FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 0-15423
__________________
SOUTH ALABAMA BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
Alabama 63-0909434
(State of Incorporation) (IRS Employer Identification No.)
100 Saint Joseph Street
P. O. Box 3067
Mobile, Alabama 36652 334-431-7800
(Address of principal executive office) (Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.01 PAR
(Title of Class)
____________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
Aggregate market value of the Common Stock ($.01 Par) held by nonaffiliates
of the registrant as of March 24, 1999 (assuming that all officers, directors
and 5% shareholders are affiliates): $81,897,927
Shares of Common Stock ($.01 Par) outstanding at March 24, 1999: 7,729,425
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1998 are incorporated by reference into Parts I and II and portions of the
Proxy Statement for the 1999 annual meeting are incorporated by reference
into Part III.
____________________________________________________________________________
Part I
Item 1. Business
General
South Alabama Bancorporation, Inc. ("South Alabama") is the parent
company and owner of 100% of the stock of South Alabama Bank, formerly The
Bank of Mobile (the "Mobile Bank"), headquartered in Mobile, Alabama, First
National Bank, Brewton (the "Brewton Bank"), headquartered in Brewton,
Alabama, The Monroe County Bank (the "Monroeville Bank"), headquartered in
Monroeville, Alabama, The Commercial Bank of Demopolis (the "Demopolis Bank"),
headquartered in Demopolis, Alabama, and of South Alabama Trust Company, Inc.
(the "Trust Company"), headquartered in Mobile, Alabama. South Alabama is a
registered bank holding company originally incorporated under Delaware law in
1985 under the name Mobile National Corporation. In 1993, the former parent
company of the Brewton Bank was merged with and into Mobile National
Corporation, at which time its name was changed to South Alabama
Bancorporation, Inc. Effective December 31, 1996, South Alabama changed its
state of domicile from Delaware to Alabama through a merger with a wholly
owned Alabama subsidiary corporation formed for that purpose.
All of the stock of the Mobile Bank was acquired in 1986. By merger
with their respective holding companies, the stock of the Brewton Bank and
the Monroeville Bank was acquired in 1993 and 1996, respectively. The
Monroeville Bank acquired by merger the assets of Peterman State Bank in 1998.
The Demopolis Bank was acquired in 1998. The Mobile Bank, the Brewton Bank,
the Monroeville Bank and the Demopolis Bank are sometimes referred to as the
" Banks." The Trust Company was formed in 1998 as a trust corporation under
Alabama law and has offices in Mobile and Brewton.
South Alabama's corporate headquarters are located at 100 Saint Joseph
Street, Mobile, Alabama 36602.
The following table reflects certain basic information concerning South
Alabama and its subsidiaries as of December 31, 1998.
<TABLE>
<CAPTION>
Monroeville South Alabama
Bank Brewton Bank Mobile Bank Demopolis Bank Trust Company Consolidated
<S> <C> <C> <C> <C> <C> <C>
Banking Offices 3 3 7 2 2 17
Employees 42 59 86 33 15 235
Percent of Ownership 100% 100% 100% 100% 100% -
Loans (Net) $ 38,397,000 $ 62,825,000 $124,244,000 $49,297,000 n/a $274,763,000
Investments $ 57,202,000 $ 36,056,000 $ 38,288,000 $16,323,000 n/a $147,869,000
Total Assets $117,357,000 $115,748,000 $193,665,000 $74,342,000 $1,264,000 $503,847,000
Deposits $ 99,020,000 $100,248,000 $168,711,000 $60,191,000 n/a $428,076,000
Equity Capital $ 17,884,000 $ 14,155,000 $ 16,625,000 $ 7,791,000 $1,150,000 $ 58,946,000
</TABLE>
South Alabama reviews policy for the Banks and the Trust Company and
coordinates certain of their common internal functions, such as loan review,
marketing and business development, accounting, auditing, compliance and
computer operations. South Alabama utilizes the services and capabilities of
the staffs of the Banks and the Trust Company in conducting its business.
South Alabama has under consideration the acquisition of additional banks
and/or the organization of additional subsidiaries to engage in bank related
activities, and to that end officers of South Alabama are engaged in general
discussions with the principals of other banking organizations from time to
time.
The Trust Company was formed on January 20, 1998 and is currently
providing services in the market areas served by the Mobile Bank and the
Brewton Bank.
On May 15, 1998, the merger of Peterman State Bank with and into the
Monroeville Bank was consummated, resulting in the Monroeville Bank's
acquisition and assumption of all of the assets and liabilities of Peterman
State Bank. On December 16, 1998, South Alabama acquired The Commercial
National Bank of Demopolis by merger of that bank with and into a
wholly-owned subsidiary of South Alabama formed for that purpose. The
Demopolis Bank was the surviving subsidiary in that merger.
On October 26, 1998, South Alabama entered into a letter of intent with
Sweet Water State Bancshares, Inc., for the merger of that bank holding
company with and into South Alabama. Subject to reaching a definitive merger
agreement and completing a satisfactory due diligence investigation, this
merger is expected to be consummated in the third quarter of 1999.
Information Incorporated by Reference
Additional information concerning the business of South Alabama is set
forth in the Annual Report to Shareholders for the year ended December 31,
1998 at pages 9-23 and is incorporated herein by reference.
Operations of Subsidiaries
Deposits of the Banks are insured to the maximum limits allowed by the
Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC").
The Banks offer similar banking services including business and personal
checking accounts, money market accounts, savings accounts, certificates of
deposit, overdraft protection, the extension of business and personal loans,
mortgages on commercial and residential real estate, access to automated
teller machines through the Cirrus System, Inc. and Honor Technologies, Inc.,
retail repurchase agreements, safe deposit box facilities, credit card
privileges, travelers' checks, letters of credit, foreign transfers and
remittances and wire transfers. The Trust Company offers general corporate
and personal trust services. Mutual funds, annuities and certain insurance
products are offered through South Alabama Financial Services, Inc., a
subsidiary of the Mobile Bank. Securities, mutual funds and annuities are
offered through South Alabama Investment Services, Inc., a subsidiary of the
Brewton Bank. The Banks also offer general banking advice and consultation to
the public as well as other customer convenience and community oriented
services. Additionally, the Banks have relationships with correspondent banks to
offer additional services which may be requested by their customers. None of
the Banks currently offer international banking services.
The Brewton Bank currently operates three offices located in and around
Brewton. The Mobile Bank has seven banking offices, two of which are located
inside supermarkets. Six of the Mobile Bank's offices are within the corporate
limits of the City of Mobile and one is in the City of Foley. The
Monroeville Bank currently operates two offices in Monroeville and one office
in Peterman. The Demopolis Bank operates two banking offices in and around
the City of Demopolis. The Mobile Bank is expanding its presence in Baldwin
County. A permanent Foley branch is now complete, replacing the temporary
branch that was operating in Foley. In addition, the Mobile Bank has plans
to remodel a vacant bank office it purchased in Gulf Shores and expects to
open that as a branch office in the near future. Two other Baldwin County
parcels owned by the Mobile Bank, one of which is in Daphne and one of which
is in Fairhope, remain undeveloped.
Markets Served
The Brewton Bank
The primary service area of the Brewton Bank is a 15 mile radius of
Brewton. Manufacturing employs the greatest number of workers in the county.
Government and the wholesale and retail trade also employ a significant
number of workers. The largest employer in the trade area is Container
Corporation of America, employing approximately 600 workers. T. R. Miller
Mill Co., a lumber manufacturer is the second largest employer with
approximately 400 workers. The area has a 160 acre industrial park which
includes all necessary utilities. Brewton Municipal Airport serves commuter
air travel and commercial air service is available in nearby Pensacola,
Florida. CSX Transportation provides railroad carrier services, and the City
of Brewton is served by two bus lines. During 1998 announced capital
investment in new and expanded industry in Escambia County totaled
approximately $7,061,182, resulting in an announced 182 new jobs according to
the Escambia County Industrial Development Authority.
The Mobile Bank
The Mobile Bank's principal office is located in downtown Mobile,
Alabama, which is situated on the western shore of Mobile Bay, bordering the
Gulf of Mexico. The Bank's primary geographic market is comprised of Mobile
County and Baldwin County. The population of the Mobile County/Baldwin
County market is approximately 530,000 persons according to the Mobile and
Baldwin County Chambers of Commerce.
The economy of Mobile County is primarily industrial in nature. The
largest employers are engaged in manufacture of paper products, providing
health care services, production of chemicals, production of nylon and rayon,
processing retail catalogue orders and manufacture of piston aircraft
engines. Southwest Alabama, including Mobile County, has been the major oil
and gas producing region in Alabama for many years. The seafood industry and
ship building and repair industry also make significant contributions to the
economy of the area. The Port of Mobile, Alabama's only port, is one of the
nation's busiest in tons of cargo handled, and through it the City is served
by more than 135 steamship lines. During 1998 announced capital investment
in new and expanded industry in Mobile County totaled approximately
$903,930,000, resulting in an announced 1,325 additional jobs, according to
the Mobile Chamber of Commerce.
The economy of Baldwin County (including the communities of Spanish Fort,
Daphne, Montrose, Fairhope, Point Clear, Foley and Gulf Shores) is growing at
a fast pace. Many businesses are expanding into Baldwin County because of
the increase in the number of new residents in this area in the last few
years. During 1998, announced capital investment in new and expanded
industry in Baldwin County totaled approximately $21,821,000, resulting in an
announced 561 additional jobs, according to the Baldwin County Economic
Development Association.
The Monroeville Bank
The Monroeville Bank's main office and one branch are located in
Monroeville, with its primary service area extending in a ten mile radius of
Monroeville. Monroe County's population is approximately 25,000, of
whom 7,500 reside in Monroeville. The Monroeville Bank also operates one
branch in Peterman, which has a population of approximately 500.
The county economy is a blend of textile and timber-related business.
Vanity Fair Mills, employing about 1,200, is the largest single employer.
Timber-related industry, including Alabama River Pulp, Alabama Pine Pulp,
Alabama River Woodlands, Stallworth Timber Company, Temple-Inland, Georgia
Pacific, Scotch Plywood and Harrigan Lumber Company, directly employs 1,580.
Monroeville is developing a 92 acre industrial park. Two trucking
companies, access to the Alabama River and railroads, and a 6,000 foot
runway airport accommodating corporate jets contribute to the marketability of
the area. The area offers parks, lakes, campgrounds, athletic fields,
playgrounds and an 18 hole golf course. The community college and local
public and private schools are accredited.
The Demopolis Bank
The Demopolis Bank's main office and one branch are located in
Demopolis, with its primary service area extending in a 15 mile radius of
Demopolis. This service area includes portions of 5 counties and has a
population of approximately 19,000. Demopolis is located in Marengo County,
which has a population of approximately 23,000, about 7,500 of which reside
in Demopolis.
The economy in and around Demopolis is primarily comprised of a mix of
forest products businesses, including a paper mill and several sawmills. The
Demopolis area is also home to a cement plant, an Alabama Power steam plant,
a trucking corporation with approximately 500 trucks headquartered in
Demopolis, a textile plant and various agricultural, cattle and catfish
farming operations.
Demopolis has a 172 acre industrial park with two locations. Both
locations have railroad access, and one has access to the Tennessee-Tombigbee
Waterway. Demopolis has a 5,000 foot lighted runway airport which
accommodates corporate jets. The Demopolis area offers the Demopolis Lake
for fishing, watersports and camping. Demopolis has a 300 acre Sportsplex
with athletic fields, playgrounds, a walking track and a 9 hole golf course.
Major 1998 capital investments include New Era Cap Company, a nationally
known company with approximately 300 local employees, and an assisted
living/retirement facility, moving to Demopolis.
The Trust Company
The Trust Company was established to provide trust services throughout
the market areas served by the subsidiary Banks, and any market area served
by a subsidiary Bank is a potential market area of the Trust Company. Prior
to the establishment of the Trust Company in January, 1998, the Mobile Bank
and the Brewton Bank both operated trust departments which served their
respective market areas. The Trust Company was formed by combining these
trust departments, and, as a result, the Trust Company currently serves
customers primarily in the market areas served by the Mobile and Brewton
Banks. South Alabama intends, and the Trust Company is working to, expand
the Trust Company's presence in the markets served by all subsidiary Banks.
Competition
Competition in the banking industry is primarily based on products and
services offered, delivery of services, product pricing and interest rate
levels. South Alabama competes with statewide bank holding companies, each
of which has substantially greater total resources than South Alabama and
numerous branch offices located throughout the state. Also providing
competition are local and regional banks, credit unions, finance companies,
insurance companies, mortgage companies, securities brokerage firms, money
market mutual funds, loan production offices operated by out-of-state banks,
and other providers of financial services in the areas served by South
Alabama's subsidiary banks.
The Brewton Bank
There are five banks based in the Brewton Bank's market area. A total
of eight financial institutions are located in Escambia County. The Brewton
Bank is the largest bank in terms of deposits in Escambia County with a
market share of deposits of approximately 23.62 percent. The second and
third largest banks in the county have market shares of approximately 19.25
percent and 17.59 percent.
The Mobile Bank
The Mobile Bank faces intense competition in its market area. It has a
market share of deposits of approximately 3.88 percent. There are currently
16 commercial banks and two savings banks doing business in the Mobile/
Baldwin County market. The primary competitors are the six commercial banks
affiliated with either statewide or regional bank holding companies, each of
which has a substantial market share. These competitors have numerous branch
offices located throughout the market area.
The Monroeville Bank
The Monroeville Bank is the oldest and largest bank in Monroe County.
It has a market share of deposits of approximately 38.61 percent. Currently
there are five commercial banks, including one bank owned by a statewide
holding company, in Monroe County.
The Demopolis Bank
The Demopolis Bank is the third largest bank in terms of deposits in
Marengo County with a market share of approximately 19.13 percent. This
places it closely behind the second largest bank in the County, which has a
market share of approximately 19.93 percent. Currently there are six
commercial banks, including one bank owned by a state-wide holding company,
in Marengo County. A locally owned and operated bank is the largest bank in
Marengo County and has a market share of approximately 40.22 percent.
The Trust Company
The Trust Company faces significant competition for trust customers from
statewide and regional bank holding companies, which have greater resources
available for marketing and promotion and offer services in broader market
areas. The Trust Company also competes with brokerage firms and mutual fund
companies. In addition, investment advisory firms, attorneys, accountants and
life insurance professionals offer services similar to those provided by the
Trust Company and therefore can be seen as competitors of the Trust Company.
At year end 1998, the Trust Company had more than 1,000 accounts and assets
in excess of $423 million.
Supervision and Regulation
South Alabama is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Act"), and is registered as
such with the Board of Governors of the Federal Reserve System (the "Board of
Governors"). The Act prohibits, subject to certain exceptions, a bank holding
company from engaging in or acquiring direct or indirect control of more than
5% of the voting stock of any company engaged in non-banking activities.
Activities expressly found by the Board of Governors, by order or regulation,
to be so closely related to banking or managing or controlling banks as to be
a proper incident thereto, such as acting as fiduciary or investment or
financial advisor, selling or underwriting insurance coverage directly
related to extensions of credit, and the leasing of real and personal property,
are excepted from this prohibition.
The Act requires every bank holding company to obtain the prior approval
of the Board of Governors before it may acquire substantially all of the
assets of any bank or control of any voting shares of any bank, if, after
such acquisition, it would own or control, directly or indirectly, more than
5% of the voting shares of such bank. In no case, however, may the Board
approve an acquisition by South Alabama of the voting shares of, or
substantially all the assets of, any bank located outside Alabama unless such
acquisition is specifically authorized by the laws of the state in which the
bank to be acquired is located. Effective June 1, 1997 banks may merge with
banks in other states as long as neither state has opted out of interstate
branching by May 31, 1997. The State of Alabama has opted in with respect to
interstate branching.
As a registered bank holding company, South Alabama is required to file
with the Board of Governors an annual report and such additional information
as the Board of Governors may require pursuant to the Act. The Board may also
conduct examinations of South Alabama and each of its subsidiaries.
Subsidiary banks of a bank holding company are subject to certain
restrictions on extensions of credit to the bank holding company or any of
its subsidiaries, on investments in the stock or other securities thereof
and on the acceptance of such stocks or securities as collateral for loans to
any borrower. Also, such subsidiaries are generally prohibited from
conditioning the extension of credit or other services, or conditioning the
lease or sale of property, on the customer's agreement to obtain or furnish
some additional credit, property or service from or to such subsidiary or an
affiliate.
As subsidiary banks, the Banks are subject to supervision and regulation
by the Board of Governors of the Federal Reserve System. As a national
banking institution, the Brewton Bank is subject to federal banking laws and
is subject to supervision and regular examination by the Office of the
Comptroller of the Currency. The Mobile Bank, the Monroeville Bank and the
Demopolis Bank are state banks, subject to state banking laws and regulation,
supervision and regular examination by the Alabama State Department of
Banking, the FDIC, and the Federal Reserve.
Areas subject to regulation include dividend payments, reserves,
investments, loans, mergers, issuance of securities, establishment of
branches and other aspects of operation, including compliance with truth-in-
lending and usury laws.
Because South Alabama is subject to the provisions of the Bank Holding
Company Act of 1956, South Alabama and its subsidiaries are affected by the
credit policies of the Board of Governors of the Federal Reserve System. A
function of the Federal Reserve System is to regulate the national supply of
bank credit in order to combat recessions and curb inflationary pressures.
Among the instruments of monetary policy used to implement these objectives
are open-market operations in United States Government securities, changes in
the discount rate on member bank borrowings, changes in reserve requirements
against member bank deposits, and limitations on the payment of interest for
certain deposit accounts. The effect of such policies upon the future business
and earnings of South Alabama and its subsidiaries cannot be predicted with
certainty.
Item 2. Properties
South Alabama and the Mobile Bank occupy leased premises located in
downtown Mobile, Alabama consisting of a building complex of approximately
30,000 square feet. The primary term of the lease of the building complex
expires December 31, 2005. The Bank has an option to extend the term of this
lease for three additional terms of five years each.
In addition to the downtown office, the Mobile Bank operates five full
service branch offices at various locations in Mobile County. The banking
premises of one branch are owned in fee, while five branches, two of which
are located inside supermarkets, are leased for varying periods through 2002.
The Mobile Bank operates one full service branch office in Baldwin County,
which it owns in fee.
The Brewton Bank's main office, containing approximately 6,832 square
feet, is located in downtown Brewton, Alabama. This main office is owned in
fee. In addition, the Brewton Bank operates two branches, one in the City of
Brewton and one in the City of East Brewton. Both of these branches are owned
in fee.
The Monroeville Bank's main office, containing approximately 20,402
square feet, is located in Monroeville, Alabama. In addition, the
Monroeville Bank operates one other branch in the city of Monroeville.
