-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EwnKaVPyieStA2uZCWSH8HW69K0mrAAZSiUjIbTI5lyWMmn6st+Avcy7yMQ2t3HS CtHNXbLHa5FE1II4yq646g== 0000931763-00-000675.txt : 20000328 0000931763-00-000675.hdr.sgml : 20000328 ACCESSION NUMBER: 0000931763-00-000675 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMMERCE BANCORPORATION CENTRAL INDEX KEY: 0000101844 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 620784645 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-06094 FILM NUMBER: 579208 BUSINESS ADDRESS: STREET 1: ONE COMMERCE SQ CITY: MEMPHIS STATE: TN ZIP: 38150 BUSINESS PHONE: 9015233242 MAIL ADDRESS: STREET 1: ONE COMMERCE SQ CITY: MEMPHIS STATE: TN ZIP: 38150 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TENNESSEE BANCSHARES CORP DATE OF NAME CHANGE: 19780820 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TENNESSEE BANSHARES CORP DATE OF NAME CHANGE: 19780525 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 December 31, 1999 0-6094 - ----------------- ------ (For the fiscal year ended) (Commission file number) 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 or organization) Identification No.) One Commerce Square, Memphis, Tennessee 38150 (901)523-3434 - --------------------------------------------- ------------- (Address of principal executive offices) (Telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $2 par value -------------------------- (Title of class) 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 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form. x ----- The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 10, 2000, was approximately $1,562,000.00. The number of shares of common stock outstanding, as of March 10, 2000, was 108,195,436. -1- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement relating to the 2000 Annual Meeting of Shareholders of National Commerce Bancorporation are incorporated by reference into Part III. Portions of the National Commerce Bancorporation Annual Report to shareholders for the fiscal year ended December 31, 1999 are incorporated by reference into Parts I and II. PART I. The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of the Company. All statements in this Annual Report on Form 10-K that are not historical facts or that express expectations and projections with respect to future matters are "forward-looking statements" for the purpose of the safe harbor provided by the Act. The Company cautions readers that such "forward-looking statements," including, without limitation, those relating to future business initiatives and prospects, revenues, working capital, liquidity, capital needs, interest costs and income, wherever they occur in this document or in other statements attributable to the Company, are necessarily estimates reflecting the best judgment of the Company's senior management. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the "forward-looking statements." Such "forward-looking statements" should, therefore be considered in light of various important factors, including those set forth in this document. 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. Other factors set forth from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission should also be considered. 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 operating results over time. During 1999, the Company acquired First Financial Corporation of Mt. Juliet, Tennessee, and Nashville-based Southeastern Mortgage of Tennessee. These acquisitions are incorporated into reported results. For comparative purposes, all prior year results are "restated" to include these events. ITEM 1. BUSINESS. NATIONAL COMMERCE BANCORPORATION: National Commerce Bancorporation ("NCBC" or "the Company"), a Tennessee corporation, is a bank holding company formed in February 1966 as Tennessee Financial Corporation. The corporate name was changed to United Tennessee Bancshares Corporation in 1970 and the present corporate name was adopted in April 1978. The business of NCBC consists of owning all of the outstanding capital stock of (1) National Bank of Commerce, Memphis, Tennessee ("NBC"), (2) NBC Bank, FSB, Knoxville, Tennessee ("Knoxville" or "the Knoxville Bank"), (3) NBC Bank, FSB, Belzoni, Mississippi ("Belzoni"), (4) Commerce Capital Management, Inc., Memphis, Tennessee ("Commerce Capital"), (5) TransPlatinum Service Corp., Nashville, Tennessee ("TransPlatinum") (6) U.S.I. Alliance Corp. -2- ("USI"), Memphis, Tennessee and (7) National Commerce Capital Trust I ("Trust I"), Memphis, Tennessee. NCBC provides NBC, Knoxville and Belzoni ("the Banks"), Commerce Capital, TransPlatinum, USI and Trust I with advice and counsel relating to financial and employee benefit matters, performs certain record-keeping functions relating to compliance with accounting and regulatory requirements and provides assistance in obtaining additional financing. In December 1999, the Company announced an agreement to acquire Piedmont Bancorp., Inc. of Hillsborough, North Carolina. The transaction is intended to be a tax-free exchange of shares and is intended to be accounted for as a pooling-of-interests with an expected close date late in the first quarter or early in the second quarter of 2000. On March 19, 2000, NCBC entered into a definitive merger agreement with CCB Financial Corporation, a bank holding company based in Durham, North Carolina ("CCB"). Pursuant to the merger agreement, NCBC will issue 2.45 shares of its common stock in exchange for each share of CCB common stock outstanding. The transaction is intended to be a tax-free exchange of shares and is intended to be accounted for as a pooling-of-interests. Consummation of the merger, which is expected to occur during the third quarter of 2000, is conditioned upon customary regulatory and shareholder approvals. National Commerce Bancorporation operates several major lines of business. The commercial banking segment includes lending and related financial services to large- and medium-sized corporations. Included among these are several specialty services such as real estate finance, asset based lending and residential construction. The retail banking segment includes sale and distribution of financial products and services to individuals. These include loan products such as residential mortgages, home equity lending, automobile and other personal financial needs. Retail banking also offers various deposit products that are designed for customers' saving and transaction needs. The financial services segment includes trust, asset management, insurance and brokerage activities. Financial services also includes balance sheet management activities including oversight of the investment portfolio, non- deposit based funding, interest rate risk management, income from transaction processing, in-store consulting/licensing and specialty leasing. See Note P of the Notes to Consolidated Financial Statements in the 1999 Annual Report incorporated herein by reference. NBC furnishes a full range of banking and trust services. At December 31, 1999 NBC had 29 branch and SUPER MONEY MARKET(R) facilities in Memphis and Shelby County, Tennessee, one branch facility in Somerville, Tennessee, one SUPER MONEY MARKET facility and two branches in Collierville, Tennessee, one SUPER MONEY MARKET facility, 31 branches and SUPER MONEY MARKET(R) facilities in Nashville, and three branches in West Memphis, Arkansas, and one branch in Marion, Arkansas. NBC has four active, wholly owned, non-banking subsidiaries, Commerce General Corporation ("Commerce General"), Commerce Finance Company ("Commerce Finance"), NBC Insurance Services, Inc. ("NBC Insurance") and National Commerce Bank Services, Inc. ("NCBS") and owns 80% of NBC Capital Markets Group, Inc. ("Capital Markets"). Commerce General provides a variety of data processing services to the Banks and other commercial enterprises. Commerce Finance emphasizes second- -3- and third-mortgage loans primarily for resale. Capital Markets was chartered as Commerce Investment Corporation in September 1986 to serve the needs of individual investors as a broker-dealer of investment products, including stocks, bonds, municipal obligations, mutual funds and unit investment trusts. The name was changed to NBC Capital Markets Group, Inc. effective January 1, 1997. NBC Insurance provides life, property and casualty insurance and annuities through NBC's in-store retail banking system. NCBS provides supermarket banking services to other financial institutions. The Knoxville Bank was organized in June 1986 as a state chartered bank to operate full-service SUPER MONEY MARKET banking facilities within the Knoxville area. During 1994, the Knoxville Bank was converted to a federally chartered savings bank and expanded into North Carolina. At December 31, 1999 the Knoxville Bank had 13 SUPER MONEY MARKET branch locations and two traditional branch locations in the Knoxville area, 23 branch locations in Raleigh-Durham, Greensboro, and Greenville, North Carolina, one branch location in Olive Branch, Mississippi and one branch in Horn Lake, Mississippi. The Knoxville Bank had one branch each in the following Georgia locations: Adairsville, Buford, Calhoun, Canton, Cartersville, Cumming, Dalton, Ft. Oglethorpe, Gainesville, Moultrie, and Rome. The Knoxville Bank also operated one stand-alone ATM in the Knoxville area. The Knoxville Bank also offers loans on an indirect basis through area automobile dealers. The Knoxville Bank has two subsidiaries, Kenesaw Leasing, Inc. and J & S Leasing, Inc., both equipment leasing firms. On July 13, 1993, the Company acquired First Federal Savings Bank, a $4.8 million institution located in Belzoni, Mississippi. The name was changed to NBC Bank, FSB, and its business expanded into Virginia. At December 31, 1999 Belzoni had 13 SUPER MONEY MARKET branches in the Roanoke, Virginia area. NCBC, through NCBS, has executed SUPER MONEY MARKET