UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number 0-6094
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NATIONAL COMMERCE BANCORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-0784645
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(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 -- 48,851,969 shares as of November 5, 1997
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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NATIONAL COMMERCE BANCORPORATION
Consolidated Balance Sheets
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(In Thousands)
Sept. 30 Dec. 31
1997 1996
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(unaudited)
ASSETS
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Cash and cash equivalents:
Interest-bearing deposits with other banks $ 18,465 $ 17,789
Cash and non-interest bearing deposits 199,129 164,894
Federal funds sold and securities
purchased under agreements to resell 16,570 13,219
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Total cash and cash equivalents 234,164 195,902
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Securities:
Held-to-maturity 962,423 817,124
Available-for-sale 611,626 700,775
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Total securities 1,574,049 1,517,899
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Trading account securities 21,197 31,812
Loans:
Commercial, financial and agricultural 470,950 469,604
Real estate - construction 218,661 168,556
Real estate - mortgage 759,112 598,277
Consumer 1,130,564 1,088,095
Lease financing 30,101 23,444
Unearned discounts (2,036) (3)
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Total loans 2,607,352 2,347,973
Less allowance for loan losses 39,911 35,514
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Net loans 2,567,441 2,312,459
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Premises and equipment, net 26,463 21,799
Broker/dealer customer receivables 14,009 11,699
Other assets 119,637 108,839
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Total assets $4,556,960 $4,200,409
========== ==========
See notes to consolidated financial statements.
1
Consolidated Balance Sheets (cont.)
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(In Thousands)
Sept. 30 Dec. 31
1997 1996
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(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Non-interest-bearing deposits $ 375,939 $ 352,676
Money market checking 259,271 275,471
Savings 80,022 79,599
Money market savings 955,331 970,838
Certificates of deposit less than $100,000 801,222 728,249
Certificates of deposit of $100,000 or more 500,112 569,597
---------- ----------
Total deposits 2,971,897 2,976,430
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Federal funds purchased and securities sold
under agreements to repurchase 451,903 298,410
Broker/dealer customer payables 0 1,002
Accounts payable and accrued liabilities 157,401 59,064
Federal Home Loan Bank advances 424,837 396,109
Long-term debt 206,086 156,065
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Total liabilities 4,212,124 3,887,080
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Stockholders' equity:
Common stock 97,893 48,770
Additional paid-in capital 58,789 61,763
Retained earnings 185,491 201,566
Unrealized gains (losses) on securities, net of taxes 2,663 1,230
---------- ----------
Total stockholders' equity 344,836 313,329
Total liabilities and ---------- ----------
stockholders' equity $4,556,960 $4,200,409
========== ==========
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 For the nine months
ended Sept. 30 ended Sept. 30
-------------------------- -------------------------
1997 1996 1997 1996
-------- -------- ------- ------
Interest income:
Loans $59,995 $48,747 $168,924 $138,889
Securities:
Taxable 24,281 20,635 72,778 62,364
Non-taxable 1,870 1,904 5,621 5,867
Trading account securities 413 446 1,237 1,218
Deposits at banks 266 233 722 674
Other 313 455 712 1,103
------- ------- -------- --------
Total interest income 87,138 72,420 249,994 210,115
------- ------- -------- --------
Interest expense:
Deposits:
Money market savings 733 945 2,559 3,016
Savings 405 390 1,195 1,250
Money market savings 10,392 9,772 31,045 25,847
Certificates of deposit less than $100,000 11,229 9,570 31,562 27,741
Certificates of deposit $100,000 or more 7,375 7,535 22,953 20,855
Federal Home Loan Bank advances 6,215 6,284 17,466 18,113
Long-term debt 3,232 1,047 8,718 1,276
Federal funds purchased and securities
sold under agreements to repurchase 6,402 3,483 16,476 12,462
------- ------- -------- --------
Total interest expense 45,983 39,026 131,974 110,560
------- ------- -------- --------
Net interest income 41,155 33,394 118,020 99,555
Provision for loan losses 4,280 4,149 11,285 11,444
------- -------- -------- --------
Net interest income after
provision for loan losses 36,875 29,245 106,735 88,111
------- -------- -------- --------
Other income:
Trust service income 2,409 2,200 6,763 6,549
Service charges on deposits 4,394 3,701 12,192 10,476
Other services charges and fees 4,086 3,234 10,941 7,639
Broker/dealer revenue 3,158 1,676 7,890 7,617
Securities gains (losses) 2 194 31 (38)
Other income 5,963 7,843 18,640 20,425
------- -------- -------- --------
Total other income 20,012 18,848 56,457 52,665
------- -------- -------- --------
3
Consolidated Statements of Income (cont.)
