 150 ---------- --------- --------- Net income $ 11,668 $ 12,127 $ 6,282 ========== ========== =========
84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1997 1996 1995 STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES: Net income $11,668 $12,127 $ 6,282 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of investment in consolidated subsidiaries in excess of net assets acquired and core deposits 368 288 120 Equity in undistributed earnings of subsidiaries (3,760) (6,907) (4,360) Deferred tax (benefit) expense 99 (282) Other 269 274 2 Increase (decrease) in other assets and liabilities 1,159 (91) 34 -------- ------- ------- Net cash provided by operating activities 9,803 5,409 2,078 -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Additional investment in subsidiaries (3,014) Acquisitions, net of cash acquired 975 -------- ------- ------- Net cash (used in) provided by investing activities (3,014) 975 -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends on common stock (3,220) (1,747) Dividends of preferred stock (4) (854) Change in other liabilities (5,024) Exercise of stock options (438) 100 Issuance of common stock 143 1,348 Distribution for fractional shares (14) (3) (2) Net (decrease) increase in borrowings (1,750) 1,223 8,027 Redemption of preferred stock (53) (10,711) -------- ------- ------- Net cash used in financing activities (5,422) (5,365) (2,192) -------- ------- ------- Net increase in cash 1,367 44 861 Cash, beginning of year 979 935 74 -------- ------- ------- Cash, end of year $ 2,346 $ 979 $ 935 ======== ======= =======
17. REGULATORY The subsidiary banks are required by law to maintain reserves in cash or deposits with the Federal Reserve Bank or other banks. At December 31, 1997, the required reserves totaled $10,782,000. At December 31, 1997 and 1996, securities with carrying values of $133,088,000 and $104,261,000 were pledged to secure U.S. government deposits and other public funds and for purposes as required or permitted by law. The Company has a policy of collecting amounts from its subsidiaries sufficient to cover expenses of the Company and to service Company debt. Such amounts have been received in the form of dividends declared by the subsidiaries. Payment of dividends is subject to the financial condition of the subsidiaries and the Company's judgment as to the desirability of utilizing alternative sources of funds. The payment of dividends by the subsidiary banks is also subject to various regulatory requirements. At December 31, 1997, $14,988,000 of the retained 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED earnings of the subsidiary banks are available for payment of dividends to the Company under the various regulatory requirements, without special approval from the applicable regulators. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company maintain minimum amounts and ratios (set forth in the table below) of total qualifying capital and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Federal Reserve Bank categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The actual capital amounts and ratios of the Company are presented in the table below (in thousands):
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTIVE PROVISIONS ---------------------- ---------------------- --------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------ ------- ------------ ------- ----------- ------- As of December 31, 1997: Total qualifying capital (to risk-weighted assets) $ 102,930 10.63% $ 77,431 8.00% $ 96,789 10.00% Tier I capital (to risk-weighted assets) $ 90,831 9.38% $ 38,715 4.00% $ 58,073 6.00% Tier I Capital (to average assets) $ 90,831 7.58% $ 47,952 4.00% $ 59,941 5.00% As of December 31, 1996: Total qualifying capital (to risk-weighted assets) $ 91,215 11.38% $ 64,123 8.00% $ 80,154 10.00% Tier I capital (to risk-weighted assets) $ 82,398 10.28% $ 32,061 4.00% $ 48,092 6.00% Tier I Capital (to average assets) $ 82,398 8.13% $ 40,540 4.00% $ 50,675 5.00%
86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The actual capital amounts and ratios of National Bank of Commerce, the Company's most significant subsidiary, are presented in the table below (in thousands):
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTIVE PROVISIONS ---------------------- ---------------------- --------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------ ------- ------------ ------- ----------- ------- As of December 31, 1997: Total qualifying capital (to risk-weighted assets) $ 56,949 10.37% $ 43,950 8.00% $ 54,938 10.00% Tier I capital (to risk-weighted assets) $ 50,082 9.12% $ 21,975 4.00% $ 32,963 6.00% Tier I Capital (to average assets) $ 50,082 7.41% $ 27,042 4.00% $ 33,802 5.00% As of December 31, 1996: Total qualifying capital (to risk-weighted assets) $ 52,182 11.72% $ 35,609 8.00% $ 44,514 10.00% Tier I capital (to risk-weighted assets) $ 46,618 10.47% $ 17,805 4.00% $ 24,518 6.00% Tier I Capital (to average assets) $ 46,618 8.10% $ 23,012 4.00% $ 28,765 5.00%
18. RELATED PARTY TRANSACTIONS In addition to the previously disclosed related party transactions, the Company received trust fees of approximately $589,000 in 1997 and $488,000 in 1996 from related parties. 19. SUBSEQUENT EVENT On March 5, 1998, the Company signed a definitive agreement with Public Bank Bancorporation (Public) pursuant to which Public will be merged into the Company. Public is a holding company for Public Bank, which operates through two offices located in Kissimmee and St. Cloud, Florida. Under the terms of the agreement, Public shareholders will receive a total of 550,000 shares of the Company's stock for each outstanding share of Public stock; an additional 25,000 shares may be received by Public shareholders if certain conditions tied to the Company's share price are met. Public had total assets of approximately $50 million (unaudited) at December 31, 1997 and net income of $843,000 (unaudited) for the year ended December 31, 1997. The merger, which is dependent upon receiving regulatory and shareholder approval, is anticipated to be accounted for as a pooling of interests. 87 EX-3.1B 2 CERTIFICATE OF MERGER EXHIBIT 3.1B ------------ CERTIFICATE OF MERGER OF NATIONAL COMMERCE CORPORATION A DELAWARE CORPORATION AND COMMERCE BANKSHARES, INC. A DELAWARE CORPORATION INTO ALABAMA NATIONAL BANCORPORATION A DELAWARE CORPORATION ================================= The undersigned Alabama National BanCorporation, a Delaware corporation, does hereby certify: FIRST: That the name and state of incorporation of each of the constituent corporations of the merger are as follows:
NAME STATE OF INCORPORATION ---- ---------------------- Alabama National BanCorporation Delaware National Commerce Corporation Delaware Commerce Bankshares, Inc. Delaware
SECOND: That an agreement of merger between the parties to the merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the requirements of subsection (c) of section 251 of the General Corporation Law of the State of Delaware. THIRD: That the name of the surviving corporation of the merger is Alabama National BanCorporation, a Delaware corporation. FOURTH: That the Certificate of Incorporation of Alabama National BanCorporation, a Delaware corporation, as amended hereby, shall be the Certificate of Incorporation of the surviving corporation until thereafter amended in accordance with applicable law. The Certificate of Incorporation of Alabama National BanCorporation is hereby amended to increase its authorized shares and to increase the maximum size of its Board of Directors by deleting Section FOURTH. A. in its entirety and inserting in lieu thereof as follows: 1 A. The total number of shares of stock which the corporation shall have authority to issue is ten million one hundred thousand (10,100,000) shares, consisting of ten million (10,000,000) shares of common stock, par value $1.00 per share (the "Common Stock"), and one hundred thousand (100,000) shares of preferred stock, par value $1.00 per share (the "Preferred Stock"). and by deleting Section SIXTH. A. in its entirety and inserting in lieu thereof the following: A. The number of Directors which shall constitute the whole Board of Directors shall be as determined from time to time by resolution and adopted by the affirmative vote of a majority of the Board of Directors, but shall not be less than three (3) or more than fifteen (15) Directors; provided that the number of Directors shall not be decreased if such decrease would have the effect of shortening the term of an incumbent Director. FIFTH: That the executed agreement of merger is on file at the principal place of business of the surviving corporation. The address of said principal place of business is 101 Carnoustie, Shoal Creek, Alabama 35242. SIXTH: That a copy of the agreement of merger will be furnished, on request and without cost, to any stockholder of any constituent corporation. IN WITNESS WHEREOF, the undersigned officers have duly authorized this Certificate of Merger as of this the 29th day of December, 1995. Alabama National BanCorporation, a Delaware corporation, By: /s/ James A. Taylor ------------------- Its Chairman of the Board Attest: By: /s/ Martha W. Taylor -------------------- Its Secretary 2 EX-10.7D 3 SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 10.7D ------------- SECOND AMENDMENT TO CREDIT AGREEMENT ------------------------------------ THIS SECOND AMENDMENT TO CREDIT AGREEMENT ("this Amendment") dated as of January 19, 1998 but executed on March 6, 1998 is entered into by ALABAMA NATIONAL BANCORPORATION, a Delaware corporation (the "Borrower") and AMSOUTH BANK, an Alabama banking corporation (the "Lender"). RECITALS -------- A. The Borrower and the Lender have entered into a Credit Agreement dated as of December 29, 1995 as amended by a First Amendment thereto dated as of January 20, 1997 (as so amended, the "Agreement"). B. The Borrower and the Lender now desire to amend the definitions of "LIBOR-Based Rate" and "Facility Termination Date" and to make the other changes set forth in this Amendment. AGREEMENT --------- NOW, THEREFORE, in consideration of the recitals and the mutual obligations and covenants contained herein, the Borrower and the Lender hereby agree as follows: 1. Capitalized terms used in this Amendment and not otherwise defined herein have the respective meanings attributed thereto in the Agreement. 