Form 10-Q, for the quarter ended September 30, 2004
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT

PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTER ENDED SEPTEMBER 30, 2004

 

0-25160

(Commission File No.)

 


 

ALABAMA NATIONAL BANCORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware   63-1114426
(State of incorporation)   (IRS employer identification number)
1927 First Avenue North, Birmingham, Alabama   35203-4009
(Address of principal executive offices)   (Zip Code)

 

205-583-3600

(Registrant’s Telephone Number)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

 

The registrant has 16,981,496 shares of common stock, par value $1.00 per share, outstanding at November 8, 2004.

 



Table of Contents

INDEX

 

ALABAMA NATIONAL BANCORPORATION

 

          PAGE

PART I. FINANCIAL INFORMATION     

Item 1.

   Financial Statements (Unaudited)     
     Consolidated Statements of Financial Condition at September 30, 2004 and December 31, 2003    3
     Consolidated Statements of Income
For The Three Months Ended September 30, 2004 and 2003;
For The Nine Months Ended September 30, 2004 and 2003
   4
     Consolidated Statements of Comprehensive Income
For The Three Months Ended September 30, 2004 and 2003;
For The Nine Months Ended September 30, 2004 and 2003
   8
     Consolidated Condensed Statements of Cash Flows For
The Nine Months Ended September 30, 2004 and 2003
   10
     Notes to the Unaudited Consolidated Financial Statements    11

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    16

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    28

Item 4.

   Controls and Procedures    28

PART II. OTHER INFORMATION

Item 6.

   Exhibits    28

SIGNATURES

   29

 

FORWARD-LOOKING INFORMATION

 

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, Alabama National BanCorporation (“Alabama National”), through its senior management, from time to time makes forward-looking public statements concerning its expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting Alabama National’s best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in Alabama National’s Securities and Exchange Commission filings and other public announcements, including the factors described in Alabama National’s Annual Report on Form 10-K for the year ended December 31, 2003. With respect to the adequacy of the allowance for loan and lease losses for Alabama National, these factors include the rate of growth in the economy, especially in the Southeast, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and the performance of the stock and bond markets. The forward-looking statements contained in this Quarterly Report speak only as of the date of this report, and Alabama National undertakes no obligation to revise these statements following the date of this Quarterly Report on Form 10-Q.

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Financial Statements (Unaudited)

Alabama National BanCorporation and Subsidiaries

Consolidated Statements of Financial Condition

(In thousands, except share amounts)

 

     September 30, 2004

    December 31, 2003

 

Assets

                

Cash and due from banks

   $ 144,110     $ 123,086  

Interest-bearing deposits in other banks

     16,313       10,019  

Federal funds sold and securities purchased under resell agreements

     39,844       16,534  

Trading securities, at fair value

     494       109  

Investment securities (fair values of $533,526 and $271,536)

     533,492       271,035  

Securities available for sale, at fair value

     637,301       539,192  

Loans held for sale

     22,634       16,415  

Loans and leases

     3,403,695       2,662,358  

Unearned income

     (3,398 )     (2,918 )
    


 


Loans and leases, net of unearned income

     3,400,297       2,659,440  

Allowance for loan and lease losses

     (45,903 )     (36,562 )
    


 


Net loans and leases

     3,354,394       2,622,878  

Property, equipment and leasehold improvements, net

     94,792       77,291  

Goodwill

     145,169       30,964  

Other intangible assets, net

     12,139       4,623  

Cash surrender value of life insurance

     63,898       59,425  

Receivable from investment division customers

     34,394       12,966  

Other assets

     45,132       35,575  
    


 


Total assets

   $ 5,144,106     $ 3,820,112  
    


 


Liabilities and Stockholders’ Equity

                

Deposits:

                

Noninterest bearing

   $ 599,117     $ 404,755  

Interest bearing

     3,035,607       2,348,994  
    


 


Total deposits

     3,634,724       2,753,749  

Federal funds purchased and securities sold under repurchase agreements

     460,493       358,393  

Treasury, tax and loan accounts

     895       1,431  

Accrued expenses and other liabilities

     49,279       41,577  

Payable for securities purchased for investment division customers

     33,692       11,967  

Short-term borrowings

     40,000       41,150  

Long-term debt

     403,792       332,427  
    


 


Total liabilities

     4,622,875       3,540,694  

Commitments and contingencies (Note B)

                

Common stock, $1 par; 27,500,000 shares authorized; 16,975,772 and 12,838,844 shares issued at September 30, 2004 and December 31, 2003, respectively

     16,976       12,839  

Additional paid-in capital

     340,400       126,370  

Retained earnings

     163,690       140,028  

Accumulated other comprehensive income, net of tax

     165       181  
    


 


Total stockholders’ equity

     521,231       279,418  
    


 


Total liabilities and stockholders’ equity

   $ 5,144,106     $ 3,820,112  
    


 


 

See accompanying notes to unaudited consolidated financial statements.

 

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Alabama National BanCorporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(In thousands, except per share data)

 

     For the three months
ended September 30,


     2004

    2003

Interest income:

              

Interest and fees on loans and leases

   $ 48,320     $ 37,578

Interest on securities

     11,981       7,428

Interest on deposits in other banks

     18       26

Interest on trading securities

     9       27

Interest on federal funds sold and securities purchased under resell agreements

     244       198
    


 

Total interest income

     60,572       45,257

Interest expense:

              

Interest on deposits

     11,924       10,355

Interest on federal funds purchased and securities sold under repurchase agreements

     1,394       815

Interest on short-term borrowings

     186       315

Interest on long-term debt

     3,454       2,674
    


 

Total interest expense

     16,958       14,159
    


 

Net interest income

     43,614       31,098

Provision for loan and lease losses

     1,624       1,396
    


 

Net interest income after provision for loan and lease losses

     41,990       29,702

Noninterest income:

              

Securities gains

     —         4

Gain (loss) on disposition of assets

     (68 )     914

Service charges on deposit accounts

     4,537       3,623

Investment services income

     2,685       4,555

Securities brokerage and trust income

     4,056       3,995

Gain on sale of mortgages

     2,852       5,478

Bank owned life insurance

     637       684

Insurance commissions

     833       797

Other

     3,034       1,822
    


 

Total noninterest income

     18,566       21,872

 

See accompanying notes to unaudited consolidated financial statements.

 

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Alabama National BanCorporation and Subsidiaries

Consolidated Statements of Income (Unaudited) (Continued)

(In thousands, except per share data)

 

    

For the three months

ended September 30,


     2004

   2003

Noninterest expense:

             

Salaries and employee benefits

     19,630      16,874

Commission based compensation

     4,357      6,062

Occupancy and equipment expenses

     4,085      3,326

Amortization of intangibles

     858      285

Other

     9,278      9,078
    

  

Total noninterest expense

     38,208      35,625
    

  

Income before provision for income taxes

     22,348      15,949

Provision for income taxes

     7,642      5,368
    

  

Net income

   $ 14,706    $ 10,581
    

  

Weighted average common shares outstanding:

             

Basic

     16,765      12,935
    

  

Diluted

     17,013      13,161
    

  

Earnings per common share:

             

Basic

   $ 0.88    $ 0.82
    

  

Diluted

   $ 0.86    $ 0.80
    

  

Cash dividends per common share

   $ 0.3125    $ 0.285
    

  

 

See accompanying notes to unaudited consolidated financial statements.

 

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Alabama National BanCorporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

(In thousands, except per share data)

 

     For the nine months
ended September 30,


     2004

    2003

Interest income:

              

Interest and fees on loans and leases

   $ 132,632     $ 108,041

Interest on securities

     31,833       23,878

Interest on deposits in other banks

     46       86

Interest on trading securities

     44       76

Interest on federal funds sold and securities purchased under resell agreements

     544       531
    


 

Total interest income

     165,099       132,612

Interest expense:

              

Interest on deposits

     33,403       32,495

Interest on federal funds purchased and securities sold under repurchase agreements

     3,354       2,435

Interest on short-term borrowings

     765       1,313

Interest on long-term debt

     9,659       7,911
    


 

Total interest expense

     47,181       44,154
    


 

Net interest income

     117,918       88,458

Provision for loan and lease losses

     4,130       3,911
    


 

Net interest income after provision for loan and lease losses

     113,788       84,547

Noninterest income:

              

Securities gains

     —         43

Gain (loss) on disposition of assets

     (31 )     881

Service charges on deposit accounts

     12,868       10,436

Investment services income

     9,865       16,087

Securities brokerage and trust income

     12,352       12,018

Gain on sale of mortgages

     8,885       13,427

Bank owned life insurance

     2,047       2,052

Insurance commissions

     2,570       2,435

Other

     6,938       4,774
    


 

Total noninterest income

     55,494       62,153

 

See accompanying notes to unaudited consolidated financial statements.

 

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Alabama National BanCorporation and Subsidiaries

Consolidated Statements of Income (Unaudited) (Continued)

(In thousands, except per share data)

 

     For the nine months
ended September 30,


     2004

   2003

Noninterest expense:

             

Salaries and employee benefits

     56,301      48,732

Commission based compensation

     13,906      18,285

Occupancy and equipment expenses

     11,450      9,696

Amortization of intangibles

     2,182      762

Other

     26,152      23,978
    

  

Total noninterest expense

     109,991      101,453
    

  

Income before provision for income taxes

     59,291      45,247

Provision for income taxes

     20,034      14,977
    

  

Net income

   $ 39,257    $ 30,270
    

  

Weighted average common shares outstanding:

             

Basic

     15,427      12,678
    

  

Diluted

     15,680      12,875
    

  

Earnings per common share:

             

Basic

   $ 2.54    $ 2.39
    

  

Diluted

   $ 2.50    $ 2.35
    

  

Cash dividends per common share

   $ 0.9375    $ 0.855
    

  

 

See accompanying notes to unaudited consolidated financial statements.

