UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 0-6094
-------
NATIONAL COMMERCE BANCORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-0784645
- ---------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation organization) Identification No.)
One Commerce Square
Memphis, Tennessee 38150
- ------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code - (901)523-3242
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $2 par value -- 50,054,180 shares as of April 30, 1998
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
--------------------
NATIONAL COMMERCE BANCORPORATION
Consolidated Balance Sheets
--------------------------------
(In Thousands)
March 31 Dec. 31
1998 1997
----------- -----------
(unaudited)
ASSETS
Cash and cash equivalents:
Interest-bearing deposits with other banks $ 17,704 $ 18,293
Cash and non-interest bearing deposits 216,050 206,191
Federal funds sold and securities
purchased under agreements to resell 54,923 23,009
---------- ----------
Total cash and cash equivalents 288,677 247,493
---------- ----------
Securities:
Held-to-maturity 1,254,194 1,210,071
Available-for-sale 541,840 408,083
---------- ----------
Total securities 1,796,034 1,618,154
---------- ----------
Trading account securities 52,049 98,332
Loans:
Commercial, financial and agricultural 517,937 512,534
Real estate - construction 229,514 241,334
Real estate - mortgage 870,937 781,826
Consumer 1,073,666 1,045,420
Lease financing 29,505 30,046
Unearned discounts (2,347) (2,193)
---------- ----------
Total loans 2,719,212 2,608,967
Less allowance for loan losses 44,643 43,297
---------- ----------
Net loans 2,674,569 2,565,670
---------- ----------
Premises and equipment, net 29,984 27,404
Broker/dealer customer receivables 11,554 7,695
Other assets 139,611 127,263
---------- ----------
Total assets $4,992,478 $4,692,011
========== ==========
See notes to consolidated financial statements.
1
Consolidated Balance Sheets (cont.)
- -----------------------------------
(In Thousands)
March 31 Dec. 31
1998 1997
---------- ---------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest-bearing deposits $ 439,495 $ 417,748
Money market checking 341,911 286,555
Savings 101,891 83,626
Money market savings 1,041,527 943,422
Certificates of deposit less than $100,000 937,630 899,027
Certificates of deposit of $100,000 or more 646,748 620,864
---------- ----------
Total deposits 3,509,202 3,251,242
---------- ----------
Federal funds purchased and securities sold
under agreements to repurchase 465,527 423,573
Broker/dealer customer payables 8,566 59
Accounts payable and accrued liabilities 82,812 68,969
Federal Home Loan Bank advances 340,866 389,884
Other borrowed funds and long-term debt 156,298 156,252
---------- ----------
Total liabilities 4,563,271 4,289,979
---------- ----------
Capital trust pass-through securities 49,887 49,884
Stockholders' equity:
Common stock 100,028 97,704
Additional paid-in capital 63,617 52,524
Retained earnings 213,275 199,670
Unrealized gains (losses) on securities, net of taxes 2,400 2,250
---------- ----------
Total stockholders' equity 379,320 352,148
---------- ----------
Total liabilities and
stockholders' equity $4,992,478 $4,692,011
========== ==========
See notes to consolidated financial statements.
2
NATIONAL COMMERCE BANCORPORATION
Consolidated Statements of Income
---------------------------------
(Unaudited)
(In Thousands, Except per Share Data)
For the three months
ended March 31
---------------------
1998 1997
--------- ----------
Interest income:
Loans $59,976 $53,015
Securities:
Taxable 24,855 23,278
Non-taxable 1,956 2,317
Trading account securities 727 305
Deposits at banks 214 223
Other 499 199
------- -------
Total interest income 88,227 79,337
------- -------
Interest expense:
Deposits:
Money market checking 839 943
Savings 478 382
Money market savings 10,520 10,349
Certificates of deposit less than $100,000 12,845 9,950
Certificates of deposit $100,000 or more 8,131 7,821
Federal Home Loan Bank advances 4,053 5,082
Long-term debt 2,312 2,249
Federal funds purchased and securities
sold under agreements to repurchase 4,778 4,657
------- -------
Total interest expense 43,956 41,433
------- -------
Net interest income 44,271 37,904
Provision for loan losses 867 3,454
------- -------
Net interest income after
provision for loan losses 43,404 34,450
------- -------
Other income:
Trust service income 2,798 2,234
Service charges on deposits 4,493 3,851
Other service charges and fees 3,628 3,144
Broker/dealer revenue 4,698 2,506
Securities gains (losses) 2 (1)
Other 5,387 5,861
------- -------
Total other income 21,006 17,595
------- -------
3
Consolidated Statements of Income (cont.)