On May 15, 1998, Peterman State Bank merged with and into the Monroeville
Bank. As a result of this merger, the Monroeville Bank now operates a 3,350
square foot branch in Peterman, which is located approximately five miles
north of Monroeville. All three locations are owned in fee by the Monroeville
Bank.
The Demopolis Bank's main office, containing approximately 7,040 square
feet, is located in downtown Demopolis, Alabama. This main office is owned
in fee. In addition, the Demopolis Bank operates one branch at the
intersection of Highway 80 and Highway 43 in Demopolis. The Branch is also
owned in fee.
Item 3. Legal Proceedings
As of the date of this report there were no material pending legal
proceedings to which South Alabama or any of the Banks was a party.
Optional Item. Executive Officers of the Registrant
The following table reflects certain information concerning the executive
officers of South Alabama. Each such officer holds his office(s) until the
first meeting of the Board of Directors following the annual meeting of
stockholders each year, or until a successor is chosen, subject to removal at
any time by the Board of Directors. Except as otherwise indicated, no family
relationships exist among the executive officers and directors of South
Alabama, and no such officer holds his office(s) by virtue of any arrangement
or understanding between him and any other person except the Board of
Directors.
<TABLE>
<CAPTION>
Name, Age and Office(s) with Other Positions with
South Alabama South Alabama
<S> <C>
J. Stephen Nelson--age 61(1) Director (since 1993)
Chairman (since 1993)
W. Bibb Lamar, Jr.--age 55(2) Director (since 1989)
President and CEO (since 1989)
John B. Barnett, III--age 46(3) Director (since 1996)
Executive Vice President (since 1996)
W. Gaillard Bixler--age 53(4) None
Executive Vice President & Chief Operating
Officer (since 1993)
F. Michael Johnson--age 53(5) None
Chief Financial Officer
& Secretary (since 1993)
(1) Chairman, since 1993, Chief Executive Officer, since 1984, and
Director, since 1979, the Brewton Bank. From 1986 until its merger with
South Alabama, Mr. Nelson was also President and a director of the Brewton
Bank's holding company.
(2) Chief Executive Officer, since 1989, and Chairman, since 1998, the
Mobile Bank. Previously: President (1989-1998), the Mobile Bank.
(3) Chairman, since 1994, and Director, since 1983, the Monroeville Bank.
Previously: Vice Chairman (1989-1994), the Monroeville Bank. From 1983 until
the merger with South Alabama in 1996, Mr. Barnett was Vice President and a
director of the Monroeville Bank's holding company.
(4) President and Chief Operating Officer, since 1993, and Director,
since 1991, the Brewton Bank. Previously: Senior Vice President and Senior
Loan Officer (1989-1993), the Brewton Bank. From 1991 until its merger with
South Alabama, Mr. Bixler was also a director of the Brewton Bank's holding
company.
(5) Executive Vice President and Cashier, since 1986, the Mobile Bank.
Previously: Executive Vice President (1984-1993), Mobile National Corporation.
</TABLE>
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The information called for by Item 5 is set forth in South Alabama's
Annual Report to Shareholders for the year ended December 31, 1998 at page 26
under the heading "Market Prices and Cash Dividends Per Share" and is
incorporated herein by reference.
Item 6. Selected Financial Data
The information called for by Item 6 is set forth in South Alabama's
Annual Report to Shareholders for the year ended December 31, 1998 at page 25
under the heading "Selected Financial Data" and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation
The information called for by Item 7 is set forth in South Alabama's
Annual Report to Shareholders for the year ended December 31, 1998 at pages
9-23 under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item 7A is included on page 14 of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations, which is incorporated herein pursuant to Item 7 above.
Item 8. Financial Statements and Supplementary Data
The information called for by Item 8, is set forth in South Alabama's
Annual Report to Shareholders for the year ended December 31, 1998 at page 24
and at pages 27-53 and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
A portion of the information called for by Item 10 is set forth above in
an Optional Item in Part I. The balance of the information called for by Item
10 is set forth in South Alabama's Proxy Statement for the 1999 annual meeting
under the captions "VOTING SECURITIES-- Section 16(a) Beneficial Ownership
Reporting Compliance" and "ELECTION OF DIRECTORS" and is incorporated herein
by reference.
Item 11. Executive Compensation
The information called for by Item 11 is set forth in South Alabama's
Proxy Statement for the 1999 annual meeting under the caption "EXECUTIVE
COMPENSATION" and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
The information called for by Item 12 is set forth in South Alabama's
Proxy Statement for the 1999 annual meeting under the caption "VOTING
SECURITIES--Security Ownership of Directors, Nominees, 5% Stockholders and
Officers" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information called for by Item 13 is set forth in South Alabama's
Proxy Statement for the 1999 annual meeting under the caption "CERTAIN
TRANSACTIONS AND MATTERS" and is incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
(a) 1. Financial Statements:
The following consolidated financial statements of the registrant and
its subsidiaries, and Report of Independent Auditors, included in the
registrant's Annual Report to Shareholders for the year ended December
31, 1998, a copy of which is included as an exhibit to this report, are
incorporated herein by reference:
Independent Auditors' Report.
Consolidated Statements of Condition as of December 31, 1998 and
1997.
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
(a) 2. Financial Statement Schedules
None.
(a) 3. Exhibits:
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession.
.1 Amended and Restated Agreement and Plan of Reorganization,
dated as of October 26, 1998, by and between South Alabama and
The Commercial National Bank of Demopolis, filed as Appendix A
to the registrant's Registration Statement on Form S-4/A filed
on November 4, 1998, (No. 333-63701), is incorporated herein
by reference.
(3) Articles of Incorporation and By-Laws.
.1 Articles of Incorporation of SAB Newco, Inc., dated November
8, 1996, filed as Exhibit B to the registrant's Definitive
Proxy Statement filed on Schedule 14A on November 15, 1996, is
incorporated herein by reference.
.2 Certificate of Ownership and Merger, dated December 20, 1996,
filed as Exhibit (3).2 to the registrant's annual report on
10-K for the year ended 1996 (No. 0-15423).
.3 Articles of Merger, dated December 20, 1996, filed as Exhibit
(3).1 to registrant's Form 10-Q (No. 0-15423), for the Quarter
ended March 31, 1997, is incorporated herein by reference.
.4 Bylaws of SAB Newco, Inc., filed as Exhibit (3).3 to the
registrant's annual report on 10-K for the year ended 1996
(No. 0-15423), is incorporated herein by reference.
(4) Instruments defining the rights of security holders, including
indentures.
.1 Articles of Incorporation of SAB Newco, Inc., dated November
8, 1996, filed as Exhibit B to the Registrant's Definitive
Proxy Statement filed on Schedule 14A on November 15, 1996, is
incorporated herein by reference.
.2 Certificate of Ownership and Merger, dated December 20, 1996,
filed as Exhibit (3).2 to the registrant's annual report on
10-K for the year ended 1996 (No. 0-15423), is incorporated
herein by reference.
.3 Articles of Merger, dated December 20, 1996, filed as Exhibit
(3).1 to registrant's Form 10-Q (No. 0-15423), for the Quarter
ended March 31, 1997, is incorporated herein by reference.
.4 Bylaws of SAB Newco, Inc. filed as Exhibit (3).3 to the
registrant's annual report on 10-K for the year ended 1996
(No. 0-15423), is incorporated herein by reference.
.5 Specimen of Common Stock Certificate of South Alabama
Bancorporation, Inc., filed as Exhibit (4).4 to the
registrant's annual report on 10-K for the year ended 1996
(No. 0-15423), is incorporated herein by reference.
(10) Material Contracts.
.1 Lease, entered into March 11, 1986 between Dauphin 65 Partners,
Ltd. and The Bank of Mobile, N.A, filed as Exhibit (10).3 to
the registrant's annual report on Form 10-K for the year 1986
(No. 0-15423), is incorporated herein by reference.
.2 Lease Renewal and Extension Agreement, dated March 18, 1992,
between Dauphin 65 Partners, Ltd. and The Bank of Mobile, filed
as Exhibit (10).2 to the registrant's annual report on Form
10-K for the year 1991 (No. 0-15423), is incorporated herein by
reference.
.3 Lease, entered into June 21, 1994 between Staples-Pake Realty,
Inc. and The Bank of Mobile, filed as Exhibit (10).3 to the
registrant's annual report on Form 10-K for the year 1994
(No. 0-15423), is incorporated herein by reference.
.4 Sublicense Agreement dated July 18, 1990, between National
Commerce Bancorporation and The Bank of Mobile, N.A, filed as
Exhibit (10).5 to the registrant's annual report on Form 10-K
for the year 1991 (No. 0-15423), is incorporated herein by
reference.
.5 *Stock Option Plan of Mobile National Corporation, filed as
Exhibit (10).3 to the registrant's annual report on Form 10-K
for the year 1985 (No. 0-15423), is incorporated herein by
reference.
.6 *The Bank of Mobile Retirement Plan (Restated), dated September
12, 1990, filed as Exhibit (10).8 to the registrant's annual
report on Form 10-K for the year 1991 (No. 0-15423), is
incorporated herein by reference.
.7 *Contracts pursuant to Supplemental Retirement Plan of The Bank
of Mobile, N.A, effective January 1, 1988, filed as Exhibit
(10).7 to the registrant's annual report on Form 10-K for the
year 1990 (No. 0-15423), are incorporated herein by reference.
.8 *Restated Contracts pursuant to Supplement Retirement Plan of
The Bank of Mobile, dated April 1, 1992, filed as Exhibit
(10).10 to registrant's Form 10-K for the year 1992
(No. 0-15423), is incorporated herein by reference.
.9 *First National Bank Employees' Profit Sharing Plan, as amended
and restated effective January 1, 1989, filed as Exhibit
(10).12 to registrant's annual report on Form 10-K for the year
1993 (No. 0-15423), is incorporated by reference.
.10 *First National Bank Employees' Pension Plan, as amended and
restated effective January 1, 1989, filed as Exhibit (10).13 to
registrant's Form 10-K for the year 1993 (No. 0-15423), is
incorporated herein by reference.
.11 *Split Dollar Insurance Agreements of First National Bank,
filed as Exhibit (10).15 to registrant's annual report on
Form 10-K for the year 1993 (No. 0-15423), is incorporated
herein by reference.
.12 *Deferred Compensation Agreements of First National Bank, filed
as Exhibit (10).16 to registrant's annual report on Form 10-K
for the year 1993 (No. 0-15423), is incorporated herein by
reference.
.13 *South Alabama Bancorporation 1993 Incentive Compensation Plan
dated October 19, 1993 as adopted by shareholders May 3, 1994
filed as Exhibit (10).18 to registrant's form 10-K for the year
1994 (No. 0-15423), is incorporated herein by reference.
.14 Lease, entered into April 17, 1995 between Augustine Meaher,
Jr., Robert H. Meaher individually and Executor of the Estate
of R. Lloyd Hill, Joseph L. Meaher and Augustine Meaher, III,
and The Bank of Mobile, filed as Exhibit (10).1 to registrant's
Form 10-Q for the Quarter ended June 30, 1995 (No. 0-15423), is
incorporated herein by reference.
.15 Lease, entered into April 17, 1995 between Augustine Meaher,
Jr. and Margaret L. Meaher, and The Bank of Mobile, filed as
Exhibit (10).2 to registrant's Form 10-Q for the Quarter ended
June 30, 1995 (No. 0-15423), is incorporated herein by
reference.
.16 Lease, entered into April 17, 1995 between Hermione McMahon
Sellers (f/k/a Hermione McMahon Dempsey) a widow, William
Michael Sellers, married, and Mary S. Burnett, married, and The
Bank of Mobile, filed as Exhibit (10).3 to registrant's Form
10-Q for the Quarter ended June 30, 1995 (No. 0-15423), is
incorporated herein by reference.
.17 Lease, entered into May 1, 1995 between Augustine Meaher, Jr.,
Robert H. Meaher individually and Executor of the Estate of R.
Lloyd Hill, Joseph L. Meaher and Augustine Meaher, III, and
The Bank of Mobile, filed as Exhibit (10).4 to registrant's
Form 10-Q for the Quarter ended June 30, 1995 (No. 0-15423),
is incorporated herein by reference.
.18 *Change in Control Compensation Agreement, dated as of
November 14, 1995, between The Bank of Mobile and W. Bibb
Lamar, Jr., filed as Exhibit (10).24 to the registrant's
annual report on Form 10-K for the year 1995 (No. 0-15423), is
incorporated herein by reference.
.19 *Change in control Compensation Agreement, dated as of
November 20, 1995, between First National Bank, Brewton and J.
Stephen Nelson, filed as Exhibit (10).25 to the registrant's
annual report on Form 10-K for the year 1995 (No. 0-15423), is
incorporated herein by reference.
.20 *Change in Control Compensation Agreements, between The Bank
of Mobile or First National Bank, Brewton and certain officers
filed as Exhibit (10).25 to the registrant's annual report on
Form 10-K for the year 1995 (No. 0-15423), is incorporated
herein by reference.
.21 *Monroe County Bank Profit Sharing Plan, Amended and Restated
January 1, 1989, filed as Exhibit (10).23 to the registrant's
annual report on Form 10-K for the year 1996 (No. 0-15423), is
incorporated herein by reference.
.22 *Monroe County Bank Pension Plan as Amended and Restated
January 1, 1989, filed as Exhibit (10).24 to the registrant's
annual report on Form 10-K for the year 1996 (No.0-15423), is
incorporated herein by reference.
.23 Agreement and Plan of Merger, dated as of May 31, 1996, as
amended and restated as of August 21, 1996, filed as Exhibit
(2).2 to the registrant s Registration Statement on Form S-4
filed on September 3, 1996 (No. 333-11305), is incorporated
herein by reference.
.24 Agreement and Plan of Merger, dated as of October 14, 1997, by
and between South Alabama, the Monroeville Bank and Peterman
State Bank, filed as Exhibit (2).1 to the registrant's annual
report on Form 10-K for the year 1997 (No. 0-15423), is
incorporated herein by reference.
.25 *Amendment Number One to South Alabama Bancorporation 1993
Incentive Compensation Plan, dated May 9, 1997 filed as
Exhibit (10).28 to the registrant's annual report on Form
10-K for the year 1997 (No. 0-15423), is incorporated herein by
reference.
.26 *Change in Control Compensation Agreement dated as of March
31, 1997, by and between South Alabama and John B. Barnett,
III, filed as Exhibit (10).29 to the registrant's annual
report on Form 10-K for the year 1997 (No. 0-15423), is
incorporated herein by reference.
.27 *Change in Control Compensation Agreement dated as of March
31, 1997, by and between South Alabama and Haniel F. Croft
filed as Exhibit (10).30 to the registrant's annual report on
Form 10-K for the year 1997 (No. 0-15423), is incorporated
herein by reference.
.28 Mutual Waiver and Agreement, dated as of March 25, 1998,
between South Alabama, the Monroeville Bank and Peterman State
Bank, filed as Exhibit (2).2 to the registrant's annual report
on Form 10-K for the year 1997 (No. 0-15423), is incorporated
herein by reference.
.29 Amended and Restated Agreement and Plan of Reorganization,
dated as of October 26, 1998, by and between South Alabama and
The Commercial National Bank of Demopolis, filed as Appendix A
to the registrant's Registration Statement on Form S-4/A filed
on November 4, 1998, (No. 333-63701), is incorporated herein
by reference.
(13) Annual report to security holders.
.1 1998 Annual Report of South Alabama Bancorporation, Inc.
(Such annual report, except for those portions expressly
incorporated by reference, is furnished solely for the
information of the Commission and is not deemed to be "filed"
as part of this report.)
(21) Subsidiaries of the registrant.
.1 Subsidiaries of South Alabama Bancorporation, Inc.
(27) Financial Data Schedule.
.1 Financial Data Schedule of South Alabama Bancorporation, Inc.
(b) Reports on Form 8-K
On December 28, 1998, South Alabama filed a current report on form 8-K
to report the consummation of the acquisition of The Commercial National
Bank of Demopolis on December 16, 1998. This report was amended by form
8-K/A filed on February 26, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SOUTH ALABAMA BANCORPORATION, INC.
By: /s/F. Michael Johnson
F. Michael Johnson
Chief Financial Officer
and Secretary
Dated: 3/26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/W. Bibb Lamar, Jr. President and 3/26/99
W. Bibb Lamar, Jr. CEO (Principal
executive officer)
/s/F. Michael Johnson Chief Financial Officer 3/26/99
F. Michael Johnson and Secretary
(Principal financial and
accounting officer)
Director, Executive
John B. Barnett, III Vice President
/s/Stephen G. Crawford Director 3/29/99
Stephen G. Crawford
/s/Haniel F. Croft Director 3/30/99
Haniel F. Croft
/s/David C. De Laney Director 3/29/99
David C. De Laney
/s/Lowell J. Friedman Director 3/30/99
Lowell J. Friedman
/s/Broox G. Garrett, Jr. Director 3/29/99
Broox G. Garrett, Jr.
Director
W. Dwight Harrigan
Director
James P. Hayes, Jr.
/s/Clifton C. Inge Director 3/29/99
Clifton C. Inge
/s/W. Bibb Lamar, Jr. Director 3/26/99
W. Bibb Lamar, Jr.
Director
Richard S. Manley
Director
Kenneth R. McCartha
Director
Thomas E. McMillan, Jr.
/s/J. Richard Miller, III Director 3/29/99
J. Richard Miller, III
Director
Harris V. Morrissette
/s/J. Stephen Nelson Director and Chairman 3/29/99
J. Stephen Nelson
/s/Paul D. Owens, Jr. Director 3/29/99
Paul D. Owens, Jr.
Director
Earl H. Weaver
Director
A. G. Westbrook
Exhibit (13).1
SOUTH ALABAMA BANCORPORATION
1998 ANNUAL REPORT
4 Consolidated Financial Highlights
5 Letter to Shareholders
6 Directors and Officers
Financial Highlights
9 Management's Discussion and Analysis of Financial Condition and
Results of Operations
24 Selected Quarterly Financial Data
26 Selected Financial Data
27 Management's Report on Financial Statement and Independent
Auditors' Report
Financial Statements
28 Consolidated Statements of Condition
29 Consolidated Statements of Income
30 Consolidated Statements of Changes in Shareholders' Equity
31 Consolidated Statements of Cash Flows
31 Notes to Consolidated Financial Statements
Far from being the downfall of small banks it was predicted to be, banking's
mega mergers have instead highlighted the reasons why community banks
continue to flourish. Personal service and community insight remain the
exclusive hallmarks of local banks. The very principles South Alabama
Bancorporation was founded upon.
