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,
1996.
RESULTS OF OPERATIONS
For the year ended December 31, 1996, net income totaled $57,513,000, a
$8,478,000 or 17.3 percent increase over 1995 net income of $49,035,000. Net
income increased by $4,693,000 or 10.6 percent in 1995. Earnings per share were
$2.30 in 1996, compared to $1.94 in 1995 and $1.77 in 1994. For 1996, return on
average assets was 1.51 percent, compared to 1.53 percent in 1995 and 1.56
percent in 1994. Return on average equity (excluding unrealized gains or losses
on investment securities) was 19.44 percent in 1996, compared to 18.00 percent
in 1995 and 18.48 percent in 1994.
Net interest income, the difference between interest earned on loans and
investments and interest paid on interest-bearing liabilities, increased by
$14,830,000 or 11.8 percent in 1996 and increased by $9,975,000 or 8.6 percent
in 1995. The increase in 1996 reflects a $39,491,000 or 15.7 percent increase
in interest income, and a $24,661,000 or 19.5 percent increase in total interest
expense. The increase in interest income was the result of a $412,386,000 or
24.0 percent increase in average loans and a $156,147,000 or 12.4 percent
increase in average securities, partially offset by a decrease in the average
yield on earning assets from 8.31 percent in 1995 to 8.08 percent in 1996. The
increased volume of average earning assets (partially funded by an increase of
$36,421,000 in average non-interest-bearing liabilities, net of non-interest-
earning assets) positively impacted interest income by approximately $48
million, while the decreased yield on average earning assets negatively impacted
interest income by approximately $9 million. Interest expense increased in
1996, reflecting a $540,659,000 or 20.6 percent increase in average outstanding
interest-bearing liabilities, partially offset by a decrease in the cost of
interest-bearing liabilities from 4.83 percent in 1995 to 4.78 percent in 1996.
The decrease in the rate paid on interest-bearing liabilities positively
affected interest expense by approximately $2 million and the increase in
average outstandings negatively affected interest expense by approximately $26
million. The 1995 increase in net interest income was primarily the result of
an increase in earning assets and an increase of $36 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 of
average earning assets) was 3.89 percent in 1996, compared to 4.14 percent in
1995 and 4.33 percent in 1994. The yield on earning assets was 8.08 percent in
1996, compared to 8.31 percent in 1995 and 7.51 percent in 1994. The cost of
interest-bearing liabilities was 4.78 in 1996, compared to 4.83 percent in 1995
and 3.71 percent in 1994.
The Company's provision for loan losses was $14,134,000 for 1996, compared to
$9,750,000 for 1995 and $7,077,000 for 1994. The 1996 provision was primarily
the result of loan growth. Net loan charge-offs were $7,515,000 (.35 percent of
average loans, net of unearned discounts) in 1996, compared to $5,050,000 (.29
percent of average loans) in 1995 and $4,234,000 (.28 percent of average loans)
in 1994.
The allowance for loan losses at December 31, 1996, was $35,514,000 or 1.51
percent of loans, net of unearned discounts, compared to $29,010,000 or 1.50
percent of net loans at December 31, 1995, and $24,310,000 or 1.53 percent of
net loans at December 31, 1994.
Following is a comparison of non-earning assets and loans past due 90 days or
more for the years ended December 31, 1996, 1995 and 1994:
In Thousands 1996 1995 1994
Non-accrual loans $ - $ - $ -
Renegotiated loans - - -
Other real estate owned - 30 61
------ ------ ------
Total non-earning assets $ - $ 30 $ 61
====== ====== ======
Accruing loans past due
90 days or more $3,482 $3,252 $2,432
Percentage of total loans 0.15% 0.17% 0.15%
At December 31, 1996, there were no non-performing assets. At December 31, 1995,
the allowance for loan losses was 967 times non-performing assets, compared to
399 times at December 31, 1994. 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 $17,286,000
or 32.2 percent in 1996. The Company's broker-dealer revenue increased $239,000
or 2.4 percent and mortgage banking origination revenue increased $1,288,000 or
96.8 percent, reflecting current market conditions. Also included in non-
interest income was a pre-tax gain of $2,900,000 relating to the sale of certain
assets, primarily loans, of the Company's Commerce Finance subsidiary, and a
pre-tax gain of $3,000,000 relating to bank premises transactions. All other
sources of non-interest income, including trust service income, service charge
income, fuel card processing income and in-store banking licensing income
increased a net of $9,859,000 or 23.2 percent. Securities gains totaled $3,000
in 1996, compared to $228,000 in 1995. Non-interest income (excluding
securities gains or losses) increased by $3,202,000 or 6.3 percent in 1995,
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 licensing income.