sublicense and consulting agreements with other financial institutions. Currently, agreements have been executed covering locations in 50 states and foreign countries, including Peru, Canada, Australia, Chile, Colombia, Guam and Portugal. As of year end, NCBS has assisted various banks with over 1,000 locations through either a license or consulting relationship. The Company has one major competitor in its supermarket branch sublicensing activity. The competitor is a non-financial institution with nationwide operations. On November 7, 1989, the service mark Super Money Market (Stylized) was registered on the U.S. Patent and Trademark Office Principal Register as Reg. No. 1,565,038. This registration presently constitutes prima facie proof that NCBC owns the mark. If certain formalities are observed, the registration will remain in force for 20 years from the date of registration and may be renewed for successive terms of ten years each. On April 2, 1991 the service mark Super Money Market (non-stylized) for banking services was registered on the Supplemental Register under Reg. No. 1,640,085. If certain formalities are observed, registration will remain in force for ten years from the date of registration and may be renewed for successive periods. Commerce Capital is a registered investment advisor with the Securities and Exchange Commission. In September of 1995, NCBC acquired TransPlatinum Service Corp. of Nashville, Tennessee which offers financial services to the trucking and petroleum industries and bankcard services to merchants. In December, 1999 -4- TransPlatinum acquired Nashville-based FleetOne LLC which expanded the Company's fuel card and merchant processing to include a new line of business targeted to all commercial vehicle classes. U.S.I. Alliance Corp. was organized in November 1995, and commenced business in February 1996. USI primarily leases personal lockboxes in long-term care facilities. National Commerce Capital Trust I was organized in March 1997 as a special purpose entity (SPE) to offer floating rate capital trust pass-through securities. Substantially all employees of the Company are also employees of one or more of its direct or indirect subsidiaries. NATIONAL BANK OF COMMERCE: From its inception in 1873, and through the granting of its charter as a national bank in 1933, NBC has operated a full-service commercial bank and trust business in metropolitan Memphis, Tennessee. At December 31, 1999 NBC had 29 branch and SUPER MONEY MARKET(R) facilities in Memphis and Shelby County, Tennessee, one branch facility in Somerville, Tennessee, one SUPER MONEY MARKET facility and two branches in Collierville, Tennessee, 31 branches and SUPER MONEY MARKET(R) facilities in Nashville, and three branches in West Memphis, Arkansas, and one branch in Marion, Arkansas. At December 31, 1999, NBC had $3,563,000,000 in deposits and was the third largest bank in the Memphis service area (population approximately 1,000,000) and the sixth largest bank in Tennessee, measured by deposits. Memphis is the largest city in Tennessee and is the center of a diversified distribution, commercial and agricultural area. NBC provides complete banking facilities and services to the Mid-South area through various divisions and departments, described below. The retail banking activity is carried on through the Branch Banking Division, the Money Market Division, the Executive Banking Division, Dealer Finance and the Consumer Services Division. NBC's Commercial Banking Group is composed of the following divisions: the Metropolitan Lending Division, the Asset Based Lending Division, the Real Estate Lending Division, the Residential Constuction Division and the Correspondent Banking Division. Trust services are provided by the Trust Division. Staff support for NBC is provided by its Human Resource, Marketing, Operations and Financial/Administrative Divisions. Retail Services: NBC provides its customers with a variety of retail banking services. Among such services are checking accounts and savings programs, night depository services, safe deposit facilities and several consumer loan programs, including installment loans for the purchase of consumer goods and revolving lines of credit. Customers are provided with current information regarding these services through NBC's marketing program. NBC has installed 86 ATMs (24-hour tellers), including ATMs located at Plough, Inc., Graceland, Methodist Hospital, Memphis International Airport, University of Memphis campus, Southern College of Optometry, Sitel Corporation and Rhodes College campus. At year end, consumer loans and leasing activity accounted for approximately 32% of NBC's outstanding loans. NBC participates in the MasterCard and Visa Card Programs, national consumer debit and credit card plans, under which NBC discounts sales drafts (accounts receivable arising from charges made with MasterCard and Visa Cards), without recourse, for participating merchants. NBC -5- also offers a Professional Services Plan, Equity Credit Lines and other credit services for individuals. A monthly revolving credit charge is levied on the purchaser depending on the credit plan desired. At December 31, 1999, NBC had consumer lines of credit totaling $70,738,000. NBC sold substantially all of its credit card portfolio in fourth quarter 1997 and now offers various credit card plans through MBNA Corp. Commercial Services: NBC provides a variety of services for commercial enterprises, including checking accounts, certificates of deposit, cash management services, short-term loans for seasonal or working capital purposes, and term loans for fixed assets and expansion purposes. In addition to these general services, NBC also provides accounts receivable and inventory financing, commodity loans and commercial loans tailored to an individual customer's needs. Secured and unsecured commercial loans and commodity loans, at December 31, 1999, accounted for approximately 25% of the loans made by NBC. Real estate construction and long-term mortgage loans (including first mortgage refinance loans) accounted for approximately 43% of NBC's outstanding loans at December 31, 1999. Correspondent Banking: NBC has correspondent relationships with approximately 200 banks located in Tennessee, Arkansas, Missouri, Florida, Mississippi, Kentucky, and Alabama to which it provides a range of financial services as well as advice in various fields of banking policy and operations. Aggregate balances of correspondent banks at NBC averaged approximately $58,000,000 in 1999. Trust Services: Through its Trust Division, NBC acts as trustee, executor, administrator, guardian, custodian and depository for a number of individuals and corporations. The Bank offers investment advisory services to its customers in addition to portfolio management. At December 31, 1999, the Trust Division administered assets valued at approximately $3,005,000,000. International Services: NBC has established 5 accounts with foreign banks, primarily in Europe, to handle international trade relationships. Two foreign banks have accounts with NBC for the same purpose. NBC does not now, nor does it intend to, engage in speculative trading of foreign currencies. Non-Bank Subsidiaries: In addition to computer services for NBC, Commerce General processes financial transactions for hospitals. During the year ended December 31, 1999, approximately 87% of the total revenues of Commerce General were derived from services provided to NBC and 13% from services provided to other customers. NBC Capital Markets Group, Inc. provides investment services to individual and institutional investors. At December 31, 1999, Capital Market's capital totaled $15,155,000. Capital Markets is registered as a broker-dealer with the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., and is a member of the Security Investor Protection Corporation. Commerce Finance Company was organized in September, 1992 and commenced business in March, 1993 in the consumer finance segment of the retail credit industry as a subsidiary of NCBC. In 1996, the store-front branches and most of the assets of Commerce Finance were sold and Commerce Finance began operating on a more centralized basis with emphasis on second- and third-mortgage loans which come from bank referrals. In February, 1997, Commerce Finance became a subsidiary of NBC. NBC Insurance Services, Inc. was organized in January, 1997 and commenced business in March, 1997 to provide life, property and casualty -6- insurance and annuities through NBC's in-store retail banking system. National Commerce Bank Services, Inc. provides supermarket banking services to other financial institutions. In August, 1999 NBC acquired Southeastern Mortgage of Tennessee, an independent mortgage banking company. Territory Serviced and Competition: NBC actively competes with other commercial banks in the Memphis trade area in providing a full range of banking services, including demand deposits, time deposits, various types of loans, trust services and other bank-related activities. At December 31, 1999, NBC had $5,560,753,000 in assets. According to September 30, 1999 call reports, one of the other banks in metropolitan Memphis is 3.4 times larger and another is approximately 6.9 times larger than NBC as measured by deposits. However, deposits for that bank include statewide branches, while NBC deposits are primarily limited to the metropolitan Memphis and Nashville areas. The Memphis trade area includes western Tennessee, northern Mississippi, and eastern Arkansas, and NBC considers commercial banks in Little Rock, Arkansas and Jackson, Mississippi, as competitors in addition to Memphis area banks. In addition, NBC competes with savings and loan associations, finance companies, credit unions, insurance companies, real estate investment trusts, mortgage companies, factoring companies, independent credit card companies and