2. The defined term "Facility Termination Date" set forth in Article I of the Agreement is hereby further amended to read, in its entirety, as follows: "Facility Termination Date" means May 31, 1999, as such date may be ------------------------- extended from time to time pursuant to Section 2.5 or accelerated pursuant to Section 7.2. 3. The defined term "LIBOR-Based Rate" set forth in Article I of the Agreement is hereby further amended to read, in its entirety, as follows: "LIBOR-Based Rate" means a rate per annum equal to the LIBOR Quote ---------------- plus 75 basis points. 4. Subparagraph (a) of Section 6.14 of the Agreement is hereby amended to read, in its entirety, as follows: "(a) for any purpose other than general working capital; or" 5. The first sentence of Section 8.13 is hereby amended to read, in its entirety, as follows: The Lender may from time to time enter into a participation agreement or agreements with one or more participants pursuant to which each such participant shall be given a participation in the Obligations and that any such participant may from time to time similarly grant to one or more subparticipants subparticipations in the Obligations. 6. Exhibit D to the Credit Agreement shall be amended in its entirety and --------- replaced with Revised Exhibit D attached hereto and made a part hereof. ----------------- 7. Notwithstanding the execution of this Amendment, all of the indebtedness evidenced by the Note shall remain in full force and effect, as modified hereby, and all of the collateral described in the Agreement and the Credit Documents shall remain subject to the liens, security interests and assignments of the Agreement and the Credit Documents as security for the indebtedness evidenced by the Note and all other indebtedness described therein; and nothing contained in this Amendment shall be construed to constitute a novation of the indebtedness evidenced by the Note or to release, satisfy, discharge, terminate or otherwise affect or impair in any manner whatsoever (a) the validity or enforceability of the indebtedness evidenced by the Note; (b) the liens, security interests, assignments and conveyances effected by the Agreement or the Credit Documents, or the priority thereof; (c) the liability of any maker, endorser, surety, guarantor or other person that may now or hereafter be liable under or on account of the Note or the Agreement or the Credit Documents; or (d) any other security or instrument now or hereafter held by the Lender as security for or as evidence of any of the above-described indebtedness. 8. All references in the Credit Documents to "Credit Agreement" shall refer to the Agreement as amended by this Amendment, and as the Agreement may be further amended from time to time. 9. The Borrower certifies that the organizational documents of the Borrower have not been amended since February 10, 1997. 10. The Borrower hereby represents and warrants to the Lender that all representations and warranties contained in the Agreement are true and correct as of the date hereof (except representations and warranties that are expressly limited to an earlier date); and the Borrower hereby certifies that no Event of Default nor any event that, upon notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing. 11. Except as hereby amended, the Agreement shall remain in full force and effect as written. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which when taken together shall constitute one and the same 2 instrument. The covenants and agreements contained in this Amendment shall apply to and inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 12. Nothing contained herein shall be construed as a waiver, acknowledgment or consent to any breach of or Event of Default under the Agreement and the Credit Documents not specifically mentioned herein, and the consents granted herein are effective only in the specific instance and for the purposes for which given. 13. This Amendment shall be governed by the laws of the State of Alabama. IN WITNESS WHEREOF, the Borrower and the Lender have caused this Amendment to be executed and delivered by their duly authorized corporate officers as of the date set forth below their signature. ALABAMA NATIONAL BANCORPORATION By /s/ John H. Holcomb, III -------------------------------------- Its Chairman and CEO ----------------------------------- Dated: March 6, 1998 AMSOUTH BANK By /s/ John M. Kettig -------------------------------------- Its Senior Vice President Dated: March 6, 1998 3 EX-10.12 4 DAN N. DAVID EMPLOYMENT AGREEMENT Exhibit 10.12 ------------- EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (this "Agreement") is effective November 30, 1997 (the "Effective Date"), by and between First American Bank, an Alabama banking corporation ("Bank"), and Alabama National BanCorporation, a Delaware corporation ("ANB"; hereinafter together with the Bank collectively referred to as "Employer"); and Dan M. David ("Executive"). Recitals -------- WHEREAS, the Bank is a wholly-owned subsidiary of First American Bancorp ("FAB"); WHEREAS, pursuant to that certain Agreement and Plan of Merger dated July 24, 1997 between FAB and ANB (the "Merger Agreement"), the parties have agreed that FAB shall merge with and into ANB, and the Bank shall become a wholly-owned subsidiary of ANB; and WHEREAS, Executive has been and continues to serve as the Chairman and Chief Executive Officer of the Bank and, as a condition to the consummation of the transactions provided for in the Merger Agreement, Executive and Employer have agreed to enter into this Agreement; Agreement --------- NOW THEREFORE, in consideration of the mutual recitals and covenants contained herein, the parties hereby agree as follows: 1. EMPLOYMENT. Employer agrees to employ Executive and Executive agrees to ---------- be employed by Employer, subject to the terms and provisions of this Agreement. 2. TERM. The employment of Executive by Employer as provided in Section 1 ---- will be for a period of five (5) years commencing on the Effective Date, unless earlier terminated in accordance with the provisions of Section 9 hereof; provided, however, that the obligations and rights set forth in Sections 7, 8 and 9 hereof shall survive termination of this Agreement (except, under certain specified circumstances set forth in Section 9 (e) hereof, the obligations and rights set forth in Section 8 shall expire upon termination). 3. DUTIES; EXTENT OF SERVICES. Executive shall perform for Employer all -------------------------- duties incident to the position of Chairman and Chief Executive Officer of the Bank, under the direction of the board of directors of Bank or its designee. At the next meeting of the board of directors of ANB immediately subsequent to the Effective Time of the Merger, Executive shall be elected to serve as its Vice- Chairman, and thereafter for the remaining term of this 1 Agreement, at each annual meeting of the ANB Board, he shall be nominated to serve as its Vice-Chairman. In addition, Executive shall engage in such other services for Bank or its affiliated companies as Employer from time to time shall direct. The precise services of Executive and the title of Executive's position may be extended, curtailed or modified by Employer from time to time without affecting the enforceability of the terms of this Agreement. Executive shall use his best efforts in, and devote his entire time, attention, and energy, to Employer's business and, except as previously disclosed to Employer, shall not during the term hereof serve as an officer or director of any business enterprise other than the Bank, ANB or an Affiliate thereof. Nothing contained herein is intended to prohibit Executive from spending a reasonable amount of time managing his personal investments and discharging his civic responsibilities and other permitted activities as long as such activities do not interfere with his duties and obligations under this Agreement. 4. COMPENSATION. ------------ (a) During the term of this Agreement, Executive's total annual cash compensation shall be an amount not less than One Hundred Eighty-Six Thousand Dollars ($186,000). During the term of this Agreement, Executive may also receive other cash or non-cash compensation (including without limitation merit increases or participation in any incentive compensation plans adopted by Employer) as may be granted by ANB's Board of Directors, in its sole discretion. (b) Bank shall continue to provide Executive with an automobile owned or leased by Bank, which automobile shall be comparable to the present automobile provided by Bank to Executive. (c) Executive shall be entitled to vacation days, paid holidays and sick days as provided in Bank's Personnel Policy. (d) Currently, Bank maintains a term life insurance policy (the "Policy") on Executive with a face value of $1,000,000. During the term of this Agreement, Employer shall continue in force for Executive's benefit the Policy. 