UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006 OR |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . |
COMMISSION FILE NUMBER: 0-25160
ALABAMA NATIONAL BANCORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 63-1114426 | |
| (State of incorporation) | (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)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Name of Exchange on Which Registered | |
| Common Stock, par value $1.00 per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of voting stock held by non-affiliates of the registrant at June 30, 2006 was $1,037,905,370.
As of February 26, 2007 the registrant had outstanding 20,589,849 shares of its common stock.
DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K:
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 23, 2007 are incorporated by reference into Part III of this report.
| Item No. |
Page No. | |||
| 1 | ||||
| PART I | ||||
| 1. |
3 | |||
| 14 | ||||
| 1A. |
16 | |||
| 1B. |
20 | |||
| 2. |
20 | |||
| 3. |
20 | |||
| 4. |
20 | |||
| PART II | ||||
| 5. |
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 21 | ||
| 6. |
22 | |||
| 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||
| 7A. |
60 | |||
| 8. |
61 | |||
| 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
61 | ||
| 9A. |
62 | |||
| 9B. |
63 | |||
| PART III | ||||
| 10. |
63* | |||
| 11. |
63* | |||
| 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 63* | ||
| 13. |
Certain Relationships and Related Transactions, and Director Independence |
63* | ||
| 14. |
63* | |||
| PART IV | ||||
| 15. |
64 | |||
| 65 | ||||
| * | Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on May 23, 2007 are incorporated by reference into Part III of this Form 10-K. |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, other periodic reports filed by Alabama National BanCorporation (the “Company” or “Alabama National”) under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of Alabama National, may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect Alabama National’s current views with respect to future events and financial performance. Such forward-looking statements are based on general assumptions and are subject to various risks, uncertainties, and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements.
These risks, uncertainties and other factors include, but are not limited to, those risks discussed under “Item 1A.—Risk Factors” and the following:
Some factors are specific to Alabama National, including:
| • | Alabama National’s ability to expand into new markets and to maintain profit margins in the face of pricing pressures. |
| • | Alabama National’s ability to keep pace with technological changes. |
| • | Alabama National’s ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by Alabama National’s customers and potential customers. |
| • | Alabama National’s ability to effectively manage interest rate risk and other market risk, credit risk and operational risk. |
| • | Alabama National’s ability to manage fluctuations in the value of assets and liabilities so as to maintain sufficient capital and liquidity to support Alabama National’s business. |
| • | The ability of Alabama National to achieve the expected operating results related to the acquired operations of recently-completed and future acquisitions (including Florida Choice Bank and The Peachtree Bank), which depends on a variety of factors, including (i) the ability of Alabama National to achieve the anticipated cost savings and revenue enhancements with respect to the acquired operations, (ii) the assimilation of the acquired operations to Alabama National’s corporate culture, including the ability to instill Alabama National’s credit practices and efficient approach to the acquired operations, (iii) the continued growth of the markets in which Alabama National operates consistent with recent historical experience, and (iv) the absence of material contingencies related to the acquired operations, including asset quality and litigation contingencies. |
| • | The cost and other effects of legal and administrative cases and proceedings, claims, settlements and judgments. |
Other factors which may affect Alabama National apply to the financial services industry more generally, including:
| • | Further easing of restrictions on participants in the financial services industry, such as banks, securities brokers and dealers, investment companies and finance companies, may increase competitive pressures. |
| • | Possible changes in interest rates may increase funding costs and reduce earning asset yields, thus reducing margins. |
| • | The threat or occurrence of war or acts of terrorism and the existence or exacerbation of general geopolitical instability and uncertainty. |
| • | Possible changes in consumer and business spending and saving habits could affect Alabama National’s ability to increase assets and to attract deposits. |
| • | Possible changes in economic and business conditions that may affect the prevailing interest rates, the prevailing rates of inflation, or the amount of growth, stagnation, or recession in the global, U.S., and southeastern U.S. economies, the value of investments, collectibility of loans and the profitability of business entities. |
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| • | Possible changes in monetary and fiscal policies, laws and regulations, and other activities of governments, agencies and similar organizations. |
Words such as “believe,” “expect,” “anticipate,” “project” and similar expressions signify forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements made by or on behalf of Alabama National. Any such statement speaks only as of the date the statement was made. Alabama National undertakes no obligation to update or revise any forward-looking statements.
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| ITEM 1. | BUSINESS |
Alabama National BanCorporation (“Alabama National” or “the Company”) is a Delaware bank holding company with its principal place of business in Birmingham, Alabama, and its main office located at 1927 First Avenue North, Birmingham, Alabama 35203 (Telephone Number: (205) 583-3600). Alabama National is currently the parent of twelve banks (the “Banks”), summarized below.
| Bank |
Principal Markets |
Total Assets at December 31, 2006 | |||
| 1. First American Bank |
Birmingham Metropolitan Area, Decatur/Huntsville/Athens, Talladega, and Auburn/Opelika, Alabama |
$ | 2,998,000,000 | ||
| 2. Indian River National Bank |
Indian River and Brevard Counties, Florida |
$ | 797,738,000 | ||
| 3. First Gulf Bank, N.A. |
Pensacola and Panama City, Florida and Baldwin County, Alabama |
$ | 654,227,000 | ||
| 4. The Peachtree Bank |
Metropolitan Atlanta, Georgia |
$ | 576,749,000 | ||
| 5. Florida Choice Bank |
Metropolitan Orlando and Ocala, Florida |
$ | 536,358,000 | ||
| 6. Community Bank of Naples, N.A. |
Naples, Florida |
$ | 428,966,000 | ||
| 7. Public Bank |
Metropolitan Orlando and Lake County, Florida |
$ | 424,008,000 | ||
| 8. Georgia State Bank |
Metropolitan Atlanta, Georgia |
$ | 408,920,000 | ||
| 9. CypressCoquina Bank |
Ormond Beach, Florida |
$ | 310,266,000 | ||
| 10. Millennium Bank |
Gainesville, Florida |
$ | 189,990,000 | ||
| 11. Bank of Dadeville |
Dadeville, Alabama |
$ | 83,607,000 | ||
| 12. Alabama Exchange Bank |
Tuskegee, Alabama |
$ | 80,516,000 | ||
In addition, Alabama National is currently the ultimate parent of one securities brokerage firm, NBC Securities, Inc. (Birmingham, Alabama); one receivables factoring company, Corporate Billing, Inc. (Decatur, Alabama); and one insurance agency, ANB Insurance Services, Inc. (headquartered in Birmingham, Alabama). Alabama National also offers commercial brokerage services through a division of First American Bank.
Subsidiary Banks
Alabama National operates through 12 subsidiary Banks which have a total of 102 banking offices and six loan/mortgage origination offices in the states of Alabama, Georgia and Florida. The Banks focus on traditional consumer, residential mortgage, commercial and real estate construction lending, and equipment leasing to customers in their market areas. The Banks also offer a variety of deposit programs to individuals and small businesses and other organizations at interest rates generally consistent with local market conditions.
Alabama National’s Wealth Management division offers trust, financial planning, investment management, and securities brokerage services to institutional and individual customers. Trust, financial planning, and investment management services are offered through First American Bank’s Trust and Asset Management division. In addition, NBC Securities, Inc. offers investment advisory and securities brokerage services at a number of locations of the Banks. Commercial mortgage services, including the origination of permanent commercial real estate mortgage loans for various lenders, are provided by Byars and Company, a division of First American Bank. Property and casualty insurance services are offered at a number of the locations of the Banks by ANB Insurance Services, Inc., a subsidiary of First American Bank. In addition, the Banks offer individual retirement and KEOGH accounts, safe deposit and night depository facilities and additional services such as the sale of traveler’s checks, money orders and cashier’s checks.
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Lending Activities
General
Through the Banks, Alabama National offers a range of lending services, including real estate, consumer and commercial loans, to individuals and small businesses and other organizations that are located in or conduct a substantial portion of their business in the Banks’ market areas. Alabama National’s total loans, net of unearned income, at December 31, 2006, were approximately $5.5 billion, or approximately 80% of total earning assets. The interest rates charged on loans vary with the degree of risk, maturity and amount of the loan and are further subject to competitive pressures, money market rates, availability of funds and government regulations. Alabama National has no “foreign loans” (other than approximately $2 million of factored receivables) or loans for “highly leveraged transactions,” as such terms are defined by applicable banking regulations.
Loan Portfolio
Real Estate Loans. Loans secured by real estate are the primary component of Alabama National’s loan portfolio, constituting approximately $4.6 billion, or 84.1% of total loans, net of unearned income, at December 31, 2006. The Banks originate consumer and commercial related real estate purpose loans. Also, the Banks often take real estate as an additional source of collateral to secure commercial and industrial loans. Such loans are classified as real estate loans rather than commercial and industrial loans if the real estate collateral is considered significant as a secondary source of repayment for the loan. Loans are typically made on a recourse basis supported by financial statements and a review of the repayment ability of the borrower(s) and/or guarantor(s). Origination fees are charged for most real estate secured loans. Furthermore, the Banks have adopted the Interagency Supervisory Real Estate Loan-to-Value Limits issued by the federal regulators as the maximum allowable loan-to-value ratio; however, exceptions are permitted provided justification is supported by sufficient mitigating factors.
Real estate lending activities consist of the following:
| • | The primary type of residential mortgage loan is the single-family first mortgage, typically structured with fixed or adjustable interest rates, based on market conditions. These loans usually have fixed rates for up to five years, with maturities of 25 to 30 years. Also, the Banks originate home equity lines of credit secured by residential property. These loans are typically made on a variable rate basis with maturities up to 15 years. |
| • | The Banks’ commercial real estate term loans accrue at either variable or fixed rates. The variable rates approximate current market rates. Amortizations are typically no more than 25 years with maturity dates generally five years or less. |
| • | Construction and land development loans are typically made on a variable rate basis. Loan terms usually do not exceed twenty-four months. |
| • | The Banks originate residential loans for sale into the secondary market. Such loans are made in accordance with underwriting standards set by the purchaser of the loan, normally as to loan-to-value ratio, interest rate, borrower qualification and documentation. Such loans are generally made under a commitment to purchase from a loan purchaser. The Banks generally collect from the borrower or purchaser a combination of the origination fee, discount points and/or service release fee. During 2006, the Banks sold approximately $665 million in loans to such purchasers. |
Consumer Loans. Consumer lending includes installment lending to individuals in the Banks’ market areas and generally consists of loans to purchase automobiles and other consumer durable goods. Consumer loans constituted $94.6 million, or 1.7% of Alabama National’s loan portfolio, at December 31, 2006. Consumer loans are underwritten based on the borrower’s income, current debt level, past credit history and collateral. Consumer rates are both variable and fixed, with terms negotiable. Terms generally range from one to five years depending on the nature and condition of the collateral. Periodic amortization, generally monthly, is typically required.
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Commercial and Financial Loans. The Banks make loans for commercial purposes in various lines of business. These loans are typically made on terms up to five years at fixed or variable rates. The loans are secured by various types of collateral including accounts receivable, inventory or, in the case of equipment loans, the financed equipment. The Banks attempt to reduce their credit risk on commercial loans by underwriting the loan based on the borrower’s cash flow and its ability to service the debt from earnings, and by limiting the loan-to-value ratio. Historically, the Banks have typically loaned up to 80% on loans secured by accounts receivable, up to 50% on loans secured by inventory, and up to 100% on loans secured by equipment. The Banks also make some unsecured commercial loans and offer equipment leasing. Commercial and financial loans constituted $401.1 million, or 7.3% of Alabama National’s loan portfolio, at December 31, 2006. Interest rates are negotiable based upon the borrower’s financial condition, credit history, management stability and collateral.
Credit Procedures and Review
Loan Approval. Certain credit risks are inherent in making loans. These include prepayment risks, risks resulting from uncertainties in the future value of collateral, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. In particular, longer maturities increase the risk that economic conditions will change and adversely affect collectibility.
Alabama National attempts to minimize loan losses through various means and uses standardized underwriting criteria. Alabama National has established a standardized loan policy for all of the Banks that may be modified based on local market conditions. In particular, on larger credits, Alabama National generally relies on the cash flow of a debtor as the source of repayment and secondarily on the value of the underlying collateral. In addition, Alabama National attempts to utilize shorter loan terms in order to reduce the risk of a decline in the value of such collateral.
Alabama National addresses repayment risks by adhering to internal credit policies and procedures which all of the Banks have adopted. These policies and procedures include officer and customer lending limits, a multi-layered loan approval process for larger loans, documentation examination and follow-up procedures for any exceptions to credit policies. The point in each Bank’s loan approval process at which a loan is approved depends on the size of the borrower’s credit relationship with such Bank. Each of the lending officers at each of the Banks has the authority to approve loans up to an approved loan authority amount as approved by each Bank’s Board of Directors. Loans in excess of the highest loan authority amount at each Bank must be approved by Alabama National’s President and Chief Operating Officer or Alabama National’s Vice President of Credit Administration. In addition, loans in excess of a particular loan officer’s approval authority must be approved by a more senior officer at the particular Bank, the loan committee at such Bank, or both.
Risk Ratings. Loan officers are directly responsible for monitoring the risk in their respective portfolio. On commercial loans, risk grades are assigned by the loan officer for the probability of default and for loss in the event of default following analysis of borrower characteristics and external economic factors. However, on consumer loans, risk grades are determined by a borrower’s credit score and personal debt ratio.
Loan Review. Alabama National’s Loan Review Department (“LRD”), which is wholly independent of the lending function, serves as a validation of each loan officer’s risk monitoring and assigned risk ratings. Alabama National maintains a continuous loan review system for First American Bank, Indian River National Bank, Florida Choice Bank, The Peachtree Bank and First Gulf Bank. For the other Banks, a scheduled review system is in place. LRD’s primary function is to provide the Board of Directors of each Bank with a thorough understanding of the credit quality of such Bank’s loan portfolio. Other review requirements are in place to provide management with early warning systems for problem loans as well as compliance with stated lending policies. LRD’s findings are reported, along with an asset quality review, to the Alabama National Board of Directors at each bi-monthly meeting.
Deposits
The principal sources of funds for the Banks are core deposits, consisting of demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits and certificates of deposit. Transaction
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accounts include checking and negotiable order of withdrawal (NOW) accounts which customers use for cash management and which provide the Banks with a source of fee income and cross-marketing opportunities, as well as a low-cost source of funds. Time and savings accounts also provide a relatively stable and low-cost source of funding. The largest source of funds for the Banks are certificates of deposit. Certificates of deposit in excess of $100,000 are held primarily by customers in the Banks’ market areas. Alabama National does utilize brokered certificate of deposits to supplement its market funding sources when funding needs or pricing warrant the use of wholesale funding.
Deposit rates are reviewed weekly by senior management of each of the Banks. Management at Alabama National believes that the rates the Banks offer are competitive with those offered by other institutions in the Banks’ market areas. Alabama National also focuses on customer service to attract and retain deposits.
Investment Services
First American Bank operates an investment department devoted primarily to servicing correspondent banks’ investment needs. Services provided by the investment department include the sale of fixed income securities, asset/liability consulting, safekeeping and bond accounting.
Wealth Management Division
The Company’s Wealth Management division offers trust, financial planning, investment management, and securities brokerage services to institutional and individual customers. Trust, financial planning, and investment management services are offered through First American Bank’s Trust and Asset Management Division. In addition, NBC Securities, Inc. offers investment advisory and securities brokerage services at a number of locations of the Banks. These services include the sale of stocks, bonds, mutual funds, annuities, margin loans, other insurance products and financial advisory services including those provided by outside money managers through separately-managed accounts. As of December 31, 2006, NBC Securities had a total of approximately 76 investment representatives and advisors located in 41 offices in Alabama, Florida, Georgia and Tennessee.
Mortgage Lending Division
Substantially all of the Banks operate mortgage lending divisions that make home loans to individuals located in the markets served by the Banks. The majority of these loans are sold to corporate investors, who also service the loans. In addition to selling traditional residential mortgages, with the 2005 acquisition of Byars and Company, Alabama National now has a commercial mortgage banking operation. Through this division of First American Bank, Alabama National arranges permanent financing with outside investors for commercial real estate transactions. First American Bank earns a fee for this service. Alabama National also services many of the loans for the permanent investors and earns a fee for this service as well.
Insurance Services Division
ANB Insurance Services, Inc., a subsidiary of Alabama National’s First American Bank, is a full service independent property and casualty insurance agency headquartered in Birmingham, Alabama. Agents are located at many of the Banks.
Competition
Alabama National encounters strong competition in all of its businesses. The Banks compete with other commercial banks, savings and loan associations, credit unions, finance companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries operating in Alabama, Florida, Georgia and elsewhere. Many of these competitors, some of which are affiliated with large bank holding companies, have substantially greater resources and lending limits, and may offer certain services
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that the Banks do not currently provide. In addition, many of Alabama National’s non-bank competitors are not subject to the same extensive federal regulations that govern bank holding companies and federally insured banks.
Customers for banking services are generally influenced by convenience, quality of service, personal contacts, prices of services and availability of products. Alabama National believes that its affiliates effectively compete with others banks and financial institutions in their relevant market areas.
Market Areas and Growth Strategy
Alabama National currently conducts business through 45 banking locations in Alabama, 44 banking locations in Florida and 13 banking locations in Georgia. Approximately 99% of the Banks’ deposits are in metropolitan statistical areas.
Alabama National intends to pursue expansion into attractive, high growth markets in Florida, Georgia and Alabama through acquisitions of community banks and branch locations and through bank expansions. Since 1995, Alabama National has successfully integrated 13 bank acquisitions and two separate branch acquisitions. Alabama National focuses its acquisition strategy on high quality community banks with proven management teams that view Alabama National as a partner, rather than as an exit strategy. Alabama National’s strategy is to maintain the management team of each acquired bank, allowing it to retain its local entrepreneurial identity and decision making, while simultaneously creating efficiencies in the administrative and back office operations of the bank.
In Alabama, Alabama National focuses its operations in three principal market areas: north Alabama (Decatur-Huntsville market); the metropolitan Birmingham area and east central Alabama; and Baldwin County (located on the Gulf Coast between Mobile, Alabama and Pensacola, Florida). In Florida, Alabama National focuses its operations in seven principal market areas: Pensacola and Panama City (located in the Florida panhandle); the Gainesville metropolitan area; the Orlando metropolitan area; Ocala; the coastal Atlantic counties of Indian River and Brevard (including the Port St. Lucie metropolitan area); the Palm Coast / Ormond Beach region; and the Naples and Fort Myers metropolitan areas. In Georgia, Alabama National focuses its operations in the greater-Atlanta counties of Cobb, Douglas, Paulding, Gwinnett and Fulton.