 

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Alabama National BanCorporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

     For the three months
ended September 30,


 
     2004

   2003

 

Net income

   $ 14,706    $ 10,581  

Other comprehensive income (loss):

               

Unrealized gains (losses) on securities available for sale arising during the period

     11,972      (6,572 )

Less: Reclassification adjustment for net gains included in net income

     —        4  
    

  


Other comprehensive income (loss), before tax

     11,972      (6,576 )

Provision for (benefit of) income taxes related to items of other comprehensive income (loss)

     4,237      (2,303 )
    

  


Other comprehensive income (loss)

     7,735      (4,273 )
    

  


Comprehensive income

   $ 22,441    $ 6,308  
    

  


 

See accompanying notes to unaudited consolidated financial statements.

 

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Alabama National BanCorporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

     For the nine months
ended September 30,


 
     2004

    2003

 

Net income

   $ 39,257     $ 30,270  

Other comprehensive (loss):

                

Unrealized (losses) on securities available for sale arising during the period

     (13 )     (3,389 )

Less: Reclassification adjustment for net gains included in net income

     —         43  
    


 


Other comprehensive (loss), before tax

     (13 )     (3,432 )

Provision for (benefit of) income taxes related to items of other comprehensive (loss)

     3       (1,182 )
    


 


Other comprehensive income (loss)

     (16 )     (2,250 )
    


 


Comprehensive income

   $ 39,241     $ 28,020  
    


 


 

See accompanying notes to unaudited consolidated financial statements.

 

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Alabama National BanCorporation and Subsidiaries

Consolidated Condensed Statements of Cash Flows (Unaudited)

(In thousands)

 

     For the nine months ended
September 30,


 
     2004

    2003

 

Net cash flows provided by operating activities

   $ 46,915     $ 52,345  

Cash flows from investing activities:

                

Proceeds from calls and maturities of investment securities

     93,114       264,830  

Purchases of investment securities

     (330,101 )     (205,133 )

Purchases of securities available for sale

     (412,988 )     (832,232 )

Proceeds from sale of securities available for sale

     6,233       47,504  

Proceeds from calls and maturities of securities available for sale

     562,524       622,027  

Net increase in interest bearing deposits in other banks

     (6,294 )     (11,850 )

Net (increase) decrease in federal funds sold and securities purchased under resell agreements

     (21,734 )     55,267  

Net increase in loans and leases

     (290,446 )     (292,259 )

Purchase acquisitions, net of cash acquired

     35,166       (2,952 )

Purchases of property, equipment and leasehold improvements

     (10,151 )     (5,325 )

Proceeds from liquidation of assets

     —         799  

Proceeds from sale of other real estate owned and fixed assets

     1,336       5,044  
    


 


Net cash used in investing activities

     (373,341 )     (354,280 )
    


 


Cash flows from financing activities:

                

Net increase in deposits

     229,199       330,714  

Net increase in federal funds purchased and securities sold under agreements to repurchase

     59,252       39,995  

Net decrease in short-term borrowings and capital leases

     (1,992 )     (90,898 )

Proceeds from long-term debt

     24,000       82,000  

Repayment of long-term debt

     —         (7,000 )

Purchase of treasury stock

     —         (900 )

Penalty on long-term debt repayment

     —         (822 )

Dividends on common stock

     (14,922 )     (10,712 )

Proceeds from the sale of common stock

     49,682       —    

Other

     2,231       448  
    


 


Net cash provided by financing activities

     347,450       342,825  
    


 


Increase in cash and cash equivalents

     21,024       40,890  

Cash and cash equivalents, beginning of period

     123,086       99,561  
    


 


Cash and cash equivalents, end of period

   $ 144,110     $ 140,451  
    


 


Supplemental schedule of noncash investing and financing activities

                

Acquisition of collateral in satisfaction of loans

   $ 2,275     $ 4,891  
    


 


Adjustment to market value of securities available for sale, net of deferred income taxes

   $ (16 )   $ (2,250 )
    


 


Assets acquired in business combinations net of cash received

   $ 875,686     $ 122,727  
    


 


Liabilities assumed in business combinations

   $ 748,354     $ 99,956  
    


 


 

Additionally, in connection with the consummation of the Company’s three acquisitions during the nine months ended September 30, 2004, the Company issued a total of 3,016,073 shares of common stock with an aggregate fair value of approximately $162.5 million. Further, during the nine months ended September 30, 2003, the Company issued 395,244 shares of common stock having a market value of approximately $19.8 million in connection with the Company’s acquisition of Millennium Bank.

 

See accompanying notes to unaudited consolidated financial statements.

 

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ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A - BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2004 are subject to year-end audit and are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2004. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Alabama National’s Form 10-K for the year ended December 31, 2003.

 

NOTE B - COMMITMENTS AND CONTINGENCIES

 

Alabama National’s subsidiary banks make loan commitments and incur contingent liabilities in the normal course of business, which are not reflected in the consolidated statements of condition. As of September 30, 2004, the total unfunded commitments which are not reflected in the consolidated statements of condition totaled $983.0 million. A majority of these commitments will expire in less than one year.

 

Alabama National, in the normal course of business, is subject to various pending and threatened litigation. Although it is not possible to determine with certainty Alabama National’s potential exposure from pending and threatened litigation, based on current knowledge and advice of legal counsel, management does not anticipate that the ultimate liability, if any, resulting from such litigation will have a material adverse effect on Alabama National’s financial condition or results of operations.

 

NOTE C - RECENTLY ISSUED PRONOUNCEMENTS

 

In December 2003, the FASB issued a revision to Statement No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (Statement 132). Statement 132 requires enhanced disclosures for defined benefit pension plans. Statement 132 requires companies to provide more details about their plan assets, investment strategy, measurement dates, benefit obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. The disclosures required by Statement 132 are effective for financial statements with fiscal years ending after December 15, 2003, except for disclosures regarding estimated future benefit payments. Disclosures regarding estimated future benefit payments will be required for fiscal years ending after June 15, 2004. The interim-period disclosures required by this statement are effective for interim periods beginning after December 15, 2003. See Note H “Defined Benefit Pension Plan” in the Notes to the Unaudited Consolidated Financial Statements for the disclosures required by this statement. As Statement 132 relates to changes in disclosures, its adoption did not have an impact on Alabama National’s financial condition or results of operations.

 

In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, “Accounting for Certain Loans and Debt Securities Acquired in a Transfer” (SOP 03-3). SOP 03-3 addresses accounting for differences between contractual cash flows expected to be collected and an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3’s application includes loans and debt securities acquired in purchase business combinations. SOP 03-3 limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. SOP 03-3 requires that the excess of contractual cash flows over cash flows to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance. SOP 03-3 prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment. SOP 03-3

 

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prohibits “carrying over” or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of SOP 03-3. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. Alabama National does not anticipate that the adoption of SOP 03-3 will have a material impact on its financial condition or results of operations.

 

On March 9, 2004, the SEC issued Staff Accounting Bulletin 105, “Application of Accounting Principles to Loan Commitments,” (SAB 105) to inform registrants of the Staff’s view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The Staff will not object to the application of existing accounting practices to loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. On April 1, 2004, Alabama National adopted the provisions of SAB 105. Alabama National records the value of its mortgage loan commitments at fair market value for mortgages it intends to sell. Alabama National does not currently include, and was not previously including, the value of mortgage servicing or any other internally-developed intangible assets in the valuation of its mortgage loan commitments. Therefore, the adoption of SAB 105 did not have an impact on Alabama National’s financial condition or results of operations.

 

In March 2004, the Emerging Issues Task Force reached a consensus on Issue 03-1, “Meaning of Other Than Temporary Impairment” (Issue 03-1). The Task Force reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired is as follows: Step 1: Determine whether the investment is impaired. An investment is impaired if its fair value is less than its cost. Step 2: Evaluate whether the impairment is other-than-temporary. Step 3: If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair value. The guidance in Issue 03-1 was intended to be effective for reporting periods beginning after June 15, 2004. However, in September 2004, the FASB issued FSP EITF 03-1-1, which deferred the effective date for the measurement and recognition provisions of Issue 03-1 until further implementation guidance could be established. Alabama National does not anticipate that the adoption of Issue 03-1 will have a material impact on its financial condition or results of operations.

 

Management evaluates securities for other-than-temporary impairment no less frequently than quarterly, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of Alabama National to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

 

As of September 30, 2004, Alabama National has securities with gross unrealized losses totaling $7.2 million. The losses for all securities are a direct result of rising interest rates and the effect that rising interest rates has on the value of debt securities and not the credit worthiness of the issuers. In addition, Alabama National has the ability and intent to hold these securities for a period of time sufficient to allow for a recovery in fair value. Therefore, Alabama National has not recognized any other-than-temporary impairments.

 

NOTE D - EARNINGS PER SHARE

 

The following table reflects the reconciliation of the numerator and denominator of the basic earnings per share computation to the diluted earnings per share computation for the three months and nine months ended September 30, 2004 and 2003.

 

     For the three months
ended September 30,


   For the nine months
ended September 30,


     2004

   2003

   2004

   2003

     (In thousands, except per share data)

Basic Earnings Per Share:

                           

Net income available to common shareholders

   $ 14,706    $ 10,581    $ 39,257    $ 30,270

Weighted average basic common shares outstanding

     16,765      12,935      15,427      12,678
    

  

  

  

Basic Earnings Per Share

   $ 0.88    $ 0.82    $ 2.54    $ 2.39
    

  

  

  

Diluted Earnings Per Share:

                           

Net income available to common shareholders

   $ 14,706    $ 10,581    $ 39,257    $ 30,270

Weighted average common shares outstanding

     16,765      12,935      15,427      12,678

Effect of dilutive securities

     248      226      253      197
    

  

  

  

Weighted average diluted common shares outstanding

     17,013      13,161      15,680      12,875
    

  

  

  

Diluted Earnings Per Share

   $ 0.86    $ 0.80    $ 2.50    $ 2.35
    

  

  

  

 

NOTE E - SEGMENT REPORTING

 

Alabama National’s reportable segments represent the distinct major product lines it offers and are viewed separately for strategic planning purposes by management. The following table is a reconciliation of the reportable segment revenues, expenses and net income (loss) to Alabama National’s consolidated totals (in thousands).