- ---------------------------------
For the three months
ended March 31
--------------------
1998 1997
--------- ---------
Other expenses:
Salaries and employee benefits 16,442 13,677
Occupancy expense 2,803 2,572
Furniture and equipment expenses 1,380 1,124
Other 13,516 11,628
------- -------
Total other expenses 34,141 29,001
------- -------
Income before income taxes 30,269 23,044
Income taxes 10,254 7,929
------- -------
Net income $20,015 $15,115
======= =======
Basic net income per share of common stock* $ .20 $ .16
Diluted net income per share of common stock* $ .19 $ .15
Dividends per share of common stock* $ .07 $ .06
* Adjusted to reflect 2-for-1 stock split declared April 22, 1998.
See notes to consolidated financial statements.
4
NATIONAL COMMERCE BANCORPORATION
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
For the Three Months
Ended March 31
----------------------
1998 1997
---------- ----------
(In Thousands)
Operating activities:
Net income $ 20,015 $ 15,115
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 867 3,454
Provision for depreciation and amortization 1,493 1,330
Amortization of security premiums and accretion
of discounts, net (896) 15
Deferred income taxes (credit) 769 (19)
(Increase) decrease in trading account securities 46,283 (13,599)
Realized securities (gains) losses (2) 1
(Increase) decrease in broker/dealer customer receivables (3,859) (13,109)
(Increase) decrease in interest receivable (143) (1,013)
(Increase) decrease in other assets 4,159 (6,477)
Increase (decrease) in broker/dealer customer payables 8,507 2,626
Increase (decrease) in interest payable (710) 592
Increase (decrease) in accounts payable and accrued expenses 16,942 20,034
--------- ---------
Net cash provided by (used in) operating activities 93,425 8,950
--------- ---------
Investing activities:
Available for sale securities:
Proceeds from the maturities of securities 170,415 5,894
Proceeds from sales of securities 1,155 29,998
Purchases of securities available for sale (168,304) (62,932)
Purchases of securities held to maturity (180,000) (71,539)
Net (increase) decrease in loans (109,766) (85,578)
Purchase of premises and equipment (4,073) (1,770)
--------- ---------
Net cash provided by (used in) investing activities (290,573) (185,927)
--------- ---------
Financing activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 193,473 (15,745)
Net increase (decrease) in certificates of deposit 64,487 5,823
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 41,954 118,067
Increase (decrease) in long-term debt 49 49,921
Increase (decrease) in Federal Home Loan Bank advances (49,018) 33,669
Proceeds from exercise of stock options 1,140 1,086
Issuance of common stock 0 17
Repurchases of common stock (7,365) (132)
Cash dividends paid (6,388) (5,399)
--------- ---------
Net cash provided by (used in) financing activities 238,332 187,307
--------- ---------
Increase (decrease) in cash and cash equivalents 41,184 10,330
Cash and cash equivalents at beginning of period 247,493 195,902
--------- ---------
Cash and cash equivalents at end of period $ 288,677 $ 206,232
========= =========
Interest paid $ 43,246 $ 40,888
Income taxes paid $ 7,200 $ 1,203
See notes to consolidated financial statements.
5
NATIONAL COMMERCE BANCORPORATION
--------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
March 31, 1998
------------------
(Unaudited)
---------
Note A - Basis of Presentation
- ------------------------------
The consolidated balance sheet at December 31, 1997 has been derived from
the audited financial statements at that date. The accompanying unaudited
interim consolidated financial statements reflect all adjustments
(consisting only of normally recurring accruals) which are, in the opinion
of management, necessary for a fair statement of the results for the interim
periods presented. The statements should be read in conjunction with the
summary of accounting policies and notes to consolidated financial
statements included in the Registrant's annual report for the year ended
December 31, 1997. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted in accordance with the
rules of the Securities and Exchange Commission.
Note B - Securities Portfolio
- -----------------------------
In accordance with FAS No. 115 "Accounting for Certain Investments in Debt
and Equity Securities", as of March 31, 1998 the securities in the
"Available for Sale" category included $3,935,000 in unrealized gains.
Accordingly, total securities and total stockholders' equity were increased
by $3,935,000 and $2,400,000 (net of taxes), respectively, at March 31,
1998, to reflect the adjustment of the securities portfolio to market. The
calculation of book value per share reflects these mark-to-market unrealized
gains, whereas the calculation of ROA and ROE do not, because the unrealized
gains are not included in net income. The fair value of the "Held to
Maturity" category was $1.26 million at March 31, 1998.
