EXHIBIT 13. Registrant's 1995 Annual Report to Shareholders
National Commerce Bancorporation and Subsidiaries
- -------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The purpose of this discussion is to focus on important factors affecting the
Company's financial condition and results of operations. Reference should be
made to the consolidated financial statements (including the notes thereto), the
selected financial data and other consolidated financial statements presented
elsewhere in this report for an understanding of the following discussion and
analysis. In this discussion, net interest income and net interest margin are
presented on a fully taxable equivalent basis. All per share data is adjusted
to reflect all stock dividends and stock splits declared through December 31,
1995.
RESULTS OF OPERATIONS
For the year ended December 31, 1995, net income totaled $49,035,000, a
$4,693,000 or 10.6 percent increase over 1994 net income of $44,342,000. Net
income increased by $4,936,000 or 12.5 percent in 1994. Earnings per share were
$1.94 in 1995, compared to $1.77 in 1994 and $1.58 in 1993. For 1995, return on
average assets was 1.53 percent, compared to 1.56 percent in 1994 and 1.65
percent in 1993. Return on average equity (excluding unrealized gains or losses
on investment securities) was 18.00 percent in 1995, compared to 18.48 percent
in 1994 and 18.68 percent in 1993.
Net interest income, the difference between interest earned on loans and
investments and interest paid on interest-bearing liabilities, increased by
$9,975,000 or 8.6 percent in 1995 and increased by $10,271,000 or 9.7 percent in
1994. The increase in 1995 reflects a $51,316,000 or 25.5 percent increase in
interest income, and a $41,341,000 or 48.6 percent increase in total interest
expense. The increase in interest income was the result of a $212,708,000 or
14.1 percent increase in average loans, a $143,271,000 or 12.7 percent increase
in average securities and an increase in the average yield on earning assets
from 7.51 percent in 1994 to 8.31 percent in 1995. The increased volume of
average earning assets (partially funded by an increase of $34,969,000 in
average non-interest-bearing liabilities, net of non-interest-earning assets)
positively impacted interest income by approximately $27.1 million, while the
increased yield positively impacted interest income by approximately $24.2
million. Interest expense increased in 1995, reflecting an increase in the cost
of interest-bearing liabilities from 3.71 percent in 1994 to 4.83 percent in
1995, and a $326,449,000 or 14.2 percent increase in average outstanding
interest-bearing liabilities. The increase in the rate paid on interest-bearing
liabilities negatively affected interest expense by approximately $29.2 million
and the increase in average outstandings negatively affected interest expense by
approximately $12.1 million. The 1994 increase in net interest income was
primarily the result of an increase in earning assets and an increase of $5.7
million in average non-interest-bearing liabilities, net of non-interest-earning
assets. The net interest margin (taxable equivalent net interest income as a
percentage
52
of average earning assets) was 4.14 percent in 1995, compared to 4.33 percent in
1994 and 4.74 percent in 1993. The yield on earning assets was 8.31 percent in
1995, compared to 7.51 percent in 1994 and 7.53 percent in 1993. The cost of
interest-bearing liabilities was 4.83 in 1995, compared to 3.71 percent in 1994
and 3.36 percent in 1993.
The Company's provision for loan losses was $9,750,000 for 1995, compared to
$7,077,000 for 1994 and $8,392,000 for 1993. The 1995 provision was primarily
the result of loan growth. Net loan charge-offs were $5,050,000 (.29 percent of
average loans, net of unearned discounts) in 1995, compared to $4,234,000 (.28
percent of average loans) in 1994 and $4,303,000 (.34 percent of average loans)
in 1993.
The allowance for loan losses at December 31, 1995, was $29,010,000 or 1.50
percent of loans, net of unearned discounts, compared to $24,310,000 or 1.53
percent of net loans at December 31, 1994, and $21,467,000 or 1.54 percent of
net loans at December 31, 1993.
Following is a comparison of non-earning assets and loans past due 90 days or
more for the years ended December 31, 1995, 1994 and 1993:
In Thousands 1995 1994 1993
Non-accrual loans $ -- $ -- $ --
Renegotiated loans -- -- --
Other real estate owned 30 61 1,711
------ ------ ------
Total non-earning assets $ 30 $ 61 $1,711
====== ====== ======
Loans past due 90 days
or more $3,252 $2,432 $2,063
Percentage of total loans 0.17% 0.15% 0.15%
Performing restructured
loans $ --- $ --- $1,984
At December 31, 1995, the allowance for loan losses was 967 times problem
assets, compared to 399 times at December 31, 1994, and 126 times at December
31, 1993. Based on the regulatory definition, the Company has no "Highly
Leveraged Transactions" (HLTs). The Company also has no loans involving
syndicated leveraged buyouts (LBOs). Management believes that the allowance for
loan losses is adequate to provide for inherent losses in the loan portfolio.
Non-interest income (excluding securities gains or losses) increased $3,202,000
or 6.3 percent in 1995. The Company's broker-dealer revenue decreased $373,000
or 3.7 percent and mortgage banking origination revenue increased $472,000 or
54.9 percent, reflecting current market conditions. Other sources of non-
interest income, including trust service income, service
53
charge income and in-store banking sublicense income increased a net of
$3,103,000 or 7.9 percent. During the fourth quarter 1994, the Company
experienced a $757,000 gain on the disposition of other real estate. The
Company realized $228,000 in securities gains in 1995, versus $498,000 in
securities losses in 1994 as lower-yielding, available-for-sale securities were
sold and the proceeds invested in higher yields which completely recovered the
losses in 1995. The 1993 securities gains were primarily the result of
municipal securities called prior to maturity. Non-interest income (excluding
securities gains or losses) decreased by $1,620,000 or 3.1 percent in 1994,
primarily as a result of decreases in broker-dealer revenue and mortgage banking
origination revenue, partially offset by increases in trust service income,
service charges on deposit accounts and in-store banking sublicense income.
Non-interest expenses (excluding the provision for loan losses) increased by
$4,256,000 or 4.9 percent in 1995. Salaries and employee benefits increased by
$1,821,000 or 4.7 percent, primarily the result of increases related to the new
automobile indirect lending and corporate cash management businesses, due to
normal merit increases, additional staffing and the higher cost of employee
benefits. Total non-interest expenses increased by $1,492,000 or 1.7 percent in
1994, primarily due to start-up expenses at the Company's North Carolina
operation of NBC Bank, FSB (Knoxville), full year expenses at the Company's
Virginia operation of NBC Bank, FSB (Belzoni) and Commerce Finance Company, the
Company's consumer finance subsidiary. The reduction in FDIC assessment was a
result of refunds and reduced premiums in 1995 due to a change in rate
schedules.
