Prepared by R.R. Donnelley Financial -- Form 10-Q Period Ending 03-31-2002
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended March 31, 2002
 
OR
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 0-25160
 
 
Alabama National BanCorporation
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
  
63-1114426
(State of Incorporation)
  
(I.R.S. Employer Identification No.)
 
1927 First Avenue North, Birmingham, Alabama 35203-4009
(Address of principal executive office)
 
(205) 583-3600
(Registrant’s telephone number, including area code)
 
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
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 the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class
  
Outstanding at May 10, 2002
Common Stock, $1.00 Par Value
  
12,357,212

Table of Contents
INDEX
 
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
 
    
Page
    
    
  
3
  
4
  
6
  
7
  
8
  
10
  
17
    
  
17
  
18
 
FORWARD-LOOKING INFORMATION
 
Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements. In addition, Alabama National BanCorporation (“Alabama National”), through its senior management, from time to time makes forward-looking public statements concerning its expected future operations and performance and other developments. Such forward-looking statements are necessarily estimates reflecting Alabama National’s best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in Alabama National’s Securities and Exchange Commission filings and other public announcements, including the factors described in Alabama National’s Annual Report on Form 10-K for the year ended December 31, 2001. With respect to the adequacy of the allowance for loan losses for Alabama National, these factors include the rate of growth in the economy, especially in the Southeast, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and the performance of the stock and bond markets. The forward-looking statements contained in this Quarterly Report speak only as of the date of this report, and Alabama National undertakes no obligation to revise these statements following the date of this Quarterly Report on Form 10-Q.

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Table of Contents
PART I— FINANCIAL INFORMATION
 
Item 1— Financial Statements (Unaudited)
 
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share amounts)
 
    
March 31, 2002
     
December 31, 2001
  
ASSETS
                  
Cash and due from banks
   
$
91,940
 
   
$
78,262
 
Interest-bearing deposits in other banks
   
 
25,084
 
   
 
10,813
 
Investment securities (market value $245,708 and $234,808, respectively)
   
 
247,662
 
   
 
234,766
 
Securities available for sale
   
 
352,260
 
   
 
332,922
 
Trading securities
   
 
—  
 
   
 
1,341
 
Federal funds sold and securities purchased under resell agreements
   
 
33,213
 
   
 
32,241
 
Loans held for sale
   
 
20,818
 
   
 
36,554
 
Loans
   
 
2,013,502
 
   
 
1,966,631
 
Unearned income
   
 
(2,340
)
   
 
(2,462
)
    
  
Loans, net of unearned income
   
 
2,011,162
 
   
 
1,964,169
 
Allowance for loan losses
   
 
(29,613
)
   
 
(28,519
)
    
  
Net loans
   
 
1,981,549
 
   
 
1,935,650
 
Property, equipment and leasehold improvements, net
   
 
65,809
 
   
 
60,821
 
Goodwill
   
 
15,325
 
   
 
14,813
 
Intangible assets
   
 
3,884
 
   
 
4,062
 
Cash surrender value of life insurance
   
 
53,888
 
   
 
53,171
 
Receivable from investment division customers
   
 
17,559
 
   
 
16,551
 
Other assets
   
 
41,071
 
   
 
31,500
 
    
  
Totals
   
$
2,950,062
 
   
$
2,843,467
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Deposits:
                  
Noninterest bearing
   
$
320,101
 
   
$
306,319
 
Interest bearing
   
 
1,859,126
 
   
 
1,760,440
 
    
  
Total deposits
   
 
2,179,227
 
   
 
2,066,759
 
Federal funds purchased and securities sold under repurchase agreements
   
 
222,570
 
   
 
240,060
 
Treasury, tax and loan accounts
   
 
660
 
   
 
3,490
 
Short-term borrowings
  
 
91,100
 
   
 
68,350
 
Payable for securities purchased for investment division customers
   
 
17,349
 
   
 
16,428
 
Accrued expenses and other liabilities
   
 
41,820
 
   
 
30,863
 
Long-term debt
   
 
184,631
 
   
 
209,631
 
    
  
Total liabilities
   
 
2,737,357
 
   
 
2,635,581
 
Common stock, $1 par, authorized 17,500,000 shares; 12,424,544 shares issued at March 31, 2002 and December 31, 2001
   
 
12,425
 
   
 
12,425
 
Additional paid-in capital
   
 
104,016
 
   
 
103,624
 
Retained earnings
   
 
98,207
 
   
 
92,866
 
Treasury stock at cost, 71,664 and 77,476 shares at March 31, 2002 and December 31, 2001, respectively
   
 
(1,930
)
   
 
(2,087
)
Accumulated other comprehensive income (loss), net of tax
   
 
(13
)
   
 
1,058
 
    
  
Total stockholders’ equity
  
 
212,705
 
   
 
207,886
 
    
  
Totals
   
$
2,950,062
 
   
$
2,843,467
 
    
  
 
See accompanying notes to unaudited consolidated financial statements

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Table of Contents
 
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
 
    
For the three months ended March 31,
    
2002
     
2001
Interest income:
                
Interest and fees on loans
   
$
34,953
 
   
$
38,279
Interest on securities
   
 
8,748
 
   
 
6,758
Interest on deposits in other banks
   
 
41
 
   
 
69
Interest on trading securities
   
 
15
 
   
 
26
Interest on Federal funds sold and securities purchased under resell agreements
   
 
200
 
   
 
693
    
  
Total interest income
   
 
43,957
 
   
 
45,825
Interest expense:
                
Interest on deposits
   
 
13,105
 
   
 
20,248
Interest on Federal funds purchased and securities sold under repurchase agreements
   
 
935
 
   
 
2,636
Interest on long and short-term borrowings
   
 
2,840
 
   
 
2,602
    
  
Total interest expense
   
 
16,880
 
   
 
25,486
    
  
Net interest income
   
 
27,077
 
   
 
20,339
Provision for loan losses
   
 
1,270
 
   
 
593
    
  
Net interest income after provision for loan losses
   
 
25,807
 
   
 
19,746
Noninterest income:
                
Securities gains
   
 
30
 
   
 
—  
Gain (loss) on disposition of assets
   
 
(133
)
   
 
21
Service charges on deposit accounts
   
 
2,722
 
   
 
2,215
Investment services income
   
 
3,081
 
   
 
3,706
Securities brokerage and trust income
   
 
2,808
 
   
 
2,382
Origination and sale of mortgage loans
   
 
2,413
 
   
 
1,315
Bank owned life insurance
   
 
713
 
   
 
548
Insurance commissions
   
 
527
 
   
 
515
Other
   
 
1,066
 
   
 
1,105
    
  
Total noninterest income
   
 
13,227
 
   
 
11,807

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Table of Contents
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)—(Continued)
(in thousands, except per share data)
 