Note C - Floating Rate Capital Trust Pass-through Securities
- ------------------------------------------------------------
In March, 1997, the Company issued $49,875,000 in Floating Rate Capital
Trust Pass-through Securities ("Capital Securities"). The proceeds of this
issue were used by the Company for general corporate purposes and may be
counted as Tier I capital.
Note D - Earnings Per Share
- ---------------------------
The following table sets forth the computation of basic and diluted earnings
per share:
Three Months Ended
March 31
------------------
In Thousands, Except Per Share Amounts 1998 1997
-------- --------
Numerator:
Net income $ 20,015 $ 15,115
======== ========
Denominator:
Denominator for basic earnings
per share - weighted average shares 99,955 98,008
Dilutive potential common shares -
Employee stock options 2,482 3,066
-------- --------
Denominator for diluted earnings per share -
adjusted weighted - average and assumed
conversions 102,437 101,074
======== ========
Basic earnings per share* $ .20 $ .16
Diluted earnings per share* $ .19 $ .15
* All share and per share amounts have been retroactively restated for stock
dividends and splits declared through April 22, 1998.
6
Note E - Comprehensive Income
- -----------------------------
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components; however,
the adoption of this Statement had no impact on the Company's net income or
stockholders' equity. Statement 130 requires unrealized gains or losses on
the Company's available-for-sale securities, which prior to adoption were
reported separately in stockholders' equity to be included in other
comprehensive income. Prior year financial statements have been
reclassified to conform to the requirements of Statement 130.
During the first quarter of 1998 and 1997, total comprehensive income
amounted to $20,165 and $11,866.
7
Item 2. 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) 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.
This Form 10-Q may contain or incorporate by reference statements which may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. Prospective investors are cautioned that any such
forward-looking statements are not guarantees for future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements include significant
fluctuations in interest rates, inflation, economic recession, significant
changes in the federal and state legal and regulatory environment, significant
underperformance in the Company's portfolio of outstanding loans, and
competition in the Company's markets. The Company undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurance of unanticipated events or changes to future results over time.
Financial Condition
- -------------------
Following is a comparison of the March 31, 1998 and December 31, 1997
consolidated balance sheets. In the liability section, total deposits increased
by $258 million or 7.9%, principally as a result of a $98 million or 10.4%
increase in money market savings accounts, a $55 million or 19.3% increase in
money market checking accounts, a $39 million or 4.3% increase in certificates
of deposit less than $100,000, a $26 million or 4.2% increase in certificates of
deposit greater than $100,000, a $22 million or 5.2% increase in non-interest
bearing deposits and a $18 million or 21.8% increase in savings accounts. These
deposit increases are the result of new deposit gathering campaigns initiated in
first quarter, 1998.
Federal funds purchased and securities sold under agreements to repurchase
increased $42 million or 9.9% from year-end 1997 levels. This category of
liabilities fluctuates with the availability of overnight funds purchased from
downstream correspondent banks.
Federal Home Loan Bank advances decreased $49 million or 12.6% from December
31, 1997. This decrease is principally the result of asset/liability management
decisions related to the current interest rate environment.
Total gross loans increased by $110 million or 4.2% compared to December 31,
1997 levels. Commercial loans increased by $5 million or 1.1% and real estate
construction loans decreased by $12 million or 4.9% reflecting current demand.
Real estate mortgage loans increased by $89 million or 11.4%, and consumer loans
increased $28 million or 2.7%, reflecting an increased emphasis on promoting
home equity and other consumer products.
Securities increased by $178 million or 11.0% from year-end 1997.
Securities held to maturity increased by $44 million or 3.6%, and securities
available for sale increased $134 million or 32.8%, reflecting current portfolio
investment strategies, and current market conditions.
Federal funds sold and securities purchased under agreements to resell
increased by $32 million or 138.7% from December 31, 1997 levels, reflecting
excess funds that otherwise were not employed in loans or securities at March
31, 1998.
Trading account securities decreased by $46 million or 47.1% from year-end
8
1997 levels. This increase reflects the trading activity generated by NBC
Capital Markets Group, Inc., the Company's broker/dealer subsidiary, which
fluctuates from time to time.
Broker/dealer customer receivables increased $4 million or 50.1% and
payables increased $9 million or 100.0% reflecting levels of activity.
Results of Operations
- ---------------------
Three Months Ended March 31, 1998, Compared to Three Months Ended March 31, 1997
- --------------------------------------------------------------------------------
Net income was $20,015,000 for the first quarter of 1998, a 32.4% increase
over the $15,115,000 reported for the same period a year earlier. Diluted
earnings per share were $.19, compared to $.15 per share in 1997, up 26.7%.
Basic earnings per share were $.20, compared to $.16 per share in 1997, up
25.0%.