 

     Investment
Services
Division


   Securities
Brokerage &
Trust Division


   Mortgage
Lending
Division


   Insurance
Services
Division (1)


    Retail and
Commercial
Banking


   Corporate
Overhead


    Elimination
Entries


    Total

Three months ended September 30, 2004:

                                                          

Interest income

   $ —      $ 267    $ 305    $ —       $ 60,067    $ (29 )   $ (38 )   $ 60,572

Interest expense

            23      83              16,181      709       (38 )     16,958
    

  

  

  


 

  


 


 

Net interest income

            244      222              43,886      (738 )             43,614

Provision for loan and lease losses

                                  1,624                      1,624

Noninterest income

     2,685      4,056      3,512      911       7,383      19               18,566

Noninterest expense

     2,117      3,946      2,741      887       26,877      1,640               38,208
    

  

  

  


 

  


 


 

Net income (loss) before tax

   $ 568    $ 354    $ 993    $ 24     $ 22,768    $ (2,359 )   $ —       $ 22,348
    

  

  

  


 

  


 


 

Total assets as of September 30, 2004

   $ 35,036    $ 27,822    $ 24,066    $ 4,316     $ 5,043,578    $ 9,288             $ 5,144,106
    

  

  

  


 

  


 


 

Three months ended September 30, 2003:

                                                          

Interest income

   $ —      $ 295    $ 830    $ —       $ 44,183    $ (29 )   $ (22 )   $ 45,257

Interest expense

            29      256              13,494      402       (22 )     14,159
    

  

  

  


 

  


 


 

Net interest income

            266      574              30,689      (431 )             31,098

Provision for loan and lease losses

                                  1,396                      1,396

Noninterest income

     4,555      3,995      5,721      797       6,804                      21,872

Noninterest expense

     3,036      3,790      3,243      748       22,932      1,876               35,625
    

  

  

  


 

  


 


 

Net income (loss) before tax

   $ 1,519    $ 471    $ 3,052    $ 49     $ 13,165    $ (2,307 )   $ —       $ 15,949
    

  

  

  


 

  


 


 

Total assets as of September 30, 2003

   $ 72,685    $ 34,125    $ 40,067    $ 4,998     $ 3,694,506    $ 6,560             $ 3,852,941
    

  

  

  


 

  


 


 

Nine months ended September 30, 2004:

                                                          

Interest income

   $ —      $ 812    $ 780    $ —       $ 163,672    $ (86 )   $ (79 )   $ 165,099

Interest expense

            79      214              45,045      1,922       (79 )     47,181
    

  

  

  


 

  


 


 

Net interest income

            733      566              118,627      (2,008 )             117,918

Provision for loan and lease losses

                                  4,130                      4,130

Noninterest income

     9,865      12,352      9,501      2,648       21,074      54               55,494

Noninterest expense

     7,482      11,748      6,801      2,663       76,590      4,707               109,991
    

  

  

  


 

  


 


 

Net income (loss) before tax

   $ 2,383    $ 1,337    $ 3,266    $ (15 )   $ 58,981    $ (6,661 )   $ —       $ 59,291
    

  

  

  


 

  


 


 

Nine months ended September 30, 2003:

                                                          

Interest income

   $ —      $ 762    $ 2,099    $ —       $ 129,912    $ (86 )   $ (75 )   $ 132,612

Interest expense

            90      723      2       42,246      1,168       (75 )     44,154
    

  

  

  


 

  


 


 

Net interest income

            672      1,376      (2 )     87,666      (1,254 )             88,458

Provision for loan and lease losses

                                  3,911                      3,911

Noninterest income

     16,087      12,018      14,018      2,435       17,593      2               62,153

Noninterest expense

     10,499      11,433      8,154      2,301       63,926      5,140               101,453
    

  

  

  


 

  


 


 

Net income (loss) before tax

   $ 5,588    $ 1,257    $ 7,240    $ 132     $ 37,422    $ (6,392 )   $ —       $ 45,247
    

  

  

  


 

  


 


 


(1) Noninterest income for the three and nine months ended September 30, 2004, includes $78,000 from the sale of two satellite locations.

 

12


Table of Contents

Corporate overhead is comprised of compensation and benefits for certain members of management, merger related costs, interest expense on parent company debt, amortization of intangibles and other expenses.

 

At September 30, 2004, the carrying value of goodwill totaled $145.2 million. The amounts attributable to the Retail and Commercial Banking segment and Insurance Services Division are $142.5 million and $2.7 million, respectively.

 

NOTE F - MERGERS AND ACQUISITIONS

 

On July 9, 2004, Alabama National completed the acquisition of Coquina Bank (“Coquina”). Pursuant to the terms of the merger agreement, Coquina was merged with another Alabama National subsidiary, Cypress Bank, on August 20, 2004 to form CypressCoquina Bank.

 

In addition to the Coquina acquisition, Alabama National completed the acquisition of Cypress Bankshares, Inc. (“Cypress”) on February 20, 2004, and the acquisition of Indian River Banking Company (“Indian River”) on February 27, 2004. The following table summarizes some details of the three acquisitions completed in 2004.

 

     Cypress
Bankshares, Inc.


   Indian River
Banking Company


   Coquina Bank

Location

     Palm Coast, Florida      Vero Beach, Florida      Ormond Beach, Florida

Merger closing date

     2/20/2004      2/27/2004      7/9/2004

Shares of Alabama National common stock issued

     455,449      2,017,053      543,571

Stock options assumed (as converted)

     52,130      123,430      —  

Additional cash consideration

   $ 1.9 million    $ 5.1 million    $ 2.0 million

Total purchase price

   $ 27.4 million    $ 112.4 million    $ 31.7 million

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed for Cypress, Indian River and Coquina at the respective dates of acquisition. Management continues to finalize the fair value of assets acquired and liabilities assumed in connection with these acquisitions.

 

     Cypress
Bankshares, Inc.


   Indian River
Banking Company


   Coquina Bank

     (Amounts in thousands)

Cash

   $ 9,691    $ 26,178    $ 8,281

Securities

     26,111      241,905      11,421

Federal funds sold and repurchase agreements

     959      384      233

Net loans

     75,396      282,857      89,229

Other assets

     7,636      10,299      6,265

Goodwill

     17,686      73,220      21,893

Core deposit intangible

     1,644      7,542      1,006
    

  

  

Total assets acquired

     139,123      642,385      138,328
    

  

  

Deposits

     104,250      444,697      102,829

Other liabilities

     7,484      85,333      3,761
    

  

  

Total liabilities assumed

     111,734      530,030      106,590
    

  

  

Net assets acquired

   $ 27,389    $ 112,355    $ 31,738
    

  

  

 

The acquisitions of Cypress, Indian River and Coquina resulted in the recognition of $19.3 million, $80.8 million and $22.9 million of intangible assets, respectively. Alabama National allocated $1.6 million, $7.5 million and $1.0 million of the total intangible created to core deposits of Cypress, Indian River and Coquina, respectively. This allocation was based upon Alabama National’s valuation of the core deposits of Cypress, Indian River and Coquina. Among the factors considered in the valuation included: (1) the rate and maturity structure of the interest bearing liabilities, (2) estimated retention rates for each deposit liability category, (3) the current interest rate environment and (4) estimated noninterest income potential of acquired relationships. The core deposit intangible created is being amortized on an accelerated basis not to exceed seven years. The remaining intangible created was allocated to goodwill.

 

The following table presents the unaudited pro forma results of operations for Alabama National, as if the Millennium Bank (“Millennium”), Cypress, Indian River and Coquina acquisitions had occurred at January 1, 2004 and 2003. The results for the nine month period ended September 30, 2004 were adjusted for Indian River, Cypress and Coquina only, as Millennium was included for the entire period. The three month period ended September 30, 2004 was not adjusted for the Coquina acquisition, as Coquina was included for all but nine days of the 2004 third quarter. Since no consideration is given to the operational efficiencies and expanded products and services typically offered by the newly acquired banks subsequent to acquisition, the pro forma summary information does not necessarily reflect the results of operations as they would have been, if the respective acquisitions had occurred at the indicated dates (amounts in thousands, except per share data):

 

     Three months ended
September 30,


   Nine months ended
September 30,


     2004

   2003

   2004

   2003

Total revenue (1)

   $ 62,180    $ 60,780    $ 180,285    $ 176,513

Net income

   $ 14,706    $ 12,154    $ 39,973    $ 35,248

Basic EPS

   $ 0.88    $ 0.76    $ 2.45    $ 2.21

Diluted EPS

   $ 0.86    $ 0.75    $ 2.40    $ 2.17

(1) Total revenue consists of net interest income plus noninterest income.

 

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Table of Contents

NOTE G - GOODWILL AND OTHER ACQUIRED INTANGIBLES

 

The changes in the carrying amounts of goodwill attributable to the Retail and Commercial Banking segment and the Insurance Services Division for the nine months ended September 30, 2004 are as follows (in thousands):

 

     Retail and
Commercial
Banking


   Insurance
Services
Division


Balance, January 1, 2004

   $ 28,271    $ 2,693

Acquired goodwill

     112,799      —  

Other goodwill adjustments

     1,406      —  
    

  

Balance, September 30, 2004

   $ 142,476    $ 2,693
    

  

 

Other goodwill adjustments relates to the refinement of the fair values assigned to the assets and liabilities of a previous acquisition.