Non-interest expenses (excluding the provision for loan losses) increased by
$13,339,000 or 14.5 percent in 1996, primarily reflecting increased employment
and other expenses relating to new products and locations, and increased
promotional expenses of new loan and deposit gathering campaigns. Total non-
interest expenses increased by $4,256,000 or 4.9 percent in 1995, primarily the
result of increases related to the new automobile indirect lending and corporate
cash management businesses, 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:
SOURCES AND USES OF FUNDS TRENDS
1995-1996 1994-1995
1996 Increase 1995 Increase 1994
AVERAGE (Decrease) Average (Decrease) Average
In Thousands BALANCE Amount % Balance Amount % Balance
---------- --------- ---------- ---------- --------- ---------- ----------
FUNDING USES
Interest-earning assets:
Loans, net of unearned
discounts $2,130,810 $412,386 24.0% $1,718,424 $212,708 14.1% $1,505,716
Securities:
Taxable 1,267,535 167,196 15.2 1,100,339 142,454 14.9 957,885
Non-taxable 143,706 (11,049) (7.1) 154,755 7,002 4.7 147,753
Trading account securities 29,157 10,439 55.8 18,718 (6,185) (24.8) 24,903
Federal funds sold and
securities purchased under
agreements to resell 23,388 (1,995) (7.9) 25,383 7,365 40.9 18,018
Time deposits in banks 16,984 103 0.6 16,881 (1,926) (10.2) 18,807
---------- -------- ---------- -------- ----------
Total interest-earning assets 3,611,580 577,080 19.0 3,034,500 361,418 13.5 2,673,082
Other uses 200,534 20,743 11.5 179,791 7,738 4.5 172,053
---------- -------- ---------- -------- ----------
Total funding uses $3,812,114 $597,823 18.6% $3,214,291 $369,156 13.0% $2,845,135
========== ======== ========== ======== ==========
FUNDING SOURCES
Interest-bearing liabilities:
Interest-bearing deposits $2,346,570 $291,761 14.2% $2,054,809 $294,720 16.7% $1,760,089
Federal funds purchased and
securities sold under
agreements to repurchase 336,727 72,513 27.4 264,214 (977) (0.4) 265,191
Other borrowed funds and
long-term debt 477,600 176,385 58.6 301,215 32,706 12.2 268,509
---------- -------- ---------- -------- ----------
Total interest-bearing liabilities 3,160,897 540,659 20.6 2,620,238 326,449 14.2 2,293,789
Non-interest-bearing deposits 305,989 21,245 7.5 284,744 2,276 0.8 282,468
Stockholders' equity 295,826 23,349 8.6 272,477 32,574 13.6 239,903
Other sources 49,402 12,570 34.1 36,832 7,857 27.1 28,975
---------- -------- ---------- -------- ----------
Total funding sources $3,812,114 $597,823 18.6% $3,214,291 $369,156 13.0% $2,845,135
========== ======== ========== ======== ==========
Average loans, the largest use of funds, increased $412 million or 24.0 percent
in 1996 and $213 million or 14.1 percent in 1995. Increases in consumer loans,
real estate construction and mortgage loans and commercial loans were the
primary reasons for the increases in 1996, and increases in real estate mortgage
loans and consumer loans were the primary reasons for the 1995 loan increase.
For 1996 the growth in all loan categories reflects increased demand and
consumer loan promotions. The 1995 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 $156 million or 12.4 percent in 1996. Taxable securities increased
by $167 million or 15.2 percent, reflecting increases in both fixed and variable
rate federal agency securities. Non-taxable securities decreased by $11 million
or 7.1 percent, reflecting decreased investment in bank-qualified municipal
investments. Total securities increased by $149 million or 13.5 percent in
1995. The 1995 increase reflects increases in both fixed- and variable-rate
federal agency securities and non-taxable securities. The Company accounts for
securities in accordance with Financial Accounting Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
requires an adjustment of the securities portfolio to market value for those
designated as available for sale, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity. This
year-end adjustment increased the securities portfolio by $2.0 million and
increased stockholders' equity by $1.2 million at December 31, 1996, and
increased the securities portfolio by $7.4 million and increased stockholders'
equity by $4.5 million at December 31, 1995.
Trading account securities increased by $10 million or 55.8 percent in 1996 and
decreased by $6 million or 24.8 percent in 1995. These changes are a result of
trading inventory levels needed by NBC Capital Markets Group, Inc.
Federal funds sold and securities purchased under agreements to resell decreased
by $2 million or 7.9 percent in 1996, and increased by $7 million or 40.9
percent in 1995, representing excess funds not otherwise employed in loans or
investment securities.
Time deposits in other banks increased by $103,000 or 0.6 percent in 1996, and
decreased by $2 million or 10.2 percent in 1995. This is a readily manageable
asset and balances are maintained at levels which are based on operating needs.
Total interest-earning assets increased by $577 million or 19.0 percent in 1996,
compared to an increase of $361 million or 13.5 percent in 1995. As described
below, the growth in 1996 and 1995 was funded primarily by increases in
interest-bearing deposits, other borrowed funds and stockholders' equity in 1996
and 1995.
Total average deposits increased by $313 million or 13.4 percent in 1996,
compared to an increase of $297 million or 14.5 percent in 1995. Total
interest-bearing deposits increased $292 million or 14.2 percent and total non-
interest-bearing deposits increased $21 million or 7.5 percent in 1996,
reflecting current market trends, compared to an increase of $295 million or
16.7 percent in interest-bearing deposits and an increase of $2 million or 0.8
percent in non-interest-bearing deposits in 1995.
Federal funds purchased and securities sold under agreements to repurchase
increased $73 million or 27.4 percent in 1996, compared to a decrease of $1
million or 0.4 percent in 1995. 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 and bank notes,
increased $176 million or 58.6 percent in 1996, compared to an increase of $33
million or 12.2 percent in 1995. Approximately $54 million of this increase was
due to a new program of floating rate bank notes issued through the Company's
banking subsidiary National Bank of Commerce. These advances and notes 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 1997, the Company anticipates loan demand and deposit growth similar to that
which occurred in 1996 due to expansion in existing Tennessee markets and
continued expansion into Virginia, North Carolina, Mississippi and Georgia.
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 products.
Interest rate sensitivity varies with different types of interest-earning assets
and interest-bearing liabilities. Overnight federal funds, on which 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 1996, both six-month and one-year
cumulative gaps were within these parameters.