FINANCIAL CONDITION
The Company functions as a financial intermediary, and as such its financial
condition should be examined in terms of trends in its sources and uses of
funds. The following comparison of daily average balances indicates how the
Company has managed its sources and uses of funds:
54
SOURCES AND USES OF FUNDS TRENDS
1994-1995 1993-1994
1995 Increase 1994 Increase 1993
Average (Decrease) Average (Decrease) Average
In Thousands Balance Amount % Balance Amount % Balance
FUNDING USES
Interest-earning assets:
Loans, net of unearned
discounts $1,718,424 $212,708 14.1% $1,505,716 $247,096 19.6% $1,258,620
Securities:
Taxable 1,100,339 142,454 14.9 957,885 215,080 29.0 742,805
Non-taxable 154,755 7,002 4.7 147,753 21,818 17.3 125,935
Trading account securities 18,718 (6,185) (24.8) 24,903 (7,791) (23.8) 32,694
Federal funds sold and
securities purchased under
agreements to resell 25,383 7,365 40.9 18,018 (29,387) (62.0) 47,405
Time deposits in banks 16,881 (1,926) (10.2) 18,807 (911) (4.6) 19,718
---------- -------- --------- ---------- -------- --------- ----------
Total interest-earning assets 3,034,500 361,418 13.5 2,673,082 445,905 20.0 2,227,177
Other uses 179,791 7,738 4.5 172,053 12,020 7.5 160,033
---------- -------- --------- ---------- -------- --------- ----------
Total funding uses $3,214,291 $369,156 13.0% $2,845,135 $457,925 19.2% $2,387,210
========== ======== ========= ========== ======== ========= ==========
FUNDING SOURCES
Interest-bearing liabilities:
Interest-bearing deposits $2,054,809 $294,720 16.7% $1,760,089 $279,584 18.9% $1,480,505
Federal funds purchased and
securities sold under
agreements to repurchase 264,214 (977) (0.4) 265,191 37,968 16.7 227,223
Other borrowed funds and
long-term debt 301,215 32,706 12.2 268,509 122,604 84.0 145,905
---------- -------- --------- ---------- -------- --------- ----------
Total interest-bearing liabilities 2,620,238 326,449 14.2 2,293,789 440,156 23.7 1,853,633
Non-interest-bearing deposits 284,744 2,276 0.8 282,468 (7,574) (2.6) 290,042
Stockholders' equity 272,477 32,574 13.6 239,903 28,896 13.7 211,007
Other sources 36,832 7,857 27.1 28,975 (3,553) (10.9) 32,528
---------- -------- --------- ---------- -------- --------- ----------
Total funding sources $3,214,291 $369,156 13.0% $2,845,135 $457,925 19.2% $2,387,210
========== ======== ========= ========== ======== ========= ==========
55
Average loans, the largest use of funds, increased $213 million or 14.1 percent
in 1995 and $247 million or 19.6 percent in 1994. Increases in consumer loans
and real estate construction loans were the primary reasons for the increases in
1995, and increases in real estate mortgage loans and consumer loans were the
primary reasons for the 1994 loan increase. For 1995 the growth in real estate
construction loans reflects increased demand. The 1994 growth in real estate
mortgage loans reflects growth in first mortgage refinancing loans. The growth
in consumer loans reflects increased indirect installment loan activity in both
years.
Total securities (excluding the trading account), another major use of funds,
increased by $149 million or 13.5 percent in 1995. Taxable securities increased
by $142 million or 14.9 percent, reflecting increases in both fixed and variable
rate federal agency securities. Non-taxable securities increased by $7 million
or 4.7 percent, reflecting increased investment in bank-qualified municipal
investments. Total securities increased by $237 million or 27.3 percent in
1994. The 1994 increase reflects increases in both fixed and variable rate
federal agency securities and non-taxable securities. Effective December 31,
1993, the Company early adopted Financial Accounting Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
resulted in the adjustment of the securities portfolio to market value for those
designated as available for sale. This year-end adjustment increased the
securities portfolio by $7.4 million and increased stockholders' equity by $4.5
million at December 31, 1995, and decreased the securities portfolio by $53.9
million and decreased stockholders' equity by $32.9 million at December 31,
1994.
Trading account securities decreased by $6 million or 24.8 percent in 1995 and
decreased by $8 million or 23.8 percent in 1994. These decreases are a result
of trading inventory levels needed by Commerce Investment Corporation.
Federal funds sold and securities purchased under agreements to resell increased
by $7 million or 40.9 percent in 1995, and decreased by $29 million or 62.0
percent in 1994, representing excess funds not otherwise employed in loans or
investment securities.
Time deposits in other banks decreased by $2 million or 10.2 percent in 1995,
and decreased by $911,000 or 4.6 percent in 1994. This is a readily manageable
asset and balances are maintained at levels which are based on operating needs.
Total interest-earning assets increased by $361 million or 13.5 percent in 1995,
compared to an increase of $446 million or 20.0 percent in 1994. As described
below, the growth in 1995 and 1994 was funded primarily by increases in
interest-bearing deposits, other borrowed funds and stockholders' equity in 1995
and 1994.
Total average deposits increased by $297 million or 14.5 percent in 1995,
compared to an increase of $272 million or 15.4 percent in 1994. Total
interest-bearing deposits increased $295 million or 16.7 percent and total
56
non-interest-bearing deposits increased $2 million or 0.8 percent in 1995,
reflecting current market trends, compared to an increase of $280 million or
18.9 percent in interest-bearing deposits and a decrease of $8 million or 2.6
percent in non-interest-bearing deposits in 1994.
Federal funds purchased and securities sold under agreements to repurchase
decreased $1 million or 0.4 percent in 1995, compared to an increase of $38
million or 16.7 percent in 1994. These changes were primarily the result of the
availability of overnight funds purchased from downstream correspondent banks.
Other borrowed funds, primarily Federal Home Loan Bank advances, increased $33
million or 12.2 percent in 1995, compared to an increase of $123 million or 84.0
percent in 1994. These advances are partially the result of asset/liability
management decisions matching certain earning assets (first mortgage and
consumer installment loans) against these advances at positive rate spreads.
For 1996, the Company anticipates loan demand similar to that which occurred in
1995 and deposit growth due to continued expansion into Virginia, North Carolina
and Mississippi. Above normal operating expense increases are expected in the
Company's thrift subsidiaries due to planned continued expansion. However, the
Company expects continued back-office expense control and continued increases in
non-interest income. The resulting pre-tax income should be sufficient to
realize the benefits of the Company's deferred tax assets referenced in Note P.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The primary functions of asset/liability management are to assure adequate
liquidity and to maintain an appropriate balance between interest-earning assets
and interest-bearing liabilities. Liquidity management involves the ability to
meet the cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid rapidly fluctuating net interest margins and to
promote consistent growth of net income through periods of changing interest
rates.
Cash and bank balances, federal funds sold, trading account securities and
securities available for sale are the principal sources of short-term asset
liquidity. Other sources of short-term liquidity include federal funds
purchased and repurchase agreements, credit lines with other banks and
borrowings from the Federal Home Loan Bank. Maturing loans and securities are
the principal sources of long-term asset liquidity. Automobile, home equity and
credit card loans are secondary liquidity sources as a result of active
securitizations based on these procducts.
Interest rate sensitivity varies with different types of interest-earning assets
and interest-bearing liabilities. Overnight federal funds, on which
57
rates change daily, and loans which are tied to the Prime rate are much more
interest rate sensitive than long-term, fixed-rate securities and fixed-rate
loans. Similarly, time deposits of $100,000 and over and money market
certificates and accounts are much more interest rate sensitive than savings
accounts. The shorter term interest rate sensitivities are the key to
measurement of the interest sensitivity gap, or difference between interest-
sensitive-earning assets or interest-sensitive-bearing liabilities or vice
versa. Trying to minimize this gap is a continual challenge in a changing
interest rate environment and one of the objectives of the Company's
asset/liability management strategy. Company policy states that the six-month
cumulative gap shall be no more than 12 percent of total assets and the one-year
cumulative gap, no more than 15 percent. At year-end 1995, both six-month and
one-year cumulative gaps were within these parameters.
CAPITAL RESOURCES
Total average assets increased by 13.0 percent in 1995, 19.2 percent in 1994 and
11.8 percent in 1993. Correspondingly, total average equity capital increased
by 13.6 percent in 1995, 13.7 percent in 1994 and 16.8 percent in 1993.
The percentage of average equity capital to average assets was 8.48 percent in
1995, 8.43 percent in 1994 and 8.84 percent in 1993. The internal capital
growth rate was 11.65 percent in 1995, 12.16 percent in 1994 and 12.33 percent
in 1993. These growth rates are the result of a return on average equity of
18.00 percent in 1995, 18.48 percent in 1994 and 18.68 percent in 1993. In
early 1996, the Company announced a share repurchase program which authorizes
the purchase, over the next two years, of up to 2,000,000 shares of its common
stock with the objective of increasing per share returns and funding stock-based
employee benefits plans.
