UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter ended June 30, 1999. Commission file #0-15423
SOUTH ALABAMA BANCORPORATION, INC.
(Exact name of registrant as specified in its charter)
Alabama 63-0909434
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification Number)
100 St. Joseph Street, Mobile, Alabama 36602
(Address of principal executive offices) (Zip Code)
(334) 431-7800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X . No .
Shares of common stock ($0.01 Par) outstanding at August 6,
1999: 7,735,425
Page 1 of 27
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
INDEX TO FORM 10 - Q
PART I. Financial Information Page Number
Consolidated Statements of Condition
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Six Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Operations
Three Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements
June 30, 1999 7-14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 15-25
PART II. Other Information 26-27
PART I. FINANCIAL INFORMATION
<TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (Unaudited)
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
A S S E T S
Cash and Due from Banks $ 16,532 $ 20,370
Federal Funds Sold 2,268 40,254
Total Cash and Cash Equivalents 18,800 60,624
Interest Bearing Deposits 534 410
Securities Available for Sale (at Market) 137,964 144,234
Securities Held to Maturity
(Market value of $3,561 and $3,736,
respectively) 3,507 3,635
Loans 309,360 278,182
Less: Unearned Loan Income <189> <171>
Allowance for Loan Losses <3,464> <3,248>
Loans, Net 305,707 274,763
Premises and Equipment 11,485 9,831
Accrued Income Receivable 4,684 4,369
Intangible assets 4,477 4,576
Other Assets 2,724 1,405
Total $489,882 $503,847
L I A B I L I T I E S
Non-interest Bearing Demand Deposits $ 67,558 $ 73,501
Interest Bearing Demand Deposits 131,471 137,326
Savings Deposits 31,309 29,831
Large Denomination Time Deposits
(of $100 or more) 75,750 76,050
Time Deposits 108,423 111,368
Total Deposits 414,511 428,076
Short-Term Borrowings 8,608 7,457
Long-Term Debt 6,000 6,000
Other Liabilities 2,728 3,368
Total Liabilities 431,847 444,901
S H A R E H O L D E R S' E Q U I T Y
Common Stock
Par Value $0.01
Shares Authorized 20,000,000
Shares Outstanding 1999-7,735,425
1998-7,714,425 77 77
Capital Surplus 37,157 37,059
Retained Earnings 21,958 20,393
Accumulated Other Comprehensive Income (1,157) 1,417
Total Shareholders' Equity 58,035 58,946
Total $489,882 $503,847
(See accompanying notes to consolidated financial statements.)
</TABLE>
<TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
<CAPTION>
Six Months Ended June 30,
1999 1998
(Dollars in thousands except
per share amounts)
<S> <C> <C>
Interest Revenue:
Loans $12,959 $11,313
Investments:Taxable 3,144 2,983
Non-Taxable 1,190 1,182
Other 325 840
Total Interest Revenue 17,618 16,318
Interest Expense:
Deposits 7,446 7,263
Short-Term Borrowings 173 158
Long-Term Debt 169 104
Total Interest Expense 7,788 7,525
Net Interest Revenue 9,830 8,793
Provision for Loan Losses 305 116
Net Interest Revenue After Provision
for Loan Losses 9,525 8,677
Non-Interest Revenue:
Trust Income 671 649
Service Charges on Deposit Accounts 971 845
Securities Gains and (Losses),net 15 (9)
Other Income, Charges and Fees 297 277
Total Non-Interest Revenue 1,954 1,762
Non-Interest Expense:
Salaries 3,348 3,116
Pensions and Employee Benefits 855 722
Net Occupancy Expense 488 481
Furniture and Equipment Expense 686 571
Intangible Amortization 99 86
Other Expense 1,935 1,938
Total Non-Interest Expense 7,411 6,914
Income Before Income Taxes 4,068 3,525
Income Tax Expense 1,150 969
Net Income $2,918 $ 2,556
Basic Earnings Per Common Share $ 0.38 $ .34
Diluted Earnings Per Common Share $ 0.37 $ .33
(See accompanying notes to consolidated financial statements.)