CAPITAL RESOURCES
Total average assets increased by 18.6 percent in 1996, 13.0 percent in 1995 and
19.2 percent in 1994. Correspondingly, total average equity capital increased
by 8.6 percent in 1996, 13.6 percent in 1995 and 13.7 percent in 1994.
The percentage of average equity capital to average assets was 7.76 percent in
1996, 8.48 percent in 1995 and 8.43 percent in 1994. The internal capital
growth rate was 12.89 percent in 1996, 11.65 percent in 1995 and 12.16 percent
in 1994. These growth rates are the result of a return on average equity of
19.44 percent in 1996, 18.00 percent in 1995 and 18.48 percent in 1994. The
capital ratios were reduced due to utilization of excess capital for a stock
repurchase program which was authorized in 1996 for 2,000,000 shares over two
years. During 1996, 1,024,928 shares of common stock were repurchased at a cost
of $30,581,000.
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.
The Company accounts for securities in accordance with FAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." This results in an
increase of $1.2 million to 1996 year-end stockholders' equity and an increase
of $4.5 million to 1995 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, 1996, 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 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, 1996.
SELECTED CAPITAL INFORMATION
December 31
------------------------
In Thousands 1996 1995
----------- -----------
Capital:
Stockholders' equity $ 313,329 $ 296,679
Less:
Unrealized gains on
securities, net of taxes 1,230 4,527
Goodwill and other deductions 4,118 9
---------- ----------
Tier 1 capital 307,981 292,143
Qualifying allowance for loan losses 34,847 29,010
---------- ----------
Total capital $ 342,828 $ 321,153
========== ==========
Total risk-weighted assets $2,787,088 $2,374,668
========== ==========
Ratios:
Total capital to risk-weighted assets 12.30% 13.52%
Tier 1 capital to risk-weighted assets 11.05 12.30
Tier 1 capital to total assets
(leverage ratio) 7.33 7.91
Average equity to assets 7.76 8.48
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's strategy is to attempt to maintain an essentially
balanced position between interest-sensitive assets and liabilities in order to
protect against wide interest rate fluctuations.
CONSOLIDATED BALANCE SHEETS
National Commerce Bancorporation and Subsidiaries
December 31
----------------------
Dollar Amounts in Thousands 1996 1995
---------- ----------
ASSETS
Cash and cash equivalents:
Interest-bearing deposits with other banks $ 17,789 $ 16,660
Cash and non-interest-bearing deposits 164,894 144,166
Federal funds sold and securities purchased under agreements to resell 13,219 226,929
---------- ----------
Total cash and cash equivalents 195,902 387,755
Available-for-sale securities (amortized cost - $699,314 at December 31, 1996,
$509,759 at December 31, 1995) 700,775 516,623
Held-to-maturity securities (market value - $804,690 at December 31, 1996, and
$765,142 at December 31, 1995) 817,124 762,023
Trading account securities 31,812 20,159
Loans, net of unearned discounts 2,347,973 1,931,213
Less allowance for loan losses 35,514 29,010
---------- ----------
Net loans 2,312,459 1,902,203
Premises and equipment, net 21,799 18,382
Broker/dealer customer receivables 11,699 13,444
Other assets 108,839 74,453
---------- ----------
Total assets $4,200,409 $3,695,042
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest-bearing $ 352,676 $ 331,436
Interest-bearing 2,623,754 2,243,334
---------- ----------
Total deposits 2,976,430 2,574,770
Federal funds purchased and securities sold under agreements to repurchase 298,410 404,746
Broker/dealer customer payables 1,002 1,271
Accounts payable and accrued liabilities 59,064 38,396
Federal Home Loan Bank advances 396,109 372,799
Long-term debt 156,065 6,381
---------- ----------
Total liabilities 3,887,080 3,398,363
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 24,385,202 in 1996 and 24,834,581 shares in 1995 48,770 49,669
Additional paid-in capital 61,763 80,605
Retained earnings 201,566 161,878
Unrealized gains on securities, net of taxes 1,230 4,527
---------- ----------
Total stockholders' equity 313,329 296,679
Total liabilities and stockholders' equity $4,200,409 $3,695,042
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
National Commerce Bancorporation and Subsidiaries
Year Ended December 31
----------------------------
In Thousands, Except Per Share Amounts 1996 1995 1994
-------- -------- --------
INTEREST INCOME
Loans $190,879 $159,816 $128,297
Securities:
Taxable 83,797 74,365 54,836
Non-taxable 7,765 8,556 8,982
-------- -------- --------
91,562 82,921 63,818
Trading account securities 1,777 1,240 1,471
Other 2,349 2,488 1,534
-------- -------- --------
Total interest income 286,567 246,465 195,120
-------- -------- --------
INTEREST EXPENSE
Deposits 107,965 96,691 63,080
Short-term borrowings 16,546 13,482 9,737
Federal Home Loan Bank advances 23,025 15,809 11,883
Long-term debt 3,565 458 399
-------- -------- --------
Total interest expense 151,101 126,440 85,099
-------- -------- --------
Net interest income 135,466 120,025 110,021
Provision for loan losses 14,134 9,750 7,077
-------- -------- --------
Net interest income after provision for loan losses 121,332 110,275 102,944
-------- -------- --------
OTHER INCOME
Trust service income 8,719 8,296 7,967
Service charges on deposits 14,292 13,519 14,359
Other service charges and fees 10,902 5,264 4,386
Broker/dealer revenue 10,079 9,840 10,213
Investment securities gains (losses) 3 228 (498)
Other 26,934 16,721 13,513
-------- -------- --------
Total other income 70,929 53,868 49,940
-------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 48,468 40,935 39,114
Occupancy expense 8,517 8,665 7,447
Furniture and equipment expense 3,848 3,510 3,301