The Company's management plans to continue its efforts to increase the return on
average equity while maintaining a consistent dividend ratio in order to achieve
continued internal capital growth.
As previously disclosed, the Company early adopted FAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," on December 31, 1993. This
resulted in an increase of $4.5 million to 1995 year-end stockholders' equity
and a decrease of $32.9 million to 1994 year-end stockholders' equity.
The following ratios in the table on selected capital information do not include
the effect of FAS No. 115 on Tier 1 capital, total capital or total risk-
weighted assets.
At December 31, 1995, the Company did not have any material commitments which
would require an expenditure of capital funds. However, there are regulatory
constraints placed on the Company's capital. The FDIC Improvement Act (FDICIA),
effective December 19, 1992, established capital levels for the five capital
categories created by the law. These capital categories range from the highest
category, well-capitalized institutions, to the lowest category, critically
under-capitalized institutions. The federal banking
58
regulatory agencies each issued substantially the same regulations on a joint
basis to establish a uniform approach to the capital categories and supervisory
procedures. Well-capitalized institutions are required to maintain a total
capital to risk-weighted assets ratio of at least 10 percent, a Tier 1 capital
to risk-weighted assets ratio of at least 6 percent and a Tier 1 capital to
total assets (leverage) ratio of at least 5 percent. As indicated in the table
of selected capital information, the Company and its banking subsidiaries
exceeded all minimum required capital ratios for well-capitalized institutions
at December 31, 1995.
SELECTED CAPITAL INFORMATION
December 31
In Thousands 1995 1994
Capital:
Stockholders' equity $ 296,679 $ 224,419
Less:
Unrealized gains (losses) on
securities, net of taxes 4,527 (32,864)
Goodwill 9 9
---------- ----------
Tier 1 capital 292,143 257,274
Qualifying allowance for loan losses 29,010 23,629
---------- ----------
Total capital $ 321,153 $ 280,903
========== ==========
Total risk-weighted assets $2,374,668 $1,889,613
Ratios:
Total capital to risk-weighted assets 13.52% 14.87%
Tier 1 capital to risk-weighted assets 12.30 13.62
Tier 1 capital to total assets
(leverage ratio) 7.91 8.56
Average equity to assets 8.48 8.43
IMPACT OF INFLATION AND CHANGING PRICES
The majority of assets and liabilities of a financial institution are monetary
in nature and therefore differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
However, inflation does have an important impact on the growth of total assets
in the banking industry and the resulting need to increase equity capital at
higher than normal rates in order to maintain an appropriate equity to assets
ratio. Another significant effect of inflation is on other expenses, which tend
to rise during periods of general inflation.
Management believes the most significant impact on financial results is the
Company's ability to react to changes in interest rates. As discussed
previously, management is attempting to maintain an essentially balanced
position between interest-sensitive assets and liabilities in order to protect
against wide interest rate fluctuations.
59
CONSOLIDATED BALANCE SHEETS
National Commerce Bancorporation and Subsidiaries
December 31
Dollar Amounts in Thousands 1995 1994
ASSETS
Cash and cash equivalents:
Interest-bearing deposits with other banks $ 16,660 $ 17,620
Cash and non-interest-bearing deposits 144,166 123,138
Federal funds sold and securities purchased
under agreements to resell 226,929 25,675
---------- ----------
Total cash and cash equivalents 387,755 166,433
Available-for-sale securities (amortized cost - $509,759
at December 31, 1995, and $926,249 at December 31, 1994) 516,623 872,379
Held-to-maturity securities (market value - $765,142 at
December 31, 1995, and $269,043 at December 31, 1994) 762,023 283,906
Trading account securities 20,159 13,507
Loans, net of unearned discounts of $1,829 at
December 31, 1995, and $1,887 at December 31, 1994 1,931,213 1,592,806
Less allowance for loan losses 29,010 24,310
---------- ----------
Net loans 1,902,203 1,568,496
Premises and equipment, net 18,382 17,729
Broker/dealer customer receivables 13,444 1,130
Other assets 74,453 82,229
---------- ----------
Total assets $3,695,042 $3,005,809
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest-bearing $ 331,436 $ 306,684
Interest-bearing 2,243,334 1,847,706
---------- ----------
Total deposits 2,574,770 2,154,390
Federal funds purchased and securities sold under
agreements to repurchase 404,746 275,136
Broker/dealer customer payables 1,271 399
Accounts payable and accrued liabilities 38,396 23,541
Federal Home Loan Bank advances 372,799 321,541
Long-term debt 6,381 6,383
---------- ----------
Total liabilities 3,398,363 2,781,390
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value -- authorized 5,000,000
shares, none issued
Common stock, par value $2 per share - authorized
75,000,000 shares, issued and outstanding 24,834,581
shares in 1995 and 24,547,121 in 1994 49,669 49,094
Additional paid-in capital 80,605 77,785
Retained earnings 161,878 130,404
Unrealized gains (losses) on securities, net of taxes 4,527 (32,864)
---------- ----------
Total stockholders' equity 296,679 224,419
---------- ----------
Total liabilities and stockholders' equity $3,695,042 $3,005,809
========== ==========
- --------
See notes to consolidated financial statements.
60
CONSOLIDATED STATEMENTS OF INCOME
National Commerce Bancorporation and Subsidiaries
Year Ended December 31
In Thousands, Except Per Share Amounts 1995 1994 1993
INTEREST INCOME
Loans $159,816 $128,297 $107,673
Securities:
Taxable 74,365 54,836 42,794
Non-taxable 8,556 8,982 8,451
-------- -------- --------
82,921 63,818 51,245
Trading account securities 1,240 1,471 1,760
Other 2,488 1,534 2,012
-------- -------- --------
Total interest income 246,465 195,120 162,690
-------- -------- --------
INTEREST EXPENSE
Deposits 96,691 63,080 49,517
Short-term borrowings 13,482 9,737 5,977
Federal Home Loan Bank advances 15,809 11,883 6,415
Long-term debt 458 399 388
-------- -------- --------
Total interest expense 126,440 85,099 62,297
-------- -------- --------
Net interest income 120,025 110,021 100,393
Provision for loan losses 9,750 7,077 8,392
-------- -------- --------
Net interest income after provision for loan losses 110,275 102,944 92,001
-------- -------- --------
OTHER INCOME
Trust service income 8,296 7,967 6,897
Service charges on deposits 13,519 14,359 14,362
Other service charges and fees 5,264 4,386 4,707
Broker/dealer revenue 9,840 10,213 17,342
Investment securities gains (losses) 228 (498) 231
Other 16,721 13,513 8,750
-------- -------- --------
Total other income 53,868 49,940 52,289
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 40,935 39,114 36,800
Occupancy expense 8,665 7,447 7,146
Furniture and equipment expense 3,510 3,301 2,865
FDIC assessment 2,725 4,375 3,862
Other 35,995 33,337 35,409
-------- -------- --------
Total other expenses 91,830 87,574 86,082
-------- -------- --------
Income before income taxes 72,313 65,310 58,208
Income taxes 23,278 20,968 18,802
-------- -------- --------
Net income $ 49,035 $ 44,342 $ 39,406
======== ======== ========
Net income per common share $1.94 $1.77 $1.58
Average shares outstanding 25,249 25,051 25,004
See notes to consolidated financial statements.