5. COMPLIANCE WITH RULES AND POLICIES. Executive shall comply with all of ---------------------------------- the rules, regulations, and policies of Employer now or hereinafter in effect. He shall promptly and faithfully do and perform any and all other duties and responsibilities which he may, from time to time, be directed to do by the board of directors of Bank or the board of directors of ANB or their respective designee. 6. REPRESENTATION OF EXECUTIVE. Except as previously disclosed to Employer, --------------------------- Executive represents to Employer that he is not subject to any rule, regulation or agreement, including without limitation, any noncompete agreement, that purports to, or which reasonably could, be expected to limit, restrict or interfere with Executive's ability to engage in the activities provided for in this Agreement. 2 7. DISCLOSURE OF INFORMATION. Executive acknowledges that any documents and ------------------------- information, whether written or not, that comes into Executive's possession or knowledge during Executive's course of employment with Employer which is not or has not become part of the public domain, including, without limitation the financial and business conditions, goals and operations of customers of Bank, ANB or any of their respective affiliates or subsidiaries as the same may exist from time to time (collectively, "Confidential Information"), are valuable, special and unique assets of Employer's business. Executive will not, during or after the term of this Agreement, (i) disclose any written Confidential Information to any person, firm, corporation, association, or other entity not employed by or affiliated with Employer for any reason or purpose whatsoever, or (ii) use any written Confidential Information for any reason other than to further the business of Employer. Executive agrees to return any written Confidential Information, and all copies thereof, upon the termination of Executive's employment (whether hereunder or otherwise). In the event of a breach or threatened breach by Executive of the provisions of this Section 7, in addition to all other remedies available to Employer, Employer shall be entitled to an injunction restraining Executive from disclosing any written Confidential Information or from rendering any services to any person, firm, corporation, association or other entity to whom any written Confidential Information has been disclosed or is threatened to be disclosed. Executive further agrees that he will not divulge to any person, firm, corporation, association, or other entity not employed by or affiliated with Employer, any of Employer's business methods, sales, services, or techniques, regardless of whether the same is written or not. 8. COMPETITION. ----------- (a) Except as specifically provided otherwise in this Agreement, during the period of his employment by Employer and for a period of two (2) years after such employment (whether such employment shall have ended by reason of the expiration or termination of this Agreement or otherwise), Executive will not, individually or as an employee, agent, officer, director or shareholder of or otherwise through any corporation or other business organization, directly or indirectly, (i) carry on or engage in a similar business or solicit or do similar business with any customer of Bank or ANB or any of their respective subsidiaries or affiliates in any territory in which Bank or ANB or any of their respective subsidiaries or affiliates is conducting business; or (ii) solicit any employee of Bank or ANB or any of their subsidiaries or affiliates to leave his or her employment with Bank or ANB or any of their subsidiaries or affiliates for any reason without the prior written consent of Employer; provided, however, notwithstanding anything to the contrary contained herein, if - -------- ------- Executive's employment by Employer is terminated for any reason, this covenant not to compete is not intended to prohibit Executive from serving as an employee/officer of certain small loan finance companies in which Executive currently maintains an ownership interest or any similar companies in which he may in the future purchase an ownership interest, as long as such small loan -- ---- -- finance or similar companies are not otherwise engaged in the business of banking. (b) Executive represents that his experience and capabilities are such that the provisions of this Section 8 will not prevent him from earning a livelihood. 3 (c) If Executive violates the provisions of Section 8(a) above, the period during which the covenants set forth therein shall apply shall be extended one (1) day for each day in which a violation of such covenants occurs; and if suit be brought to enforce such covenants and one or more violations by Executive be established, then Employer and Bank shall be entitled to an injunction restraining Executive from further violations for a period of two (2) years from the date of the final decree, less only such number of days that Executive shall have not violated such covenants. The purpose of this provision is to prevent Executive from profiting from his own wrong if he violates such covenants. 9. TERMINATION. ----------- (a) Employer shall be obligated to comply with all provisions of this Agreement and may terminate Executive only For Cause. "For Cause" shall mean (i) abuse of or addiction to intoxicating drugs (including alcohol); (ii) any act on the part of Executive which constitutes fraud, willful malfeasance of duty or conduct grossly inappropriate to Executive's office and is demonstrably likely to lead to material injury to Bank, ANB or a successor or affiliate of Bank or ANB; (iii) a felony conviction of Executive; or (iv) the suspension or removal of Executive by federal or state banking regulatory authorities; provided, that "For Cause" shall not include Executive's medical disability. In addition, the services of Executive and the obligations of Employer under this Agreement may be terminated For Cause by Employer due to the death of Executive. (b) If Employer terminates Executive's employment hereunder "For Cause" prior to November 30, 2002, all rights and obligations specified in Section 8 shall survive any such termination and Executive shall not be entitled to any further compensation from Employer. (c) If for any reason during the term of this Agreement Executive desires to cease working for Employer, Executive shall notify Employer of such desire and Employer may choose, in its sole discretion, one of the following alternatives: (i) (A) the employment relationship between Employer and Executive shall immediately terminate, (B) all rights and obligations specified in Section 8 shall survive any such termination and (C) Executive shall not be entitled to any further compensation from Employer. (ii) (A) the employment relationship between Employer and Executive shall continue for the term of this Agreement, (B) Executive shall continue to receive the minimum cash compensation provided for in Section 4(a), (C) Employer shall continue to maintain the Policy described in Section 4(d) and health insurance comparable to that maintained by Employer on behalf of Executive prior to such termination through the fifth anniversary of this Agreement and (D) all rights and obligations specified in Section 8 shall survive any such termination, which for purposes hereof shall mean that the noncompete covenant provided for therein shall continue through the seventh anniversary of the date of this Agreement. 4 (d) If Employer terminates Executive other than "For Cause", (i) Executive shall continue to receive the minimum cash compensation provided for in Section 4(a), (ii) Employer shall continue to maintain the Policy described in Section 4(d) and health insurance comparable to that maintained by Employer on behalf of Executive prior to such termination through the fifth anniversary of this Agreement, and (iii) all rights and obligations specified in Section 8 shall survive any such termination, which for purposes hereof shall mean that the noncompete covenant provided for therein shall continue through the seventh anniversary of the date of this Agreement. (e) Notwithstanding anything to the contrary contained herein, upon the occurrence of a "Change in Control", all rights and obligations specified in Section 8 (but not Section 4) shall terminate immediately. For purposes of this Section 9(e), "Change of Control" shall mean the occurrence during the term of this Agreement of any of the following events: (i) a merger, consolidation or other corporate reorganization of ANB in which ANB does not survive; (i) a merger, consolidation or other corporate reorganization of the Bank, in which the Bank does not survive, excluding any such merger, consolidation or reorganization involving the Bank in which ANB remains the ultimate parent of the resulting entity; (iii) the acquisition of beneficial ownership by one person or a related group of persons of greater than fifty percent (50%) of the outstanding voting stock or assets of ANB, excluding the existing related group of stockholders that includes certain of ANB's current officers and directors and the one family that on the date hereof owns greater than 10% of the voting stock; or (iv) individuals who currently constitute the directors of ANB, or who become directors of ANB upon nomination or election by the directors of ANB, other than through an actual or threatened stockholder election contest, cease for any reason to constitute a majority of the directors of ANB. (f) Notwithstanding anything to the contrary contained herein, the noncompete covenant contained in Section 8 hereof shall not extend beyond the seventh anniversary of the execution of this Agreement. (g) The provisions of Section 7 shall survive regardless of any termination of Executive's employment hereunder, whether voluntary or involuntary. 