Change being the industry's only constant--acquiring new technology is a must
for staying competitive. Sophisticated technology is no longer the sole
domain of the big banks. This technology is now available with the soul of a
community bank.
No image symbolizes the changes sweeping the financial services industry more
than the microchip. Much effort is being invested in upgrading and adding new
technology. These advances will allow us to improve our operating efficiency
while facilitating the introduction of new products for an increasingly more
sophisticated customer. The introduction of our internet banking product in
1998 is but one example of the new and exciting financial products to come as
we stand on the brink of the 21st century.
We are constantly aware, however, that technology can be pretty cold without
a handshake or warm voice. And no one has a better reputation for friendly
service than South Alabama Bancorporation. Our customers can rest assured
that whatever technology brings tomorrow, they can always rely on our
traditional banking values.
South Alabama Bancorporation, Inc. operates as a bank holding company
headquartered in Mobile, Alabama. Its subsidiaries are South Alabama Bank,
First National Bank, Brewton, The Monroe County Bank, The Commercial Bank of
Demopolis, and South Alabama Trust Company.
The annual meeting of shareholders will be held May 13, 1999 at 10:00 a.m.
C.D.T., in the Company's headquarters, at South Alabama Bank, 100 St. Joseph
Street, Mobile, Alabama 36602.
The Annual Report to the Securities and Exchange Commission (Form 10-K) is
available upon request to: South Alabama Bancorporation, 100 St. Joseph
Street, Mobile, Alabama 36602, (334) 431-7800.
South Alabama's common stock trades on The Nasdaq Stock Market
under the symbol SABC.
Transfer Agent: South Alabama Trust Company, Inc., Post Office Box 3067,
Mobile, Alabama 36652, (334) 431-7835.
Internet address: www.southalabamabancorp.com
This Annual Report reflects the consolidated financial position and results
of operations of the Company, with all significant intercompany transactions
eliminated.
<TABLE>
Consolidated Financial Highlights
(Dollars in Thousands Except Per Share Amounts)
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 Change
<S> <C> <C> <C>
Net income $ 5,575 $ 5,505 + 1.3%
Per common share - basic .73 .73 .0%
- diluted .72 .73 - 1.4%
Cash dividends declared
per share - regular .318 .266 +19.5%
Cash dividends declared
per share - special .702
AT DECEMBER 31, 1998 1997 Change
Total assets $503,847 $437,592 +15.1
Total deposits 428,076 371,991 +15.1%
Total loans 278,182 244,889 +13.6%
Total investment securities 147,869 133,656 +10.6%
Shareholders' equity 58,946 52,664 +11.9%
Per common share 7.64 6.97 + 9.6%
Common shares outstanding (000's) 7,714 7,558
</TABLE>
<TABLE>
GRAPH
<CAPTION>
Growth Balance at December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Loans $169,808 $182,850 $232,153 $244,889 $278,182
Earning Assets 255,833 280,959 376,351 404,938 466,715
Total Assets 275,579 306,740 413,863 437,592 503,847
</TABLE>
Letter To Shareholders
Dear Shareholder:
We have concluded a most successful year in which South Alabama Bancorporation
surpassed one-half billion dollars in total assets. Net income of $5,575,000
was the highest in our company's history, enabling us to increase our
quarterly dividend to shareholders in the third quarter of 1998. You will
recall that we split our common stock 3 shares for 2 in May 1998. This
quarterly increase to $.085 per share, when combined with the stock split
produced an annualized increase of 15.9%. In fact, we have increased our
dividend each year since we became a ulti-bank holding company in1993.
Our healthy growth was accomplished both internally and externally. As a
result, deposits increased 15.1% to $428 million while year-ending loans
increased 13.6% to $278 million. We complemented out internal growth with
both the acquisition in May of the Peterman State Bank, through its merger
into Monroe County Bank, and the acquisition in December of The Commercial
Bank of Demopolis. Subject to regulatory approval and the approval of their
shareholders, we anticipate the addition of Sweet Water State Bank to our
company around mid-year 1999. This acquisition of Sweet Water, a
fifty-million dollar asset bank, will enable us immediately upon closing to
serve the communities of Sweetwater, Linden, and Thomasville.
We continue to expand in the Mobile and Baldwin County areas. During the
first quarter of 1999, South Alabama Bank moved into its spacious new
building located at 699 McKenzie Street in Foley, Alabama. We also recently
acquired a second Baldwin County location in Gulf Shores at 1700 Gulf Shores
Parkway. Renovation of this property is in process, and a tentative opening
date of mid-summer is scheduled. We hope to have our third Baldwin County
location under construction by early next year in Daphne.
Two other notable changes occurred in 1998. In January, we formed South
Alabama Trust Company by merging the trust departments of First National
Bank, Brewton and South Alabama Bank. This wholly-owned subsidiary, with
trust assets at year-end 1998 of $423 million, will give us the capability of
providing trust services to the new areas of the state that we have begun
serving through our new bank locations. It will also enable us to provide
more effective and efficient services to all our trust customers. Also, in
order to reflect our growing presence throughout this part of the state, we
changed the name of our Mobile Bank to South Alabama Bank. We believe our
new name better identifies us in the Mobile and Baldwin markets as we
continue to expand in these areas.
There has been considerable media attention given to the year 2000 (Y2K) and
the possible computer malfunction problems which may occur January 1, 2000.
South Alabama Bancorporation has spent many hours and resources, starting in
1997, in preparing for the millennium, and we are now confident that we are
going to have a smooth transition into the 21st century. We urge you to
contact us with any concerns or questions you might have in this area.
We are a young and exciting company which is growing at a steady pace. Our
objective is to balance prudent growth with profitability, thereby enhancing
shareholder value in both the short and long terms. We appreciate your
confidence in our company and welcome your comments or suggestions at any
time.
/s/J. Stephen Nelson /s/W. Bibb Lamar, Jr.
J. Stephen Nelson W. Bibb Lamar, Jr.
Chairman of the Board President and Chief Executive Officer
South Alabama Bancorporation
DIRECTORS
John B. Barnett, III
Executive Vice President, South Alabama Bancorporation, Inc., Chairman,
Monroe County Bank and Member, Barnett, Bugg, Holzborn, L.L.C., Attorneys
Stephen G. Crawford
Member, Hand Arendall, L.L.C., Attorneys
Haniel F. Croft
President and CEO, Monroe County Bank
David C. De Laney
President, First Small Business Investment Company of Alabama
Lowell J. Friedman
President, Creola Investment Corporation
Broox G. Garrett, Jr.
Partner, Thompson, Garrett & Hines, L.L.P., Attorneys
W. Dwight Harrigan
President, Scotch Lumber Company
James P. Hayes, Jr.
Revenue Commissioner, State of Alabama and
President, J.P. Hayes & Co., Inc.
Clifton C. Inge
Chairman, Willis Corroon Corporation of Mobile
W. Bibb Lamar, Jr.
President and CEO, South Alabama Bancorporation, Inc. and Chairman and CEO,
South Alabama Bank
Richard S. Manley
Partner, Manley, Traeger, Perry & Stapp, Attorneys
Kenneth R. McCartha
Retired, Alabama Superintendent of Banks
Thomas E. McMillan, Jr.
President of General Partner, Smackco, Ltd.
J. Richard Miller, III
Managing Partner, Miller Investments
Harris V. Morrissette
President, Marshall Biscuit Company
J. Stephen Nelson
Chairman, South Alabama Bancorporation, Inc. and Chairman, First National
Bank, Brewton
Paul D. Owens, Jr.
Attorney
Earl H. Weaver
Earl H. Weaver Management Services
A.G. Westbrook
Chairman, Commercial Bank of Demopolis
Director Emeritus
John B. Barnett, Jr.
OFFICERS
J. Stephen Nelson
Chairman of the Board
W. Bibb Lamar, Jr.
President and Chief Executive Officer
John B. Barnett, III
Executive Vice President
W. Gaillard Bixler
Executive Vice President and Chief Operating Officer
J. Olen Kerby, Jr.
Executive Vice President
F. Michael Johnson
Chief Financial Officer and Secretary
Mark E. McVay
Auditor
South Alabama Bank
DIRECTORS
Stephen G. Crawford
David C. De Laney
Ann W. Delchamps
Michael D. Fitzhugh
Lowell J. Friedman
Barry E. Gritter
W. Dwight Harrigan
James M. Harrison, Jr.
Walter L. Hovell
Clifton C. Inge
Kenneth S. Johnson
W. Bibb Lamar, Jr.
Thomas W. Leavell
John H. Lewis, Jr.
J. Richard Miller, III
Ray H. Miller, III
Harris V. Morrissette
Paul D. Owens, Jr.
Charles L. Rutherford, Jr.
Directors Emeriti
T. Massey Bedsole
J. Robert Boykin, Sr.
William J. Hearin, Jr.
Joseph N. Langan
Dwain G. Luce
John R. Miller, Jr.
James L. Murray
Robert H. Radcliff, Jr.
OFFICERS
W. Bibb Lamar, Jr.
Chairman and Chief Executive Officer
Michael D. Fitzhugh
President and Chief Operating Officer
Bruce C. Finley, Jr.
Executive Vice President and Senior Loan Officer
Percy C. Fountain, Jr.
Executive Vice President
F. Michael Johnson
Executive Vice President and Secretary
Melvin R. Coxwell
Senior Vice President
Karen P. Sullivan
Senior Vice President
Randall S. Adams
Vice President
L. Russell Brandau, Jr.
Vice President
Harry D. Henson
Vice President
Joy W. Lyons
Vice President and Credit Administration Officer
Robert S. Murray, Jr.
Vice President
Pamela S. Watson
Vice President
Paul J. England
Assistant Vice President and Real Estate Officer
Rebecca S. Minto
Assistant Vice President and Branch Manager
Lisa H. Owen
Assistant Vice President
Maria K. Papastefan
Assistant Vice President and Branch Manager
Carolyn T. Peterson
Assistant Vice President
Mark E. Thompson
Assistant Vice President
James M. Alexander
Assistant Cashier
Alexia G. Beegle
Real Estate Officer
D. Eric Chitty
Assistant Cashier
Donna L. Gatlin
Operations Officer
Christina C. Haab
Auditor
Helen W. Inge
Assistant Cashier
Jeffrey B. McCurley
Assistant Cashier
Deirdre M. Pearman
Real Estate Officer
Sandra J. Wilson
Branch Officer and Branch Manager
Baldwin County Officers
David R. Pruet, Jr.
Baldwin County President
Agnes H. Easley
Assistant Vice President and Branch Manager
First National Bank, Brewton
DIRECTORS
W. Gaillard Bixler
Dan Britton
John David Finlay, Jr.
Broox G. Garrett, Jr.
Carol F. Gordy
Billy Joe Griffin
James P. Hayes, Jr.
Jack W. Hines, Jr.
Thomas E. McMillan, Jr.
J. Richard Miller, III
J. Stephen Nelson
Earl H. Weaver
Directors Emeriti
John R. Miller, Jr.
Lee M. Otts
Clarence L. Turnipseed
OFFICERS
J. Stephen Nelson
Chairman
W. Gaillard Bixler
President and Chief Executive Officer
James L. Stark
Senior Vice President
Mary M. Thompson
Senior Vice President and Secretary to the Board
R. Jerry Jackson
Vice President
Cindy W. Madden
Vice President
Doris B. Morris
Vice President
Daniel C. Thomas
Vice President
Hilda Baggett
Assistant Vice President
Phillip Jennings
Assistant Vice President
Carrie L. King
Assistant Vice President and Operations Officer
Janis B. Norman
Assistant Vice President
James William Luker, Jr.
Auditor
Charlene B. Godwin
Compliance Officer
Sandra B. Neeley
Mature Market Officer
Debbie C. Hardee
Branch Manager
Deborah W. Roberson
Accounting Officer
Ann H. Coale
Credit Administration Officer
Susan P. Reeves
Branch Manager
The Monroe County Bank
DIRECTORS
John B. Barnett, Jr.
John B. Barnett, III
Haniel F. Croft
Sloan R. Fountain, Jr.
Karl M. Lazenby
Alice F. Lee
Edwin C. Lee, Jr.
John T. Lee, III
Lloyd T. McCall, Jr.
R. A. Smith, Jr.
Joe R. Whatley
Director Emeritus
J.C. Niehuss
OFFICERS
John B. Barnett, III
Chairman
John B. Barnett, Jr.
Vice Chairman
Haniel F. Croft
President and Chief Executive Officer
J. Robison Harper
Executive Vice President
Paul P. Redmond, Jr.
Senior Vice President and Cashier
Harold W. Grimes, III
Senior Vice President
Elaine P. Brooks
Vice President
Dereck P. Dillow
Vice President
Albert A. Nettles, Jr.
Vice President
Susan D. O.Brien
Assistant Cashier
Annette S. Morrison
Data Services Officer
The Commercial Bank of Demopolis
DIRECTORS
Austin Caldwell, Jr.
H.H. Harvey
Harold Johnson
Meador Jones, Jr.
J. Olen Kerby, Jr.
Richard S. Manley
W.H. Traeger, Jr.
Mem S. Webb
A.G. Westbrook
Dan Wilson
OFFICERS
J. Olen Kerby, Jr.
President and CEO
Meador Jones, Jr.
Senior Vice President, Secretary to the Board
James L. Stanford, III
Vice President and Marketing Officer
Christine Black
Assistant Vice President
Marie Williams
Cashier and Assistant Vice President
Mark Johnson
Assistant Vice President
Barbara L. Winters
Branch Manager
Janice Stroud
Executive Secretary
Margie Williams
Assistant Cashier
Janet Broughton
Assistant Cashier
Vivian Odom
Assistant Cashier, Security Officer, and Compliance Officer
Charles Singleton
Loan Officer
South Alabama Trust Company
DIRECTORS
Dan Britton
John B. Barnett, III
Stephen G. Crawford
Broox G. Garrett, Jr.
Clifton C. Inge
W. Bibb Lamar, Jr.
J. Stephen NelsonEarl H. Weaver
OFFICERS
Dan Britton
President and Chief Executive Officer
Raymond F. Lynn, Jr.
Senior Vice President and Secretary
Kay I. McKee
Senior Vice President and Treasurer
James G. Beck
Vice President
Elaine Catoe
Vice President
Joyce Baker
Assistant Vice President
Alexis Maloy
Assistant Vice President and Employee Benefit Manager
Carolyn Bollenbacher
Trust Operations Manager
Grace D. Phelps
Trust Officer
Oliver G. Rester
Employee Benefits Officer
Susan C. Smed
Trust Officer
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis focuses on information about South
Alabama Bancorporation, Inc. (the "Company" or "South Alabama") and its
subsidiaries, South Alabama Bank, (the "Mobile Bank"), First National Bank,
Brewton (the "Brewton Bank"), The Monroe County Bank (the "Monroeville Bank"),
The Commercial Bank of Demopolis (the "Demopolis Bank") and South Alabama
Trust Company, Inc., (the "Trust Company"), that is not otherwise apparent
from the consolidated financial statements and related footnotes appearing
later in this annual report. Reference should be made to those statements and
the financial data presented elsewhere in this report for a complete
understanding of the following discussion and analysis.
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 Demopolis Bank have been included in the consolidated
results of South Alabama for all years presented.
On May 15, 1998, Peterman State Bank was merged into the Monroeville Bank.
The merger has been accounted for as a purchase ("the Peterman purchase") and
accordingly the results of operations for the Peterman Bank have been
included in the consolidated results from that day forward.
On October 31, 1996, First Monco Bancshares, Inc., a Monroeville, Alabama,
bank holding company, was merged into South Alabama. The merger between First
Monco Bancshares, Inc. and South Alabama has been accounted for as a purchase
(the "Monroeville purchase") and accordingly the results of operations of the
Monroeville Bank have been included in the consolidated results from that day
forward.
Summary
Net income for 1998 was $5.6 million compared to $5.5 million in 1997. On a
per share basis, basic earnings were $.73 for both 1998 and 1997 and diluted
earnings were $.72 for 1998 compared to $.73 in 1997. Return on average
assets in 1998 was 1.20 percent compared to 1.34 percent in 1997. In 1998 and
1997, return on average equity was 10.04 percent and 10.59 percent,
respectively. Average shareholders' equity to average assets remained strong
at 11.95 percent in 1998.
Financial Condition
Average Assets and Liabilities
Average assets in 1998 were $464.7 million, compared to $412.1 million in
1997, an increase of 12.8 percent. Approximately two thirds of the growth was
generated internally and approximately one third resulted from the Peterman
purchase.
Average loans, net, were 7.6 percent higher in 1998 than in 1997, however
strong loan demand in the latter half of 1998 resulted in an increase of 13.6
percent in total loans at December 31, 1998 compared to a year earlier.
Average total deposits in 1998 were 12.4 percent higher than in 1997. Growth
was experienced in all categories, with the largest increase, 14.5 percent,
occurring in time deposits.
Short-term borrowings consist of federal funds purchased, overnight
repurchase agreements and deposits in the treasury tax and loan account.
Management strives to maintain a low volume of these funds relative to total
assets and this ratio has consistently been below 2.0 percent for all years
shown.
Long-term debt consists of loans from the Federal Home Loan Bank. These funds,
when borrowed, are used to fund assets of comparable maturities such as
investment securities and loans.
The Company's average equity as a percent of average total assets in 1998 was
11.94 percent, compared to 12.6 percent in 1997. Average equity in 1998 and
1997 included approximately $4.4 million and $4.1 million, respectively,
recorded as goodwill related to the Monroeville and Peterman purchases.
<TABLE>
Table 1
Distribution of Average Assets, Liabilities and Shareholders" Equity
<CAPTION>
(In Millions) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Average Assets
Cash and non-interest
bearing deposits $ 17.2 $ 16.5 $ 14.6 $ 14.1 $ 14.1
Interest bearing deposits .4 .1 .3 .7 1.0
Federal funds sold 27.2 13.0 9.5 9.4 6.9
Investment securities 146.9 129.0 91.4 78.9 87.9
Loans, net 254.0 236.0 194.9 175.1 155.0
Premises and equipment, net 9.4 8.5 7.2 5.3 5.1
Intangible assets 4.4 4.1 .7
Other assets 5.2 4.9 5.1 4.9 4.5
Average Total Assets $464.7 $412.1 $323.7 $288.4 $274.5
Average Liabilities and
Shareholders' Equity
Non-interest bearing
demand deposits $ 63.4 $ 58.0 $ 47.1 $ 41.6 $ 38.8
Interest bearing
demand deposits 125.3 110.7 88.2 80.8 93.4
Savings deposits 30.2 28.8 20.9 18.4 18.7
Time deposits 174.5 152.4 120.5 106.0 85.0
Total deposits 393.4 349.9 276.7 246.8 235.9
Short-term borrowings 6.3 6.1 5.0 5.4 5.5
Long-term debt 5.4 1.0
Other liabilities 4.1 3.1 3.1 3.0 2.3
Shareholders' Equity 55.5 52.0 38.9 33.2 30.8
Average Total Liabilities
and Shareholders' Equity $464.7 $412.1 $323.7 $288.4 $274.5
</TABLE>
Loans
The largest and highest yielding category of interest earning assets at South
Alabama is the loan portfolio. For the five year period of 1994 to 1998,
average net loans grew at a compounded rate of 13.2 percent.