- ---------------------------------
For the three months For the nine months
ended Sept. 30 ended Sept. 30
-------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
Other expenses:
Salaries and employee benefits 14,123 11,744 41,917 35,797
Occupancy expense 2,581 2,391 7,727 7,103
Furniture and equipment expenses 1,236 1,067 3,534 3,130
Other expenses 11,727 10,377 35,056 31,326
------- ------- -------- --------
Total other expenses 29,667 25,579 88,234 77,356
------- ------- -------- --------
Income before income taxes 27,220 22,514 74,958 63,420
Income taxes 9,175 7,789 25,689 21,656
------- ------- -------- --------
Net income $18,045 $14,725 $ 49,269 $ 41,764
======= ======= ======== ========
Net income per share of common stock $.36 $.30 $.97 $.83
Dividends per share of common stock $.11 $.10 $.33 $.29
See notes to consolidated financial statements.
4
NATIONAL COMMERCE BANCORPORATION
Consolidated Statements of Cash Flows
-------------------------------------
(Unaudited)
For the Nine Months
Ended Sept. 30
------------------------
1997 1996
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(In Thousands)
Operating activities:
Net income $49,269 $41,764
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses 11,285 11,444
Provision for depreciation and amortization 3,884 2,839
Amortization of security premiums and accretion
of discounts, net 28 6
Deferred income taxes (credit) (861) 945
(Increase) decrease in trading account securities 10,615 (5,406)
Realized securities (gains) losses (31) 38
(Increase) decrease in broker/dealer customer receivables (2,310) 2,843
(Increase) decrease in interest receivable 3,260 496
(Increase) decrease in other assets (13,547) (22,553)
Increase (decrease) in broker/dealer customer payables (1,002) (1,271)
Increase (decrease) in interest payable 1,137 (662)
Increase (decrease) in accounts payable and accrued expenses 98,728 13,727
-------- -------
Net cash provided by (used in) operating activities 160,455 44,210
-------- -------
Investing activities:
Available for sale securities:
Proceeds from the maturities of securities 168,886 168,279
Proceeds from sales of securities 79,987 274,464
Purchases of securities available for sale (128,655) (375,478)
Purchases of securities held to maturity (174,019) (149,707)
Net increase (decrease) in loans (266,267) (323,472)
Purchase of premises and equipment (8,198) (3,685)
-------- --------
Net cash provided by (used in) investing activities (328,266) (409,599)
-------- --------
Financing activities:
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts (8,021) 99,386
Net increase (decrease) in certificates of deposit 3,488 84,233
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 153,493 (105,884)
Increase (decrease) in long-term debt 50,021 149,636
Increase (decrease) in Federal Home Loan Bank advances 28,728 (50,437)
Proceeds from exercise of stock options 2,987 3,198
Issuance of common stock 53 3,583
Repurchases of common stock (8,481) (24,180)
Cash dividends paid (16,195) (13,997)
-------- --------
Net cash provided by (used in) financing activities 206,073 145,538
-------- --------
Decrease in cash and cash equivalents 38,262 (219,851)
Cash and cash equivalents at beginning of period 195,902 387,755
-------- --------
Cash and cash equivalents at end of period $234,164 $167,904
======== ========
Interest paid $130,837 $111,222
Income taxes paid $23,818 $22,549
5
NATIONAL COMMERCE BANCORPORATION
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Notes to Consolidated Financial Statements
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September 30, 1997
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(Unaudited)
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Note A - Basis of Presentation
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The consolidated balance sheet at December 31, 1996 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, 1996. 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 September 30, 1997 the securities in
the "Available for Sale" category included $4.37 million in unrealized
gains. Accordingly, total securities and total stockholders' equity
were increased by $4.37 million and $2.66 million (net of taxes),
respectively, at September 30, 1997, to reflect the adjustment of the
securities portfolio to market. The calculation of book value per share
reflects these mark-to-market unrealized losses, 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 $956.5 million at September 30, 1997.
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 are being used by the Company for general corporate purposes
and may be counted as Tier I capital.
Note D - Effect of FASB Statement No. 128
- -----------------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will
be excluded. The impact of Statement 128 on the calculation of primary
earnings per share and fully diluted earnings per share is not expected
to be material.
Note E - Effect of FASB Statement No. 131
- -----------------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the reporting of
financial information from operating segments using the management
approach in annual and interim financial statements. This Statement
requires that financial information be reported on the basis that it is
reported internally for evaluating segment performance and deciding how
to allocate resources to segments. Because this Statement addresses how
supplemental financial information is disclosed in annual and interim
reports, the adoption will have no material impact on the financial
statements. SFAS No. 131 will become effective in 1998.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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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 through September 30, 1997.
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 comtemplated 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
occurrence of unanticipated events or changes to future results over time.
