UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter ended September 30, 1999. Commission file #0-15423
SOUTH ALABAMA BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
Alabama 63-0909434
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification Number)
100 St. Joseph Street, Mobile, Alabama 36602
(Address of principal executive offices) (Zip Code)
(334) 431-7800
(Registrant's telephone number, including area code)
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 .
Shares of common stock ($0.01 Par) outstanding at November 12,
1999: 8,585,555
Page 1 of 27
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
INDEX TO FORM 10 - Q
PART I. Financial Information Page Number
Consolidated Statements of Condition
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Operations
Three Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements
September 30, 1999 7-14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15-26
PART II. Other Information 26-27
PART I. FINANCIAL INFORMATION
<TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
<CAPTION>
September 30, December 31,
1999 1998
(Unaudited)
(Dollars in thousands)
A S S E T S
<S> <C> <C>
Cash and Due from Banks $ 19,567 $ 22,194
Federal Funds Sold 4,384 42,614
Total Cash and Cash Equivalents 23,951 64,808
Interest Bearing Deposits 599 410
Securities Available for Sale (at Market) 141,147 147,890
Securities Held to Maturity
(Market value of $12,393 and $12,986,
respectively) 12,229 12,490
Loans 362,524 314,512
Less: Unearned Loan Income <1,571> <1,481>
Allowance for Loan Losses <4,053> <3,664>
Loans, Net 356,900 309,367
Premises and Equipment 12,795 10,875
Accrued Income Receivable 5,665 5,365
Intangible assets 4,428 4,576
Other Assets 3,420 1,577
Total $561,134 $557,358
L I A B I L I T I E S
Non-interest Bearing Demand Deposits $ 78,326 $ 78,486
Interest Bearing Demand Deposits 130,842 143,121
Savings Deposits 35,746 33,810
Large Denomination Time Deposits
(of $100 or more) 94,114 86,601
Time Deposits 129,106 133,427
Total Deposits 468,134 475,445
Short-Term Borrowings 18,553 7,457
Long-Term Debt 7,000 6,000
Other Liabilities 3,264 3,726
Total Liabilities 496,951 492,628
S H A R E H O L D E R S' E Q U I T Y
Common Stock
Par Value $0.01
Shares Authorized 20,000,000
Shares Outstanding 1999-8,585,555
1998-8,564,555 86 86
Capital Surplus 37,826 37,751
Retained Earnings 28,095 25,464
Accumulated Other Comprehensive Income (1,824) 1,429
Total Shareholders' Equity 64,183 64,730
Total $561,134 $557,358
(See accompanying notes to consolidated financial statements.)
</TABLE>
<TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
<CAPTION>
Nine Months Ended September 30,
1999 1998
(Dollars in thousands except
per share amounts)
<S> <C> <C>
Interest Revenue:
Loans $22,263 $19,903
Investments: Taxable 5,044 4,896
Non-Taxable 2,067 2,147
Other 545 1,254
Total Interest Revenue 29,919 28,200
Interest Expense:
Deposits 12,817 12,595
Short-Term Borrowings 272 258
Long-Term Debt 263 189
Total Interest Expense 13,352 13,042
Net Interest Revenue 16,567 15,158
Provision for Loan Losses 508 268
Net Interest Revenue After Provision
for Loan Losses 16,059 14,890
Non-Interest Revenue:
Trust Income 1,029 970
Service Charges on Deposit Accounts 1,781 1,529
Securities Gains and (Losses),net 14 18
Other Income, Charges and Fees 489 473
Total Non-Interest Revenue 3,313 2,990
Non-Interest Expense:
Salaries 5,739 5,437
Pensions and Employee Benefits 1,471 1,267
Net Occupancy Expense 811 815
Furniture and Equipment Expense 1,089 939
Intangible Amortization 149 136
Other Expense 3,313 3,232
Total Non-Interest Expense 12,572 11,826
Income Before Income Taxes 6,800 6,054
Income Tax Expense 1,894 1,595
Net Income $4,906 $ 4,459
Basic Earnings Per Common Share $ 0.57 $ .53
Diluted Earnings Per Common Share $ 0.57 $ .52
(See accompanying notes to consolidated financial statements.)