Through First American Bank, Alabama National serves the metropolitan Birmingham market, which includes portions of Jefferson, Shelby and St. Clair Counties. First American Bank also serves Morgan, Limestone and Madison Counties in north Alabama, Talladega County in central Alabama and Lee County in east central Alabama. The Decatur-Huntsville, Alabama market has demonstrated a growing economic base in recent years. First American entered the Lee County market, which includes the communities of Auburn and Opelika, with the 2001 acquisition of Farmers National Bancshares, Inc. Lee County is also one of Alabama’s higher growth counties.
Through First Gulf Bank, N.A., Alabama National serves Baldwin County, Alabama, as well as Pensacola and Panama City, Florida. Baldwin County, located between Mobile, Alabama and Pensacola, Florida, has a broad base of economic activity in the retail and service, agriculture, seafood, tourism and manufacturing industries. Baldwin County includes the popular tourism and retirement resort communities of Gulf Shores, Orange Beach and Fairhope. Shelby, Baldwin, Lee and St. Clair Counties have been named in statistical surveys as four of the fastest growing counties in Alabama.
In 1997, Alabama National expanded outside of Alabama with the opening of Citizens & Peoples Bank, N.A. in Escambia County, Florida. In May 2005, Alabama National’s First Gulf Bank merged with and into Citizens & Peoples Bank, N.A., which now operates under the name First Gulf Bank, N.A. and serves Pensacola and Panama City, Florida, as well as Baldwin County, Alabama. In 1998, Alabama National further expanded its presence in markets outside of Alabama with two acquisitions in Florida and one in Georgia. Community Bank
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of Naples, N.A., located in Collier County, Florida, and Georgia State Bank, located in the greater-Atlanta counties of Cobb, Douglas and Paulding, are located in markets that are among the fastest growing in their respective states. Public Bank is located in the fast-growing greater Orlando area, with offices in Altamonte Springs, Kissimmee and St. Cloud, Florida. In 2001, Alabama National expanded its presence in the greater-Orlando area with the acquisition of Peoples State Bank of Groveland (“Peoples State Bank”), serving customers in the communities of Groveland, Leesburg and Clermont, Florida. Peoples State Bank merged with Public Bank in 2004. In 2003, Alabama National further expanded in Florida with the acquisition of Millennium Bank in Gainesville. Home to the University of Florida, Gainesville has experienced solid economic activity and good population growth.
In 2004, Alabama National completed the acquisitions of two additional Florida banks: Cypress Bank in Palm Coast and Indian River National Bank in Vero Beach. Palm Coast, located in Flagler County, has experienced strong growth in population and bank deposits. Indian River serves the coastal Atlantic counties of Indian River and Brevard through eight locations in Vero Beach, Sebastian, Melbourne, Palm Bay and Rockledge, Florida. In July 2004, Alabama National acquired Coquina Bank of Ormond Beach, Florida. Coquina Bank subsequently merged with Cypress Bank in August 2004 to form CypressCoquina Bank.
In April 2006, Alabama National acquired Florida Choice Bank, with six offices in the greater Orlando, Florida market and one office in Ocala, Florida. In October 2006 Alabama National acquired The Peachtree Bank, with four offices in the north central Atlanta metropolitan area.
The other subsidiary Banks, Alabama Exchange Bank and Bank of Dadeville, are located in non-metropolitan areas. Each of these Banks, while experiencing lower growth due to limited market growth, typically operates at a high level of profitability. As a result, these Banks tend to produce capital for growth in many of the high growth markets served by the other Banks. Alabama National’s strategy is to focus on maximization of profitability for these non-metropolitan banks, since market growth has not been as significant.
Due to continuing consolidation within the banking industry, particularly in the Southeastern United States, Alabama National may in the future seek to combine with other banks or thrifts (or their holding companies) that may be of smaller, equal or greater size than Alabama National. Alabama National currently intends to concentrate on acquisitions of additional banks or thrifts (or their holding companies) which operate in attractive market areas in Florida, Georgia and Alabama. In addition to price and terms, the factors considered by Alabama National in determining the desirability of a business acquisition or combination are financial condition, asset quality, earnings potential, quality of management, market area and competitive environment.
In addition to its strategy of expansion through combinations with other banks or thrifts, Alabama National intends to continue to expand organically where possible by growing its existing banks in their respective market areas and nearby attractive markets.
Alabama National continuingly explores expansion into lines of business closely related to banking and will pursue such expansion if it believes such lines could be profitable without causing undue risk to Alabama National. First American Bank operates a commercial leasing division which currently focuses on machinery and equipment leases to business customers. ANB Insurance Services, Inc., Alabama National’s full service independent property and casualty insurance agency headquartered in Decatur, Alabama, has agents in most of the markets serviced by the Banks. Alabama National has also expanded its securities brokerage unit, NBC Securities, Inc., by locating investment representatives in offices of several of Alabama National’s subsidiary Banks as well as in offices of some correspondent banks. It has also added investment representatives in other non-bank locations when opportunities have arisen. In September 2005, Alabama National entered the commercial mortgage banking business with the acquisition of Byars and Company, now a division of First American Bank. Byars originates and services commercial mortgage loans for life insurance companies and commercial mortgage conduits.
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While Alabama National plans to continue its growth as described above, there is no assurance that its efforts will be successful.
Employees
As of December 31, 2006, Alabama National and the Banks together had approximately 1,789 full-time equivalent employees. None of these employees is a party to a collective bargaining agreement. Alabama National considers its relations with its employees to be good.
Supervision and Regulation
Alabama National and the Banks are subject to state and federal banking laws and regulations, which impose specific requirements and restrictions on, and provide for general regulatory oversight with respect to, virtually all aspects of operations. These laws and regulations are generally intended to protect depositors, not shareholders. To the extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of Alabama National and the Banks.
Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and following in 1991 with the Federal Deposit Insurance Corporation Act (“FDICIA”), numerous additional regulatory requirements have been placed on the banking industry, and additional changes have been proposed. The operations of Alabama National and the Banks may be affected by legislative changes and the policies of various regulatory authorities. Alabama National and the Banks are unable to predict the nature or the extent of the effect on its business and earnings that fiscal or monetary policies, economic control or new federal or state legislation may have in the future.
As a registered bank holding company, Alabama National is subject to regulation under the Bank Holding Company Act of 1956, as amended (“BHCA”), and to inspection, examination and supervision by the Federal Reserve. The Banks are subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Deposit Insurance Corporation (the “FDIC”). The Banks are also subject to various requirements and restrictions under federal and state law, including requirements to maintain allowances against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Banks. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve as it attempts to control the money supply and credit availability in order to influence the economy.
Under the BHCA, Alabama National may not generally engage in activities or acquire more than 5% of any class of voting securities of any company engaged in activities other than banking or activities that are closely related to banking. However, a bank holding company that has elected to be treated as a financial holding company may engage in activities that are financial in nature or incidental or complementary to such financial activities, as determined by the Federal Reserve alone, or together with the Secretary of the Department of the Treasury. Alabama National has not elected financial holding company status. See “Gramm-Leach-Bliley Act” beginning on page 12 below.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”)
Under Riegle-Neal, bank holding companies from any state may acquire banks located in any other state, subject to certain conditions, including concentration limits. A bank may establish branches across state lines by merging with a bank in another state (unless applicable state law prohibits such interstate mergers), provided that
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certain conditions are met. A bank may also establish a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits such interstate de novo branching and certain other conditions are met.
Bank Holding Company Support of Subsidiary Banks
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event that the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. All of the Banks are FDIC-insured depository institutions. Any capital loans by a bank holding company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Regulatory Capital Requirements
Alabama National is required to comply with the capital adequacy standards established by the Federal Reserve, and the Banks must comply with similar capital adequacy standards established by the OCC, FDIC and the Federal Reserve, as applicable. Failure to meet capital adequacy standards could subject Alabama National or the Banks to a variety of enforcement remedies, including the issuance of a capital directive, the termination of deposit insurance by the FDIC and certain other restrictions on its business. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” as such terms are defined under regulations issued by each of the federal banking agencies. In general, the agencies measure capital adequacy within a framework that makes capital requirements sensitive to the risk profiles of individual banking companies. The guidelines define capital as either Tier 1 (primarily common shareholders’ equity) or Tier 2 (certain debt instruments and a portion of the allowance for loan losses). Alabama National and the Banks are subject to a minimum Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) of 4%, a total capital ratio (Tier 1 plus Tier 2 to risk-weighted assets) of 8% and a Tier 1 leverage ratio (Tier 1 to average quarterly assets) of 4%. To be considered a “well capitalized” institution, the Tier 1 capital ratio, the total capital ratio and the Tier 1 leverage ratio must equal or exceed 6%, 10% and 5%, respectively.
The Federal Reserve has adopted rules to incorporate market and interest rate risk components into its risk-based capital standards. Under these market risk requirements, capital is allocated to support the amount of market risk related to a financial institution’s ongoing trading activities.
Affiliate Transactions
The Banks are subject to Regulation W, which comprehensively implemented statutory restrictions on transactions between a bank and its affiliates. Regulation W combines the Federal Reserve’s interpretations and exemptions relating to Sections 23A and 23B of the Federal Reserve Act. Regulation W and Section 23A of the Federal Reserve Act place limits on the amount of loans or extensions of credit to, investments in, or certain other transactions with affiliates, and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. In general, the Banks’ “affiliates” are Alabama National and Alabama National’s non-bank subsidiaries.
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Regulation W and Section 23B of the Federal Reserve Act prohibit, among other things, a bank from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with non-affiliated companies.
The Banks are also subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders and their related interests. Such extensions of credit must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and must not involve more than the normal risk of repayment or present other unfavorable features.
Community Reinvestment Act (“CRA”)
The CRA requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC or the OCC shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. These factors are considered in evaluating mergers, acquisitions and applications to open a branch or facility. The CRA also requires all institutions to make public disclosure of their CRA ratings. Each of the Banks received at least a satisfactory rating in its most recent evaluation.
Dividends
There are various legal and regulatory limits on the extent to which banks may pay dividends or otherwise supply funds to their holding companies. In addition, federal and state regulatory agencies also have the authority to prevent a bank or bank holding company from paying a dividend or engaging in any other activity that, in the opinion of the agency, would constitute an unsafe or unsound practice. The Federal Reserve has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company’s net income over the preceding year is sufficient to fund the dividends, and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition.
In addition to the limitations placed on the payment of dividends at the holding company level, there are various legal and regulatory limits on the extent to which the Banks may pay dividends or otherwise supply funds to Alabama National. The Banks located and chartered in Alabama, Florida and Georgia are subject to the laws and regulations of those states, which place certain restrictions on the payment of dividends. Additionally, the state chartered Banks that are members of the Federal Reserve System are subject to the regulations of the Federal Reserve Board, while Alabama National’s national chartered Banks are subject to the regulations of the OCC. Both the Federal Reserve and OCC place certain restrictions on the payment of dividends.
Under Alabama law, a bank may not pay a dividend in excess of 90 percent of its net earnings until the bank’s surplus is equal to at least 20 percent of capital. Also, under Alabama law, a bank is required to obtain approval of the Superintendent of Banking prior to the payment of dividends if the total of all dividends declared by the bank in any calendar year will exceed the total of (a) the bank’s net earnings (as defined by statute) for the year, plus (b) its retained net earnings for the preceding two years, less any required transfers to surplus. Also, no dividends may be paid from the bank’s surplus without the prior written approval of the Superintendent of Banking. All of the Banks that are chartered under Alabama law are subject to these dividends restrictions.
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Florida law places similar restrictions on the payment of dividends. Florida chartered banks are subject to regulatory restrictions on the payment of dividends, including a prohibition of payment of dividends from their capital under certain circumstances without the prior approval of the Florida Department of Financial Services. Except with the prior approval of the Department of Financial Services, all dividends of any Florida bank must be paid out of retained net profits from the current period and the previous two years, after deducting expenses, including losses and bad debts. In addition, Florida banks are required to transfer at least 20 percent of their net income to surplus until their surplus equals the amount of paid-in capital.
For Georgia chartered banks, a bank must have approval of the Georgia Department of Banking and Finance to pay cash dividends if, at the time of such payment: (i) the ratio of Tier I capital to adjusted total assets is less than 6 percent; (ii) the aggregate amount of dividends to be declared or anticipated to be declared during the current calendar year exceeds 50 percent of its net after-tax profits for the previous calendar year; or (iii) its total classified assets in its most recent regulatory examination exceeded 80 percent of its Tier 1 capital plus its allowance for loan losses, as reflected in the examination.
In addition, the approval of the OCC is required for a national bank to pay dividends in excess of the bank’s retained net income for the current year plus retained net income for the preceding two years. Approval of the Federal Reserve Board is required for payment of any dividend by a state chartered bank that is a member of the Federal Reserve System (sometimes referred to as a state member bank), if the total of all dividends declared by the bank in any calendar year would exceed the total of its net profits, as defined by regulatory agencies, for that year combined with its retained net profits for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its net profits then on hand.
Federal and state banking regulations applicable to us and our Bank subsidiaries require minimum levels of capital which limit the amounts available for payment of dividends. See “Regulatory Capital Requirements” on page 10 above and Note 19 to the Consolidated Financial Statements of Alabama National and Subsidiaries included in this Annual Report on Form 10-K beginning at page F-1.
The inability of the Banks to pay dividends may have an adverse effect on Alabama National.
FDIC Regulation
FDIC regulations require that management report on its responsibility for preparing its institution’s financial statements and for establishing and maintaining an internal control structure and procedures for financial reporting and compliance with designated laws and regulations concerning safety and soundness.
The FDIC currently uses a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The FDIC recently has proposed changes to its assessment system that are designed to require premium payments by a greater number of banks and other FDIC-insured depository institutions and that also would provide rebates to some institutions. If any of these changes were to take effect, the assessment obligations of the Banks could change.
Gramm-Leach-Bliley Act (“Gramm-Leach-Bliley”)
Gramm-Leach-Bliley, which became effective in 2000, permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. A bank holding company may become a financial holding company by filing a declaration if each of its subsidiary banks is well capitalized under the FDICIA prompt corrective action provisions, is well managed and has at least a satisfactory rating under the CRA. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. At this time, Alabama National has not registered to become a financial holding company.
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Gramm-Leach-Bliley broadly defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking; and activities that the Federal Reserve has determined to be closely related to banking. Gramm-Leach-Bliley also permits the Federal Reserve, in consultation with the Department of the Treasury, to determine that other activities are “financial in nature” and are therefore permissible for financial holding companies. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature (other than insurance underwriting, insurance company portfolio investment, merchant banking, real estate development and real estate investment) through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory CRA rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank at issue has a CRA rating of satisfactory or better. Bank holding companies that have not become financial holding companies are prohibited from engaging in activities other than banking or managing or controlling banks or other permissible subsidiaries and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Gramm-Leach-Bliley preserves the role of the Federal Reserve as the umbrella supervisor for holding companies while at the same time incorporating a system of functional regulation designed to take advantage of the strengths of the various federal and state regulators. In particular, Gramm-Leach-Bliley replaces the broad exemption from Securities and Exchange Commission regulation that banks previously enjoyed with more limited exemptions, and it reaffirms that states are the regulators for the insurance activities of all persons, including federally-chartered banks.
Gramm-Leach-Bliley also establishes a minimum federal standard of financial privacy. In general, the applicable regulations issued by the various federal regulatory agencies prohibit affected financial institutions (including banks, insurance agencies and broker/dealers) from sharing information about their customers with non-affiliated third parties unless (i) the financial institution has first provided a privacy notice to the customer; (ii) the financial institution has given the customer an opportunity to opt out of the disclosure; and (iii) the customer has not opted out after being given a reasonable opportunity to do so.
USA Patriot Act
On October 26, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) was signed into law. The USA Patriot Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. government to detect and prosecute international money laundering and the financing of terrorism. The principal provisions of Title III of the USA Patriot Act require that regulated financial institutions: (i) establish an anti-money laundering program that includes training and audit components; (ii) comply with regulations regarding the verification of the identity of any person seeking to open an account; (iii) take additional required precautions with non-U.S. owned accounts; and (iv) perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships. The USA Patriot Act also expanded the conditions under which funds in a U.S. interbank account may be subject to forfeiture and increased the penalties for violation of anti-money laundering regulations. Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution.
Other
As a registered broker-dealer and investment advisor, NBC Securities is subject to regulation by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and other self-regulatory organizations, which may affect its manner of operation and profitability.
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ANB Insurance Services, Inc., a subsidiary of First American Bank, is subject to regulation in the various states and jurisdictions in which it transacts business.
Executive Officers of the Registrant
The executive officers of Alabama National serve at the pleasure of the Board of Directors. Set forth below are the current executive officers of Alabama National and a brief explanation of their principal employment during the last five (5) years.
John H. Holcomb, III—Age 55—Chairman and Chief Executive Officer. Mr. Holcomb has served as Chairman and Chief Executive Officer of Alabama National since 1996. Mr. Holcomb served as Chief Executive Officer of National Bank of Commerce of Birmingham (“NBC”) from 1990 to 2005. Effective 2005, Mr. Holcomb began serving as Chairman of the Board of First American Bank.
Dan M. David—Age 61—Vice Chairman. Mr. David has served as Vice Chairman of Alabama National since 1997 when First American Bancorp merged with and into Alabama National. Mr. David also serves as Vice Chairman of First American Bank, a position he has held since 2005. From 1995 to 2005, Mr. David served as Chairman and Chief Executive Officer of First American Bank. Mr. David served as Chairman and Chief Executive Officer of First American Bancorp from 1995 through 1997.
Richard Murray, IV—Age 44—President and Chief Operating Officer. Mr. Murray has served as President and Chief Operating Officer of Alabama National since 2000. Prior to such time, Mr. Murray served as Executive Vice President of Alabama National beginning in 1998. Mr. Murray also serves as Vice Chairman of First American Bank, a position he has held since 2005. Mr. Murray served as Executive Vice President of NBC from 1997 to 2005.
William E. Matthews, V—Age 42—Executive Vice President and Chief Financial Officer. Mr. Matthews has served as Executive Vice President and Chief Financial Officer of Alabama National since 1998. Mr. Matthews also serves as Executive Vice President and Chief Financial Officer of First American Bank, positions he has held since 2005. Mr. Matthews served as Executive Vice President and Chief Financial Officer of NBC from 1998 to 2005. Prior to that date, Mr. Matthews served as Senior Vice President of NBC beginning in 1996.
John R. Bragg—Age 45—Executive Vice President. Mr. Bragg has served as Executive Vice President of Alabama National since 1998. Mr. Bragg also serves as Executive Vice President of First American Bank, a position he has held since 2005. Mr. Bragg served as Executive Vice President of NBC from 1997 to 2005. Mr. Bragg served as Senior Vice President of NBC from 1992 until 1997.
