| ALABAMA NATIONAL BANCORPORATION ITEM 1A RISK FACTORS Making or continuing an investment in securities issued by Alabama National, including our common stock, involves certain risks that you should carefully consider |
| The risks and uncertainties described below are not the only risks that may have a material adverse effect on Alabama National |
| Additional risks and uncertainties also could adversely affect our business and our results |
| If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment |
| Further, to the extent that any of the information contained in this Annual Report constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause Alabama National’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Alabama National |
| We may not be able to maintain our historical growth rate, which may adversely affect our results of operations and financial condition |
| We have grown substantially in the past few years from approximately dlra2dtta03 billion in total assets at December 31, 1999 (as restated for a 2001 pooling-of-interests transaction) to approximately dlra5dtta93 billion in total assets at December 31, 2005 |
| This growth has been achieved through a combination of internal growth and acquisitions |
| Our future profitability will depend in part on our continued ability to grow |
| We may not be able to sustain our historical rate of growth or may not be able to grow our business at all in the future |
| We may also not be able to obtain the financing necessary to fund additional growth and may not be able to find suitable candidates for additional acquisitions in the future |
| Various factors, such as economic conditions, regulatory and legislative considerations and competition, may impede or prohibit our ability to acquire additional bank subsidiaries or open or acquire new branch offices |
| We may need to raise additional capital in the future, but that capital may not be available when it is needed or on favorable terms |
| We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations |
| We anticipate that our capital resources will satisfy our capital requirements for the immediate future |
| We may, however, need to raise additional capital to support our continued growth or for other capital needs |
| Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance |
| Accordingly, we cannot assure you of our ability to raise additional capital, if needed, on terms acceptable to us or at all |
| If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired |
| Our directors and executive officers own a significant portion of our common stock |
| Our directors and executive officers, as a group, beneficially owned approximately 21dtta09prca of our common stock outstanding as of March 10, 2006 |
| As a result of their beneficial ownership, directors and executive officers will have the ability, by voting their shares in concert, to significantly influence the outcome of all matters submitted to our stockholders for approval, including the election of directors |
| We make and hold in our loan portfolio a significant number of construction loans, which may pose more credit risk than other types of real estate loans |
| We offer residential and commercial construction programs for builders and developers, which constituted 29dtta6prca of our loan portfolio as of December 31, 2005 |
| Builder construction loans are considered more risky than other types of real estate loans |
| While we believe we have established adequate reserves to cover the credit risk associated with our construction loan portfolio, there can be no assurance that losses will not exceed our reserves, which could adversely affect our earnings |
| 15 ______________________________________________________________________ Competition in the banking industry is intense |
| Competition in the banking and financial services industry is intense |
| In their primary market areas, our subsidiary banks compete with other commercial banks, savings and loan associations, credit unions, finance companies, insurance companies, brokerage and investment banking firms and other financial intermediaries that offer similar services, operating locally and elsewhere |
| Many of these competitors have substantially greater resources and lending limits than our subsidiary banks and may offer certain services that our subsidiary banks do not or cannot provide |
| Additionally, some of our non-bank competitors are not subject to the same regulations that govern Alabama National or the Banks and may have greater flexibility in competing for business |
| Our profitability depends upon the subsidiary banks’ continued ability to compete effectively in their market areas |
| We operate in a heavily regulated environment |
| The banking industry is heavily regulated under both federal and state law |
| We are subject, in certain respects, to regulation by the Federal Reserve Board, the Federal Depository Insurance Corporation, the Office of the Comptroller of the Currency, the Alabama State Banking Department, the Florida Department of Financial Services and the Georgia State Banking Department |
| Our success depends not only on competitive factors but also on state and federal regulations affecting banks and bank holding companies |
| The regulations are primarily intended to protect depositors, not stockholders |
| The ultimate effect of recent and proposed changes to the regulation of the financial institution industry cannot be predicted |
| Regulations now affecting us may be modified at any time, and there is no assurance that such modifications, if any, will not adversely affect our business |
| Changes in the policies of monetary authorities and other government action could adversely affect our profitability |
| Our results of operations are affected by credit policies of monetary authorities, particularly the Federal Reserve |
| The instruments of monetary policy employed by the Federal Reserve include open market operations in United States government securities, changes in the discount rate or the federal funds rate on bank borrowings and changes in reserve requirements against bank deposits |
| In view of changing conditions in the national economy and in the money markets, particularly in light of the continuing threat of terrorist acts and the current military operations in the Middle East, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of Alabama National |
| Furthermore, the actions of the United States government and other governments in responding to such terrorist attacks and the military operations in the Middle East may result in currency fluctuations, exchange controls, market disruption and other adverse effects |
| Our success depends upon local economic conditions |
| Our success depends to a certain extent on the general economic conditions of the geographic markets served by our subsidiary banks in the states of Alabama, Georgia and Florida |
| The local economic conditions in these areas have a significant impact on the subsidiary banks’ commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans |
| Adverse changes in the economic conditions of the Southeastern United States in general or any one or more of these local markets could negatively impact the financial results of our banking operations and have a negative effect on our profitability |
| We cannot guarantee that we will pay dividends to stockholders in the future |
| Our principal business operations are conducted through our subsidiary banks |
| Cash available to pay dividends to our stockholders is derived primarily, if not entirely, from dividends paid by the subsidiary banks |
| The ability of the subsidiary banks to pay dividends, as well as our ability to pay dividends to our stockholders, will continue to be subject to and limited by the results of operations of the subsidiary banks and by certain legal 16 ______________________________________________________________________ and regulatory restrictions |