various other financial institutions whose activities correspond with banking functions. See "Supervision and Regulation." Employees: As of December 31, 1999, NBC and its subsidiaries employed approximately 364 officers, 858 other full-time employees, 132 part--time employees and 57 peak-time employees. Relations with employees have been good. No employees are covered by collective bargaining agreements. All full-time employees are afforded the benefits of group life and health insurance plans. In addition, the Company has a non-contributory qualified retirement plan. All employees who have one full year of service are eligible to become participants in the retirement plan. The Company also has a taxable income reduction account ("TIRA") plan which allows employees to defer payment of taxes on an elected percentage of salary up to $10,000 by making contributions to this plan. The Company may also make contributions to this plan for the benefit of participating employees. The Company had an Employee Stock Ownership Plan ("ESOP") which was merged with the TIRA into the NBC Employee Stock Ownership Plan With 401K Provisions. NBC BANK, FSB (KNOXVILLE): -7- The Company organized NBC Bank, FSB (Knoxville) to become competitive in retail banking in the Knoxville area. After its 1994 conversion from a state chartered bank to a federally chartered savings bank, it expanded into North Carolina. At December 31, 1999 the Knoxville Bank had 13 SUPER MONEY MARKET branch locations and one traditional branch location in the Knoxville area, 23 branch locations in the Raleigh-Durham, Greensboro, and Greenville, North Carolina areas, one branch location in Olive Branch, Mississippi, and one branch in Horn Lake, Mississippi. The Knoxville Bank has one branch each in the following Georgia locations: Adairsville, Buford, Calhoun, Canton, Cartersville, Cumming, Dalton, Ft. Oglethorpe, Gainesville, Moultrie, and Rome. The Knoxville Bank employees are provided with the same benefits that all Company employees have available to them. At December 31, 1999, the Knoxville Bank and its subsidiaries employed 83 officers, 196 other full-time employees, 33 part-time employees and 5 peak-time employees. At year-end 1999, the Knoxville Bank had total assets of $1,132,141,000. The Knoxville Bank competes with a number of substantially larger financial institutions, both banks and savings and loans, as well as various other financial institutions whose activities correspond with banking functions. Non-Bank Subsidiaries: Kenesaw Leasing, Inc, and J & S Leasing, Inc. are both equipment leasing firms. At December 31, 1999 Kenesaw's capital totaled $2,826,000 and J & S's capital was $2,321,000. NBC BANK, FSB (BELZONI): NBC Bank, FSB was acquired to expand its retail banking activities through supermarket branches in other states. At December 31, 1999 13 SUPER MONEY MARKET branches were located in Kroger supermarkets in Virginia. At December 31, 1999, Belzoni employed 21 officers, 52 other full-time employees, and two part-time employees. The same Company benefits are provided to these employees. At year-end 1999, Belzoni had total assets of $418,262,000. Belzoni competes with a number of substantially larger financial institutions, both banks and savings and loans, as well as various other financial institutions whose activities correspond with banking functions. COMMERCE CAPITAL MANAGEMENT, INC.: Commerce Capital was organized to provide specialized investment management services to individuals, family groups, endowment funds and corporations. Assets presently managed are approximately $916,000,000. At December 31, 1999, Commerce Capital had eight full-time employees. Commerce Capital's employees are covered under the same Company benefits. Commerce Capital competes with a number of other investment counselors, insurance companies, banks, and other money managers, many of which are substantially larger. TRANSPLATINUM SERVICE CORP.: In September of 1995, NCBC acquired TransPlatinum Service Corp. which offers financial services to the trucking and petroleum industries and bankcard services to merchants. TransPlatinum is located in Nashville, Tennessee. As of December 31, 1999, TransPlatinum had 7 officers, 85 full-time employees, and 5 part-time employees. TransPlatinum competes with larger companies offering similar services on a nation-wide basis. -8- U.S.I. ALLIANCE CORP.: U.S.I. Alliance Corp. commenced formal operations in February of 1996 as a wholly owned subsidiary of NCBC. USI operates and administers a security program in the long-term care industry. The program activities include leasing personal lock boxes, education and training, risk management reduction, and the administration of an 800-number tip line and reward payment system for long-term care facilities. USI Alliance has filed federal and state trademarks in all 50 states for the name "Senior Crimestoppers" and currently does business in all states. At December 31, 1999, USI had 2 officers and 2 other full-time employees. NATIONAL COMMERCE CAPITAL TRUST I: National Commerce Capital Trust I was organized in March 1997 as a special purpose entity (SPE) to offer floating rate capital trust pass-through securities. At December 31, 1999, Trust I had $49,909,000 in outstanding securities issued. SUPERVISION AND REGULATION NCBC and its subsidiaries are subject to a number of federal and state laws and regulations. As a bank holding company, NCBC is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "Act"), which is administered by the Federal Reserve Board (the "Board"). Under the Act, the Company is generally prohibited from directly engaging in any activities other than banking, managing or controlling banks, and those activities that the Board considers closely related and incidental to banking. Generally, bank holding companies from any state can now acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Effective January 1, 1991, Tennessee amended its reciprocal interstate banking statute to allow a bank or bank holding company in any other state to acquire a Tennessee bank or bank holding company as long as a Tennessee bank or bank holding would have a similar acquisition opportunity in that state. Effective June 1, 1997, banks also became eligible to branch across state lines by acquisition, merger or de novo (unless state law would permit such interstate branching at an earlier date), providing certain conditions are met including that applicable state law must expressly permit de novo interstate branching. The Act requires that a bank holding company obtain the prior approval of the Board before merging or consolidating with another bank holding company. Furthermore, unless a bank holding company already owns or controls a majority of the shares of a bank or another bank holding company, Board approval is required for any transaction, if following such transaction, the bank holding company directly or indirectly owns or controls more than 5% of the shares of such bank or bank holding company. A bank holding company and its non-bank subsidiaries must also seek the prior approval of the Board to acquire all or substantially all of the assets of a bank. Under the Act, a bank holding company is required to file with the Board an annual report and any additional information required by the Board. The Board may examine the Company's and each of its direct subsidiaries' records, including -9- a review of capital adequacy in relation to guidelines issued by the Board. If the level of capital is deemed to be inadequate, the Board may restrict the future expansion and operations of the Company. The Board possesses cease-and- desist powers over a bank holding company if its actions or actions of any of its subsidiaries represent unsafe or unsound practices or violations of law. Federal law also regulates transactions among the Company and its affiliates, including the amount of a banking affiliate's loans to, or investments in, non-bank affiliates and the amount of advances to third parties collateralized by securities of an affiliate. In addition, various requirements and restrictions under federal and state law regulate the operations of the Company's banking affiliates, including (1) requiring the maintenance of reserves against deposits, (2) limiting the nature of loans and the interest that may be charged thereon, and (3) restricting investments and other activities. The amount of dividends that the Company's bank affiliates may declare is also limited. Regulatory approval must be obtained before declaring any dividends if the amount of capital, surplus and retained earnings is below certain statutory limits. See Note O of the Notes to Consolidated Financial Statements in the 1999 Annual Report, incorporated herein by reference. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation ("FDIC") insurance fund in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions to commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross-guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized", "adequately capitalized" or "significantly undercapitalized", as such terms are defined under uniform regulations defining such capital levels issued by each of the federal banking agencies. The Community Reinvestment Act ("CRA") requires banks to help meet the credit needs of the community. Regulatory authorities are required to consider the CRA performance of a bank or bank holding company when reviewing regulatory applications. In August 1989, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") was enacted. FIRREA contains major regulatory reforms, stronger capital standards for savings and loans and stronger civil and criminal enforcement provisions. FIRREA allows the acquisition of healthy and failed savings and loan associations by bank holding companies, and it imposes no -10- interstate barriers on such acquisitions by bank holding companies. With certain qualifications, FIRREA also allows bank holding companies to merge acquired savings and loan associations into their existing commercial bank subsidiaries. FIRREA also provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") became effective in December 1991. FDICIA revises the bank regulatory insurance coverage and funding provisions of the Federal Deposit Insurance Act and makes changes to the regulatory structures found in several other banking statutes. Various sections of FDICIA are designed to recapitalize the Bank Insurance Fund and provide for increased funding of the Bank Insurance Fund by insured banks. The FDIC's capacity to borrow from the United States Treasury was increased. FDICIA requires the FDIC to develop and implement a system of risk-based premiums for federal deposit insurance under which the semiannual rates at which a depository institution is assessed are based on the probability that the depository institution fund will incur a loss with respect to the institution. Various sections of FDICIA impose substantial new audit and reporting requirements on insured depository institutions. All insured banks are generally subject to an annual on-site examination by their primary federal regulatory agency. The role of independent public accountants is increased, and there are additional reporting requirements imposed on depository institutions. The federal regulatory agency must devise rules requiring banks and thrift institutions to disclose the fair market value of their assets. The agencies must also devise rules for banks and thrifts to report off-balance sheet items on financial statements. Banks are rated according to a new scheme of capital adequacy. Better-capitalized institutions are generally subject to less onerous regulation and supervision than poorly-capitalized institutions. Under FDICIA, each federal banking agency must prescribe standards for depository institutions and depository institution holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of market value to book value for publicly traded shares, and other standards as the agency deems appropriate. As a national bank, NBC operates under the rules and regulations of the Comptroller of the Currency and is also a member of the Federal Reserve System, subject to provisions of the Federal Reserve Act. NBC Bank, FSB (Knoxville) and NBC Bank, FSB (Belzoni), are federally chartered savings banks that are primarily regulated by the Office of Thrift Supervision. The FDIC insures the domestic deposits of all the Banks. Commerce Finance Company is a consumer finance company organized under the laws of the State of Tennessee and is primarily regulated by the Consumer Finance Division of the Tennessee Department of Financial Institutions. The Federal Trade Commission has primary federal regulatory authority. Commerce Capital Management, Inc. is registered with the Securities and Exchange Commission and is an investment adviser pursuant to the Investment Advisers Act of 1940, as amended. All regulatory agencies require periodic audits and regularly scheduled -11- reports of financial information. The federal Comprehensive Environmental Response Compensation and Liability Act ("CERCLA") imposes a liability scheme for the remediation of property where hazardous substances have been released. The liability extends to owners and operators of such properties which could include banks. There is proposed or pending federal legislation that would consolidate some of the federal agencies that regulate financial institutions. -12- STATISTICAL AND OTHER DATA - The following tables set forth selected statistical and other information. - -------------------------------------------------------------------------------- DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY: Interest Rates and Interest Differential The following table sets forth the combined daily average condensed (consolidated) balance sheets of NCBC and an analysis of net interest earnings for each of the three years in the period ended December 31, 1997 through 1999. Interest income and yields on non-taxable investment securities have been calculated on a fully taxable-equivalent basis assuming a tax rate of 35%.
1999 1998 1997 ------------------------------ ---------------------------- -------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ---------- -------- -------- --------- -------- ------- --------- -------- ----- (in thousands of dollars) ASSETS Interest-earning assets: Loans:(1) Domestic(2) 3,600,337 316,442 8.79% 3,040,662 277,141 9.11% 2,650,663 243,754 9.20% Taxable securities including trading account 2,153,350 140,876 6.54 1,719,108 114,297 6.65 1,489,969 100,155 6.72 Non-taxable investment securities(2) 205,485 18,404 8.96 159,873 13,214 8.27 150,016 12,289 8.19 Federal funds sold and securities purchased under agreements to resell 67,923 4,968 7.31 44,562 3,426 7.69 23,985 1,429 5.96 Interest-bearing deposits with other banks 24,016 953 3.97 19,326 1,619 8.38 18,456 1,287 6.97 --------- ------- --------- -------- --------- -------- Total interest-earning assets 6,051,111 481,643 7.96 4,983,531 409,697 8.22 4,333,089 358,914 8.28 ------- -------- -------- Non-interest earning assets: Cash and due from banks 179,429 178,269 142,173 Premises & equipment, net 47,043 40,238 31,147 Other assets 232,342 205,666 143,789 Allowance for loan losses (55,077) (49,718) (39,768) --------- --------- --------- TOTAL ASSETS 6,454,848 5,357,986 4,610,430 ========= ========= =========
(1) For the purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding and income on such loans is recognized as received. There were no foreign loans outstanding. (2) These items are affected by fully taxable-equivalent adjustments. Reference is made to page 29 of the Annual Report to Shareholders for the corresponding unadjusted amounts as presented in the financial statements. -13-
1999 1998 1997 ---------------------------- --------------------------- ------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate --------- -------- ------- --------- -------- ------- --------- -------- ------ (in thousands of dollars) LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Demand deposits 405,370 4,713 1.16% 348,036 4,021 1.16% 282,241 3,814 1.35% Savings deposits 1,282,826 46,553 3.63 1,202,325 47,253 3.93 1,075,530 43,823 4.07 Time deposits 2,108,598 107,211 5.08 1,681,671 91,693 5.45 1,425,705 79,104 5.55 Short-term borrowings 686,223 31,212 4.55 476,147 23,206 4.87 452,721 23,062 5.09 Federal Home Loan Bank advances 832,206 41,432 4.98 552,176 27,904 5.05 405,308 23,032 5.68 Long-term debt 6,372 369 5.79 103,103 6,135 5.95 156,152 9,316 5.97 --------- ------- --------- -------- --------- -------- Total interest bearing liabilities 5,321,595 231,490 4.35 4,363,458 200,212 4.59 3,797,657 182,151 4.80 --------- ------- --------- -------- --------- -------- Non-interest bearing liabilities: Domestic demand deposits 467,645 443,395 351,882 Other 117,159 102,507 75,429 Capital Trust Preferred Securities 49,903 49,891 38,079 Stockholders' equity 498,546 398,735 347,383 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 6,454,848 5,357,986 4,610,430 ========= ========= ========= Net interest earnings 250,153 209,485 176,763 ======= ======= ======= Net yield on interest-earning assets 4.13% 4.20% 4.08% ==== ==== ====
-14- CHANGES IN INTEREST INCOME AND EXPENSES - --------------------------------------- The following table sets forth for NCBC and its subsidiaries (consolidated), for the periods indicated, a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates. Interest on non- taxable investment securities has been calculated on a fully taxable-equivalent basis assuming a tax rate of 35%.
1999 Compared to 1998 1998 Compared to 1997 Increase (decrease) Due to (1) Increase (decrease) Due to (1) ----------------------------------- ------------------------------------------ Rate/ Rate/ Volume Rate Net Volume Volume Rate Net Volume ------- -------- ------- ------- ---------- ---------- --------- ------- (in thousands of dollars) Interest earned on: Loans:(2) Domestic 49,487 (10,186) 39,301 (1,820) 35,564 (2,177) 33,387 (318) Taxable securities including trading account 28,436 (1,857) 26,579 (462) 15,246 (1,104) 14,142 (168) Non-taxable securities 4,014 1,176 5,190 315 814 111 925 7 Federal funds sold and securities purchased under agreements to resell 1,716 (174) 1,542 (87) 1,492 505 1,997 356 Interest-bearing deposits with other banks 328 (994) (666) (207) 63 269 332 12 ------ ------- ------ ------ ------ ------ ------ ------ Total interest earning assets 83,981 (12,035) 71,947 (2,262) 53,179 (2,396) 50,783 (110) ------ ------- ------ ------ ------ ------ ------ ------ Interest paid on: Demand deposits 666 26 692 4 810 (603) 207 (129) Savings deposits 3,051 (3,751) (700) (242) 5,026 (1,596) 3,430 (183) Time deposits 22,037 (6,519) 15,518 (1,571) 13,978 (1,389) 12,589 (246) Federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings 9,645 (1,639) 8,006 (683) 1,165 (1,021) 144 (52) Federal Home Loan Bank advances 13,947 (419) 13,528 (210) 7,638 (2,766) 4,872 (924) Long-term debt (5,606) (160) (5,766) 154 (3,157) (24) (3,181) 8 ------ ------- ------ ------ ------ ------ ------ ------ Total interest bearing liabilities 43,741 (12,463) 31,278 (2,548) 25,460 (7,399) 18,061 (1,525) ------ ------- ------ ------ ------ ------ ------ ------ Net interest earnings 40,240 428 40,668 287 27,719 5,003 32,722 1,415 ====== ======= ====== ====== ====== ====== ====== ======
(1) The change in interest due to both rate and volume has been allocated to change due to volume and change due to rate in proportion to the relationship of the absolute dollar amounts to the change in each. (2) There were no foreign loans outstanding. -15- SECURITIES PORTFOLIO - -------------------- The following table sets forth the aggregate book value of investment securities at the dates indicated.