The distribution of loans by category at year-end 1998 was relatively
unchanged from year-end 1997. The growth rate for the various categories of
loans was consistent at approximately 13 percent, except that real estate-
construction loans increased approximately 30 percent. This category, however,
remained the smallest of all categories, accounting for 3.8 percent of total
loans at year-end 1998.
It is Management's goal to make loans with relatively short maturities or, in
the case of loans with longer maturities, with floating rate arrangements
when possible. Of the outstanding loans in the categories of commercial,
financial and agricultural, real estate-construction and real estate-mortgage
at December 31, 1998, $98.3 million, or 42.3 percent, mature within one year
and are therefore available for interest rate changes, if needed, to adjust
for asset/liability management purposes. Of the remaining loans in these
categories maturing after one year, 19.2 percent are on a floating rate basis.
Of the total loans outstanding in these categories at December 31, 1998, 53.4
percent was available for repricing within one year, either because the loans
mature within one year or because they are based on a variable rate
arrangement.
The Company makes available to its customers fixed rate, longer term loans,
especially in the residential real estate-mortgage area. South Alabama is
able to offer, through third party arrangements, certain loan products which
do not require that the longer term loans be carried on the books of the
Company. These products allow the Company to gain the benefit of a larger
variety of product offerings and generate fee income.
Table 2 shows the distribution of loans by major category at December 31,
1998, and at each of the previous four year-ends. Table 3 depicts maturities
of selected loan categories and the interest rate structure for such loans
maturing after one year.
The Company's rollover policy consists of an evaluation of maturing loans to
determine whether such loans will be renewed (or rolled over) and,if so, at
what amount, rate and maturity.
<TABLE>
GRAPH
Distribution of Loans by Category
<CAPTION>
December 31, 1998
<S> <C>
Commercial, financial,
and agricultural 31.56%
Real estate - construction 3.85%
Real estate - mortgage 48.09%
Installment 16.50%
</TABLE>
<TABLE>
Table 2
Distribution of Loans by Category
<CAPTION>
(In Millions) December 31,
--------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 87.8 $ 77.7 $ 73.7 $ 49.9 $ 55.8
Real estate - construction 10.7 8.2 12.4 9.6 7.4
Real estate - mortgage 133.8 118.4 106.2 88.3 74.3
Installment 45.9 40.6 39.9 35.1 32.3
Total loans $278.2 $244.9 $232.2 $182.9 $169.8
</TABLE>
<TABLE>
Table 3
Selected Loans by Type and Maturity
(In Millions)
<CAPTION>
December 31, 1998
Maturing
----------------------------------------------------
Within After One But After
One Year Within Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial, financial,
and agricultural $51.7 $ 34.4 $ 1.7 $ 87.8
Real estate - construction 8.7 2.0 10.7
Real estate - mortgage 37.9 85.6 10.3 133.8
$98.3 $122.0 $12.0 $232.3
Loans maturing
after one year with:
Fixed interest rates $103.5 $ 4.8
Floating interest rates 18.5 7.2
$122.0 $12.0
</TABLE>
Investment Securities
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," as
of January 1, 1994. SFAS No. 115 requires that securities be classified into
one of three categories: held to maturity, available for sale, or trading.
Securities classified as held to maturity will be stated at amortized cost.
This classification means that Management has the positive intent and the
Company has the ability to hold the securities until they mature. Securities
classified as available for sale will be stated at fair value. Securities in
this category are held for indefinite periods of time, and include securities
that Management intends to use as part of its asset/liability strategy, or
that may be sold in response to changes in interest rates, changes in
prepayment risks, changes in liquidity needs, the need to increase regulatory
capital or other similar factors. At December 31, 1998, 97.5 percent of the
Company's investment portfolio was in the available for sale category.
The Company holds no trading securities.
The maturities and weighted average yields of securities held to maturity and
securities available for sale at December 31, 1998, are presented in Table 4
at amortized cost using the average stated contractual maturities. The average
stated contractual maturities may differ from the average expected life
because of amortized principal payments or because borrowers may have the
right to call or prepay obligations. Tax equivalent adjustments, using a 34
percent tax rate, have been made when calculating yields on tax-exempt
obligations.
<TABLE>
Table 4
Maturity Distribution of Investment Securities
December 31, 1998
(Dollars in Thousands)
<CAPTION>
After one but After five but
Within one year within five years within ten years After ten years Total
--------------- ----------------- ---------------- --------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity
US Treasury securities $ 989 7.43% $ 989 7.43%
US Government agencies $ 137 6.05% $ 122 7.88% $ 9 10.85% 268 7.04
State and political
subdivisions 61 6.85 345 9.49 1,212 9.46 511 8.75 2,129 9.22
Other investments 249 6.65 249 6.65
Total securities
held to maturity 1,050 7.40 731 7.88 1,334 9.32 520 8.79 3,635 8.40
Securities available for sale
US Treasury securities 2,614 6.42 4,796 6.45 7,410 6.44
US Government agencies 8,493 5.58 16,708 6.25 20,460 6.10 19,791 6.27 65,452 6.12
State and political
subdivisions 1,547 7.08 16,636 6.75 15,881 7.69 23,374 7.50 57,438 7.32
Other investments 4,235 6.06 5,049 6.36 1,028 6.49 1,368 7.07 11,680 6.35
Total securities
available for sale 16,889 5.97 43,189 6.48 37,369 6.78 44,533 6.94 141,980 6.64
Total investments $17,939 6.05% $43,920 6.50% $38,703 6.87% $45,053 6.96% $145,615 6.68%
</TABLE>
Deposits and Short-Term Borrowings
Average deposits have grown at a compounded rate of 13.7 percent since 1994.
Growth has been experienced in all categories, but the fastest growth has
been in time deposits, at a compounded five year rate of 19.7 percent.
Several certificate of deposit promotional programs since 1995 have been
aimed at attracting longer term, small denomination time deposits, and then
developing multiple product relationshipwith those customers. In 1998 the
anticipation of lower future interest rates caused some customers to seek
fixed rate deposits.
A primary emphasis at South Alabama is on attracting and retaining core
deposits, defined as total deposits less certificates of deposits of $100,000
or more. Core deposits were $352.0 million at year-end 1998, a 12.0 percent
increase over year-end 1997.
<TABLE>
Table 5
Average Deposits
<CAPTION>
(Dollars in Millions) Average for the year
---------------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ----------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
Outstanding Paid Outstanding Paid Outstanding Paid
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 63.4 N/A $ 58.0 N/A $ 47.1 N/A
Interest bearing
demand deposits 125.3 3.60% 110.7 3.55% 88.2 3.41%
Savings deposits 30.2 3.07 28.8 3.07 20.9 3.15
Time deposits 174.5 5.46 152.4 5.42 120.5 5.54
Total average deposits $393.4 $349.9 $276.7
</TABLE>
Table 6 reflects maturities of time deposits of $100 thousand or more at
December 31, 1998. Deposits of $76.1 million in this category represented
17.8 percent of total deposits at year-end 1998, compared to 15.5 percent at
year-end 1997 and 13.4 percent at year-end 1996. Although this ratio has
increased over the three year period, Management views these deposits as the
most volatile of all deposit categories and does not pursue these deposits as
aggressively as smaller denomination consumer deposits.
<TABLE>
Table 6
Maturities of Time Deposits of $100,000 or More
(In Millions) At December 31, 1998
-----------------------------------
<CAPTION>
Under Over
3 3-12 12
Months Months Months Total
<C> <C> <C> <C>
$36.9 $24.8 $14.4 $76.1
</TABLE>
<TABLE>
GRAPH
Distribution of Deposits by Category
<CAPTION>
December 31, 1998
<S> <C>
Non-interest bearing
demand deposits 17.2%
Interest bearing
demand deposits 32.1%
Savings deposits 7.0%
Time deposits 43.7%
</TABLE>
Short-term borrowings include three items: 1) federal funds purchased,
2) securities sold under agreements to repurchase, which are overnight
transactions with large corporate customers, commonly referred to as repos,
and 3) other, representing borrowings from the Federal Home Loan Bank, from
the Federal Reserve through its discount operations and U.S. Treasury tax and
loan funds on deposit subject to a note payable to the U.S. Treasury
Department. The Company purchased a small amount of federal funds during 1998.
Average short-term borrowings in 1998 increased to $6.3 million compared to
$6.1 million in 1997. Management has sought to control the volume of funds in
this category within certain acceptable limits.
One of Management's asset/liability management goals relating to liquidity is
to maintain a net sold position (whereby federal funds sold exceeds short
term borrowings). The Company has maintained this position, on average, for
all years shown. In 1998 the net sold position increased to $20.9 million
from $6.9 million in 1997, due primarily to the increase in average deposits.
<TABLE>
Table 7
Short-Term Borrowings
(Dollars in Thousands)
<CAPTION>
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Average Weighted Average Weighted Average Weighted
Maximum Balance Average Maximum Balance Average Maximum Balance Average
Month-end During Interest Month-end During Interest Month-end During Interest
Balance Year Rate Balance Year Rate Balance Year Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds purchased $2,100 $ 14 5.50% $3,779 $ 739 6.22% $3,600 $ 329 5.14%
Securities sold under
agreement to repurchase 7,797 5,747 5.43 6,021 4,733 4.86 5,858 3,422 4.44
Other 1,452 495 5.45 2,539 639 5.01 2,572 1,205 4.67
Total short-term
borrowings $6,256 5.43% $6,111 5.04% $4,956 4.54%
</TABLE>
Asset/Liability Management
The purpose of asset/liability management is to maximize return while
minimizing risk. Maximizing return means achieving the Company's profitability
and growth goals. Minimizing risk means considering four key risk factors: 1)
liquidity, 2) interest rate sensitivity, 3) capital adequacy, and 4) asset
quality. Asset/liability management at the Company involves a comprehensive
approach to balance sheet management which meets the risk and return criteria
established by Management and the Board of Directors.
The Company's primary market risk is its exposure to interest rate changes.
Interest rate risk management strategies are designed to optimize net
interest income while minimizing fluctuations caused by changes in the
interest rate environment. It is through these strategies that the Company
seeks to manage the maturity and repricing characteristics of its balance
sheet.
The modeling techniques used by the Company simulate net interest income and
impact on fair values of the Company's assets and liabilities under various
rate scenarios. Important elements of these techniques include the mix of
floating versus fixed rate assets and liabilities, and the scheduled, as well
as expected, repricing and maturing volumes and rates of the existing balance
sheet. Under a scenario simulating a hypothetical 100 basis point rate
increase applied to all interest earning assets and interest-bearing
liabilities, the Company would expect a net loss in fair value of the
underlying instruments of $11.7 million. This hypothetical loss is not a
precise indicator of future events. Instead, it is a reasonable estimate of
the results anticipated if the assumptions used in the modeling techniques
were to occur.
Liquidity
Liquidity represents the ability of a bank to meet loan commitments as well
as deposit withdrawals. Liquidity is derived from both the asset side and the
liability side of the balance sheet. On the asset side, liquidity is provided
by marketable investment securities, maturing loans, federal funds sold and
cash and cash equivalents. On the liability side, liquidity is provided by a
stable base of core deposits. Additionally, the Company has available, if
needed, federal funds lines of credit, Federal Home Loan Bank lines of credit
and Federal Reserve discount window operations and an operating line of
credit from a correspondent bank.
Interest Rate Sensitivity
By monitoring the Company's interest rate sensitivity Management attempts to
maintain a desired balance between the growth of net interest revenue and the
risks that might result from significant changes in interest rates in the
market. One tool for measurement of this risk is gap analysis, whereby the
repricing of assets and liabilities is compared within certain time
categories. By identifying mismatches in repricing opportunities within a
time category, interest rate risk can be identified. The interest sensitivity
analysis presented in Table 8 is based on this type of gap analysis, which
assumes that rates earned on interest earning assets and rates paid on
interest bearing liabilities will move simultaneously in the same direction
and to the same extent. However, the rates associated with these assets and
liabilities actually change at different times and in varying amounts.
Changes in the composition of earning assets and interest bearing liabilities
can increase or decrease net interest revenue without affecting interest
sensitivity. The interest rate spread between assets and their corresponding
liability can be significantly changed while the repricing interval for both
remain unchanged, thus impacting net interest revenue. Over a period of time,
net interest revenue can increase or decrease if one side of the balance
sheet reprices before the other side. An interest sensitivity ratio of 1.0
(earning assets divided by interest bearing liabilities), which represents a
matched interest sensitive position, does not guarantee maximum net interest
revenue. Management must evaluate several factors, including the general
direction of interest rates, before investing in order to determine the type
of investment and the maturity needed. Management may, from time to time,
accept calculated risks associated with interest sensitivity in order to
maximize net interest revenue. The Company does not currently use derivative
financial instruments to manage interest rate sensitivity.
At December 31, 1998, the Company's three-month interest sensitivity gap
position was .90 percent, and at twelve months the gap position, on a
cumulative basis, was .84 percent, well within the range established by
Management as acceptable. The Company's three month gap position indicates
that, in a period of rising interest rates, each $1.00 of assets which
reprice upward could be followed with more than $1.00 in liabilities which
could reprice upward within three months. Thus, under this scenario, net
interest revenue might decrease during the three month period of rising rates.
In a period of falling rates, the opposite effect might occur. While certain
categories, such as some loans and certain certificates of deposit, are
contractually tied to interest rate movements, most are subject only to
competitive pressures and do not necessarily reprice directly with changes
in market rates. Management has a certain amount of flexibility when adjusting
rates on these funds. Management is confident of and has demonstrated over
the years its ability to adjust to interest rate changes in a manner that
minimizes any significant adverse effect on the net interest margin.
<TABLE>
Table 8
Interest Sensitivity Analysis
(Dollars in Thousands)
<CAPTION>
December 31, 1998 Non-Interest
-------------------------------------- Sensitive
Interest Sensitive Within (Cumulative) Within
3 Months 3-12 Months 1-5 Years 5 Years Total
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans (1) $112,329 $149,733 $271,717 $ 6,465 $278,182
Unearned income (171) (171)
Less allowance for loan losses (3,248) (3,248)
Net loans 112,329 149,733 271,717 3,046 274,763
Investment securities 8,985 23,844 77,728 70,141 147,869
Federal funds sold and
resale agreements 40,254 40,254 40,254 40,254
Interest bearing deposits in
other financial institutions 410 410 410 410
Total earning assets $161,978 $214,241 $390,109 $ 73,187 $463,296
INTEREST BEARING LIABILITIES
Non-interest bearing deposits $ 73,501 $ 73,501
Interest bearing demand
deposits (2) $ 89,572 $ 89,572 $ 89,572 47,754 137,326
Savings deposits (2) 29,831 29,831
Large denomination
time deposits 36,939 61,732 75,719 331 76,050
Other time deposits 45,148 91,690 111,142 226 111,368
Short-term borrowings 7,457 7,457 7,457 7,457
Long-term borrowing 6,000 6,000 6,000
Total interest bearing
liabilities $179,116 $256,451 $289,890 $151,643 $441,533
Interest sensitivity gap $(17,138) $(42,210) $100,219
Earning assets/interest
bearing liabilities .90 .84 1.35
Interest sensitivity gap/
earning assets (.11) (.20) .26
(1) Non-accrual loans are included in the "Non-Interest Sensitive Within 5
Years" category.
(2) Certain types of savings and NOW accounts (included in interest bearing
demand deposits) are included in the "Non-Interest Sensitive Within 5
Years" category. In Management's opinion, these liabilities do not reprice
in the same proportions as rate-sensitive assets, as they are not
responsive to general interest rate changes in the economy.
</TABLE>
Capital Resources
Both the Monroeville purchase in 1996 and the Peterman purchase in 1998 were
accounted for under the purchase method of accounting. The two transactions
resulted in the addition of $19.2 million in capital, of which $4.9 million
was attributable to goodwill. The goodwill is being amortized over 25 years
at approximately $196 thousand per year.
Tangible shareholders' equity (shareholders' equity less goodwill and
unrealized gains and losses of available for sale securities) was $53.0
million at December 31, 1998, compared to $47.9 million at December 31, 1997,
an increase of 10.6 percent. In May 1997 the Company paid a special dividend
of $.702 per share. Like many banking institutions, the Company has capital
in excess of industry norms, and the special dividend was one aspect of the
Company's strategic plan to enhance shareholder value. As a result of the
special dividend, Tier I capital at year end 1997 was below year end 1996. At
year end 1998 the Tier I capital ratio declined to 16.23 percent from 17.19
percent at year end 1997. In 1998 risk-adjusted assets grew at a faster rate
than Tier I capital. The Company's leverage ratio, defined as shareholders'
equity divided by quarterly average assets, was 11.00 percent, well above
peer group averages. The Federal Reserve and the FDIC require that bank
holding companies and banks maintain certain minimum levels of capital as
defined by risk-based capital guidelines. These 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 and these capital tiers are used in conjunction with "risk-based"
assets in determining "risk-based" capital ratios. Total capital, which is
Tier I plus the allowable portion of the allowance for loan losses, was $56.2
million at December 31, 1998. The ratios expressed as a percent of total
risk-adjusted assets for Tier I and total capital were 16.23 percent and
17.23 percent, respectively, at December 31, 1998. The Company exceeded the
minimum risk-based capital guidelines at December 31, 1998, 1997, and 1996
(see Footnote 14 of Notes to Consolidated Financial Statements).
<TABLE>
Table 9
Risk-Based Capital
<CAPTION>
(Dollars in Thousands) December 31,
----------------------------------
1998 1997 1996
<S> <C> <C> <C>
Tier I capital -
Tangible common shareholders' equity $ 52,953 $ 47,865 $ 49,422
Tier II capital -
Allowable portion of the allowance
for loan losses 3,248 3,167 3,073
Total capital (Tier I and Tier II) $ 56,201 $ 51,032 $ 52,495
Risk-adjusted assets $326,168 $278,469 $260,326
Quarterly average assets 481,538 422,350 371,522
Risk-based capital ratios:
Tier I capital 16.23% 17.19% 18.98%
Total capital (Tier I and Tier II) 17.23% 18.33% 20.17%
Minimum risk-based capital guidelines:
Tier I capital 4.00% 4.00% 4.00%
Total capital (Tier I and Tier II) 8.00% 8.00% 8.00%
Tier I leverage ratio 11.00% 11.33% 13.30%
</TABLE>
Results of Operations
Net Interest Revenue
Net interest revenue, the difference between amounts earned on assets and the
amounts paid on liabilities, is the most significant component of earnings
for a financial institution. Changes in interest rates, changes in the volume
of assets and liabilities, and changes in the asset/liability mix are the
major factors that influence net interest revenue. Presented below is an
analysis of net interest revenue, weighted average yields on earning assets
and weighted average rates paid on interest bearing liabilities for the past
three years.