</TABLE>
<TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)
<CAPTION>
Three Months Ended June 30,
1999 1998
(Dollars in thousands except
per share amounts)
<S> <C> <C>
Interest Revenue:
Loans $ 6,640 $ 5,756
Investments: Taxable 1,561 1,572
Non-Taxable 606 616
Other 93 438
Total Interest Revenue 8,900 8,382
Interest Expense:
Deposits 3,671 3,726
Short-Term Borrowings 103 88
Long-Term Debt 85 61
Total Interest Expense 3,859 3,875
Net Interest Revenue 5,041 4,507
Provision for Loan Losses 163 21
Net Interest Revenue After Provision
for Loan Losses 4,878 4,486
Non-Interest Revenue:
Trust Income 358 325
Service Charges on Deposit Accounts 496 451
Securities Gains and (Losses), net (3) (4)
Other Income, Charges and Fees 147 158
Total Non-Interest Revenue 998 930
Non-Interest Expense:
Salaries 1,707 1,624
Pensions and Employee Benefits 401 318
Net Occupancy Expense 249 242
Furniture and Equipment Expense 356 329
Intangible Amortization 49 44
Other Expense 990 1,063
Total Non-Interest Expense 3,752 3,620
Income Before Income Taxes 2,124 1,796
Income Tax Expense 606 493
Net Income $1,518 $ 1,303
Basic Earnings Per Common Share $ 0.20 $ .17
Diluted Earnings Per Common Share $ 0.19 $ .17
(See accompanying notes to consolidated financial statements.)
</TABLE>
<TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<CAPTION>
Six Months Ended June 30,
1999 1998
(Dollars in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,918 $ 2,556
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 778 715
Provision for loan losses 305 116
Securities (gains) and losses,net <15> 9
(Increase) decrease in:
Income receivable <315> <210>
Other assets <764> <633>
Increase (decrease) in other liabilities 197 <444>
Net cash provided by operating activities 3,104 2,109
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing
deposits <124> <329>
Net (increase) decrease in loans <31,249> <10,789>
Purchase of premises and equipment <2,258> <1,441>
Proceeds from sale of securities
available for sale 10,434 1,196
Proceeds from maturities of investments 36,003 29,836
Purchase of investments <44,065> <50,890>
Net cash acquired from business
combinations 0 8,132
Net cash provided by (used in) investing
activities <31,259> <24,285>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits <13,565> 13,688
Net increase (decrease) in short-
term borrowing 1,151 2,949
Net increase in long-term debt 0 3,500
Proceeds from issuance of stock 98 9
Dividends paid <1,353> <1,152>
Net cash provided by (used in) financing
activities <13,669> 18,994
NET INCREASE <DECREASE> IN CASH
AND CASH EQUIVALENTS <41,824> <3,182>
Cash and cash equivalents at beginning
of period 60,624 44,743
Cash and cash equivalents at end of
period $18,800 $41,561
Supplemental disclosures of cash flow
information:
Interest paid in cash $ 8,033 $ 7,410
Income taxes paid in cash 941 686
(See accompanying notes to consolidated financial statements.)
</TABLE>
SOUTH ALABAMA BANCORPORATION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A: The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. The
information furnished reflects all adjustments, consisting of
normal and recurring accruals, which in the opinion of
management are necessary for a fair presentation of the
results of the interim periods. Results for interim periods
may not necessarily be indicative of results to be expected
for the year.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's
report on Form 10-K for the year ended December 31, 1998.
NOTE B: The allowance for losses on loans for the six month periods
ended June 30, 1999 and 1998 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
Allowance for loan losses:
<S> <C> <C>
Balance at beginning of period $ 3,248 $ 3,167
Balance acquired 0 287
Provision charged to
operating expense 305 116
Losses charged off <313> <539>
Recoveries 224 261
Balance at end of period $ 3,464 $ 3,292
</TABLE>
NOTE C: Basic earnings per share were computed by dividing net income
by the weighted average number of shares of common stock
outstanding during the six month periods ended June 30,
1999 and 1998.
Diluted earnings per share for the six month periods ended
June 30, 1999 and 1998, were computed by dividing net
income by the weighted average number of shares of common
stock and the dilutive effects of the shares awarded under the
Stock Option plans, based on the treasury stock method using
an average fair market value of the stock during the
respective periods.
The following tables represents the earnings per share
calculations for the six and three months ended June 30, 1999
and 1998, (in thousands except per share amounts):
<TABLE>
<CAPTION>
Six Months Ended Income Shares Earnings per share
June 30, 1999
<S> <C> <C> <C>
Net income $2,918
Basic earnings per share:
Income available to common
shareholders $2,918 7,730 $0.38
Dilutive securities
Stock option plan shares 81
Dilutive earnings per share:
Income available to common
shareholders plus assumed
conversions $2,918 7,811 $0.37
Six Months Ended Income Shares Earnings per share
June 30, 1998
Net income $2,556
Basic earnings per share:
Income available to common
shareholders $2,556 7,600 $0.34
Dilutive securities
Stock option plan shares 120
Dilutive earnings per share:
Income available to common
shareholders plus assumed
conversions $2,556 7,720 $0.33
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Income Shares Earnings per share
June 30, 1999
<S> <C> <C> <C>
Net income $1,518
Basic earnings per share:
Income available to common
shareholders $1,518 7,733 $0.20
Dilutive securities
Stock option plan shares 118
Dilutive earnings per share:
Income available to common
shareholders plus assumed
conversions $1,518 7,851 $0.19
Three Months Ended Income Shares Earnings per share
June 30, 1998
Net income $1,303
Basic earnings per share:
Income available to common
shareholders $1,303 7,640 $0.17
Dilutive securities
Stock option plan shares 126
Dilutive earnings per share:
Income available to common
shareholders plus assumed
conversions $1,303 7,766 $0.17
</TABLE>
NOTE D: The American Institute of Certified Public Accountants has
issued Statement of Position (SOP) 98-5, "Reporting on the
Costs of Start-up Activities." This SOP provides guidance on
the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and
organization activities to be expensed as incurred, and the
initial application of this SOP should be reported as the
cumulative effect of a change in accounting principle. This
SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. Earlier application is
encouraged for fiscal years for which annual financial
statements previously have not been issued. The adoption of
this SOP did not have a material impact on the presentation of
the Company's financial condition or results of operations.