    
For the three months ended March 31,
    
2002
   
2001
Noninterest expense:
              
Salaries and employee benefits
   
 
13,428
   
 
11,291
Commission based compensation
   
 
3,440
   
 
3,044
Occupancy and equipment expenses
   
 
2,768
   
 
2,532
Amortization of intangibles
   
 
184
   
 
280
Other
   
 
6,635
   
 
5,812
    
  
Total noninterest expense
   
 
26,455
   
 
22,959
    
  
Income before provision for income taxes
   
 
12,579
   
 
8,594
Provision for income taxes
   
 
3,971
   
 
2,751
    
  
Net income
   
$
8,608
   
$
5,843
    
  
Net income per common share (basic)
   
$
.70
   
$
.50
    
  
Weighted average common shares outstanding (basic)
   
 
12,350
   
 
11,788
    
  
Net income per common share (diluted)
   
$
.68
   
$
.49
    
  
Weighted average common and common equivalent shares outstanding (diluted)
   
 
12,634
   
 
12,027
    
  
 
 
 
See accompanying notes to unaudited consolidated financial statements

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Table of Contents
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
 
    
For the three months ended March 31,
    
2002
     
2001
Net income
   
$
8,608
 
   
$
5,843
Other comprehensive income (loss):
                
Unrealized gains (losses) on securities available for sale
   
 
(1,520
)
   
 
4,047
Less: Reclassification adjustment for net gains included in net income
   
 
30
 
   
 
—  
    
  
Other comprehensive income (loss), before tax
   
 
(1,550
)
   
 
4,047
Provision for (benefit from) income taxes related to items of other comprehensive income
   
 
(479
)
   
 
1,382
    
  
Other comprehensive income (loss), net of tax
   
 
(1,071
)
   
 
2,665
    
  
Comprehensive income
   
$
7,537
 
   
$
8,508
    
  
 
 
 
 
See accompanying notes to unaudited consolidated financial statements

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Table of Contents
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
 
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
    
For the three months ended March 31,
  
    
2002
     
2001
  
Net cash flows provided by operating activities
   
$
13,388
 
   
$
10,757
 
Cash flows from investing activities:
                  
Proceeds from maturities of investment securities
   
 
26,696
 
   
 
5,256
 
Purchases of investment securities
   
 
(39,570
)
   
 
(59,032
)
Purchases of securities available for sale
   
 
(81,568
)
   
 
(29,045
)
Proceeds from sale of securities available for sale
   
 
1,030
 
   
 
—  
 
Proceeds from maturities of securities available for sale
   
 
59,738
 
   
 
62,456
 
Net increase in interest bearing deposits in other banks
   
 
(14,271
)
   
 
(13,992
)
Net increase in Federal funds sold and securities purchased under resell agreements
   
 
(972
)
   
 
(55,736
)
Net increase in loans
   
 
(31,717
)
   
 
(38,185
)
Purchases of property, equipment and leasehold improvements
   
 
(6,038
)
   
 
(1,248
)
Premiums returned for bank-owned life insurance
   
 
—  
 
   
 
791
 
Proceeds from sale of other real estate owned
   
 
159
 
   
 
303
 
Proceeds from sale of property, equipment and leasehold improvements
   
 
—  
 
   
 
51
 
    
  
Net cash used in investing activities
   
 
(86,513
)
   
 
(128,381
)
    
  
Cash flows from financing activities:
                  
Net increase in deposits
   
 
112,468
 
   
 
72,214
 
Increase (decrease) in Federal funds purchased and securities sold under agreements to repurchase
   
 
(17,490
)
   
 
46,625
 
Net increase (decrease) in short and long-term borrowings and capital leases
   
 
(5,080
)
   
 
4,814
 
Exercise of stock options
   
 
—  
 
   
 
(14
)
Changes incidental to merger
   
 
(7
)
   
 
(10
)
Dividends on common stock
   
 
(3,088
)
   
 
(2,712
)
    
  
Net cash provided by financing activities
   
 
86,803
 
   
 
120,917
 
    
  
Increase in cash and cash equivalents
   
 
13,678
 
   
 
3,293
 
Cash and cash equivalents, beginning of period
   
 
78,262
 
   
 
80,476
 
    
  
Cash and cash equivalents, end of period
   
$
91,940
 
   
$
83,769
 
    
  
Supplemental schedule of noncash investing and financing activities
                  
Acquisition of collateral in satisfaction of loans
   
$
284
 
   
$
1,468
 
    
  
Adjustment to market value of securities available for sale, net of deferred income taxes
   
$
(1,071
)
   
$
2,665
 
    
  
 
 
See accompanying notes to unaudited consolidated financial statements

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Table of Contents
 
ALABAMA NATIONAL BANCORPORATION AND SUBSIDIARIES
 
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
 
NOTE A—BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002 are subject to year-end audit and are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2002. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Alabama National’s Form 10-K for the year ended December 31, 2001.
 
NOTE B—COMMITMENT AND CONTINGENCIES
 
Alabama National’s subsidiary banks make loan commitments and incur contingent liabilities in the normal course of business, which are not reflected in the consolidated statements of condition.
 
NOTE C—RECENTLY ISSUED PRONOUNCEMENTS
 
Business Combinations and Goodwill and Other Intangibles
 
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets,” having a required effective date for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
 
Alabama National adopted the new rules on accounting for goodwill and other intangible assets in the first quarter of 2002. Application of the non-amortization provisions of SFAS No.142 is expected to result in an increase in net income of approximately $521,000 for the year ended December 31, 2002. Under the transitional provisions of SFAS No. 142, Alabama National identified its reporting units and performed impairment tests on the net goodwill associated with each of the reporting units. The testing resulted in no impairment losses to any recorded goodwill.
 
The recorded amount of goodwill increased during the first quarter of 2002 from $14.8 million at December 31, 2001, to $15.3 million at March 31, 2002. This increase was attributable to items related to the fourth quarter acquisition of Farmers National Bank of Opelika.
 
The following table details the impact of the amortization of goodwill on net income for the periods ended March 31, 2002 and 2001 (amounts in thousands, except per share data):
 
    
For the three months ended March 31,
    
2002
   
2001
Net Income:
              
Reported net income
   
$
8,608
   
$
5,843
Add back:
              
Goodwill amortization, net of taxes
   
 
—  
   
 
117
    
  
Net income excluding goodwill amortization, net of taxes
   
$
8,608
   
$
5,960
    
  
Basic net income per common share:
              
Reported net income
   
$
0.70
   
$
0.50
Add back:
              
Goodwill amortization, net of taxes
   
 
—  
   
 
0.01
    
  
Net income excluding goodwill amortization, net of taxes
   
$
0.70
   
$
0.51
    
  
Weighted average shares outstanding (basic)
   
 
12,350
   
 
11,788
    
  
Diluted net income per common share:
              
Reported net income
   
$
0.68
   
$
0.49
Add back:
              
Goodwill amortization, net of taxes
   
 
—  
   
 
0.01
    
  
Net income excluding goodwill amortization, net of taxes
   
$
0.68
   
$
0.50
    
  
Weighted average shares outstanding (diluted)
   
 
12,634
   
 
12,027
    
  
 
Intangible assets other than goodwill that have finite useful lives will continue to be amortized over their useful lives. Alabama National’s other intangible assets consist solely of core deposit intangibles and are considered to have finite lives. The gross carrying amount of such intangible assets as of March 31, 2002 was $7.0 million with a balance of $3.1 million in accumulated amortization. As a result of adoption of the Statements, there have been no changes to amortizable lives or methods. The amortization of such intangible assets for the three months ended March 31, 2002 and 2001 was $184,000 and $157,000, respectively. The estimated amortization expense for each of the five succeeding fiscal years is as follows (amounts in thousands):
 
For the year ended December 31,
       
2002
     
$683
2003
     
$620
2004
     
$569
2005
     
$528
2006
     
$528
 

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Table of Contents
 
NOTE E - EARNINGS PER SHARE
 
The following table reflects the reconciliation of the numerator and denominator of the basic earnings per share computation to the diluted earnings per share computation for the quarters ended March 31, 2002 and 2001.
 