 

Intangible assets as of September 30, 2004 and December 31, 2003 are as follows (in thousands):

 

     As of September 30, 2004

     Gross
Carrying
Amount


   Accumulated
Amortization


    Net
Carrying
Value


Amortizing intangible assets

                     

Core deposit intangibles

   $ 18,130    $ (6,351 )   $ 11,779

Other customer intangibles

     959      (599 )     360
    

  


 

Total amortizing intangible assets

   $ 19,089    $ (6,950 )   $ 12,139
    

  


 

     As of December 31, 2003

     Gross
Carrying
Amount


   Accumulated
Amortization


    Net
Carrying
Value


Amortizing intangible assets:

                     

Core deposit intangibles

   $ 7,938    $ (4,342 )   $ 3,596

Other customer intangibles

     1,453      (426 )     1,027
    

  


 

Total amortizing intangible assets

   $ 9,391    $ (4,768 )   $ 4,623
    

  


 

 

During the nine months ended September 30, 2004 and 2003, Alabama National recognized $2,182,000 and $762,000 of other intangible amortization expense, respectively, and during the three months ended September 30, 2004 and 2003, Alabama National recognized $858,000 and $285,000 of other intangible expense, respectively. Based upon recorded intangible assets as of September 30, 2004, aggregate amortization expense for each of the next five years is estimated to be $3.2 million, $2.8 million, $2.4 million, $1.7 million and $1.1 million, respectively.

 

NOTE H - DEFINED BENEFIT PENSION PLAN

 

The following table provides certain information with respect to Alabama National’s defined benefit pension plans for the periods indicated (amounts in thousands):

 

     For the three
months ended
September 30,


    For the nine
months ended
September 30,


 
     2004

    2003

    2004

    2003

 

Service cost

   $ —       $ —       $ —       $ —    

Interest cost

     92       92       275       275  

Expected return on plan assets

     (118 )     (109 )     (353 )     (329 )

Amortization of prior service cost

     —         —         —         —    

Amortization of transition asset

     —         (1 )     —         (1 )

Amortization of net loss

     8       17       25       52  
    


 


 


 


Net periodic pension income

   $ (18 )   $ (1 )   $ (53 )   $ (3 )
    


 


 


 


 

As of September 30, 2004, Alabama National has not made any 2004 contributions to the defined benefit pension plan because the plan is fully funded and Alabama National does not anticipate making any contributions in the year ended December 31, 2004. If needed in the future, Alabama National will contribute any amounts necessary to satisfy funding requirements of the Employee Retirement Income Security Act.

 

NOTE I - TREASURY STOCK REPURCHASE PLAN

 

On February 18, 2004, the Board of Directors of Alabama National renewed its share repurchase program that expired on December 31, 2003. The renewed plan authorizes the Company to repurchase up to 300,000 shares of its common stock and will expire on December 31, 2004. There were no shares repurchased during the nine months ended September 30, 2004.

 

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Table of Contents

NOTE J - UNDERWRITTEN PUBLIC OFFERING

 

During the 2004 third quarter, Alabama National completed an underwritten public offering of 977,500 shares of its common stock at a public offering price of $54.20 per share. Alabama National received net proceeds of approximately $49.7 million from the public offering.

 

NOTE K - SUBSEQUENT EVENTS-ALABAMA NATIONAL SUBSIDIARY BANK MERGERS

 

Alabama National announced by press release on October 29, 2004 that it plans to unite First American Bank with National Bank of Commerce of Birmingham in February 2005 and with First Citizens Bank of Talladega in May 2005, creating a financial institution with approximately $2.5 billion in assets as of September 30, 2004. The combined institution will be called First American Bank, with 33 locations in north and central Alabama.

 

Alabama National also announced in the press release the planned March 2005 unification of First Gulf Bank in Baldwin County, Alabama and Citizens & Peoples Bank, N.A. of Pensacola, Florida. These two banks will unite to form First Gulf Bank, N.A., which will be a $425 million bank headquartered in Pensacola serving its customers through 10 offices. To be consummated, these transactions must first receive certain regulatory approvals.

 

15


Table of Contents

Item 2. 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 Alabama National and results of operations as of the dates and for the periods indicated. All significant intercompany accounts and transactions have been eliminated. The accounting and reporting policies of Alabama National conform with generally accepted accounting principles and with general financial services industry practices.

 

Many of the comparisons of financial data from period to period presented in the following discussion have been rounded from actual values reported in the financial statements. The percentage changes presented herein are based on a comparison of the actual values recorded in the financial statements, not the rounded values.

 

Alabama National acquired Millennium Bank on June 19, 2003, Cypress Bankshares, Inc. on February 20, 2004, Indian River Banking Company on February 27, 2004 and Coquina Bank on July 9, 2004, using the purchase method of accounting in each transaction. Accordingly, the results of operations for Cypress Bank, Indian River National Bank and Coquina Bank are not included in the three or nine month periods ended September 30, 2003. Millennium Bank’s results of operations are included for the entire three months ended September 30, 2003, but the nine months ended September 30, 2003 include only Millennium Bank’s results subsequent to the acquisition date. The three and nine month periods ended September 30, 2004 include Millennium for the entire periods but only include the results of operations of Cypress, Indian River and Coquina subsequent to the acquisition date for each.

 

This information should be read in conjunction with Alabama National’s unaudited consolidated financial statements and related notes appearing elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Alabama National’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

Critical Accounting Policies and Estimates

 

Alabama National’s accounting policies are critical to understanding the results of operations and financial position as reported in the consolidated financial statements. Significant accounting policies utilized by Alabama National are discussed in detail in the notes to the consolidated financial statements and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Alabama National’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

Performance Overview

 

Alabama National’s net income was $14.7 million for the third quarter of 2004 (the “2004 third quarter”), compared to $10.6 million for the third quarter of 2003 (the “2003 third quarter”). Net income for the nine months ended September 30, 2004 (the “2004 nine months”) was $39.3 million, compared to $30.3 million for the nine months ended September 30, 2003 (the “2003 nine months”). Net income per diluted common share for the 2004 and 2003 third quarters was $0.86 and $0.80, respectively. For the 2004 nine months, net income per diluted common share was $2.50, compared to $2.35 for the 2003 nine months.

 

The annualized return on average assets for Alabama National was 1.15% and 1.12% for the 2004 and 2003 third quarters, respectively. The annualized return on average assets for Alabama National was 1.11% for the 2004 nine months, compared to 1.14% for the 2003 nine months. The annualized return on average stockholders’ equity was 11.77% for the 2004 third quarter, as compared to 15.55% for the 2003 third quarter. The annualized return on average stockholders’ equity was 12.39% and 16.07% for the 2004 and 2003 nine months, respectively. Return on average assets and return on average stockholders’ equity have each been negatively affected by recent acquisitions due to the amount of goodwill and other intangible assets recorded, which amount increased the denominator in both of these ratio calculations. The recent public offering by Alabama National has also negatively affected the return on average shareholders’ equity for the 2004 periods because it resulted in an increase in shareholders’ equity. Book value per share at September 30, 2004 was $30.70, an increase of $8.94 from year-end 2003, due primarily to the impact of 2004 acquisitions. Alabama National declared cash dividends totaling $0.9375 per share on common stock during the 2004 nine months, compared to $0.855 per share declared on common stock during the 2003 nine months.

 

16


Table of Contents

Net Income

 

The primary reasons for the increased net income during the 2004 third quarter and 2004 nine months, compared to the same periods in 2003, are an increase in net interest income and the acquisitions of Cypress Bank, Indian River National Bank and Coquina Bank. The 2004 acquisitions contributed $2.7 million and $5.5 million in net income for the 2004 third quarter and nine months, respectively. Net interest income for the 2004 third quarter totaled $43.6 million, a 40.2% increase over the $31.1 million recorded in the 2003 third quarter. During the 2004 nine months, net interest income totaled $117.9 million, a 33.3% increase compared to $88.5 million recorded in the 2003 nine months. The increased net interest income was offset by a decline in total noninterest income recorded during the 2004 third quarter and nine months. During the 2004 third quarter, total noninterest income was $18.6 million, a decrease of $3.3 million as compared to the 2003 third quarter. For the 2004 nine months, noninterest income was $55.5 million, a decrease of 10.7% from $62.2 million recorded in the 2003 nine months. The income from the sale of mortgage loans and income from investment services experienced a significant decrease in each period of 2004 as compared to the same periods in 2003. The revenue recorded in these two business segments during the 2003 third quarter and nine months were both near record levels for Alabama National.

 

Average earning assets for the 2004 third quarter and nine months increased by $1.18 billion and $1.03 billion, respectively, as compared to the same periods in 2003. Average interest-bearing liabilities increased by $919.6 million and $833.2 million during the 2004 third quarter and nine months, respectively, as compared to the same periods in 2003. Recent acquisitions have contributed greatly to the increases in average earning assets and interest-bearing liabilities. The average taxable equivalent rate earned on assets was 5.27% and 5.18% for the 2004 third quarter and 2004 nine months, respectively, compared to 5.27% and 5.48% for the 2003 third quarter and 2003 nine months, respectively. The average rate paid on interest-bearing liabilities was 1.72% and 1.70% for the 2004 third quarter and 2004 nine months, respectively, compared to 1.87% and 2.06% for the 2003 third quarter and 2003 nine months, respectively. The net interest margin was 3.77% and 3.67% for the 2004 third quarter and 2004 nine months, respectively, compared to 3.60% and 3.63% for the 2003 third quarter and 2003 nine months, respectively. The net interest margin for the 2004 third quarter increased by 16 basis points compared to the second quarter of 2004. Alabama National has benefited from the Federal Reserve Bank’s three separate fed funds rate increases beginning June 30, 2004. Alabama National’s variable rate loans have repriced at the higher rates but deposit costs have not repriced as quickly.