NOTE E: The Company adopted SFAS No. 130 January 1, 1998.
SFAS No. 130 established standards for reporting and display
of comprehensive income and its components.
The Company has classified the majority of its securities as
available for sale in accordance with FASB Statement No. 115.
For the six months ended June 30, 1999, the net
unrealized gain on these securities decreased by $4.1 million.
For the six months ended June 30, 1998, the net unrealized
gain (loss) on these securities increased by $170 thousand.
Pursuant to Statement No. 115, any unrealized gain or loss
activity of available for sale securities is to be recorded as
an adjustment to a separate component of shareholders' equity,
net of income tax effect. Accordingly, for the six months
ended June 30, 1999 and 1998, the Company recognized a
decrease of $2.6 million and an increase of $107 thousand,
respectively, in the net unrealized gain (loss) component of
equity.
Since comprehensive income is a measure of all changes in
equity of an enterprise that result from transactions and
other economic events of the period, this change in unrealized
gain(loss) serves to increase or decrease comprehensive
income.
The following table represents comprehensive income for the
six months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net Income $2,918 $2,556
Other comprehensive income (loss),
net of tax
Unrealized gain (loss) on securities <2,574> 107
Comprehensive income $ 344 $2,663
</TABLE>
The following table represents comprehensive income for the
three months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Net Income $ 1,518 $1,303
Other comprehensive income (loss),
net of tax
Unrealized gain (loss) on securities <2,011> < 17>
Comprehensive income $< 493> $1,286
</TABLE>
NOTE F: There have been no material changes in reported market risk
since year-end.
NOTE G: Segment Reporting
Under SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related information", certain information is
disclosed for the four reportable operating segments of the
Company. The reportable segments were determined using the
internal management reporting system. They are composed of
the Company's significant subsidiaries. The accounting
policies for each segment are the same as those used by the
Company. The segment results include certain overhead
allocations and intercompany transactions that were recorded
at current market prices. All intercompany transactions have
been eliminated to determine the consolidated balances.
The results for the four reportable segments of the company
are included in the following tables (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
Monroe-
Mobile Brewton ville Demopolis
Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 7,139 $ 4,156 $ 3,594 $ 2,733 $ 13 $ <17> $17,618
Total interest expense 3,173 1,696 1,562 1,374 0 <17> 7,788
Net interest income 3,966 2,460 2,032 1,359 13 0 9,830
Provision for loan losses 201 14 0 90 0 0 305
Net interest income after
provision 3,765 2,446 2,032 1,269 13 0 9,525
Total noninterest income 469 291 260 263 676 <5> 1,954
Total noninterest expense 2,649 1,541 1,332 1,007 887 <5> 7,411
Income before taxes 1,585 1,196 960 525 <198> 0 4,068
Provision for income taxes 558 279 262 124 <73> 1,150
Net income $ 1,027 $ 917 $ 698 $ 401 $ <125> $ 0 $ 2,918
Other significant items:
Total assets $187,267 $112,037 $115,556 $72,461 $60,389 $<57,828> $489,882
Total investment securities 34,049 35,289 54,398 17,735 0 0 141,471
Total loans 139,220 69,401 50,400 50,150 0 0 309,171
Investment in subsidiaries 7 67 0 0 58,134 <58,208> 0
Total interest income from
external customers 7,139 4,147 3,586 2,733 13 0 17,618
Total interest income from
affiliates 0 9 8 0 0 <17> 0
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
Monroe-
Mobile Brewton ville Demopolis
Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 6,276 $ 4,187 $ 3,132 $ 2,723 $ 0 $ 0 $16,318
Total interest expense 2,934 1,757 1,412 1,422 0 0 7,525
Net interest income 3,342 2,430 1,720 1,301 0 0 8,793
Provision for loan losses 42 56 0 18 0 0 116
Net interest income after
provision 3,300 2,374 1,720 1,283 0 0 8,677