10. NOTICE. For the purposes of this Agreement, notices and demands shall be ------ deemed given when mailed by United States mail, addressed in the case of Bank to First American Bank, 251 Johnston Street S.E., Post Office 2203, Decatur, Alabama 35609-2203, Attention: Chairman of the Board of Directors, with a copy to ANB at Alabama National BanCorporation, 1927 First Avenue North, Birmingham, Alabama 35203, Attention: Chief Executive Officer; or in the case of Executive, to 251 Johnston Street, S.E., Decatur, Alabama 35609-2203. 11. MISCELLANEOUS. No provision of this Agreement may be modified, waived or ------------- discharged unless such modification, waiver or discharge is agreed to in writing. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws 5 of the State of Alabama. This Agreement supersedes and cancels any prior employment agreement or understanding entered into between Executive and Bank or Executive and FAB. 12. VALIDITY. The invalidity of any provision or provisions of this -------- Agreement shall not affect any other provision of this Agreement, which shall remain in full force and effect, nor shall the invalidity of a portion of any provision of this Agreement affect the balance of such provision. 13. DEFAULT. ------- (a) If Executive breaches or violates any of the covenants, conditions, or terms of this Agreement on his part to be performed, Employer shall have the right, without notice to Executive, to obtain a writ of injunction against him restraining him from violating any such covenant, condition, or term, such notice being hereby expressly waived by Executive. (b) Additionally, in the event of any conduct by Executive violating any provision of this Agreement, Employer shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either at law or in equity, to obtain damages for such conduct, to enforce specific performance of such provision or to obtain any other relief or any combination of the foregoing that Employer may elect to pursue. 14. PARTIES. This Agreement shall be binding upon and shall inure to the ------- benefit of any successors or assigns to Bank or ANB. Executive may not assign any of his rights or delegate any of his duties or obligations under this Agreement or any portion hereof. 15. DEFINITIONS. Any capitalized terms not otherwise defined herein shall ----------- have the meanings ascribed to them in the Merger Agreement. 6 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by Executive and by a duly authorized officer of each of Bank and ANB as of the date first above written. Witnesses: "EXECUTIVE": /s/ James R. Thompson, III /s/ Dan M. David - -------------------------- ---------------- Dan M. David /s/ Alfred E. Cheatham, Jr. - --------------------------- "BANK": Attest: First American Bank By: /s/ Jon H. Moores By: /s/ Dan M. David ----------------- ---------------- Its: Secretary Its: Chairman of the Board of Directors [Corporate Seal] "ANB": Attest: Alabama National BanCorporation By: /s/ Kimberly Moore By: /s/ John H. Holcomb, III ------------------ ------------------------ Its: Secretary Its: Chief Executive Officer [Corporate Seal] 7 EX-10.13 5 FIRST AMERICAN BANCORP STOCK OPTION PLAN Exhibit 10.13 ------------- FIRST AMERICAN BANCORP STOCK OPTION PLAN A. Purpose and Scope. The purposes of this Plan are to encourage stock ownership by key management employees of the First American Bancorp (the "Company") and its Subsidiaries, to provide an incentive for those employees to expand and improve the profits and prosperity of the Company and its Subsidiaries, and to assist the Company and its Subsidiaries in attracting and retaining key personnel through the grant of Options to purchase shares of the Company's common stock. B. Definitions. Unless otherwise required by the context: 1. "Board" means the Board of Directors of the Company. 2. "Committee" means the Stock Option Plan Committee, which is appointed by the Board, and which shall be composed of three members of the Board. 3. "Company" means the First American Bancorp, an Alabama banking corporation. 4. "Code" means the Internal Revenue Code of 1986, as amended. 5. "Option" means a right to purchase Stock, granted under this Plan. 6. "Option Price" means the purchase price for Stock under an Option, as determined in Section F below. 7. "Participant" means an employee of the Company, or of any Subsidiary of the Company, to whom an Option is granted under the Plan. 8. "Plan" means this First American Bancorp Stock Option Plan. 9. "Stock" means the common stock of the Company, par value $0.01. 10. "Subsidiary" means a subsidiary corporation of the Company, defined in Sections 425(f) and 425(g) of the Code. 11. "Vested" means the nonforfeitable part of an Option awarded to a Participant. 1 C. Stock to be Optioned. Subject to the provisions of Section M of the Plan, the maximum number of shares of Stock that may be optioned or sold under the Plan is 50,000 shares. Those shares may be treasury, or authorized, but unissued, shares of Stock of the Company. D. Administration The Plan shall be administered by the Committee. Two members of the Committee shall constitute a quorum for the transaction of the business. The Committee shall be responsible to the Board for the operation of the Plan, and shall make recommendations to the Board for participation in the Plan by employees of the Company and its Subsidiaries, and for the extend of that participation. The interpretation and construction of any provision of the Plan by the Committee shall be final, unless otherwise determined by the Board. No member of the Board or the Committee shall be liable for any action or determination made by him in good faith. E. Eligibility The Board, upon recommendation of the Committee, may grant Options to any key management employee (including an employee who is a director or an officer) of the Company or its Subsidiaries. Options may be awarded by the Board at any time and from time to time to new Participants, or to then Participants, or to a greater or lesser number of Participants, and may include or exclude previous Participants, as the Board, upon recommendation by the Committee shall determine. Options granted at different times need not contain similar provisions. F. Option Price. The purchase price for Stock under each Option shall be 100 percent of the fair market value of the Stock at the time the Option is granted, but in no event less than the book value of the Stock. G. Terms and Conditions of Options. Options granted under the Plan shall be authorized by the Board and shall be evidenced by agreements in the form as the Board, upon recommendation of the Committee, approves. Those agreements shall comply with and be subject to the following terms and conditions: 1. Employment Agreement. The Board may, in its discretion, include in any Option granted under the Plan a condition that the Participant shall agree to remain in the employ of, and to render services to, the Company or any of its Subsidiaries for a period of time (specified in the agreement) following the date the Option is granted. No such 2 agreement shall impose upon the Company or any of its Subsidiaries, however, any obligation to employ the Participant for any period of time. 2. Time and Method of Payment The Option Price shall be paid in full in cash at the time an Option is exercised under the Plan. Otherwise, an exercise of any Option granted under the Plan shall be invalid and of no effect. Promptly after the exercise of an Option and the payment of the full Option Price, the Participant shall be entitled to the issuance of a stock certificate evidencing his ownership of such Stock. Subject to the provisions of Paragraph L, below, a Participant shall have none of the rights of a shareholder until shares are issued to him. 3. Number of Shares. Each Option shall state the total number of shares of Stock subject to the option. 