</TABLE>
<TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
<CAPTION>
Three Months Ended September 30,
1999 1998
(Dollars in thousands except
per share amounts)
<S> <C> <C>
Interest Revenue:
Loans $ 7,669 $ 7,004
Investments: Taxable 1,634 1,712
Non-Taxable 701 767
Other 133 358
Total Interest Revenue 10,137 9,841
Interest Expense:
Deposits 4,246 4,399
Short-Term Borrowings 99 100
Long-Term Debt 94 85
Total Interest Expense 4,439 4,584
Net Interest Revenue 5,698 5,257
Provision for Loan Losses 185 92
Net Interest Revenue After Provision
for Loan Losses 5,513 5,165
Non-Interest Revenue:
Trust Income 358 321
Service Charges on Deposit Accounts 623 538
Securities Gains and (Losses), net (3) 22
Other Income, Charges and Fees 158 162
Total Non-Interest Revenue 1,136 1,043
Non-Interest Expense:
Salaries 1,928 1,878
Pensions and Employee Benefits 476 424
Net Occupancy Expense 283 288
Furniture and Equipment Expense 367 343
Intangible Amortization 50 50
Other Expense 1,165 1,099
Total Non-Interest Expense 4,269 4,082
Income Before Income Taxes 2,380 2,126
Income Tax Expense 679 546
Net Income $1,701 $ 1,580
Basic Earnings Per Common Share $ 0.20 $ .19
Diluted Earnings Per Common Share $ 0.20 $ .18
(See accompanying notes to consolidated financial statements.)
</TABLE>
<TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<CAPTION>
Nine Months Ended September 30,
1999 1998
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,906 $ 4,459
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,280 1,161
Provision for loan losses 508 268
Securities (gains) and losses,net <14> <18>
(Increase) decrease in:
Income receivable <300> <495>
Other assets <108> <295>
Increase (decrease) in other liabilities <461> <291>
Net cash provided by operating activities 5,811 4,789
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing
deposits <189> <371>
Net (increase) decrease in loans <48,042> <29,528>
Proceeds from the sale of other real
estate owned 66 0
Purchase of premises and equipment <2,917> <1,759>
Proceeds from sale of securities
available for sale 10,995 1,989
Proceeds from maturities of investments 46,866 53,298
Purchase of investments <56,031> <69,064>
Net cash acquired from business
combinations 0 8,132
Net cash provided by (used in) investing
activities <49,252> <37,303>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits <7,312> 16,426
Net increase (decrease) in short-
term borrowing 11,096 376
Net increase in long-term debt 1,000 3,500
Proceeds from issuance of stock 75 9
Dividends paid <2,275> <1,791>
Net cash provided by (used in) financing
activities 2,584 18,520
NET INCREASE <DECREASE> IN CASH
AND CASH EQUIVALENTS <40,857> <13,994>
Cash and cash equivalents at beginning
of period 64,808 49,000
Cash and cash equivalents at end of
period $23,951 $35,006
Supplemental disclosures of cash flow
information:
Interest paid in cash $13,602 $12,809
Income taxes paid in cash 1,671 1,260
(See accompanying notes to consolidated financial statements.)
</TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A: The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 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. The
information furnished reflects all adjustments, consisting of
normal and recurring accruals, which in the opinion of
management are necessary for a fair presentation of the
results of the interim periods. Results for interim periods
may not necessarily be indicative of results to be expected
for the year.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's
report on Form 10-K for the year ended December 31, 1998.
NOTE B: The allowance for losses on loans for the nine month periods
ended September 30, 1999 and 1998 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
Allowance for loan losses:
<S> <C> <C>
Balance at beginning of period $ 3,664 $ 3,394
Balance acquired 0 287
Provision charged to
operating expense 508 268
Losses charged off <469> <800>
Recoveries 350 362
Balance at end of period $ 4,053 $ 3,511
</TABLE>
NOTE C: Basic earnings per share were computed by dividing net income
by the weighted average number of shares of common stock
outstanding during the nine month periods ended September 30,
1999 and 1998.
Diluted earnings per share for the nine month periods ended
September 30, 1999 and 1998, were computed by dividing net
income by the weighted average number of shares of common
stock and the dilutive effects of the shares awarded under the
Stock Option plans, based on the treasury stock method using
an average fair market value of the stock during the
respective periods.