Total noninterest income 378 271 267 197 650 <1> 1,762
Total noninterest expense 2,486 1,480 1,221 969 759 <1> 6,914
Income before taxes 1,192 1,165 766 511 <109> 0 3,525
Provision for income taxes 411 248 222 123 <35> 0 969
Net income $ 781 $ 917 $ 544 $ 388 $ <74> $ 0 $ 2,556
Other significant items:
Total assets $173,532 $111,202 $113,871 $76,072 $56,955 $<54,454> $477,178
Total investment securities 32,998 45,489 56,870 21,102 0 0 156,459
Total loans 114,966 58,554 37,884 50,211 0 0 261,615
Investment in subsidiaries <1> 46 0 0 54,397 <54,442> 0
Total interest income from
external customers 6,276 4,187 3,132 2,723 0 0 16,318
Total interest income from
affiliates 0 0 0 0 0 0 0
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1999
Monroe-
Mobile Brewton ville Demopolis
Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 3,631 $ 2,089 $ 1,824 $ 1,369 $ 3 $ <16> $ 8,900
Total interest expense 1,573 840 778 684 0 <16> 3,859
Net interest income 2,058 1,249 1,046 685 3 0 5,041
Provision for loan losses 118 0 0 45 0 0 163
Net interest income after
provision 1,940 1,249 1,046 640 3 0 4,878
Total noninterest income 224 169 124 123 360 <2> 998
Total noninterest expense 1,356 783 669 506 440 <2> 3,752
Income before taxes 808 635 501 257 < 77> 0 2,124
Provision for income taxes 287 142 138 63 < 24> 606
Net income $ 521 $ 493 $ 363 $ 194 $ < 53> $ 0 $ 1,518
Other significant items:
Total assets $187,267 $112,037 $115,556 $72,461 $60,389 $<57,828> $489,882
Total investment securities 34,049 35,289 54,398 17,735 0 0 141,471
Total loans 139,220 69,401 50,400 50,150 0 0 309,171
Investment in subsidiaries 7 67 0 0 58,134 <58,208> 0
Total interest income from
external customers 3,631 2,081 1,816 1,369 3 0 8,900
Total interest income from
affiliates 0 8 8 0 0 <16> 0
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998
Monroe-
Mobile Brewton ville Demopolis
Bank Bank Bank Bank Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest income $ 3,201 $ 2,143 $ 1,650 $ 1,388 $ 0 $ 0 $ 8,382
Total interest expense 1,496 897 749 733 0 0 3,875
Net interest income 1,705 1,246 901 655 0 0 4,507
Provision for loan losses 21 0 0 0 0 0 21
Net interest income after
provision 1,684 1,246 901 655 0 0 4,486
Total noninterest income 193 167 143 102 325 0 930
Total noninterest expense 1,269 780 652 520 399 0 3,620
Income before taxes 608 633 392 237 < 74> 0 1,796
Provision for income taxes 210 142 112 54 < 25> 0 493
Net income $ 398 $ 491 $ 280 $ 183 $ < 49> $ 0 $ 1,303
Other significant items:
Total assets $173,532 $111,202 $113,871 $76,072 $56,955 $<54,454> $477,178
Total investment securities 32,998 45,489 56,870 21,102 0 0 156,459
Total loans 114,966 58,554 37,884 50,211 0 0 261,615
Investment in subsidiaries <1> 46 0 0 54,397 <54,442> 0
Total interest income from
external customers 3,201 2,143 1,650 1,388 0 0 8,382
Total interest income from
affiliates 0 0 0 0 0 0 0
</TABLE>
NOTE H: In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133." This
statement delays the effective date of Statement 133 from
fiscal quarters of all fiscal years beginning after June 15,
1999, with earlier application encouraged to fiscal quarters
of all fiscal years beginning after 15, 2000.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Presented below is an analysis of the consolidated financial
condition and results of operations of South Alabama Bancorporation,
Inc. (the "Company") and its wholly owned subsidiaries, South Alabama
Bank, First National Bank, Brewton, The Monroe County Bank, The
Commercial Bank of Demopolis and South Alabama Trust Company, Inc. This
analysis focuses upon significant changes in financial condition between
December 31, 1998 and June 30, 1999, and significant changes for the
three month periods ended June 30, 1999 and 1998, as well as significant
changes for the six months periods ended June 30, 1999 and 1998.
In January 1998, the trust departments of South Alabama Bank and
First National Bank, Brewton were merged to form South Alabama Trust
Company, Inc., a wholly owned subsidiary of the Company. This
combination should allow the Company to realize certain economies of
scale and reduce operational expenses.