James R. Thompson, III—Age 47—First American Bank’s President and Chief Executive Officer. Mr. Thompson has served as President and Chief Executive Officer of First American Bank, the largest subsidiary of Alabama National, since 2005. Prior to that date, Mr. Thompson served as President and Chief Operating Officer of First American Bank beginning in 1994.
Shelly S. Williams—Age 44—Senior Vice President and Controller. Ms. Williams has served as Senior Vice President and Controller of Alabama National since 2000. Ms. Williams also serves as Senior Vice President and Chief Accounting Officer of First American Bank, positions she has held since 2005. Ms. Williams served as Senior Vice President and Controller of NBC from 2000 to 2005. Ms. Williams served as Vice President and Controller of NBC from 1997 through 2000, and as Assistant Vice President and Assistant Controller of NBC from 1996 to 1997.
William R. Ireland, Jr.—Age 49—Executive Vice President and Chief Risk Management Officer. Mr. Ireland has served as Executive Vice President and Chief Risk Management Officer of Alabama National and Executive Vice President of First American Bank since 2005. Mr. Ireland also serves as Loan Review and Compliance Officer of First American Bank, a position he has held since 1990. Mr. Ireland served as Senior Vice President of Alabama National from 1993 through 2005.
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Company Website
Alabama National’s website address is www.alabamanational.com. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report. Alabama National makes available free of charge through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material has been filed with or furnished to the Securities and Exchange Commission.
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Making or continuing an investment in securities issued by Alabama National, including our common stock, involves certain risks that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on Alabama National. Additional risks and uncertainties also could adversely affect our business and our results. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause Alabama National’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Alabama National.
We may not be able to maintain our historical growth rate, which may adversely affect our results of operations and financial condition.
We have grown substantially in the past several years from approximately $2.03 billion in total assets at December 31, 1999 (as restated for a 2001 pooling-of-interests transaction) to approximately $7.67 billion in total assets at December 31, 2006. This growth has been achieved through a combination of internal growth and acquisitions. Our future profitability will depend in part on our continued ability to grow. We may not be able to sustain our historical rate of growth or may not be able to grow our business at all in the future. We may also not be able to obtain the financing necessary to fund additional growth and may not be able to find suitable candidates for additional acquisitions in the future. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may impede or prohibit our ability to acquire additional bank subsidiaries or open or acquire new branch offices.
We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our capital resources will satisfy our capital requirements for the immediate future. We may, however, need to raise additional capital to support our continued growth or for other capital needs. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us or at all. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.
Our directors and executive officers own a significant portion of our common stock.
Our directors and executive officers, as a group, beneficially owned approximately 17.6% of our common stock outstanding as of February 26, 2007. As a result of their beneficial ownership, directors and executive officers will have the ability, by voting their shares in concert, to significantly influence the outcome of all matters submitted to our stockholders for approval, including the election of directors.
We make and hold in our loan portfolio a significant number of construction loans, which may pose more credit risk than other types of real estate loans.
We offer residential and commercial construction programs for builders and developers, which constituted 34.8% of our loan portfolio as of December 31, 2006. Builder construction loans are considered more risky than other types of real estate loans. While we believe we have established adequate reserves to cover the credit risk associated with our construction loan portfolio, there can be no assurance that losses will not exceed our reserves, which could adversely affect our earnings.
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Competition in the banking industry is intense.
Competition in the banking and financial services industry is intense. In their primary market areas, our subsidiary banks compete with other commercial banks, savings and loan associations, credit unions, finance companies, insurance companies, brokerage and investment banking firms and other financial intermediaries that offer similar services, operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than our subsidiary banks and may offer certain services that our subsidiary banks do not or cannot provide. Additionally, some of our non-bank competitors are not subject to the same regulations that govern Alabama National or the Banks and may have greater flexibility in competing for business. Our profitability depends upon the subsidiary banks’ continued ability to compete effectively in their market areas.
We operate in a heavily regulated environment.
The banking industry is heavily regulated under both federal and state law. We are subject, in certain respects, to regulation by the Federal Reserve Board, the Federal Depository Insurance Corporation, the Office of the Comptroller of the Currency, the Alabama State Banking Department, the Florida Department of Financial Services and the Georgia State Banking Department. Our success depends not only on competitive factors but also on state and federal regulations affecting banks and bank holding companies. The regulations are primarily intended to protect depositors, not stockholders. The ultimate effect of recent and proposed changes to the regulation of the financial institution industry cannot be predicted. Regulations now affecting us may be modified at any time, and there is no assurance that such modifications, if any, will not adversely affect our business.
Changes in the policies of monetary authorities and other government action could adversely affect our profitability.
Our results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits. In view of changing conditions in the national economy and in the money markets, particularly in light of the continuing threat of terrorist acts and the current military operations in the Middle East, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of Alabama National. Furthermore, the actions of the United States government and other governments in responding to such terrorist attacks and the military operations in the Middle East may result in currency fluctuations, exchange controls, market disruption and other adverse effects.
Our success depends upon local economic conditions.
Our success depends to a certain extent on the general economic conditions of the geographic markets served by our subsidiary banks in the states of Alabama, Georgia and Florida. The local economic conditions in these areas have a significant impact on the subsidiary banks’ commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the Southeastern United States in general or any one or more of these local markets could negatively impact the financial results of our banking operations and have a negative effect on our profitability.
A decrease in the market for real estate could harm our revenues and profitability.
A significant percentage of our assets is secured by residential and commercial real estate mortgages. Our financial results may be adversely affected by changes in prevailing economic conditions, particularly decreases in real estate values. Decreases in real estate values could adversely affect the value of property used as collateral for our loans and investments. If poor economic conditions result in decreased demand for real estate loans, our profits may decrease because our alternative investments may earn less income than real estate loans.
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We cannot guarantee that we will pay dividends to stockholders in the future.
Our principal business operations are conducted through our subsidiary banks. Cash available to pay dividends to our stockholders is derived primarily, if not entirely, from dividends paid by the subsidiary banks. The ability of the subsidiary banks to pay dividends, as well as our ability to pay dividends to our stockholders, will continue to be subject to and limited by the results of operations of the subsidiary banks and by certain legal and regulatory restrictions. Further, any lenders making loans to us may impose financial covenants that may be more restrictive than regulatory requirements with respect to our payment of dividends to stockholders. There can be no assurance of whether or when we may pay dividends to our stockholders.
Changes in the allowances for loan and lease losses of our subsidiary banks could affect our profitability.
Management of each of our subsidiary banks maintains an allowance for loan and lease losses based upon, among other things, (1) historical experience, (2) an evaluation of local and national economic conditions, (3) regular reviews of delinquencies and loan portfolio quality, (4) current trends regarding the volume and severity of past due and problem loans, (5) the existence and effect of concentrations of credit, (6) growth rates in the loan portfolio and (7) results of regulatory examinations. Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the respective loan portfolios. Although we believe that the allowance for loan and lease losses at each of the subsidiary banks is adequate, there can be no assurance that such allowances will prove sufficient to cover future losses. Future adjustments may be necessary if economic conditions differ or adverse developments arise with respect to nonperforming or performing loans. Material additions to the allowance for loan and lease losses would result in a material decrease in our net income, and possibly our capital, and could result in the inability to pay dividends, among other adverse consequences.
Changes in interest rates could have an adverse effect on our income.
Our profitability depends to a significant extent upon our net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments. Changes in interest rates could also adversely affect the income of certain of our non-interest income businesses. For example, if mortgage interest rates increase, the demand for residential mortgage loans will likely decrease, and this would have an adverse effect on our gain on the sale of mortgages.
The performance of our investment portfolio is subject to fluctuations due to changes in interest rates and market conditions.
Changes in interest rates can negatively affect the performance of most of our investments. Interest rate volatility can reduce unrealized gains or create unrealized losses in our portfolios. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Fluctuations in interest rates affect our returns on, and the market value of, our investment securities.
The fair market value of the securities in our portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations.
Future acquisitions may disrupt our business, dilute stockholder value and adversely affect our operating results.
We may grow by acquiring banks or branches of other banks that we believe provide a strategic fit with our business. To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth. Acquiring other banks or branches involves risks commonly associated with acquisitions, including:
| • | potential exposure to unknown or contingent liabilities of acquired banks; |
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| • | exposure to potential asset quality issues of acquired banks; |
| • | difficulty and expense of integrating the operations and personnel of acquired banks; |
| • | potential disruption to our business; |
| • | possible loss of key employees and customers of acquired banks; |
| • | potential short-term decrease in profitability; and |
| • | potential diversion of our management’s time and attention. |
We continually encounter technological change, and we may have fewer resources than our competition to continue to invest in technological improvements.
The banking and financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience, as well as create additional efficiencies in our operations. Many of our competitors have greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete.
Hurricanes could cause a disruption in our operations which could have an adverse impact on the results of operations.
A significant portion of our operations are located in the areas bordering the Gulf of Mexico, a region that is susceptible to hurricanes. Such weather events can cause disruption to our operations and could have a material adverse effect on our overall results of operations. We maintain hurricane insurance including coverage for lost profits and extra expense. However, there is no insurance against the loss of market share that a catastrophic hurricane could produce. Further, a hurricane in any of our market areas could adversely impact the ability of borrowers to timely repay their loans and may adversely impact the value of any collateral held by us.
Substantial sales of our common stock could cause our stock price to fall.
If we or our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. Such sales also might make it more difficult for us to raise capital through the sale of common stock or use our common stock as currency in future acquisitions.
Certain state and federal laws and certain provisions in our certificate of incorporation and bylaws may deter potential acquirors and may depress our stock price.
Certain provisions of state and federal law, our certificate of incorporation and our bylaws might have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. Under federal law, subject to certain exemptions, a person, entity, or group must notify the federal banking agencies before acquiring 10% or more of the outstanding voting stock of a bank holding company, including our shares. Banking agencies review the acquisition to determine if it will result in a change of control. The banking agencies have 60 days to act on the notice, and take into account several factors, including the resources of the acquiror and the antitrust effects of the acquisition. There also are provisions in our certificate of incorporation and bylaws that may be used to delay or block a takeover attempt. As a result, these statutory provisions and provisions in our certificate of incorporation and bylaws may have anti-takeover effects and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider to be in such shareholder’s best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders and may make removal of management more difficult.
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Securities issued by Alabama National, including our common stock, are not insured deposits.
Securities issued by Alabama National, including our common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the FDIC, the Bank Insurance Fund, or any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of principal.
We may issue additional securities, which could result in dilution of your ownership.
We may determine from time to time to issue additional securities to raise additional capital or finance acquisitions or upon the exercise or conversion of outstanding options. These issuances of our securities will dilute the ownership interests of our stockholders.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
Alabama National, through the Banks, currently operates 102 banking offices, 6 loan/mortgage origination offices, 5 operations offices and two insurance offices. Of these offices, Alabama National, through the Banks, owns 78 banking offices without encumbrance and leases an additional 24 banking offices and its 6 loan/mortgage origination offices. Of its 5 operations offices, 3 are owned without encumbrance and 2 are leased. ANB Insurance Services, Inc. owns one of its offices without encumbrance, and leases its other office. Alabama National, through First American Bank, leases its principal administrative offices, which are located at 1927 First Avenue North, Birmingham, Alabama. See Notes 7 and 10 to the Consolidated Financial Statements of Alabama National and Subsidiaries included in this Annual Report on Form 10-K beginning at page F-1 for additional information regarding Alabama National’s premises and equipment.
| ITEM 3. | LEGAL PROCEEDINGS |
Alabama National, in the normal course of business, is subject to various pending and threatened litigation. Although it is not possible to determine at this point in time, based on consultation with legal counsel, management does not anticipate that the ultimate liability, if any, resulting from such litigation will have a material effect on Alabama National’s financial condition and results of operations.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS |
None.
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
At February 26, 2007 Alabama National had approximately 2,728 stockholders of record (including shares held in “street” names by nominees who are record holders) and 20,589,849 shares of common stock outstanding. Alabama National’s common stock is listed on the Nasdaq Global Select Market under the symbol “ALAB.”
The following table sets forth, for the calendar quarters indicated, the high and low sales prices per share for Alabama National’s common stock on the Nasdaq Global Select Market, and the cash dividends declared per share in each such quarter:
| High | Low | Dividends Declared Per Share | |||||||
| 2005 |
|||||||||
| First Quarter |
$ | 65.59 | $ | 59.61 | $ | 0.3375 | |||
| Second Quarter |
66.44 | 55.51 | 0.3375 | ||||||
| Third Quarter |
70.49 | 62.26 | 0.3375 | ||||||
| Fourth Quarter |
68.00 | 59.35 | 0.3375 | ||||||
| 2006 |
|||||||||
| First Quarter |
$ | 70.26 | $ | 64.55 | $ | 0.375 | |||
| Second Quarter |
70.80 | 64.78 | 0.375 | ||||||
| Third Quarter |
70.09 | 65.48 | 0.375 | ||||||
| Fourth Quarter |
70.00 | 65.70 | 0.375 | ||||||
Dividends are paid at the discretion of Alabama National’s Board of Directors, based on Alabama National’s operating performance and financial position, including earnings, capital and liquidity. Dividends from the subsidiary Banks are Alabama National’s primary source of funds for the payment of dividends to its stockholders, and there are various legal and regulatory limits on the extent to which the subsidiary Banks may pay dividends or otherwise supply funds to Alabama National. In addition, federal and state regulatory agencies have the authority to prevent Alabama National from paying a dividend to its stockholders. Thus, while Alabama National intends to continue paying dividends, it can make no assurances that it will be able to or be permitted to do so in the future.
The last reported sales price of Alabama National’s common stock as reported on the Nasdaq Global Select Market on February 26, 2007 was $73.71.
21
| ITEM 6. | SELECTED FINANCIAL DATA |
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except ratios and per share data)
| Year Ended December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
| Income Statement Data: |
||||||||||||||||||||
| Interest income |
$ | 433,667 | $ | 309,260 | $ | 229,186 | $ | 178,631 | $ | 178,147 | ||||||||||
| Interest expense |
199,559 | 109,413 | 65,934 | 57,668 | 65,313 | |||||||||||||||
| Net interest income |
234,108 | 199,847 | 163,252 | 120,963 | 112,834 | |||||||||||||||
| Provision for loan and lease losses |
5,393 | 7,615 | 4,949 | 5,931 | 7,956 | |||||||||||||||
| Net interest income after provision for loan and lease losses |
228,715 | 192,232 | 158,303 | 115,032 | 104,878 | |||||||||||||||
| Net securities (losses) gains |
(1,250 | ) | 72 | — | 46 | 35 | ||||||||||||||
| Noninterest income |
79,540 | 71,651 | 72,785 | 78,258 | 61,129 | |||||||||||||||
| Noninterest expense |
185,194 | 162,480 | 148,322 | 131,892 | 113,605 | |||||||||||||||
| Income before income taxes |
121,811 | 101,475 | 82,766 | 61,444 | 52,437 | |||||||||||||||
| Provision for income taxes |
41,995 | 34,802 | 28,122 | 20,398 | 16,735 | |||||||||||||||
| Net income |
$ | 79,816 | $ | 66,673 | $ | 54,644 | $ | 41,046 | $ | 35,702 | ||||||||||
| Balance Sheet Data: |
||||||||||||||||||||
| Total assets |
$ | 7,671,274 | $ | 5,931,673 | $ | 5,315,869 | $ | 3,820,112 | $ | 3,316,168 | ||||||||||
| Earning assets |
6,856,309 | 5,385,824 | 4,841,255 | 3,512,744 | 3,034,980 | |||||||||||||||
| Securities |
1,265,774 | 1,136,487 | 1,200,407 | 810,227 | 700,333 | |||||||||||||||
| Loans held for sale |
27,652 | 14,940 | 22,313 | 16,415 | 51,030 | |||||||||||||||
| Loans and leases, net of unearned income |
5,456,136 | 4,144,095 | 3,495,701 | 2,659,440 | 2,191,394 | |||||||||||||||
| Allowance for loan and lease losses |
68,246 | 52,815 | 46,584 | 36,562 | 32,704 | |||||||||||||||
| Deposits |
5,567,603 | 4,343,264 | 3,934,723 | 2,753,749 | 2,330,395 | |||||||||||||||
| Short-term debt |
161,830 | 34,700 | 30,500 | 41,150 | 152,100 | |||||||||||||||
| Long-term debt |
402,399 | 369,246 | 393,688 | 332,393 | 240,065 | |||||||||||||||
| Stockholders’ equity |
853,623 | 571,879 | 529,543 | 279,418 | 234,492 | |||||||||||||||
| Weighted Average Shares Outstanding—Diluted |
19,147 | 17,445 | 16,100 | 12,957 | 12,683 | |||||||||||||||
| Per Common Share Data: |
||||||||||||||||||||
| Net income—diluted |
$ | 4.17 | $ | 3.82 | $ | 3.39 | $ | 3.17 | $ | 2.81 | ||||||||||
| Book value (period end) |
41.51 | 33.40 | 31.15 | 21.76 | 18.95 | |||||||||||||||
| Tangible book value (period end) (4) |
25.41 | 24.20 | 21.99 | 18.99 | 17.28 | |||||||||||||||
| Dividends declared |
1.50 | 1.35 | 1.25 | 1.14 | 1.00 | |||||||||||||||
| Dividend payout ratio—diluted |
35.97 | % | 35.34 | % | 36.87 | % | 35.96 | % | 35.59 | % | ||||||||||
| Performance Ratios: |
||||||||||||||||||||
| Return on average assets |
1.18 | % | 1.18 | % | 1.13 | % | 1.14 | % | 1.18 | % | ||||||||||
| Return on average equity |
11.36 | 12.11 | 12.15 | 15.89 | 16.01 | |||||||||||||||
| Net interest margin (1) |
3.84 | 3.90 | 3.71 | 3.65 | 4.07 | |||||||||||||||
| Net interest margin (taxable equivalent) (1) |
3.88 | 3.93 | 3.74 | 3.68 | 4.11 | |||||||||||||||
| Asset Quality Ratios: |
||||||||||||||||||||
| Allowance for loan and lease losses to period end loans (2) |
1.25 | % | 1.27 | % | 1.33 | % | 1.37 | % | 1.49 | % | ||||||||||
| Allowance for loan and lease losses to period end nonperforming loans (3) |
624.91 | 819.35 | 575.75 | 372.44 | 318.07 | |||||||||||||||
| Net charge-offs to average loans and leases (2) |
0.02 | 0.04 | 0.06 | 0.13 | 0.18 | |||||||||||||||
| Nonperforming assets to period end loans and leases and foreclosed property (2)(3) |
0.21 | 0.17 | 0.28 | 0.40 | 0.59 | |||||||||||||||
| Capital and Liquidity Ratios: |
||||||||||||||||||||
| Average equity to average assets |
10.40 | % | 9.76 | % | 9.29 | % | 7.17 | % | 7.36 | % | ||||||||||
| Leverage (4.00% required minimum) |
7.95 | 8.29 | 8.44 | 7.73 | 7.52 | |||||||||||||||
| Risk-based capital |
||||||||||||||||||||
| Tier 1 (4.00% required minimum) |
9.82 | 10.89 | 11.49 | 10.47 | 10.00 | |||||||||||||||
| Total (8.00% required minimum) |
10.98 | 12.10 | 12.74 | 11.73 | 11.26 | |||||||||||||||
| Average loans and leases to average deposits |
99.78 | 94.41 | 92.30 | 94.38 | 96.44 | |||||||||||||||
22
| (1) | Net interest income divided by average earning assets. |
| (2) | Does not include loans held for sale. |
| (3) | Nonperforming loans and nonperforming assets include loans past due 90 days or more that are still accruing interest. It is Alabama National’s policy to place all loans on nonaccrual status when over ninety days past due. |
| (4) | “Tangible book value per share”, a financial measure determined other than in accordance with generally accepted accounting principles, is computed by dividing tangible book value by the total number of common shares outstanding. “Tangible book value” equals book value less goodwill and other intangible assets. Management believes that this measure is useful because it provides book value exclusive of goodwill and other intangible assets and because it is a measure used by many investors as part of their analysis of Alabama National. The following table sets forth a reconciliation of book value per share to tangible book value per share: |
| Year Ended December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
| Book value (stockholders’ equity) |
$ | 853,623 | $ | 571,879 | $ | 529,543 | $ | 279,418 | $ | 234,492 | ||||||||||
| Deduct: goodwill and other intangible assets |
(331,118 | ) | (157,429 | ) | (155,682 | ) | (35,587 | ) | (20,622 | ) | ||||||||||
| Tangible book value |
522,505 | 414,450 | 373,861 | 243,831 | 213,870 | |||||||||||||||
| Book value per common share |
41.51 | 33.40 | 31.15 | 21.76 | 18.95 | |||||||||||||||
| Effect of goodwill and intangible assets per share |
(16.10 | ) | (9.20 | ) | (9.16 | ) | (2.77 | ) | (1.67 | ) | ||||||||||
| Tangible book value per common share |
$ | 25.41 | $ | 24.20 | $ | 21.99 | $ | 18.99 | $ | 17.28 | ||||||||||
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Management’s Discussion and Analysis contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in forward-looking statements. For additional information regarding forward-looking statements, see the section titled “SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS” on page 1 of this Annual Report.