The following tables represent the earnings per share
calculations for the nine and three month periods ended
September 30, 1999 and 1998, (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Nine Months Ended Income Shares Earnings per share
<S> <C> <C> <C>
September 30, 1999
Net income $4,906
Basic earnings per share:
Income available to common
shareholders $4,906 8,582 $0.57
Dilutive securities
Stock option plan shares 79
Dilutive earnings per share:
Income available to common
shareholders plus assumed
conversions $4,906 8,661 $0.57
Nine Months Ended Income Shares Earnings per share
September 30, 1998
Net income $4,459
Basic earnings per share:
Income available to common
shareholders $4,459 8,488 $0.53
Dilutive securities
Stock option plan shares 124
Dilutive earnings per share:
Income available to common
shareholders plus assumed
conversions $4,459 8,612 $0.52
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Income Shares Earnings per share
September 30, 1999
<S> <C> <C> <C>
Net income $1,701
Basic earnings per share:
Income available to common
shareholders $1,701 8,671 $0.20
Dilutive securities
Stock option plan shares 52
Dilutive earnings per share:
Income available to common
shareholders plus assumed
conversions $1,701 8,723 $0.20
Three Months Ended Income Shares Earnings per share
September 30, 1998
Net income $1,580
Basic earnings per share:
Income available to common
shareholders $1,580 8,540 $0.19
Dilutive securities
Stock option plan shares 34
Dilutive earnings per share:
Income available to common
shareholders plus assumed
conversions $1,580 8,574 $0.18
</TABLE>
NOTE D: The American Institute of Certified Public Accountants has
issued Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-up Activities." This SOP provides guidance on
the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and
organization activities to be expensed as incurred, and the
initial application of this SOP should be reported as the
cumulative effect of a change in accounting principle. This
SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. Earlier application is
encouraged for fiscal years for which annual financial
statements previously have not been issued. The adoption of
this SOP did not have a material impact on the presentation of
the Company's financial condition or results of operations.
NOTE E: The Company adopted SFAS No. 130 January 1, 1998.
SFAS No. 130 established standards for reporting and display
of comprehensive income and its components.
The Company has classified the majority of its securities as
available for sale in accordance with FASB Statement No. 115.
For the nine months ended September 30, 1999, the net
unrealized gain on these securities decreased by $5.1 million.
For the nine months ended September 30, 1998, the net
unrealized gain (loss) on these securities increased by $1.8
million. Pursuant to Statement No. 115, any unrealized gain
or loss activity of available for sale securities is to be
recorded as an adjustment to a separate component of
shareholders' equity, net of income tax effect. Accordingly,
for the nine months ended September 30, 1999 and 1998, the
Company recognized a decrease of $3.3 million and an increase
of $1.1 million, respectively, in the net unrealized gain
(loss) component of equity.
Since comprehensive income is a measure of all changes in
equity of an enterprise that result from transactions and
other economic events of the period, this change in unrealized
gain(loss) serves to increase or decrease comprehensive
income.
The following table represents comprehensive income for the
nine months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net Income $4,906 $4,459
Other comprehensive income (loss),
net of tax
Unrealized gain (loss) on securities <3,253> 1,103
Comprehensive income $1,653 $5,562
</TABLE>
The following table represents comprehensive income for the
three months ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net Income $ 1,701 $1,580
Other comprehensive income (loss),
net of tax
Unrealized gain (loss) on securities <515> 1,006
Comprehensive income $<1,186> $2,586
</TABLE>
NOTE F: There have been no material changes in reported market risk
since year-end.
NOTE G: Segment Reporting
Under SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", certain information is
disclosed for the five reportable operating segments of the
Company. The reportable segments were determined using the
internal management reporting system. They are composed of
the Company's significant subsidiaries. The accounting
policies for each segment are the same as those used by the
Company. The segment results include certain overhead
allocations and intercompany transactions that were recorded
at current market prices. All intercompany transactions have
been eliminated to determine the consolidated balances.