FDIC assessment 431 2,725 4,375
Other 43,905 35,995 33,337
-------- -------- --------
Total other expenses 105,169 91,830 87,574
-------- -------- --------
Income before income taxes 87,092 72,313 65,310
Income taxes 29,579 23,278 20,968
-------- -------- --------
Net income $ 57,513 $ 49,035 $ 44,342
======== ======== ========
Net income per common share $2.30 $1.94 $1.77
Weighted average shares outstanding 25,049 25,249 25,051
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
National Commerce Bancorporation and Subsidiaries
For Year Ended December 31
----------------------------------
In Thousands 1996 1995 1994
---------- ---------- ----------
OPERATING ACTIVITIES
Net income $ 57,513 $ 49,035 $ 44,342
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 14,134 9,750 7,077
Provision for depreciation and amortization 3,227 4,249 3,359
Amortization of securities premiums and (accretion of discounts), net 11 (460) 409
Deferred income taxes (1,079) (1,866) (1,008)
(Increase) decrease in trading account securities (11,653) (6,652) 49,617
Realized securities (gains) losses (3) (228) 498
(Increase) decrease in broker/dealer customer receivables 1,745 (12,314) 22,515
Increase (decrease) in interest receivable 1,838 (5,532) (4,438)
Increase in other assets (28,429) (6,363) (5,673)
Increase (decrease) in broker/dealer customer payables (269) 872 (13,219)
Increase (decrease) in interest payable (315) 10,907 2,044
Increase in accounts payable and accrued liabilities 23,388 2,368 417
--------- --------- ---------
Net cash provided by operating activities 60,108 43,766 105,940
INVESTING ACTIVITIES
Available-for-sale securities:
Proceeds from maturities of securities 78,456 101,157 213,724
Proceeds from sales of securities 289,492 512,112 82,936
Purchases of securities (557,647) (276,553) (283,964)
Held-to-maturity securities:
Purchases of securities (149,707) (406,827) (266,452)
Proceeds from maturities of securities 94,738 9,731 ---
Net increase in loans (422,848) (343,718) (200,785)
Purchases of premises and equipment (6,644) (4,455) (5,306)
--------- --------- ---------
Net cash used in investing activities (674,160) (408,553) (459,847)
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts, and savings accounts 249,372 66,154 257,162
Net increase (decrease) in certificates of deposit 152,288 354,226 (22,413)
Net increase (decrease) in federal funds purchased and securities
sold under agreements to repurchase (106,336) 129,610 27,605
Net increase in Federal Home Loan Bank advances 23,310 51,258 151,516
Net proceeds from issuance of bank notes 149,684 --- ---
Proceeds from exercise of stock options 3,829 2,163 1,172
Cash dividends (19,367) (17,300) (15,183)
Other --- (2) 85
Repurchase of common stock (30,581) --- ---
--------- --------- ---------
Net cash provided by financing activities 422,805 586,109 399,944
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (191,853) 221,322 46,037
Cash and cash equivalents at beginning of year 387,755 166,433 120,396
--------- --------- ---------
Cash and cash equivalents at end of year $ 195,902 $ 387,755 $ 166,433
========= ========= =========
See notes to consolidated financial statements.
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, 1994 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
Change in unrealized gain 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 ($.70 per share) (17,300) (17,300)
Tax benefit of stock options exercised 1,232 1,232
Change in unrealized losses on
available-for-sale securities,
net of taxes 37,391 37,391
Other (261) (261)
---------- ------- -------- -------- -------- --------
Balance at December 31, 1995 24,834,581 49,669 80,605 161,878 4,527 296,679
Add (deduct):
Net income 57,513 57,513
Common stock issued upon
exercise of stock options 346,433 693 3,136 3,829
Cash dividends declared ($.79 per share) (19,367) (19,367)
Tax benefit of stock options exercised 2,405 2,405
Change in unrealized gain on
available-for-sale securities,
net of taxes (3,297) (3,297)
Shares repurchased/canceled (1,024,928) (2,050) (28,531) (30,581)
Common stock issued for acquisitions 229,116 458 4,148 4,606
Other 1,542 1,542
---------- ------- -------- -------- -------- --------
Balance at December 31, 1996 24,385,202 $48,770 $ 61,763 $201,566 $ 1,230 $313,329
========== ======= ======== ======== ======== ========
See notes to consolidated financial statements.
Notes To Consolidated Financial Statements
National Commerce Bancorporation and Subsidiaries
December 31, 1996
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 or interest 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.
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 1996, 1995 and 1994, interest paid was $151,416,000, $115,533,000 and
$83,055,000, respectively. During 1996, 1995 and 1994, income taxes paid were
$27,385,000, $25,329,000 and $23,294,000, respectively.
Reclassification Certain account reclassifications have been made to the 1995
and 1994 financial statements to conform with the 1996 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.
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.
Recent Accounting Pronouncement Issued in June 1996, FAS Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," provides new accounting and reporting standards for sales,
securitizations and servicing of receivables and other financial assets and
extinguishments of liabilities. The provisions of the Statement are to be
applied to transactions occurring after December 31, 1996, even for transfers of
assets pursuant to securitization transactions that previously were established.
The Company does not believe that the adoption of this Statement will have a
material effect on its consolidated financial condition or results of
operations.
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 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.