 

The following tables depict, on a taxable equivalent basis for the 2004 and 2003 third quarter and nine months certain information related to Alabama National’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 balance of the associated assets or liabilities.

 

AVERAGE BALANCES, INCOME AND EXPENSES AND RATES

(Amounts in thousands, except yields and rates)

 

     Three months ended September 30,

 
     2004

    2003

 
     Average
Balance


    Income/
Expense


   Yield/
Cost


    Average
Balance


    Income/
Expense


   Yield/
Cost


 

Assets:

                                          

Earning assets:

                                          

Loans and leases (1)(2)(3)

   $ 3,360,817     $ 48,442    5.73 %   $ 2,549,891     $ 37,643    5.86 %

Securities:

                                          

Taxable

     1,120,518       11,406    4.05       768,416       7,061    3.65  

Tax exempt (2)

     57,312       871    6.05       30,881       531    6.82  

Cash balances in other banks

     5,242       18    1.37       11,650       26    0.89  

Funds sold

     58,722       244    1.65       61,345       198    1.28  

Trading account securities

     778       9    4.60       3,191       27    3.36  
    


 

        


 

      

Total earning assets (2)

     4,603,389       60,990    5.27       3,425,374       45,486    5.27  
    


 

        


 

      

Cash and due from banks

     160,867                    85,028               

Premises and equipment

     90,134                    76,805               

Other assets

     266,000                    189,257               

Allowance for loan losses

     (45,345 )                  (36,334 )             
    


              


            

Total assets

   $ 5,075,045                  $ 3,740,130               
    


              


            

Liabilities:

                                          

Interest-bearing liabilities:

                                          

Interest-bearing transaction accounts

   $ 751,808     $ 1,440    0.76 %   $ 511,578     $ 931    0.72 %

Savings deposits

     873,149       2,120    0.97       515,106       1,109    0.85  

Time deposits

     1,449,082       8,364    2.30       1,285,128       8,315    2.57  

Funds purchased

     406,405       1,394    1.36       342,499       815    0.94  

Other short-term borrowings

     37,135       186    1.99       66,750       315    1.87  

Long-term debt

     403,007       3,454    3.41       279,922       2,674    3.79  
    


 

        


 

      

Total interest-bearing liabilities

     3,920,586       16,958    1.72       3,000,983       14,159    1.87  
    


 

        


 

      

Demand deposits

     602,994                    418,895               

Accrued interest and other liabilities

     54,442                    50,273               

Stockholders’ equity

     497,023                    269,979               
    


              


            

Total liabilities and stockholders’ equity

   $ 5,075,045                  $ 3,740,130               
    


              


            

Net interest spread

                  3.55 %                  3.40 %
                   

                

Net interest income/margin on a taxable equivalent basis

             44,032    3.81 %             31,327    3.63 %
                   

                

Tax equivalent adjustment (2)

             418                    229       
            

                

      

Net interest income/margin

           $ 43,614    3.77 %           $ 31,098    3.60 %
            

  

         

  


(1) Average loans include nonaccrual loans. All loans and deposits are domestic.
(2) Tax equivalent adjustments are based upon an assumed tax rate of 34%, and do not reflect the disallowance for Federal income tax purposes of interest expense related to certain tax exempt assets.
(3) Fees in the amount of $2.0 million and $1.7 million are included in interest and fees on loans for the three months

ended September 30, 2004 and 2003, respectively.

 

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AVERAGE BALANCES, INCOME AND EXPENSES AND RATES

(Amounts in thousands, except yields and rates)

 

     Nine months ended September 30,

 
     2004

    2003

 
     Average
Balance


    Income/
Expense


   Yield/
Cost


    Average
Balance


    Income/
Expense


   Yield/
Cost


 

Assets:

                                          

Earning assets:

                                          

Loans and leases (1)(2)(3)

   $ 3,142,319     $ 132,962    5.65 %   $ 2,404,068     $ 108,249    6.02 %

Securities:

                                          

Taxable

     1,029,276       30,274    3.93       749,279       22,765    4.06  

Tax exempt (2)

     50,860       2,362    6.20       31,233       1,661    7.11  

Cash balances in other banks

     6,215       46    0.99       11,465       86    1.00  

Funds sold

     58,959       544    1.23       55,341       531    1.28  

Trading account securities

     1,319       44    4.46       2,689       76    3.78  
    


 

        


 

      

Total earning assets (2)

     4,288,948       166,232    5.18       3,254,075       133,368    5.48  
    


 

        


 

      

Cash and due from banks

     141,475                    87,812               

Premises and equipment

     88,204                    74,649               

Other assets

     234,469                    163,433               

Allowance for loan losses

     (42,573 )                  (34,520 )             
    


              


            

Total assets

   $ 4,710,523                  $ 3,545,449               
    


              


            

Liabilities:

                                          

Interest-bearing liabilities:

                                          

Interest-bearing transaction accounts

   $ 695,276     $ 3,868    0.74 %   $ 507,490     $ 3,482    0.92 %

Savings deposits

     744,658       5,041    0.90       458,843       3,286    0.96  

Time deposits

     1,427,334       24,494    2.29       1,227,867       25,727    2.80  

Funds purchased

     392,212       3,354    1.14       310,743       2,435    1.05  

Other short-term borrowings

     57,785       765    1.77       89,904       1,313    1.95  

Long-term debt

     382,541       9,659    3.37       271,793       7,911    3.89  
    


 

        


 

      

Total interest-bearing liabilities

     3,699,806       47,181    1.70       2,866,640       44,154    2.06  
    


 

        


 

      

Demand deposits

     538,931                    368,953               

Accrued interest and other liabilities

     48,610                    57,995               

Stockholders’ equity

     423,176                    251,861               
    


              


            

Total liabilities and stockholders’ equity

   $ 4,710,523                  $ 3,545,449               
    


              


            

Net interest spread

                  3.48 %                  3.42 %
                   

                

Net interest income/margin on a taxable equivalent basis

             119,051    3.71 %             89,214    3.67 %
                   

                

Tax equivalent adjustment (2)

             1,133                    756       
            

                

      

Net interest income/margin

           $ 117,918    3.67 %           $ 88,458    3.63 %
            

  

         

  


(1) Average loans include nonaccrual loans. All loans and deposits are domestic.
(2) Tax equivalent adjustments are based upon an assumed tax rate of 34%, and do not reflect the disallowance for Federal income tax purposes of interest expense related to certain tax exempt assets.

 

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(3) Fees in the amount of $5.6 million and $4.5 million are included in interest and fees on loans for the nine months ended September 30, 2004 and 2003, respectively.

 

The following tables set 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 the 2004 third quarter and nine months, compared to the 2003 third quarter and nine months, respectively. For the purposes of these tables 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)

 

     Three months ended September 30,

 
    

2004 Compared to 2003

Variance Due to


 
     Volume

    Yield/Rate

    Total

 

Earning assets:

                        

Loans and leases

   $ 16,292     $ (5,493 )   $ 10,799  

Securities:

                        

Taxable

     3,506       839       4,345  

Tax exempt

     721       (381 )     340  

Cash balances in other banks

     (61 )     53       (8 )

Funds sold

     (53 )     99       46  

Trading account securities

     (65 )     47       (18 )
    


 


 


Total interest income

     20,340       (4,836 )     15,504  

Interest-bearing liabilities:

                        

Interest-bearing transaction accounts

     455       54       509  

Savings and money market deposits

     840       171       1,011  

Time deposits

     3,833       (3,784 )     49  

Funds purchased

     171       408       579  

Other short-term borrowings

     (253 )     124       (129 )

Long-term debt

     2,368       (1,588 )     780  
    


 


 


Total interest expense

     7,414       (4,615 )     2,799  
    


 


 


Net interest income on a taxable equivalent basis

   $ 12,926     $ (221 )     12,705  
    


 


       

Taxable equivalent adjustment

                     (189 )
                    


Net interest income

                   $ 12,516  
                    


 

ANALYSIS OF CHANGES IN NET INTEREST INCOME

(Amounts in thousands)

 

     Nine months ended September 30,

 
    

2004 Compared to

2003 Variance Due to


 
     Volume

    Yield/Rate

    Total

 

Earning assets:

                        

Loans and leases

   $ 35,415     $ (10,702 )   $ 24,713  

Securities:

                        

Taxable

     8,711       (1,202 )     7,509  

Tax exempt

     1,055       (354 )     701  

Cash balances in other banks

     (39 )     (1 )     (40 )

Funds sold

     43       (30 )     13  

Trading account securities

     (51 )     19       (32 )
    


 


 


Total interest income

     45,134       (12,270 )     32,864  

Interest-bearing liabilities:

                        

Interest-bearing transaction accounts

     1,448       (1,062 )     386  

Savings and money market deposits

     2,095       (340 )     1,755  

Time deposits

     5,323       (6,556 )     (1,233 )

Funds purchased

     693       226       919  

Other short-term borrowings

     (435 )     (113 )     (548 )

Long-term debt

     3,445       (1,697 )     1,748  
    


 


 


Total interest expense

     12,569       (9,542 )     3,027  
    


 


 


Net interest income on a taxable equivalent basis

   $ 32,565     $ (2,728 )     29,837  
    


 


       

Taxable equivalent adjustment

                     (377 )
                    


Net interest income

                   $ 29,460  
                    


 

The provision for loan and lease losses represents a charge to current earnings necessary to maintain the allowance for loan and lease losses at an appropriate level based on management’s analysis of the loss in the loan and lease portfolio. The amount of the provision is a function of the level of loans and leases outstanding, the level of non-performing loans and adversely rated loans, historical loan and lease loss experience, the amount of loan and lease charge-offs during a given period, and current economic conditions. The provision for loan and lease losses was $1.6 million for the 2004 third quarter, an increase of $228,000 when compared with $1.4 million recorded in the 2003 third quarter. The provision for loan and lease losses was $4.1 million for the 2004 nine months, compared to $3.9 million in the 2003 nine months. The allowance for loan and lease losses as a percentage of outstanding loans, net of unearned income (excluding loans held for sale), was 1.35% at September 30, 2004, compared to 1.37% at December 31, 2003.