61
CONSOLIDATED STATEMENTS OF CASH FLOWS
National Commerce Bancorporation and Subsidiaries
For Year Ended December 31
In Thousands 1995 1994 1993
OPERATING ACTIVITIES
Net income $ 49,053 $ 44,342 $ 39,406
Adjustments to reconcile net
income to net cash provided
by operating activities:
Provision for loan losses 9,750 7,077 8,392
Provision for depreciation and
amortization 4,249 3,359 3,455
Amortization of securities premiums and
(accretion of discounts), net (460) 409 1,283
Deferred income taxes (1,866) (1,008) (1,579)
(Increase) decrease in trading account securities (6,652) 49,617 (26,841)
Realized securities (gains) losses (228) 498 (231)
(Increase) decrease in broker/dealer customer
receivables (12,314) 22,515 (22,503)
Increase in interest receivable (5,532) (4,438) (1,287)
Increase in other assets (6,363) (5,673) (2,874)
Increase (decrease) in broker/dealer customer
payables 872 (13,219) 12,491
Increase in interest payable 10,907 2,044 1,692
Increase in accounts payable and accrued
liabilities 2,368 417 4,589
--------- --------- ---------
Net cash provided by operating activities 43,766 105,940 15,993
INVESTING ACTIVITIES
Available-for-sale securities:
Proceeds from maturities of securities 101,157 213,724 342,062
Proceeds from sales of securities 512,112 82,936 20,157
Purchases of securities (276,553) (283,964) (636,555)
Held-to-maturity securities:
Purchases of securities (406,827) (266,452) (7,077)
Proceeds from maturities of securities 9,731 --- ---
Net increase in loans (343,718) (200,785) (201,214)
Purchases of premises and equipment (4,455) (5,306) (5,564)
--------- --------- ---------
Net cash used in investing activities (408,553) (459,847) (488,191)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
and savings accounts 66,154 257,162 36,023
Net increase (decrease) in
certificates of deposit 354,226 (22,413) 112,448
Net increase in federal
funds purchased and securities
sold under agreements to repurchase 129,610 27,605 31,084
Net increase in Federal Home Loan Bank advances 51,258 151,516 98,926
Proceeds from exercise of stock options 2,163 1,172 1,413
Other (2) 85 626
Cash dividends (17,300) (15,183) (13,394)
--------- --------- ---------
Net cash provided by financing activities 586,109 399,944 267,126
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 221,322 46,037 (205,072)
Cash and cash equivalents at beginning of year 166,433 120,396 325,468
--------- --------- ---------
Cash and cash equivalents at end of year $ 387,755 $ 166,433 $ 120,396
========= ========= =========
See notes to consolidated financial statements.
62
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
National Commerce Bancorporation and Subsidiaries
Unrealized
Additional Securities
Number of Common Paid-in Retained Gains
Dollar Amounts in Thousands Shares Stock Capital Earnings (Losses) Total
Balance at January 1, 1993 16,120,046 $32,240 $73,900 $ 92,520 $198,660
Add (deduct):
Net income 39,406 $ 39,406
Common stock issued upon
exercise of stock options 137,789 276 1,137 1,413
Cash dividends declared ($.55 per share) (13,394) (13,394)
3-for-2 stock split 8,113,506 16,227 (16,227)
Tax benefit of stock options exercised 762 762
Unrealized gains on available-for-sale
securities, net of taxes 9,084 9,084
ESOP loan (1,706) (1,706)
Other 21,240 42 584 226 852
---------- ------- ------- -------- -------- -------
Balance at December 31, 1993 24,392,581 48,785 76,383 100,825 9,084 235,077
Add (deduct):
Net income 44,342 44,342
Common stock issued upon
exercise of stock options 128,066 256 916 1,172
Cash dividends declared ($.62 per share) (15,183) (15,183)
Tax benefit of stock options exercised 459 459
Unrealized losses on available-for-sale
securities, net of taxes (41,948) (41,948)
Other 26,474 53 27 420 500
---------- ------- ------- -------- -------- -------
Balance at December 31, 1994 24,547,121 49,094 77,785 130,404 (32,864) 224,419
Add (deduct):
Net income 49,035 49,035
Common stock issued upon
exercise of stock options 287,460 575 1,588 2,163
Cash dividends declared
($.70 per share) (17,300) (17,300)
Tax benefit of stock
options exercised 1,232 1,232
Unrealized gain on available-for-sale
securities, net of taxes 37,391 37,391
ESOP loan (261) (261)
---------- ------- ------- -------- -------- -------
Balance at December 31, 1995 24,834,581 $49,669 $80,605 $161,878 $ 4,527 $296,679
========== ======= ======= ======== ======== ========
63
Notes To Consolidated Financial Statements
National Commerce Bancorporation and Subsidiaries
December 31, 1995
Note A - Significant Accounting Policies
Consolidation The consolidated financial statements include the accounts of
National Commerce Bancorporation and its subsidiaries (the Company). The
consolidated group provides financial services principally to domestic markets.
All significant intercompany transactions have been eliminated in consolidation.
Securities In accordance with Financial Accounting Statement (FAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," securities
available for sale are carried at market. The amortized cost of debt securities
classified as available for sale is adjusted for amortization of premiums and
accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated life of the security. Unrealized gains or losses
on these securities are included in stockholders' equity net of tax. Securities
which the Company intends to hold until maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. Trading account securities
consist of securities inventories held for the purpose of brokerage activities
and are carried at market. Trading account income includes the effects of
adjustments to market values. The adjusted cost of the specific securities sold
is used to compute gains or losses on the sale of securities.
Interest Rate Swaps Net interest received or paid on an interest rate agreement
that is a hedge against interest rate risks is recognized over the life of the
contract as an adjustment to interest income (expense) of the hedged financial
instrument.
Interest Income Interest on loans is accrued and credited to operations based
upon the principal amount outstanding. Generally, the accrual of income is
discontinued when the full collection of principal is in doubt or when the
payment of principal or interest has become contractually 90 days past due
unless the obligation is both well secured and in the process of collection.
When interest accruals are discontinued, interest credited to income in the
current year is reversed and interest accrued in the prior year is charged to
the allowance for loan losses.
Loan Fees and Costs Loan origination and commitment fees and certain direct
costs are deferred and the net amount amortized as an adjustment of the related
loans' yields, generally over the contractual life, or estimated economic life
if shorter, of the related loans.
Premises and Equipment Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed generally
by use of the straight-line method. Leasehold improvements are amortized over
the period of the leases or the estimated lives of the improvements, whichever
period is shorter.
Provision for Loan Losses For financial reporting purposes, the provision for
loan losses charged to operating expense is based upon a credit review of the
loan portfolio, past loan loss experience, current economic conditions and other
pertinent factors which form a basis for determining the adequacy of the
allowance for loan losses. The allowance is maintained at a level believed
adequate by management to absorb potential losses in the loan portfolio.
64
Net Income Per Common Share The number of shares used to compute net income per
common share is determined by use of the weighted average method including
shares issuable under the stock option plans, when dilutive, and excluding
leveraged shares under the Company's Employee Stock Ownership Plan (ESOP), all
of which are adjusted retroactively for stock dividends and splits.
Income Taxes The Company and its subsidiaries file a consolidated federal
income tax return. Each subsidiary provides for income taxes on a separate-
return basis and remits to or receives from the Company amounts currently
payable or receivable.
Income taxes have been provided using the liability method in accordance with
FAS No. 109, "Accounting for Income Taxes."
Cash Flow Information Cash equivalents include cash, due from banks, federal
funds sold and securities purchased under agreements to resell. Generally,
federal funds are sold for one-day periods and securities purchased under
agreements to resell are for periods of less than two weeks.
During 1995, 1994 and 1993, interest paid was $115,533,000, $83,055,000 and
$60,605,000, respectively. During 1995, 1994 and 1993, income taxes paid were
$25,329,000, $23,294,000 and $18,922,000, respectively.
Reclassification Certain account reclassifications have been made to the 1994
financial statements to conform with the 1995 presentation, none of which are
material.
Stock-based Compensation The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for the stock option
grants.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation," which provides an alternative to
APB Opinion No. 25 in accounting for stock-based compensation issued to
employees. The statement allows for a fair value based method of accounting for
employee stock options and similar equity instruments. However, for companies
that continue to account for stock-based compensation arrangements under Opinion
No. 25, FAS No. 123 requires disclosure of the pro forma effect on net income
and earnings per share of its fair value based accounting for those
arrangements. These disclosure requirements are effective for fiscal years
beginning after December 15, 1995.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Note B - Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. These fair values are provided for disclosure purposes only, and do not
impact carrying values of financial statement
65
amounts.