    
Income
   
Shares
   
Per Share Amount
    
(In thousands, except per share amounts)
Three months ended March 31, 2002
                   
Basic EPS net income
   
$
8,608
   
12,350
   
$
0.70
                
Effect of dilutive securities
   
 
—  
   
284
       
    
  
      
Diluted EPS
   
$
8,608
   
12,634
   
$
0.68
    
  
  
Three months ended March 31, 2001
                   
Basic EPS net income
   
$
5,843
   
11,788
   
$
0.50
                
Effect of dilutive securities
   
 
—  
   
239
       
    
  
      
Diluted EPS
   
$
5,843
   
12,027
   
$
0.49
    
  
  
 
NOTE F—SEGMENT REPORTING
 
Alabama National’s reportable segments represent the distinct major product lines it offers and are viewed separately for strategic planning purposes by management. The following table is a reconciliation of the reportable segment revenues, expenses and profit to Alabama National’s consolidated totals (in thousands).
 
    
Investment Services Division
   
Securities Brokerage & Trust Division
   
Mortgage Lending Division
   
Insurance Division
     
Retail and Commercial Banking
   
Corporate Overhead
     
Elimination Entries
     
Total
Three months ended March 31, 2002:
                          
Interest income
   
$
—  
   
$
251
   
$
424
   
$
—  
 
   
$
43,339
   
$
(18
)
   
$
(39
)
   
$
43,957
Interest expenses
          
 
39
   
 
161
   
 
1
 
   
 
16,382
   
 
336
 
   
 
(39
)
   
 
16,880
    
  
  
  
  
  
  
  
Net interest income
          
 
212
   
 
263
   
 
(1
)
   
 
26,957
   
 
(354
)
            
 
27,077
Provision for loan losses
                                 
 
1,270
                     
 
1,270
Noninterest income
   
 
3,081
   
 
2,808
   
 
2,446
   
 
527
 
   
 
4,365
                     
 
13,227
Noninterest expense
   
 
2,277
   
 
2,672
   
 
1,437
   
 
606
 
   
 
18,356
   
 
1,107
 
            
 
26,455
    
  
  
  
  
  
  
  
Net income before tax
   
$
804
   
$
348
   
$
1,272
   
$
(80
)
   
$
11,696
   
$
(1,461
)
   
$
—  
 
   
$
12,579
    
  
  
  
  
  
  
  
Three months ended March 31, 2001:
                               
Interest income
   
$
—  
   
$
706
   
$
178
   
$
5
 
   
$
45,511
   
$
(12
)
   
$
(563
)
   
$
45,825
Interest expenses
          
 
220
   
 
137
   
 
3
 
   
 
25,235
   
 
454
 
   
 
(563
)
   
 
25,486
    
  
  
  
  
  
  
  
Net interest income
          
 
486
   
 
41
   
 
2
 
   
 
20,276
   
 
(466
)
            
 
20,339
Provision for loan losses
                                 
 
593
                     
 
593
Noninterest income
   
 
3,706
   
 
2,382
   
 
1,358
   
 
515
 
   
 
3,835
   
 
11
 
            
 
11,807
Noninterest expense
   
 
2,694
   
 
2,243
   
 
902
   
 
503
 
   
 
14,813
   
 
1,804
 
            
 
22,959
    
  
  
  
  
  
  
  
Net income before tax
   
$
1,012
   
$
625
   
$
497
   
$
14
 
   
$
8,705
   
$
(2,259
)
   
$
—  
 
   
$
8,594
    
  
  
  
  
  
  
  
Corporate overhead is comprised of compensation and benefits for certain members of management, merger related costs, interest expense on parent company debt, amortization of intangibles and other expenses.

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Table of Contents
 
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS
 
Basis of Presentation
 
The following is a discussion and analysis of the consolidated financial condition of Alabama National and results of operations as of the dates and for the periods indicated. All significant intercompany accounts and transactions have been eliminated. The accounting and reporting policies of Alabama National conform with generally accepted accounting principles and with general financial services industry practices.
 
This information should be read in conjunction with Alabama National’s unaudited consolidated financial statements and related notes appearing elsewhere in this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Alabama National’s Annual Report on Form 10-K for the year ended December 31, 2001.
 
Performance Overview
 
Alabama National’s net income for the three month period ended March 31, 2002 (the “2002 three months”) was $8.61 million compared to $5.84 million for the three months ended March 31, 2001 (the “2001 three months”). Net income per diluted common share for the 2002 three months and the 2001 three months was $0.68 and $0.49, respectively. Excluding after tax merger-related charges relating to the Peoples State Bank merger during the 2001 three months, Alabama National’s net operating earnings increased $1.98 million, or 30.0% during the 2002 three months, and net operating earnings per diluted common share for the 2002 three months and the 2001 three months was $0.68 and $0.55, respectively, an increase of 23.7%.
 
The annualized return on average assets for Alabama National was 1.21% and 0.98% for the 2002 three months and the 2001 three months, respectively. On an operating basis, the annualized return on average equity was 1.21% and 1.12% for the 2002 three months and the 2001 three months, respectively. The annualized return on average stockholders’ equity increased for the 2002 three months to 16.35%, as compared to 13.48% for the 2001 three months. On an operating basis, the annualized return on average stockholders’ equity increased for the 2002 three months to 16.35%, as compared to 15.28% for the 2001 three months. Book value per share at March 31, 2002 was $17.22, an increase of $0.38 from year-end 2001. Tangible book value per share at March 31, 2002 was $15.66, an increase of $0.35 from year-end 2001. Alabama National paid cash dividends totaling $0.25 on common shares during the 2002 three months, compared to $0.23 paid on common shares during the 2001 three months.
 
Net Income
 
The principal reasons for the increase in net income during the 2002 three months was the growth in net interest income and increased revenue from noninterest income business lines. Net interest income in the 2002 three months totaled $27.1 million, compared to $20.3 million during the 2001 three months, an increase of $6.7 million, or 33.1%. Net interest income is the difference between the income earned on interest bearing assets and the interest paid on deposits and borrowings used to support such assets. Noninterest income in the 2002 three months totaled $13.2 million, compared to $11.8 million during the 2001 three months, an increase of $1.4 million, or 12.0%. The increased net interest income and noninterest income were offset by an increase in noninterest expense of $3.5 million to $26.5 million for the 2002 three months, compared with $23.0 million for the 2001 three months, an increase of 15.2%.
 