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 accounting principles generally accepted in the United States of America and with general financial service industry practices.
The historical consolidated financial statements of Alabama National and the “FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA” are derived from the historical Consolidated Financial Statements of Alabama National which are included in this Annual Report beginning on page F-1. This discussion should be read in conjunction with those Consolidated Financial Statements and selected consolidated financial data and the other financial information included in this Annual Report.
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.
Executive Summary
The purpose of this section is to provide a brief summary overview of 2006. Additional detail about the income statement and balance sheet is provided in the pages following this summary.
Income Statement
Alabama National reported $79.8 million in 2006 net income, a 19.7% increase from 2005, with diluted earnings per share growing 9.1% from $3.82 in 2005 to $4.17 in 2006. Alabama National has two components of revenue—net interest income and noninterest income. The primary reasons for increased net income in 2006 are
23
the increase in net interest income and the income produced by two additional banks acquired during 2006, Florida Choice Bank and The Peachtree Bank. Strong loan growth during 2006 generated much of the increased net interest income, offset slightly by a decrease in the net interest margin.
Net interest income grew 17.1% to $234.1 million in 2006. The Company experienced a reduction in its net interest spread and in its net interest margin during 2006 of 0.21% and 0.06%, respectively. Alabama National experienced some margin compression beginning in the second quarter of 2006, with a flat to inverted yield curve negatively impacting its lending and investing margin. As short term rates rose without a corresponding increase in long term rates, the spread between the rate earned on loans, investments, and other earning assets and the rate paid on deposits and other interest-bearing liabilities contracted. Alabama National’s loan portfolio (excluding loans held for sale) grew by $1.31 billion, or 31.7%, during 2006. A significant portion of this growth was attributable to the two banks that the Company acquired during the year. Because loans are typically the Company’s highest yielding asset, this loan growth aided net interest income growth.
Noninterest income in 2006 increased by $6.6 million, or 9.2%, from 2005 levels. This category of income includes residential and commercial mortgage banking, wealth management services, investment services, insurance services, and service charges and other fees associated with traditional retail and commercial banking. The increase in noninterest income was led by wealth management (increase of $2.7 million, or 14.0%), commercial mortgage banking income ($1.8 million increase, or 334.5%), bank-owned life insurance ($0.8 million increase, or 25.8%), and insurance commissions ($0.5 million, or 14.0%). The largest increase in noninterest income was in the “other noninterest income” category, which includes debit and credit card income, letter of credit fees, gains on early extinguishment of borrowings, ATM fees and other types of noninterest income. Areas of declining noninterest income included service charges (down 2.7%, or $0.4 million) and residential mortgage gains on sale ($1.5 million decrease, or 12.2%). The wealth management division continues to experience growth in numbers of customers and client assets, both of which generally lead to increased revenue. The Company entered the commercial mortgage banking business in September 2005, so the 2006 increase in this area was primarily due to 2006 being the first full year of results for this business. In the other noninterest income area, credit and debit card income continues to grow from an increase in customers as well as increased use by existing customers. Residential mortgage activity declined in 2006 from prior year levels due to a general reduction in residential housing activity in the Company’s markets.
On the expense side, Alabama National’s noninterest expenses grew $22.8 million, or 14.0%, during 2006 as compared with 2005. The largest increase in noninterest expense was in salaries and employee benefits, which grew $11.4 million, or 13.3%. Occupancy and equipment expense grew by $3.0 million, or 17.0%. Increases in both of these areas are partially attributable to the Company’s growth and acquisitions, as new banks and new locations lead to increased staffing and occupancy expenses. The Company’s performance-based incentive compensation expense shrank in 2006, somewhat offsetting the increase in salary and employee benefits. Other operating expenses, which category includes such expenses as advertising, supplies and printing, and communication expenses, increased $4.2 million, or 10.2%, during 2006 as compared with 2005. Commission-based compensation expenses increased $2.5 million (16.2%) due to the increase in commission-based revenue.
Balance Sheet
Alabama National’s total assets grew $1.74 billion, or 29.3%, during 2006. This growth was due to a combination of normal growth in the Company’s subsidiary banks as well as the acquisition of two banks, Florida Choice Bank and The Peachtree Bank, during 2006. Florida Choice Bank and The Peachtree Bank had assets of approximately $449.4 million and $578.9 million, respectively, at the time of their acquisition. The largest asset growth in 2006 was in loans, which grew $1.31 billion, or 31.7%, over 2005 levels. Securities also grew $130 million, or 11.4%. Deposits grew $1.22 billion (28.2%) during 2006.
Asset Quality
Alabama National reported 2006 net charge-offs of $0.9 million, or 0.02% of average loans and leases, down from 2005’s $1.4 million (0.04% of average loans and leases). Nonperforming assets at December 31, 2006 were
24
$11.7 million (0.21% of period end loans and leases and foreclosed property), up from $7.1 million (0.17% of period end loans and leases and foreclosed property) at year end 2005. Potential problem loans increased to $29.6 million at December 31, 2006 from $24.5 million at December 31, 2005. Alabama National’s provision for loan and lease losses declined from $7.6 million in 2005 to $5.4 million in 2006. This decrease was due largely to credit quality measures and the reduced losses during the year. As a result of loan growth, net charge-offs and the provision for loan and lease losses, Alabama National’s allowance for loan and lease losses as a percentage of period-end loans and leases declined to 1.25% at December 31, 2006 from 1.27% at December 31, 2005.
Selected Bank Financial Data
Alabama National’s success is dependent upon the financial performance of its subsidiary banks (the “Banks”). Alabama National, with input from the management of each Bank, establishes operating goals for each Bank. The following tables summarize selected financial information for 2006 and 2005 for each of the Banks. Florida Choice Bank was acquired in April 2006, and The Peachtree Bank was acquired in October 2006. Only the operating activity since the date of acquisition of each these acquired banks is included in Alabama National’s results of operations.
25
SELECTED BANK FINANCIAL DATA
(Amounts in thousands, except ratios)
| December 31, 2006 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Alabama Exchange Bank |
Bank of Dadeville |
First American Bank |
First Gulf |
Indian River National Bank |
Public Bank |
Georgia State Bank |
Community Bank of Naples, N.A. |
Millennium Bank |
Cypress Coquina Bank |
Florida Choice Bank |
The Peachtree Bank |
|||||||||||||||||||||||||||||||||||||
| Summary of Operations: |
||||||||||||||||||||||||||||||||||||||||||||||||
| Interest income |
$ | 4,297 | $ | 4,669 | $ | 188,183 | $ | 41,741 | $ | 46,856 | $ | 27,241 | $ | 26,686 | $ | 26,769 | $ | 10,775 | $ | 18,716 | $ | 30,196 | $ | 11,898 | ||||||||||||||||||||||||
| Interest expense |
946 | 1,559 | 94,014 | 20,311 | 19,356 | 10,962 | 11,715 | 11,155 | 4,695 | 5,752 | 12,343 | 4,841 | ||||||||||||||||||||||||||||||||||||
| Net interest income |
3,351 | 3,110 | 94,169 | 21,430 | 27,500 | 16,279 | 14,971 | 15,614 | 6,080 | 12,964 | 17,853 | 7,057 | ||||||||||||||||||||||||||||||||||||
| Provision for loan and lease losses |
120 | 10 | 1,645 | 660 | 445 | 160 | 610 | 265 | 207 | 60 | 1,150 | 61 | ||||||||||||||||||||||||||||||||||||
| Noninterest income |
797 | 837 | 57,252 | 5,724 | 4,929 | 2,574 | 3,908 | 1,743 | 950 | 1,128 | 908 | 347 | ||||||||||||||||||||||||||||||||||||
| Noninterest expense |
2,359 | 1,687 | 96,813 | 15,530 | 17,554 | 8,340 | 9,546 | 7,099 | 4,529 | 6,443 | 9,370 | 2,516 | ||||||||||||||||||||||||||||||||||||
| Net income |
1,157 | 1,681 | 35,605 | 7,006 | 9,632 | 6,477 | 5,776 | 6,226 | 1,415 | 4,737 | 5,204 | 3,017 | ||||||||||||||||||||||||||||||||||||
| Balance Sheet Highlights: |
||||||||||||||||||||||||||||||||||||||||||||||||
| At Period-End: |
||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets |
$ | 80,516 | $ | 83,607 | $ | 2,998,259 | $ | 654,227 | $ | 797,738 | $ | 424,008 | $ | 408,920 | $ | 428,966 | $ | 189,990 | $ | 310,266 | $ | 536,358 | $ | 576,749 | ||||||||||||||||||||||||
| Securities |
34,738 | 32,727 | 517,180 | 66,476 | 251,220 | 74,610 | 85,132 | 47,983 | 25,000 | 41,476 | 35,458 | 53,247 | ||||||||||||||||||||||||||||||||||||
| Loans and leases, net of unearned income |
36,593 | 42,205 | 2,103,416 | 534,289 | 502,870 | 319,157 | 295,058 | 339,798 | 138,944 | 218,684 | 458,711 | 465,951 | ||||||||||||||||||||||||||||||||||||
| Allowance for loan and lease losses |
819 | 625 | 25,947 | 6,488 | 6,116 | 3,889 | 3,622 | 4,248 | 1,688 | 2,668 | 6,217 | 5,919 | ||||||||||||||||||||||||||||||||||||
| Deposits |
68,408 | 66,658 | 2,023,260 | 505,881 | 623,098 | 320,081 | 292,924 | 329,431 | 133,205 | 234,988 | 448,234 | 525,262 | ||||||||||||||||||||||||||||||||||||
| Short-term debt |
5,000 | 5,000 | 44,000 | 15,000 | 7,530 | 25,000 | 5,000 | 23,000 | 7,500 | — | 9,000 | — | ||||||||||||||||||||||||||||||||||||
| Long-term debt |
— | — | 120,000 | 64,000 | 77,161 | 17,000 | 30,000 | 22,000 | — | — | 8,817 | — | ||||||||||||||||||||||||||||||||||||
| Stockholders’ equity |
6,329 | 5,870 | 241,802 | 48,019 | 59,288 | 34,755 | 32,658 | 35,240 | 28,746 | 50,001 | 55,783 | 45,094 | ||||||||||||||||||||||||||||||||||||
| Performance Ratios: |
||||||||||||||||||||||||||||||||||||||||||||||||
| Return on average assets |
1.41 | % | 2.06 | % | 1.24 | % | 1.13 | % | 1.25 | % | 1.60 | % | 1.44 | % | 1.58 | % | 0.79 | % | 1.55 | % | 1.33 | % | 2.04 | % | ||||||||||||||||||||||||
| Return on average equity |
18.13 | 28.09 | 14.45 | 15.79 | 15.00 | 19.46 | 18.47 | 18.89 | 4.97 | 9.69 | 13.47 | 33.10 | ||||||||||||||||||||||||||||||||||||
| Net interest margin |
4.44 | 4.12 | 3.53 | 3.71 | 3.73 | 4.29 | 4.02 | 4.22 | 3.89 | 5.01 | 4.92 | 4.96 | ||||||||||||||||||||||||||||||||||||
| Capital and Liquidity Ratios: |
||||||||||||||||||||||||||||||||||||||||||||||||
| Average equity to average assets |
7.79 | % | 7.33 | % | 8.59 | % | 7.15 | % | 8.31 | % | 8.23 | % | 7.79 | % | 8.36 | % | 15.83 | % | 15.97 | % | 9.90 | % | 6.17 | % | ||||||||||||||||||||||||
| Leverage (4.00% required minimum) |
8.02 | 7.31 | 7.84 | 7.58 | 7.36 | 8.52 | 7.79 | 8.59 | 7.51 | 9.58 | 9.21 | 7.46 | ||||||||||||||||||||||||||||||||||||
| Risk-based capital |
||||||||||||||||||||||||||||||||||||||||||||||||
| Tier 1 (4.00% required minimum) |
16.41 | 13.79 | 10.07 | 9.10 | 10.60 | 10.52 | 10.47 | 10.53 | 9.36 | 10.74 | 9.28 | 8.17 | ||||||||||||||||||||||||||||||||||||
| Total (8.00% required minimum) |
17.67 | 15.04 | 11.21 | 10.30 | 11.72 | 11.66 | 11.62 | 11.78 | 10.58 | 11.80 | 10.48 | 9.32 | ||||||||||||||||||||||||||||||||||||
| Average loans and leases to average deposits |
77.43 | 78.67 | 123.92 | 118.27 | 108.22 | 113.67 | 112.77 | 134.34 | 123.06 | 106.91 | 121.20 | 98.81 | ||||||||||||||||||||||||||||||||||||
26
SELECTED BANK FINANCIAL DATA
(Amounts in thousands, except ratios)
| December 31, 2005 | ||||||||||||||||||||||||||||||||||||||||
| Alabama Exchange Bank |
Bank of Dadeville |
First American Bank |
First Gulf |
Indian River National Bank |
Public Bank |
Georgia State Bank |
Community Bank of Naples, N.A. |
Millennium Bank |
Cypress Coquina Bank |
|||||||||||||||||||||||||||||||
| Summary of Operations: |
||||||||||||||||||||||||||||||||||||||||
| Interest income |
$ | 4,143 | $ | 4,248 | $ | 147,806 | $ | 29,909 | $ | 38,640 | $ | 21,193 | $ | 21,179 | $ | 20,357 | $ | 8,348 | $ | 15,744 | ||||||||||||||||||||
| Interest expense |
744 | 1,029 | 57,994 | 10,098 | 11,394 | 6,147 | 7,951 | 6,159 | 2,665 | 3,780 | ||||||||||||||||||||||||||||||
| Net interest income |
3,399 | 3,219 | 89,812 | 19,811 | 27,246 | 15,046 | 13,228 | 14,198 | 5,683 | 11,964 | ||||||||||||||||||||||||||||||
| Provision for loan and lease losses |
235 | — | 2,530 | 1,380 | 1,005 | 385 | 845 | 882 | 233 | 120 | ||||||||||||||||||||||||||||||
| Noninterest income |
805 | 777 | 50,890 | 5,863 | 4,948 | 3,038 | 3,708 | 1,736 | 1,260 | 1,104 | ||||||||||||||||||||||||||||||
| Noninterest expense |
2,322 | 1,690 | 86,393 | 13,721 | 17,625 | 8,229 | 8,758 | 6,268 | 4,434 | 6,206 | ||||||||||||||||||||||||||||||
| Net income |
1,116 | 1,677 | 34,517 | 6,736 | 9,051 | 5,933 | 4,898 | 5,446 | 1,405 | 4,208 | ||||||||||||||||||||||||||||||
| Balance Sheet Highlights: |
||||||||||||||||||||||||||||||||||||||||
| At Period-End: |
||||||||||||||||||||||||||||||||||||||||
| Total assets |
$ | 82,612 | $ | 78,080 | $ | 2,779,982 | $ | 586,199 | $ | 752,914 | $ | 382,850 | $ | 379,005 | $ | 385,371 | $ | 168,682 | $ | 296,889 | ||||||||||||||||||||
| Securities |
33,857 | 30,779 | 493,578 | 63,892 | 261,002 | 65,674 | 86,936 | 34,050 | 26,643 | 39,787 | ||||||||||||||||||||||||||||||
| Loans and leases, net of unearned income |
38,140 | 39,494 | 1,982,360 | 468,331 | 448,705 | 285,068 | 258,928 | 306,767 | 116,379 | 199,348 | ||||||||||||||||||||||||||||||
| Allowance for loan and lease losses |
712 | 656 | 24,947 | 5,826 | 5,694 | 3,718 | 3,239 | 3,991 | 1,454 | 2,578 | ||||||||||||||||||||||||||||||
| Deposits |
70,874 | 66,509 | 1,881,187 | 488,708 | 579,767 | 308,609 | 296,634 | 294,499 | 124,339 | 243,034 | ||||||||||||||||||||||||||||||
| Short-term debt |
— | — | 14,000 | 5,000 | 5,700 | 5,000 | — | 5,000 | — | — | ||||||||||||||||||||||||||||||
| Long-term debt |
5,000 | 5,000 | 155,000 | 44,000 | 53,636 | 12,000 | 15,000 | 26,000 | — | — | ||||||||||||||||||||||||||||||
| Stockholders’ equity |
6,193 | 5,695 | 236,023 | 40,365 | 61,285 | 31,307 | 28,852 | 29,708 | 27,901 | 47,004 | ||||||||||||||||||||||||||||||
| Performance Ratios: |
||||||||||||||||||||||||||||||||||||||||
| Return on average assets |
1.36 | % | 2.12 | % | 1.32 | % | 1.25 | % | 1.23 | % | 1.63 | % | 1.33 | % | 1.56 | % | 0.85 | % | 1.38 | % | ||||||||||||||||||||
| Return on average equity |
17.38 | 27.89 | 15.07 | 17.96 | 15.23 | 19.77 | 17.73 | 20.60 | 5.12 | 9.20 | ||||||||||||||||||||||||||||||
| Net interest margin |
4.48 | 4.42 | 3.67 | 4.01 | 3.90 | 4.43 | 3.87 | 4.34 | 4.01 | 4.68 | ||||||||||||||||||||||||||||||
| Capital and Liquidity Ratios: |
||||||||||||||||||||||||||||||||||||||||
| Average equity to average assets |
7.82 | % | 7.60 | % | 8.74 | % | 6.98 | % | 8.10 | % | 8.23 | % | 7.49 | % | 7.56 | % | 16.63 | % | 15.03 | % | ||||||||||||||||||||
| Leverage (4.00% required minimum) |
7.62 | 7.70 | 8.15 | 7.27 | 7.98 | 8.51 | 7.56 | 7.97 | 7.78 | 8.30 | ||||||||||||||||||||||||||||||
| Risk-based capital |
||||||||||||||||||||||||||||||||||||||||
| Tier 1 (4.00% required minimum) |
15.61 | 14.30 | 10.69 | 8.87 | 11.96 | 10.59 | 10.55 | 9.57 | 10.51 | 10.50 | ||||||||||||||||||||||||||||||
| Total (8.00% required minimum) |
16.86 | 15.55 | 11.88 | 10.11 | 13.10 | 11.81 | 11.71 | 10.82 | 11.76 | 11.64 | ||||||||||||||||||||||||||||||
| Average loans and leases to average deposits |
53.64 | 62.18 | 108.04 | 92.81 | 73.67 | 86.28 | 83.13 | 113.81 | 85.37 | 74.72 | ||||||||||||||||||||||||||||||
27
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 more detail in the notes to the Consolidated Financial Statements set forth beginning on page F-1 herein.