Net yield on interest earning assets is net interest revenue, on a tax
equivalent basis, divided by total interest earning assets. This ratio is a
measure of the Company's effectiveness in pricing interest earning assets and
funding them with both interest bearing and non-interest bearing liabilities.
The Company's net yield, on a tax equivalent basis, decreased to 4.51 percent
in 1998 from 4.88 percent and 5.01 percent in 1997 and 1996, respectively.
Competitive factors on both the loan and deposit sides of the balance sheet
in the markets served by South Alabama contributed to a steady decline in the
net yield on interest earning assets (tax equivalent) from 1996 to 1998. The
cost of funds was 4.50 percent in 1996, fell slightly to 4.49 percent in 1997
and then rose to 4.56 percent in 1998. Although interest rates in the economy
fell in the latter half of 1998, the cost of funds did not adjust downward as
quickly as yields on certain asset categories, especially loans. This resulted
in a narrowing of the net interest margin. Contributing to the decline in the
net yield was a decrease in the ratio of non-interest bearing deposits to
total interest bearing liabilities from 20.1 percent in 1996 to 19.4 percent
in 1997 and to 18.6 percent in 1998. Table 10 contains details of the net
interest margin for the years 1996, 1997 and 1998.
The banking industry has experienced lower net interest margins over the past
several years, and this trend is expected to continue.
<TABLE>
Table 10
Net Interest Revenue
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
Average Interest Average Interest Average Interest
Amount Average Earned/ Amount Average Earned/ Amount Average Earned/
Outstanding Rate Paid Outstanding Rate Paid Outstanding Rate Paid
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Taxable securities $ 98,496 6.72% $ 6,618 $ 92,364 6.40% $ 5,910 $ 67,070 6.59% $ 4,419
Non-taxable securities 48,378 4.21 2,037 36,666 5.37 1,970 24,347 5.45 1,328
Total securities 146,874 5.89 8,655 129,030 6.11 7,880 91,417 6.29 5,747
Loans(1) 257,241 9.21 23,684 239,044 9.33 22,296 197,518 9.35 18,475
Federal funds sold 27,212 5.39 1,466 13,044 5.46 712 9,416 5.17 487
Deposits 410 5.12 21 100 9.00 9 336 7.44 25
Total interest earning
assets 431,737 7.83 33,826 381,218 8.10 30,897 298,687 8.28 24,734
Non-interest
earning assets
Cash and due from banks 17,170 16,501 14,591
Premises and
equipment, net 9,409 8,487 7,208
Other real estate 58 16 147
Deferred tax asset 247 912
Other assets 5,256 4,621 4,037
Intangible assets 4,361 4,075 694
Allowance for
loan losses (3,263) (3,078) (2,603)
Total $464,728 $412,087 $323,673
Interest Bearing Liabilities
Interest bearing demand
and savings deposits $155,535 3.50 5,444 $139,426 3.45 4,809 $109,100 3.36 3,661
Time deposits 174,505 5.46 9,525 152,378 5.42 8,258 120,464 5.54 6,675
Short-term borrowing 6,256 5.43 340 6,111 5.04 308 4,956 4.54 225
Long-term debt 5,381 4.98 268 1,074 5.40 58
Total interest bearing
liabilities 341,677 4.56 15,577 298,989 4.49 13,433 234,520 4.50 10,561
Non-interest bearing liabilities
Demand deposits 63,387 58,006 47,138
Deferred tax liability 236
Other 3,889 3,129 3,114
67,512 61,135 50,252
Shareholders' equity 55,539 51,963 38,901
Total $464,728 $412,087 $323,673
Net Interest Revenue 3.27% $18,249 3.61% $17,464 3.78% $14,173
Net yield on interest earning assets 4.23% 4.58% 4.75%
Tax equivalent adjustment 0.28 0.30 0.26
Net yield on interest
earning assets (tax equivalent) 4.51% 4.88% 5.01%
(1)Loans classified as non-accruing are included in the average volume
classification. Loan fees for all years shown are included in the interest
amounts for loans.
</TABLE>
Table 11 reflects the changes in sources of taxable-equivalent interest
income and expense between 1998 and 1997 and between 1997 and 1996.
The variances resulting from changes in interest rates and the variances
resulting from changes in volume are shown.
Tax-equivalent net interest revenue in 1998 was $824 thousand higher than in
1997, the result of large volume increases in both the loan and investment
portfolios. Smaller, negative rate variances in these portfolios occurred as
interest rates in the economy decreased during 1998. A significant increase
due to federal funds volume was realized. In 1997 compared to 1996, the
increase of $3.67 million in net interest revenue was caused almost entirely
by the Monroeville purchase. Rate variances between these years were small
because interest rates in general were relatively stable.
<TABLE>
GRAPH
<CAPTION>
Net Interest Margin
<S> <C>
1994 5.20%
1995 5.15%
1996 5.01%
1997 4.88%
1998 4.51%
</TABLE>
<TABLE>
Table 11
Analysis of Taxable-Equivalent Interest Increases (Decreases)
(Dollars in Thousands)
<CAPTION>
1998 Change From 1997 1997 Change From 1996
-------------------------- ------------------------
Due to(1) Due to(1)
---------------- --------------
Amount Volume Rate Amount Volume Rate
-------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Revenue:
Taxable securities $ 708 $ 401 $ 307 $1,491 $1,662 $(171)
Non-taxable securities 106 884 (778) 1,019 1,066 (47)
Total securities 814 1,285 (471) 2,510 2,728 (218)
Loans 1,388 1,694 (306) 3,821 3,884 (63)
Federal funds sold 754 773 (19) 225 189 36
Deposits 12 22 (10) (16) (18) 2
Total 2,968 3,774 (806) 6,540 6,783 (243)
Interest Expense:
Interest bearing demand
and savings deposits 635 557 78 1,148 1,021 127
Other time deposits 1,267 1,200 67 1,583 1,765 (182)
Short-term borrowing 32 (4) 36 83 54 29
Long-term debt 210 231 (21) 58 29 29
Total 2,144 1,984 160 2,872 2,869 3
Net interest revenue $ 824 $1,790 $(966) $3,668 $3,914 $(246)
(1)The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amount of the change in each.
</TABLE>
Provision for Loan Losses and Allowance for Loan Losses
The provision for loan losses is the cost of providing an allowance that is
adequate to absorb inherent losses on loans in the portfolio. Management
reviews the adequacy of the allowance for loan losses on a continuous basis
by assessing the quality of the loan portfolio and adjusting the allowance
when appropriate. Loan review procedures are in place to ensure that
potential problem loans are identified and include a continuous review of the
portfolios at the affiliate banks by the Company's loan review department.
Management's evaluation of each loan includes a review of the financial
condition and capacity of the borrower, the value of the collateral, current
economic trends, historical losses, workout and collection arrangements, and
possible concentrations of credit. The loan review process also includes a
collective evaluation of credit quality within the mortgage and installment
loan portfolios. In establishing the allowance, loss percentages are applied
to groups of loans with similar risk characteristics. These loss percentages
are determined by historical experience, portfolio mix, and other economic
factors. Each quarter this review is quantified in a report to Management
which uses it to determine whether an appropriate allowance is maintained.
This report is then submitted to the Company's Board of Directors quarterly.
The amount of the allowance is affected by: (i) loan charge-offs, which
decrease the allowance; (ii) recoveries on loans previously charged-off,
which increase the allowance; and (iii) the provisions for loan losses
charged to income, which increase the allowance.
Table 12 sets forth certain information with respect to the Company's average
loans, allowance for loan losses, charge-offs and recoveries for the five
years ended December 31, 1998.
<TABLE>
Table 12
Summary of Loan Loss Experience
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Allowance for loan losses -
Balance at beginning of year $ 3,167 $ 3,073 $ 2,747 $ 2,833 $ 2,836
Balance acquired in purchase
business combination 287 500
Charge-offs
Commercial, financial and agricultural 465 221 400 137 124
Real estate - construction 34
Real estate -mortgage 118 9 21 9
Installment 306 261 286 165 181
Total charge-offs 923 482 695 323 314
Recoveries
Commercial, financial and agricultural 266 85 95 55 116
Real estate - construction
Real estate -mortgage 32 9 7 30 33
Installment 118 86 111 74 78
Total recoveries 416 180 213 159 227
Net charge-offs 507 302 482 164 87
Addition to allowance charged to
operating expense 301 396 308 78 84
Allowance for loan losses-
Balance at end of year $ 3,248 $ 3,167 $ 3,073 $ 2,747 $ 2,833
Loans at end of year $278,182 $244,889 $232,153 $182,850 $169,808
Ratio of ending allowance
to ending loans 1.17% 1.29% 1.32% 1.50% 1.67%
Average loans, net of
unearned income $257,241 $239,044 $197,518 $177,932 $157,867
Non-performing loans $ 884 $ 738 $ 1,526 $ 621 $ 752
Ratio of net charge-offs
to average loans .20% .13% .24% .09% .06%
Ratio of ending allowance to total
non-performing loans 367.42% 429.13% 201.38% 442.35% 376.73%
</TABLE>
The allowance was increased in 1998 through an expense of $301 thousand and
the addition of $287 thousand associated with the Peterman purchase. Net
charge-offs in 1998 of $507 thousand were 67.9 percent greater than in 1997.
The allowance at both year-end 1998 and 1997 was $3.2 million.
The allowance for loan losses as a percent of loans was 1.17 percent at
December 31, 1998, and 1.29 percent at December 31, 1997. The allowance for
loan losses represented 3.7 times non-performing loans at December 31, 1998,
compared to 4.3 times non-performing loans at December 31, 1997. 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 was considered
adequate at December 31, 1998.
<TABLE>
Table 13
Allocation of the Allowance for Loan Losses
<CAPTION>
1998 1997 1996
------------------------ ------------------------- -------------------------
Percentage Percentage Percentage
of Loans of Loans of Loans
in Each in Each in Each
Allowance Category to Allowance Category to Allowance Category to
Allocation Total Loans Allocation Total Loans Allocation Total Loans
<S> <C> <C> <C> <C> <C> <C>
Commercial,
financial and agricultural $1,029 31.56% $ 937 31.72% $1,047 31.74%
Real estate 1,258 51.95 1,047 51.69 939 51.08
Installment 618 16.49 706 16.59 545 17.18
Unallocated 343 477 542
Total $3,248 100.00% $3,167 100.00% $3,073 100.00%
</TABLE>
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 14 sets forth certain information with respect to accruing loans 90
days or more past due, loans on non-accrual, renegotiated loans and other
real estate owned.
<TABLE>
Table 14
Summary of Non-Performing Assets
<CAPTION>
(Dollars in Thousands) December 31,
--------------------------
1998 1997 1996
<S> <C> <C> <C>
Accruing loans 90 days or more past due $ 465 $ 52 $ 315
Loans on non-accrual 419 686 1,211
Renegotiated loans
Total non-performing loans 884 738 1,526
Other real estate owned 168 15
Total non-performing assets $1,052 $738 $1,541
Loans 90 days or more past due
as a percent of loans 0.17% 0.02% 0.14%
Total non-performing loans
as a percent of loans 0.32% 0.30% 0.66%
Total non-performing assets as a percent
of loans and other real estate owned 0.38% 0.30% 0.66%
</TABLE>
Total non-performing assets as a percent of loans and other real estate owned
at year-end 1998 was 0.38 percent compared to 0.30 percent at year-end 1997
and .66 percent at year-end 1996.
Any loans classified for regulatory purposes as loss, doubtful, substandard
or special mention, and not included above, 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.
Details of Non-Accrual Loans
The impact of non-accrual loans on interest income the past three years is
shown in Table 15. Not included in the table are loans totaling $1.6 million
at December 31, 1998, as to which Management has reservations about the
ability of the borrowers to comply with present repayment terms. 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.
<TABLE>
GRAPH
Quality
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Non-performing Assets/
Loans (year end) 0.44 0.34 0.66 0.30 0.32
Net Charge Offs/
Average Loans 0.06 0.09 0.24 0.13 0.20
</TABLE>
<TABLE>
Table 15
Details of Non-Accrual Loans
(Thousands)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Principal balance at December 31, $419 $686 $1,211
Interest that would have been
recorded under original terms
for the years ended December 31, $ 93 $ 68 $ 74
Interest actually recorded
in the financial statements for
the years ended December 31, $ 32 $ 19 $ 30
</TABLE>
Non-Interest Revenue and Non-Interest Expense
<TABLE>
Table 16
Non-Interest Revenue
<CAPTION>
(In Thousands) Year Ended December 31,
----------------------------
1998 1997 1996
<S> <C> <C> <C>
Non-Interest Revenue:
Trust revenue $1,384 $1,289 $1,177
Service charges on deposit accounts 1,799 1,721 1,301
Securities gains, net 384 69 126
Other income, charges and fees 546 596 430
Total $4,113 $3,675 $3,034
</TABLE>
In 1998 Trust revenue accounted for 33.6 percent of total non-interest
revenue at the Company. In January, 1998 the trust departments of the Mobile
and Brewton Banks were merged to form South Alabama Trust Company, Inc., a
wholly owned subsidiary. This combination is expected to allow the Company to
realize certain economies of scale and therefore decrease operational
expenses. At December 31, 1998 the Trust Company had assets of $423 million.
Other increases in non-interest revenue in 1997 compared to 1996 resulted
primarily from the Monroeville purchase. The restructuring of a small portion
of the investment portfolio in 1998 resulted in net securities gains of $384
thousand. In 1999, Management intends to conduct an extensive review of
non-interest revenue opportunities.
<TABLE>
Table 17
Non-Interest Expense
<CAPTION>
(In Thousands) Year Ended December 31,
-------------------------------
1998 1997 1996
<S> <C> <C> <C>
Non-Interest Expense:
Salaries $ 6,420 $ 5,695 $ 4,755
Pension and other employee benefits 1,510 1,391 1,244
Furniture and equipment expenses 1,228 1,081 919
Net occupancy expenses 999 947 825
Intangible amortization 186 168 28
Other operating expenses 3,989 3,960 3,269
Total $14,332 $13,242 $11,040
</TABLE>
One method of countering the effects of declining net interest margins is to
improve (lower) the Company's efficiency ratio, calculated as non-interest
expense divided by net interest revenue (tax adjusted) plus non-interest
revenue. The efficiency ratio in 1997 dropped below 60 percent for the first
time from a high of 64.55 percent in 1994. The ratio climbed to 61.84 percent
in 1998, a partial result of expenses relating to the Company's expansion
into Baldwin County, a rapidly growing section of southwest Alabama.
Additional one time expenses were incurred with a name change at the Mobile
bank and merger expenses associated with the Peterman and Demopolis
acquisitions. Non-interest expense in 1998, excluding these expenses,
grew approximately 6.0 percent compared to 1997. The increases in non-
interest expense in 1997 compared to 1996 are almost entirely a result of the
Monroeville purchase.
<TABLE>
GRAPH
<CAPTION>
Efficiency Ratio
<S> <C>
1994 64.55%
1995 62.71%
1996 61.87%
1997 59.58%
1998 61.84%
</TABLE>
Income Taxes
Income tax expense was $2.2 million in 1998, compared to $2.0 million and
$1.7 million in 1997 and 1996, respectively.
Year 2000
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 Bank's 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 timeline 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 will have completed and tested contingency plans
by June 30, 1999. 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 the tests are currently being reviewed. Other
mission critical systems have been tested, and any necessary corrections
completed. Vendor testing and review of proxy testing for non-mission
critical systems will be completed by March 31, 1999, as required by federal
guidelines.
The Company estimates that the cost of testing and updating its systems for
Y2K compliance will be less than $170 thousand, of which approximately $75
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.
South Alabama believes it has an effective plan to correct its Y2K issues.
However, if these corrections are not made, or if problems go undetected,
the Y2K issue could materially impact South Alabama's operations. South
Alabama believes that it and its vendors and customers are on schedule to
achieve Y2K compliance, and South Alabama does not expect a material adverse
impact on its operations.
Inflation and Other Issues
Because the Company's assets and liabilities are essentially monetary in
nature, the effect of inflation on the Company's assets differs greatly from
that of most commercial and industrial companies. Inflation does have an
impact on the growth of total assets in the banking industry and the
resulting need to increase capital at higher than normal rates in order to
maintain an appropriate equity to assets ratio. Inflation also has a
significant effect on other expenses, which tend to rise during periods of
general inflation. Management believes, however, that the Company's financial
results are influenced more by its ability to react to changes in interest
rates than by inflation.
Except as discussed in this Management's Discussion and Analysis, Management
is not aware of 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.
Forward Looking Statements
This Annual Report contains certain forward looking information with respect
to the financial condition, results of operations and business of the Company,
including the Notes to Consolidated Financial Statements and statements
contained in the discussion above with respect to security maturities, loan
maturities, loan growth, expectations for and the impact of interest rate
changes, the adequacy of the loan loss reserve, expected loan losses, the
ability to improve the efficiency ratio, and the impact of inflation, the Year
2000, and unknown trends or regulatory action. The Company cautions readers
that forward looking statements, including without limitation those noted
above, 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 and the performance of stock and bond
markets.