The results for the five reportable segments of the company
are included in the following tables (in thousands):
<TABLE>
Nine Months Ended
September 30, 1999
<CAPTION>
Monroe- Sweet
Mobile Brewton ville Demopolis Water
Bank Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $10,769 $ 6,297 $ 5,436 $ 4,143 $ 3,279 $ 17 $ <22> $29,919
Total interest expense 4,738 2,534 2,336 2,084 1,682 0 <22> 13,352
Net interest income 6,031 3,763 3,100 2,059 1,597 17 0 16,567
Provision for loan losses 302 44 0 135 27 0 0 508
Net interest income after
provision 5,729 3,719 3,100 1,924 1,570 17 0 16,059
Total noninterest income 717 430 422 379 336 1,036 <7> 3,313
Total noninterest expense 4,019 2,334 1,997 1,524 1,346 1,359 <7> 12,572
Income before taxes 2,427 1,815 1,525 779 560 <306> 0 6,800
Provision for income taxes 857 425 429 183 110 <110> 0 1,894
Net income $ 1,570 $ 1,390 $ 1,096 $ 596 $ 450 $ <196> $ 0 $ 4,906
Other significant items:
Total assets $197,576 $113,718 $115,258 $73,495 $58,543 $67,248 $<64,704> $561,134
Total investment securities 35,969 34,660 49,294 17,250 16,203 0 0 153,376
Total loans 146,921 71,741 52,697 52,051 37,543 0 0 360,953
Investment in subsidiaries 10 67 0 0 64,582 <64,659> 0
Total interest income from
external customers 10,764 6,288 5,428 4,143 3,279 17 0 29,919
Total interest income from
affiliates 5 9 8 0 0 <22> 0
</TABLE>
<TABLE>
Nine Months Ended
September 30, 1998
<CAPTION>
Monroe- Sweet
Mobile Brewton ville Demopolis Water
Bank Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 9,722 $ 6,305 $ 4,882 $ 4,150 $ 3,134 $ 12 $ <5> $28,200
Total interest expense 4,563 2,662 2,205 2,173 1,444 0 <5> 13,042
Net interest income 5,159 3,643 2,677 1,977 1,690 12 0 15,158
Provision for loan losses 74 66 0 38 90 0 0 268
Net interest income after
provision 5,085 3,577 2,677 1,939 1,600 12 0 14,890
Total noninterest income 579 421 427 313 280 975 <5> 2,990
Total noninterest expense 3,789 2,212 1,897 1,517 1,240 1,176 <5> 11,826
Income before taxes 1,875 1,786 1,207 735 640 <189> 0 6,054
Provision for income taxes 648 372 342 181 125 < 73> 0 1,595
Net income $ 1,227 $ 1,414 $ 865 $ 554 $ 515 $ <116> $ 0 $ 4,459
Other significant items:
Total assets $177,735 $113,887 $111,169 $74,111 $50,608 $63,817 $<63,792> $527,535
Total investment securities 33,740 46,544 54,272 17,269 12,702 0 0 164,527
Total loans 125,183 60,270 39,583 50,133 33,639 0 0 308,808
Investment in subsidiaries <11> 54 0 0 61,264 <61,307> 0
Total interest income from
external customers 9,717 6,305 4,882 4,150 3,134 12 0 28,200
Total interest income from
affiliates 5 0 0 0 0 0 < 5> 0
</TABLE>
<TABLE>
Three Months Ended
September 30, 1999
<CAPTION>
Monroe- Sweet
Mobile Brewton ville Demopolis Water
Bank Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 3,630 $ 2,141 $ 1,842 $ 1,410 $ 1,115 $ 4 $ <5> $10,137
Total interest expense 1,565 838 774 710 557 0 <5> 4,439
Net interest income 2,065 1,303 1,068 700 558 4 0 5,698
Provision for loan losses 101 30 0 45 9 0 0 185
Net interest income after
provision 1,964 1,273 1,068 655 549 4 0 5,513
Total noninterest income 247 139 162 116 114 360 <2> 1,136
Total noninterest expense 1,370 793 665 517 454 472 <2> 4,269
Income before taxes 841 619 565 254 209 <108> 0 2,380
Provision for income taxes 298 146 167 59 46 < 37> 679
Net income $ 543 $ 473 $ 398 $ 195 $ 163 $ < 71> $ 0 $ 1,701
Other significant items:
Total assets $197,576 $113,718 $115,258 $73,495 $58,543 $67,248 $<64,704> $561,134
Total investment securities 35,969 34,660 49,294 17,250 16,203 0 0 153,376
Total loans 146,921 71,741 52,697 52,051 37,543 0 0 360,953
Investment in subsidiaries 10 67 0 0 64,582 <64,659> 0
Total interest income from
external customers 3,625 2,141 1,842 1,410 1,115 4 0 10,137
Total interest income from
affiliates 5 0 0 0 0 0 < 5> 0
</TABLE>
<TABLE>
Three Months Ended
September 30, 1998
Monroe- Sweet
<CAPTION>
Mobile Brewton ville Demopolis Water
Bank Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 3,446 $ 2,118 $ 1,750 $ 1,427 $ 1,093 $ 12 $ <5> $ 9,841
Total interest expense 1,630 905 793 751 510 0 <5> 4,584
Net interest income 1,816 1,213 957 676 583 12 0 5,257
Provision for loan losses 32 10 0 20 30 0 0 92
Net interest income after
provision 1,784 1,203 957 656 553 12 0 5,165
Total noninterest income 202 150 160 116 94 325 <4> 1,043
Total noninterest expense 1,303 732 676 548 410 417 <4> 4,082
Income before taxes 683 621 441 224 237 <80> 0 2,126
Provision for income taxes 237 124 120 58 45 <38> 0 546
Net income $ 446 $ 497 $ 321 $ 166 $ 192 $ <42> $ 0 $ 1,580
Other significant items:
Total assets $177,735 $113,887 $111,169 $74,111 $50,608 $63,817 $<63,792> $527,535
Total investment securities 33,740 46,544 54,272 17,269 12,702 0 0 164,527
Total loans 125,183 60,270 39,583 50,133 33,639 0 0 308,808
Investment in subsidiaries <11> 54 0 0 61,264 <61,307> 0
Total interest income from
external customers 3,441 2,118 1,750 1,427 1,093 12 0 9,841
Total interest income from
affiliates 5 0 0 0 0 0 < 5> 0
</TABLE>
NOTE H: In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." This
statement delays the effective date of Statement 133 from
fiscal quarters of all fiscal years beginning after June 15,
1999, with earlier application encouraged to fiscal quarters
of all fiscal years beginning after June 15, 2000.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Presented below is an analysis of the consolidated financial
condition and results of operations of South Alabama Bancorporation,
Inc. (the "Company") and its wholly owned subsidiaries, South Alabama
Bank, First National Bank, Brewton, The Monroe County Bank, The
Commercial Bank of Demopolis, Sweet Water State Bank and South Alabama
Trust Company, Inc. This analysis focuses upon significant changes in
financial condition between December 31, 1998 and September 30, 1999,
and significant changes for the three month periods ended September 30,
1999 and 1998, as well as significant changes for the nine months
periods ended September 30, 1999 and 1998.