Average earning assets for the 2002 three months increased by approximately $457.1 million as compared to the 2001 three months, as average interest-bearing liabilities increased $402.8 million. The average taxable equivalent rate earned on assets was 6.76% for the 2002 three months compared to 8.50% for the 2001 three months. The average rate paid on interest-bearing liabilities was 2.93% for the 2002 three months compared to 5.34% for the 2001 three months. The reduction in each of these rates reflects the effects of rate cuts by the Federal Reserve Bank during 2001. The net interest margin for the 2002 three months was 4.14%, compared to 3.75% for the 2001 three months. The increased net interest margin is due to Alabama National’s ability to support its interest earning asset growth with lower cost liabilities due to the effects of rate cuts by the Federal Reserve Bank throughout 2001. The net interest margin increased 12 basis points during the 2002 three months as compared the fourth quarter 2001’s net interest margin of 4.02%. Management

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anticipates the net interest margin to stabilize at current levels, absent any additional rate reductions by the Federal Reserve or significant changes in the general interest rate environment.
 
The following table depicts, on a taxable equivalent basis for the 2002 and 2001 three months, certain information related to Alabama National’s average balance sheet and its average yields on assets and average costs of liabilities. Such yields or costs are derived by dividing income or expense by the average daily balance of the associated assets or liabilities.
 
AVERAGE BALANCES, INCOME AND EXPENSES AND RATES
(Amounts in thousands, except yields and rates)
 
    
Three months ended March 31,
  
    
2002
    
                                2001              
  
    
 
 
Average
Balance
 
 
   
 
 
Income/
Expense
   
Yield/Cost
 
   
 
 
Average
Balance
 
 
   
 
 
Income/
Expense
   
Yield/Cost
 
Assets:
                                              
Earning assets:
                                              
Loans (1) (3)
   
$
2,008,617
 
   
$
35,030
   
7.07
%
   
$
1,730,094
 
   
$
38,344
   
8.99
%
Securities:
                                              
Taxable
   
 
561,163
 
   
 
8,351
   
6.04
 
   
 
380,464
 
   
 
6,379
   
6.80
 
Tax exempt
   
 
32,065
 
   
 
602
   
7.61
 
   
 
30,281
 
   
 
574
   
7.69
 
Cash balances in other banks
   
 
7,649
 
   
 
41
   
2.17
 
   
 
6,577
 
   
 
69
   
4.25
 
Funds sold
   
 
44,200
 
   
 
200
   
1.84
 
   
 
48,864
 
   
 
693
   
5.75
 
Trading account securities
   
 
1,218
 
   
 
15
   
4.99
 
   
 
1,574
 
   
 
26
   
6.70
 
    
  
         
  
      
Total earning assets (2)
   
 
2,654,912
 
   
 
44,239
   
6.76
 
   
 
2,197,854
 
   
 
46,085
   
8.50
 
    
  
         
  
      
Cash and due from banks
   
 
95,123
 
                 
 
81,501
 
              
Premises and equipment
   
 
62,987
 
                 
 
52,127
 
              
Other assets
   
 
113,201
 
                 
 
99,800
 
              
Allowance for loan losses
   
 
(29,267
)
                 
 
(22,635
)
              
    
                
             
Total assets
   
$
2,896,956
 
                 
$
2,408,647
 
              
    
                
             
Liabilities:
                                              
Interest-bearing liabilities:
                                              
Interest-bearing transaction accounts
   
$
389,228
 
   
 
1,296
   
1.35
 
   
$
291,564
 
   
 
2,434
   
3.39
 
Savings deposits
   
 
395,751
 
   
 
1,445
   
1.48
 
   
 
307,153
 
   
 
2,722
   
3.59
 
Time deposits
   
 
1,034,979
 
   
 
10,364
   
4.06
 
   
 
965,129
 
   
 
15,092
   
6.34
 
Funds purchased
   
 
238,725
 
   
 
935
   
1.59
 
   
 
189,982
 
   
 
2,636
   
5.63
 
Other short-term borrowings
   
 
70,902
 
   
 
399
   
2.28
 
   
 
42,708
 
   
 
689
   
6.54
 
Long-term debt
   
 
209,355
 
   
 
2,441
   
4.73
 
   
 
139,566
 
   
 
1,913
   
5.56
 
    
  
         
  
      
Total interest-bearing liabilities
   
 
2,338,940
 
   
 
16,880
   
2.93
 
   
 
1,936,102
 
   
 
25,486
   
5.34
 
    
  
         
  
      
Demand deposits
   
 
299,284
 
                 
 
244,615
 
              
Accrued interest and other liabilities
   
 
45,270
 
                 
 
52,121
 
              
Stockholders’quity
   
 
213,462
 
                 
 
175,809
 
              
    
                
             
Total liabilities and stockholders’ equity
   
$
2,896,956
 
                 
$
2,408,647
 
              
    
                
             
                                               
Net interest spread
                   
3.83
%
                   
3.16
%
                    
                  
Net interest income/margin on a taxable equivalent basis
            
 
27,359
   
4.18
%
            
 
20,599
   
3.80
%
             
  
           
  
Tax equivalent adjustment (2)
            
 
282
                   
 
260
       
             
  
           
  
Net interest income/margin
            
$
27,077
   
4.14
%
            
$
20,339
   
3.75
%
             
  
           
  
 
                                              
(1)
 
Average loans include nonaccrual loans. All loans and deposits are domestic.
(2)
 
Tax equivalent adjustments are based upon assumed tax rate of 34%, and do not reflect the disallowance for |Federal income tax purposes of interest expense related to certain tax exempt assets.
(3)
 
Fees in the amount of $1,217,000 and $1,061,000 are included in interest and fees on loans for the three months ended March 31, 2002 and 2001, respectively.
 
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 the 2002 three months compared to the 2001 three months. For the purposes of this table, changes which are not solely attributable to volume or rate are allocated to volume and rate on a pro rata basis.
 