Some of the more complex technical accounting policies require management to make significant estimates and judgments that affect the valuation of reported assets and liabilities, including associated revenues, expenses, and disclosure. The following briefly describes the more complex policies involving a significant amount of judgments about valuation and the application of complex accounting standards and interpretations.
Allowance for Loan and Lease Losses
Alabama National records estimated probable inherent credit losses in the loan and lease portfolios as an allowance for loan and lease losses. The methodologies and assumptions for determining the adequacy of the overall allowance for loan and lease losses involve significant judgments to be made by management. Some of the more critical judgments supporting the amount of Alabama National’s allowance for loan and lease losses include judgments about: creditworthiness of borrowers, estimated value of underlying collateral, assumptions about cash flow, determination of loss factors for estimating credit losses, and the impact of current events, conditions, and other factors impacting the level of probable inherent losses. Under different conditions or using different assumptions, the actual amount of credit losses ultimately realized by Alabama National may be different than management’s estimates provided in the Consolidated Financial Statements.
For a more complete discussion of the methodology employed to calculate the allowance for loan and lease losses, see Note 1 to Alabama National’s Consolidated Financial Statements included in this Annual Report beginning on page F-1 herein and “Provision and Allowance for Loan and Lease Losses” beginning on page 37.
Mergers and Acquisitions
Alabama National’s growth in business and profitability over the past several years has been enhanced significantly by mergers and acquisitions. Effective July 1, 2001, Alabama National adopted SFAS No. 141, “Business Combinations,” which allows only the use of the purchase method of accounting. For purchase acquisitions, Alabama National is required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective as is the appropriate amortization period for such intangible assets. These estimates also include the establishment of various accruals and allowances based on planned facilities dispositions and employee severance considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in recording goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to the carrying value of goodwill.
Income Taxes
The calculation of Alabama National’s income tax provision is complex and requires the use of estimates and judgments in its determination. As part of Alabama National’s overall business strategy, management must consider tax laws and regulations that apply to the specific facts and circumstances under consideration. This analysis includes evaluating the amount and timing of the realization of income tax liabilities or benefits. Management closely monitors tax developments in order to evaluate the effect they may have on Alabama National’s overall tax position.
28
Pension and Other Postretirement Benefits
Alabama National offers various pension plans and postretirement benefit plans to employees. The calculation of obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial valuations and the determination of future market values of plan assets are subject to management judgment and may differ significantly if different assumptions are used. Please refer to Note 12 to Alabama National’s Consolidated Financial Statements included in this Annual Report beginning on page F-1 for disclosures related to Alabama National’s benefit plans.
Stock-Based Compensation
Alabama National uses a fair value based method of accounting for stock based compensation costs. Compensation costs for stock-based compensation arrangements are measured at the grant date based on the fair value of the award and are recognized over the related service period. Accounting for stock-based compensation requires the use of an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. Please refer to Note 13 to Alabama National’s Consolidated Financial Statements included in this Annual Report beginning on page F-1 for disclosures related to Alabama National’s stock-based compensation awards.
Results of Operations
Year ended December 31, 2006, compared with year ended December 31, 2005
Alabama National’s net income increased by $13.1 million, or 19.7%, to $79.8 million for the year ended December 31, 2006, from $66.7 million for the year ended December 31, 2005. Net income per diluted share increased to $4.17 for the year ended December 31, 2006, as compared to $3.82 recorded for the year ended December 31, 2005. Return on average assets during 2006 and 2005 was 1.18% in each year, and return on average equity was 11.36% during 2006, compared with 12.11% during 2005.
Net interest income increased $34.3 million, or 17.1%, to $234.1 million in 2006, from $199.8 million in 2005, as interest income increased by $124.4 million and interest expense increased by $90.1 million. Contributing to this increase is strong growth in Alabama National’s earnings assets, particularly loans. During 2006, average earning assets grew $967.3 million, or 18.9%, to $6.09 billion for the year ended December 31, 2006. Average loans and leases experienced the most significant growth during 2006, increasing $941.6 million. The acquisitions of Florida Choice Bank and The Peachtree Bank contributed significantly to growth in average loans and earning assets. The 2006 acquisitions contributed $504.8 million and $452.1 million of the increase in average earning assets and average loans and leases, respectively. In addition to growth through acquisitions, Alabama National continues to have strong organic growth in loans due to continued strength in many of the economies in the markets served by Alabama National. In general, loans are Alabama National’s highest yielding earning asset, and management continues to emphasize steady loan growth. To support the asset growth, average interest-bearing liabilities increased $908.5 million, to $5.23 billion in 2006. Acquisitions during 2006 accounted for $421.0 million of this increase. All categories of average interest-bearing liabilities increased during 2006.
Alabama National’s net interest spread and net interest margin were 3.34% and 3.84%, respectively, in 2006, compared to 3.54% and 3.90%, respectively, in 2005. The net interest margin for 2006 was lower due to the impact of the current interest rate environment. The flattening of the interest rate yield curve (reduction in the spread between short and long term interest rates) has led to an increase in the cost of deposits and other liabilities exceeding the increase in the yield on loans and other earning assets. The yield earned on loans and leases increased 116 basis points in 2006 to 7.83%, while rates paid on interest bearing liabilities has increased by 129 basis points to 3.82%. In addition to rate increases by the Federal Reserve, general competitive deposit pricing in the markets served by Alabama National has increased deposit costs. See “Net Interest Income” beginning on page 31.
29
Alabama National recorded a provision for loan and lease losses of $5.4 million during 2006, compared to $7.6 million in 2005. Management believes that both loan loss experience and asset quality indicate that the allowance for loan losses is maintained at an adequate level, although there can be no assurance that economic factors will not require future adjustments to the allowance. Alabama National’s allowance for loan and lease losses as a percentage of period-end loans and leases (excluding loans held for sale) was 1.25% at December 31, 2006, compared with 1.27% at December 31, 2005. The allowance for loan and lease losses as a percentage of period-end nonperforming assets was 582.75% at December 31, 2006, compared with 747.14% at December 31, 2005. Alabama National experienced net charge-offs of $0.9 million in 2006, equating to a ratio of net charge-offs to average loans and leases of 0.02%, compared with net charge-offs of $1.4 million in 2005, equating to a ratio of net charge-offs to average loans and leases of 0.04%. See “Provision and Allowance for Loan and Lease Losses” beginning on page 37.
Noninterest income, including net securities gains and losses, increased $6.6 million, or 9.2%, to $78.3 million in 2006, compared with $71.7 million in 2005. Total revenue for the investment services division increased $81 thousand, or 1.9%, to $4.3 million in 2006, from $4.2 million in 2005. Service charges on deposit accounts decreased by $0.4 million, or 2.7%, to $15.9 million in 2006, from $16.3 million in 2005. Total revenue from the retail mortgage division decreased $1.5 million, or 12.2%, to $11.0 million in 2006, from $12.5 million in 2005. The wealth management division experienced a revenue increase of $2.7 million, or 14.0%, to $21.9 million in 2006, from $19.2 million in 2005. The commissions generated by the insurance division totaled $4.0 million in 2006, compared with $3.5 million recorded in 2005. Earnings on bank owned life insurance totaled $3.6 million in 2006, compared with $2.9 million in 2005, and other noninterest income increased $4.1 million to $16.5 million in 2006. Noninterest expense increased $22.7 million, or 14.0%, to $185.2 million in 2006, compared with $162.5 million during 2005. For a detailed discussion of these income and expense categories, see “Noninterest Income and Expense” beginning on page 41.
Because of an increase in pre-tax income, income tax expense was $42.0 million for 2006, compared to $34.8 million for 2005. The effective tax rate for 2006 was 34.5%, compared to 34.3% for 2005. These effective tax rates are affected by items of income and expense that are not subject to federal or state taxation. The effective rate in 2006 is higher than 2005 due to higher pre-tax income without a corresponding increase in income items not subject to federal or state taxation.
Year ended December 31, 2005, compared with year ended December 31, 2004
Alabama National’s net income increased by $12.0 million, or 22.0%, to $66.7 million for the year ended December 31, 2005, from $54.6 million for the year ended December 31, 2004. Net income per diluted share increased to $3.82 for the year ended December 31, 2005, as compared to $3.39 recorded for the year ended December 31, 2004. Return on average assets during 2005 was 1.18%, compared with 1.13% during 2004, and return on average equity was 12.11% during 2005, compared with 12.15% during 2004.
Net interest income increased $36.6 million, or 22.4%, to $199.8 million in 2005, from $163.3 million in 2004, as interest income increased $80.1 million and interest expense increased $43.5 million. Contributing to this increase was strong growth in Alabama National’s earnings assets, particularly loans. During 2005, average earning assets grew $724.9 million, or 16.5%, to $5.13 billion for the year ended December 31, 2005. Average loans and leases experienced the most significant growth during 2005 increasing $654.0 million. Alabama National had strong organic growth in loans in 2005 due to continued strength in many of the economies in the markets served by Alabama National. To support the asset growth, average interest-bearing liabilities increased $545.6 million, to $4.32 billion in 2005. All categories of average interest-bearing liabilities increased during 2005, except for long-term debt.
Alabama National’s net interest spread and net interest margin were 3.54% and 3.90%, respectively, in 2005, compared to 3.49% and 3.71%, respectively, in 2004. The net interest margin for 2005 was higher due to the impact of the recent interest rate increases by the Federal Reserve. These increases increased the yield
30
substantially on Alabama National’s loans and leases. The yield earned on loans and leases increased 93 basis points in 2005 to 6.67%. The Federal Reserve rate increases also increased the rate paid on deposits in 2005. Overall interest cost on interest bearing liabilities increased 78 basis points to 2.53% in 2005 from 1.75% during 2004. Generally deposits, and specifically time deposits, did not reprice as quickly as variable rate loans and led to an increase in Alabama National’s net interest margin during 2005. See “Net Interest Income” below.
Alabama National recorded a provision for loan and lease losses of $7.6 million during 2005, compared to $4.9 million in 2004. Management believes that both loan loss experience and asset quality indicate that the allowance for loan losses was maintained at an adequate levels for those periods, although there can be no assurance that economic factors will not require future adjustments to the allowance. Alabama National’s allowance for loan and lease losses as a percentage of period-end loans and leases (excluding loans held for sale) was 1.27% at December 31, 2005, compared with 1.33% at December 31, 2004. The allowance for loan and lease losses as a percentage of period-end nonperforming assets was 747.14% at December 31, 2005, compared with 484.14% at December 31, 2004. Alabama National experienced net charge-offs of $1.4 million in 2005, equating to a ratio of net charge-offs to average loans and leases of 0.04%, compared with net charge-offs of $1.8 million in 2004, equating to a ratio of net charge-offs to average loans and leases of 0.06%. See “Provision and Allowance for Loan and Lease Losses” beginning on page 37.
Noninterest income, including net securities gains and losses, decreased $1.1 million, or 1.5%, to $71.7 million in 2005, compared with $72.8 million in 2004. Total revenue for the investment services division decreased $7.4 million, or 63.9%, to $4.2 million in 2005, from $11.7 million in 2004. Service charges on deposit accounts decreased by $0.8 million, or 4.6%, to $16.3 million in 2005, from $17.1 million in 2004. Total revenue from the mortgage division increased $1.0 million, or 8.3%, to $12.5 million in 2005, from $11.6 million in 2004. The securities brokerage and trust division experienced a revenue increase of $2.4 million, or 14.0%, to $19.2 million in 2005, from $16.9 million in 2004. The commissions generated by the insurance division totaled $3.5 million in 2005, compared with $3.6 million recorded in 2004. Earnings on bank owned life insurance totaled $2.9 million in 2005, compared with $2.7 million in 2004, and other noninterest income increased $2.9 million to $12.2 million in 2005. Noninterest expense increased $14.2 million, or 9.5%, to $162.5 million in 2005, compared with $148.3 million during 2004. For a detailed discussion of these income and expense categories, see “Noninterest Income and Expense” beginning on page 41.
Because of an increase in pre-tax income, income tax expense was $34.8 million for 2005, compared to $28.1 million for 2004. The effective tax rate for 2005 was 34.3%, compared to 34.0% for 2004. These effective tax rates are affected by items of income and expense that are not subject to federal or state taxation. The effective rate in 2005 was higher than 2004 due to higher pre-tax income without a corresponding increase in income items not subject to federal or state taxation.
Net Interest Income
The largest component of Alabama National’s net income is its net interest income—the difference between the income earned on assets and interest paid on deposits and borrowed funds used to support its assets. Net interest income is determined by the yield earned on Alabama National’s earning assets and rates paid on its interest-bearing liabilities, the relative amounts of earning assets and interest-bearing liabilities and the maturity and repricing characteristics of its earning assets and interest-bearing liabilities. Net interest income divided by average earning assets represents Alabama National’s net interest margin.
31
Average Balances, Income, Expenses and Rates
The following table depicts, on a taxable equivalent basis for the periods indicated, 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 balances of the associated assets or liabilities.
AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
(Amounts in thousands, except yields and rates)
| Year ended December 31, | ||||||||||||||||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||||||||||||||
| Average Balance |
Income/ Expense |
Yield/ Rate |
Average Balance |
Income/ Expense |
Yield/ Rate |
Average Balance |
Income/ Expense |
Yield/ Rate |
||||||||||||||||||||||
| A S S E T S : |
||||||||||||||||||||||||||||||
| Earning assets: |
||||||||||||||||||||||||||||||
| Loans and leases (1)(2)(3) |
$ | 4,819,534 | $ | 377,279 | 7.83 | % | $ | 3,877,979 | $ | 258,575 | 6.67 | % | $ | 3,223,989 | $ | 184,935 | 5.74 | % | ||||||||||||
| Securities: |
||||||||||||||||||||||||||||||
| Taxable |
1,103,913 | 49,083 | 4.45 | 1,103,820 | 45,904 | 4.16 | 1,049,274 | 41,468 | 3.95 | |||||||||||||||||||||
| Tax exempt (2) |
86,033 | 5,503 | 6.40 | 52,357 | 3,402 | 6.50 | 52,717 | 3,247 | 6.16 | |||||||||||||||||||||
| Cash balances in other banks |
15,033 | 723 | 4.81 | 8,794 | 274 | 3.12 | 6,225 | 65 | 1.04 | |||||||||||||||||||||
| Funds sold |
68,766 | 3,499 | 5.09 | 83,602 | 2,783 | 3.33 | 68,651 | 991 | 1.44 | |||||||||||||||||||||
| Trading account securities |
1,058 | 50 | 4.73 | 477 | 21 | 4.40 | 1,244 | 55 | 4.42 | |||||||||||||||||||||
| Total earning assets (2) |
6,094,337 | 436,137 | 7.16 | 5,127,029 | 310,959 | 6.07 | 4,402,100 | 230,761 | 5.24 | |||||||||||||||||||||
| Cash and due from banks |
180,812 | 169,624 | 143,433 | |||||||||||||||||||||||||||
| Premises and equipment |
134,730 | 105,734 | 90,388 | |||||||||||||||||||||||||||
| Other assets |
400,823 | 288,879 | 246,108 | |||||||||||||||||||||||||||
| Allowance for loan losses |
(60,724 | ) | (49,661 | ) | (43,535 | ) | ||||||||||||||||||||||||
| Total assets |
$ | 6,749,978 | $ | 5,641,605 | $ | 4,838,494 | ||||||||||||||||||||||||
| L I A B I L I T I E S : |
||||||||||||||||||||||||||||||
| Interest-bearing liabilities: |
||||||||||||||||||||||||||||||
| Interest-bearing transaction accounts |
$ | 1,112,263 | $ | 29,800 | 2.68 | % | $ | 910,956 | $ | 13,932 | 1.53 | % | $ | 722,774 | $ | 5,738 | 0.79 | % | ||||||||||||
| Savings and money market deposits |
974,001 | 27,641 | 2.84 | 899,980 | 14,360 | 1.60 | 771,993 | 7,234 | 0.94 | |||||||||||||||||||||
| Time deposits |
1,996,283 | 86,584 | 4.34 | 1,585,741 | 49,195 | 3.10 | 1,434,798 | 33,376 | 2.33 | |||||||||||||||||||||
| Funds purchased |
649,007 | 29,856 | 4.60 | 515,225 | 15,515 | 3.01 | 402,991 | 5,345 | 1.33 | |||||||||||||||||||||
| Other short-term borrowings |
107,760 | 5,737 | 5.32 | 67,940 | 2,614 | 3.85 | 53,027 | 1,027 | 1.94 | |||||||||||||||||||||
| Long-term debt |
386,856 | 19,941 | 5.15 | 337,780 | 13,797 | 4.08 | 386,477 | 13,214 | 3.42 | |||||||||||||||||||||
| Total interest-bearing liabilities |
5,226,170 | 199,559 | 3.82 | 4,317,622 | 109,413 | 2.53 | 3,772,060 | 65,934 | 1.75 | |||||||||||||||||||||
| Demand deposits |
747,662 | 710,774 | 563,349 | |||||||||||||||||||||||||||
| Accrued interest and other liabilities |
73,833 | 62,715 | 53,502 | |||||||||||||||||||||||||||
| Stockholders’ equity |
702,313 | 550,494 | 449,583 | |||||||||||||||||||||||||||
| Total liabilities and stockholders’ equity |
$ | 6,749,978 | $ | 5,641,605 | $ | 4,838,494 | ||||||||||||||||||||||||
| Net interest spread |
3.34 | % | 3.54 | % | 3.49 | % | ||||||||||||||||||||||||
| Net interest income/margin on a taxable equivalent basis |
$ | 236,578 | 3.88 | % | $ | 201,546 | 3.93 | % | $ | 164,827 | 3.74 | % | ||||||||||||||||||
| Tax equivalent adjustment (2) |
2,470 | 1,699 | 1,575 | |||||||||||||||||||||||||||
| Net interest income/margin |
$ | 234,108 | 3.84 | % | $ | 199,847 | 3.90 | % | $ | 163,252 | 3.71 | % | ||||||||||||||||||
| (1) | Average loans include nonaccrual loans. All loans and deposits are domestic. |
| (2) | Tax equivalent adjustments are based on the assumed rate of 34%, and do not give effect to the disallowance for federal income tax purposes of interest expense related to certain tax-exempt assets. |
| (3) | Fees in the amount of $11.5 million, $9.8 million and $7.6 million are included in interest and fees on loans for 2006, 2005, and 2004, respectively. |
32
During 2006, Alabama National experienced an increase in net interest income of $34.3 million, or 17.1%, to $234.1 million, compared with $199.8 million in 2005. Net interest income increased primarily due to an increase in the volume of average earning assets outstanding. The primary reasons for the growth in earning assets is attributable to organic loan growth generated by Alabama National and loans acquired in the two bank acquisitions completed in 2006. Average earnings assets increased by $967.3 million during 2006. Acquisitions in 2006 contributed $504.8 million of the 2006 increase in average earning assets and $24.9 million of the increase in net interest income. Due to the growth in earning assets, Alabama National’s net interest income increased in 2006 despite a reduction in its net interest margin during 2006. The net interest margin for 2006 was 3.84% compared to 3.90% during 2005, a decrease of 6 basis points. The 2006 average taxable equivalent yield earned of earning assets was 7.16% compared with 6.07% for 2005. The increased yield and volume lead to an increase in total interest income of $125.2 million, or 40.3%, to $436.1 million in 2006. The rate paid on interest bearing liabilities increased by 129 basis points to 3.82% for 2006. The rate paid on all categories of interest bearing liabilities increased significantly during 2006. The increase in rate paid on interest bearing liabilities contributed to the spread compression experienced by Alabama National during 2006 versus 2005. Time deposits that were originated in lower interest rate environments repriced at higher current rates. Also, to remain competitive, Alabama National has increased rates on interest-bearing transaction accounts and savings deposits due to competitive market conditions and past rate increases by the Federal Reserve. Also, as deposits have become more difficult to attract to support asset growth, Alabama National has increasingly relied on wholesale funding such as FHLB advances that are generally more expensive than traditional deposit accounts.
33
Analysis of Changes in Net Interest Income
The following table sets forth, on a taxable equivalent basis, the effect which varying levels of earning assets and interest-bearing liabilities and the applicable rates had on changes in net interest income for 2006 versus 2005, and 2005 versus 2004. For purposes of this table, changes that are not solely attributable to volume or rate are allocated to volume and rate on a pro rata basis.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Amounts in thousands)
| December 31, | |||||||||||||||||||||||
| 2006 Compared to 2005 Variance Due to |
2005 Compared to 2004 Variance Due to |
||||||||||||||||||||||
| Volume | Yield/Rate | Total | Volume | Yield/Rate | Total | ||||||||||||||||||
| Earning assets: |
|||||||||||||||||||||||
| Loans and leases |
$ | 69,144 | $ | 49,559 | $ | 118,703 | $ | 40,940 | $ | 32,700 | $ | 73,640 | |||||||||||
| Securities: |
|||||||||||||||||||||||
| Taxable |
4 | 3,175 | 3,179 | 2,193 | 2,243 | 4,436 | |||||||||||||||||
| Tax exempt |
2,155 | (53 | ) | 2,102 | (22 | ) | 177 | 155 | |||||||||||||||
| Cash balances in other banks |
254 | 195 | 449 | 36 | 173 | 209 | |||||||||||||||||
| Funds sold |
(559 | ) | 1,275 | 716 | 255 | 1,537 | 1,792 | ||||||||||||||||
| Trading account securities |
27 | 2 | 29 | (34 | ) | — | (34 | ) | |||||||||||||||
| Total interest income |
71,025 | 54,153 | 125,178 | 43,369 | 36,829 | 80,198 | |||||||||||||||||
| Interest-bearing liabilities: |
|||||||||||||||||||||||
| Interest-bearing transaction accounts |
3,605 | 12,263 | 15,868 | 1,782 | 6,412 | 8,194 | |||||||||||||||||
| Savings and money market deposits |
1,269 | 12,012 | 13,281 | 1,361 | 5,765 | 7,126 | |||||||||||||||||
| Time deposits |
14,734 | 22,655 | 37,389 | 3,820 | 11,999 | 15,819 | |||||||||||||||||
| Funds purchased |
4,730 | 9,611 | 14,341 | 1,837 | 8,333 | 10,170 | |||||||||||||||||
| Other short-term borrowings |
1,887 | 1,236 | 3,123 | 353 | 1,234 | 1,587 | |||||||||||||||||
| Long-term debt |
2,192 | 3,952 | 6,144 | (1,785 | ) | 2,368 | 583 | ||||||||||||||||
| Total interest expense |
28,417 | 61,729 | 90,146 | 7,367 | 36,112 | 43,479 | |||||||||||||||||
| Net interest income on a taxable equivalent basis |
$ | 42,608 | $ | (7,576 | ) | 35,032 | $ | 36,002 | $ | 717 | 36,719 | ||||||||||||
| Taxable equivalent adjustment |
(771 | ) | (124 | ) | |||||||||||||||||||
| Net interest income |
$ | 34,261 | $ | 36,595 | |||||||||||||||||||
Interest Sensitivity and Market Risk
Interest 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 their 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 projections 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” beginning on page 36.
34
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 or trading securities, 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 rate 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 December 31, 2006, assuming the relevant assets and liabilities are collected and paid, respectively, based upon historical experience rather than their stated maturities.
INTEREST SENSITIVITY ANALYSIS
(Amounts in thousands, except ratios)
| December 31, 2006 | |||||||||||||||||||||||||||
| Within One Month |
After One Through Three Months |
After Three Through Twelve Months |
Within One Year |
One Through Three Years |
Greater Than Three Years |
Total | |||||||||||||||||||||
| A S S E T S: | |||||||||||||||||||||||||||
| Earning assets: |
|||||||||||||||||||||||||||
| Loans and leases (1) |
$ | 2,719,321 | $ | 382,464 | $ | 577,284 | $ | 3,679,069 | $ | 1,058,539 | $ | 735,259 | $ | 5,472,867 | |||||||||||||
| Securities (2) |
16,422 | 38,786 | 182,067 | 237,275 | 521,364 | 464,000 | 1,222,639 | ||||||||||||||||||||
| Trading securities |
532 | — | — | 532 | — | — | 532 | ||||||||||||||||||||
| Interest-bearing deposits in other banks |
16,350 | — | — | 16,350 | — | — | 16,350 | ||||||||||||||||||||
| Funds sold |
89,865 | — | — | 89,865 | — | — | 89,865 | ||||||||||||||||||||
| Total interest-earning assets |
$ | 2,842,490 | $ | 421,250 | $ | 759,351 | $ | 4,023,091 | $ | 1,579,903 | $ | 1,199,259 | $ | 6,802,253 | |||||||||||||
| L I A B I L I T I E S: | |||||||||||||||||||||||||||
| Interest-bearing liabilities: |
|||||||||||||||||||||||||||
| Interest-bearing deposits: |
|||||||||||||||||||||||||||
| Demand deposits |
$ | 721,049 | $ | — | $ | — | $ | 721,049 | $ | — | $ | 458,637 | $ | 1,179,686 | |||||||||||||
| Savings and money market deposits |
652,226 | — | — | 652,226 | — | 468,457 | 1,120,683 | ||||||||||||||||||||
| Time deposits (3) |
210,315 | 264,988 | 1,497,690 | 1,972,993 | 292,924 | 152,190 | 2,418,107 | ||||||||||||||||||||
| Funds purchased |
627,297 | — | — | 627,297 | — | — | 627,297 | ||||||||||||||||||||
| Short-term borrowings |
116,530 | 19,500 | 25,800 | 161,830 | — | — | 161,830 | ||||||||||||||||||||
| Long-term debt |
34,120 | 84,301 | 115,000 | 233,421 | 86,000 | 82,978 | 402,399 | ||||||||||||||||||||
| Total interest-bearing liabilities |
$ | 2,361,537 | $ | 368,789 | $ | 1,638,490 | $ | 4,368,816 | $ | 378,924 | $ | 1,162,262 | $ | 5,910,002 | |||||||||||||
| Period gap |
$ | 480,953 | $ | 52,461 | $ | (879,139 | ) | $ | (345,725 | ) | $ | 1,200,979 | $ | 36,997 | |||||||||||||
| Cumulative gap |
$ | 480,953 | $ | 533,414 | $ | (345,725 | ) | $ | (345,725 | ) | $ | 855,254 | $ | 892,251 | $ | 892,251 | |||||||||||
| Ratio of cumulative gap to total interest-earning assets |
7.07 | % | 7.84 | % | -5.08 | % | -5.08 | % | 12.57 | % | 13.12 | % | |||||||||||||||
| (1) | Excludes nonaccrual loans of $10.9 million. |
| (2) | Excludes investment in equity securities with a fair market value of $43.1 million. |
| (3) | Excludes matured certificates which have not been redeemed by the customer and on which no interest is accruing. |
Alabama National generally benefits from increasing market rates of interest when it has an asset-sensitive gap (a positive number) and generally benefits from decreasing market interest rates when it is liability sensitive (a negative number). As shown in the table above, Alabama National is liability sensitive on a cumulative basis
35
throughout the one year time frame. Alabama National is asset sensitive during the one through three year time frame as well as in the greater than three years period, and it remains asset sensitive on a cumulative basis. The current market sensitivity analysis shows that Alabama National is more liability sensitive within one year at December 31, 2006 than within one year at December 31, 2005. The interest sensitivity 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 impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.
Market Risk
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 interest 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 the current prevailing 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 prior to maturity. These prepayment options make anticipating the performance of those instruments difficult given changes in prevailing interest rates. At December 31, 2006, mortgage backed securities with a carrying value of $875.8 million, or 11.4% of total assets, and essentially every loan and lease, net of unearned income, (totaling $5.46 billion, or 71.1% 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 $5.57 billion, or 72.6% of total assets at December 31, 2006. 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 interest rates are higher. As prevailing interest rates decline, the spread tends to compress, with severe compression at very low prevailing interest rates. This characteristic is
36
called “spread compression” and adversely affects net interest income in the simulation analysis when anticipated prevailing interest rates are reduced from current rates. Management relies upon historical experience to estimate the degree of spread compression in its simulation analysis. Management believes that such estimates of possible spread compression are reasonable. However, if the degree of spread compression varies from that expected, the actual results could differ from those indicated by the simulation analysis.
The following tables illustrate the results of simulation analysis used by Alabama National to determine the extent to which market risk would affect net interest income for the next twelve months if prevailing interest rates increased or decreased by the specified amounts from current rates. As noted above, this model uses estimates and assumptions in asset and liability account rate reactions to changes in prevailing interest rates. However, to isolate the market risk inherent in the balance sheet, the model assumes that no growth in the balance sheet occurs during the projection period. This model also assumes an immediate and parallel shift in interest rates, which would result in no change in the shape or slope of the interest rate yield curve. 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 income may differ from that found in the tables.
MARKET RISK
| Change in Prevailing Interest Rates (1) |
Year Ended December 31, 2006 % Change in Net Interest Income |
Year Ended December 31, 2005 % Change in Net Interest Income |
||||
| +200 basis points |
(0.41 | )% | 1.66 | % | ||
| +100 basis points |
(0.17 | ) | 0.70 | |||
| 0 basis points |
— | — | ||||
| -100 basis points |
(0.71 | ) | (2.15 | ) | ||
| -200 basis points |
(2.91 | ) | (4.38 | ) |
| (1) | Assumes an immediate and parallel rate change of this magnitude. |
Provision and Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents management’s estimate of probable inherent credit losses in the loan and lease portfolio. Management determines the allowance based on an ongoing evaluation of risk as it correlates to potential losses within the portfolio. Increases to the allowance are made by charges to the provision for loan and lease losses. Loans or leases deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses.
In the determination of the allowance, management utilizes the Loan Review Department’s quarterly independent analysis of the minimum required loan and lease loss reserve for each subsidiary Bank. In these analyses, larger problem loans of a defined threshold are reviewed for impairment or for loss exposure based on their payment performance, probability of default, and value of the collateral. These totals are then specifically allocated to the reserve. Loan and lease portfolios are then divided into various homogeneous risk pools utilizing call codes, loan products, and internal risk ratings. Historical losses are used to estimate the probable loss in the current portfolio using both an average loss methodology and a migration loss methodology. The methodologies and the time periods considered are subjective and vary for each risk pool based on systematic risk relative to its ability to estimate losses. As every loan has a risk of loss, the calculation begins with a minimum loss allocation for each loan pool. The minimum loss is estimated based on long term trends for the subsidiary Bank, the banking industry, and the economy. A minimum loss allocation is similarly applied to letters of credit and unused lines of credit. Loss allocations are adjusted for changes in the economy, problem loans, payment performance, loan policy, management, credit administration systems, credit concentrations, loan growth, and other elements over the time periods utilized in the methodology. The adjusted loss allocations are then applied to the current
37
balances in their respective loan pools. Loss allocations are totaled, yielding the required allowance for loan and lease losses for each Bank. Each Bank’s required allowance for loan and lease losses is aggregated, yielding the consolidated required allowance for Alabama National.
Management incorporates the data from the quarterly required allowance assessments with interim changes to that data in its ongoing determination of the allowance for loan and lease losses. Management then takes into consideration other factors that may support an allowance in excess of required minimums. These factors include mergers and acquisitions, systems changes, historically high loan growth, and rapid changes in the economy. In these conditions, there can be increased uncertainty in the data used and assumptions made by management. Management believes that the data it uses in determining the allowance for loan and lease losses is sufficient to estimate the potential losses in the loan and lease portfolio; however, actual results could differ from management’s estimates.
The following table presents the information associated with Alabama National’s allowance and provision for loan and lease losses for the dates indicated.
ALLOWANCE FOR LOAN AND LEASE LOSSES
(Amounts in thousands, except percentages)
| Year ended December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
| Total loans and leases outstanding at end of period, net of unearned income (1) |
$ | 5,456,136 | $ | 4,144,095 | $ | 3,495,701 | $ | 2,659,440 | $ | 2,191,394 | ||||||||||
| Average amount of loans and leases outstanding, net of unearned income (1) |
$ | 4,799,041 | $ | 3,850,676 | $ | 3,205,306 | $ | 2,410,782 | $ | 2,092,829 | ||||||||||
| Allowance for loan and lease losses at beginning of period |
$ | 52,815 | $ | 46,584 | $ | 36,562 | $ | 32,704 | $ | 28,519 | ||||||||||
| Charge-offs: |
||||||||||||||||||||
| Commercial, financial and agricultural |
916 | 824 | 3,430 | 3,535 | 1,573 | |||||||||||||||
| Real estate—mortgage |
363 | 814 | 200 | 1,426 | 1,463 | |||||||||||||||
| Consumer |
1,043 | 1,280 | 953 | 858 | 3,200 | |||||||||||||||
| Total charge-offs |
2,322 | 2,918 | 4,583 | 5,819 | 6,236 | |||||||||||||||
| Recoveries: |
||||||||||||||||||||
| Commercial, financial and agricultural |
559 | 818 | 784 | 821 | 991 | |||||||||||||||
| Real estate—mortgage |
255 | 131 | 434 | 478 | 754 | |||||||||||||||
| Consumer |
610 | 585 | 1,528 | 1,452 | 720 | |||||||||||||||
| Total recoveries |
1,424 | 1,534 | 2,746 | 2,751 | 2,465 | |||||||||||||||
| Net charge-offs |
898 | 1,384 | 1,837 | 3,068 | 3,771 | |||||||||||||||
| Provision for loan and lease losses |
5,393 | 7,615 | 4,949 | 5,931 | 7,956 | |||||||||||||||
| Additions to allowance from acquisitions |
10,936 | — | 6,910 | 995 | — | |||||||||||||||
| Allowance for loan and lease losses at period-end |
$ | 68,246 | $ | 52,815 | $ | 46,584 | $ | 36,562 | $ | 32,704 | ||||||||||
| Allowance for loan and lease losses to period-end loans (1) |
1.25 | % | 1.27 | % | 1.33 | % | 1.37 | % | 1.49 | % | ||||||||||
| Net charge-offs to average loans and leases (1) |
0.02 | 0.04 | 0.06 | 0.13 | 0.18 | |||||||||||||||
| (1) | Does not include loans held for sale. |
38
The provision for loan and lease losses decreased by $2.2 million, or 29.2%, to $5.4 million in 2006, from $7.6 million on 2005. The primary reason for the decrease in provision expense during 2006 is due to slower organic loan growth in 2006 as compared to 2005 and continued favorable asset quality indicators. During 2006, net charge-offs were $0.9 million, compared to $1.4 million in 2005.