 

Because of the inherent uncertainty of assumptions made during the assessment process, there can be no assurance that loan and lease losses in future periods will not exceed the allowance for loan and lease losses or that additional allocations to the allowance will not be required. See Asset Quality.

 

Total noninterest income for the 2004 third quarter was $18.6 million, compared to $21.9 million for the 2003 third quarter, a decrease of 15.1%. For the 2004 nine months, noninterest income decreased to $55.5 million, compared to $62.2 million for the 2003 nine months, a decrease of 10.7%. The major components of noninterest income include service charges on deposits, investment services revenue, securities brokerage and trust revenue, insurance commissions, fees relating to the sale of mortgage loans, and income earned on bank owned life insurance. Service charges on deposits posted a significant increase in both periods of 2004. Service charges on deposits for the 2004 third quarter and 2003 third quarter were $4.5 million and $3.6 million, respectively. For the 2004 nine months, service charge income increased to $12.9 million from $10.4 million for the 2003 nine months. The primary reason for the increase in service charges is the impact of Alabama National’s recent acquisitions, which contributed $779,000 and $1.8 million of service charge income during the 2004 third quarter and nine months, respectively.

 

Revenue from Alabama National’s investment division totaled $2.7 million in the 2004 third quarter, a decrease of $1.9 million, or 41.1%, as compared to $4.6 million recorded in the 2003 third quarter. During the 2004 nine months the investment division’s revenue totaled $9.9 million, a decrease of $6.2 million, or 38.7%, as compared to $16.1 million in the 2003 nine months. Since Coquina Bank, Cypress Bank, Indian River National Bank and Millennium Bank do not operate in this business line, the acquisition of these banks had no impact on investment services revenue. The revenue recorded by the investment division in the 2003 nine months was at a record level for this division. The revenue generated by the investment division is dependent upon the demand for fixed income securities by its customers, which are primarily correspondent community banks. Demand for these securities was high during the 2003 third quarter and nine months due to increased liquidity of community banks resulting from decreased loan demand and increased cash flow from their existing securities portfolios. Although the activity for this division has moderated as interest rates have remained low, the investment division continues to add new customers and expand its market area.

 

Securities brokerage and trust revenue increased modestly during the 2004 third quarter and nine months as compared with the same periods of 2003. The increase in the securities brokerage and trust division revenue during each period of 2004 is attributable to continued expansion in the number of customers and total customer assets under management by these departments, as well as an increase in the number of registered representatives. The gain generated from the sale of mortgages decreased to $2.9 million for the 2004 third quarter from $5.5 million in the 2003 third quarter, representing a 47.9% decrease. During the 2004 nine months the gain from sale of mortgages decreased to $8.9 million

 

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from $13.4 million during the 2003 nine months, a decrease of 33.8%. The gain recorded from the sale of mortgages during the 2003 third quarter and nine months were record levels for Alabama National due to falling interest rates and the impact on mortgage refinancing activity. Mortgage rates have shown modest increases in 2004, and refinance activity has thus slowed and revenue from refinancing has decreased.

 

Other noninterest income increased to $3.0 million for the 2004 third quarter, compared to $1.8 million during the 2003 third quarter. Other noninterest income increased to $6.9 million during the 2004 nine months, an increase of 45.3%, compared to $4.8 million recorded in the 2003 nine months. During the 2004 third quarter Alabama National received approximately $400,000 from settlement of a litigation claim, increasing other noninterest income for each period of 2004. Also contributing to this increase is the impact of Alabama National’s recent acquisitions, which contributed $210,000 and $573,000 of other noninterest income during the 2004 third quarter and nine months, respectively. Another reason for the increase is an increase in the income earned from debit card and credit card activity.

 

Noninterest expense was $38.2 million for the 2004 third quarter, compared to $35.6 million for the 2003 third quarter. For the 2004 nine months, noninterest expense was $110.0 million, compared to $101.5 million for the 2003 nine months. Noninterest expense includes salaries and employee benefits, commission based compensation, occupancy and equipment expenses, amortization of intangibles, and other expenses. Salaries and employee benefits were $19.6 million for the 2004 third quarter, compared to $16.9 million for the 2003 third quarter. For the 2004 nine months, salaries and employee benefits were $56.3 million, compared to $48.7 million in the 2003 nine months. The most significant reason for the increase in salaries and employee benefit expense is the impact of recent acquisitions, which accounted for $2.6 million and $5.9 million of the increase during the 2004 third quarter and nine months, respectively. Commission based compensation was $4.4 million for the 2004 third quarter, compared to $6.1 million for the 2003 third quarter. For the 2004 nine months, commission based compensation totaled $13.9 million, compared to $18.2 million in the 2003 nine months. The decrease in commission based compensation recorded for each period of 2004 is attributable to decreased production in the mortgage and investment services divisions, as a significant portion of the compensation in these divisions is production-based. Occupancy and equipment expense totaled $4.1 million in the 2004 third quarter and $3.3 million in the 2003 third quarter. Occupancy and equipment expense totaled $11.5 million in the 2004 nine months and $9.7 million in the 2003 nine months. The increased occupancy and equipment expense for the 2004 third quarter and nine months is due primarily to Alabama National’s recent acquisitions. Other noninterest expense increased to $9.3 million in the 2004 third quarter, compared with $9.1 million in the 2003 third quarter. Other noninterest expense was $26.2 million in the 2004 nine months, compared to $24.0 million in the 2003 nine months. The primary reason for the increase in period of 2004 is due to Alabama National’s recent acquisitions. Other components of noninterest expense that experienced increases in the 2004 periods are transactional costs associated with a greater volume of debit and credit card transactions and an increase in professional services associated with complying with the Sarbanes-Oxley Act.

 

Because of an increase in pre-tax income, income tax expense was $7.6 million for the 2004 third quarter, compared to $5.4 million for the 2003 third quarter. For the 2004 nine months, income tax expense was $20.0 million, compared to $15.0 million for the 2003 nine months. The effective tax rates for the 2004 third quarter and the 2004 nine months were 34.2% and 33.8%, respectively, compared to 33.7% and 33.1% for the same periods of 2003. These effective tax rates are impacted by items of income and expense that are not subject to federal or state taxation. The effective rate in the 2004 third quarter and nine months is higher than the 2003 periods due to higher pre-tax income without a corresponding increase in income items not subject to federal or state taxation.

 

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Earning Assets

 

Loans and leases comprised the largest single category of Alabama National’s earning assets on September 30, 2004. Loans and leases, net of unearned income, were $3.40 billion, or 66.1% of total assets at September 30, 2004, compared to $2.66 billion, or 69.6% of total assets at December 31, 2003. Loans and leases grew $740.9 million, or 27.9%, during the 2004 nine months, compared to the 2003 year-end. Excluding the Indian River National Bank, Cypress Bank and Coquina Bank acquisitions, loans and leases grew $255.9 million, or 9.6% from December 31, 2003 balances. The following table details the composition of the loan and lease portfolio by category at the dates indicated:

 

COMPOSITION OF LOAN AND LEASE PORTFOLIO

(Amounts in thousands, except percentages)

 

     September 30, 2004

    December 31, 2003

 
     Amount

    Percent
of Total


    Amount

    Percent
of Total


 

Commercial, financial and agricultural

   $ 271,996     7.99 %   $ 265,923     9.99 %

Real estate:

                            

Construction

     741,155     21.78       530,024     19.91  

Mortgage - residential

     927,994     27.26       676,658     25.42  

Mortgage - commercial

     1,025,495     30.13       814,904     30.61  

Mortgage - other

     9,615     .28       9,412     .35  

Consumer

     93,677     2.75       74,137     2.78  

Lease financing receivables

     72,452     2.13       77,857     2.92  

Securities brokerage margin loans

     12,521     .37       15,407     .58  

Other

     248,790     7.31       198,036     7.44  
    


 

 


 

Total gross loans and leases

     3,403,695     100.00 %     2,662,358     100.00 %
    


 

         

Unearned income

     (3,398 )           (2,918 )      
    


       


     

Total loans and leases, net of unearned income

     3,400,297             2,659,440        

Allowance for loan and lease losses

     (45,903 )           (36,562 )      
    


       


     

Total net loans and leases

   $ 3,354,394           $ 2,622,878        
    


       


     

 

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The carrying value of investment securities increased $262.5 million during the 2004 nine months from $271.0 million at December 31, 2003. During the 2004 nine months, Alabama National purchased $330.1 million of investment securities, received $93.1 million from maturities, including principal paydowns of mortgage backed securities, and acquired $25.8 million of investment securities in connection with the 2004 acquisitions.

 

The carrying value of securities available for sale increased $98.1 million in the 2004 nine months compared to year-end 2003. The 2004 acquisitions increased the carrying value of securities available for sale by $253.7 million. During the 2004 nine months, purchases of available for sale securities totaled $413.0 million, and maturities, calls, and sales of available for sale securities totaled $568.8 million. During the 2004 nine months, the available for sale portfolio experienced an unrealized loss totaling $13 thousand.