December 31, 1996
In Thousands Carrying Amount Fair Value
--------------- -----------
Financial assets:
Cash and cash equivalents $ 195,902 $ 195,902
Available-for-sale securities $ 700,775 $ 700,775
Held-to-maturity securities $ 817,124 $ 804,690
Trading account securities $ 31,812 $ 31,812
Net loans $2,312,459 $2,359,914
Financial liabilities:
Deposits $2,976,430 $2,975,952
Federal funds purchased $ 298,410 $ 298,410
Federal Home Loan Bank advances
and long-term debt $ 552,174 $ 534,480
Off-balance sheet financial instruments:
Interest rate swaps in net receivable
position (loss) --- ---
December 31, 1996
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)
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, 1996 and 1995, were approximately $4,262,000 and
$9,665,000, respectively.
NOTE D - Securities
The following is a summary of available-for-sale securities and held-to-maturity
securities:
December 31, 1996
----------------------------------------------
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 $521,357 $ 776 $ (2,215) $519,918
Obligations of states and
political subdivisions 67,872 1,347 (297) 68,922
Mortgage-backed securities 61,334 2,104 --- 63,438
-------- ------ -------- --------
Total debt securities 650,563 4,227 (2,512) 652,278
Equity securities 48,751 --- (254) 48,497
-------- ------ -------- --------
Total $699,314 $4,227 $ (2,766) $700,775
======== ====== ======== ========
December 31, 1996
---------------------------------------------
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 $ 48,300 --- $ (1,404) $ 46,896
Obligations of states and
political subdivisions 71,789 2,595 (201) 74,183
Other asset-based securities 107,537 --- (716) 106,821
Mortgage-backed securities 588,942 799 (12,951) 576,790
-------- ------ -------- --------
Total $816,568 $3,394 $(15,272) $804,690
======== ====== ======== ========
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 1996 or 1995. 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. At
December 31, 1996, the net unrealized gain on the securities reclassified on
December 27, 1995, was $556,000.
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
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
======== ====== ======= ========
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1996, 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, 1996
Available-for-sale
Securities
---------------------
Amortized Estimated
In Thousands Cost Fair Value
--------- ----------
Due in one year or less $ 11,845 $ 11,920
Due after one year through five years 241,978 242,878
Due after five years through 10 years 332,856 331,285
Due after 10 years 2,550 2,758
-------- --------
589,229 588,841
Mortgage-backed securities 61,334 63,437
Equity securities 48,751 48,497
-------- --------
Total $699,314 $700,775
======== ========
December 31, 1996
Held-to-maturity
Securities
--------------------
Amortized Estimated
In Thousands Cost Fair Value
--------- ----------
Due in one year or less $ 200 $ 200
Due after one year through five years 3,521 3,480
Due after five years through 10 years 69,364 68,429
Due after 10 years 154,541 155,791
-------- --------
227,626 227,900
Mortgage-backed securities 588,942 576,790
-------- --------
Total $816,568 $804,690
======== ========
The amortized cost of securities pledged to secure repurchase agreements and
government, public and trust deposits was $992,773,000 and $915,854,000 at
December 1996 and 1995, respectively.
Note E - Loans
Analyses of loans outstanding by category were as follows:
December 31
------------------------
In Thousands 1996 1995
Commercial, financial and agricultural $ 466,830 $ 399,580
Real estate - construction 170,188 122,720
Real estate - mortgage 602,064 520,657
Consumer 1,086,104 871,407
Lease financing 22,790 18,678
Unearned discounts (3) (1,829)
---------- ----------
2,347,973 1,931,213
Allowance for loan losses (35,514) (29,010)
---------- ----------
Net loans $2,312,459 $1,902,203
========== ==========
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 $44,696,000 and $31,187,000 at
December 31, 1996 and 1995, respectively. During 1996, $90,286,000 of new loans
to related parties were made and payments totaled $76,777,000.
Note F - Allowance for Loan Losses
Changes in the allowance for loans losses were as follows:
Year Ended December 31
In Thousands 1996 1995 1994
------- ------- -------
Balance at beginning of year $29,010 $24,310 $21,467
Provision for loan losses 14,134 9,750 7,077
Increase due to acquisitions 288 --- ---
Decrease due to loan sale (403) --- ---
Loans charged off, net of recoveries of
$2,823 in 1996, $2,199 in 1995 and
$2,240 in 1994 (7,515) (5,050) (4,234)
------- ------- -------
Balance at end of year $35,514 $29,010 $24,310
======= ======= =======
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 1996 1995
------- -------
Non-accrual loans $ --- $ ---
Other real estate owned --- 30
------- -------
Total $ --- $ 30
======= =======
There were no non-accrual loans at December 31, 1996 or 1995. There were no
restructured loans at December 31, 1996 or 1995. Accruing loans past due 90
days or more were $3,482,000 and $3,252,000 at December 31, 1996 and 1995,
respectively.