4. Option Period and Limitations on Exercise of Options. The Board may, in its discretion, provide that an Option may not be exercised in whole or in part for any period of periods of time specified in the Option agreement. Except as provided in the Option agreement, an Option may be exercised in whole or in part at any time during its term. No Option may be exercised after the expiration of ten (10) years from the date it is granted. No Option may be exercised for a fractional share of Stock. H. Termination of Employment Except as provided in Section I below (concerning the effect of a Participant's death) or except as provided in a Stock Option Agreement Vesting Schedule with a designated Participant, if a Participant ceases to be employed by the Company or any of its Subsidiaries, his Options shall terminate immediately; provided, --------- however, that if a Participant's cessation of employment with the Company and - -------- its Subsidiaries is due to his retirement with the consent of the Company or any of its Subsidiaries, the Participant may, at any time within three months after such cessation of employment, exercise his Options to the extent that he was entitled to exercise them on the date of cessation of employment, but in no event shall any Option be exercisable more than fifteen (15) years from the date it was granted. Except as provided in a Stock Option Agreement Vesting Schedule with a designated Participant, the Committee may cancel an Option during the three month period referred to in this paragraph, if the Participant engages in employment for activities contrary, in the option of the Committee, to the best interests of the Company or any of its Subsidiaries. The Committee shall determine in each case whether a termination of employment shall be considered a retirement with the consent of the Company or a Subsidiary, and, subject to applicable law, whether a leave of absence shall constitute a termination of 3 employment. Any such determination of the Committee shall be final and conclusive, unless overruled by the Board. I. Rights in Event of Death. If a Participant dies while employed by the Company or any of its Subsidiaries, or within three months after having retired with the consent of the Company or any of its Subsidiaries, and without having fully exercised his Options, the executors or administrators, or legatees or heirs, of his estate shall have the right to exercise such Options to the extent that such deceased Participant was entitled to exercise the Options on the date of his death; provided, however, ------------------ that in no event shall the Options be exercisable more than fifteen years from the date they were granted. J. No Obligations to Exercise Option. The grant of an Option shall impose no obligation on the Participant to exercise that Option. K. Nonassignability. Options shall not be transferable other than by will or by the laws of descent and distribution, and during a Participant's lifetime shall be exercisable only by the Participant. L. Effect of Change in Stock Subject to the Plan. The aggregate number of shares of Stock available for Options under the Plan, the shares subject to any Option, and the price per share shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subsequent to the effective date of the Plan resulting from (a) a subdivision or consolidation of shares or any other capital adjustment, (b) the payment of a stock dividend, or (c) other increase or decrease in the shares effected without receipt of consideration by the Company. If the Company is the surviving corporation in a merger or consolidation, any Option shall apply to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled after the merger or consolidation. If the Company is dissolved or liquidated or is not the surviving corporation to a merger or consolidation, all Options outstanding under the Plan shall terminate; provided, however, that each Participant (and each other person as determined - ------------------ under Section I) shall have the right, immediately prior to a dissolution or liquidation, or such merger or consolidation, to exercise his or her Options in whole or in part, but only to the extent that those Options are otherwise exercisable under the terms of the Plan. A change in control transaction or series of transactions which results in at least fifty-one (51) percent of the Company's shares or assets being owned by a person, firm, or corporation other than the owner before the change and during the prior six (6) month period shall be treated as a merger in which the Company is not the surviving corporation. 4 M. Amendment and Termination. The Board, by resolution, may terminate, amend, or revise the Plan for any shares as to which Options have not been granted. Neither the Board nor the Committee may, without the consent of the holder of an Option, alter or impair any Option previously granted under the Plan, except as authorized herein. Unless sooner terminated, the Plan shall remain in effect for a period of fifteen years from the date of the Plan's adoption by the Board. Termination of the Plan shall not affect any Option previously granted. N. Agreement and Representation of Employees. As a condition to the exercise of any portion of an Option the Company may require the person exercising such Option to represent and warrant at the time of such exercise that any shares of Stock acquired at exercise are being acquired only for investment and without any present intention to sell or distribute those shares, if, in the opinion of counsel for the Company, that representation is required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any governmental agency. O. Reservation of Shares of Stock. The Company, during the term of this Plan, will at all times reserve and keep available, and will seek or obtain from any regulatory body having jurisdiction any requisite authority necessary to issue and to sell, the number of shares of Stock that shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed necessary by counsel for the Company for the lawful issuance and sale of its Stock hereunder shall relieve the Company of any liability in respect of the failure to issue or sell Stock as to which the requisite authority has not been obtained. P. Effective Date of Plan. The Plan shall be effective from the date on which the Plan is approved by the Board, which date is October 20, 1992. 5 EX-10.14 6 FIRST AMERICAN BANCORP 1994 STOCK OPTION PLAN Exhibit 10.14 ------------- FIRST AMERICAN BANCORP 1994 STOCK OPTION PLAN A. PURPOSE AND SCOPE. The purposes of this Plan are to encourage stock ownership by key management employees of First American Bancorp (the "Company") and its Subsidiaries, to provide an incentive for those employees to expand and improve the profits and prosperity of the Company and its Subsidiaries, and to assist the Company and its Subsidiaries in attracting and retaining key personnel through the grant of Options to purchase shares of the Company's common stock. B. DEFINITIONS. Unless otherwise required by the context: 1. "Board" means the Board of Directors of the Company. 2. "Committee" means the Stock Option Plan Committee, which is appointed by the Board, and which shall be composed of three members of the Board. No member of the Committee shall be eligible to receive awards under the Plan while serving on the Committee, and no member of the Committee shall have been eligible to receive awards for one year prior to serving on the Committee. 3. "Company" means the First American Bancorp, an Alabama corporation. 4. "Code" means the Internal Revenue Code of 1986, as amended. 5. "Fair Market Value" shall mean the fair market value of a share of Stock as determined in good faith by the Board, using such methodology as it in its sole discretion may deem appropriate, or, if at any time the Stock is publicly traded on any exchange or in the over-the-counter market, the average of the closing bid and asked prices for the date of determination. 6. "Option" means a right to purchase Stock, granted under this Plan. 7. "Option Price" means the purchase price for Stock subject to an Option, as determined in Section G below. 8. "Participant" means an employee of the Company or of any Subsidiary of the Company to whom an Option is granted under the Plan. 9. "Plan" means this First American Bancorp 1994 Stock Option Plan. 1 10. "Stock" means the common stock of the Company, par value $0.01 per share. 11. "Subsidiary" means a subsidiary corporation of the Company, as defined in Sections 425(f) and 425(g) of the Code. 12. "Ten Percent Shareholder" means any individual who, immediately prior to the time an Option is granted pursuant to this Plan, directly or indirectly owns Stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, or of any parent or subsidiary corporation. For purposes of this Plan, an individual shall be treated as owning indirectly any Stock which is owned by such individual's brothers and sisters (whether by the whole or half blood), spouse, ancestors and lineal descendants, and stock owned directly or indirectly, by or for a corporation, partnership, trust or estate shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. Stock available for purchase pursuant to an outstanding option, however, shall not be treated as owned for purposes of this paragraph. 13. "Vested" means the nonforfeitable part of an Option awarded to a Participant. C. STOCK TO BE OPTIONED. 1. Number. Subject to the provisions of Section M of the Plan, the maximum ------ number of shares of Stock that may be optioned or sold under the Plan is 50,000 shares. Those shares may be treasury shares or authorized but unissued shares of Stock of the Company. 2. Unused Stock. In the event any shares of Stock that are subject to an ------------ Option, which, for any reason, expires, terminates or, with the consent of the Participant, is cancelled as to such shares, such Stock may again be made subject to Options awarded pursuant to the Plan. D. ADMINISTRATION. 1. Administration and Interpretation. The Plan shall be administered and --------------------------------- interpreted by the Committee. Two members of the Committee shall constitute a quorum for the transaction of business. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan and perform all acts, including the delegation of its administrative responsibilities, as it shall, from time to time, deem advisable; to construe and interpret the terms and provisions of the Plan and any Option issued under the Plan (and any notices or agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any notice of an Option or any agreement relating thereto in the manner and to the extent it shall deem necessary to carry the Plan into effect. Any decision, interpretation or other action made or taken in good faith by or at the direction of the Committee arising out of or in connection with the Plan shall be within its absolute discretion 2 and shall be final, binding and conclusive on the Company and all employees and Participants and their respective beneficiaries, heirs, executors, administrators, successors and assigns, unless otherwise determined by the Board. Neither the Board, the Committee, nor any member thereof shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith, and the members of the Committee or the Board may be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including attorney's fees) arising therefrom to the full extent permitted by law and under any directors' and officers' liability insurance that may be in effect from time to time, in all events as a majority of the Board then in office may determine from time to time, as evidenced by a written resolution thereof. In addition, no member of the Board or the Committee and no employee of the Company shall be liable for any act or failure to act hereunder, by any other member or other employee or by any agent to whom duties in connection with the administration of this Plan have been delegated or, for any act or failure to act by such member or employee, in all events except in circumstances involving such member's or employee's bad faith, gross negligence, intentional fraud or violation of a statute. 2. Awards. The Committee shall have the authority: ------ (a) to select the officers and employees to whom Options may from time to time be granted hereunder; (b) to determine the number of shares of Stock to be covered by each Option granted hereunder; (c) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Option granted hereunder (including, but not limited to, any restriction or limitation on exercise or transfer, any vesting schedule or acceleration thereof, or any forfeiture provisions or waiver thereof, regarding any Option and the shares of Stock relating thereto, based on such factors as the Committee shall determine, in its sole discretion); and (d) to modify or waive any restrictions or limitations contained in, and grant extensions to or accelerate the vesting of, any outstanding Options as long as such modifications, waivers, extensions or accelerations are consistent with the terms of this Plan; but no such changes shall impair the rights of any Participant without his or her consent. An Option under the Plan shall be evidenced by written agreement between the Company and the Participant to whom the Option is granted and no such Option shall be valid until so evidenced. 3 E. ELIGIBILITY. The Committee may grant Options to any key management employee (including an employee who is a director or an officer) of the Company or its Subsidiaries. Options may be awarded by the Committee at any time and from time to time to new Participants, or to then Participants, or to a greater or lesser number of Participants, and may include or exclude previous Participants as the Committee shall determine. Options granted at different times need not contain similar provisions. F. GRANT OF OPTIONS. Options granted under this Plan shall be of one of two types: (i) an "incentive stock option" within the meaning of Section 422 of the Code (or any successor provision) or (ii) a non-qualified stock option. The Committee shall have the authority to grant to any Participant one or more incentive stock options, non-qualified stock options, or both types of stock options (in each case with or without stock appreciation rights). No incentive stock options may be awarded after the tenth anniversary of the date this Plan is adopted by the Board. With respect to Options granted under this Plan, if the Fair Market Value (determined at the date of grant) of Stock with respect to which incentive stock options may become exercisable for the first time in any calendar year by any Participant is greater than $100,000, then any such stock options in excess of such amount, if any, shall constitute non-qualified stock options and shall not be incentive stock options. G. OPTION PRICE. The exercise price per share of Stock purchasable under an Option shall be determined by the Board at the time of grant, provided that no incentive stock option shall have an exercise price less than 100% of the Fair Market Value of the Stock on the date such stock option is granted, and, provided further, that no incentive stock option which is granted to a Ten Percent Shareholder shall have an exercise price that is less than 110% of the Fair Market Value of the Stock on the date such incentive stock option is granted. H. TERMS AND CONDITIONS OF OPTIONS. Options granted under the Plan shall be authorized by the Committee and shall be evidenced by agreement in the form as the Committee approves. Those agreements shall comply with and be subject to the following terms and conditions: 1. Employment Agreement. The Board may, in its discretion, include in any -------------------- Option granted under the Plan a condition that the Participant shall agree to remain in the employ of, and to render services to, the Company or any of its Subsidiaries for a period of time (specified in the agreement) following the date the Option is granted. No such agreement shall impose upon the Company or any of its Subsidiaries, however, any obligation to employ the Participant for any period of time. 4 2. Time and Method of Payment. An Option may be exercised (i) by giving -------------------------- written notice to the Company specifying the number of whole shares of Stock to be purchased with the purchase price therefor to be payable in full either (A) in cash, (B) in previously owned whole shares of Stock (for which the holder of the Option has good title free and clear of all liens and encumbrances) with their Fair Market Value determined as of the date of exercise, (C) with respect to non-qualified stock options, by authorizing the Company to retain whole shares of Stock which would otherwise be issuable upon exercise of the Option with their Fair Market Value determined as of the date of exercise, or (D) a combination of (A), (B) and (C), in each case to the extent determined by the Board, and (ii) by executing such documents as the Company may reasonably request. No shares of Stock shall be issued until the full purchase price has been paid. 3. Number of Shares. Each Option shall state the total number of shares of ---------------- Stock subject to the Option. 4. Option Period and Limitations on Exercise of Options. The Board may, in ---------------------------------------------------- its discretion, provide that an Option may not be exercised in whole or in part for any period or periods of time specified in the Option agreement. Except as provided in the Option agreement, an Option may be exercised in whole or in part at any time during its term. No Option may be exercised after the expiration of ten (10) years from the date it is granted, and no Option designated as an incentive stock option which is granted to a Ten Percent Shareholder shall be exercisable more than five (5) years after the date the option is granted. No Option may be exercised for a fractional share of Stock. I. TERMINATION OF EMPLOYMENT. Except as provided in Section J below (concerning the effect of a Participant's death) or except as provided in a vesting schedule set forth in a stock option agreement with a designated Participant, if a Participant ceases to be employed by the Company or any of its Subsidiaries, his or her Options shall terminate immediately; provided, however, that if a Participant's cessation of -------- ------- employment with the Company and its Subsidiaries is due to his or her retirement with the consent of the Company or any of its Subsidiaries, the Participant may, at any time within three months after such cessation of employment, exercise his or her Options to the extent that he or she was entitled to exercise them on the date of cessation of employment, but in no event shall any Option be exercisable for more than ten (10) years from the date it was granted. Except as provided in the stock option agreement with a designated Participant, the Committee may cancel an Option during the three month period referred to in this paragraph, if the Participant engages in employment or other activities which are contrary, in the opinion of the Committee, to the best interests of the Company or any of its Subsidiaries. The Committee shall determine in each case whether a termination of employment shall be considered a retirement with the consent of the Company or a Subsidiary, and, subject to applicable law, whether a leave of absence shall constitute a termination of employment. Any such determination of the Committee shall be final and conclusive, unless overruled by the Board. 