 

Trading account securities, which had a balance of $494 thousand at September 30, 2004, are securities owned by Alabama National prior to sale and delivery to Alabama National’s customers. It is the policy of Alabama National to limit positions in such securities to reduce its exposure to market and interest rate changes. Federal funds sold and securities purchased under agreements to resell totaled $39.8 million at September 30, 2004, and $16.5 million at December 31, 2003.

 

Deposits and Other Funding Sources

 

Deposits increased by $881.0 million from December 31, 2003, to $3.63 billion at September 30, 2004. Excluding the 2004 acquisitions, deposits increased $185.2 million, or 6.7%, during the 2004 nine months, compared with December 31, 2003 balances. Deposits continue to increase organically due to recent branch expansions, successful business development efforts by Alabama National and overall economic growth in the markets served by Alabama National. At September 30, 2004, deposits included $184.3 million of brokered time deposits, compared to $156.0 million at December 31, 2003.

 

Federal funds purchased and securities sold under agreements to repurchase totaled $460.5 million at September 30, 2004, an increase of $102.1 million from December 31, 2003. Short-term borrowings at September 30, 2004 totaled $40.0 million, comprised entirely of advances from the Federal Home Loan Bank (“FHLB”).

 

Alabama National’s short-term borrowings at September 30, 2004 and December 31, 2003 are summarized as follows:

 

SHORT-TERM BORROWINGS

(Amounts in thousands)

 

    

September 30,

2004


   December 31,
2003


Note payable to third party bank under secured master note agreement; rate varies with LIBOR and was 1.89125% at December 31, 2003; collateralized by Alabama National’s stock in subsidiary banks. Matures on May 31, 2005.

   $ —      $ 1,650

FHLB open ended notes payable; rate varies daily based on the FHLB Daily Rate Credit interest price and was 2.15% and 1.15% at September 30, 2004 and December 31, 2003, respectively; collateralized by FHLB stock and certain first real estate mortgages.

     35,000      24,500

FHLB borrowings at September 30, 2004 are due December 4, 2004; at December 31, 2003, maturities ranged from February 2, 2004 to December 4, 2004; bearing interest at a fixed rate of 1.79% at September 30, 2004, and at fixed rates ranging from 1.79% to 5.715% at December 31, 2003; collateralized by FHLB stock and certain first real estate mortgages.

     5,000      15,000
    

  

Total short-term borrowings

   $ 40,000    $ 41,150
    

  

 

Alabama National’s long-term debt at September 30, 2004 and December 31, 2003 is summarized as follows:

 

LONG-TERM DEBT

(Amounts in thousands)

 

     September 30,
2004


   December 31,
2003


FHLB borrowings due at various maturities ranging from November 10, 2005 through November 7, 2012 at September 30, 2004; maturities ranged from November 10, 2005 to October 23, 2012 at December 31, 2003; bearing interest at fixed rates ranging from 1.89% to 6.00% and 1.09% to 6.00% at September 30, 2004 and December 31, 2003, respectively; convertible to a variable rate at the option of the FHLB at dates ranging from October 7, 2004 to November 7, 2007; collateralized by FHLB stock and certain first real estate mortgages.

   $ 273,167    $ 258,000

FHLB borrowing due September 12, 2006; rate varies quarterly with LIBOR and was 0.52% at December 31, 2003; on September 12, 2004 the advance converted to a fixed rate of 2.54%; convertible to a variable rate at the option of the FHLB on December 12, 2004; collateralized by FHLB stock and certain first real estate mortgages.

     28,000      28,000

FHLB borrowings due at dates ranging from May 12, 2006 to November 5, 2008; rates vary quarterly with LIBOR and were 1.70%; collateralized by FHLB stock and certain first real estate mortgages.

     49,000      —  

Junior subordinated debentures payable to unconsolidated trusts due at dates ranging from December 18, 2031 to September 26, 2033; rates vary with LIBOR and ranged from 5.025% to 5.51% and 4.2125% to 4.77% at September 30, 2004 and December 31, 2003, respectively.

     53,610      46,393

Capital leases payable

     15      34
    

  

Total long-term debt

   $ 403,792    $ 332,427
    

  

 

Asset Quality

 

Nonperforming loans are comprised of loans past due 90 days or more and still accruing interest, loans accounted for on a nonaccrual basis and loans in which the terms have been restructured to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower. At September 30, 2004, Alabama National had no loans past due 90 days or more that were still accruing interest. 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. It is Alabama National’s policy to place a delinquent loan on nonaccrual status when it becomes 90 days or more past due. When a loan is placed on nonaccrual status, all interest that 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 the 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 and lease losses.

 

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At September 30, 2004, nonperforming assets totaled $9.8 million, compared to $10.5 million at year-end 2003. Nonperforming assets as a percentage of loans plus other real estate were 0.29% at September 30, 2004, compared to 0.40% at December 31, 2003. The following table presents Alabama National’s nonperforming assets for the dates indicated.

 

NONPERFORMING ASSETS

(Amounts in thousands, except percentages)

 

     September 30,
2004


    December 31,
2003


 

Nonaccrual loans

   $ 8,252     $ 9,817  

Restructured loans

     —         —    

Loans past due 90 days or more and still accruing

     —         —    
    


 


Total nonperforming loans

     8,252       9,817  

Other real estate owned

     1,639       699  
    


 


Total nonperforming assets

   $ 9,891     $ 10,516  
    


 


Allowance for loan and lease losses to period-end loans

     1.35 %     1.37 %

Allowance for loan and lease losses to period-end nonperforming loans

     556.27       372.44  

Allowance for loan losses to period-end nonperforming assets

     464.09       347.68  

Net charge-offs to average loans (1)

     0.07       0.13  

Nonperforming assets to period-end loans and other real estate owned

     0.29       0.40  

Nonperforming loans to period-end loans

     0.24       0.37  

(1) Excludes average loans held for sale

 

Net loan charge-offs for the 2004 nine months totaled $1.7 million, or 0.07% (annualized) of average loans and leases for the period. The allowance for loan and lease losses as a percentage of total loans and leases, net of unearned income, was 1.35% at September 30, 2004, compared to 1.37% at December 31, 2003. The following table analyzes activity in the allowance for loan and lease losses for the periods indicated.

 

ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES

(Amounts in thousands)

 

     Three months ended September 30,

   Nine months ended September 30,

     2004

   2003

   2004

   2003

Allowance for loan and lease losses at beginning of period

   $ 43,484    $ 35,595    $ 36,562    $ 32,704

Charge-offs:

                           

Commercial, financial and agricultural

     519      306      3,148      693

Real estate - mortgage

     66      183      168      1,285

Consumer

     240      213      628      718
    

  

  

  

Total charge-offs

     825      702      3,944      2,696
    

  

  

  

Recoveries:

                           

Commercial, financial and agricultural

     121      218      542      494

Real estate - mortgage

     42      197      314      375

Consumer

     88      275      1,389      1,196
    

  

  

  

Total recoveries

     251      690      2,245      2,065
    

  

  

  

Net charge-offs

     574      12      1,699      631

Provision for loan and lease losses

     1,624      1,396      4,130      3,911

Additions to allowance through acquisitions

     1,369      —        6,910      995
    

  

  

  

Allowance for loan and lease losses at end of period

   $ 45,903    $ 36,979    $ 45,903    $ 36,979
    

  

  

  

 

The loan and lease portfolio is periodically reviewed to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan and lease losses. This analysis includes a review of delinquency trends, actual losses and internal credit ratings. Based on this analysis, management considers the allowance for loan and lease losses at September 30, 2004 to be adequate to cover probable loan and lease losses in the portfolio as of that date. However, because of the inherent uncertainty of assumptions made during the evaluation process, there can be no assurance that loan and lease losses in future periods will not exceed the allowance for loan and lease losses or that additional allocations to the allowance will not be required.

 

Interest Rate Sensitivity

 

Alabama National 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 Alabama National is simulation analysis, which technique is augmented by “gap” analysis.

 

In simulation analysis, Alabama National reviews each individual asset and liability category and its projected behavior in various different interest rate environments. These projected behaviors are based upon management’s past experiences and upon current competitive environments, including the various environments in the different markets in which Alabama National competes. Using this projected behavior and differing rate scenarios as inputs, the simulation analysis generates as output a projection of net interest income. Alabama National also periodically verifies the validity of this approach by comparing actual results with those that were projected in previous models. See Market Risk.

 

Another technique used by Alabama National in interest rate management is the measurement of the interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets and liabilities, selling securities available for sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability.

 

Alabama National 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. Alabama National 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 Alabama National’s interest rate sensitivity at September 30, 2004, assuming relevant assets and liabilities are collected and paid, respectively, based upon historical experience rather than their stated maturities.

 

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INTEREST SENSITIVITY ANALYSIS

(Amounts in thousands, except ratios)

 

     September 30, 2004

     Zero
Through
Three
Months


    After Three
Through
Twelve
Months


    One
Through
Three
Years


    Greater Than
Three Years


    Total

Assets:

                                      

Earning assets:

                                      

Loans (1)

   $ 2,088,867     $ 454,419     $ 494,571     $ 376,822     $ 3,414,679

Securities (2)

     114,387       201,832       410,983       420,502       1,147,704

Trading securities

     494       —                         494

Interest-bearing deposits in other banks

     16,313       —         —         —         16,313

Funds sold

     39,844       —         —         —         39,844
    


 


 


 


 

Total interest-earning assets

   $ 2,259,905     $ 656,251     $ 905,554     $ 797,324     $ 4,619,034

Liabilities:

                                      

Interest-bearing liabilities:

                                      

Interest-bearing deposits:

                                      

Demand deposits

   $ 371,343     $ —       $ —       $ 373,377     $ 744,720

Savings and money market deposits

     410,188       —         —         420,455       830,643

Time deposits (3)

     346,158       670,573       304,795       138,718       1,460,244

Funds purchased

     460,493       —         —         —         460,493

Short-term borrowings (4)

     40,895       —         —         —         40,895

Long-term debt

     302,625       35,000       32,000       34,167       403,792
    


 


 


 


 

Total interest-bearing liabilities

   $ 1,931,702     $ 705,573     $ 336,795     $ 966,717     $ 3,940,787
    


 


 


 


 

Period gap

   $ 328,203     $ (49,322 )   $ 568,759     $ (169,393 )      
    


 


 


 


     

Cumulative gap

   $ 328,203     $ 278,881     $ 847,640     $ 678,247     $ 678,247
    


 


 


 


 

Ratio of cumulative gap to total earning assets

     7.11 %     6.04 %     18.35 %     14.68 %      

(1) Excludes nonaccrual loans of $8.3 million.
(2) Excludes available for sale equity securities of $23.1 million.
(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 $0.9 million.