December 31 ------------------------------------ 1999 1998 1997 --------- --------- --------- (in thousands of dollars) Held-to-maturity securities: U.S. Treasury - 3,997 - U.S. Government agencies and corporations 1,322,109 564,599 471,928 States of the U.S. and political subdivisions 5,292 80,777 71,654 Other securities 431,982 727,729 666,489 --------- --------- --------- Total 1,759,383 1,377,102 1,210,071 ========= ========= ========= Available-for-sale securities: U.S. Treasury 28,386 35,640 45,358 U.S. Government agencies and corporations 235,624 322,658 207,920 States of the U.S. and political subdivisions 123,516 83,893 79,872 Other securities 166,402 335,424 114,948 --------- --------- --------- Total 553,928 777,615 448,098 ========= ========= =========
The following table sets forth the maturities at December 31, 1999, and the weighted average yields of such securities, all of which are computed on a fully taxable-equivalent basis assuming a tax rate of 35%. Yields on available-for- sale securities are based on amortized cost.
Maturing --------------------------------------------------------------------------------- After 1 But After 5 But After Within 1 Year Within 5 Years Within 10 Years 10 Years --------------- ---------------- ------------------ ------------------ Amount Yield Amount Yield Amount Yield Amount Yield ------- ----- ------- ------ -------- ------- ------- ------ (in thousands of dollars) Held-to-maturity securities: U.S. Treasury - - - - U.S. Government agencies and corporations 100,000 6.42% 60,188 6.60% 650,301 6.63% 511,620 6.53% States of the U.S. and political subdivisions - 270 8.05 3,363 8.43 1,659 8.69 Other 2,312 6.38 252,630 6.58 155,579 7.04 21,461 7.83 ------- ------- --------- -------- Total 102,312 6.42% 313,088 6.59% 809,243 6.72% 534,740 6.59% ======= ======= ========= ======== Available-for-sale securities: U.S. Treasury 6,414 5.61% 21,972 6.15% - - U.S. Government agencies and corporations 5 6.69 17,704 7.51 147,456 7.49% 70,459 6.84% States of the U.S. and political subdivisions 10,590 6.60 43,468 7.17 55,001 7.98 14,457 8.97 Other 64,376 11.15 38,974 7.84 63,052 7.08 - ------- ------- --------- -------- Total 81,385 10.12% 122,118 7.25% 265,509 7.50% 84,916 7.20% ======= ======= ========= ========
-16- LOAN PORTFOLIO - -------------- The following table shows the Company's gross loan distribution at the end of the last five years.
December 31 ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (in thousands of dollars) Commercial, financial, and agricultural 689,945 613,557 529,985 481,720 413,544 Real estate - construction 283,033 273,968 269,078 190,796 138,096 Real estate - mortgage 1,625,374 1,250,698 856,157 668,878 572,871 Consumer(1)(2) 1,356,824 1,207,431 1,070,754 1,108,762 891,513 Lease financing 33,405 29,805 30,448 23,244 19,257 --------- --------- --------- --------- --------- Total 3,988,581 3,375,459 2,756,422 2,473,400 2,035,281 ========= ========= ========= ========= =========
(1) Included within "Consumer" loans are revolving lines of credit secured by home equities. (2) The Company sold approximately $63 million or substantially all of its credit card receivables in fourth quarter 1997. The following table shows the amounts of loans (excluding real estate mortgages, consumer loans and lease financing) outstanding as of December 31, 1999, which, based on remaining scheduled repayments of principal, are due in the periods indicated.
Maturing Within After 1 But After 1 Year Within 5 Yrs 5 Years Total ------- ------------ ------- ------- (in thousands of dollars) Commercial, financial, and agricultural 327,327 256,900 105,718 689,945 Real estate - construction 143,644 93,847 45,542 283,033 ------- ------- ------- ------- Total 470,971 350,747 151,260 972,978 ======= ======= ======= =======
-17- The following table shows the amounts of loans (excluding real estate mortgages, consumer loans and lease financing) due after one year classified, according to the sensitivity to changes in interest rates as of December 31, 1999.
After 1 but After Within 5 Yrs 5 Years -------------- --------- (in thousands of dollars) Predetermined interest rate 232,870 116,313 Floating or adjustable interest rates 117,877 34,947 ------- ------- Total 350,747 151,260 ======= =======
DEPOSITS - -------- The following table sets out the average amount of deposits and the average rate paid on such deposits for the periods indicated. There were no material deposits by foreign depositors in domestic offices. There were no material deposits in foreign banking offices.
Year Ended December 31 --------------------------------------------------------------------------- 1999 1998 1997 ---------------------- --------------------- -------------------- Amount Rate Amount Rate Amount Rate --------- ------- --------- ------- --------- ------- (in thousands of dollars) Non-interest bearing demand deposits 467,645 - 443,395 - 351,882 - Interest bearing demand deposits 405,370 1.16% 348,036 1.16% 282,241 1.35% Savings deposits 1,282,826 3.63 1,202,325 3.93 1,075,530 4.07 Time deposits 2,108,598 5.08 1,681,671 5.45 1,425,705 5.55 --------- --------- --------- Total 4,264,439 3,675,427 3,135,358 ========= ========= =========
Summarized below are outstanding maturities of time deposits of $100,000 or more issued by domestic offices (which consist entirely of time certificates of deposit) at December 31, 1999 (in thousands of dollars):
Time remaining until maturity Amount - ----------------------------- ------- 3 months or less 787,866 Over 3 through 6 months 206,764 Over 6 through 12 months 246,285 Over 12 months 96,153 --------- Total 1,337,068 =========
-18- RETURN ON EQUITY AND ON TOTAL ASSETS - ------------------------------------ The following table shows consolidated operating ratios for the Company for each of the last three years. Year Ended December 31 ------------------------- 1999 1998 1997 ----- ----- ----- Return on average total assets 1.66% 1.64% 1.57% Return on average equity* 22.51% 22.07% 20.86% Dividend payout percent** 37.89% 38.55% 33.33% Average equity to assets percent 7.72% 7.52% 7.53% * exclusive of other comprehensive income adjustment. ** includes special 1998 dividend increase which accompanied the 2-for-1 stock split effective July 1, 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Registrant's Annual Report for capital ratios and discussion of minimum capital requirements. SHORT-TERM BORROWINGS - --------------------- The following table shows the distribution of the Company's short-term borrowings and the weighted average interest rates thereon at the end of the last three years. Also provided are the maximum amounts of borrowings and the average amounts of borrowings as well as weighted average interest rates for the reported years.
Year Ended December 31 -------------------------------------- 1999 1998 1997 ---- ---- ---- (in thousands of dollars) Short-term borrowings: Balance at year-end 883,038 599,378 432,256 Weighted average interest rate payable at year-end 4.65% 4.32% 5.04% Maximum amount outstanding at any month end Average outstanding balance 883,038 599,378 540,622 (total daily outstanding principal balance divided by 365) 686,223 476,147 452,721 Weighted average interest rate (related interest expense divided by the average outstanding balance) 4.55% 4.87% 5.09%
-19- ITEM 2. PROPERTIES. The Company's headquarters are located in leased space at One Commerce Square, Memphis, Tennessee. Also, occupying space at One Commerce Square is the Commerce Square Branch and the following subsidiaries: Commerce General Corporation; Commerce Capital Management, Inc.; National Commerce Bank Services; NBC Insurance Services and USI Alliance Corp. As of December 31, 1999, the corporation operated 79 traditional and in- store branches in Tennessee, 23 in North Carolina, 35 in Virginia, 2 in Mississippi, 11 in Georgia, 4 in Arkansas and 8 in West Virginia. Of the above locations, 18 traditional locations are owned; the remaining branches and all in-store branches are leased. There are 207 ATM locations in operation, with 162 in banking offices and 45 away from the offices. The Company does not own or lease any other properties that it considers materially important to its financial statements. ITEM 3. LEGAL PROCEEDINGS. Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT.