On May 15, 1998, Peterman State Bank, a Peterman, Alabama state
bank, was acquired by the Company and merged into The Monroe County
Bank. This transaction has been accounted for as a purchase (the
"Peterman purchase").
On May 12, 1998, the Company announced a stock split effected in
the form of a stock dividend of one-half of a share of the Company's
common stock to be paid on each share of the Company's common stock
outstanding at the close of business on June 15, 1998. All share and
per share information in these financial statements have been restated
to give effect to the stock split.
On December 15, 1998, The Commercial National Bank of Demopolis was
merged into a wholly-owned subsidiary of the Company, with the resulting
company changing its name to The Commercial Bank of Demopolis. This
merger has been accounted for as a pooling-of-interests and,
accordingly, the results of operations of The Commercial Bank of
Demopolis have been included in the consolidated results for all periods
presented.
This report on Form 10-Q contains certain forward looking
statements with respect to financial condition, liquidity, non-
performing assets and results of operations, including the Notes to
Consolidated Financial Statements and statements in the following
discussion. These statements can be identified by the use of words like
"expect," "may," "could," "should," "intend," "project," "estimate," or
"anticipate." The Company cautions readers that forward looking
statements are subject to risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward
looking statements. Factors that may cause actual results to differ
materially from those contemplated include, among others, the stability
of interest rates, the rate of growth of the economy in the Company's
market area, the success of the Company's marketing efforts, the ability
to expand into new segments of the market area, competition, changes in
technology, the strength of the consumer and commercial credit sectors,
levels of consumer confidence, the impact of regulation applicable to
the Company, the performance of stock and bond markets, and disruptions
of the operations of the Company or any other private or governmental
entity as a result of the "Year 2000 problem."
Financial Condition
Total assets at June 30, 1999 were $489.9 million, a decrease of
$14.0 million from $503.8 million at December 31, 1998. Federal funds
sold decreased $38.0 million and investment securities decreased $6.4
million from December 31, 1998. These decreases in federal funds sold
and investment securities were used in part to fund the increase in
loans of $31.2 million, or 11.2 percent, from $278.2 million at December
31, 1998 to $309.4 million at June 30, 1999. The decrease in total
deposits of $13.6 million, or 3.2 percent, from $428.1 million at
December 31, 1998 to $414.5 million at June 30, 1999 also contributed to
the decrease in federal funds sold and investment securities.
Time deposits, consisting of certificates of deposit, decreased
$2.9 million, or 2.6 percent. Large denomination time deposits
decreased $300 thousand. The Company does not actively seek large
denomination time deposits as a source of funding. Non-interest bearing
demand deposits decreased $5.9 million, or 8.1 percent, while interest
bearing demand deposits decreased $5.9 million, or 4.3 percent. Core
deposits, defined as total deposits less time deposits, decreased by
$10.3 million. Short-term borrowings increased $1.2 million, or 15.4
percent, from year-end 1998 and long-term debt was unchanged.
The Company's equity as a percent of total assets at June 30, 1999
was 11.8 percent, compared to 11.7 percent at December 31, 1998. The
primary capital ratio (defined as the sum of common and preferred stock,
capital surplus, retained earnings, allowance for loan losses and
contingency and capital reserves divided by total assets) was 12.8
percent, compared to 12.1 at year-end 1998.
The Company and its subsidiary banks are required by the various
depository institutions' regulatory agencies to maintain certain
capital-to-asset ratios. Risk-based capital guidelines consider risk
factors associated with various components of assets, both on and off
the Statement of Condition. Under these guidelines capital is measured
in two tiers. These capital tiers are used in conjunction with "risk-
weighted" assets in determining "risk-weighted" capital ratios. The
Company's Tier I capital, which is shareholders' equity less goodwill
and accumulated other comprehensive income, was $53.0 million at
December 31, 1998 and $54.7 million at June 30, 1999. Tier II capital,
which is Tier I capital plus the allowable portion of the allowance for
loan losses, was $56.2 million at December 31, 1998 and $58.2 million at
June 30, 1999. The ratios, expressed as a percent of total risk-
weighted assets for Tier I and Tier II capital, were 16.23 percent and
17.23 percent, respectively, at December 31, 1998, and 15.92 percent and
16.92 percent, respectively, at June 30, 1999. Both the December 1998
and the June 1999 ratios exceed the minimum ratios of four percent and
eight percent for Tier I and Tier II capital, respectively.
The components of the Company's risk-based capital calculations
for June 30, 1999 are shown below (dollars in thousands):
<TABLE>
<CAPTION>
June 30,
1999
<S> <C>
Tier I capital--
Tangible Common shareholders'
equity $54,715
Tier II capital--
Allowable portion of the allowance
for loan losses 3,464
Total capital (Tiers I and II) $58,179
Risk-weighted assets $343,767
Quarterly average assets 496,548
Risk-based capital ratios:
Tier I capital 15.92%
Total capital (Tiers I and II) 16.92%
</TABLE>
During the second quarter of 1999 the Company declared a regular
quarterly dividend of $0.09 per share, payable July 1, 1999, to
shareholders of record June 14, 1999.