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Amounts in thousands)
 
    
Three Months Ended March 31,
  
    
2002 Compared to 2001
Variances Due to
  
    
Volume
     
Yield/Rate
     
Total
  
Earning assets:
                           
Loans
   
$
27,130
 
   
$
(30,444
)
   
$
(3,314
)
Securities:
                           
Taxable
   
 
6,278
 
   
 
(4,306
)
   
 
1,972
 
Tax exempt
   
 
65
 
   
 
(37
)
   
 
28
 
Cash balances in other banks
   
 
61
 
   
 
(89
)
   
 
(28
)
Funds sold
   
 
(61
)
   
 
(432
)
   
 
(493
)
Trading account securities
   
 
(5
)
   
 
(6
)
   
 
(11
)
    
  
  
Total interest income
   
 
33,468
 
   
 
(35,314
)
   
 
(1,846
)
Interest-bearing liabilities:
                           
Interest-bearing transaction accounts
   
 
3,847
 
   
 
(4,985
)
   
 
(1,138
)
Savings and money market deposits
   
 
3,847
 
   
 
(5,124
)
   
 
(1,277
)
Time deposits
   
 
6,581
 
   
 
(11,309
)
   
 
(4,728
)
Funds purchased
   
 
3,595
 
   
 
(5,296
)
   
 
(1,701
)
Other short-term borrowings
   
 
1,686
 
   
 
(1,976
)
   
 
(290
)
Long-term debt
   
 
2,191
 
   
 
(1,663
)
   
 
528
 
    
  
  
Total interest expense
   
 
21,747
 
   
 
(30,353
)
   
 
(8,606
)
    
  
  
                            
Net interest income on a taxable equivalent basis
   
$
11,721
 
   
$
(4,961
)
   
 
6,760
 
    
  
        
Taxable equivalent adjustment
                     
 
(22
)
                      
Net interest income
                     
$
6,738
 
                      
The provision for loan losses represents a charge to current earnings necessary to maintain the allowance for loan losses at an appropriate level based on management’s analysis of the potential risk in the loan portfolio. The amount of the provision is a function of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, and the amount of loan losses actually charged against the allowance during a given period and current economic conditions. The provision for loan losses was $1.3 million for the 2002 three months, compared to $0.6 million recorded in the 2001 three months. The increased provision during the 2002 three months is attributable to an increase in potential problem loans, an increase in nonperforming loans and growth in the loan portfolio. The allowance for loan losses as a percentage of outstanding loans, net of unearned income, was 1.47% at March 31, 2002, compared to 1.45% at December 31, 2001.
 
Because of the inherent uncertainty of assumptions made during the assessment process, there can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additional allocations to the allowance will not be required. See Asset Quality.
 
Total noninterest income for the 2002 three months was $13.2 million, compared to $11.8 million for the 2001 three months, an increase of 12.0%. The major components of noninterest income include service charges on deposits, investment services revenue, securities brokerage and trust revenue, insurance commissions, and fees relating to the origination and sale of mortgage loans. Service charges on deposits were $2.7 million in the 2002 three months, compared to $2.2 million in the 2001 three months, an increase of 22.9%. This increase is primarily attributable to the acquisition of Farmers National Bank during the fourth quarter of 2001. Revenue from the investment division totaled $3.1 million in the 2002 three months, a decrease of $0.6 million, or 16.9%, as compared to $3.7 million recorded in the 2001 three months. The revenue generated by the investment division is dependent upon the demand for fixed income securities by its customers that include correspondent community banks and corporate customers. The securities brokerage and trust division revenue increased 17.9%, to $2.8 million in the 2002 three months, compared to $2.4 million for the 2001 three months. This increase is attributable to continued expansion in the number of customers and

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total customer assets under management by the securities brokerage and trust division, as well as an increase in the number of registered representatives. Fees generated from the origination and sale of mortgages increased to $2.4 million for the 2002 three months from $1.3 million in the 2001 three months, representing an 83.5% increase. This increase is primarily a result of declining interest rates and the impact the interest rate environment has on refinancing and new mortgage origination activity. Other noninterest income for the 2002 three months decreased slightly from the $1.1 million recorded for the 2001 three months.
 
Noninterest expense was $26.5 million for the 2002 three months, compared to $23.0 million for the 2001 three months. The 2001 three months balance includes $997,000 of merger-related charges associated with the acquisition of Peoples State Bank. Noninterest expense includes salaries and employee benefits, commission based compensation, occupancy and equipment expenses, amortization of intangibles, and other expenses. Salaries and employee benefits were $13.4 million for the 2002 three months, compared to $11.3 million for the 2001 three months. The 2002 three months includes the salaries and employee benefit expense for Farmers National Bank of Opelika which was acquired during the fourth quarter of 2001 and accounted for as a purchase transaction. Also contributing to the increase in salaries and employee benefits were general staffing increases concurrent with expansion of offices and business lines and merit compensation increases. Commission based compensation was $3.4 million for the 2002 three months compared to $3.0 million for the 2001 three months. The increase in commission based compensation is attributable to increased production in the mortgage and securities brokerage and trust divisions, as a significant portion of the compensation in these divisions is production based. Net occupancy expenses increased $236,000, or 9.3%, during the 2002 three months. A majority of this increase is due to the effect of the Farmers National acquisition. Other noninterest expense increased to $6.6 million in the 2002 three months, compared with $5.8 million in the 2001 three months.
 
Income tax expense was $4.0 million for the 2002 three months, compared to $2.8 million for the 2001 three months. The effective tax rates for the 2002 three months and 2001 three months were 31.6% and 32.0%, respectively. The decrease in the effective tax rate for the 2002 three months is due to merger-related charges that are not deductible for federal or state taxes that occurred during the 2001 three months. These effective tax rates are also impacted by other items of income and expense that are not subject to federal or state taxation.
 
Earning Assets
 
Loans comprised the largest single category of Alabama National’s earning assets on March 31, 2002. Loans, net of unearned income, were $2.01 billion, or 68.2% of total assets at March 31, 2002, compared to $1.96 billion, or 69.1% at December 31, 2001. Loans grew $47.0 million, or 2.4%, during the 2002 three months. The following table details the composition of the loan portfolio by category at the dates indicated:
 
COMPOSITION OF LOAN PORTFOLIO
(Amounts in thousands, except percentages)
 
    
March 31, 2002
     
December 31, 2001
  
    
Amount
     
Percent of Total
     
Amount
     
Percent
of Total
  
Commercial, financial and agricultural
   
$
249,959
 
   
12.42
%
   
$
247,613
 
   
12.59
%
Real estate:
                                
Construction
   
 
243,606
 
   
12.10
 
   
 
231,369
 
   
11.76
 
Mortgage—residential
   
 
553,989
 
   
27.51
 
   
 
546,730
 
   
27.80
 
Mortgage—commercial
   
 
659,987
 
   
32.78
 
   
 
637,575
 
   
32.42
 
Mortgage—other
   
 
5,996
 
   
.30
 
   
 
5,645
 
   
.29
 
Consumer
   
 
85,831
 
   
4.26
 
   
 
82,909
 
   
4.22
 
Lease financing receivables
   
 
76,805
 
   
3.81
 
   
 
73,924
 
   
3.76
 
Securities brokerage margin loans
   
 
13,987
 
   
.69
 
   
 
16,302
 
   
.83
 
Other
   
 
123,342
 
   
6.13
 
   
 
124,564
 
   
6.33
 
    
  
  
  
Total gross loans
   
 
2,013,502
 
   
100.00
%
   
 
1,966,631
 
   
100.00
%
             
           
Unearned income
   
 
(2,340
)
          
 
(2,462
)
       
    
         
      
Total loans, net of unearned income
   
 
2,011,162
 
          
 
1,964,169
 
       
Allowance for loan losses
   
 
(29,613
)
          
 
(28,519
)
       
    
         
      
Total net loans
   
$
1,981,549
 
          
$
1,935,650
 
       
    
         
      
The carrying value of investment securities increased $12.9 million in the 2002 three months. During the 2002 three months, Alabama National purchased $39.6 million of investment securities and received $26.7 million from maturities, including principal paydowns of mortgage backed securities.
 