Note H - Premises and Equipment
The following is a summary of the premises and equipment accounts:
December 31
----------------
In Thousands 1996 1995
------- -------
Land $ 2,240 $ 2,240
Premises 2,364 2,364
Furniture and equipment 29,828 22,780
Leasehold improvements 13,839 13,262
Construction in progress 146 846
------- -------
48,417 41,492
Less accumulated depreciation and amortization 26,618 23,110
------- -------
Premises and equipment, net $21,799 $18,382
======= =======
Note I - Deposits
Analyses of deposits outstanding by category were as follows:
December 31
----------------------
In Thousands 1996 1995
---------- ----------
Non-interest-bearing $ 352,676 $ 331,436
Money market checking 275,471 274,876
Savings 79,599 86,989
Money market savings 970,838 735,911
Certificates of deposit less than $100,000 728,249 677,733
Certificates of deposit $100,000 and over 569,597 467,825
---------- ----------
Total $2,976,430 $2,574,770
========== ==========
The time deposit maturities at December 31 for the next five years
and thereafter are as follows:
(In thousands)
1997 $1,173,842
1998 65,413
1999 21,022
2000 12,205
2001 9,030
Thereafter 16,334
----------
$1,297,846
==========
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 1996 1995 1994
------ ------ ------
Minimum rentals $5,024 $4,456 $3,996
Contingent rentals 852 823 848
------ ------ ------
Total $5,876 $5,279 $4,844
====== ====== ======
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-cancellable
operating leases with initial or remaining terms of one year or more, consisted
of the following at December 31, 1996:
In Thousands
1997 $ 4,567
1998 3,890
1999 3,651
2000 3,197
2001 2,845
Thereafter 16,863
-------
Total minimum lease payments $35,013
=======
The various leases on the land and bank premises may be renewed for periods of
five to 70 years upon the expiration of the respective leases.
Note K - Credit Facilities
During 1996, the Company obtained numerous advances from the Federal Home Loan
Bank totaling $280 million. The advances ranged from $20 million to $50 million
at floating interest rates equal to one month LIBOR, which ranged from 5.38
percent to 5.56 percent. Maturity dates ranged from January 26, 1998, until
November 6, 1998. At December 31, 1996, the Company had pledged as collateral
$277,725,000 of its loans secured by mortgages on one-to-four family residential
properties and certain securities totaling $305,916,000. 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. 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, 1996:
In Thousands
1997 $165,225
1998 177,002
1999 14,822
2000 12,647
2001 9,837
Thereafter 16,577
--------
Total $396,110
========
Long-term debt at December 31, 1996 and 1995, consisted primarily of the
following unsecured term notes of the Company's lead subsidiary National Bank of
Commerce (NBC):
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, 1996, 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, 1996, the rates ranged
from 7.57 percent to 7.69 percent, maturing December 3 and
December 17, 2007. $1,025
------
Total $6,372
======
On August 24, 1996, NBC issued $150 million in regular floating-rate bank notes
due August 24, 1998, which are included in long-term debt. Interest is payable
monthly on the 24/th/ day of each month. The interest rate for each interest
period will be reset monthly based on the one-month London interbank offered
rate plus a spread of .09 percent. The rates ranged from 5.52 percent to 5.75
percent during the year. This rate was approximately 5.75 percent at December
31, 1996. The notes are not redeemable or repayable prior to maturity.
At December 31, 1996, 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, 1997, and a $2 million line of credit which expires
June 29, 1997. There were no borrowings against these lines during 1996.
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 (the 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 committee recently authorized a one million share addition to
the option reserve, pending shareholder approval in April 1997. The following
amounts reflect the effect of all stock dividends and splits declared through
1996:
1996 1995
Weighted Weighted
average average
exercise exercise
Options price Options price
--------- ------- --------- -------
Outstanding January 1 1,721,516 $16.999 1,856,224 $15.313
Granted 266,413 $30.263 237,806 $24.572
Exercised (356,795) $ 9.125 (318,871) $ 9.189
Cancelled (48,582) $22.518 (53,643) $14.861
--------- ------- --------- -------
Outstanding December 31 1,582,552 $19.408 1,721,516 $16.999
========= ======= ========= =======
Exercisable at year end 983,297 $18.448 1,137,336 $16.097
Unoptioned shares 61,890 328,928
Total shares reserved 1,644,442 2,050,444
Weighted average fair
value of options granted
during the year $ 8.19 $ 4.52
Exercise prices for options outstanding as of December 31, 1996, ranged from
$8.66 to $36.00. The weighted average remaining contractual life of those
options is approximately six and one-half years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issues to Employees" (APB No. 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1996
and 1995, respectively: risk-free interest rates of 6.5 percent and 6.0 percent;
dividend yields of 2.3 percent and 2.9 percent; volatility factors of the
expected market price of the Company's common stock of .30 and .18; and a
weighted average expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
In thousands, except per share data
1996 1995
------- -------
Pro forma net income $57,255 $48,969
Pro forma earnings
per share:
Primary $ 2.29 $ 1.94
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, 1996, $39,108,000 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, 1996, 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.
Note N - Employee Benefit Plans
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 1996 1995
--------- ---------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $37,413 at December 31, 1996, and
$37,031 at December 31, 1995 $ 39,020 $ 39,713
Projected benefit obligation for services rendered
to date (45,274) $(45,148)
Plan assets at fair value (stocks and bonds) 48,243 43,491
======== ========
Plan assets in excess of (under) projected
benefit obligation 2,969 (1,657)
Unrecognized net assets (1,696) (2,074)
Unrecognized net loss 7,676 12,287
Unrecognized prior service cost (1,731) (1,604)
-------- --------
Prepaid pension cost included in other assets $ 7,218 $ 6,952
======== ========
In Thousands 1996 1995 1994
------- -------- --------
Net pension cost included the
following components:
Service cost - benefits earned
during the period $ 1,499 $ 1,210 $ 1,607
Interest cost on projected
benefit obligation 3,088 2,941 2,652
Actual return on plan assets
(gain) loss (7,944) (6,254) 787
Net amortization and deferral 3,438 2,193 (4,911)
------- -------- --------
Net periodic pension expense $ 81 $ 90 $ 135
======= ======== ========
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 7.75 percent and 4.25 percent, respectively, at December 31,
1996, and 7.25 percent and 4.25 percent, respectively, at December 31, 1995.