Liquidity
Liquidity management involves the ability to meet the day-to-day
cash flow requirements of customers, primarily depositors' withdrawals
and borrowers' requirements for funds. This is achieved by carefully
monitoring the amount of liquid assets available to meet these needs.
Liquid assets (cash and cash items, deposits with other banks, federal
funds sold and securities available for sale excluding pledged
securities) totaled $74.0 million at June 30, 1999. These assets
represented 15.1 percent of total assets at quarter end as compared to
23.6 percent at December 31, 1998. The net change in cash and cash
equivalents for the six month period ended June 30, 1999 was a
decrease of $41.8 million. Cash includes currency on hand and demand
deposits with other financial institutions. Cash equivalents are defined
as short-term and highly liquid investments, which are readily
convertible to known amounts of cash and so near maturity that there is
no significant risk of changes in value because of changes in interest
rates. The Company has available, if needed, federal fund lines of
credit, Federal Reserve discount window operations, Federal Home Loan
Bank lines of credit, and an operating line of credit from a
correspondent bank.
Management is not aware of any trends, events or uncertainties that
will have or that are reasonably likely to have a material effect on the
liquidity, capital resources or operations of the Company. Management
is not aware of any current recommendations by regulatory authorities
which, if they were implemented, would have such an effect.
Non-Performing Assets
Non-performing assets include accruing loans 90 days or more past
due, loans on non-accrual, renegotiated loans and other real estate
owned. Commercial, business and installment loans are classified as
non-accrual by Management upon the earlier of: (i) a determination that
collection of interest is doubtful, or (ii) the time at which such loans
become 90 days past due, unless collateral or other circumstances
reasonably assure full collection of principal and interest.
<TABLE>
Summary of Non-Performing Assets
(Dollars in Thousands)
June 30, December 31,
<CAPTION>
1999 1998
<S> <C> <C>
Accruing loans 90 days or more past due $2,619 $ 465
Loans on non-accrual 345 419
Renegotiated loans 0 0
Total non-performing loans 2,964 884
Other real estate owned 111 168
Total non-performing assets $3,075 $1,052
Accruing Loans 90 days or more past due
as a percent of loans 0.85% 0.17%
Total non-performing loans as a
percent of loans 0.96% 0.32%
Total non-performing assets as a percent
of loans and other real estate owned 0.99% 0.38%
</TABLE>
Non-performing loans increased by $2.1 million from year-end 1998.
The majority of this increase is due to one loan for $2 million at the
Mobile Bank which is guaranteed by an individual who is now deceased.
The Mobile Bank has filed a claim against the estate and expects to
collect the loan in full. Other real estate owned consists of several
small parcels of property.
The amount of impaired loans determined under SFAS No. 114 and 118
was not material. These credits were considered in determining the
adequacy of the allowance for loan losses and, while current, are
regularly monitored for changes within a particular industry or general
economic trends which could cause the borrowers severe financial
difficulties.
Any loans classified for regulatory purposes as loss, doubtful,
substandard or special mention, and not included above as non-performing
assets, do not (i) represent or result from trends or uncertainties
which management reasonably expects will materially impact future
operating results, or (ii) represent material credits about which
management is aware of any information which causes management to have
serious doubts as to the ability of such borrower to comply with the
loan repayment terms.
Results of Operations
THE SECOND QUARTER
The Company recorded net income of $1.5 million, or $0.20 per share,
during the second quarter of 1999, compared to net income in the second
quarter of 1998 of $1.3 million, or $0.17 per share. An increase in
average interest earning assets and a shift to loans from investment
securities and federal funds sold enabled the Company to increase total
interest revenue by $518 thousand, or 6.2 percent. Interest expense
remained relatively unchanged. The net interest margin was steady at
4.61 percent in the second quarter of 1999 compared to 4.60 percent in
the second quarter of 1998.
Management provided $163 thousand for loan losses during the second
quarter of 1999, compared to a $21 thousand provision for the second
quarter of 1998. The increase in the provision was in response to the
Company's loan portfolio growth. Net charge offs during the first six
months of 1999 were $89 thousand compared to $278 thousand in the first
six months of 1998. The allowance for loan losses at June 30, 1999 and
December 31, 1998 as a percent of loans was 1.12 percent and 1.17
percent respectively. The decrease in the allowance for loan losses as
a percentage of loans was due primarily to the increase in loans. The
allowance for loan losses represented 1.17 times non-performing loans at
June 30, 1999 and 3.67 times non-performing loans at December 31, 1998.