5 J. RIGHTS IN EVENT OF DEATH. If a Participant dies while employed by the Company or any of its Subsidiaries, or within three months after having retired with the consent of the Company or any of its Subsidiaries, and without having fully exercised his or her Options, the executors or administrators, or legatees or heirs, of his or her estate shall have the right to exercise such Options to the extent that such deceased Participant was entitled to exercise the Options on the date of his or her death; provided, however, that in no event shall the Options be exercisable ------------------ more than ten (10) years from the date they were granted. K. NO OBLIGATIONS TO EXERCISE OPTION. The grant of an Option shall impose no obligation on the Participant to exercise that Option. L. NONASSIGNABILITY. Options shall not be transferable other than by will or by the laws of descent and distribution, and during a Participant's lifetime shall be exercisable only by the Participant. All Options may be exercised or settled during the Participant's lifetime, only by the Participant or his or her guardian, conservator or other legal representative. Options or other benefits payable under this Plan shall not in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such benefit, nor shall it be subject to attachment or legal process for or against such person. M. EFFECT OF CHANGE IN STOCK SUBJECT TO THE PLAN. The aggregate number of shares of Stock available for Options under the Plan, the shares subject to any Option, and the price per share shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subsequent to the effective date of the Plan resulting from (1) a subdivision or consolidation of shares or any other capital adjustment, (2) the payment of a stock dividend, or (3) other increase or decrease in the shares effected without receipt of consideration by the Company. If the Company is the surviving corporation in a merger or consolidation, any Option shall apply to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled after the merger or consolidation. If the Company is dissolved or liquidated or is not the surviving corporation to a merger or consolidation, all Options outstanding under the Plan shall terminate; provided, however, that each Participant (and each other person as determined - ------------------ under Section J) shall have the right, immediately prior to a dissolution or liquidation, or such merger or consolidation, to exercise his or her Options in whole or in part, but only to the extent that those Options are otherwise exercisable under the terms of the Plan. A change in control transaction or series of being owned by a person, firm, or corporation other than the owner before the change and during the prior six (6) month period shall be treated as a merger in which the Company is not the surviving corporation. 6 N. AMENDMENT AND TERMINATION. The Board, by resolution, may terminate, amend, or revise the Plan for any shares as to which Options have not been granted. Neither the Board nor the Committee may, without the consent of the holder of an Option, alter or impair any Option previously granted under the Plan, except as authorized herein. Unless sooner terminated, the Plan shall remain in effect for a period of ten (10) years from the date of the Plan's adoption by the Board. Termination of the Plan shall not affect any Option previously granted. O. AGREEMENT AND REPRESENTATION OF EMPLOYEES. As a condition to the exercise of any portion of an Option, the Company may require the person exercising such Option to represent and warrant at the time of such exercise that any shares of Stock acquired at exercise are being acquired only for investment and without any present intention to sell or distribute those shares, if, in the opinion of counsel for the Company, that representation is required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any governmental agency. P. RESERVATION OF SHARES OF STOCK. The Company, during the term of this Plan, will at all times reserve and keep available, and will seek or obtain from any regulatory body having jurisdiction any requisite authority necessary to issue and to sell, the number of shares of Stock that shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed necessary by counsel for the Company for the lawful issuance and sale of its Stock hereunder shall relieve the Company of any liability in respect of the failure to issue or sell Stock as to which the requisite authority has not been obtained. Q. GENERAL PROVISIONS. 1. Unfunded Status of Plan. This Plan is intended to be unfunded. With ----------------------- respect to any payments as to which a Participant has a fixed and vested interest but which are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. 2. No Right to Employment. Neither this Plan nor the grant of any Option ---------------------- hereunder shall give any Participant or other employee any right with respect to continuance of employment by the Company or any Subsidiary, nor shall they be a limitation in any way on the right of the Company or any Subsidiary by which an employee is employed to terminate his or her employment at any time. 3. Use of Proceeds. The proceeds received by the Company from the sale of --------------- Stock pursuant to the sale or exercise of Options under the Plan shall be added to the Company's general funds and used for general corporate purposes. 7 4. Other Plans. In no event shall the value of, or income arising from, any ----------- Options under this Plan be treated as compensation for purposes of any pension, profit sharing, life insurance, disability or any other retirement or welfare benefit plan now maintained or hereafter adopted by the Company or any Subsidiary, unless such plan specifically provides to the contrary. 5. No Restriction on Right of Company to Effect Corporate Changes. Nothing -------------------------------------------------------------- in the Plan shall affect the right or power of the Company or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Stock or the rights thereof or which are convertible into or exchangeable for Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 6. Withholding of Taxes. As a condition to the granting of any Option, the -------------------- vesting of any Option or the lapse of any restrictions pertaining thereto, the Company may, in the discretion of the Board, require the Participant to pay such sum to the Company as may be necessary to discharge the Company's obligations with respect to any taxes, assessments or other governmental charges imposed on property or income received by a Participant pursuant to the Plan. In the discretion of the Board, such payment may be in the form of cash or other property. In the discretion of the Board, the Company may (i) make available for delivery a lesser number of shares, in satisfaction of such taxes, assessments or other governmental charges, (ii) deduct or withhold from any payment or distribution to a Participant whether or not pursuant to the Plan, or (iii) offer loans to Participants to satisfy withholding requirements on such terms as the Board may determine. 7. Shareholder Rights. A Participant shall have no rights as a shareholder ------------------ with respect to any shares issued or issuable with respect to an Option until a certificate or certificates evidencing such shares shall have been issued to or for the benefit of such Participant, and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Participant shall become the holder of record thereof. 8. Governing Law. This Plan and actions taken in connection herewith shall ------------- be governed and construed in accordance with the laws of the State of Alabama (without regard to applicable Alabama principles of conflict of laws). 8 EX-10.15 7 NON-QUALIFIED STOCK OPTION AGREEMENT Exhibit 10.15 ------------- FIRST AMERICAN BANCORP NON-QUALIFIED STOCK OPTION AGREEMENT This Agreement is made between First American Bancorp (the "Company") and Dan M. David (the "Optionee"). W I T N E S S E T H: 1. GRANT OF OPTION. The Company hereby grants to the Optionee, subject to the terms and conditions set forth in this Agreement, the right and option (the "Option") to purchase from the Company all or any part of an aggregate of 20,000 shares of common stock ($.01 par value) of the Company (the "Stock") at the purchase price of $14.00 per share. The Option shall not be treated as an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended. 2. TERMS AND CONDITIONS. It is understood and agreed that the Option evidenced hereby is subject to the following terms and conditions: (a) Expiration Date. The Option shall expire ten (10) years after the --------------- effective date hereof (the "Expiration Date"). After the Expiration Date, the parties shall have no further rights or obligations hereunder. (b) Exercise of Option. Subject to the terms and conditions of this ------------------ Agreement regarding the exercisability of the Option, the Option may be exercised in whole or in part in accordance with the following vesting schedule:
The Option shall be Exercisable With Respect On or After to the Following Cumulative This Date Number of Shares ------------ --------------------------- March 7, 1997 2,000 March 7, 1998 2,000 March 7, 1999 2,000 March 7, 2000 2,000 March 7, 2001 2,000 March 7, 2002 2,000 March 7, 2003 2,000 March 7, 2004 2,000 March 7, 2005 2,000 March 7, 2006 2,000