The expected long-term rate of return on plan assets was 10.25 percent in 1996
and 1995. The assumed normal retirement age was 64 in 1996 and 1995.
The Company and its subsidiaries previously maintained an Employee Stock
Ownership Plan (ESOP) which was generally available to all full-time employees.
Annual contributions to this plan, which were discretionary, were $400,000 in
both 1995 and 1994. During 1996, the Company approved a plan to merge the ESOP
into the Company's Taxable Income Retirement Account Plan (TIRA).
TIRA 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 TIRA Plan and the Retirement Plan net assets include equity
securities of the Company.
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 1996 1995 1994
-------- -------- --------
Accumulated postretirement benefit
obligation (APBO):
Retirees $(2,778) $(3,217) $(2,919)
Fully eligible active plan participants --- (91) (62)
Other active plan participants --- (2,265) (1,552)
------- ------- -------
Postretirement benefit obligation in excess
of plan assets (2,778) (5,573) (4,533)
Unrecognized transition obligation 324 3,003 3,180
Unrecognized net (gain) or loss 1,114 1,047 372
Unrecognized prior service cost (634) --- ---
------- ------- -------
Accrued expense $(1,974) $(1,523) $ (981)
======= ======= =======
Both the retiree medical and life insurance plans were amended during 1996. The
amendment to the retiree medical plan reduced the APBO by $2,872,000. This
amount was used to offset the unrecognized transition obligation of $2,238,000
and the remaining amount of $634,000 will be amortized as negative prior service
cost beginning in 1997. The retiree life insurance benefit was eliminated for
retirements after December 31, 1996.
Net periodic postretirement benefits costs include the following components:
In Thousands 1996 1995 1994
----- ----- -----
Service cost $ 189 $ 142 $ 149
Interest cost 414 387 330
Net amortization and deferral 211 191 202
----- ----- -----
Net periodic postretirement benefits cost $ 814 $ 720 $ 681
===== ===== =====
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 1996 and
1995 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, 1996, by approximately
$96,000 and the aggregate of the service and interest cost components of net
periodic postretirement benefit costs for 1996 by approximately $235,000. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.50 percent at December 31, 1996 and
1995.
The Company also provides healthcare and various other benefits primarily to its
full-time employees through its Flex-Ability plan. This plan allows employees
to choose the coverages they desire. The costs of these benefits are shared
between the Company and the employee. This is accomplished by giving flex
credits to participating employees to help reduce their costs.
Expenses exceeding 1 percent of total revenue which are included in other
expenses are broker-dealer commissions of $3,446,000, $3,484,000 and $3,874,000
paid to employees for the years ended December 31, 1996, 1995 and 1994,
respectively, and 1996 sales promotion expense of $5,900,000.
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 1996 1995 1994
-------- -------- --------
Federal:
Current $28,116 $23,008 $19,107
Deferred (credits) (1,079) (1,866) (1,008)
------- ------- -------
27,037 21,142 18,099
State 2,542 2,136 2,869
------- ------- -------
Income taxes $29,579 $23,278 $20,968
======= ======= =======
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 assets and liabilities are summarized as
follows:
December 31
----------------------
In Thousands 1996 1995
-------- --------
Deferred tax assets:
Provision for loan losses over charge-offs $13,450 $11,285
Other 2,049 1,620
------- -------
Total deferred tax assets 15,499 12,905
------- -------
Deferred tax liabilities:
Net unrealized gains on available-for-
sale securities $ 786 $ 2,896
Pension costs 1,885 1,895
FAS No. 91 net deferred costs 2,755 2,264
Other 2,825 1,791
------- -------
Total deferred tax liabilities 8,251 8,846
------- -------
Net deferred tax assets $ 7,248 $ 4,059
======= =======
Income taxes varied from the amount computed at the statutory federal
income tax rate as follows:
1996 1995 1994
--------------- ----------------- -----------------
In Thousands AMOUNT % Amount % Amount %
------- ----- ------- ------- ------- -------
Federal income tax
at statutory rate $30,482 35.00% $25,310 35.00% $22,858 35.00%
Add (deduct):
State income taxes net
of federal tax benefits 1,652 1.90 1,388 1.92 1,865 2.85
Non-taxable interest
income (2,677) (3.07) (3,700) (5.12) (3,586) (5.49)
Other items, net 122 .13 280 .39 (169) (.25)
------- ----- ------- ------- ------- -------
Income taxes $29,579 33.96% $23,278 32.19% $20,968 32.11%
======= ===== ======= ======= ======= =======
Income taxes (credits) applicable to securities gains (losses) for 1996, 1995
and 1994 which are included in the provision for income taxes were $1,000,
$89,000 and $(194,000), respectively.
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 1996 1995
-------- --------
Loan commitments $560,095 $789,210
Standby letters of credit $ 41,428 $ 20,792
Commercial letters of credit $ 3,691 $ 3,696
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 December 31, 1996, was as follows:
In Thousands 1996 1995
------- --------
Forward contracts:
Commitments to purchase $44,373 $212,836
Commitments to sell $45,976 $217,847
When issued contracts:
Commitments to purchase $15,778 $ 10,388
Commitments to sell $17,287 $ 10,633
Interest rate agreements
(Notional amount) --- $150,000
Option contracts:
Written option contracts --- $ 2,000
Purchased option contracts --- $ 2,000
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 - Line of Business - Services Offered
The Company is engaged in a single line of business as a bank holding company.