The carrying value of securities available for sale increased $19.3 million in the 2002 three months. During the 2002 three months, purchases of available for sale securities totaled $81.6 million and maturities, calls, and sales of available for sale securities totaled $60.7 million. Unrealized losses on available for sale securities totaled $1.1 million net of income taxes during the 2002 three months.
 
Trading account securities, which had a balance of zero at March 31, 2002, are securities owned by Alabama National prior to sale and delivery to Alabama National’s customers. It is the policy of Alabama National to limit positions in such securities to reduce its exposure to market and interest rate changes. Federal funds sold and securities purchased under agreements to resell totaled $33.2 million at March 31, 2002 and $32.2 million at December 31, 2001.
 
Deposits and Other Funding Sources
 
Deposits increased $112.5 million from December 31, 2001, to $2.18 billion at March 31, 2002. All categories of deposits experienced growth during the 2002 three months. At March 31, 2002, deposits included $64.0 million of brokered time deposits, compared to $39.0 million at December 31, 2001.

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Federal funds purchased and securities sold under agreements to repurchase totaled $222.6 million at March 31, 2002, a decrease of $17.5 million from December 31, 2001. The treasury, tax and loan account decreased to $0.7 million at March 31, 2002, compared with $3.5 million at December 31, 2001. Short-term borrowings at March 31, 2002 totaled $91.1 million, including a note payable to a third party bank of $19.1 million and advances from the Federal Home Loan Bank (“FHLB”) totaling $72.0 million.
 
Alabama National’s short-term borrowings at March 31, 2002 and December 31, 2001 are summarized as follows:
 
SHORT-TERM BORROWINGS
(Amounts in thousands)
 
    
March 31, 2002
   
December 31, 2001
Note payable to third party bank under secured master note agreement; rate varies with LIBOR and was 2.65% and 2.68125% at March 31, 2002 and December 31, 2001, respectively; collateralized by the Company's stock in subsidiary banks
   
$
19,100
   
$
16,350
FHLB debt due at various maturities ranging from May 30, 2002 through February 11, 2003; bearing interest at fixed and variable rates ranging from 2.17% to 5.0275% and 2.17% to 2.53% at March 31, 2002 and December 31, 2001, respectively; collateralized by FHLB stock and certain first mortgages. The increase from December 31, 2001 resulted from a $25 million note being classified as long-term at December 31, 2001
   
 
72,000
   
 
47,000
FHLB open ended note payable; rate varies daily based on the FHLB Daily Rate Credit interest price and was 1.83% at December 31, 2001; collateralized by FHLB stock and certain first mortgage loans. This note was repaid during the first quarter of 2002
          
 
5,000
    
  
Total short-term borrowings
   
$
91,100
   
$
68,350
    
  
 
Alabama National’s long-term debt at March 31, 2002 and December 31, 2001 is summarized as follows:
 
LONG-TERM DEBT
(Amounts in thousands)
 
    
March 31, 2002
   
December 31, 2001
FHLB debt due at various maturities ranging from November 5, 2003 through November 7, 2011; bearing interest at fixed rates ranging from 3.31% to 6.00% at March 31, 2002 and December 31, 2001; convertible at the option of the FHLB at dates ranging from April 7, 2002 to November 7, 2006; collateralized by FHLB stock, certain first mortgage loans and pledged available for sale securities
   
 
169,000
   
 
169,000
FHLB debt due February 11, 2003; interest rate varies with LIBOR and was 5.3275% at December 31, 2001; collateralized by FHLB stock and certain first mortgage loans. At March 31, 2002, note was classified as short-term
          
 
25,000
Trust preferred securities due December 18, 2031; rate varies with LIBOR and was 5.59% and 5.60% at March 31, 2002 and December 31, 2001, respectively
   
 
15,000
   
 
15,000
Various notes payable
   
 
559
   
 
554
Capital leases payable
   
 
72
   
 
77
    
  
    
$
184,631
   
$
209,631
    
  
 
Asset Quality
 
Nonperforming loans are comprised of loans past due 90 days or more and still accruing interest, loans accounted for on a nonaccrual basis and loans in which the terms have been restructured to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower. At March 31, 2002, Alabama National had no loans past due 90 days or more and still accruing interest. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that the collection of interest is doubtful. It is Alabama National’s policy to place a delinquent loan on nonaccrual status when it becomes 90 days or more past due. When a loan is placed on nonaccrual status, all interest that is accrued on the loan is reversed and deducted from earnings as a reduction of reported interest. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual writedown or charge-off of the principal balance of the loan which would necessitate additional charges to the allowance for loan losses.
 
At March 31, 2002, nonperforming assets totaled $9.6 million, compared to $9.2 million at year-end 2001. Nonperforming assets as a percentage of period-end loans plus other real estate were 0.48% at March 31, 2002, compared to 0.47% at December 31, 2001. The following table presents Alabama National’s nonperforming assets for the dates indicated.
 
NONPERFORMING ASSETS
(Amounts in thousands, except percentages)
 
    
March 31, 2002
     
December 31, 2001
  
Nonaccrual loans
   
$
7,978
 
   
$
7,563
 
Restructured loans
   
 
—  
 
   
 
—  
 
Loans past due 90 days or more and still accruing
   
 
—  
 
   
 
—  
 
    
  
Total nonperforming loans
   
 
7,978
 
   
 
7,563
 
Other real estate owned
   
 
1,633
 
   
 
1,680
 
    
  
Total nonperforming assets
   
$
9,611
 
   
$
9,243
 
    
  
Allowance for loan losses to period-end loans
   
 
1.47
%
   
 
1.45
%
Allowance for loan losses to period-end nonperforming loans
   
 
371.18
 
   
 
377.09
 
Allowance for loan losses to period-end nonperforming assets
   
 
308.12
 
   
 
308.55
 
Net charge-offs to average loans
   
 
0.04
 
   
 
0.09
 
Nonperforming assets to period-end loans and other real estate owned
   
 
0.48
 
   
 
0.47
 
Nonperforming loans to period-end loans
   
 
0.40
 
   
 
0.39
 
 
Net loan charge-offs for the 2002 three months totaled $176,000, or 0.04% (annualized) of average loans for the period. The allowance for loan losses as a percentage of total loans, net of unearned income, was 1.47% at March 31, 2002, compared to 1.45% at December 31, 2001. The following table analyzes activity in the allowance for loan losses for the 2002 three months.
 