<TABLE>
Selected Quarterly Financial Data (Unaudited)
(Dollars in Thousands Except Per Share Amounts)
1998
---------------------------------------------------
<CAPTION>
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Interest revenue $7,936 $8,382 $8,749 $8,759 $33,826
Interest expense 3,650 3,875 4,072 3,980 15,577
Net interest revenue 4,286 4,507 4,677 4,779 18,249
Provision for loan losses 95 21 62 123 301
Non-interest revenue 832 930 947 1,404 4,113
Non-interest expense 3,294 3,620 3,674 3,744 14,332
Income before income taxes 1,729 1,796 1,888 2,316 7,729
Income tax expense 476 493 501 684 2,154
Net income $1,253 $1,303 $1,387 $1,632 $ 5,575
Net income per share
Basic $ .17 $ .17 $ .18 $ .21 $ .73
Diluted $ .16 $ .17 $ .18 $ .21 $ .72
</TABLE>
<TABLE>
(Dollars in Thousands Except Per Share Amounts)
1997
---------------------------------------------------
<CAPTION>
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Interest revenue $7,531 $7,685 $7,747 $7,934 $30,897
Interest expense 3,150 3,278 3,414 3,591 13,433
Net interest revenue 4,381 4,407 4,333 4,343 17,464
Provision for loan losses 74 95 68 159 396
Non-interest revenue 807 823 936 1,109 3,675
Non-interest expense 3,192 3,245 3,287 3,518 13,242
Income before income taxes 1,922 1,890 1,914 1,775 7,501
Income tax expense 553 521 519 403 1,996
Net income $1,369 $1,369 $1,395 $1,372 $ 5,505
Net income per share
Basic $ .18 $ .18 $ .19 $ .18 $ .73
Diluted $ .18 $ .18 $ .19 $ .18 $ .73
</TABLE>
<TABLE>
SELECTED FINANCIAL DATA
(Dollars in Thousands Except Per Share Amounts)
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest revenue $ 33,826 $ 30,897 $ 24,734 $ 22,778 $ 19,605
Interest expense 15,577 13,433 10,561 9,702 7,112
Net interest revenue 18,249 17,464 14,173 13,076 12,493
Provision for loan losses 301 396 308 78 84
Non-interest revenue 4,113 3,675 3,034 2,693 2,664
Non-interest expense 14,332 13,242 11,040 10,279 10,130
Income before income taxes 7,729 7,501 5,859 5,412 4,943
Income taxes 2,154 1,996 1,733 1,646 1,439
Net income $ 5,575 $ 5,505 $ 4,126 $ 3,766 $ 3,504
Basic net income per share $ .73 $ .73 $ .69 $ .66 $ .62
Diluted net income per share $ .72 $ .73 $ .69 $ .66 $ .62
YEAR-END STATEMENT
OF CONDITION:
Total assets $503,847 $437,592 $413,863 $306,740 $275,579
Loans 278,182 244,889 232,153 182,850 169,808
Deposits 428,076 371,991 349,660 264,748 234,983
Shareholders' equity 58,946 52,664 53,586 34,921 31,190
AVERAGE BALANCES:
Total assets $464,728 $412,087 $323,673 $288,320 $274,459
Average earning assets 431,737 381,218 298,687 266,819 253,633
Loans 257,241 239,044 197,518 177,932 157,867
Deposits 393,427 349,810 276,702 246,868 235,846
Shareholders' equity 55,539 51,963 38,901 33,128 30,822
PERFORMANCE RATIOS:
Net income to:
Average total assets 1.20% 1.34% 1.27% 1.31% 1.28%
Average shareholders' equity 10.04% 10.59% 10.61% 11.37% 11.37%
Average shareholders' equity to
average total assets 11.95% 12.61% 12.02% 11.49% 11.23%
Dividend payout ratio 43.56% 132.60%(1) 35.80% 30.72% 27.49%
</TABLE>
Market Prices And Cash Dividends Per Share
South Alabama Bancorporation's common stock trades on The NASDAQ Stock Market
under the symbol SABC.
Trades have generally occurred in small lots, and the prices quoted are not
necessarily indicative of the market value of a substantial block.
At December 31, 1998, the Company had approximately 1,770 shareholders, of
record or through registered clearing agents.
Per Share amounts have been restated to reflect a three for two stock split
in 1998.
<TABLE>
<CAPTION>
Regular Cash Special Cash
Market Prices Dividends Declared Dividends Declared
Per Share Per Share Per Share
High Low
<S> <C> <C> <C> <C>
1998
1st Quarter $18.83 $14.00 $.062
2nd Quarter 20.67 15.33 .088
3rd Quarter 24.75 15.00 .083
4th Quarter 16.25 13.50 .085
1997
1st Quarter $10.50 $ 8.33 $.056 $.702
2nd Quarter 12.00 8.67 .070
3rd Quarter 14.33 10.83 .062
4th Quarter 16.37 13.17 .078
1996
1st Quarter $ 9.67 $ 8.67 $.053
2nd Quarter 9.67 8.83 .069
3rd Quarter 9.50 8.67 .053
4th Quarter 9.50 8.17 .072
</TABLE>
<TABLE>
GRAPH
EPS and Dividend
<CAPTION>
Divided Basic Special
Declared EPS Dividends
<S> <C> <C>
1994 0.169 0.62
1995 0.200 0.66
1996 0.247 0.69
1997 0.266 0.73 0.702
1998 0.318 0.73
</TABLE>
Management's Report on Financial Statements
The Management of South Alabama Bancorporation, Inc. is responsible for the
preparation, content, integrity, objectivity and reliability of the financial
statements and all other financial information included in this annual report.
These statements have been prepared in accordance with generally accepted
accounting principles appropriate within the banking industry to reflect, in
all material respects, the substance of events and transactions that should
be included. In preparing the consolidated financial statements, Management
made judgments and estimates based upon currently available facts, events
and transactions.
Management depends upon the Company's accounting system and the internal
control structure to meet its responsibility for the reliability of these
statements. These systems and controls are designed to provide reasonable
assurance that the assets are safeguarded from material loss and that the
transactions executed are in accordance with Management's authorizations and
are properly recorded in the financial records. The concept of reasonable
assurance recognizes that the cost of internal accounting controls should not
exceed the benefits derived and that there are inherent limitations of any
system of internal accounting controls.
The independent public accounting firm of Arthur Andersen LLP has been
engaged to audit the Company's financial statements and to express an opinion
as to whether the Company's statements present fairly, in all material
respects, the financial position, cash flows and the results of operations in
accordance with generally accepted accounting principles. Their audit is
conducted in conformity with generally accepted auditing standards and
includes procedures believed by them to be sufficient to provide reasonable
assurance that the financial statements are free of material misstatement.
The Audit Committee of the Board of Directors, composed of directors who are
not employees of the Company, oversees Management's responsibility in the
preparation of these statements. This committee has the responsibility to
periodically review the scope, findings and the opinions of the audits of the
independent and internal auditors. The independent auditors and the internal
auditors have free access to the Audit Committee and also to the Board of
Directors to meet independent of Management to discuss the internal control
structure, accounting, auditing and other financial reporting concerns.
We believe these policies and procedures provide reasonable assurance that
our operations are conducted pursuant to a high standard of business conduct
and that the financial statements reflect fairly the financial position,
results of operations and the cash flows of the Company.
/s/J. Steve Nelson /s/W. Bibb Lamar /s/F. Michael Johnson
Chairman President and CEO Chief Financial Officer
Independent Auditors' Report
To South Alabama Bancorporation, Inc. and Subsidiaries:
We have audited the accompanying consolidated statements of condition of
South Alabama Bancorporation, Inc. (an Alabama Corporation) and Subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the years
in the three year period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the 1997 and 1996 financial statements of The Commercial National
Bank of Demopolis, a bank acquired during 1998 in a transaction accounted for
as a pooling-of-interests, as discussed in Note 2, which statements reflect
total assets and net income of 16 percent and 14 percent in 1997 and net
income of 19 percent in 1996, respectively, of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts
included for that entity, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors,the
financial statements referred to above present fairly, in all material
respects, the financial position of South Alabama Bancorporation, Inc. and
Subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three year
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/Arthur Andersen LLP
Birmingham, Alabama
January 29, 1999
<TABLE>
Consolidated Statements of Condition
As of December 31, 1998 and 1997
South Alabama Bancorporation, Inc. and Subsidiaries
(Dollars and Shares in Thousands except per share)
<CAPTION>
December 31,
-----------------------
1998 1997
<S> <C> <C>
ASSETS:
Cash and due from banks $ 20,370 $ 18,450
Federal funds sold 40,254 26,293
Total cash and cash equivalents 60,624 44,743
Interest-bearing bankbalances 410 100
Investment securities available for sale 144,234 125,311
Investment securities held to maturity 3,635 8,345
Loans 278,182 244,889
Less: Unearned income (171) (261)
Allowance for loan losses (3,248) (3,167)
Loans, net 274,763 241,461
Premises and equipment, net 9,831 8,541
Accrued income receivable 4,369 4,161
Intangible assets 4,576 3,993
Other assets 1,405 937
Total $503,847 $437,592
LIABILITIES:
Deposits
Interest bearing $354,575 $306,890
Non-interest bearing 73,501 65,101
Total deposits 428,076 371,991
Short-term borrowings 7,457 6,779
Long-term debt 6,000 2,500
Other liabilities 3,368 3,658
Total liabilities 444,901 384,928
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock - no par value
Shares authorized - 500
Shares outstanding - none
Common stock - $.01 par value
Shares authorized - 10,000
Shares outstanding - 7,714 in 1998 and
7,558 in 1997 77 76
Capital surplus 37,059 34,512
Accumulated other comprehensive income,
net of taxes of $837 in 1998 and
$486 in 1997 1,417 806
Retained earnings 20,393 17,270
Total shareholders' equity 58,946 52,664
Total $503,847 $437,592
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
Consolidated Statements of Income
For the Years Ended December 31, 1998, 1997 and 1996
South Alabama Bancorporation, Inc. and Subsidiaries
(In Thousands Except Earnings Per Share)
<CAPTION>
Year Ended December 31,
-------------------------------
1998 1997 1996
<S> <C> <C> <C>
INTEREST REVENUE:
Loans $23,684 $22,296 $18,475
Investment securities - taxable 6,618 5,910 4,419
Investment securities - non-taxable 2,037 1,970 1,328
Federal funds sold 1,466 712 487
Interest-bearing bank balances 21 9 25
Total interest revenue 33,826 30,897 24,734
INTEREST EXPENSE:
Deposits 14,969 13,067 10,336
Short-term borrowings 340 308 225
Federal Home Loan Bank borrowings 268 58
Total interest expense 15,577 13,433 10,561
Net interest revenue 18,249 17,464 14,173
Provision for loan losses 301 396 308
Net interest revenue after provision
for loan losses 17,948 17,068 13,865
NON-INTEREST REVENUE:
Trust revenue 1,384 1,289 1,177
Service charges on deposit accounts 1,799 1,721 1,301
Securities gains, net 384 69 126
Other income,charges and fees 546 596 430
Total non-interest revenue 4,113 3,675 3,034
NON-INTEREST EXPENSE:
Salaries 6,420 5,695 4,755
Pensions and other employee benefits 1,510 1,391 1,244
Furniture and equipment expense 1,228 1,081 919
Net occupancy expense 999 947 825
Intangible amortization 186 168 28
Other expense 3,989 3,960 3,269
Total non-interest expense 14,332 13,242 11,040
Income before income taxes 7,729 7,501 5,859
Income tax expense 2,154 1,996 1,733
NET INCOME $ 5,575 $ 5,505 $ 4,126
Basic earnings per share $ .73 $ .73 $ .69
Diluted earnings per share $ .72 $ .73 $ .69
See notes to consolidated financial statements.
</TABLE>
<TABLE>
Consolidated Statements of Changes in Shareholders Equity
For the Years Ended December 31, 1998, 1997 and 1996
South Alabama Bancorporation, Inc. and Subsidiaries
(Dollars and Shares in Thousands except per share)
<CAPTION>
Common Stock Accumulated
Other
Shares Capital Comprehensive Retained
Issued Amount Surplus Income Earnings Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 5,692 $57 $17,812 $ 585 $16,467 $34,921
Comprehensive income:
Net income 4,126 4,126
Net change in unrealized gain (loss)
on securities available for sale,
net of taxes (495) (495)
Total comprehensive income 3,631
Dividends paid ($.247 per share) (1,533) (1,533)
Common stock issued in business
combination 1,838 19 16,548 16,567
Balance, December 31, 1996 7,530 76 34,360 90 19,060 53,586
Comprehensive income:
Net income 5,505 5,505
Net change in unrealized gain (loss)
on securities available for sale,
net of taxes 716 716
Total comprehensive income 6,221
Dividends paid ($.968 per share) (7,295) (7,295)
Common stock options exercised 28 152 152
Balance, December 31, 1997 7,558 76 34,512 806 17,270 52,664
Comprehensive income:
Net income 5,575 5,575
Net change in unrealized gain (loss)
on securities available for sale,
net of taxes 611 611
Total comprehensive income 6,186
Dividends paid ($.318 per share) (2,452) (2,452)
Common stock options exercised 5 40 40
Common stock issued in business
combination 151 1 2,507 2,508
Balance, December 31, 1998 7,714 $ 77 $37,059 $1,417 $20,393 $58,946
</TABLE>
<TABLE>
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
South Alabama Bancorporation, Inc. and Subsidiaries
(Dollars and Shares in Thousands)
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,575 $ 5,505 $ 4,126
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 1,475 1,385 1,045
Provisions for losses on loans 301 396 308
Securities (gains) and losses, net (384) (69) (108)
Deferred income tax provision (benefit) 32 (101) 11
(Increase) decrease in:
Accrued income receivable 21 (79) (95)
Other assets (202) 256 (468)
(Decrease) increase in other liabilities (616) 13 (267)
Net cash provided by operating activities 6,202 7,306 4,552
INVESTING ACTIVITIES:
Net decrease in interest-bearing bank balances (310) 552
Net increase in loans (27,718) (12,907) (27,731)
(Purchase) sale of premises and equipment, net (2,184) (669) (1,564)
Proceeds from sale of other real estate owned 15 311
Proceeds from maturities of securities held to maturity 5,058 8,461 5,461
Proceeds from maturities of securities available for sale 47,081 26,293 15,448
Proceeds from sales of securities available for sale 19,625 4,801 9,713
Purchases of securities held to maturity (350) (10) (995)
Purchases of securities available for sale (81,649) (38,468) (27,609)
Net cash acquired from business combination 8,132 9,001
Net cash used in investing activities (32,315) (12,484) (17,413)
FINANCING ACTIVITIES:
Net increase in deposits 40,228 22,331 6,389
Net increase (decrease) in short-term borrowings 678 (358) 2,784
Net increase in long-term debt 3,500 2,500
Dividends paid (2,452) (7,295) (1,533)
Proceeds from issuance of stock 40 152
Net cash provided by financing activities 41,994 17,330 7,640
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 15,881 12,152 (5,221)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 44,743 32,591 37,812
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 60,624 $ 44,743 $ 32,591
See notes to consolidated financial statements.
</TABLE>
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1998, 1997 and 1996
South Alabama Bancorporation, Inc. and Subsidiaries
(Dollars and Shares in Thousands except per share)
Note 1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of South Alabama Bancorporation, Inc. (the
"Company" or "South Alabama") and its wholly-owned subsidiaries, South
Alabama Bank, (the "Mobile Bank"), First National Bank, Brewton (the "Brewton
Bank"), The Monroe County Bank (the "Monroeville Bank") and The Commercial
Bank of Demopolis (the "Demopolis Bank"), (collectively the "Banks"), and
South Alabama Trust Company, Inc. (the "Trust Company"). All significant
intercompany accounts and transactions are eliminated. The Banks are engaged
in the business of obtaining funds, primarily in the form of deposits, and
investing such funds in commercial and real estate loans and investment
securities in Mobile, Brewton, Monroeville, Demopolis and the surrounding
areas. The Banks also offer a range of other commercial bank services
including investment products. The Trust Company offers trust services.
BASIS OF FINANCIAL STATEMENT PRESENTATION - The financial statements have been
prepared in conformity with generally accepted accounting principles and with
general practices within the banking industry. In preparing the financial
statements, Management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the
allowance for loan losses and real estate owned, Management obtains
independent appraisals for significant properties.
A substantial portion of the Company's loans are secured by real estate in
Mobile, Baldwin, Monroe, Marengo and Escambia Counties of Alabama. In
addition, the real estate owned by the Company is located in this same area.
Accordingly, the ultimate collectibility of a substantial portion of the
Company's loan portfolio and the recovery of real estate owned are susceptible
to changes in market conditions in this area.
Management believes that the allowances for losses on loans and real estate
owned are adequate. While Management uses available information to recognize
losses on loans and real estate owned, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for losses on loans and real
estate owned. Such agencies may require the Company to recognize additions to
the allowances based on their judgment about information available to them at
the time of their examination.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal
funds sold. Federal funds are generally purchased and sold for one day
periods.
Supplemental disclosures of cash flow information and non-cash transactions
related to cash flows for the years ended December 31, 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash Paid For:
Interest $ 15,387 $13,395 $ 10,610
Income taxes 1,735 2,190 2,065
Non-cash transactions
Details of acquisition:
Fair value of tangible assets
acquired 18,428 96,593
Liabilities assumed (15,890) (80,027)
Stock issued (2,538) (16,566)
Cash paid 0 0
Less cash acquired (8,132) (9,001)
Net cash acquired $ (8,132) $ (9,001)
</TABLE>
INVESTMENT SECURITIES - Investment securities available for sale are carried
at fair value. Unrealized gains and losses are excluded from earnings and
reported, net of tax, as a separate component of shareholders' equity until
realized. Securities within the available for sale portfolio may be used as
part of the Company's asset/liability strategy and may be sold in response to
changes in interest rate risk, prepayment risk or other similar economic
factors. The specific identification method is used to compute gains or
losses on the sale of these assets.
Investment securities not classified as available for sale or trading are
carried at cost, adjusted for the amortization of premiums and the accretion
of discounts. Premiums and discounts are amortized and accreted to operations
using the level yield method, adjusted for prepayments as applicable.
Management has the intent and the Company has the ability to hold these
assets as long-term investments until their maturities. Under certain
circumstances (including the significant deterioration of the issuer's credit
worthiness or a significant change in tax-exempt status or statutory or
regulatory requirements), securities classified as held to maturity may be
sold or transferred to another portfolio.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is maintained at a
level considered by Management to be sufficient to absorb losses inherent in
the loan portfolio. Management's determination of the adequacy of the
allowance and the amount of the provision charged to expense is based on
periodic reviews of the portfolio, past loan loss experience, current and
expected economic conditions and such other factors which, in Management's
judgment, deserve current recognition in estimating loan losses. This
determination also considers the balance of impaired loans (which are
generally considered to be nonperforming loans, excluding residential
mortgages and other homogeneous loans). Specific allowances for impaired
loans are based on comparisons of the recorded carrying values of the loans
to the present value of these loans' estimated cash flows at each loan's
effective interest rate, the fair value of the collateral, or the loans'
observable market price. Recovery of the carrying value of loans is
dependent to a great extent on economic, operating and other conditions that
may be beyond the Company's control.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. The provision for depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the assets or terms of the leases as applicable.
OTHER REAL ESTATE OWNED - Other real estate owned is carried at the lower of
the recorded investment in the loan or fair value, less costs to dispose. Any
excess of the recorded investment over fair value, less costs to dispose, is
charged to the allowance for loan losses at the time of foreclosure. A
provision is charged to earnings and a related valuation account for
subsequent losses on other real estate owned is established when, in the
opinion of Management, such losses have occurred. The ability of the Company
to recover the carrying value of real estate is based upon future sales of
the real estate. The ability to effect such sales is subject to market
conditions and other factors, all of which are beyond the Company's control.