This encompasses several significant classes of services including traditional
banking, investment services, trust services, investment advice, in-store
banking to licensed banks, electronic payment systems and data processing
services. The various services contributed to other income as follows:
(In thousands)
1996 1995 1994
------- ------- -------
Banking $23,917 $19,970 $19,681
In-store banking to
licensed banks 18,590 14,424 10,487
Investment services
(broker/dealer) 10,079 9,840 10,213
Trust and investment advice 8,719 8,296 7,967
Electronic payment, data
processing and card services 4,392 --- ---
Other 5,232 1,338 1,592
------- ------- -------
$70,929 $53,868 $49,940
======= ======= =======
Note S - Regulatory Matters
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined) and
of Tier 1 capital (as defined) to total assets (as defined) of 8 percent, 4
percent and 4 percent, respectively. Management believes, as of December 31,
1996, that the Company exceeds all capital adequacy requirements to which it is
subject.
As of December 31, 1996, the most recent regulatory notification categorized the
Company and its banking subsidiaries as well capitalized. 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. There are no conditions or events since that notification
that management believes have changed the institution's category.
The Company and NBC's actual capital amounts and ratios are presented in the
following table:
The Company NBC
Actual Actual
----------------------- -------------------
Amount Ratio Amount Ratio
------------ --------- --------- --------
As of December 31, 1996
(in thousands)
Total capital (to risk-
weighted assets) $342,828 12.30% $231,066 11.48%
Tier 1 capital (to risk-
weighted assets) $307,981 11.05% $206,223 10.24%
Tier 1 capital (to total
assets) $307,981 7.33% $206,223 7.15%
As of December 31, 1995
Total capital (to risk-
weighted assets) $321,153 13.52% $228,265 12.56%
Tier 1 capital (to risk-
weighted assets) $292,143 12.30% $207,203 11.41%
Tier 1 capital (to total
assets) $292,143 7.91% $207,203 8.06%
Note T - National Commerce Bancorporation Financial Information
(Parent Company Only)
Balance Sheets
December 31
In Thousands 1996 1995
-------- --------
ASSETS
Cash* $ 205 $ 2,261
Investments in:
Bank subsidiaries* 273,541 267,749
Non-bank subsidiaries* 33,083 26,403
Other 7,030 1,606
-------- --------
Total assets $313,859 $298,019
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 530 $ 1,340
Stockholders' equity 313,329 296,679
-------- --------
Total liabilities and stockholders' equity $313,859 $298,019
======== ========
*Eliminated in consolidation.
Statements of Income
Year Ended December 31
In Thousands 1996 1995 1994
-------- -------- --------
Income:
Dividends from bank and thrift subsidiaries* $ 47,045 $ 26,330 $ 32,938
Dividends from non-bank subsidiaries* 5,500 2,500 3,500
Income from bank subsidiaries* 50 132 154
Other (250) --- 321
-------- -------- --------
52,345 28,962 36,913
Expenses:
Salaries and employee benefits 63 50 65
Other (567) 2,138 774
-------- -------- --------
(504) 2,188 839
Income before income taxes (credits) and
equity in undistributed earnings
of subsidiaries 52,849 26,774 36,074
Income taxes (credits) 116 (808) (142)
-------- -------- --------
52,733 27,582 36,216
Equity in undistributed net income of:
Bank and thrift subsidiaries (1,457) 15,653 6,066
Non-bank subsidiaries 6,237 5,800 2,060
-------- -------- --------
Net income $ 57,513 $ 49,035 $ 44,342
======== ======== ========
*Eliminated in consolidation.
Statements of Cash Flows
Year Ended December 31
------------------------------
In Thousands 1996 1995 1994
-------- -------- --------
Operating activities:
Net income $ 57,513 $ 49,035 $ 44,342
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed earnings of subsidiaries (4,780) (21,453) (8,126)
Decrease in other assets 1,438 522 1,914
Increase (decrease) in liabilities (810) 442 (795)
-------- -------- --------
Net cash provided by operating
activities 53,361 28,546 37,335
Investing activities:
Investment in subsidiaries (9,298) (12,000) (26,298)
Financing activities:
Cash used to repurchase/retire stock (30,581) --- ---
Proceeds from exercise of stock options 3,829 2,163 1,172
Cash dividends paid (19,367) (17,300) (15,183)
Other --- --- 75
-------- -------- --------
Net cash used in financing activities (46,119) (15,137) (13,936)
Increase (decrease) in cash (2,056) 1,409 (2,899)
Cash at beginning of year 2,261 852 3,751
-------- -------- --------
Cash at end of year $ 205 $ 2,261 $ 852
======== ======== ========
Note U - Quarterly Results of Operations (Unaudited)
Quarter
----------------------------------------
In Thousands, Except Per Share Data First Second Third Fourth
-------- -------- -------- -------
1996:
Interest income $ 67,250 $ 70,445 $ 72,420 $76,452
Interest expense 34,919 36,615 39,026 40,541
Net interest income 32,331 33,830 33,394 35,911
Provision for loan losses 2,842 4,453 4,149 2,690
Other income 14,931 19,118 18,654 18,223
Securities gains (losses) 25 (257) 194 41
Other expenses 24,421 27,356 25,579 27,813
Income before income taxes 20,024 20,882 22,514 23,672
Income taxes 6,748 7,119 7,789 7,923
Net income $ 13,276 $ 13,763 $ 14,725 $15,749
Net income per common share $.53 $.55 $.59 $ .63
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