The decrease was due primarily to the increase in non-performing loans
discussed under the heading "Non-performing assets." Management reviews
the adequacy of the allowance for loan losses on a continuous basis by
assessing the quality of the loan portfolio, including non-performing
loans, and adjusting the allowance when appropriate. The allowance for
loan losses was considered adequate at June 30, 1999.
Non-interest revenue was $998 thousand for the second quarter of
1999, compared to $930 thousand for the same period in 1998, an increase
of 7.3 percent, due primarily to the increase in deposit account service
charges of $45 thousand.
Salary and employee benefit expense increased $166 thousand, or 8.5
percent, caused by an increase in full time equivalent employees from
243 at June 30, 1998 to 246 at June 30, 1999, and by merit increases.
Net occupancy expense of $249 thousand in second quarter 1999 was
relatively unchanged from 1998 while furniture and equipment expense
increased $27 thousand.
Other expenses include data processing fees for the Trust Company,
FDIC insurance, insurance costs, accounting and legal fees, stationery
and supplies, credit card service fees, loan collection fees and
advertising. Other non-interest expense in second quarter 1999
decreased by $73 thousand, or 6.9 percent, a result of efforts to
contain costs in this category.
Income tax expense was $606 thousand for the second quarter of
1999, compared to $493 thousand for the same period in 1998. The
increase in income tax expense in 1999 compared to 1998 resulted
primarily from an increase in taxable income.
THE SIX MONTHS
The Company recorded net income of $2.9 million, or $0.38 per share,
during the first six months of 1999 compared to net income in the first
six months of 1998 of $2.6 million, or $0.34 per share. Total interest
revenue increased by $1.3 million, or 8.0 percent, due to increased
volume in loans and to the Peterman purchase. Interest expense
increased $263 thousand, or 3.5 percent, due primarily to increased
deposit volume and to the Peterman purchase. Management provided $305
thousand for loan losses during the first six months of 1999 compared to
$116 thousand for the first six months of 1998, with the increase
necessitated by loan growth.
Non-interest revenue was $2.0 million for the first six months of
1999, compared to $1.8 million for the same period in 1998, an increase
of 10.9 percent.
Non-interest expense in the six month period was $7.4 million in
1999, an increase of $497 thousand from 1998. Salary and employee
benefits increased $365 thousand, or 9.5 percent, a combination of merit
increases and an increase in full time equivalent employees.
Income tax expense was $1.2 million for the first six months of
1999, compared to $969 thousand for the same period in 1998. The
increase in income tax expense in 1999 compared to 1998 resulted
primarily from higher levels of taxable income.
YEAR 2000 PROBLEM
The Year 2000 ("Y2K") issue is a result of some computer software
programs and hardware systems using only two digits to indicate a year
and assuming that the first two digits of any year are "19." Risks to
the Company if its computer systems are not Y2K compliant include the
inability to process customer deposits or checks drawn on the Banks,
inaccurate interest accruals and maturity dates of loans and time
deposits, and the inability to update accounts for daily transactions.
Other risks to the Company exist if certain of its vendors', suppliers'
and customers' computer systems are not Y2K compliant. These risks
include the inability of two of the Banks to communicate with the
centralized data processing center if phone systems are not working, the
interruption of business in the event of power outages, the inability of
loan customers to comply with repayment terms if their businesses are
interrupted, and the inability to make payment for checks drawn on the
Banks, receive payment for checks deposited by the Banks' customers, or
invest excess funds if the Federal Reserve Banks or correspondent banks
are not Y2K compliant.
Each Bank and the Trust Company formed a Year 2000 committee to
address Y2K issues. These committees performed a Y2K risk assessment,
identified systems requiring changes due to Y2K risks, established a
time line to correct noncompliant systems, verified that all new systems
purchased are Y2K compliant and determined types of assistance needed by
customers to be Y2K compliant. These committees have completed
contingency plans. These committees report to the Board of Directors of
the Banks and the Trust Company, and reports for all Banks and the Trust
Company are given to the Company's Board of Directors.
The Y2K committees identified the most important mission critical
system as the software and hardware responsible for maintaining and
processing general ledger, deposits, and loans accounts. The testing of
this system has been completed and the results of the have reviewed with
the Board of Directors. Based on this test, the Company believes this
system is Y2K compliant. Other mission critical systems have been
tested, and any necessary corrections completed. Vendor testing and
review of proxy testing for non-mission critical systems was completed
by March 31, 1999, as required by federal guidelines. Based on these
test, the Company believes these system are Y2K compliant.
The Company estimates that the cost of testing and updating its
systems for Y2K compliance will be less than $170 thousand, of which
approximately $106 thousand has been incurred. These costs do not
include indirect costs, such as salaries and employee benefits of South
Alabama employees, as these costs are not separately tracked.