Financial Condition
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Following is a comparison of the September 30, 1997, and December 31,
1996, consolidated balance sheets. Total deposits decreased by $5 million or
.2%, principally as a result of a $69 million or 12.2% decrease in certificates
of deposit of $100,000 or more, a $16 million or 5.9% decrease in money market
checking accounts, and a $16 million or 1.6% decrease in money market savings
accounts. Partially offsetting these decreases, non-interest bearing deposits
increased $23 million or 6.6% and certificates of deposit less than $100,000
increased $73 million or 10.0%.
Federal funds purchased and securities sold under agreements to
repurchase increased $153 million or 51.4% from year-end 1996 levels. This
category of liabilities fluctuates with the availability of overnight funds
purchased from downstream correspondent banks.
Federal Home Loan Bank advances increased $29 million or 7.3% from
December 31, 1996. This increase is principally the result of asset/liability
management decisions related to the current interest rate environment.
Long-term debt increased $50 million or 32.1%, reflecting management's
decision to issue floating-rate Capital Trust Pass-through Securities in March,
1997. The proceeds of this issue are being used by the Company for general
corporate purposes and may be counted as Tier 1 capital.
Total loans, net of unearned discounts, increased by $259 million or
11.0% compared to December 31, 1996 levels. Commercial loans increased by $1
million or 0.3% and real estate construction loans increased by $50 million or
29.7%, reflecting current demand. Real estate mortgage loans increased by $161
million or 26.9%, reflecting an increased emphasis on promoting home equity
loans. Consumer loans increased $42 million or 3.9%, while lease financing loans
increased $7 million or 28.4% due to the Company's recent purchase of two
leasing companies.
Securities increased by $56 million or 3.7% from year-end 1996.
Securities held to maturity increased by $145.3 million or 17.8%, and securities
available for sale decreased $89.1 million or 12.7%, reflecting current
portfolio investment strategies, and current market conditions.
7
Federal funds sold and securities purchased under agreements to resell
increased by $3 million or 25.3% from December 31, 1996 levels, reflecting
excess funds that otherwise were not employed in loans or securities at
September 30, 1997.
Trading account securities decreased by $11 million or 33.4% from
year-end 1996 levels. This decrease 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 $2 million or 19.7% and
payables decreased $1 million or 100.0% reflecting levels of activity.
Results of Operations
- ---------------------
Three Months Ended September 30, 1997, Compared to Three Months Ended
September 30, 1996
- -------------------------------------------------------------------------------
Net income was $18,045,000 for the third quarter of 1997, a 22.5%
increase over the $14,725,000 reported for the same period a year earlier.
Earnings per share were $.36, compared to $.30 per share in 1996, up 20.0%.
Net interest income, the difference between interest earned on loans
and investments and interest paid on interest-bearing liabilities, increased by
$7,656,000 or 22.1% for the third quarter of 1997 compared to third quarter
1996. This increase reflects an $14,613,000 or 19.8% increase in total interest
income that more than offsets a $6,957,000 or 17.8% increase in interest
expense. Interest income increased in 1997 due to an increase of $581,632,000 or
15.9% in total average earning assets, and an increase in the yield on average
earning assets from 8.00% in the third quarter of 1996 to 8.25% in the third
quarter of 1997. The increased volume of earning assets positively impacted
interest income by approximately $12,000,000, while the increased yield
positively impacted interest income by approximately $2,600,000. Interest
expense increased in the third quarter of 1997, reflecting an increase in
average interest-bearing liabilities of $537,820,000 or 16.7%, and an increase
in the cost of interest-bearing liabilities from 4.81% to 4.84%. The increase in
the rate paid on interest-bearing liabilities had a minimal effect on interest
expense, and the increase in average outstandings negatively affected interest
expense by approximately $7,000,000. The net interest margin (taxable equivalent
net interest income as a percentage of average earning assets) was 3.95% in
third quarter 1997, compared to 3.76% in third quarter of 1996.
The provision for loan losses in the third quarter of 1997 was
$4,280,000, versus $4,149,000 for the third quarter of 1996. Net charge-offs
were $2,479,000, or .38% of average loans compared to $1,797,000 or .33% of
average loans in 1996. The allowance for loan losses totaled $39,911,000 at
September 30, 1997, representing 1.53% of quarter-end net loans, compared to
$34,827,000 or 1.55% of quarter-end net loans at September 30, 1996.