On May 15, 1998, Peterman State Bank, a Peterman, Alabama state
bank, was acquired by the Company and merged into The Monroe County
Bank. This transaction has been accounted for as a purchase (the
"Peterman purchase").
On May 12, 1998, the Company announced a stock split effected in
the form of a stock dividend of one-half of a share of the Company's
common stock to be paid on each share of the Company's common stock
outstanding at the close of business on June 15, 1998. All share and
per share information in these financial statements have been restated
to give effect to the stock split.
On December 15, 1998, The Commercial National Bank of Demopolis was
merged into a wholly-owned subsidiary of the Company, with the resulting
company changing its name to The Commercial Bank of Demopolis. This
merger has been accounted for as a pooling-of-interests, and,
accordingly, the results of operations of The Commercial Bank of
Demopolis have been included in the consolidated results for all periods
presented.
On September 10, 1999, Sweet Water State Bancshares, Inc., the
parent company of Sweet Water State Bank, was merged into the Company.
This merger has been accounted for as a pooling-of-interests, and,
accordingly, the results of operations of Sweet Water State Bank have
been included in the consolidated results for all periods presented.
This report on Form 10-Q contains certain forward looking
statements with respect to financial condition, liquidity, non-
performing assets and results of operations, including the Notes to
Consolidated Financial Statements and statements in the following
discussion. These statements can be identified by the use of words like
"expect," "may," "could," "should," "intend," "project," "estimate," or
"anticipate." The Company cautions readers that forward looking
statements are subject to risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward
looking statements. Factors that may cause actual results to differ
materially from those contemplated include, among others, the stability
of interest rates, the rate of growth of the economy in the Company's
market area, the success of the Company's marketing efforts, the ability
to expand into new segments of the market area, competition, changes in
technology, the strength of the consumer and commercial credit sectors,
levels of consumer confidence, the impact of regulation applicable to
the Company, the performance of stock and bond markets, and disruptions
of the operations of the Company or any other private or governmental
entity as a result of the "Year 2000 problem."
Financial Condition
Total assets at September 30, 1999 were $561.1 million, an increase
of $3.8 million from $557.4 million at December 31, 1998. Federal
funds sold decreased $38.2 million and investment securities decreased
$7.0 million from December 31, 1998. These decreases in federal funds
sold and investment securities were used in part to fund the increase in
loans of $48.0 million, or 15.3 percent, from $314.5 million at December
31, 1998 to $362.5 million at September 30, 1999. The decrease in total
deposits of $7.3 million, or 1.5 percent, from $475.4 million at
December 31, 1998 to $468.1 million at September 30, 1999 also
contributed to the decrease in federal funds sold and investment
securities.
Time deposits, consisting of certificates of deposit, decreased
$4.3 million, or 3.2 percent. Large denomination time deposits
increased $7.5 million. The Company does not actively seek large
denomination time deposits as a source of funding. Non-interest bearing
demand deposits were relatively unchanged, while interest bearing demand
deposits decreased $12.3 million, or 8.6 percent. Core deposits,
defined as total deposits less time deposits, decreased by $10.5
million. Short-term borrowings increased $11.1 million, or 148.8
percent, as the increase in loans and the decrease in deposits
necessitated the purchasing of federal funds at several of the banks.
Long-term debt increased $1.0 million.