Cash and Cash Equivalents The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Securities (Including Mortgage-backed Securities) Fair values for securities
are based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments.
Trading Account Assets Fair values for the Company's trading account assets
(including off-balance-sheet instruments), which also are the amounts recognized
in the balance sheet, are based on quoted market prices where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans Receivable For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for certain mortgage loans (e.g., one-to-four family
residential), credit card loans and other consumer loans are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair values
for other loans (e.g., commercial real estate and rental property mortgage
loans, commercial and industrial loans, financial institution loans and
agricultural loans) are estimated using discounted cash flow analyses, using
interest rates currently offered for loans with similar terms to borrowers of
similar credit quality. The carrying amount of accrued interest approximates
its fair value.
Deposit Liabilities The fair values disclosed for demand deposits (e.g.,
interest and non-interest checking, passbook savings and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short-term Borrowings The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
Long-term Borrowings The fair values of the Company's long-term borrowings
(other than deposits) are estimated using discounted cash flow analyses, based
on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Off-balance-sheet Instruments Fair values for the Company's swaps are based on
current settlement values. The Company has commitments to extend credit and
standby letters of credit. These types of credit are made at market rates;
therefore, there would be no market risk associated with these credits which
would create a significant fair value liability for the Company.
66
December 31, 1995
In Thousands Carrying Amount Fair Value
Financial assets:
Cash and cash equivalents $ 387,755 $ 387,755
Available-for-sale securities $ 516,623 $ 516,623
Held-to-maturity securities $ 762,023 $ 765,142
Trading account securities $ 20,159 $ 20,159
Net loans $1,902,203 $1,958,071
Financial liabilities:
Deposits $2,574,770 $2,578,229
Federal funds purchased $ 404,746 $ 404,746
Federal Home Loan Bank advances
and long-term debt $ 379,180 $ 409,045
Off-balance sheet financial instruments:
Interest rate swaps in net payable
position (loss) $ 13 $ (116)
December 31, 1994
In Thousands Carrying Amount Fair Value
Financial assets:
Cash and cash equivalents $ 166,433 $ 166,433
Available-for-sale securities $ 872,379 $ 872,379
Held-to-maturity securities $ 283,906 $ 269,043
Trading account securities $ 13,507 $ 13,507
Net loans $1,568,496 $1,559,661
Financial liabilities:
Deposits $2,154,390 $2,152,521
Federal funds purchased $ 275,136 $ 275,136
Federal Home Loan Bank advances
and long-term debt $ 327,924 $ 317,353
Off-balance sheet financial instruments:
Interest rate swaps in net receivable
position (loss) $ 78 $ (3,172)
Note C - Restrictions on Cash and Due From Banks
The Company's lead bank subsidiary is required to maintain reserve balances with
the Federal Reserve Bank. The average amounts of those reserve balances for the
years ended December 31, 1995 and 1994, were approximately $9,665,000 and
$15,148,000, respectively.
NOTE D - Securities
The following is a summary of available-for-sale securities and held-to-maturity
securities:
December 31, 1995
-----------------
Available-for-sale Securities
Gross Gross
Amortized Unrealized Unrealized Estimated
In Thousands Cost Gains Losses Fair Value
-------- ------ ---------- --------
U.S. Treasury securities and
obligations of U.S.
government agencies
and corporations $114,624 $ 661 $ --- $115,285
67
Obligations of states and
political subdivisions 78,100 1,955 (289) 79,766
Mortgage-backed securities 281,098 5,592 (1,045) 285,645
Total debt securities 473,822 8,208 (1,334) 480,696
Equity securities 35,937 --- (10) 35,927
-------- ------ ---------- --------
Total $509,759 $8,208 $(1,344) $516,623
======== ====== ========== ========
December 31, 1995
-----------------
Held-to-maturity Securities
Gross Gross
Amortized Unrealized Unrealized Estimated
In Thousands Cost Gains Losses Fair Value
-------- ------ ---------- --------
U.S. Treasury securities and
obligations of U.S.
government agencies
and corporations $131,289 $ 270 $ --- $131,559
Obligations of states and
political subdivisions 71,722 3,035 (283) 74,474
Mortgage-backed securities 512,222 3,082 (2,466) 512,838
Total debt securities 715,233 6,387 (2,749) 718,871
Equity securities 46,231 40 --- 46,271
-------- ------ ---------- --------
Total $761,464 $6,427 $(2,749) $765,142
======== ====== ========== ========
On December 27, 1995, the Company reclassified securities with an amortized cost
of $415,469,000 (market value $418,061,000) from held to maturity to available
for sale. The Company also reclassified securities with an amortized cost of
$495,870,000 (market value $496,429,000) from available for sale to held to
maturity. The reclassification was made pursuant to a reassessment of the
securities portfolio based on the Financial Accounting Standards Board "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with the provisions in the special
report, the Company was allowed a one-time reclassification of the securities
portfolio between the special report date of November 15, 1995, and December 31,
1995. There were no sales of held-to-maturity securities in 1995 or 1994. At
December 31, 1995, the net unrealized gain on the securities reclassified was
$559,000. Consistent with the requirements of FAS No. 115, the write-ups
(downs) on the reclassified securities are being accreted back to the amortized
cost of each specific security based upon its estimated average life.
68
December 31, 1994
-----------------
Available-for-sale Securities
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
In Thousands Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
U.S. Treasury securities and
obligations of U.S.
government agencies
and corporations $115,684 $ 200 $ (2,495) $113,389
Obligations of states and
political subdivisions 99,219 1,273 (4,825) 95,667
Mortgage-backed securities 681,459 1,104 (49,120) 633,443
-------- ------ --------- --------
Total debt securities 896,362 2,577 (56,440) 842,499
Equity securities 29,887 --- (7) 29,880
-------- ------ -------- --------
Total $926,249 $2,577 $(56,447) $872,379
======== ====== ======== ========
December 31, 1994
-----------------
Held-to-maturity Securities
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
In Thousands Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
U.S. Treasury securities and
obligations of U.S.
government agencies
and corporations $ 6,937 $ --- $ (17) $ 6,920
Obligations of states and
political subdivisions 65,630 --- (3,476) 62,154
Mortgage-backed securities 211,339 --- (11,370) 199,969
-------- ------ --------- --------
Total $283,906 $ --- $(14,863) $269,043
-------- ------ -------- --------
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1995, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
December 31, 1995
-----------------
Available-for-sale Securities
-----------------------------
Amortized Estimated
In Thousands Cost Fair Value
Due in one year or less $ 63,751 $ 63,847
Due after one year through five years 81,222 82,731
Due after five years through 10 years 45,202 45,673
Due after 10 years 2,549 2,800
-------- --------
192,724 195,051
69
Mortgage-backed securities 281,098 285,645
Equity securities 35,937 35,927
-------- --------
Total $509,759 $516,623
======== ========
December 31, 1995
---------------------------
Held-to-maturity Securities
---------------------------
Amortized Estimated
In Thousands Cost Fair Value
------------ ------------
Due in one year or less $131,288 $131,559
Due after one year through five years 2,841 2,809
Due after five years through 10 years 11,290 11,469
Due after 10 years 103,823 106,467
-------- --------
249,242 252,304
Mortgage-backed securities 512,222 512,838
-------- --------
Total $761,464 $765,142
======== ========
The amortized cost of securities pledged to secure repurchase agreements and
government, public and trust deposits was $915,854,000 and $729,483,000 at
December 1995 and 1994, respectively.