The recognition of sales and sales gains is dependent upon whether the nature
and term of the sales, and including possible future involvement of the
Company, if any, meet certain defined requirements. If not met, sale and gain
recognition would be deferred.
INTEREST INCOME - Interest on loans is recorded generally over the term of
the loan based on the unpaid principal balance. Accrual of interest is
discontinued when, in Management's opinion, collectibility of
interest and principal becomes doubtful. Upon such discontinuance, all
unpaid accrued interest is reversed.
INCOME TAXES - The Company files a consolidated federal income tax return.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
INTANGIBLE ASSETS - Intangible assets, primarily goodwill, are amortized on
the straight-line basis over 25 years. The Company continually evaluates
whether events and circumstances have occurred that indicate that such assets
have been impaired. Measurement of any impairment of such assets is based on
those assets' fair value, with the resulting charge recorded as a loss. There
were no significant impairment losses recorded in 1998, 1997 or 1996.
TRUST DEPARTMENT ASSETS AND INCOME - Assets held by the Trust Company in a
fiduciary capacity for customers are not included in the consolidated
financial statements. Fiduciary fees on trust accounts are generally
recognized on the cash basis. The income recognized on the cash basis is not
materially different from that which would be reported on the accrual basis.
MARKET RISK MANAGEMENT - Market risk is a risk of loss arising from adverse
changes in market prices and rates. The Company's market risk is composed
primarily of interest rate risk created by its lending and deposit taking
activities. Management addresses this risk through an active Asset/Liability
Management process and through management of loan and investment portfolio
maturities and repricing.
PENDING ACCOUNTING PRONOUNCEMENTS - The AICPA has issued Statements of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This statement requires capitalization of external
direct costs of materials and services; payroll and payroll-related costs for
employees directly associated; and interests costs during development of
computer software for internal use (planning and preliminary costs should be
expensed). Also, capitalized costs of computer software developed or obtained
for internal use should be amortized on a straight-line basis unless another
systematic and rational basis is more representative of the software's use.
This statement is effective for financial statements for fiscal years
beginning after December 15, 1998 (prospectively) and is not expected to have
a material effect on the consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Initial application of this Statement should be as of the beginning of
an entity's fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of this Statement.
Earlier application of all of the provisions of this Statement is encouraged,
but it is permitted only as of the beginning of any fiscal quarter that
begins after issuance of this Statement. This Statement should not be applied
retroactively to financial statements of prior periods.
Management believes there will be no material effect on the consolidated
financial statements from the adoption of this pronouncement.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained After The Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise. This statement, an amendment to SFAS No. 65,
requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interests based on its ability to sell or
hold those investments. This Statement is effective the first fiscal quarter
beginning after December 15, 1998. The Company adopted the provisions of this
Statement on January 1, 1999. Based on the Company's current operating
activities, Management does not believe that adoption of this Statement will
have material effect on the consolidated financial statements.
Certain reclassifications of 1997 and 1996 balances have been made to conform
with classifications used in 1998.
Note 2. Mergers
On December 15, 1998, the Company acquired the Demopolis Bank in a business
combination accounted for as a pooling of interests. Accordingly, the Company's
financial statements have been restated to include the results of the
Demopolis Bank for all periods presented. This agreement resulted in the
exchange of approximately 1,189 shares of the Company's common stock for 100
percent of the Demopolis Bank's common stock. Merger costs of approximately
$150 have been expensed in the accompanying 1998 consolidated statement of
income.
Combined and separate results of the Company and the Demopolis Bank during
the periods preceding the merger were as follows:
<TABLE>
<CAPTION>
South Alabama Demopolis Bank Combined
<S> <C> <C> <C>
Nine months ended
September 30, 1998 (unaudited)
Net interest revenue $11,492 $1,978 $13,470
Net income 3,388 514 3,902
Year ended December 31, 1997
Net interest revenue $14,895 $2,569 $17,464
Net income 4,728 777 5,505
Year ended December 31, 1996
Net interest revenue $11,705 $2,468 $14,173
Net income 3,354 772 4,126
</TABLE>
On May 15, 1998, the Company acquired Peterman State Bank ("PSB"). PSB was
merged into the Monroe County Bank. This transaction was accounted for under
the purchase method of accounting and, accordingly, the 1998 consolidated
statement of income includes PSB's results of operations subsequent to that
date.
The Company issued approximately 151 shares of its common stock for all the
outstanding common shares of PSB. The purchase price of the outstanding
common shares of PSB totaled approximately $2,500, which exceeded the fair
value of the net tangible assets acquired by approximately $768.
Assuming the acquisition of PSB had been consummated at January 1, 1996, the
consolidated results of operations on a pro forma basis for the years ended
December 31, 1998, 1997 and 1996, would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net Interest Revenue $18,259 $18,107 $14,856
Net Income 5,404 5,343 4,203
Earnings Per Share:
Basic $ .70 $ .69 $ .68
Diluted .69 .69 .68
</TABLE>
On October 31, 1996, the Company acquired First Monco Bancshares, Inc. ("FMB")
and its wholly-owned subsidiary, the Monroeville Bank. This transaction was
accounted for under the purchase method of accounting and, accordingly, the
1996 consolidated statement of income includes the Monroeville Bank's results
of operations subsequent to that date.
The Company issued approximately 1,200 shares of its common stock for
all the outstanding common shares of FMB. The purchase price of the
outstanding common shares of FMB totaled approximately $16,600, which
exceeded the fair value of the net tangible assets acquired by approximately
$4,200.
Assuming the acquisition of FMB had been consummated at January 1, 1996, the
consolidated results of operations on a pro forma basis for the year ended
December 31, 1996, would have been as follows:
<TABLE>
<CAPTION>
1996
<S> <C>
Net Interest Income $16,995
Net Income 5,068
Earnings Per Share:
Basic $ 0.68
Diluted 0.67
</TABLE>
Note 3. Restrictions on Cash and Due From Bank Accounts
The Banks are required to maintain average reserve balances with the Federal
Reserve Bank. The average of those reserve balances for the years ended
December 31, 1998 and 1997 was approximately $1,978 and $2,088, respectively.
Note 4. Investment Securities
The following summary sets forth the amortized cost amounts and the
corresponding market values of investment securities available for sale at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1998:
U.S. Treasury securities $ 7,410 $ 189 $ 7,599
Obligations of U.S. Government
agencies 65,452 485 $271 65,666
Obligations of states
and political subdivisions 57,438 1,822 70 59,190
Other investments 11,680 100 1 11,779
Total $141,980 $2,596 $342 $144,234
1997:
U.S. Treasury securities $ 7,546 $ 135 $ 7,681
Obligations of U.S. Government
agencies 49,087 105 $466 48,726
Obligations of states
and political subdivisions 44,581 1,455 25 46,011
Other investments 22,805 96 8 22,893
Total $124,019 $1,791 $499 $125,311
</TABLE>
The following summary sets forth the amortized cost amounts and the
corresponding market values of investment securities held to maturity at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C>
1998:
U.S. Treasury securities $ 989 $ 21 $ 1,010
Obligations of U.S. Government
agencies 268 4 $ 1 271
Obligations of states
and political subdivisions 2,129 77 2,206
Other investments 249 249
Total $ 3,635 $ 102 $ 1 $ 3,736
1997:
U.S. Treasury securities $ 3,992 $ 44 $ 4,036
Obligations of U.S. Government
agencies 1,514 6 $ 6 1,514
Obligations of states
and political subdivisions 2,591 94 2,685
Other investments 248 248
Total $ 8,345 $ 144 $ 6 $ 8,483
</TABLE>
Securities with a carrying value of approximately $78,434 and $65,619 at
December 31, 1998 and 1997, respectively, were pledged to secure deposits of
public funds and trust deposits. Additionally, investment securities with a
carrying value of approximately $7,270 and $5,685 at December 31, 1998 and
1997, respectively, were pledged to secure repurchase agreements.
Proceeds from the sales of securities available for sale were $19,625 in 1998
and $4,801 in 1997. Gross realized gains on the sale of these securities were
$451 in 1998 and $123 in 1997, and gross realized losses were $67 in 1998 and
$54 in 1997.
Maturities of investment securities as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Market Amortized Market
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in 1 year or less $ 16,889 $ 16,969 $1,050 $1,071
Due in 1 to 5 years 43,189 44,045 731 744
Due from 5 to 10 years 37,369 38,032 1,334 1,386
Due in over 10 years 44,533 45,188 520 535
Total $141,980 $144,234 $3,635 $3,736
</TABLE>
Note 5. Loans
A summary of loans follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
<S> <C> <C>
Commercial, financial and agricultural $ 87,789 $ 77,675
Real estate - construction 10,771 8,203
Real estate - mortgage 133,756 118,380
Consumer, installment and single pay 45,866 40,631
Total $278,182 $244,889
</TABLE>
In the normal course of business, the Banks make loans to directors, executive
officers, significant shareholders and their affiliates (related parties).
Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other customers, and in Management's opinion, do not
involve more than the normal risk of collectibility. The aggregate dollar
amount of these loans was $13,339 at December 31, 1998, and $11,009 at
December 31, 1997. During 1998, $20,856 of new loans and advances were made,
and principal repayments totaled $18,526. Outstanding commitments to extend
credit to related parties totaled $12,647 at December 31, 1998.
At December 31, 1998 and 1997, non-accrual loans totaled $419 and $686,
respectively. The amount of interest income that would have been recorded
during 1998 and 1997, if these non-accrual loans had been current in
accordance with their original terms, was $93 and $68, respectively. The
amount of interest income actually recognized on these loans during 1998 and
1997 was $32 and $19, respectively.
At December 31, 1998 and 1997, the recorded investments in loans that were
considered to be impaired under SFAS 114 were $419 and $668, respectively
(all of which were carried on a non-accrual basis). Included in this amount
is $277 in 1998 and $615 in 1997 of impaired loans for which the related
allowance for loan losses is $135 in 1998 and $269 in 1997. The amounts of
impaired loans that did not have allowances for loan losses were $142 in 1998
and $50 in 1997. The average recorded investment amounts in impaired loans
during the years ended December 31, 1998 and 1997, were approximately $541
and $561, respectively. For the years ended December 31, 1998 and 1997, the
amount of interest income recognized on impaired loans was immaterial.
Note 6. Allowance for Loan Losses
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
<S> <C> <C> <C>
Balance at the beginning of year $3,167 $3,073 $2,747
Balance acquired in purchase business
combination 287 500
Provision charged to operating expense 301 396 308
Losses charged off (923) (482) (695)
Recoveries 416 180 213
Balance at the end of the year $3,248 $3,167 $3,073
</TABLE>
Activity in the allowance for losses on other real estate owned was not
significant in 1998, 1997 and 1996.
Note 7. Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
Estimated --------------------
Useful Lives 1998 1997
<S> <C> <C> <C>
Land and land improvements $ 2,438 $ 1,953
Bank buildings and improvements 40 years 5,770 5,115
Furniture, fixtures and equipment 3-10 years 7,980 7,115
Leasehold improvements 5-15 years 2,258 2,163
Total 18,446 16,346
Less accumulated depreciation
and amortization 8,615 7,805
Premises and equipment - net $ 9,831 $ 8,541
</TABLE>
The provision for depreciation and amortization charged to operating expense
in 1998, 1997 and 1996 amounted to $1,088, $912 and $806, respectively.
Note 8. Deposits
The following summary presents the detail of interest bearing deposits:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
<S> <C> <C>
Interest bearing checking accounts $ 68,104 $ 63,867
Savings accounts 29,831 25,814
Money market savings accounts 69,222 58,619
Time deposits ($100 thousand or more) 76,050 57,789
Other time deposits 111,368 100,801
Total $354,575 $306,890
</TABLE>
The following summary details interest expense on deposits:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
<S> <C> <C> <C>
Interest bearing checking accounts $ 1,933 $ 1,689 $ 1,098
Savings accounts 927 881 656
Money market savings accounts 2,584 2,239 1,907
Time deposits ($100 thousand or more) 3,303 2,701 2,075
Other time deposits 6,222 5,557 4,600
Total $14,969 $13,067 $10,336
</TABLE>
The following table reflects maturities of time deposits of $100 or more at
December 31, 1998:
<TABLE>
<CAPTION>
Less than 1 year 1 to 5 years 5 to 10 years Total
<C> <C> <C> <C>
$36,939 $24,793 $14,318 $76,050
</TABLE>
Note 9. Short-Term Borrowings
Following is a summary of short-term borrowings:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
<S> <C> <C>
Securities sold under agreement to repurchase $7,270 $5,685
Other short-term borrowings 187 1,094
Total $7,457 $6,779
Weighted average interest rate at year-end 4.20% 4.85%
Weighted average interest rate on
amounts outstanding during the year
(based on average of daily balances) 5.43% 5.04%
</TABLE>
Information concerning securities sold under agreement to repurchase
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Average balance during the year $5,747 $4,733
Average interest rate during the year 5.43% 4.86%
Maximum month-end balances during the year $7,797 $6,021
</TABLE>
Federal funds purchased and securities sold under agreements to repurchase
generally represented overnight borrowing transactions. Other short-term
borrowings consist of demand notes owed to the U.S. Treasury.
At December 31, 1998 and 1997, securities sold under agreements to repurchase
had average interest rates of 4.20% and 4.80%, respectively. Included in the
balances of securities sold under agreements to repurchase at December 31,
1998 and 1997, were repurchase agreements to related parties of $3,164 and
$3,710, respectively.
Note 10. Accounting for Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997 1996
<S> <C> <C> <C>
Current income tax expense:
Federal $1,839 $1,812 $1,481
State 283 285 241
Total current income tax expense 2,122 2,097 1,722
Deferred income tax expense (benefit):
Federal 28 (90) 10
State 4 (11) 1
Total deferred income tax expense 32 (101) 11
Total income tax expense $2,154 $1,996 $1,733
</TABLE>
Total income tax expense differed from the amount computed using the
applicable statutory Federal income tax rate of 34 percent applied to pretax
earnings for the following reasons:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997 1996
<S> <C> <C> <C>
Income tax expense at statutory rate $2,628 $2,550 $1,992
Increase (decrease) resulting from:
Tax exempt interest (877) (701) (579)
Reduced interest deduction on debt
used to carry tax-exempt securities 105 72 67
State income tax, net of federal benefit 189 181 160
Other, net 109 (106) 93
Total $2,154 $1,996 $1,733
Effective tax rate 27.9% 26.6% 29.6%
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses and other
real estate not currently deductible $ 861 $ 865
Accrued pension cost not currently deductible 67 65
Accrued expenses 59 61
Other 154 32
Total deferred tax assets 1,141 1,023
Deferred tax liabilities:
Unrealized gain on securities available for sale (837) (486)
Differences between book and tax basis of property (538) (543)
Other (238) (84)
Total deferred tax liabilities (1,613) (1,113)
Net deferred tax asset (liability) $ (472) $ (90)
</TABLE>
There was no valuation allowance during either 1998 or 1997.
Note 11. Retirement Plans
In 1998, the Company adopted FASB Statement No. 132, "Employers Disclosure
About Pensions and Other Postretirement Benefits." The measurement date is
December 31 for each year.
Pension Plans
Changes during the year in the projected benefit obligations and in the fair
value of plan assets were a follows:
<TABLE>
Projected Benefit Obligations
<CAPTION>
1998 1997
<S> <C> <C>
Balance at beginning of year $5,230 $4,632
Service cost 339 306
Interest cost 350 340
Benefits paid (394) (505)
Actuarial (gain) loss 233 457
Balance, end of year $5,758 $5,230
</TABLE>
<TABLE>
Plan Assets
<CAPTION>
1998 1997
<S> <C> <C>
Balance at beginning of year $6,221 $5,697
Return on plan assets 1,182 750
Employer contributions 279
Benefits paid (394) (505)
Balance, end of year $7,009 $6,221
</TABLE>
The prepaid pension costs recognized in the consolidated balance sheets were
as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance at begining of the year $1,250 $991
Unrecognized transition obligation 29 (30)
Unrecognized prior service cost 85 (92)
Unrecognized net gain (706) (19)
Prepaid asset recognized in the
consolidated balance sheets 658 850
</TABLE>
Components of the plans' net cost were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost $339 $306 $248
Interest cost 350 340 196
Expected return on plan assets (505) (448) (204)
Net amortization 8 (11) 4
Net pension cost $192 $187 $244
</TABLE>
The weighted average rates assumed in the actuarial calculations for the
pension plan were:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Discount 6.5% 7.0%
Annual salary increase 5.0 5.0
Long-term return on plan asset 8.5 8.0
</TABLE>
Note 12. Earnings Per Share
Basic earnings per share were computed by dividing net income by the weighted
average number of shares of common stock outstanding during the years ended
December 31, 1998, 1997 and 1996. Diluted earnings per share for the years
ended December 31, 1998, 1997 and 1996, were computed by dividing net income
by the weighted average number of shares of common stock outstanding 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 table represents the earnings
per share calculations for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Per Share
December 31, 1998 Income Shares Amount
<S> <C> <C> <C>
Net Income: $5,575
Basic earnings per share:
Income available to common shareholders 5,575 7,657 $.73
Dilutive securities:
Stock option plan shares 121
Dilutive earnings per share:
Income available to common shareholders
plus assumed conversions $5,575 7,778 $.72
Per Share
December 31, 1997 Income Shares Amount
Net Income: $5,505
Basic earnings per share:
Income available to common shareholders 5,505 7,540 $.73
Dilutive securities:
Stock option plan shares 53
Dilutive earnings per share:
Income available to common shareholders
plus assumed conversions $5,505 7,593 $.73
Per Share
December 31, 1996 Income Shares Amount
Net Income: $4,126
Basic earnings per share:
Income available to common shareholders 4,126 5,994 $.69
Dilutive securities:
Stock option plan shares 29
Dilutive earnings per share:
Income available to common shareholders
plus assumed conversions $4,126 6,023 $.69
</TABLE>
Note 13. Stock Options
The Company utilizes the intrinsic value method of accounting for stock
option grants. As the option exercise price is considered to be equal to the
fair value of the stock at the date of grant, no compensation cost is
recognized.
The Company has two incentive stock option plans, the South Alabama Incentive
Compensation Plan (the "SAB Plan") and the Mobile National Stock Option Plan
(the "MBNC Plan").
The MBNC Plan was terminated in 1993 upon the creation of South Alabama
Bancorporation. The remaining granted and outstanding options are convertible
into common shares of the Company. At December 31, 1998, options for 34
shares were granted and outstanding under the MBNC Plan.