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
For the Three Months Ended March 31, 2002
(Amounts in thousands, except percentages)
 
        
Allowance for loan losses at beginning of period
   
$
28,519
Charge-offs:
       
Commercial, financial and agricultural
   
 
246
Real estate—mortgage
   
 
375
Consumer
   
 
255
    
Total charge-offs
   
 
876
    
Recoveries:
       
Commercial, financial and agricultural
   
 
381
Real estate—mortgage
   
 
195
Consumer
   
 
124
    
Total recoveries
   
 
700
    
Net charge-offs
   
 
176
    
Provision for loan losses
   
 
1,270
    
Allowance for loan losses at end of period
   
$
29,613
    
 
The loan portfolio is periodically reviewed to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. This analysis includes a review of delinquency trends, actual losses and internal credit ratings. Based on this analysis, management considers the allowance for loan losses at March 31, 2002, to be adequate to cover possible loan losses in the portfolio as of that date. However, because of the inherent uncertainty of assumptions made during the evaluation process, there can be no assurance that loan losses in future periods will not exceed the allowance for loan losses or that additional allocations to the allowance will not be required.

13

Table of Contents
Interest Rate Sensitivity
 
Alabama National monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The principal monitoring technique employed by Alabama National is simulation analysis, which technique is augmented by “gap” analysis.
 
In simulation analysis, Alabama National reviews each individual asset and liability category and its projected behavior in various different interest rate environments. These projected behaviors are based upon management’s past experiences and upon current competitive environments, including the various environments in the different markets in which Alabama National competes. Using this projected behavior and differing rate scenarios as inputs, the simulation analysis generates as output a projection of net interest income. Alabama National also periodically verifies the validity of this approach by comparing actual results with those that were projected in previous models. See Market Risk.
 
Another technique used by Alabama National in interest rate management is the measurement of the interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets and liabilities, selling securities available for sale, replacing an asset or liability at maturity or by adjusting the interest rate during the life of an asset or liability.
 
Alabama National evaluates interest sensitivity risk and then formulates guidelines regarding asset generation and repricing, and sources and prices of off-balance sheet commitments in order to decrease interest sensitivity risk. Alabama National uses computer simulations to measure the net income effect of various interest rate scenarios. The modeling reflects interest rate changes and the related impact on net income over specified periods of time.
 
The following table illustrates Alabama National’s interest rate sensitivity at March 31, 2002, assuming 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)
 
    
March 31, 2002
    
Zero
Through
Three
Months
     
After Three
Through
Twelve
Months
     
One Through Three Years
     
Greater Than Three Years
     
Total
Assets:
                                           
Earning assets:
                                           
Loans (1)
   
$
948,976
 
   
$
252,030
 
   
$
407,547
 
   
$
415,449
 
   
$
2,024,002
Securities (2)
   
 
69,274
 
   
 
92,910
 
   
 
225,262
 
   
 
196,080
 
   
 
583,526
Trading securities
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
Interest-bearing deposits in other banks
   
 
25,084
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
25,084
Funds sold
   
 
33,213
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
33,213
    
  
  
  
  
Total interest-earning assets
   
$
1,076,547
 
   
$
344,940
 
   
$
632,809
 
   
$
611,529
 
   
$
2,665,825
Liabilities:
                                           
Interest-bearing liabilities:
                                           
Interest-bearing deposits:
                                           
Demand deposits
   
$
141,438
 
   
$
—  
 
   
$
—  
 
   
$
269,859
 
   
$
411,297
Savings and money market deposits
   
 
165,379
 
   
 
—  
 
   
 
—  
 
   
 
222,201
 
   
 
387,580
Time deposits (3)
   
 
324,143
 
   
 
536,354
 
   
 
168,982
 
   
 
30,770
 
   
 
1,060,249
Funds purchased
   
 
222,570
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
222,570
Short-term borrowings (4)
   
 
88,100
 
   
 
3,000
 
                     
 
91,100
Long-term debt
   
 
94,208
 
   
 
59,012
 
   
 
10,035
 
   
 
22,036
 
   
 
185,291
    
  
  
  
  
Total interest-bearing liabilities
   
$
1,035,838
 
   
$
598,366
 
   
$
179,017
 
   
$
544,866
 
   
$
2,358,087
    
  
  
  
  
Period gap
   
$
40,709
 
   
$
(253,426
)
   
$
453,792
 
   
$
66,663
 
       
    
  
  
  
      
Cumulative gap
   
$
40,709
 
   
$
(212,717
)
   
$
241,075
 
   
$
307,738
 
   
$
307,738
    
  
  
  
  
Ratio of cumulative gap to total earning assets
   
 
1.53
%
   
 
-7.98
%
   
 
9.04
%
   
 
11.54
%
       
(1)
 
Excludes nonaccrual loans of $7,978,000
(2)
 
Excludes available for sale equity securities of $16,396,000
(3)
 
Excludes matured certificates which have not been redeemed by the customer and on which no interest is accruing.
(4)
 
Includes treasury, tax and loan account of $660,000
 
Alabama National generally benefits from increasing market rates of interest when it has an asset-sensitive gap and generally benefits from decreasing market rates of interest when it is liability sensitive. Alabama National is liability sensitive through the one year time frame, except for the zero through three month period. However, Alabama National’s gap analysis is not a precise indicator of its interest sensitivity position. The analysis presents only a static view of the timing of maturities 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 rates are viewed by management as significantly less interest-sensitive than market-based rates, such as those paid on non-core deposits. Accordingly, management believes that a liability-sensitive gap position is not as indicative of Alabama National’s true interest sensitivity as it would be for an organization which depends to a greater extent on purchased funds to support earning assets. Net interest income may be affected by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.
 
Market Risk
 
Alabama National’s earnings are dependent on its net interest income which is the difference between interest income earned on all earning assets, primarily loans and securities, and interest paid on all interest bearing liabilities, primarily deposits. Market risk is the risk of loss from adverse changes in market prices and rates. Alabama National’s market risk arises primarily from inherent interest rate risk in its lending, investing and deposit gathering activities. Alabama National seeks to reduce its exposure to market risk through actively monitoring and managing its interest rate risk. Management relies upon static “gap” analysis to determine the degree of mismatch in the maturity and repricing distribution of interest earning assets and interest bearing liabilities which quantifies, to a large extent, the degree of market risk inherent in Alabama National’s balance sheet. Gap analysis is further augmented by simulation analysis to evaluate the impact of varying levels of prevailing interest rates and the sensitivity of specific earning assets and interest bearing liabilities to changes in those prevailing rates. Simulation analysis consists of evaluating the impact on net interest income given changes from 200 basis points below 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

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interest bearing liabilities, which assumptions consider both historical experience and consensus estimates of outside sources.
 