Note E - Loans
Analyses of loans outstanding by category were as follows:
December 31
In Thousands 1995 1994
---------- ----------
Commercial, financial and agricultural $ 399,580 $ 356,035
Real estate - construction 122,720 91,424
Real estate - mortgage 520,657 501,489
Consumer 871,407 630,927
Lease financing 18,678 14,818
Unearned discounts (1,829) (1,887)
---------- ----------
1,913,213 1,592,806
Allowance for loan losses (29,010) (24,310)
---------- ----------
Net loans $1,902,203 $1,568,496
========== ==========
The Company and its subsidiaries have granted loans to officers and directors of
the Company and its subsidiaries and to their associates. 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
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was $31,187,000 and $31,970,000 at
December 31, 1995 and 1994, respectively. During 1995, $24,848,000 of new loans
to related parties
70
were made and payments totaled $25,631,000.
Note F - Allowance for Loan Losses
Changes in the allowance for loans losses were as follows:
Year Ended December 31
In Thousands 1995 1994 1993
Balance at beginning of year $24,310 $21,467 $17,356
Provision for loan losses 9,750 7,077 8,392
Loans charged off, net of recoveries of
$2,199 in 1995, $2,240 in 1994 and
$2,538 in 1993 (5,050) (4,234) (4,281)
------- ------- -----------
Balance at end of year $29,010 $24,310 $21,467
======= ======= ===========
Note G - Non-performing Assets and Past Due Loans
The following table summarizes the Company's non-performing assets (all of
which are domestic):
December 31
In Thousands 1995 1994
Non-accrual loans $ -- $ --
Other real estate owned 30 61
- --- --
Total $ 30 $ 61
======= =======
During 1993, the Company early adopted FAS No. 114, "Accounting by Creditors for
Impairment of a Loan." The early adoption had no effect on either the balance
sheet or income statement. In summary, the statement calls for reducing the
value of impaired loans either to the present value of expected future cash
flows, discounted at the loan's effective interest rate, the market price of the
loan or fair value of the underlying collateral if the loan is collateral
dependent.
There were no non-accrual loans at December 31, 1995 or 1994. There were no
restructured loans at December 31, 1995 or 1994. Accruing loans past due 90
days or more were $3,252,000 and $2,432,000 at December 31, 1995 and 1994,
respectively.
Note H - Premises and Equipment
The following is a summary of the premises and equipment accounts:
December 31
In Thousands 1995 1994
Land $ 2,240 $ 2,240
Premises 2,364 2,364
Furniture and equipment 22,780 20,821
Leasehold improvements 13,262 10,720
Construction in progress 846 1,309
------- -------
41,492 37,454
71
Less accumulated depreciation and amortization 23,110 19,725
---------- ----------
Premises and equipment,net $ 18,382 $ 17,729
========== ==========
Note I - Deposits
Analyses of deposits outstanding by category were as follows:
December 31
In Thousands 1995 1994
Non-interest-bearing $ 331,436 $ 306,684
Money market checking 274,876 257,729
Savings 86,989 93,094
Money market savings 735,911 705,551
Certificates of deposit less than $100,000 677,733 511,772
Certificates of deposit $100,000 and over 467,825 279,560
---------- ----------
Total $2,574,770 $2,154,390
========== ==========
Note J - Lease Commitments
The Company leases land, certain bank premises and equipment. Total rental
expense for all operating leases is as follows:
Year Ended December 31
In Thousands 1995 1994 1993
Minimum rentals $4,456 $3,996 $3,860
Contingent rentals 823 848 671
------ ------ ------
Total $5,279 $4,844 $4,531
====== ====== ======
The contingent rentals are based on additional usage of equipment in excess of a
specified minimum. Also, for land and bank premises, contingent rentals are
based on escalation and parity clauses for real estate.
Future minimum payments, by year and in the aggregate, under non-cancelable
operating leases with initial or remaining terms of one year or more, consisted
of the following at December 31, 1995:
In Thousands
1996 $ 3,968
1997 3,472
1998 3,033
1999 2,799
2000 2,392
Thereafter 2,578
-------
Total minimum lease payments $18,242
=======
The various leases on the land and bank premises may be renewed for periods
72
of five to 70 years upon the expiration of the respective leases.
Note K - Credit Facilities
During 1995, the Company obtained numerous advances from the Federal Home Loan
Bank totaling $394 million. The advances ranged from $19 million to $50 million
with interest rates from 5.50 percent to 5.94 percent. Maturity dates ranged
from July 18, 1997, until August 18, 2000. At December 31, 1995, the Company
had pledged as collateral $237,333,000 of its loans secured by mortgages on one-
to-four family residential properties and certain securities totaling
$233,407,000. During 1994, the Company obtained numerous advances from the
Federal Home Loan Bank totaling $205 million. The advances ranged from $1.6
million to $50 million with interest rates from 3.95 percent to 6.8 percent.
Maturity dates ranged from February 9, 1995, until September 23, 2004. At
December 31, 1994, the Company had pledged as collateral $222,958,000 of its
loans secured by mortgages on one-to-four family residential properties and
certain securities totaling $223,454,000. Future minimum payments, by year and
in the aggregate, related to the advances with initial or remaining terms of one
year or more, consisted of the following at December 31, 1995:
In Thousands
------------
1996 $ 26,690
1997 195,225
1998 67,002
1999 14,822
2000 42,647
Thereafter 26,413
--------
Total $372,799
========
Long-term debt at December 31, 1995 and 1994, consisted primarily of the
following unsecured term notes of a subsidiary of the Company:
In Thousands
Term notes originated October 23 and December 11, 1987, bearing interest payable
at calendar quarters with a variable rate which is repriced every three years
based on the yield on three-year United States Treasury notes. The next reprice
date for the notes is 1997. At December 31, 1995, the rates ranged from 7.04
percent to 7.66 percent, maturing October 23 and December 11, 2007. $5,347
Term notes originated December 3 and December 17, 1987, bearing interest payable
at calendar quarters with a variable rate which is repriced every three years
based on the yield on United States Treasury notes. The next reprice date for
the notes is 1997. At December 31, 1995, the rates ranged from 7.57 percent to
7.69 percent, maturing December 3 and December 17, 2007.
$1,025
------
Total $6,372
======
At December 31, 1995, the Company had available $7 million in unsecured lines of
credit with other financial institutions consisting of a $5 million line of
credit which is contractual in nature and requires no compensating balances or
fees and expires May 31, 1996, and a $2 million
73
line of credit which expires June 29, 1996. There were no borrowings against
these lines during 1995.
Note L - Stock Options
During 1994, the shareholders approved the Company's 1994 Stock Plan, which
reserved an additional 1,050,000 shares of the Company's common stock for use
under the Plan. Options become exercisable in equal parts over the succeeding
five years from the date of grant. Unoptioned shares under previous plans were
transferred to reserved shares for the 1994 Plan. The 1990 Stock Plan reserved
an additional 675,000 shares of the Company's common stock for the granting of
options and restricted stock to key employees. The 1990 Plan amended the
Company's 1986 Stock Option Plan and the 1982 Incentive Stock Option Plan and
merged such amended and restated plans into the 1990 Stock Plan. Options became
exercisable six months subsequent to the date of grant under the 1982 Plan and
became exercisable in equal parts over the succeeding five to 10 years under the
1986 and 1990 Plans. At the discretion of the 1982 Plan's administering
committee, stock appreciation rights were attached to some of the options,
whereby the optionee may receive cash for the difference between the exercise
price of the related option and the fair market value of the Company's common
stock. The Plans are restricted to eligible officers and key employees. The
following amounts reflect the effect of all stock dividends and splits declared
through 1995:
December 31
------------------------------
1995 1994
-------------- --------------
Options outstanding 1,592,690 1,764,704
Price/share range $6.68 - $24.63 $5.26 - $23.25
Options exercised during the year 317,871 132,525
Price/share range $5.25 - $22.67 $3.15 - $21.00
Stock appreciation rights exercised 1,000 500
Price/share range $ 18.39 $ 17.98
Exercisable options 1,008,510 1,228,537
Unoptioned shares 328,928 477,285
Total shares reserved 1,921,618 2,241,989
Note M - Debt and Dividend Restrictions
In accordance with federal banking laws, certain restrictions exist regarding
the ability of the banking subsidiaries to transfer funds to the Company in the
form of cash dividends, loans or advances. The approval of certain regulatory
authorities is required to pay dividends in excess of earnings retained in the
current year plus retained net earnings for the preceding two years. As of
December 31, 1995, $58,487,000 of undistributed earnings of the banking
subsidiaries, included in consolidated retained earnings, was available for
distribution to the Company as dividends without prior regulatory approval. For
the thrift subsidiaries the undistributed earnings are such that any dividend
restrictions would not prevent the payment of routine dividends.