Executive Officers Name Age Office Held ---- --- --------------------------------------------------------------------------------------- Thomas M. Garrott 62 Chairman of the Board, President, Chief Executive Officer and Director of the Company Lewis E. Holland 57 Vice Chairman, Treasurer and Chief Financial Officer of the Company William R. Reed, Jr. 53 Vice Chairman of the Company Gary L. Lazarini 58 Executive Vice President of the Company and Chairman of NBC Capital Markets Group, Inc. Mackie H. Gober 53 Executive Vice President of the Company Tom W. Scott 56 President of Commerce General Corporation David T. Popwell 40 Executive Vice President and Secretary
Of the foregoing officers, Messrs. Garrott, Holland, and Reed are also directors of the Company. -20- The above officers have served in the capacities shown for more than five years except for the following: Mr. Holland was elected Vice Chairman and Director of the Company in June 1997. He was Executive Vice President of the Company from August 1995 until June 1997. He was elected Treasurer of the Company in June 1995. He was Vice President from July 1994 until August 1995. Mr. Reed was elected Vice Chairman and Director of the Company in June 1997 and was Executive Vice President of the Company from August 1995 until June 1997. Mr. Lazarini was elected Executive Vice President of the Company in March 2000. He was Executive Vice President of NBC until March 2000. Mr. Gober was elected Executive Vice President of the Company in January 1998 and was President of NBC from August 1995 until January 1998. He was Executive Vice President and Retail Credit Group Head of NBC from January 1992 until August 1995. Mr. Popwell was elected Executive Vice President of the Company in August 1998 and Secretary in October 1999. Prior to that time he was an attorney with Baker, Donelson, Bearman and Caldwell. -21- PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market quotations for the Company's common stock and cash dividends per share, as restated to give retroactive recognition to all stock dividends and stock splits, are as follows:
Fourth Third Second First ------ ------ ------ ------ 1999: High $26.44 $23.88 $25.69 $24.38 Low 21.50 20.50 21.88 17.56 Cash dividends .105 .09 .09 .09 1998: High $19.06 $25.75 $23.38 $21.56 Low 13.94 16.50 19.69 15.13 Cash dividends* .09 .08 .08 .07
* includes special dividend increase which accompanied the 2-for-1 stock split effective July 1, 1998. The Company's stock is traded over-the-counter on the Nasdaq National Market tier and is quoted under the trade symbol NCBC. The stock prices listed in the table were obtained from Nasdaq and represent the high and low closing sales prices. At March 10, 2000, there were approximately 4,000 stockholders of record. ITEM 6. SELECTED FINANCIAL DATA. In Thousands of Dollars, Except Per Share and Ratio Data
1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- Net interest income $ 236,538 $ 202,896 $ 171,907 $ 143,535 $ 125,887 Net income 107,234 88,020 72,454 59,886 50,848 Per common share data:* Basic earnings per share 1.00 .85 .72 .59 .50 Diluted earnings per share .99 .83 .69 .58 .49 Cash dividends declared .375 .32 .23 .20 .18 Book value 5.15 4.06 3.62 3.21 2.97 Total average equity 498,546 398,735 347,383 307,910 282,406 Total average assets 6,454,868 5,357,986 4,610,430 3,988,379 3,361,071 Average debt: Federal Home Loan Bank advances 832,206 552,176 405,308 417,316 294,833 Other borrowed funds and long term debt 9,291 103,103 163,010 65,829 11,176 Capital trust pass- through securities 49,903 49,891 38,079 - - Ratios: Average equity to average assets 7.72% 7.44% 7.53% 7.72% 8.40% Return on average equity 21.51 22.07 20.86 19.45 18.09 Return on average assets 1.66 1.64 1.57 1.50 1.52
* After retroactive adjustment for all stock dividends and stock splits declared through December 31, 1999. -22- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 18 through 27 in the Registrant's 1999 Annual Report to Shareholders is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information appearing under the caption "Liquidity and Interest Rate Sensitivity Management" appearing on page 23 of the 1999 Annual Report to Shareholders is incorporated herein by reference (see Item 7, Management's Discussion and Analysis). ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The report of independent auditors and consolidated financial statements on pages 28 through 46 in the Registrant's 1999 Annual Report to Shareholders are incorporated herein by reference. Quarterly Results of Operations on page 46 of the Registrant's 1999 Annual Report to Shareholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT. Except for information contained in Item X above pertaining to executive officers of the Registrant, the information required by Item 10 is incorporated herein by reference from the Registrant's Proxy Statement relating to the Registrant's 2000 Annual Meeting of Shareholders under the caption "Management of the Company". ITEM 11. EXECUTIVE COMPENSATION. The information under the caption "Compensation of Management" in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the captions "Management of the Company and Other Information" and "Principal Shareholders" in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference. -23- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Certain Transactions with Directors and Management" in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders is incorporated herein by reference. -24- PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) and (2) and (c) LIST OF FINANCIAL STATEMENTS The following consolidated financial statements and report of independent auditors of National Commerce Bancorporation and Subsidiaries, included in the Annual Report of the Registrant to its shareholders for the year ended December 31, 1999, are incorporated by reference in Item 8: Consolidated Balance Sheets--December 31, 1999 and 1998 Consolidated Statements of Income--Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity--Years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows--Years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements--December 31, 1999 Report of Independent Auditors Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) Listing of Exhibits: Exhibit No. Description ----------- ----------- 3.1 Charter of National Commerce Bancorporation as amended and restated and filed as Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended June 30, 1998 (File NO. 0-6094) and incorporated herein by reference. 3.2 Bylaws of National Commerce Bancorporation as amended filed as Exhibit 3.2 to the Registrant's Form 10-K for the year ended December 31, 1995 (File No. 0-6094) and incorporated herein by reference. 4.1 Specimen Stock Certificate filed as Exhibit 4.1 to the Registrant's Form 10-Q for the quarter ended June 30, 1999 (File No. 0-6094) and incorporated herein by reference. 10.1 Form of Promissory Notes of NBC payable to The Mallory Partners, filed as Exhibit 10.1 to the Registrant's Form 10-K for the year ended December 31, 1987 (File No. 0-6094) and incorporated herein by reference. 10.2 Employment Agreement dated as of January 1, 1992, by and between National Bank of Commerce and William R. Reed, Jr., filed as Exhibit 10.8 to the Registrant's Form 10-K for the year ended December 31, 1992 (File No. 0-6094) and incorporated herein by reference. -25- 10.3 Employment Agreement dated as of September 1, 1993, by and between National Bank of Commerce and Thomas M. Garrott, filed as Exhibit 10.9 to the Registrant's Form 10-K for the year ended December 31, 1994 (File No. 0-6094) and incorporated herein by reference. 10.4 Employment Agreement dated as of September 1, 1993, by and between National Bank of Commerce and Gary L. Lazarini, filed as Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1994 (File No. 0-6094) and incorporated herein by reference. 10.5 Employment Agreement dated as of September 1, 1993, by and between National Bank of Commerce and Mackie H. Gober, filed as Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 1994 (File No. 0-6094) and incorporated herein by reference. 10.6 Deferred Compensation Agreement as of December 1, 1983, for Thomas M. Garrott, filed as Exhibit 10c(2) to the Registrant's Form 10-K for the year ended December 31, 1984 (File No. 0-6094) and incorporated herein by reference. 10.7 Employment Agreement dated as of July 1, 1994, by and between National Bank of Commerce and Lewis E. Holland, filed as Exhibit 10.14 to the Registrant's Form 10-K for the year ended December 31, 1984 (File No. 0-6094) and incorporated herein by reference. 10.8 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce and William R. Reed, Jr., filed as Exhibit 10.8 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094) and incorporated herein by reference. 10.9 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce and Thomas M. Garrott, filed as Exhibit 10.9 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094) and incorporated herein by reference. 10.10 Second Amendment to Amended and Restated Agreement Respecting Employment dated December 17, 1999 by and between National Commerce Bancorporation and Thomas M. Garrott. 10.11 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce and Gary L. Lazarini, filed as Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094) and incorporated herein by reference. 10.12 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce and Mackie H. Gober, filed as Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094) and incorporated herein by reference. -26- 10.13 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce and Lewis E. Holland, filed as Exhibit 10.12 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094) and incorporated herein by reference. 