1 Any exercise shall be accompanied by a written notice to the Company specifying the number of shares purchased. Notation of any partial exercise shall be made by the Company on Schedule 1 hereto. (c) Payment of Purchase Price Upon Exercise. At the time of any --------------------------------------- exercise, the purchase price of the shares as to which the Option shall be exercised shall be paid in full to the Company in cash. (d) Termination of Employment. Except as provided in Section 2(f) ------------------------- below (concerning the effect of Optionee's death), if Optionee ceases to be employed by the Company or any of its subsidiaries as defined in Section 424(f) or Section 424(g) of the Internal Revenue Code of 1986, as amended (the "Subsidiaries"), the Option shall terminate immediately; provided, however, that if Optionee's cessation of employment with the Company and its Subsidiaries is due to his retirement with the consent of the Company or any of its Subsidiaries, the Optionee may, at any time within three months after such cessation of employment, exercise the Option to the extent that he was entitled to exercise the Option on the date of cessation of employment, but in no event shall the Option be exercisable for more than ten (10) years from the effective date hereof. Except as otherwise provided in this Agreement, the Board of Directors or the Committee may cancel the Option during the three month period referred to in this paragraph, if the Optionee engages in employment or other activities which are contrary, in the opinion of the Board or the Committee, to the best interests of the Company or any of its Subsidiaries. The Board or the Committee shall determine in each case whether a termination of employment shall be considered a retirement with the consent of the Company or a Subsidiary, and, subject to applicable law, whether a leave of absence shall constitute a termination of employment. Any such determination of the Board or the Committee shall be final and conclusive. (e) Exercise Upon Death. If the Optionee dies while employed by the ------------------- Company or any of its Subsidiaries, or within three months after having retired with the consent of the Company or any of its Subsidiaries, and without having fully exercised the Option, the executors or administrators, or legatees or heirs, of his estate shall have the right to exercise the Option to the extent that such deceased Optionee was entitled to exercise the Option on the date of his death; provided, however, that in no event shall the Option be exercisable more than ten (10) years from the effective date hereof. (f) Non-Transferability. The Option shall not be transferable other ------------------- than by will or by the laws of descent and distribution. During the lifetime of Optionee, the Option shall be exercisable only by the Optionee or Optionee's guardian or authorized representative. (g) No Rights as Shareholder. Optionee shall have no rights as a ------------------------ shareholder with respect to any shares of Stock subject to the Option prior to the date of issuance to him of a certificate or certificates for such shares. 2 (h) No Right to Continued Employment. The Option shall not confer -------------------------------- upon Optionee any right with respect to continuance of employment with the Company or any subsidiary or affiliate thereof, nor shall it interfere in any way with the right of Optionee's employer to terminate Optionee's employment at any time. (i) Compliance with Laws and Regulations. The Option and the ------------------------------------ obligation of the Company to sell and deliver shares hereunder shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. Moreover, the Option may not be exercised if such exercise, or the receipt of shares of Stock pursuant thereto, would be contrary to applicable law. By accepting this Option, the Optionee represents and agrees for himself or herself and his or her transferees by will or the laws of descent and distribution that, unless a registration statement under the Securities Act of 1933 is in effect as to shares purchased upon any exercise of this Option, (i) any and all shares so purchased shall be acquired for his or her personal account and not with a view to or for sale in connection with any distribution, and (ii) each notice of the exercise of any portion of this Option shall be accompanied by a representation and warranty in writing, signed by the person entitled to exercise the same, that the shares are being so acquired in good faith for his personal account and not with a view to or for sale in connection with any distribution. 3. STOCK CERTIFICATES. Each certificate for shares of Stock issued upon exercise of this Option will bear an appropriate legend with respect to the restrictions on transfer, sale or pledge of such Stock and will require, among other things, before any transfer of shares is permitted by the Company that the Company receive an opinion of counsel, in form and from counsel satisfactory to the Company and its counsel, to the effect that such transfer, sale or pledge has been registered under all applicable federal and state securities laws or that an exemption therefrom is available with respect to such proposed transfer, sale or pledge. 4. CHANGE IN STOCK. The aggregate number of shares subject to the Option, and the price per share shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subsequent to the effective date of this Agreement resulting from (1) a subdivision or consolidation of shares or any other capital adjustment, (2) the payment of a stock dividend, or (3) other increase or decrease in the shares effected without receipt of consideration by the Company. 5. MERGER OF CHANGE IN CONTROL. If there is a merger or a change in control transaction or series of transactions, then the shares subject to the Option which are not vested, as set forth in Section 2(b) above, shall become vested and may be exercised; provided, however, in no event shall an Option be exercised more than ten (10) years from the date it was granted. For the purposes of this Agreement, "change in control" shall mean the acquisition of the power to direct, or cause the direction of, the management and policies of the Company by any person or entity or any group thereof not previously possessing such power, acting alone or in conjunction with others, whether through the ownership of Stock, by contract or otherwise. 3 6. PAYMENT OF TAXES. Optionee shall, no later than the date as of which the value of any portion of the Option first becomes includable in the Optionee's gross income for federal income tax purposes, pay to the Company, or make other arrangements satisfactory to the Board regarding payment of, any federal, state, local or FICA taxes of any kind required by law to be withheld with respect to the Option. The obligations of the Company under the Option shall be conditioned on such payment or arrangements, and the Company, where applicable, and its subsidiaries and affiliates shall, to the extent permitted by law, have the right to deduct such taxes from the payment of any kind otherwise due to the Optionee. 7. NOTICES. Any notice hereunder to the Company shall be in writing and addressed to the President of the Company, 251 Johnston Street, S.E., Decatur, Alabama 35601, subject to the right of the Company to designate at any time hereafter in writing some other address. 8. COUNTERPARTS. This Agreement has been executed in two counterparts each of which shall constitute one and the same instrument. 9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Alabama (without regard to applicable Alabama principles of conflicts of laws). 10. EFFECTIVE DATE. The Option is granted effective as of March 7,1997. FIRST AMERICAN BANCORP By:/s/ Jon H. Moores ----------------- Jon H. Moores Its: Secretary OPTIONEE /s/ Dan M. David ---------------- Dan M. David 4 SCHEDULE 1 NOTATIONS AS TO PARTIAL EXERCISE
Number of Balance Date of Purchased of Shares Authorized Notation Exercise Shares on Option Signature Date - ----------- ----------- --------- ---------- --------
5 EX-21 8 SUBSIDIARIES OF ANB Exhibit 21 ---------- SUBSIDIARIES OF ANB Name of Subsidiary State of Organization National Bank of Commerce of Birmingham....... National Bank NBC Securities, Inc...................... Alabama Bank of Dadeville............................. Alabama Ashland Insurance, Inc................... Alabama Alabama Exchange Bank......................... Alabama Tuskegee Loan Company, Inc............... Alabama First Gulf Bank............................... Alabama First Citizens Bank, National Association..... National Bank Clay County Finance Company, Inc......... Alabama First American Bank........................... Alabama Corporate Billing, Inc................... Alabama First Allegiance Mortgage, Inc........... Alabama Citizens and Peoples Bank, N.A................ National Bank EX-23.1 9 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 ------------ Consent of Ernst & Young LLP We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-07951) pertaining to the Alabama National BanCorporation 1994 Stock Option Plan and in the Registration Statement (Form S-8 No. 333-27285) pertaining to the Alabama National BanCorporation Employee Capital Accumulation Plan of our report dated February 29, 1996, with respect to the 1995 consolidated financial statements of Alabama National BanCorporation (not presented separately in the 1997 Annual Report on Form 10-K) which report is included in Alabama National BanCorporation's Annual Report (Form 10-K) for the year ended December 31, 1997, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Birmingham, Alabama March 27, 1998 EX-23.2 10 CONSENT OF COOPERS & LYBRAND Exhibit 23.2 ------------ Consent of Certified Public Accountants We consent to the incorporation by reference in the registration statement of Alabama National BanCorporation ("ANB") on form S-8 (File No. 333-07951) and in the registration statement of ANB on Form S-8 (File No. 333-27285) of our report dated January 15, 1998, on our audits of ANB as of December 31, 1997 and 1996, and for the years then ended, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Birmingham, Alabama March 27, 1998 EX-27 11 FDS
9 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 42,438 2,391 50,009 399 157,094 56,519 56,997 842,790 12,829 1,274,166 928,970 27,750 59,046 14,587 0 0 8,648 89,285 1,274,166 75,117 12,429 2,842 90,388 35,341 42,840 47,548 2,988 (8) 45,461 17,138 17,138 0 0 11,668 1.31 1.31 8.72 4,174 0 1,052 17,900 11,011 2,749 1,579 12,829 12,829 0 12,829
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