The Company's equity as a percent of total assets at September 30,
1999 was 11.4 percent, compared to 11.6 percent at December 31, 1998.
The primary capital ratio (defined as the sum of common and preferred
stock, capital surplus, retained earnings, allowance for loan losses and
contingency and capital reserves divided by total assets) was 12.5
percent, compared to 12.0 at year-end 1998.
The Company and its subsidiary banks are required by the various
depository institutions' regulatory agencies to maintain certain
capital-to-asset ratios. Risk-based capital guidelines consider risk
factors associated with various components of assets, both on and off
the Statement of Condition. Under these guidelines capital is measured
in two tiers. These capital tiers are used in conjunction with "risk-
weighted" assets in determining "risk-weighted" capital ratios. The
Company's Tier I capital, which is shareholders' equity less goodwill
and accumulated other comprehensive income, was $58.7 million at
December 31, 1998 and $61.6 million at September 30, 1999. Tier II
capital, which is Tier I capital plus the allowable portion of the
allowance for loan losses, was $62.3 million at December 31, 1998 and
$65.6 million at September 30, 1999. The ratios, expressed as a
percent of total risk-weighted assets for Tier I and Tier II capital,
were 15.91 percent and 16.90 percent, respectively, at December 31,
1998, and 15.52 percent and 16.54 percent, respectively, at September
30, 1999. Both the December 1998 and the September 1999 ratios exceed
the minimum ratios of four percent and eight percent for Tier I and Tier
II capital, respectively.
The components of the Company's risk-based capital calculations
for September 30, 1999 are shown below (dollars in thousands):
<TABLE>
<CAPTION>
September 30,
1999
<S> <C>
Tier I capital--
Tangible Common shareholders'
equity $61,579
Tier II capital--
Allowable portion of the allowance
for loan losses 4,053
Total capital (Tiers I and II) $65,632
Risk-weighted assets $396,704
Quarterly average assets 548,967
Risk-based capital ratios:
Tier I capital 15.52%
Total capital (Tiers I and II) 16.54%
</TABLE>
During the third quarter of 1999 the Company declared a regular
quarterly dividend of $0.09 per share, payable October 1, 1999, to
shareholders of record September 15, 1999.
Liquidity
Liquidity management involves the ability to meet the day-to-day
cash flow requirements of customers, primarily depositors' withdrawals
and borrowers' requirements for funds. This is achieved by carefully
monitoring the amount of liquid assets available to meet these needs.
Liquid assets (cash and cash items, deposits with other banks, federal
funds sold and securities available for sale excluding pledged
securities) totaled $86.6 million at September 30, 1999. These assets
represented 15.4 percent of total assets at quarter end as compared to
22.3 percent at December 31, 1998. The net change in cash and cash
equivalents for the nine month period ended September 30, 1999 was a
decrease of $40.9 million. Cash includes currency on hand and demand
deposits with other financial institutions. Cash equivalents are defined
as short-term and highly liquid investments, which are readily
convertible to known amounts of cash and so near maturity that there is
no significant risk of changes in value because of changes in interest
rates. The Company has available, if needed, federal fund lines of
credit, Federal Reserve discount window operations, Federal Home Loan
Bank lines of credit, and an operating line of credit from a
correspondent bank.
Management is not aware of any trends, events or uncertainties that
will have or that are reasonably likely to have a material effect on the
liquidity, capital resources or operations of the Company. Management
is not aware of any current recommendations by regulatory authorities
which, if they were implemented, would have such an effect.
Non-Performing Assets
Non-performing assets include accruing loans 90 days or more past
due, loans on non-accrual, renegotiated loans and other real estate
owned. Commercial, business and installment loans are classified as
non-accrual by Management upon the earlier of: (i) a determination that
collection of interest is doubtful, or (ii) the time at which such loans
become 90 days past due, unless collateral or other circumstances
reasonably assure full collection of principal and interest.
<TABLE>
Summary of Non-Performing Assets
(Dollars in Thousands)
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Accruing loans 90 days or more past due $3,077 $ 530
Loans on non-accrual 1,573 510
Renegotiated loans 0 0
Total non-performing loans 4,650 1,040
Other real estate owned 102 168
Total non-performing assets $4,752 $1,208
Accruing Loans 90 days or more past due
as a percent of loans 0.85% 0.17%
Total non-performing loans as a
percent of loans 1.28% 0.33%
Total non-performing assets as a percent
of loans and other real estate owned 1.31% 0.38%
</TABLE>
Non-performing loans increased by $3.6 million from year-end 1998.