With respect to the primary earning assets, loans and securities, certain features of individual types of loans and specific securities introduce uncertainty as to their expected performance at varying levels of interest rates. In some cases, prepayment options exist whereby the borrower may elect to repay the obligation at any time. These prepayment options make anticipating the performance of those instruments difficult given changes in prevailing rates. At March 31, 2002, mortgage backed securities with a carrying value of $474.2 million, or 16.1% of total assets and essentially every loan, net of unearned income, (totaling $2.01 billion, or 68.2% 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 $2.18 billion, or 73.9%, of total assets at March 31, 2002. Since deposits are the primary funding source for earning assets, the associated market risk is considered by management in its simulation analysis. Generally, it is anticipated that deposits will be sufficient to support funding requirements. However, the rates paid for deposits at varying levels of prevailing interest rates have a significant impact on net interest income and therefore, must be quantified by Alabama National in its simulation analysis. Specifically, Alabama National’s spread, the difference between the rates earned on earning assets and rates paid on interest bearing liabilities, is generally higher when prevailing rates are higher. As prevailing rates reduce, the spread tends to compress, with severe compression at very low prevailing interest rates. This characteristic is called “spread compression” and adversely effects net interest income in the simulation analysis when anticipated prevailing rates are reduced from current rates. Management relies upon historical experience to estimate the degree of spread compression in its simulation analysis. Management believes that such estimates of possible spread compression are reasonable. However, if the degree of spread compression varies from that expected, the actual results could differ from those indicated by the simulation analysis.
 
The following table illustrates the results of simulation analysis used by Alabama National to determine the extent to which market risk would affect net interest margin for the next twelve months if prevailing interest rates increased or decreased the specified amounts from current rates. Due to the current low interest rate environment, Alabama National’s net interest income would decrease significantly if prevailing interest rates were to further decrease 100 or 200 basis points. The current rates paid on interest-bearing accounts cannot decrease below zero, yet rates earned on loans can experience a decrease in the falling rate scenarios, and the interest rate spread would therefore compress. Because of the inherent use of estimates and assumptions in the simulation model used to derive this information, the actual results of the future impact of market risk on Alabama National’s net interest margin, may differ from that found in the table.
 
MARKET RISK
(Amounts in thousands)
 
   
As of March 31, 2002
     
As of December 31, 2001
  
Change in Prevailing Interest Rates (1)
   
Net Interest
Income Amount
   
Change from Income Amount
     
Net Interest
Income Amount
   
Change from Income Amount
  
+200 basis points
   
$
118,776
   
4.83
%
   
$
117,465
   
5.47
%
+100 basis points
   
 
117,730
   
3.91
 
   
 
115,562
   
3.76
 
0 basis points
   
 
113,299
   
—  
 
   
 
111,375
   
—  
 
-100 basis points
   
 
97,594
   
(13.86
)
   
 
101,536
   
(8.83
)
-200 basis points
   
 
91,404
   
(19.32
)
   
 
96,871
   
(13.02
)
(1)
 
Assumes an immediate rate change of this magnitude.
 
Liquidity and Capital Adequacy
 
Alabama National’s net loan to deposit ratio was 92.3% at March 31, 2002, compared to 95.0% at year-end 2001. Alabama National’s liquid assets as a percentage of total deposits were 6.9% at March 31, 2002, compared to 5.9% at year-end 2001. At March 31, 2002, Alabama National had unused federal funds lines of approximately $140.7 million, unused lines at the Federal Home Loan Bank of $231.2 million and an unused credit line with a third party bank of $15.9 million. Alabama National also has access to approximately $153.8 million via a credit facility with the Federal Reserve Bank of Atlanta. At March 31, 2002 and year-end 2001 there were no outstanding borrowings under this credit facility. Management analyzes the level of off-balance sheet assets such as unfunded loan commitments and outstanding letters of credit as they relate to the levels of cash, cash equivalents, liquid investments, and available funds lines in an attempt to minimize the possibility that a potential liquidity shortfall will exist. Based on this analysis, management

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believes that Alabama National has adequate liquidity to meet short-term operating requirements. However, no assurances can be given in this regard.
 
Alabama National’s stockholders’ equity increased by $4.8 million from December 31, 2001, to $212.7 million at March 31, 2002. This increase was attributable to the following components (in thousands):
 
          
Net income
   
$
8,608
 
Dividends
   
 
(3,088
)
Issuance of stock from treasury
   
 
46
 
Additional paid in capital related to stock based compensation
   
 
324
 
Change in unrealized gain or loss on securities available for sale, net of deferred taxes
   
 
(1,071
)
    
Net increase
   
$
4,819
 
    
A strong capital position is vital to the continued profitability of Alabama National because it promotes depositor and investor confidence and provides a solid foundation for future growth of the organization. The capital of Alabama National and its subsidiary banks (the “Banks”) exceeded all prescribed regulatory capital guidelines at March 31, 2002. Under the capital guidelines of their regulators, Alabama National and the Banks are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common stockholders’ equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, less goodwill. In addition, Alabama National and the Banks must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 3%, but this minimum ratio is increased by 100 to 200 basis points for other than the highest rated institutions. The following table sets forth the risk-based and leverage ratios of Alabama National and each subsidiary bank at March 31, 2002:
 
    
Tier 1 Risk Based
     
Total Risk Based
     
Tier 1 Leverage
  
Alabama National BanCorporation
   
9.88
%
   
11.13
%
   
7.27
%
National Bank of Commerce of Birmingham
   
10.47
 
   
11.72
 
   
7.60
 
Alabama Exchange Bank
   
13.21
 
   
14.46
 
   
7.33
 
Bank of Dadeville
   
12.01
 
   
13.26
 
   
7.87
 
Citizens & Peoples Bank, N.A.
   
9.69
 
   
10.94
 
   
7.33
 
Community Bank of Naples, N.A.
   
9.57
 
   
10.82
 
   
6.95
 
First American Bank
   
9.39
 
   
10.65
 
   
7.54
 
First Citizens Bank
   
13.93
 
   
15.10
 
   
7.19
 
First Gulf Bank
   
10.40
 
   
11.65
 
   
7.35
 
Georgia State Bank
   
11.94
 
   
13.13
 
   
7.37
 
Public Bank
   
9.56
 
   
10.71
 
   
7.83
 
Peoples State Bank
   
10.61
 
   
11.86
 
   
7.45
 
Required minimums
   
4.00
 
   
8.00
 
   
4.00
 

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Item 3— Quantitative and Qualitative Disclosures about Market Risk
 
The information required by this item is contained in Item 2 herein under the headings “Interest Rate Sensitivity” and “Market Risk”.
 
PART II—OTHER INFORMATION
 
Item 6—Exhibits and Reports on Form 8-K
 
(a)  Exhibits:
 
Exhibit 3.1—Restated Certificate of Incorporation
 
Exhibit 3.2—Bylaws (filed as an Exhibit to Alabama National’s Registration Statement on Form S-1 (Commission File
No. 33-83800) and incorporated herein by reference).
 
Exhibit 11—Computation of Earnings Per Share
 
(b)  Reports on Form 8-K
 
None.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
    
ALABAMA NATIONAL BANCORPORATION
Date: May 10, 2002
   
/s/    JOHN H. HOLCOMB, III
    
    
John H. Holcomb, III,
its Chairman and Chief Executive Officer
Date: May 10, 2002
   
/s/    WILLIAM E. MATTHEWS, V.
    
    
William E. Matthews, V.,
its Executive Vice President and Chief Financial Officer
 

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