| Further, any lenders making loans to us may impose financial covenants that may be more restrictive than regulatory requirements with respect to our payment of dividends to stockholders |
| There can be no assurance of whether or when we may pay dividends to our stockholders after this offering |
| Changes in the allowances for loan and lease losses of our subsidiary banks could affect our profitability |
| Management of each of our subsidiary banks maintains an allowance for loan and lease losses based upon, among other things, (1) historical experience, (2) an evaluation of local and national economic conditions, (3) regular reviews of delinquencies and loan portfolio quality, (4) current trends regarding the volume and severity of past due and problem loans, (5) the existence and effect of concentrations of credit, (6) growth rates in the loan portfolio and (7) results of regulatory examinations |
| Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the respective loan portfolios |
| Although we believe that the allowance for loan and lease losses at each of the subsidiary banks is adequate, there can be no assurance that such allowances will prove sufficient to cover future losses |
| Future adjustments may be necessary if economic conditions differ or adverse developments arise with respect to nonperforming or performing loans |
| Material additions to the allowance for loan and lease losses would result in a material decrease in our net income, and possibly our capital, and could result in the inability to pay dividends, among other adverse consequences |
| Our profitability depends to a significant extent upon our net interest income |
| Net interest income is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings |
| Our net interest income will be adversely affected if market interest rates change such that the interest we pay on deposits and borrowings increases faster than the interest earned on loans and investments |
| Changes in interest rates could also adversely affect the income of certain of our non-interest income businesses |
| For example, if mortgage interest rates increase, the demand for residential mortgage loans will likely decrease, and this would have an adverse effect on our gain on the sale of mortgages |
| The performance of our investment portfolio is subject to fluctuations due to changes in interest rates and market conditions |
| Changes in interest rates can negatively affect the performance of most of our investments |
| Interest rate volatility can reduce unrealized gains or create unrealized losses in our portfolios |
| Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control |
| Fluctuations in interest rates affect our returns on, and the market value of, our investment securities |
| The fair market value of the securities in our portfolio and the investment income from these securities also fluctuate depending on general economic and market conditions |
| In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations |
| Future acquisitions may disrupt our business, dilute stockholder value and adversely affect our operating results |
| We may grow by acquiring banks or branches of other banks that we believe provide a strategic fit with our business |
| To the extent that we grow through acquisitions, we cannot assure you that we will be able to adequately or profitably manage this growth |
| Acquiring other banks or branches involves risks commonly associated with acquisitions, including: • potential exposure to unknown or contingent liabilities of acquired banks; • exposure to potential asset quality issues of acquired banks; 17 ______________________________________________________________________ • difficulty and expense of integrating the operations and personnel of acquired banks; • potential disruption to our business; • possible loss of key employees and customers of acquired banks; • potential short-term decrease in profitability; and • potential diversion of our management’s time and attention |
| We continually encounter technological change, and we may have fewer resources than our competition to continue to invest in technological improvements |
| The banking and financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services |
| In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs |
| Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that enhance customer convenience, as well as create additional efficiencies in our operations |
| Many of our competitors have greater resources to invest in technological improvements, and we may not be able to effectively implement new technology-driven products and services, which could reduce our ability to effectively compete |
| Hurricanes could cause a disruption in our operations which could have an adverse impact on the results of operations |
| A significant portion of our operations are located in the areas bordering the Gulf of Mexico, a region that is susceptible to hurricanes |
| Such weather events can cause disruption to our operations and could have a material adverse effect on our overall results of operations |
| We maintain hurricane insurance including coverage for lost profits and extra expense |
| However, there is no insurance against the loss of market share that a catastrophic hurricane could produce |
| Further, a hurricane in any of our market areas could adversely impact the ability of borrowers to timely repay their loans and may adversely impact the value of any collateral held by us |
| Substantial sales of our common stock could cause our stock price to fall |
| If we or our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall |
| Such sales also might make it more difficult for us to raise capital through the sale of common stock or use our common stock as currency in future acquisitions |
| Certain state and federal laws and certain provisions in our certificate of incorporation and bylaws may deter potential acquirors and may depress our stock price |
| Certain provisions of state and federal law, our certificate of incorporation and our bylaws might have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us |
| Under federal law, subject to certain exemptions, a person, entity, or group must notify the federal banking agencies before acquiring 10prca or more of the outstanding voting stock of a bank holding company, including our shares |
| Banking agencies review the acquisition to determine if it will result in a change of control |
| The banking agencies have 60 days to act on the notice, and take into account several factors, including the resources of the acquiror and the antitrust effects of the acquisition |
| There also are provisions in our certificate of incorporation and bylaws that may be used to delay or block a takeover attempt |
| As a result, these statutory provisions and provisions in our certificate of incorporation and bylaws may have anti-takeover effects and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider to be in such shareholder’s best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders and may make removal of management more difficult |
| 18 ______________________________________________________________________ Securities issued by Alabama National, including our common stock, are not insured deposits |
| Securities issued by Alabama National, including our common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the FDIC, the Bank Insurance Fund, or any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of principal |
| We may issue additional securities, which could result in dilution of your ownership |
| We may determine from time to time to issue additional securities to raise additional capital or finance acquisitions or upon the exercise or conversion of outstanding options |
| These issuances of our securities will dilute the ownership interests of our stockholders |