Under Federal Reserve regulations, the banking subsidiaries are also limited as
to the amount they may loan to affiliates, including the Company, unless such
loans are collateralized by specified obligations. At December 31, 1995, the
maximum amount available for transfer from the banking subsidiaries to the
Company in the form of loans approximated 11 percent of consolidated net assets.
74
Note N - Employee Benefits
The Company has a defined benefit non-contributory pension plan covering
substantially all of its full-time employees who have served continuously for
one year. Amounts determined under ERISA are funded annually. Benefits are
based on compensation and years of service.
The following tables set forth the plan's status and amounts recognized in the
Company's consolidated financial statements:
December 31
In Thousands 1995 1994
-------- --------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $37,031 at December 31, 1995, and
$29,850 at December 31, 1994 $ 39,713 $ 32,053
======== ========
Projected benefit obligation for services rendered
to date $(45,148) $(36,485)
Plan assets at fair value (stocks and bonds) 43,491 38,237
-------- --------
Plan assets in excess of (under) projected
benefit obligation (1,657) 1,752
Unrecognized net assets (2,074) (2,038)
Unrecognized net loss 12,287 9,105
Unrecognized prior service cost (1,604) (1,711)
-------- --------
Prepaid pension cost included in other assets $ 6,952 $ 7,108
======= ========
In Thousands 1995 1994 1993
------- -------- --------
Net pension cost included the
following components:
Service cost - benefits earned
during the period $ 1,210 $ 1,607 $ 1,478
Interest cost on projected
benefit obligation 2,941 2,652 2,521
Actual return on plan assets
(gain) loss (6,254) 787 (5,074)
Net amortization and deferral 2,193 (4,911) 1,448
------- -------- --------
Net periodic pension expense $ 90 $ 135 $ 373
======= ======== ========
The weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 7.25 percent and 4.25 percent, respectively, at December 31,
1995, and 8.25 percent and 4.25 percent, respectively, at December 31, 1994.
The expected long-term rate of return on plan assets was 10.25 percent in 1995
and 10 percent in 1994. The assumed normal retirement age was 64 in 1995 and
1994.
The Company and its subsidiaries maintain an Employee Stock Ownership Plan which
is generally available to all full-time employees. Annual contributions to this
plan, which are discretionary, were $400,000 in both 1995 and 1994 and $425,000
in 1993.
75
The Company and its subsidiaries also maintain a Taxable Income Reduction
Account Plan. Participants can elect to defer a percentage of their annual
earnings, subject to the maximum amount allowed of $9,240. The Company matches
participants' basic contributions up to a specified percentage of basic
contributions. The Taxable Income Reduction Account Plan, Employee Stock
Ownership Plan and the Retirement Plan net assets include equity securities of
the Company.
Included in other expenses are broker-dealer commissions of $3,484,000,
$3,874,000 and $6,955,000 paid to employees for the years ended December 31,
1995, 1994 and 1993, respectively.
Note O - Other Employee Benefits
In addition to the Company's defined benefit pension plan, the Company sponsors
retirement medical and life insurance plans that provide postretirement
healthcare and life insurance benefits.
Employees must retire under the pension plan with at least 15 years of service
and must have participated in the active medical plan for at least 10 years
prior to retirement to be eligible for retiree medical plan benefits.
The plan is contributory and contains other cost-sharing features such as
deductibles and coinsurance. The Company's policy to fund the cost of medical
benefits to employees varies by age and service at retirement. Employees must
retire under the pension plan to be eligible for retiree life insurance
benefits.
The following table represents the plan's funded status reconciled with amounts
recognized in the Company's statement of income:
December 31
---------------------------
In Thousands 1995 1994 1993
------- ------- -------
Accumulated postretirement benefit obligation:
Retirees $(3,217) $(2,919) $(2,496)
Fully eligible active plan participants (91) (62) (32)
Other active plan participants (2,265) (1,552) (1,842)
------- ------- -------
Postretirement benefit obligation in excess
of plan assets (5,573) (4,533) (4,367)
Unrecognized transition obligation 3,003 3,180 3,356
Unrecognized net (gain) or loss 1,047 372 624
------- ------- -------
Accrued expense $(1,523) $ (981) $ (387)
======= ======= =======
Net periodic postretirement benefits costs include the following
components:
In Thousands 1995 1994 1993
------- ------- -------
Service cost $ 142 $ 149 $ 111
Interest cost 387 330 285
Net amortization and deferral 191 202 177
------- ------- -------
Net periodic postretirement benefits cost $ 720 $ 681 $ 573
======= ======= =======
76
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., healthcare cost trend rate) is 10 percent for 1995 and
12 percent for 1994 and is assumed to decrease gradually to 5.5 percent for 2005
and thereafter. The healthcare cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing the assumed healthcare
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1995, by
$687,595 and the aggregate of the service and interest cost components of net
periodic postretirement benefit costs for 1995 by $83,156. The weighted-average
discount rate used in determining the accumulated postretirement benefit
obligation was 7.5 percent at December 31, 1995, and 8.50 percent at December
31, 1994.
Note P - Income Taxes
The Company accounts for income taxes using the liability method required by FAS
No. 109, "Accounting for Income Taxes."
The components of the provision for income taxes for the three years ended
December 31 were:
In Thousands 1995 1994 1993
------- ------- -------
Federal:
Current $23,008 $19,107 $16,763
Deferred (credits) (1,866) (1,008) (1,579)
------- ------- -------
21,142 18,099 15,184
State 2,136 2,869 3,618
------- ------- -------
Income taxes $23,278 $20,968 $18,802
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax liabilities and assets are summarized as follows:
December 31
----------------
In Thousands 1995 1994
------- -------
Deferred tax liabilities:
Net unrealized gains on available-for-
sale securities $ 2,896 $ ---
Pension costs 1,895 1,812
FAS No. 91 net deferred costs 2,264 2,324
Other 1,791 1,784
------- -------
Total deferred tax liabilities 8,846 5,920
------- -------
Deferred tax assets:
Net unrealized losses on available-for-sale
securities --- 21,009
Provision for loan losses over charge-offs 11,285 9,417
Other 1,620 1,592
------- -------
Total deferred tax assets 12,905 32,018
------- -------
Net deferred tax assets $ 4,059 $26,098
======= =======
77
Income taxes varied from the amount computed at the statutory federal income tax
rate as follows:
1995 1994 1993
----- ------ ------
In Thousands Amount % Amount % Amount %
------- ----- ------- ----- ------- -----
Federal income tax at statutory rate $25,310 35.00 $22,858 35.00 $20,372 35.00
Add (deduct):
State income taxes net of federal
tax benefits 1,388 1.92 1,865 2.85 2,352 4.04
Non-taxable interest income (3,700) (5.12) (3,586) (5.49) (3,457) (5.94)
Other items - net 280 .39 (169) (.25) (465) (.80)
------- ----- ------- ----- ------- -----
Income taxes $23,278 32.19 $20,968 32.11 $18,802 32.30
======= ===== ======= ===== ======= =====
Income taxes (credits) applicable to securities gains (losses) for 1995, 1994
and 1993 which are included in the provision for income taxes were $89,000,
$(194,000) and $90,000, respectively.