Allocation of Allowance
While no portion of the allowance is in any way restricted to any individual loan or group of loans and the entire allowance is available to absorb losses from any and all loans, the following table represents management’s allocation of the allowance for loan and lease losses to specific loan categories.
| 2006 | 2005 | 2004 | |||||||
| (Amounts in thousands) | |||||||||
| Commercial and financial |
$ | 4,415 | $ | 3,573 | $ | 3,884 | |||
| Real estate construction |
24,090 | 14,235 | 7,527 | ||||||
| Real estate residential mortgage |
11,807 | 13,279 | 8,595 | ||||||
| Real estate commercial mortgage |
17,444 | 12,574 | 11,949 | ||||||
| Consumer |
1,522 | 1,336 | 1,540 | ||||||
| Lease financing receivables |
616 | 452 | 511 | ||||||
| Other |
4,604 | 3,860 | 4,058 | ||||||
| Unallocated |
3,748 | 3,506 | 8,520 | ||||||
| Total allowance for loan and lease losses |
$ | 68,246 | $ | 52,815 | $ | 46,584 | |||
Allocation amounts within the allowance for loan and lease losses were affected by several factors identified throughout the 2006 calendar year. Total loan amounts specifically allocated to the allowance increased by $609 thousand over December 31, 2005. Non-performing assets and potential problem loans increased by $4.6 million and $5.1 million, respectively. These segments are primarily real estate oriented and have demonstrated below industry loss averages resulting in reduced allocations over the year. The most significant change occurred within the real estate construction and commercial mortgage portfolio segments. The allocation for real estate construction increased by $9.9 million, or 69.2%. The increase in allocation of the allowance for real estate construction is primarily due to loan growth and economic conditions. Loan growth for this segment has been a factor of both organic growth and non-organic growth from mergers and acquisitions. Additionally, the slowdown in the housing sector has lead to heightened credit risk in certain Alabama National markets. Losses directly attributable to these factors had not materialized by year end. The allocation for the real estate commercial mortgage segment increased by $4.8 million, or 38.7%. Contributing factors are loan growth and concentration levels. Commercial mortgages represent the second largest concentration within the loan portfolio. The real estate residential mortgage allocation decreased by $1.5 million, or 11.1%, given stability within the loan segment. The unallocated reserve increased by $246 thousand, or 7.0%. However, in relation to the total reserve, the unallocated reserve decreased from 6.6% to 5.5%. There were no significant changes in the allowance methodology and assumptions year over year. Changes in allocation amounts for the year are most reflective of stable asset quality indicators, loan growth through mergers and acquisitions, organic loan growth in various portfolio segments, changes in loan concentrations, and changes in local and national economic conditions.
39
Nonperforming Assets
The following table presents Alabama National’s nonperforming assets for the dates indicated.
NONPERFORMING ASSETS
(Amounts in thousands, except percentages)
| At December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
| Nonaccrual loans |
$ | 10,921 | $ | 6,446 | $ | 8,091 | $ | 9,817 | $ | 10,282 | ||||||||||
| Restructured loans |
— | — | — | — | — | |||||||||||||||
| Loans past due 90 days or more and still accruing |
— | — | — | — | — | |||||||||||||||
| Total nonperforming loans |
10,921 | 6,446 | 8,091 | 9,817 | 10,282 | |||||||||||||||
| Other real estate owned |
790 | 623 | 1,531 | 699 | 2,569 | |||||||||||||||
| Total nonperforming assets |
$ | 11,711 | $ | 7,069 | $ | 9,622 | $ | 10,516 | $ | 12,851 | ||||||||||
| Allowance for loan and lease losses to period-end loans (1) |
1.25 | % | 1.27 | % | 1.33 | % | 1.37 | % | 1.49 | % | ||||||||||
| Allowance for loan and lease losses to period-end nonperforming loans |
624.91 | 819.35 | 575.75 | 372.44 | 318.07 | |||||||||||||||
| Allowance for loan and lease losses to period-end nonperforming assets |
582.75 | 747.14 | 484.14 | 347.68 | 254.49 | |||||||||||||||
| Net charge-offs to average loans and leases (1) |
0.02 | 0.04 | 0.06 | 0.13 | 0.18 | |||||||||||||||
| Nonperforming assets to period-end loans and leases and foreclosed property (1) |
0.21 | 0.17 | 0.28 | 0.40 | 0.59 | |||||||||||||||
| Nonperforming loans and leases to period-end loans (1) |
0.20 | 0.16 | 0.23 | 0.37 | 0.47 | |||||||||||||||
| (1) | Does not include loans held for sale. |
Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is doubtful. In addition to consideration of these factors, Alabama National has a consistent and continuing policy of placing all loans on nonaccrual status if they become 90 days or more past due. When a loan is placed on nonaccrual status, all interest which is accrued on the loan is reversed and deducted from earnings as a reduction of reported interest. No additional interest is accrued on the loan balance until collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual writedown or charge-off of the principal balance of the loan which would necessitate additional charges to the allowance for loan and lease losses. During the years ending December 31, 2006, 2005 and 2004, approximately $518,000, $453,000 and $489,000, respectively, in additional interest income would have been recognized in earnings if Alabama National’s nonaccrual loans had been current in accordance with their original terms.
Total nonperforming assets increased $4.6 million, to $11.7 million at December 3l, 2006, from $7.1 million at December 31, 2005. The increase in nonperforming assets is attributable to weaknesses in certain credits and to the current slowdown in the housing market. Other real estate owned increased $0.2 million to $0.8 million at December 31, 2006. The allowance for loan and lease losses to period-end nonperforming loans was 624.91% at December 31, 2006, compared with 819.35% at December 31, 2005. This ratio will generally fluctuate from period to period depending upon nonperforming loan levels at period end.
Potential Problem Loans
A potential problem loan is one that management has concerns as to the borrower’s future performance under terms of the loan contract. These loans are current as to principal and interest, and accordingly, they are not
40
included in the nonperforming asset categories. Management monitors these loans closely in order to ensure that Alabama National’s interests are protected. At December 31, 2006, Alabama National had certain loans considered by management to be potential problem loans totaling $29.6 million, as compared with $24.5 million at December 31, 2005. Alabama National believes early identification of potential problem loans is an important factor in its ability to successfully collect such loans. As such, it encourages early identification of potential problem loans both with its loan officers and loan review staff. The level of potential problem loans is factored into the determination of the adequacy of the allowance for loan and lease losses.
Noninterest Income and Expense
Noninterest income
Alabama National relies on six distinct segments for the production of recurring noninterest income: (1) traditional retail and commercial banking, (2) retail mortgage lending, (3) wealth management services, (4) investment services, (5) insurance services, and (6) commercial mortgage banking. Combined revenue associated with Alabama National’s six segments totaled $78.3 million in 2006, compared with $71.7 million in 2005, an increase of $6.6 million, or 9.2%. An analysis of this increase is provided below.
The following table sets forth, for the periods indicated, the principal components of noninterest income.
NONINTEREST INCOME
(Amounts in thousands)
| Year ended December 31, | ||||||||||
| 2006 | 2005 | 2004 | ||||||||
| Service charges on deposit accounts |
$ | 15,896 | $ | 16,335 | $ | 17,126 | ||||
| Investment services income |
4,291 | 4,210 | 11,652 | |||||||
| Wealth management income |
21,902 | 19,220 | 16,863 | |||||||
| Gain on sale of mortgages |
10,990 | 12,522 | 11,566 | |||||||
| Insurance commissions |
4,047 | 3,549 | 3,604 | |||||||
| Bank owned life insurance |
3,632 | 2,886 | 2,690 | |||||||
| Commercial mortgage banking income |
2,251 | 525 | — | |||||||
| Securities (losses) gains |
(1,250 | ) | 72 | — | ||||||
| Other |
16,531 | 12,404 | 9,284 | |||||||
| Total noninterest income |
$ | 78,290 | $ | 71,723 | $ | 72,785 | ||||
Service charges on deposit accounts decreased $0.4 million to $15.9 million during 2006, a 2.7% decrease from 2005’s total of $16.3 million. The decrease in service charges for 2006 versus 2005 is primarily related to increases in the earnings credit rate (“ECR”) attributed to commercial deposit accounts. The ECR, which generally varies with short term interest rates, is used by commercial customers to offset service charges on deposit accounts. As interest rates rose in 2006, the higher ECR resulted in lower service charges. Other noninterest income increased $5.9 million to $18.8 million during 2006, a 45.3% increase over 2005’s total of $12.9 million. Contributing to the increase in other noninterest income is increased revenue from merchant credit card activity, ATM card revenue, and debit card income. The other components of noninterest income are discussed in more detail in “Segment Information” beginning on page 42.
41
Noninterest Expense
The following table sets forth, for the periods indicated, the principal components of noninterest expense.
NONINTEREST EXPENSE
(Amounts in thousands)
| Year ended December 31, | |||||||||
| 2006 | 2005 | 2004 | |||||||
| Salaries and employee benefits |
$ | 96,717 | $ | 85,402 | $ | 74,983 | |||
| Commission based compensation |
17,961 | 15,458 | 17,500 | ||||||
| Occupancy and equipment expense, net |
20,656 | 17,653 | 15,488 | ||||||
| Amortization of other intangibles |
4,911 | 3,189 | 3,034 | ||||||
| Travel and entertainment |
2,832 | 2,303 | 1,926 | ||||||
| Advertising |
3,855 | 3,308 | 2,436 | ||||||
| Banking assessments |
2,615 | 2,429 | 2,183 | ||||||
| Data processing expenses |
3,332 | 2,751 | 2,615 | ||||||
| Legal and professional fees |
4,527 | 5,400 | 5,235 | ||||||
| Noncredit losses |
298 | 740 | 940 | ||||||
| Postage and courier services |
3,373 | 3,060 | 2,893 | ||||||
| Supplies and printing |
3,316 | 2,922 | 2,813 | ||||||
| Telephone |
2,571 | 2,355 | 2,183 | ||||||
| Electronic banking expense |
4,560 | 3,571 | 2,961 | ||||||
| Software expense |
2,706 | 2,335 | 2,025 | ||||||
| Commercial insurance |
1,415 | 1,057 | 1,207 | ||||||
| Directors fees |
1,392 | 1,176 | 1,083 | ||||||
| Business licenses and other taxes |
1,011 | 920 | 1,013 | ||||||
| Other |
7,146 | 6,451 | 5,804 | ||||||
| Total noninterest expense |
$ | 185,194 | $ | 162,480 | $ | 148,322 | |||
Noninterest expense increased $22.7 million, or 14.0%, to $185.2 million in 2006, from $162.5 million in 2005. Salaries and employee benefits increased $11.3 million, or 13.2%, in 2006. The 2006 amount includes the salary and benefit expense of the two banks acquired in 2006, which totaled $6.2 million. In addition to the 2006 acquisitions, contributing to the increase in salaries and employee benefits were general staffing increases concurrent with expansion of offices and business lines, increases in health insurance costs and merit salary increases. Commission based compensation increased $2.5 million, or 16.2%, in 2006. The increase in commission based compensation during 2006 is attributable to increased production in the wealth management division and a full year of commercial mortgage banking activity. Net occupancy expense increased $3.0 million, or 17.0%, in 2006. The 2006 amounts includes the net occupancy expense of the 2006 bank acquisitions, which totaled $1.2 million.
Segment Information
In addition to traditional commercial and consumer retail banking products, Alabama National offers investment services, wealth management services, retail mortgage lending services, commercial mortgage banking and insurance services to its customers. Please refer to Note 20 to Alabama National’s Consolidated Financial Statements included in this Annual Report beginning at page F-1 for disclosures related to Alabama National’s operating segments. The results of the operating segments include certain income and expense items that are allocated by management to the operating segments. Further, the results of each operating segment are not necessarily the same as would be expected if these activities were conducted by a stand-alone entity, because certain corporate overhead expenses are not allocated directly to each operating segment.
42
Investment Services
The following table sets forth, for the periods indicated, the summary of operations for the investment services division of Alabama National:
INVESTMENT SERVICES DIVISION
(Amounts in thousands)
| Year ended December 31, | |||||||||||
| 2006 | 2005 | 2004 | |||||||||
| Investment services revenue |
$ | 4,291 | $ | 4,210 | $ | 11,652 | |||||
| Expenses and allocated charges |
4,987 | 4,852 | 8,998 | ||||||||
| Net investment services (loss) income |
$ | (696 | ) | $ | (642 | ) | $ | 2,654 | |||
First American Bank operates an investment services division devoted primarily to handling correspondent banks’ investment needs. Investment services revenue consists primarily of commission income from the sale of fixed income securities to correspondent banks. A small portion of investment services revenue is generated from fee based services, including asset/liability consulting, bond accounting and security safekeeping. Investment services revenue increased slightly to $4.3 million during 2006, from $4.2 million in 2005. The revenue recorded in 2006 and 2005 are down significantly from the $11.7 million recorded in 2004. During 2006 and 2005, the cash flow from the securities portfolio of correspondent banks has slowed and loan demand increased, which has negatively impacted the revenue for this division. In addition to the market conditions during 2006 and 2005, another significant reason for decreased revenue production during 2006 and 2005 as compared with 2004 is due to the departure of a group of salespeople and support staff from this division during the fourth quarter of 2004. The revenue generated by the investment services division is dependent upon the demand for fixed income securities by its customers, which are primarily correspondent community banks. The activities of the investment services division leads to additional business opportunities for the commercial and retail banking segment through loans and deposits attributable to the investment service division’s customers. Revenue for this additional activity is recorded in the commercial and retail banking segment.
Wealth Management Division
The following table sets forth, for the periods indicated, the summary of operations for the wealth management division of Alabama National:
WEALTH MANAGEMENT DIVISION
(Amounts in thousands)
| Year ended December 31, | |||||||||
| 2006 | 2005 | 2004 | |||||||
| Wealth management revenue |
$ | 21,989 | $ | 19,220 | $ | 16,863 | |||
| Interest income |
1,861 | 1,486 | 1,109 | ||||||
| Total wealth management revenue |
23,850 | 20,706 | 17,972 | ||||||
| Interest expense |
468 | 242 | 105 | ||||||
| Expenses and allocated charges |
21,428 | 17,946 | 15,907 | ||||||
| Net wealth management income |
$ | 1,954 | $ | 2,518 | $ | 1,960 | |||
First American Bank has a wholly owned subsidiary, NBC Securities, Inc. (“NBC Securities”), that is a full service licensed broker-dealer. The asset management division of the trust department of First American Bank and NBC Securities manage the assets of both institutional and individual customers located primarily in the markets served by Alabama National. Collectively these two units are called the wealth management division.
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The revenue generated by this division consists primarily of commission income generated from the sale of equity securities and other investment products to individual and corporate customers, from fees paid for assets under management or custody and from fees related to investment advisory work performed for clients. NBC Securities also recognizes interest income from margin loans. Revenue for this division increased $2.8 million, or 14.4%, to $22.0 million in 2006. Revenue for this division increased $2.4 million, or 14.0%, to $19.2 million in 2005. The increase in revenue during both 2006 and 2005 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. Asset management fees recorded by the trust department of First American Bank and NBC Securities also increased during 2006 as a result of an increase in the total assets managed by this division, which was in part attributable to an increase in employees in the asset management and wealth strategies roles. The interest income from margin loans increased slightly during 2006 versus the levels recorded during 2005 and 2004. The additional registered representatives, additional asset management and wealth strategy employees, new offices opened and variable overhead, combined with higher commission expense on the higher revenue base, led to an increase in the expenses and allocated charges for this division in 2006, which resulted in a reduction of pre-tax income for this division.
Retail Mortgage Lending Division
The following table sets forth, for the periods indicated, the summary of operations for the retail mortgage lending division of Alabama National:
RETAIL MORTGAGE LENDING DIVISION
(Amounts in thousands)
| Year ended December 31, | |||||||||
| 2006 | 2005 | 2004 | |||||||
| Gain on sale of retail mortgage loans (1) |
$ | 11,834 | $ | 13,673 | $ | 12,398 | |||
| Interest income |
1,384 | 1,238 | 1,053 | ||||||
| Total revenue |
13,218 | 14,911 | 13,451 | ||||||
| Interest expense |
930 | 550 | 294 | ||||||
| Expenses and allocated charges |
10,053 | 9,720 | 8,858 | ||||||
| Net retail mortgage lending division income |
$ | 2,235 | $ | 4,641 | $ | 4,299 | |||
| (1) | Includes intercompany income allocated to the retail mortgage lending division totaling $844,000, $1,151,000 and $832,000 at December 31, 2006, 2005 and 2004, respectively. |
Fees earned in connection with the origination and resale of retail mortgages decreased $1.8 million, or 13.4%, to $11.8 million in 2006, from $13.7 million in 2005. During 2005, fees earned in connection with the origination and resale of retail mortgages increased $1.3 million, or 10.3%, to $13.7 million, from $12.4 million in 2004. The decrease during 2006 is primarily due to rising interest rates and the impact that rising rates have on refinance activity and new construction, and the reduced level of residential real estate sales activity in many of the markets Alabama National serves. Expenses and allocated charges totaled $10.1 million during 2006, compared to $9.7 million during 2005. This increase during 2006 is attributable to expenses associated with expanding the number of retail mortgage lenders during 2006.
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Commercial Mortgage Banking
The following table sets forth, for the periods indicated, the summary of operations for the commercial mortgage banking division of Alabama National:
COMMERCIAL MORTGAGE BANKING
(Amounts in thousands)
| Year ended December 31, | |||||||||
| 2006 | 2005 | 2004 (1) | |||||||
| Commission income |
$ | 1,795 | $ | 448 | $ | — | |||
| Servicing fees |
486 | 77 | — | ||||||
| Total revenue |
2,281 | 525 | — | ||||||
| Expenses and allocated charges |
1,618 | 332 | — | ||||||
| Net commercial mortgage banking income |
$ | 663 | $ | 193 | $ | — | |||
| (1) | No activity prior to the acquisition of this business September 2005. |
Alabama National entered this line of business via an acquisition of an existing business in September 2005. This division specializes in finding permanent long term financing for primarily large real estate projects in the Southeast. In addition to brokering the transaction and earning a brokerage fee, the division routinely services the loans for the investors and earns servicing fee revenue. 2006 was the first full year of activity for this division.
Insurance Services Division
The following table sets forth, for the periods indicated, a summary of operations for the insurance services division of Alabama National:
INSURANCE SERVICES DIVISION
(Amounts in thousands)
| Year ended December 31, | |||||||||
| 2006 | 2005 | 2004 | |||||||
| Commission income |
$ | 4,047 | $ | 3,549 | $ | 3,604 | |||
| Other income |
35 | — | 109 | ||||||
| Total revenue |
4,082 | 3,549 | 3,713 | ||||||
| Expenses and allocated charges |
3,625 | 3,349 | 3,642 | ||||||
| Net insurance division income |
$ | 457 | $ | 200 | $ | 71 | |||
Commission income earned from the sale of insurance products during 2006 increased to $4.0 million from $3.5 million recorded in 2005. The profitability of this segment increased due to higher revenue production in 2006. The increased revenue is due to successful business development efforts of insurance services division employees and expanding the insurance services products to more of the markets served by Alabama National.