Net interest income, the difference between interest earned on loans and
investments and interest paid on interest-bearing liabilities, increased by
$6,397,000 or 16.4% for the first quarter of 1998. This increase reflects a
$8,920,000 or 11.l% increase in total interest income that more than offsets a
$2,523,000 or 6.1% increase in interest expense. Interest income increased in
1998 due to an increase of $398,578,000 or 10.0% in total average earning
assets, and an increase in the yield on average earning assets from 8.19% in the
first quarter of 1997 to 8.27% in the first quarter of 1998. The increased
volume of earning assets positively impacted interest income by approximately
$8,000,000, while the increased yield positively impacted interest income by
approximately $900,000. Interest expense increased in the first quarter of
1998, reflecting an increase in average interest-bearing liabilities of
$274,265,000 or 7.8%, partially offset by a decrease in the cost of interest-
bearing liabilities from 4.77% to 4.70%. The decrease in the rate paid on
interest-bearing liabilities positively affected interest expense by
approximately $700,000 and the increase in average outstandings negatively
affected interest expense by approximately $3,200,000. The net interest margin
(taxable equivalent net interest income as a percentage of average earning
assets) was 4.21% in first quarter 1997, compared to 3.98% in first quarter of
1997.
The provision for loan losses in the first quarter of 1998 was $867,000,
versus $3,454,000 for the first quarter of 1997. Net charge-offs were $762,000,
or .11% of average loans compared to $2,554,000 or .43% of average loans in
1997. The allowance for loan losses totaled $44,643,000 at March 31, 1998,
representing 1.64% of quarter-end net loans, compared to $36,739,000 or 1.51% of
quarter-end net loans at March 31, 1997.
Following is a comparison of non-earning assets and loans past due 90 days
or more for the quarters ended March 31, 1998, December 31, 1997, and March 31,
1997 (dollars in thousands):
3-31-98 12-31-97 3-31-97
-------- -------- -------
Non-accrual loans 0 0 0
Renegotiated loans 0 0 0
Other real estate 217 0 0
----- ----- -----
Total non-earning assets 217 0 0
===== ===== =====
Accruing loans past due 90 days or more 4,602 3,134 4,430
Percentage of total loans .17% .12% .18%
Non-interest income, excluding securities transactions, totaled $21,004,000
for the quarter, an increase of $3,408,000, or 19.4%, from last year's first
9
quarter. The Company's broker/dealer revenue increased $2,192,000 versus first
quarter 1997, reflecting current market conditions. All other sources of non-
interest income, including service charge income, trust service income, fuel
card processing income, and supermarket sublicense income increased a net of
$1,216,000 or 8.1%. Securities gains totaled $2,000 in first quarter 1998,
compared to securities losses of $1,000 in 1997.
Non-interest expenses (excluding the provision for loan losses) increased by
$5,140,000 or 17.7% in first quarter, 1998, primarily reflecting increased
employment and other expenses relating to new products and locations and
increased promotional expenses of new loan and deposit gathering campaigns.
The Company's annualized return on average assets and return on average
equity were 1.70% and 21.76% respectively, for first quarter of 1998. These
compared with 1997 first quarter returns of 1.44% and 19.02%, respectively.
Liquidity and Capital Resources
- -------------------------------
Interest-bearing 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 Reserve Bank and the Federal Home Loan
Bank. Maturing loans and securities are the principal sources of long-term
asset liquidity.
Total realized stockholders' equity increased by $27,022,000 from December
31, 1997. Retained earnings accounted for the majority of the increase.
Through March 31, 1998, 2.98 million shares had been repurchased and cancelled
under a stock repurchase program initiated in January, 1996, and extended in
December, 1997.
The following capital ratios do not include the effect of FAS No. 115 on
Tier I capital, total capital, or total risk-weighted assets.
As indicated in the following table, the Company and its banking
subsidiaries exceeded all minimum required capital ratios for well-capitalized
institutions at March 31, 1998.
3-31-98 12-31-97 3-31-97
------- -------- -------
Total capital to risk-weighted assets 14.07% 13.86% 13.91%
Tier I capital to risk-weighted assets 12.82% 12.61% 12.66%
Tier I capital to assets (leverage ratio) 8.89% 8.69% 8.76%
10
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
27. Financial Data Schedule
b. Reports on Form 8-K
The Registrant did not file any reports on Form 8-K
during the quarter ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NATIONAL COMMERCE BANCORPORATION
(Registrant)
By /s/ Lewis E. Holland
--------------------------------------
Lewis E. Holland
Vice Chairman, Treasurer and
Chief Financial Officer
(Authorized Officer)
(Principal Financial Officer)
Date May 14, 1998
--------------------
11