Of this increase $2 million is due to one loan at the Mobile Bank which
is guaranteed by an individual who is now deceased. The Mobile Bank has
filed a claim against the estate and expects to collect the loan in
full. The increase in loan on non-accrual was caused primarily by three
loans at the Mobile Bank being placed on non-accrual. Other real estate
owned consists of several small parcels of property.
The amount of impaired loans determined under SFAS No. 114 and 118
was not material. These credits were considered in determining the
adequacy of the allowance for loan losses and, while current, are
regularly monitored for changes within a particular industry or general
economic trends which could cause the borrowers severe financial
difficulties.
Any loans classified for regulatory purposes as loss, doubtful,
substandard or special mention, and not included above as non-performing
assets, do not (i) represent or result from trends or uncertainties
which management reasonably expects will materially impact future
operating results, or (ii) represent material credits about which
management is aware of any information which causes management to have
serious doubts as to the ability of such borrower to comply with the
loan repayment terms.
Results of Operations
THE THIRD QUARTER
The Company recorded net income of $1.7 million, or $0.20 per share,
during the third quarter of 1999, compared to net income in the third
quarter of 1998 of $1.6 million, or $0.19 per share. An increase in
average interest earning assets and a shift to loans from investment
securities and federal funds sold enabled the Company to increase total
interest revenue by $296 thousand, or 3.0 percent. Interest expense
decreased by $145 thousand. The net interest margin was steady at 4.63
percent in the third quarter of 1999 compared to 4.66 percent in the
third quarter of 1998.
Management provided $185 thousand for loan losses during the third
quarter of 1999, compared to a $92 thousand provision for the third
quarter of 1998. The increase in the provision was in response to the
Company's loan portfolio growth. Net charge offs during the first nine
months of 1999 were $119 thousand compared to $438 thousand in the first
nine months of 1998. The allowance for loan losses at September 30,
1999 and December 31, 1998 as a percent of loans was 1.12 percent and
1.16 percent respectively. The decrease in the allowance for loan
losses as a percentage of loans was due primarily to the increase in
loans. The allowance for loan losses represented 0.87 times non-
performing loans at September 30, 1999 and 3.52 times non-performing
loans at December 31, 1998. The decrease was due primarily to the
increase in non-performing loans discussed under the heading "Non-
Performing Assets." Management reviews the adequacy of the allowance
for loan losses on a continuous basis by assessing the quality of the
loan portfolio, including non-performing loans, and adjusting the
allowance when appropriate. The allowance for loan losses was
considered adequate at September 30, 1999.
Non-interest revenue was $1.1 million for the third quarter of
1999, compared to $1.0 million for the same period in 1998, an increase
of 8.9 percent, due primarily to the increase in deposit account service
charges of $85 thousand. Three of the banks will introduce new fee
schedules in the fourth quarter of 1999 and these new fee schedules
should have a positive impact on this category in future periods.
Salary and employee benefit expense increased $102 thousand, or 4.4
percent, from third quarter of 1998 to the third quarter of 1999, caused
primarily by merit increases. Net occupancy expense of $283 thousand in
third quarter 1999 was relatively unchanged from 1998 while furniture
and equipment expense increased $24 thousand.
Other expenses include data processing fees for the Trust Company,
FDIC insurance, insurance costs, accounting and legal fees, stationery
and supplies, credit card service fees, loan collection fees and
advertising. Other non-interest expense in third quarter 1999 increased
by $66 thousand, or 6.0 percent from third quarter 1998.
Income tax expense was $679 thousand for the third quarter of 1999,
compared to $546 thousand for the same period in 1998. The increase in
income tax expense in 1999 compared to 1998 resulted primarily from an
increase in taxable income.
THE NINE MONTHS
The Company recorded net income of $4.9 million, or $0.57 per share,
during the first nine months of 1999 compared to net income in the first
nine months of 1998 of $4.5 million, or $0.53 per share. Total interest
revenue increased by $1.7 million, or 6.1 percent, due to increased
volume in loans and to the Peterman purchase. Interest expense
increased $310 thousand, or 2.4 percent, due primarily to increased
deposit volume and to the Peterman purchase. Management provided $508
thousand for loan losses during the first nine months of 1999 compared
to $268 thousand for the first nine months of 1998, with the increase
necessitated by loan growth.
Non-interest revenue was $3.3 million for the first nine months of
1999, compared to $3.0 million for the same period in 1998, an increase
of 10.8 percent.
Non-interest expense in the nine month period was $12.6 million in
1999, an increase of $746 thousand from 1998. Salary and employee
benefits increased $506 thousand, or 7.5 percent, a result of merit
increases.