Earning Assets
Loans and Leases
Loans and leases are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks which management attempts to control and counterbalance. Total loans and leases averaged $4.82 billion in 2006, compared to $3.88 billion in 2005, an increase of $941.6 million, or 24.3%. At December 31, 2006, total loans
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and leases, net of unearned income, were $5.46 billion, compared to $4.14 billion at the end of 2005, an increase of $1.31 billion, or 31.7%. Excluding the loans acquired in the 2006 bank acquisitions, average loans and leases increased $489.4 million, or 12.6%, and end of period year-over-year organic loan growth for 2006 was $387.4 million, or 9.4%.
The growth in Alabama National’s loan and lease portfolio is attributable to Alabama National’s ability to attract new customers while maintaining consistent underwriting standards. Loan growth is also impacted by general economic conditions that may result in increased loan demand from existing customers. Many of the markets served by Alabama National continue to experience economic expansion, and Alabama National has benefited from this market growth. The following table details the composition of the loan portfolio by category at the dates indicated.
COMPOSITION OF LOAN AND LEASE PORTFOLIO
(Amounts in thousands, except percentages)
| December 31, | |||||||||||||||||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||||||||
| Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
||||||||||||||||||||||||||
| Commercial and financial |
$ | 401,057 | 7.34 | % | $ | 287,014 | 6.92 | % | $ | 282,212 | 8.06 | % | $ | 265,923 | 9.99 | % | $ | 253,569 | 11.56 | % | |||||||||||||||
| Real estate: |
|||||||||||||||||||||||||||||||||||
| Construction |
1,901,671 | 34.82 | 1,225,451 | 29.55 | 776,594 | 22.20 | 530,024 | 19.91 | 311,259 | 14.19 | |||||||||||||||||||||||||
| Mortgage—residential |
1,166,847 | 21.37 | 1,092,514 | 26.34 | 963,083 | 27.52 | 676,658 | 25.42 | 616,651 | 28.11 | |||||||||||||||||||||||||
| Mortgage—commercial |
1,517,744 | 27.79 | 1,100,794 | 26.54 | 1,046,622 | 29.91 | 814,904 | 30.61 | 699,403 | 31.88 | |||||||||||||||||||||||||
| Mortgage—other |
20,129 | .37 | 9,828 | .24 | 10,644 | .30 | 9,412 | .35 | 5,672 | .26 | |||||||||||||||||||||||||
| Consumer |
94,563 | 1.73 | 82,908 | 2.00 | 88,653 | 2.53 | 74,137 | 2.78 | 78,342 | 3.57 | |||||||||||||||||||||||||
| Lease financing receivables |
87,018 | 1.59 | 62,423 | 1.50 | 70,289 | 2.01 | 77,857 | 2.92 | 80,113 | 3.65 | |||||||||||||||||||||||||
| Securities brokerage margin loans |
18,642 | .34 | 17,928 | .43 | 14,517 | .41 | 15,407 | .58 | 14,502 | .66 | |||||||||||||||||||||||||
| Other |
253,729 | 4.65 | 268,879 | 6.48 | 246,739 | 7.06 | 198,036 | 7.44 | 134,191 | 6.12 | |||||||||||||||||||||||||
| Total gross loans and leases |
5,461,400 | 100.00 | % | 4,147,739 | 100.00 | % | 3,499,353 | 100.00 | % | 2,662,358 | 100.00 | % | 2,193,702 | 100.00 | % | ||||||||||||||||||||
| Unearned income |
(5,264 | ) | (3,644 | ) | (3,652 | ) | (2,918 | ) | (2,308 | ) | |||||||||||||||||||||||||
| Total loans and leases, net of unearned income (1) |
5,456,136 | 4,144,095 | 3,495,701 | 2,659,440 | 2,191,394 | ||||||||||||||||||||||||||||||
| Allowance for loan and lease losses |
(68,246 | ) | (52,815 | ) | (46,584 | ) | (36,562 | ) | (32,704 | ) | |||||||||||||||||||||||||
| Total net loans and leases (1) |
$ | 5,387,890 | $ | 4,091,280 | $ | 3,449,117 | $ | 2,622,878 | $ | 2,158,690 | |||||||||||||||||||||||||
| (1) | Does not include loans held for sale. |
In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than loans for construction purposes, secured by real estate, regardless of the purpose of the loan. It is common practice for financial institutions in Alabama National’s market areas, and for Alabama National in particular, to obtain a security interest or lien in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component. In general, Alabama National prefers real estate collateral to many other potential collateral sources, such as accounts receivable, inventory and equipment.
The principal component of Alabama National’s loan portfolio is real estate mortgage loans. At year-end 2006, this category totaled $2.70 billion and represented 49.5% of the total loan portfolio, compared to $2.20 billion, or 53.1% of the total loan portfolio at year-end 2005.
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Residential mortgage loans increased $74.3 million, or 6.8%, to $1.17 billion at December 31, 2006, compared with $1.09 billion at December 31, 2005. Commercial mortgage loans increased $417.0 million, or 37.9%, to $1.52 billion at December 31, 2006.
Real estate construction loans experienced the largest increase of any category of loan. Real estate construction loans increased $676.2 million, or 55.2%, to $1.90 billion at December 31, 2006, compared with $1.23 billion at December 31, 2005. Real estate construction is now the largest category of loans for Alabama National. Alabama National’s focus on the home construction market, as well as strong commercial construction activity in markets it serves and the 2006 bank acquisitions, led to this increase during 2006. In addition, the two banks acquired during 2006 are also involved in this type of lending in their markets, so their acquisition brought additional such loans to Alabama National.
The repayment of loans is a source of additional liquidity for Alabama National. The following table sets forth Alabama National’s loans maturing within specific intervals at December 31, 2006.
LOAN MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
(Amounts in thousands)
| December 31, 2006 | ||||||||||||
| One year or less |
Over one year through five Years |
Over five years |
Total | |||||||||
| Commercial, financial and agricultural |
$ | 232,778 | $ | 145,044 | $ | 23,235 | $ | 401,057 | ||||
| Real estate—construction |
1,221,201 | 589,843 | 90,627 | 1,901,671 | ||||||||
| Real estate—residential |
184,202 | 261,218 | 721,427 | 1,166,847 | ||||||||
| Real estate—commercial |
244,214 | 886,784 | 386,746 | 1,517,744 | ||||||||
| Consumer |
38,118 | 47,763 | 2,118 | 87,999 | ||||||||
| $ | 1,920,513 | $ | 1,930,652 | $ | 1,224,153 | $ | 5,075,318 | |||||
| Predetermined Rates |
Floating Rates |
Total | |||||||
| Maturing after one year but within five years |
$ | 1,163,195 | $ | 767,457 | $ | 1,930,652 | |||
| Maturing after five years |
174,426 | 1,049,727 | 1,224,153 | ||||||
| $ | 1,337,621 | $ | 1,817,184 | $ | 3,154,805 | ||||
The information presented in the above table is based upon the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon their maturity. Consequently, management believes this treatment presents fairly the maturity structure of the loan portfolio.
Securities
Securities, including securities classified as held to maturity (or investment securities) and available for sale, represent a significant portion of Alabama National’s earning assets. The carrying value of securities averaged $1.19 billion during 2006, compared with $1.16 billion during 2005, an increase of $33.8 million, or 2.9%. Growth in the securities portfolio is generally a function of growth in funding sources net of lending opportunities, and during 2006 most of the earning asset growth of Alabama National was in loans and leases. The average securities balance for 2006 would have decreased slightly if not for the 2006 bank acquisitions. Management attempts to maintain earning asset growth commensurate with its funding growth and with its overall growth plans. At December 31, 2006, the securities portfolio totaled $1.27 billion, including securities held to maturity with an amortized cost of $716.4 million and securities available for sale with a market value of $549.4 million.
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The following tables set forth the carrying value of securities held by Alabama National at the dates indicated.
INVESTMENT SECURITIES
(Amounts in thousands)
| December 31, | ||||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||
| Cost | Market | Cost | Market | Cost | Market | |||||||||||||
| U.S. Government corporations and agencies |
$ | 24,227 | $ | 23,632 | $ | 24,217 | $ | 23,464 | $ | 24,207 | $ | 24,003 | ||||||
| State and political subdivisions |
74,785 | 75,168 | 21,152 | 21,158 | 15,569 | 15,866 | ||||||||||||
| Mortgage backed securities |
617,394 | 606,660 | 545,784 | 531,802 | 528,717 | 526,733 | ||||||||||||
| Total |
$ | 716,406 | $ | 705,460 | $ | 591,153 | $ | 576,424 | $ | 568,493 | $ | 566,602 | ||||||
AVAILABLE FOR SALE SECURITIES
(Amounts in thousands)
| December 31, | ||||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||
| Cost | Market | Cost | Market | Cost | Market | |||||||||||||
| U.S. Treasury securities |
$ | 350 | $ | 348 | $ | 350 | $ | 347 | $ | 350 | $ | 349 | ||||||
| U.S. Government corporations and agencies |
192,537 | 188,666 | 212,443 | 206,346 | 220,315 | 218,690 | ||||||||||||
| State and political subdivisions |
57,805 | 58,309 | 36,234 | 36,496 | 45,282 | 46,338 | ||||||||||||
| Mortgage backed securities |
264,795 | 257,910 | 277,706 | 269,927 | 336,551 | 335,647 | ||||||||||||
| Other securities |
1,000 | 1,000 | — | — | — | — | ||||||||||||
| Equity securities |
43,135 | 43,135 | 32,261 | 32,218 | 30,890 | 30,890 | ||||||||||||
| Total |
$ | 559,622 | $ | 549,368 | $ | 558,994 | $ | 545,334 | $ | 633,388 | $ | 631,914 | ||||||
The following tables show the scheduled maturity and average yields of securities owned by Alabama National at December 31, 2006.
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
(Amounts in thousands, except yields)
| December 31, 2006 | |||||||||||||||||||||||||||||
| Within one year | After one but Within five years |
After five but Within ten years |
After ten years | Other securities | |||||||||||||||||||||||||
| Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | ||||||||||||||||||||
| U.S. Government corporations and agencies |
$ | — | $ | 24,227 | 4.98 | % | $ | — | $ | — | $ | — | |||||||||||||||||
| State and political subdivisions |
— | 1,542 | 6.67 | % | 9,636 | 5.56 | % | 63,607 | 5.30 | % | |||||||||||||||||||
| Mortgage backed securities |
— | — | — | — | $ | 617,394 | 5.25 | % | |||||||||||||||||||||
| Total |
$ | — | $ | 25,769 | 5.08 | % | $ | 9,636 | 5.56 | % | $ | 63,607 | 5.30 | % | $ | 617,394 | 5.25 | % | |||||||||||
| (1) | Computed on a tax-equivalent basis utilizing a 38% tax rate, without giving effect to the disallowance for Federal income tax purposes of interest related to certain tax-exempt assets. |
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SECURITIES AVAILABLE FOR SALE MATURITY DISTRIBUTION AND YIELDS
(Amounts in thousands, except yields)
| December 31, 2006 | ||||||||||||||||||||||||||||||
| Within one year | After one but Within five years |
After five but Within ten years |
After ten years | Other securities | ||||||||||||||||||||||||||
| Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | |||||||||||||||||||||
| U.S. Treasury securities |
$ | 348 | 4.96 | % | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| U.S. Government corporations and agencies |
11,398 | 5.22 | % | 165,442 | 4.96 | % | 11,825 | 5.62 | % | |||||||||||||||||||||
| State and political subdivisions |
1,139 | 6.14 | % | 12,607 | 5.76 | % | 17,395 | 5.61 | % | 27,169 | 6.02 | % | ||||||||||||||||||
| Mortgage backed securities |
— | — | 257,910 | 5.33 | % | |||||||||||||||||||||||||
| Other securities |
1,000 | 9.00 | % | |||||||||||||||||||||||||||
| Equity securities (2) |
— | — | — | — | 43,135 | 5.89 | % | |||||||||||||||||||||||
| Total |
$ | 12,885 | 5.29 | % | $ | 178,049 | 5.02 | % | $ | 29,220 | 5.61 | % | $ | 28,169 | 6.13 | % | $ | 301,045 | 5.41 | % | ||||||||||
| (1) | Computed on a tax-equivalent basis utilizing a 38% tax rate, without giving effect to the disallowance for Federal income tax purposes of interest related to certain tax-exempt assets. |
| (2) | Comprised primarily of Federal Home Loan Bank and Federal Reserve Bank stock. |
At December 31, 2006, mortgage-backed securities, consisting of collateralized mortgage obligations and pass-through mortgage obligations, had a carrying value totaling $875.3 million. These mortgage-backed securities include $617.4 million classified as investment securities and $257.9 million classified as securities available for sale. Management expects the annual repayment of the underlying mortgages to vary as a result of monthly repayment of principal and/or interest required under terms of the underlying promissory notes. Further, the actual rate of repayment is subject to changes depending upon the terms of the underlying mortgages, the relative level of mortgage interest rates, and the structure of the securities. When relative interest rates decline to levels below that of the underlying mortgages, acceleration of principal repayment is expected as some borrowers on the underlying mortgages refinance to lower rates. When the underlying rates on mortgage loans are comparable to, or in excess of, market rates, repayment more closely conforms to scheduled amortization in accordance with terms of the promissory note with additional repayment as a result of sales of homes collateralizing the mortgage loans constituting the security. Accordingly, management generally expects an average life of 3.5 years for both collateralized mortgage obligations and pass-through mortgage obligations.
Other attributes of securities are discussed in “Interest Sensitivity and Market Risk” beginning on page 34.
Short-Term Investments
Alabama National utilizes overnight investment of funds in federal funds sold and securities purchased under agreements to resell to ensure that adequate liquidity will be maintained, while at the same time minimizing the level of uninvested cash reserves. Short-term investments are also utilized by Alabama National when the level of funds committed to lending and investment portfolio programs changes or the level of deposit generation changes. During 2006, federal funds sold and securities purchased under agreements to resell averaged $68.8 million, compared to $83.6 million during 2005, representing a decrease of $14.8 million.
Trading Account Securities
The investment services division carries trading account securities, which represent securities owned by Alabama National prior to sale and delivery to Alabama National’s customers. Trading account securities averaged approximately $1.1 million and $0.5 million in 2006 and 2005, respectively. This small dollar amount reflects management’s policy of limiting positions in such securities to reduce its exposure to market and interest rate changes.
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Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities increased $908.5 million, or 21.0%, to $5.23 billion in 2006, from $4.32 billion in 2005. Average interest-bearing deposits increased $685.9 million, or 20.2%, to $4.08 billion in 2006, from $3.40 billion in 2005. The 2006 bank acquisitions contributed $421.0 million and $395.1 million to the increase in average interest bearing liabilities and average interest bearing deposits, respectively. The remaining organic increase is attributable to competitive rate and product offerings by Alabama National, successful marketing efforts and growth in many of Alabama National’s markets. Average federal funds purchased and securities sold under agreements to repurchase increased $133.8 million, or 26.0%, to $649.0 million in 2006, from $515.2 million in 2005, due in part to additional liquidity provided by downstream correspondent banks. Average short-term borrowings increased by $39.8 million, or 58.6%, to $107.8 million in 2006, compared to $67.9 million in 2005. Average long-term borrowings increased $49.1 million, or 14.5%, to $386.9 million in 2006, from $337.8 million in 2005.
Deposits
Average total deposits increased $722.8 million, or 17.6%, to $4.83 billion during 2006, from $4.11 billion during 2005. At December 31, 2006, total deposits were $5.57 billion, compared with $4.34 billion at December 31, 2005. The 2006 bank acquisitions accounted for $455.6 million of the increase in average deposits and $973.5 million of the increase in year-end 2006 deposit growth. Organic deposit growth during 2006 was 5.9%. The deposit growth did not keep pace with loan growth for 2006, and Alabama National used other wholesale funding sources, such as FHLB advances, to support asset growth. This reliance on other funding sources has negatively impacted Alabama National’s net interest margin.
The following table sets forth the deposits of Alabama National by category at the dates indicated.
DEPOSITS
(Amounts in thousands, except percentages)
| December 31, | ||||||||||||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||
| Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
|||||||||||||||||||||
| Demand |
$ | 849,127 | 15.25 | % | $ | 729,045 | 16.79 | % | $ | 683,245 | 17.36 | % | $ | 404,755 | 14.70 | % | $ | 336,172 | 14.43 | % | ||||||||||
| NOW |
1,179,686 | 21.19 | 1,021,494 | 23.52 | 906,399 | 23.04 | 528,766 | 19.20 | 476,721 | 20.46 | ||||||||||||||||||||
| Savings and money market |
1,120,683 | 20.13 | 884,496 | 20.36 | 887,431 | 22.55 | 521,440 | 18.94 | 378,361 | 16.24 | ||||||||||||||||||||
| Time less than $100,000 |
1,211,208 | 21.75 | 760,832 | 17.52 | 665,696 | 16.92 | 619,229 | 22.49 | 635,827 | 27.27 | ||||||||||||||||||||
| Time greater than $100,000 |
1,206,899 | 21.68 | 947,397 | 21.81 | 791,952 | 20.13 | 679,559 | 24.68 | 503,314 | 21.60 | ||||||||||||||||||||
| Total deposits |
$ | 5,567,603 | 100.00 | % | $ | 4,343,264 | 100.00 | % | $ | 3,934,723 | 100.00 | % | $ | 2,753,749 | 100.00 | % | $ | 2,330,395 | 100.00 | % | ||||||||||
Core deposits, which exclude time deposits of $100,000 or more, provide for a relatively stable funding source that supports earning assets. Alabama National’s core deposits totaled $4.36 billion, or 78.3%, of total deposits at December 31, 2006, and totaled $3.40 billion, or 78.2%, of total deposits at December 31, 2005.
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Deposits, in particular core deposits, have historically been Alabama National’s primary source of funding and have enabled Alabama National to meet successfully both short-term and long-term liquidity needs. Management anticipates that such deposits will continue to be Alabama National’s primary source of funding in the future, although economic and competitive factors could affect this funding source. Alabama National’s loan-to-deposit ratio was 98.0% at December 31, 2006, and 95.4% at the end of 2005, and the ratio averaged 99.8% during 2006 and 94.4% during 2005. The maturity distribution of Alabama National’s time deposits in excess of $100,000 at December 31, 2006 is shown in the following table.
MATURITIES OF CERTIFICATES OF DEPOSIT AND OTHER TIME
DEPOSITS OF $100,000 OR MORE
(Amounts in thousands)
| December 31, 2006 | |||||||||||||||||||||