78
Note Q - Commitments and Contingent Liabilities
For purposes other than trading, the Company and its subsidiaries have various
commitments and contingent liabilities, such as commitments to extend credit,
letters of credit, guarantees and liability for assets held in trust, which
arise in the normal course of business. Loan commitments are made to
accommodate the financial needs of the Company's customers. Standby letters of
credit commit the Company to make payments on behalf of customers when certain
specified future events occur. Commercial letters of credit are issued to
facilitate the purchase of foreign and domestic merchandise.
Both types of letters of credit have credit risk essentially the same as that
involved in extending loans to customers and are subject to the bank's normal
credit policies. Collateral primarily consists of securities, cash,
receivables, inventory and equipment. It is obtained based on management's
credit assessment of the customer. Management does not anticipate any
significant losses as a result of these transactions.
The Company's maximum exposure to credit loss at December 31 was as follows:
In Thousands 1995 1994
-------- --------
Loan commitments $789,210 $635,440
Standby letters of credit $ 20,792 $ 26,394
Commercial letters of credit $ 3,696 $ 2,826
Interest rate agreements are designed to provide an exchange of interest
payments computed on notional amounts that will offset all or part of any
undesirable change in cash flows resulting from market rate changes on
designated (hedged) transactions. The Company limits the credit risks of the
interest rate agreements by initiating the transactions with counter parties
with significant financial positions.
The Company's agreements modify the interest characteristics of its outstanding
debt from a fixed to a floating rate basis. These agreements involve the
receipt of fixed rate amounts in exchange for floating rate interest payments
over the life of the agreement without an exchange of the underlying principal
amount. The differential to be paid or received is accrued as interest rates
change and recognized as an adjustment to interest expense related to the debt.
The related amount payable to or receivable from counterparties is included in
other liabilities or assets. The fair values of the swap agreements are not
recognized in the financial statements.
The Company's broker-dealer subsidiary, for trading purposes, enters into
transactions involving financial instruments with off-balance sheet risk in
order to meet the financing and hedging needs of its customers and to reduce its
own exposure to fluctuations in interest rates. These financial instruments
include forward contracts, when issued contracts and options written. All such
contracts are for United States Treasury, federal agency or municipal
securities. These financial instruments involve varying degrees of credit and
market risk. The contract amounts of those instruments reflect the extent of
involvement in particular classes of financial instruments. Risks arise from
the possible inability of counter parties to meet the terms of their contracts
and from movements in securities' market values and interest rates. The extent
of the Company's involvement in financial instruments with off-balance sheet
risk as of
79
December 31, 1995, was as follows:
In Thousands 1995 1994
-------- --------
Forward contracts:
Commitments to purchase $212,836 $ 28,798
Commitments to sell $217,847 $ 31,512
When issued contracts:
Commitments to purchase $ 10,388 $ 10,379
Commitments to sell $ 10,633 $ 12,926
Interest rate agreements
(Notional amount) $150,000 $100,000
Option contracts:
Written option contracts $ 2,000 $ 92,000
Purchased option contracts $ 2,000 $ 1,000
The Company and its subsidiaries are involved in certain legal actions and
claims arising in the ordinary course of business. Although the ultimate
outcome cannot be ascertained at this time, it is the opinion of management
(based on advice of legal counsel) that all litigation and claims should be
resolved without material effect on the Company's financial position or results
of operations.
Note R - National Commerce Bancorporation Financial Information (Patent Company
Only)
Balance Sheets
December 31
----------------------
In Thousands 1995 1994
-------- --------
Assets
Cash* $ 2,261 $ 852
Investments in:
Bank subsidiaries* 267,749 184,863
Non-bank subsidiaries* 26,403 38,706
Other 1,606 896
-------- --------
Total assets $298,019 $225,317
======== ========
Liabilities and Stockholders' Equity
Accounts payable and accrued liabilities $ 1,340 $ 898
Stockholders' equity 296,679 224,419
-------- --------
Total liabilities and stockholders' equity $298,019 $225,317
======== ========
*Eliminated in consolidation.
80
Statements of Income
Year Ended December 31
In Thousands 1995 1994 1993
-------- -------- --------
Income:
Dividends from bank and thrift subsidiaries* $ 26,330 $ 32,938 $ 13,376
Dividends from non-bank subsidiaries* 2,500 3,500 ---
Income from bank subsidiaries* 132 154 672
Other --- 321 ---
-------- -------- --------
28,962 36,913 14,048
Expenses:
Salaries and employee benefits 50 65 74
Other 2,138 774 561
======== ======== ========
2,188 839 635
Income before income taxes (credits) and
equity in undistributed earnings
of subsidiaries 26,774 36,074 13,413
Income taxes (credits) (808) (142) 13
-------- -------- --------
27,582 36,216 13,400
Equity in undistributed net income of:
Bank and thrift subsidiaries 15,653 6,066 20,241
Non-bank subsidiaries 5,800 2,060 5,765
-------- -------- --------
Net income $ 49,035 $ 44,342 $ 39,406
======== ======== ========
*Eliminated in consolidation.
Statements of Cash Flows
Year Ended December 31
In Thousands 1995 1994 1993
-------- -------- --------
Operating activities:
Net income $ 49,035 $ 44,342 $ 39,406
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiaries (21,453) (8,126) (26,006)
Decrease in other assets 522 1,914 2,592
Increase (decrease) in liabilities 442 (795) (545)
-------- -------- --------
Net cash provided by operating
activities 28,546 37,335 15,447
Investing activities:
Investment in subsidiaries (12,000) (26,298) (9,577)
Financing activities:
Proceeds from exercise of stock options 2,163 1,172 1,413
Cash dividends paid (17,300) (15,183) (13,394)
Other --- 75 626
-------- -------- --------
Net cash used in financing activities (15,137) (13,936) (11,355)
-------- -------- --------
Increase (decrease) in cash 1,409 (2,899) (5,485)
Cash at beginning of year 852 3,751 9,236
-------- -------- --------
Cash at end of year $ 2,261 $ 852 $ 3,751
======== ======== ========
81
Note S - Quarterly Results of Operations (Unaudited)
Quarter
In Thousands, Except Per Share Data
First Second Third Fourth
-------- -------- -------- -------
1995:
Interest income $ 55,828 $ 57,042 $ 64,307 $69,288
Interest expense 28,031 28,669 32,987 36,753
Net interest income 27,797 28,373 31,320 32,535
Provision for loan losses 1,708 1,685 3,011 3,346
Other income 12,455 14,430 13,310 13,445
Securities gains 53 115 51 9
Other expenses 22,064 23,686 22,317 23,763
Income before income taxes 16,533 17,547 19,353 18,880
Income taxes 5,313 5,684 6,587 5,694
Net income $ 11,220 $ 11,863 $ 12,766 $13,186
Net income per common share $.45 $.47 $.51 $.52
1994:
Interest income $ 43,685 $ 46,993 $ 50,166 $54,276
Interest expense 17,438 19,289 22,573 25,799
Net interest income 26,247 27,704 27,593 28,477
Provision for loan losses 1,661 2,399 1,554 1,463
Other income 11,343 12,801 12,745 13,549
Securities gains (losses) 335 34 --- (867)
Other expenses 21,131 21,875 21,895 22,673
Income before income taxes 15,133 16,265 16,889 17,023
Income taxes 4,978 5,495 5,621 4,874
Net income $ 10,155 $ 10,770 $ 11,268 $12,149
Net income per common share $.41 $.43 $.45 $.48
82
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Commerce Bancorporation
We have audited the accompanying consolidated balance sheets of National
Commerce Bancorporation and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. 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 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Commerce
Bancorporation and Subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes A, O and P to the consolidated financial statements, the
Company changed its methods of accounting for certain securities, postretirement
benefits other than pensions and income taxes in the year ended December 31,
1993.
Memphis, Tennessee
February 5, 1996