The Company may grant options for up to 300 shares under the SAB Plan and has
granted options outstanding of 252 shares through December 31, 1998. Under
both the SAB and MBNC Plans, the option exercise price equals the stock's
market price at the date of grant. The options vest upon issuance and expire
after ten years.
Had compensation costs for these plans been determined consistent with SAFA
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <S> <C> <C> <C>
Net Income: As reported $5,575 $5,505 $4,126
Pro forma 5,341 5,431 4,014
Earnings per share: As reported or restated
Basic $ .73 $ .73 $ .69
Diluted .72 .73 .69
Pro forma
Basic $ .70 $ .72 $ .67
Diluted .69 .72 .67
</TABLE>
Because the SAFA 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation costs
may not be representative of that to be expected in future years for future
grants of stock options.
A summary of the status of the Company's two stock option plans at December
31, 1998, 1997, and 1996 and the changes during the years then ended is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 237 $ 8.51 230 $8.01 191 $7.81
Granted 49 16.44 42 9.35 39 9.00
Exercised 5 8.26 29 5.51
Forfeited 6 8.79
Outstanding at end of year 281 $ 9.84 237 $8.51 230 $8.01
Exercisable at end of year 232 $ 8.43 197 $8.35 191 $7.81
Weighted average fair value of
the options granted $ 5.25 $2.16 $2.85
</TABLE>
At December 31, 1998, 232 of the 281 options outstanding have exercise prices
between $3 and $9 with a weighted average exercise price of $8.43 and an
average remaining contractual life of 5.7 years. All of these options are
exercisable. The remaining 49 options outstanding at December 31, 1998
consist of options granted during fiscal 1998 and have exercise prices
between $16 and $22, with a weighted average exercise price of $16 and an
average remaining contractual life of 9.1 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively; risk-free
interest rates of 5.47%, 6.33% and 5.73%; expected dividend yields of 2.3%,
3.6% and 4.0%; expected lives of 10 years; and expected volatility of .34,
.25 and .22, respectively.
Note 14. Regulatory Matters
The Company's principal source of funds for dividend payments is dividends
from the Banks. Dividends payable by a bank in any year, without prior
approval of the appropriate regulatory body, are limited to the bank's net
profits (as defined) for that year combined with its net profits for the two
preceding years. The dividends, as of January 1, 1999, that the Banks could
declare, without the approval of regulators, amounted to $3,182.
The Banks are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Banks' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet
specific capital guidelines that involve quantitative measures of the Banks'
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Banks' capital amounts and
classifications are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the
tables below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1998 and
1997, that the Banks meet all capital adequacy requirements to which they are
subject.
As of December 31, 1998 and 1997, the most recent notification from the
regulatory authorities categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the tables below.
Actual capital amounts and ratios are presented in the table below for the
Banks and on a consolidated basis for the Company.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Total Capital (to Risk Weighted Assets)
Consolidated $56,201 17.2% $26,093 8.0%
Demopolis Bank 8,201 17.8 3,691 8.0 $ 4,613 10.0%
Brewton Bank 14,683 18.9 6,202 8.0 7,752 10.0
Monroeville Bank 13,135 19.5 5,393 8.0 6,741 10.0
Mobile Bank 17,980 12.7 11,333 8.0 14,167 10.0
Tier I Capital (to Risk Weighted Assets)
Consolidated $52,953 16.2% $13,047 4.0%
Demopolis Bank 7,704 17.8 1,845 4.0 $ 2,768 6.0%
Brewton Bank 13,908 17.9 3,101 4.0 4,651 6.0
Monroeville Bank 12,610 18.7 2,696 4.0 4,044 6.0
Mobile Bank 16,530 11.7 5,667 4.0 8,500 6.0
Tier I Capital (to Average Assets)
Consolidated $52,953 11.0% $19,262 4.0%
Demopolis Bank 7,704 16.7 2,978 4.0 $ 4,466 6.0%
Brewton Bank 13,908 17.9 4,652 4.0 6,978 6.0
Monroeville Bank 12,610 18.7 4,454 4.0 6,681 6.0
Mobile Bank 16,530 11.7 7,376 4.0 11,064 6.0
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Total Capital (to Risk Weighted Assets)
Consolidated $51,032 18.3% $22,278 8.0%
Demopolis Bank 7,778 18.2 3,413 8.0 $ 4,267 10.0%
Brewton Bank 14,595 20.5 5,702 8.0 7,127 10.0
Monroeville Bank 11,146 22.8 3,903 8.0 4,882 10.0
Mobile Bank 16,432 14.0 9,379 8.0 11,724 10.0
Tier I Capital (to Risk Weighted Assets)
Consolidated $47,865 17.2% $11,139 4.0%
Demopolis Bank 7,296 17.1 1,707 4.0 $ 2,560 6.0%
Brewton Bank 13,795 19.4 2,851 4.0 4,276 6.0
Monroeville Bank 10,683 21.9 1,953 4.0 2,929 6.0
Mobile Bank 15,011 12.8 4,690 4.0 7,035 6.0
Tier I Capital (to Average Assets)
Consolidated $47,865 11.3% $16,894 4.0%
Demopolis Bank 7,296 10.7 2,720 4.0 $ 3,399 5.0%
Brewton Bank 13,795 12.9 4,267 4.0 6,401 6.0
Monroeville Bank 10,683 11.9 3,593 4.0 5,390 6.0
Mobile Bank 15,011 9.6 6,274 4.0 9,410 6.0
</TABLE>
Note 15. Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or
not recognized in the statement of condition, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. Also, the fair value estimates presented herein
are based on pertinent information available to Management as of December 31,
1998. Such amounts have not been comprehensively revalued for purposes of
these financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
The following methods and assumptions were used by the Company in estimating
its fair values disclosures for financial instruments:
Investment Securities - Fair values for investment securities are primarily
based on quoted market prices. If a quoted market price is not available,
fair value is estimated using market prices for similar securities.
Loans - For equity lines and other loans with short-term or variable rate
characteristics, the carrying value reduced by an estimate for credit losses
inherent in the portfolio is a reasonable estimate of fair value. The fair
value of all other loans is estimated by discounting their future cash flows
using interest rates currently being offered for loans with similar terms,
reduced by an estimate of credit losses inherent in the portfolio. The
discount rates used are commensurate with the interest rate and prepayment
risks involved for the various types of loans.
Deposits - The fair value disclosed for demand deposits (i.e., interest and
non-interest bearing demand, savings and money market savings) is, as
required by SFAS No. 107, equal to the amounts payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for certificates
of deposits are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a schedule
of aggregated monthly maturities.
Commitments to extend credit and standby letters of credit - The value of
these unrecognized financial instruments is estimated based on the fee income
associated with the commitments which, in the absence of credit exposure, is
considered to approximate their settlement value. As no significant credit
exposure exists and because such fee income is not material to the Company's
financial statements at December 31, 1998, the fair value of these
commitments is not presented.
Many of the Company's assets and liabilities are short-term financial
instruments whose carrying amounts reported in the statement of condition
approximate fair value. These items include cash and due from banks, interest-
bearing bank balances, federal funds sold, other short-term borrowings and
accrued interest receivable and payable balances. The estimated fair values
of the Company's remaining on-balance sheet financial instruments as of
December 31, 1998 and 1997, are summarized below.
<TABLE>
<CAPTION>
1998 1997
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial assets:
Investment securities available for sale $144,234 $144,234 $125,311 $125,311
Investment securities held to maturity 3,635 3,736 8,345 8,483
Loans, net of allowance for loan losses 274,763 273,332 241,461 239,821
Financial liabilities:
Deposits $428,076 $428,639 $371,991 $371,827
</TABLE>
SFAS No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. The disclosures also do not
include certain intangible assets, such as customer relationships, deposit
base intangibles and goodwill. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
Note 16. Commitments and Contingencies
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, letters of
credit and others, which are not included in the consolidated financial
statements. The financial instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of amounts recognized in the
financial statements. A summary of these commitments and contingent
liabilities is presented below.
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Standby letters of credit $ 4,989 $ 5,537
Commitments to extend credit 65,914 61,383
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on Management's credit evaluation of the counter-party.
Collateral held varies but may include accounts receivable, inventory,
property, plant, and equipment, and income-producing commercial properties.
At December 31, 1998, the Company was under contract to lease certain bank
premises and equipment. The terms of these contracts vary and are subject to
certain changes at renewal. Future minimum rental payments required under
operating leases having initial or remaining noncancelable terms in excess of
one year as of December 31, 1998 were not significant.
Rental expense under all operating leases amounted to $189, $173, and $195 in
1998, 1997, and 1996, respectively.
The Company and its Banks are the subject of claims and disputes arising in
the normal course of business. Management, through consultation with their
legal counsel, is of the opinion that these matters will not have a material
impact on results of operations.
Note 17. Non-Interest Expense
Components of other non-interest expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Advertising $ 377 $ 241 $ 196
Professional services 834 404 406
Stationery and supplies 518 339 354
Other 2,260 2,976 2,313
Total $3,989 $3,960 $3,269
</TABLE>
Note 18. Segment Reporting
Under SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", certain information is disclosed for the four reportable
operating segments of the Company. The reportable segments are 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 as described in Note 1 - Summary of
Significant Accounting Policies. 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 four reportable
segments of the Company are included in the following table:
<TABLE>
1998
<CAPTION>
Mobile Brewton Monroeville Demopolis All
Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest revenue $ 13,226 $ 8,415 $ 6,644 $ 5,545 $ 14 $ (18) $ 33,826
Total interest expense 6,159 3,550 2,990 2,896 (18) 15,577
Net interest revenue 7,067 4,865 3,654 2,649 14 18,249
Provision for loan losses 142 76 83 301
Net interest income after
provision 6,925 4,789 3,654 2,566 14 17,948
Total noninterest revenue 814 920 573 422 1,391 (7) 4,113
Total noninterest expense 5,128 2,933 2,615 2,037 1,626 (7) 14,332
Income before taxes 2,611 2,776 1,612 951 (221) 7,729
Provision for income taxes 905 645 442 226 (64) 2,154
Net income $ 1,706 $ 2,131 $ 1,170 $ 725 $ (157) $ 5,575
Other significant items:
Total assets $ 193,665 $ 115,748 $ 117,357 $ 74,342 $ 60,075 $(57,340) $ 503,847
Total investment securities 38,288 36,056 57,202 16,323 147,869
Total loans 125,820 63,600 38,939 49,823 278,182
Investment in subsidiaries 2 46 57,606 (57,654)
Total interest revenue from
customers 13,208 8,415 6,644 5,545 14 33,826
Total interest revenue from
affiliates 18 (18)
</TABLE>
<TABLE>
1997
<CAPTION>
Mobile Brewton Monroeville Demopolis All
Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest revenue $ 11,726 $ 8,187 $ 5,900 $ 5,102 $ (18) $ 30,897
Total interest expense 5,160 3,227 2,531 2,533 (18) 13,433
Net interest revenue 6,566 4,960 3,369 2,569 17,464
Provision for loan losses 141 132 123 396
Net interest income after
provision 6,425 4,828 3,369 2,446 17,068
Total noninterest revenue 1,244 1,418 547 472 $ 1 (7) 3,675
Total noninterest expense 4,973 3,629 2,383 1,915 349 (7) 13,242
Income before taxes 2,696 2,617 1,533 1,003 (348) 7,501
Provision for income taxes 932 631 342 226 (135) 1,996
Net income $ 1,764 $ 1,986 $ 1,191 $ 777 $ (213) $ 5,505
Other significant items:
Total assets $ 165,800 $ 108,184 $ 94,826 $ 67,997 $ 52,750 $(51,965) $437,592
Total investment securities 29,946 39,383 49,271 15,056 133,656
Total loans 109,910 57,947 28,787 48,245 244,889
Investment in subsidiaries (1) 14 51,585 (51,598)
Total interest revenue from
customers 11,717 8,181 5,897 5,102 30,897
Total interest revenue from
affiliates 9 6 3 (18)
</TABLE>
<TABLE>
1996
<CAPTION>
Mobile Brewton Monroeville Demopolis All
Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest revenue $ 10,887 $ 8,003 $ 953 $ 4,897 $ (6) $ 24,734
Total interest expense 4,655 3,068 415 2,429 (6) 10,561
Net interest revenue 6,232 4,935 538 2,468 14,173
Provision for loan losses 233 65 10 308
Net interest income after
provision 5,999 4,870 538 2,458 13,865
Total noninterest revenue 1,324 1,195 77 445 (7) 3,034
Total noninterest expense 4,912 3,612 323 1,884 $ 316 (7) 11,040
Income before taxes 2,411 2,453 292 1,019 (316) 5,859
Provision for income taxes 850 654 90 247 (108) 1,733
Net income $ 1,561 $ 1,799 $ 202 $ 772 $ (208) $ 4,126
Other significant items:
Total assets $ 145,394 $ 107,359 $ 97,815 $ 63,786 $ 53,526 $(54,017) $413,863
Total investment securities 25,438 37,268 55,067 16,152 133,925
Total loans 107,101 58,031 24,028 42,993 232,153
Investment in subsidiaries 2 1 52,780 (52,783)
Total interest revenue from
customers 10,883 8,001 953 4,897 24,734
Total interest revenue from
affiliates 4 2 (6)
</TABLE>
Note 19. Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income is the change in equity during a period from transactions
and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from nonowner sources.
It includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners.
In addition to net income, the Company has identified changes related to
other nonowner transactions in the consolidated statement of changes in
stockholders' equity and comprehensive income. For the Company, changes in
other nonowner transactions consist entirely of changes in unrealized gains
and losses on securities available for sale.
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting items that are displayed as
part of net income and other comprehensive income in that period or earlier
periods. The following table reflects the reclassification amounts and the
related tax effect for the three years ended December 31:
<TABLE>
<CAPTION>
1998
Before After
Tax Tax Tax
Amount Effect Amount
<S> <C> <C> <C>
Unrealized gains (losses) arising
during the period $ 1,346 $ 493 $ 853
Less reclassification adjustments for
(gains) losses included in net income (384) (142) (242)
Net unrealized gain (loss) on securities $ 962 $ 351 $ 611
1997
Before After
Tax Tax Tax
Amount Effect Amount
Unrealized gains (losses) arising
during the period $ 1,206 $ 447 $ 759
Less reclassification adjustments for
(gains) losses included in net income (69) (26) (43)
Net unrealized gain (loss) on securities $ 1,137 $ 421 $ 716
1996
Before After
Tax Tax Tax
Amount Effect Amount
Unrealized gains (losses) arising
during the period $ (660) $(244) $(416)
Less reclassification adjustments for
(gains) losses included in net income (126) (47) (79)
Net unrealized gain (loss) on securities $ (786) $(291) $(495)
</TABLE>
Note 20. Condensed Parent Company Financial Statements
<TABLE>
<CAPTION>
Condensed Statements of Operations Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash dividends from subsidiaries $4,011 $7,630 $1,651
Other income 1
Total income 4,011 7,631 1,651
Expenses - other 307 215 207
Income before undistributed
income of subsidiaries 3,704 7,416 1,444
Distributions (in excess of) under
equity basis earnings of subsidiaries 1,871 (1,911) 2,682
Net Income $5,575 $5,505 $4,126
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Condition December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash and short-term investments $ 53 $ 328
Investment in subsidiaries - eliminated
upon consolidation 57,606 51,585
Land 1,086 691
Other assets 211 146
Total $ 58,956 $ 52,750
LIABILITIES
Other liabilities $ 10 $ 86
SHAREHOLDERS' EQUITY
Preferred stock - no par value
Shares authorized - 500
Shares outstanding - none
Common stock - $.01 par value
Shares authorized - 10,000
Shares outstanding - 7,714 in 1998
and 7,558 in 1997 $ 77 $ 76
Capital surplus 37,059 34,512
Accumulated other comprehensive
income 1,417 806
Retained earnings 20,393 17,270
Total shareholders' equity 58,946 52,664
Total $ 58,956 $ 52,750
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 5,575 $ 5,505 $ 4,126
Adjustments to reconcile net income to
net cash provided by operating activities:
Distributions (in excess of) under equity
basis earnings of subsidiaries (1,871) 1,911 (2,682)
Other (172) 29 (85)
Net cash provided by operating
activities 3,532 7,445 1,359
INVESTING ACTIVITIES
Investment in subsidiary (1,000)
Purchase of land (395)
Net cash used in investing activities (1,395)
FINANCING ACTIVITIES
Cash dividends (2,452) (7,295) (1,533)
Proceeds from issuance of stock 40 152
Net cash used in financing activities (2,412) (7,143) (1,533)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (275) 302 (174)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 328 26 200
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 53 $ 328 $ 26
</TABLE>
Exhibit (21).1
SUBSIDIARIES OF SOUTH ALABAMA BANCORPORATION, INC.
(1) South Alabama Bank, organized under the laws of the State of Alabama.
(2) First National Bank, organized under the laws of the United States of
America.
(3) The Monroe County Bank, organized under the laws of the State of Alabama.
(4) South Alabama Trust Company, Inc., organized under the laws of the State
of Alabama.
(5) The Commercial Bank of Demopolis, organized under the laws of the State
of Alabama.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-K and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,370
<INT-BEARING-DEPOSITS> 410
<FED-FUNDS-SOLD> 40,254
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 144,234
<INVESTMENTS-CARRYING> 3,635
<INVESTMENTS-MARKET> 3,736
<LOANS> 278,011
<ALLOWANCE> 3,248
<TOTAL-ASSETS> 503,847
<DEPOSITS> 428,076
<SHORT-TERM> 7,457
<LIABILITIES-OTHER> 3,368
<LONG-TERM> 6,000
0
0
<COMMON> 57,529
<OTHER-SE> 1,417
<TOTAL-LIABILITIES-AND-EQUITY> 503,847
<INTEREST-LOAN> 23,684
<INTEREST-INVEST> 8,655
<INTEREST-OTHER> 1,487
<INTEREST-TOTAL> 33,826
<INTEREST-DEPOSIT> 14,969
<INTEREST-EXPENSE> 15,577
<INTEREST-INCOME-NET> 18,249
<LOAN-LOSSES> 301
<SECURITIES-GAINS> 384
<EXPENSE-OTHER> 14,332
<INCOME-PRETAX> 7,729
<INCOME-PRE-EXTRAORDINARY> 5,575
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,575
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 4.23
<LOANS-NON> 419
<LOANS-PAST> 465
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,620
<ALLOWANCE-OPEN> 3,167
<CHARGE-OFFS> 923
<RECOVERIES> 416
<ALLOWANCE-CLOSE> 3,248
<ALLOWANCE-DOMESTIC> 2,905
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 343
</TABLE>