Income tax expense was $1.9 million for the first nine months of
1999, compared to $1.6 million for the same period in 1998. The
increase in income tax expense in 1999 compared to 1998 resulted
primarily from higher levels of taxable income.
YEAR 2000 PROBLEM
The Year 2000 ("Y2K") issue is a result of some computer software
programs and hardware systems using only two digits to indicate a year
and assuming that the first two digits of any year are "19." Risks to
the Company if its computer systems are not Y2K compliant include the
inability to process customer deposits or checks drawn on the Banks,
inaccurate interest accruals and maturity dates of loans and time
deposits, and the inability to update accounts for daily transactions.
Other risks to the Company exist if certain of its vendors', suppliers'
and customers' computer systems are not Y2K compliant. These risks
include the inability of two of the Banks to communicate with the
centralized data processing center if phone systems are not working, the
interruption of business in the event of power outages, the inability of
loan customers to comply with repayment terms if their businesses are
interrupted, and the inability to make payment for checks drawn on the
Banks, receive payment for checks deposited by the Banks' customers, or
invest excess funds if the Federal Reserve Banks or correspondent banks
are not Y2K compliant.
Each Bank and the Trust Company formed a Year 2000 committee to
address Y2K issues. These committees performed a Y2K risk assessment,
identified systems requiring changes due to Y2K risks, established a
time line to correct noncompliant systems, verified that all new systems
purchased are Y2K compliant and determined types of assistance needed by
customers to be Y2K compliant. These committees have completed
contingency plans. These committees report to the Board of Directors of
the Banks and the Trust Company, and reports for all Banks and the Trust
Company are given to the Company's Board of Directors.
The Y2K committees identified the most important mission critical
system as the software and hardware responsible for maintaining and
processing general ledger, deposits, and loans accounts. The testing of
this system has been completed, and the results of this test have been
presented to the Board of Directors. Based on this test, the Company
believes this system is Y2K compliant. Other mission critical systems
have been tested, and any necessary corrections completed. Vendor
testing and review of proxy testing for non-mission critical systems was
completed by March 31, 1999, as required by federal guidelines. Based
on these tests, the Company believes these systems are Y2K compliant.
The Company estimates that the cost of testing and updating its
systems for Y2K compliance will be less than $170 thousand, of which
approximately $126 thousand has been incurred. These costs do not
include indirect costs, such as salaries and employee benefits of South
Alabama employees, as these costs are not separately tracked.
The Company believes it has effectively detected and corrected its
Y2K issues. However, if the Company has failed to detect or correct its
Y2K issues, the Y2K issue could materially impact the Company's
operations. The Company believes that it and its most significant
vendors and customers are on schedule to achieve Y2K compliance, and the
Company does not expect a material adverse impact on its operations.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed of Form 8-K for the three month
period ended September 30, 1999.
Pursuant to the requirement of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SOUTH ALABAMA BANCORPORATION
11/15/1999 /s/W. Bibb Lamar, Jr.
Date W. Bibb Lamar, Jr.
President
11/15/1999 /s/F. Michael Johnson
Date F. Michael Johnson
Chief Financial Officer
Exhibit Index
The following is a list of exhibits filed herewith.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 19,567
<INT-BEARING-DEPOSITS> 599
<FED-FUNDS-SOLD> 4,384
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 141,147
<INVESTMENTS-CARRYING> 12,229
<INVESTMENTS-MARKET> 12,393
<LOANS> 360,953
<ALLOWANCE> (4,053)
<TOTAL-ASSETS> 561,134
<DEPOSITS> 468,134
<SHORT-TERM> 18,553
<LIABILITIES-OTHER> 3,264
<LONG-TERM> 7,000
0
0
<COMMON> 66,007
<OTHER-SE> (1,824)
<TOTAL-LIABILITIES-AND-EQUITY> 561,134
<INTEREST-LOAN> 22,263
<INTEREST-INVEST> 7,711
<INTEREST-OTHER> 545
<INTEREST-TOTAL> 29,919
<INTEREST-DEPOSIT> 12,817
<INTEREST-EXPENSE> 13,352
<INTEREST-INCOME-NET> 16,567
<LOAN-LOSSES> 508
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 12,572
<INCOME-PRETAX> 6,800
<INCOME-PRE-EXTRAORDINARY> 4,906
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,906
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
<YIELD-ACTUAL> 4.63
<LOANS-NON> 1,573
<LOANS-PAST> 3,077
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,869
<ALLOWANCE-OPEN> 3,664
<CHARGE-OFFS> 469
<RECOVERIES> 350
<ALLOWANCE-CLOSE> 4,053
<ALLOWANCE-DOMESTIC> 3,535
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 518
</TABLE>