10.14 Employment Agreement dated as of August 17, 1998, by and between National Commerce Bancorporation, National Bank of Commerce and David T. Popwell, filed as Exhibit 10.13 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094) and incorporated herein by reference. 10.15 Bonus Incentive Plan, filed as Exhibit 10c(1) to the Registrant's Form 10-K for the year ended December 31, 1980 (File No. 0-6094) and incorporated herein by reference. 10.16 1990 Stock Plan, filed as Exhibit A to the Registrant's Proxy Statement for the 1990 Annual Meeting of Shareholders and incorporated herein by reference. 10.17 1994 Stock Plan as Amended and Restated Effective as of November 1, 1996, filed as Exhibit A to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders and incorporated herein by reference. 10.18 Amendment Number One National Commerce Bancorporation 1994 Stock Plan, as Amended and Restated Effective as of November 1, 1996, filed as Exhibit 10.17 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094) and incorporated herein by reference. 10.19 Resolution authorizing Pension Restoration Plan, filed as Exhibit 10(c)(7) to the Registrant's Form 10-K for the year ended December 31, 1986 (File No. 0-6094) and incorporated herein by reference. 10.20 National Commerce Bancorporation Deferred Compensation Plan effective January 1, 1999, filed as Exhibit 10.19 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094) and incorporated herein by reference. 13 Registrant's 1999 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Registrant during the last quarter of the period covered by this report. (d) Financial Statement Schedules: None -27- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL COMMERCE BANCORPORATION -------------------------------- (Registrant) /s/ Thomas M. Garrott ---------------------------- Thomas M. Garrott Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. March 9, 2000 /s/ Thomas M. Garrott - -------------- ---------------------------- Dated Thomas M. Garrott Chairman of the Board (Principal Executive Officer) March 9, 2000 /s/ Lewis E. Holland - -------------- ---------------------------- Dated Lewis E. Holland Vice Chairman, Treasurer, and Chief Financial Officer (Principal Financial Officer) March 9, 2000 /s/ Mark A. Wendel - -------------- ---------------------------- Dated Mark A. Wendel Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) /s/ G. Mark Thompsom - ----------------------------- ---------------------------- Director Director /s/ Bruce E. Campbell, Jr. /s/ William R. Reed, Jr. - ----------------------------- ---------------------------- Director Director James H. Daughdrill, Jr. /s/ J. Brad Reed - ----------------------------- ---------------------------- Director Director /s/ W. Neely Mallory, Jr. /s/ James E. McGehee, Jr. - ----------------------------- ---------------------------- Director Director /s/ Thomas C. Farnsworth, Jr. /s/ R. Grattan Brown, Jr. - ----------------------------- ---------------------------- Director Director /s/ Lewis E. Holland - ----------------------------- Director -28- /s/ Frank G. Barton, Jr. - ----------------------------- Director /s/ Phillip H. McNeill, Sr. - ----------------------------- Director Dated: March 9, 2000 -------------- -29- EXHIBIT INDEX Exhibit Description of Exhibit - ------- ---------------------- 3.1 Charter of National Commerce Bancorporation as amended and restated filed as Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended June 30, 1998 (File No. 0-6094). 3.2 Bylaws of National Commerce Bancorporation as amended filed as Exhibit 3.2 to the Registrant's Form 10-K for the year ended December 31, 1995 (File No. 0-6094). 4.1 Specimen Stock Certificate filed as Exhibit 4.1 to the Registrant's Form 10-Q for the year ended June 30, 1999 (File No. 0-6094). 10.1 Form of Promissory Notes of National Bank of Commerce payable to The Mallory Partners filed as Exhibit 10.1 to the Registrant's Form 10-K for the year ended December 31, 1987 (File No. 0-6094). 10.2 Employment Agreement dated as of January 1, 1992, by and between National Bank of Commerce and William R. Reed, Jr. filed as Exhibit 10.8 to the Registrant's Form 10-K for the year ended December 31, 1992 (File No. 0-6094). 10.3 Employment Agreement dated as of September 1, 1993, by and between National Bank of Commerce and Thomas M. Garrott filed as Exhibit 10.9 to the Registrant's Form 10-K for the year ended December 31, 1994 (File No. 0-6094). 10.4 Employment Agreement dated as of September 1, 1993, by and between National Bank of Commerce and Gary L. Lazarini filed as Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1994 (File No. 0-6094). 10.5 Employment Agreement dated as of September 1, 1993, by and between National Bank of Commerce and Mackie H. Gober filed as Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 1994 (File No. 0-6094). 10.6 Deferred Compensation Agreement dated as of December 1, 1983, for Thomas M. Garrott, filed as Exhibit 10c(2) to the Registrant's Form 10- K for the year ended December 31, 1984 (File No. 0-6094). 10.7 Employment Agreement dated as of July 1, 1994 by National Commerce Bancorporation and between Lewis E. Holland, filed as Exhibit 10.14 to the Registrant's Form 10-K for the year ended December 31, 1994 (File No. 0-6094). 10.8 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce, and William R. Reed, Jr. filed as Exhibit 10.8 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094). 10.9 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce, and Thomas M. Garrott filed as Exhibit 10.9 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094). 10.10 Second Amendment to Amended and Restated Agreement Respecting Employment dated December 17, 1999 by and between National Commerce Bancorporation and Thomas M. Garrott. 10.11 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce, and Gary L. Lazarini filed as Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094). 10.12 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce, and Mackie H. Gober filed as Exhibit 10.11 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094). 10.13 First Amendment to Agreement Respecting Employment dated July 27, 1998 by and between National Commerce Bancorporation, National Bank of Commerce, and Lewis E. Holland filed as Exhibit 10.12 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094). 10.14 Employment Agreement dated as of August 17, 1998, by and between National Commerce Bancorporation, National Bank of Commerce and David T. Popwell filed as Exhibit 10.13 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094). 10.15 Bonus Incentive Plan, filed as Exhibit 10c(1) to the Registrant's Form 10-K for the year ended December 31, 1980 (File No. 0-6094). 10.16 1990 Stock Plan, filed as Exhibit A to the Registrant's Proxy Statement for the 1990 Annual Meeting of Shareholders. 10.17 1994 Stock Plan as Amended and Restated Effective November 1, 1996, filed as Exhibit A to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders. 10.18 Amendment Number One National Commerce Bancorporation 1994 Stock Plan, as Amended and Restated Effective as of November 1, 1996 filed as Exhibit 10.17 to the Form 10-K for the year ended December 31, 1998 (File No. 0-6094). 10.19 Resolution authorizing Pension Restoration Plan, filed as Exhibit 10(c)(7) to the Registrant's Form 10-K for the year ended December 31, 1986 (File No. 0-6094). 10.20 National Commerce Bancorporation Deferred Compensation Plan effective January 1, 1999 filed as Exhibit 10.19 to the Registrant's Form 10-K for the year ended December 31, 1998 (File No. 0-6094). 13 Registrant's 1999 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule EX-10.10 2 2ND AMENDMENT TO EMPLOYMENT AGREMENT DATED 12/17/1999 EXHIBIT 10.10 SECOND AMENDMENT TO AMENDED AND RESTATED AGREEMENT RESPECTING EMPLOYMENT This Second Amendment to Amended and Restated Agreement Respecting Employment ("Second Amendment") dated as of the 17th day of December 1999, is made and entered into by and between NATIONAL COMMERCE BANCORPORATION, a Tennessee Corporation ("NCBC"), and THOMAS M. GARROTT ("Employee") and amends certain provisions of the Amended and Restated Agreement Respecting Employment by and between the National Bank Of Commerce ("NBC"), NCBC and Employee dated as of September 1, 1993 (the "Employment Agreement"). WHEREAS, by an Assignment Agreement dated the 17th day of December, 1999, NBC, with the consent of the Employee, assigned all of its rights and responsibilities under the Employment Agreement to NCBC, and NCBC assumed all of the rights and responsibilities of NBC under the Employment Agreement; and WHEREAS, NCBC and Employee have determined that it is in the best interest of the parties to amend the Employment Agreement to modify certain provisions. NOW, THEREFORE, for valuable considerations, the receipt of which are hereby acknowledged, the parties hereto agree as follows: 1. Section 4(C)(iii) is hereby amended by deleting "November 3, 1999" in the second line and inserting in lieu thereof "May 3, 2001". 2. In consideration of Employee extending the date from November 3, 1999, to May 3, 2001 upon which Employee may elect to be employed on part- time status, employee shall be paid a lump sum payment in the amount of $2,296,998.00. It is further provided, however, that in the event of the termination of employment of Employee under Section 4(A)(i), 4(A)(ii) or 4(C)(iv) of the Employment Agreement, Employee agrees to return to NCBC a pro rata portion of the $2,296,998.00 lump sum payment. The pro rata amount of said lump sum payment to be returned shall be determined based on the days remaining from the date of termination of employment of Employee to the end of the 18 month period from November 3, 1999, to May 3, 2001. 