Following is a comparison of non-earning assets and loans past due 90
days or more for the quarters ended September 30, 1997, June 30, 1997, and
September 30, 1996 (dollars in thousands):
9-30-97 6-30-97 9-30-96
-------- -------- --------
Non-accrual loans 111 0 0
Renegotiated loans 0 0 0
Other real estate 34 0 0
--- -- -----
Total non-earning assets 145 0 0
=== == =====
Loans past due 90 days or more 4,181 4,196 3,068
8
Percentage of total loans .16% .17% .14%
Non-interest income, excluding securities transactions, totaled
$20,010,000 for the quarter, an increase of $1,356,000, or 7.3%, from last
year's third quarter. Included in third quarter, 1996 non-interest income was a
pre-tax gain of $1.8 million relating to bank facilities. Excluding this gain,
non-interest income increased $3,156,000 or 18.7% for the third quarter compared
to third quarter 1996. The Company's broker/dealer revenue decreased $1,482,000
versus third quarter 1996, 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 $1,674,000 or 11.0%. Securities gains totaled $2,000 in third quarter
1997, compared to securities gains of $194,000 in third quarter 1996.
Non-interest expenses (excluding the provision for loan losses)
increased by $4,088,000 or 16.0% in third quarter, 1997, primarily reflecting
increased employment and occupancy expenses relating to new products and
locations and increased promotional expenses of new loan and deposit gathering
campaigns.
The Company's return on average assets and return on average equity
were 1.60% and 21.38% respectively, for third quarter of 1997. These compared
with 1996 third quarter returns of 1.52% and 19.98%, respectively.
Nine Months Ended September 30, 1997, Compared to Nine Months Ended September
30, 1996
- --------------------------------------------------------------------------------
For the nine months ended September 30, 1997, net income totaled
$49,269,000, a 18.0% increase over the $41,764,000 for the first nine months of
1996. Earnings per share were $.97, compared to $.83 for the same period in
1996, a 16.9% increase. For the nine-month period, return on average assets and
return on average stockholders' equity were $1.50% and 19.95% respectively.
These compared with 1996 nine month returns of 1.49% and 19.01%.
Net interest income increased by $18,054,000 or 17.4% for the first
nine months of 1997. This increase reflects a $39,468,000 or 18.4% increase in
total interest income that more than offsets a $21,414,000,000 or 19.4% increase
in interest expense. Interest income increased in 1997 due to an increase of
$581,393,000 or 16.4% in total average earning assets and an increase in the
yield on average earning assets from 8.06% in 1996 to 8.21% in 1997. The
increased volume of earning assets positively impacted interest income by
approximately $35,000,000, and the increased yield positively impacted interest
income by approximately $4,000,000. Interest expense increased in the first nine
months of 1997, reflecting an increase in average interest-bearing liabilities
of $558,369,000 or 18.0%, with the cost of interest-bearing liabilities
increasing from 4.77% to 4.82% in 1997. The increase in average outstandings
negatively impacted interest expense by approximately $20,000,000 while the
increased rate negatively impacted expense by approximately $1,500,000. The net
interest margin was 3.94% in the first nine months of 1997, compared to 3.90% in
the first nine months of 1996.
The provision for loan losses for the first nine months of 1997 was
$11,285,000, versus $11,444,000 for the first nine months of 1996. Net
charge-offs were $7,513,000, compared to $5,224,000 in 1996.
Non-interest income, excluding securities transactions, totaled
$56,426,000 for the first nine months of 1997, compared to a total of
$52,703,000 for the first nine months of 1996, an increase of 7.1%. Included in
1996 non-interest income was a $1.2 million gain on the sale of certain assets,
primarily loans, of the Company's Commerce Finance subsidiary, and the
previously mentioned $1.8 million gain relating to bank facilities transactions.
Excluding these gains, non-interest income increased $6,723,000 or 13.5%. The
Company's broker-dealer revenue increased $273,000 or 3.6%, reflecting current
market conditions. Other sources of non-interest income, including service
charge income, trust service income, fuel card processing income, supermarket
sublicence income increased a net of $6,450,000 or
9
15.3%. Securities gains totaled $31,000 in 1997, compared to $38,000 in
securities losses in 1996.
Non-interest expenses (excluding the provision for loan losses)
increased by $10,878,000 or 14.1% for the first nine months of 1997. Increased
employment and occupancy expenses relating to new products and locations, and
increased promotional expenses of new loan and deposit gathering campaigns were
the primary reasons for the increase.
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 $30,074,000 from
December 31, 1996. Retained earnings accounted for the majority of the increase.
Through September 30, 1997, 2,428,201 shares had been repurchased and cancelled
under a stock repurchase program initiated in January, 1996 and are used to fund
employee benefit plans.
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 September 30, 1997.
9-30-97 6-30-97 9-30-96
------- ------- -------
Total capital to risk-weighted assets 13.73% 13.91% 12.36%
Tier I capital to risk-weighted assets 12.47% 12.65% 11.11%
Tier I capital to assets (leverage ratio) 8.50% 8.58% 7.69%
10
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
---------------------------------
a. Exhibits
11. Computation of Earnings per Share
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 September 30, 1997.
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 November 12, 1997
--------------------
11