 

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Table of Contents

Alabama National generally benefits from increasing market rates of interest when it has an asset-sensitive gap and generally benefits from decreasing market rates of interest when it is liability sensitive. As shown in the table above, Alabama National is asset sensitive on a cumulative basis throughout all periods but is liability sensitive in the after three through twelve months time and greater than three years time frame. The analysis presents only a static view of the timing and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those are viewed by management as significantly less interest sensitive than market-based rates such as those paid on non-core deposits. For this and other reasons, management relies more upon the simulation analysis (as noted above) in managing interest rate risk. Net interest income may be affected 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

 

Alabama National’s earnings are dependent, to a large degree, 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. Alabama National’s market risk arises primarily from inherent interest rate risk in its lending, investing and deposit gathering activities. Alabama National 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 Alabama National’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 (adjusted in the current period due to historically low interest rates) 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, prepayment options exist whereby the borrower may elect to repay the obligation at any time. These prepayment options make anticipating the performance of those instruments difficult given changes in prevailing rates. At September 30, 2004, mortgage backed securities with a carrying value of $839.6 million, or 16.3% of total assets, and essentially every loan and lease, net of unearned income (totaling $3.40 billion, or 66.1% of total assets), carried such prepayment options. Management believes that assumptions used in its simulation analysis about the performance of financial instruments with such prepayment 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 financial 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 $3.63 billion, or 70.7%, of total assets at September 30, 2004. 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 Alabama National in its simulation analysis. Specifically, Alabama National’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 decrease, the spread tends to compress, with severe compression at very low prevailing interest rates. This characteristic is called “spread compression” and adversely affects net interest income in the simulation analysis when anticipated prevailing rates are reduced from current rates. Management relies upon historical experience to estimate the degree of spread compression in its simulation analysis. Management believes that such estimates of possible spread compression are reasonable. However, if the degree of spread compression varies from that expected, the actual results could differ from those indicated by the simulation analysis.

 

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Table of Contents

The following tables illustrate the results of simulation analysis used by Alabama National to determine the extent to which market risk would affect net interest margin for the next twelve months if prevailing interest rates increased or decreased the specified amounts from current rates. As also noted above, this model uses estimates and assumptions in both balance sheet growth and asset and liability account rate reactions to changes in prevailing interest rates. Because of the inherent use of these estimates and assumptions in the simulation model used to derive this market risk information, the actual results of the future impact of market risk on Alabama National’s net interest margin may differ from that found in the tables.

 

MARKET RISK

(Amounts in thousands)

 

Change in Prevailing Interest Rates (1)


   As of September 30, 2004

    As of December 31, 2003

 
   Net Interest
Income Amount


   Change from
Income Amount


    Net Interest
Income Amount


   Change from
Income Amount


 

+200 basis points

   $ 193,075    5.66 %   $ 150,671    8.72 %

+100 basis points

     188,704    3.27       144,794    4.48  

0 basis points

     182,724    —         138,592    —    

-25 basis points

     182,151    (0.31 )     137,755    (0.60 )

-50 basis points

     181,130    (0.87 )     136,300    (1.65 )

(1) Assumes an immediate rate change of this magnitude.

 

Liquidity and Capital Adequacy

 

Alabama National’s net loans and leases to deposit ratio was 93.6% at September 30, 2004, compared to 96.6% at year-end 2003. Alabama National’s liquid assets as a percentage of total deposits were 5.5% at September 30, 2004, compared to 5.4% at year-end 2003. At September 30, 2004, Alabama National had unused federal funds lines of approximately $121.7 million, unused lines at the Federal Home Loan Bank of $1.03 billion and an unused credit line with a third party bank of $30.0 million. The ability of Alabama National to use the entire amount of credit extended by the Federal Home Loan Bank depends on the available collateral to pledge for borrowings. Alabama National also has access to approximately $41.2 million via a credit facility with the Federal Reserve Bank of Atlanta. At September 30, 2004 and year-end 2003, there were no outstanding borrowings under this Federal Reserve credit facility.

 

Management analyzes the level of off-balance sheet agreements such as unfunded loan commitments and outstanding letters of credit as they relate to the levels of cash, cash equivalents, liquid investments, and available funds lines in an attempt to minimize the possibility that a potential liquidity shortfall will exist. Based on this analysis, management believes that Alabama National has adequate liquidity to meet short-term operating requirements. However, no assurances can be given in this regard.

 

During the 2004 third quarter, Alabama National completed an underwritten public offering of 977,500 shares of common stock (including 127,500 shares subject to an over-allotment option) and received net proceeds of approximately $49.7 million after deducting underwriting discounts and offering expenses. The net proceeds were used to pay off the credit facility with the third party bank and make capital injections in subsidiary banks. In addition, a portion of the net proceeds were retained for general corporate liquidity needs at the holding company.

 

Alabama National’s stockholders’ equity increased by $241.8 million from December 31, 2003, to $521.2 million at September 30, 2004. This increase was attributable to the following components (in thousands):

 

Net income

   $ 39,257  

Dividends

     (14,922 )

Issuance of stock for option exercises and other stock based compensation

     2,066  

Issuance of stock in purchase business combinations

     164,180  

Underwritten public offering

     49,682  

Additional paid in capital related to stock based compensation

     1,566  

Change in unrealized gain or loss on securities available for sale, net of deferred taxes

     (16 )
    


Net increase

   $ 241,813  
    


 

A strong capital position is vital to the continued profitability of Alabama National because it promotes depositor and investor confidence and provides a solid foundation for future growth of the organization. The capital of Alabama National and its subsidiary banks (the “Banks”) exceeded all prescribed regulatory capital guidelines at September 30, 2004. Under the capital guidelines of their regulators, Alabama National and its subsidiary banks are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common stockholders’ equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill. In addition, Alabama National and the Banks must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 3%, but this minimum ratio is increased by 100 to 200 basis points for other than the highest rated institutions. The following table sets forth the risk-based and leverage ratios of Alabama National and each subsidiary bank at September 30, 2004:

 

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Table of Contents
     Tier 1 Risk
Based


    Total Risk
Based


    Tier 1
Leverage


 

Alabama National BanCorporation

   12.18 %   13.43 %   8.46 %

National Bank of Commerce of Birmingham

   11.40     12.56     8.25  

Alabama Exchange Bank

   14.95     16.21     7.54  

Bank of Dadeville

   12.89     14.14     7.24  

Citizens & Peoples Bank, N.A.

   10.25     11.50     8.12  

Community Bank of Naples, N.A.

   9.89     11.14     8.32  

First American Bank

   13.24     14.49     8.68  

First Citizens Bank

   14.47     15.63     7.25  

First Gulf Bank

   10.96     12.21     7.69  

Georgia State Bank

   11.46     12.64     7.67  

Public Bank

   11.29     12.55     8.36  

Millennium Bank

   11.26     12.51     7.53  

CypressCoquina Bank

   9.70     10.97     8.16  

Indian River National Bank

   13.18     14.43     7.79  

Required minimums

   4.00     8.00     4.00  

 

On February 18, 2004, the Board of Directors of Alabama National renewed its share repurchase program that expired on December 31, 2003. The renewed plan authorizes the company to repurchase up to 300,000 shares of its common stock and will expire on December 31, 2004. There were no shares repurchased during the nine months ended September 30, 2004.

 

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Table of Contents

Item 3 – Quantitative and Qualitative Disclosures about Market Risk.

 

The information required by this item is contained in Item 2 herein under the headings “Interest Rate Sensitivity” and “Market Risk.”

 

Item 4 – Controls and Procedures.

 

As of September 30, 2004, the end of the quarter covered by this report, Alabama National carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Alabama National’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Alabama National’s disclosure controls and procedures are effective in timely alerting them to material information relating to Alabama National that is required to be included in its periodic filings with the Securities and Exchange Commission.

 

There was no significant change in Alabama National’s internal controls over financial reporting during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, Alabama National’s internal controls over financial reporting.

 

Part II. OTHER INFORMATION

 

Item 6 - Exhibits.

 

Exhibit 3.1 –

   Restated Certificate of Incorporation (Filed as an Exhibit to Alabama National’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference).

Exhibit 3.2 –

   Amended and Restated Bylaws (filed as an Exhibit to Alabama National’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).

Exhibit 10 –

   Amendment Number Four to the Alabama National BanCorporation Plan for the Deferral of Compensation by Non-Employee Directors of the Subsidiary Banks.

Exhibit 31.1 –

   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2 –

   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32 –

   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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Table of Contents

SIGNATURES

 

Pursuant to the requirements 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.

 

ALABAMA NATIONAL BANCORPORATION

Date: November 8, 2004

 

/s/ John H. Holcomb, III


    John H. Holcomb, III, its Chairman and Chief Executive Officer

Date: November 8, 2004

 

/s/ William E. Matthews, V


    William E. Matthews, V, its Executive Vice President and
    Chief Financial Officer

 

29