The Company believes it has effectively detected and corrected its
Y2K issues. However, if the Company has failed to detect or correct its
Y2K issues, the Y2K issue could materially impact the Company's
operations. The Company believes that it and its most significant
vendors and customers are on schedule to achieve Y2K compliance, and the
Company does not expect a material adverse impact on its operations.
Item 4. Submission of Matters to a Vote of Security Holders
The stockholders approved, during the annual meeting on May 13, 1999,
the Election of the Directors. A total of 6,930,587 shares of Common
Stock, or 89.66 percent of the total outstanding, were represented
either in person or by proxy at the meeting. The Election of the Board
of Directors was approved as to each nominee, as follows:
<TABLE>
<CAPTION>
Votes in Votes Broker
Nominee Favor Against Abstaining Non-Votes
<S> <C> <C> <C> <C>
John B. Barnett, III 6,929,342 1,245 0 157,986
Stephen G. Crawford 6,929,342 1,245 0 157,986
Haniel F. Croft 6,929,342 1,245 0 157,986
David C. DeLaney 6,929,342 1,245 0 157,986
Lowell J. Friedman 6,928,892 1,695 0 157,986
Broox G. Garrett, Jr. 6,926,342 4,245 0 157,986
W. Dwight Harrigan 6,920,629 9,958 0 157,986
James P. Hayes, Jr. 6,929,342 1,245 0 157,986
Clifton C. Inge 6,929,342 1,245 0 157,986
W. Bibb Lamar, Jr. 6,929,342 1,245 0 157,986
Richard S. Manley 6,912,940 17,647 0 157,986
Kenneth R. McCartha 6,929,342 1,245 0 157,986
Thomas E. McMillan, Jr. 6,929,342 1,245 0 157,986
J. Richard Miller, III 6,929,342 1,245 0 157,986
Harris V. Morrissette 6,929,342 1,245 0 157,986
J. Stephen Nelson 6,929,342 1,245 0 157,986
Paul D. Owens, Jr. 6,926,342 4,245 0 157,986
Earl H. Weaver 6,929,342 1,245 0 157,986
A.G. Westbrook 6,929,342 1,245 0 157,986
</TABLE>
The stockholders also approved, at the May 13, 1999 meeting, an amendment
to the South Alabama 1993 Incentive Compensation Plan to increase the
number of shares reserved for issuance under the plan from 300,000 to
450,000. The vote was as follows:
For approval of the amendment 6,788,012
Against approval of the amendment 88,193
Abstain 54,382
Broker Non-Votes 157,986
The stockholders also approved, at the May 13, 1999 meeting, an amendment
to South Alabama's Articles of Incorporation to increase the number of
authorized shares to 20,000,000. The vote was as follows:
For approval of the amendment 6,877,561
Against approval of the amendment 13,160
Abstain 39,866
Broker Non-Votes 157,986
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed of Form 8-K for the three month
period ended June 30, 1999.
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH ALABAMA BANCORPORATION
08/06/1999 /s/W. Bibb Lamar, Jr.
Date W. Bibb Lamar, Jr.
President
08/06/99 /s/F. Michael Johnson
Date F. Michael Johnson
Chief Financial Officer
Exhibit Index
The following is a list of exhibits filed herewith.
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 16,532
<INT-BEARING-DEPOSITS> 534
<FED-FUNDS-SOLD> 2,268
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 137,964
<INVESTMENTS-CARRYING> 3,507
<INVESTMENTS-MARKET> 3,561
<LOANS> 309,171
<ALLOWANCE> (3,464)
<TOTAL-ASSETS> 489,882
<DEPOSITS> 414,511
<SHORT-TERM> 8,608
<LIABILITIES-OTHER> 2,728
<LONG-TERM> 6,000
0
0
<COMMON> 59,192
<OTHER-SE> (1,157)
<TOTAL-LIABILITIES-AND-EQUITY> 489,882
<INTEREST-LOAN> 12,959
<INTEREST-INVEST> 4,334
<INTEREST-OTHER> 325
<INTEREST-TOTAL> 17,618
<INTEREST-DEPOSIT> 7,446
<INTEREST-EXPENSE> 7,788
<INTEREST-INCOME-NET> 9,830
<LOAN-LOSSES> 305
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 7,411
<INCOME-PRETAX> 4,068
<INCOME-PRE-EXTRAORDINARY> 2,918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,918
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 4.61
<LOANS-NON> 345
<LOANS-PAST> 2,619
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,463
<ALLOWANCE-OPEN> 3,248
<CHARGE-OFFS> 313
<RECOVERIES> 224
<ALLOWANCE-CLOSE> 3,464
<ALLOWANCE-DOMESTIC> 3,190
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 274
</TABLE>