3. Section 4(D)(viii) of the Employment Agreement in hereby amended by adding the following to the end of such section: On an after the termination of this Employment Agreement and Employee's retirement as an employee of NCBC or on and after the termination of this Agreement by the election of Employee to take a lump sum payment upon a change in control as provided in this Employment Agreement in Section D, NCBC agrees to provide to Employee until such time as Employee reaches age 70 with either the same or, at NCBC's election, at a different location within the same general geographic area, alternate office space, furnishings, facilities, reserved parking, supplies, services, equipment, secretarial and administrative assistance that are in each case at least commensurate with the size and quality of that which are provided to the other principal executive officers of NCBC. NCBC and Employee may mutually agree upon an equivalent monthly cash allowance in lieu of the Employment being provided all or any part of these items. NCBC shall have no obligation to provide for or furnish these items if (i) the Employee has obtained a full time position with another company or organization, and (ii) such items are being furnished or provided for in comparable fashion by such other company or organization. 4. Except as expressly modified hereby, the terms and provisions of the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Second Amendment to be duly executed and delivered as of the date first above written. /s/ Thomas M. Garrott --------------------------------------- Thomas M. Garrott, Employee NATIONAL COMMERCE BANCORPORATION BY: /s/ Thomas C. Farnsworth, Jr. ----------------------------------- Thomas, C. Farnsworth, Jr. Director EX-13 3 1999 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 1999 Annual Report To Shareholders National Commerce Bancorporation 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, 1999. The Company completed three business combinations during 1999. Two combinations have been accounted for as poolings of interests and, accordingly, all prior period consolidated financial statements and selected financial data have been restated to include the combined results of operations, financial position and cash flows as though the companies were combined for all historical periods. (See Note B Business Combinations on page 22.) FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of the Company. All statements in this annual report that are not historical facts or that express expectations and projections with respect to future matters are "forward-looking statements" for the purpose of the safe harbor provided by the Act. The Company cautions readers that such forward-looking statements, including, without limitation, those relating to future business initiatives and prospects, revenues, working capital, liquidity, capital needs and interest costs and income, wherever they occur in this document or in other statements attributable to the Company, are necessarily estimates reflecting the best judgment of the Company's senior management. Such statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this document. 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. Other factors set forth from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission should also be considered. 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 operating results over time. RESULTS OF OPERATIONS For the year ended December 31, 1999, net income totaled $107,234,000, a 21.8 percent increase over 1998 net income of $88,020,000. Net income increased in 1998 by $15,566,000 or 21.5 percent over 1997. Basic earnings per share were $1.00 in 1999, compared to $.85 in 1998 and $.72 in 1997. Diluted earnings per share were $.99 in 1999, compared to $.83 in 1998 and $.69 in 1997. For the year ended December 31, 1999, net income (excluding $1.3 million of after-tax [$2.1 million pre-tax] merger related expenses) totaled $108.5 million, a 23.3 percent increase over 1998 net income of $88,020,000. Diluted earnings per share, excluding merger related expenses of $.01 per share, were $1.00 in 1999, compared to $.83 in 1998, representing a 20.5 percent increase. (See other expenses for further discussion of non-recurring merger related expenses.) For 1999, return on average assets was 1.66 percent, compared to 1.64 percent in 1998 and 1.57 percent in 1997. Return on average equity (excluding unrealized gains or losses on investment securities) was 21.51 percent in 1999, compared to 22.07 percent in 1998 and 20.86 percent in 1997. Excluding the non-recurring merger related expenses, returns on average assets and equity would have been 1.68 percent and 21.77 percent, respectively, for 1999. Net interest income, the difference between interest earned on loans and investments and interest paid on interest-bearing liabilities, increased by $40,668,000 or 19.4 percent in 1999, increased by $32,722,000 or 18.5 percent in 1998 and increased by $27,864,000 or 18.7 percent in 1997. The increase in 1999 reflects a $71,946,000 or 17.6 percent increase in interest income and a $31,278,000 or 15.6 percent increase in total interest expense. The increase in interest income was the result of a $559,675,000 or 18.4 percent increase in average loans and a $488,732,000 or 26.7 percent increase in average investment securities, offset by a decrease in the average yield on earning assets from 8.22 percent in 1998 to 7.96 percent in 1999. The increased volume of average earning assets positively impacted interest income by approximately $84 million, while the decreased yield on average earning assets negatively impacted interest income by approximately $12 million. Interest expense increased in 1999, reflecting a $958,137,000 or 22.0 percent increase in average outstanding interest-bearing liabilities, and a decrease in the cost of interest-bearing liabilities from 4.59 percent in 1998 to 4.35 percent in 1999. The decrease in the rate paid on interest-bearing liabilities reduced interest expense by approximately $12 million and the increase in average outstandings negatively affected interest expense by approximately $44 million. The 1998 increase in net interest income was primarily the result of an increase in earning assets of 15.0 percent. The net interest margin (taxable equivalent net interest income as a percentage of average earning assets) was 4.13 percent in 1999, compared to 4.20 percent in 1998 and 4.08 percent in 1997. The yield on earning assets was 7.96 percent in 1999, compared to 8.22 percent in 1998 and 8.28 percent in 1997. The cost of interest-bearing liabilities was 4.35 percent in 1999, compared to 4.59 percent in 1998 and 4.80 percent in 1997. 2 ASSET QUALITY The Company's provision for loan losses was $15,206,000 for 1999, compared to $10,079,000 for 1998 and $17,363,000 for 1997. The 1999 provision was primarily the result of loan growth. Net loan charge-offs were $8,627,000 (.24 percent of average loans, net of unearned discounts) in 1999, compared to $7,973,000 (.26 percent of average loans, net of unearned discounts) in 1998 and $10,042,000 (.38 percent of average loans, net of unearned discounts) in 1997. The allowance for loan losses at December 31, 1999, was $59,597,000 or 1.50 percent of loans, net of unearned discounts, compared to $53,018,000 or 1.57 percent of loans at December 31, 1998, and $47,076,000 or 1.71 percent of loans at December 31, 1997. The allowance for loan losses provides for probable losses inherent in the Company's loan portfolio. Management reviews the adequacy of the allowance each quarter. The overall allowance is evaluated based on a continuing assessment of problem loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories and other factors including its risk rating system, regulatory guidance and economic conditions. Management has determined that the allowance for loan losses is adequate, although financial market volatility, economic reversals or decreased customer earnings from operations could require an increase in the required allowance. Management allocates the allowance for loan losses by category, but even with the various methods employed by management in allocating the allowance, certain inherent, but undetected, losses are probable within the loan portfolio. Commercial, financial and agricultural allocations are based on a quarterly review of individual loans outstanding and binding commitments to lend. Reserves are allocated based on actual loss experience and credits with similar risk characteristics. Real estate loan allocations are based on quarterly reviews of individual loans and discounted cash flow analysis and independent appraisals. Consumer loan allocations are based on an analysis of product mix, credit scoring, migration analyses, losses from fraud and bankruptcy experience and historical and expected delinquency and charge-off statistics. Although the allocation of the allowance is an important management tool, no portion of the allowance is restricted to any individual loan or group of loans, rather the entire allowance is available to absorb losses from the entire loan portfolio. 3 SUMMARY OF LOAN LOSS EXPERIENCE This table summarizes the Company's loan loss experience for each of the five years ended December 31. There were no foreign loans.
In Thousands 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------ Balance at beginning of period $53,018 $47,076 $39,130 $32,331 $27,317 Charge-offs: Commercial, financial and agricultural 1,004 819 323 32 25 Real estate - construction 40 946 95 70 199 Real estate - mortgage 2,346 808 257 87 97 Consumer 8,486 8,521 10,951 8,335 5,421 Lease financing 744 943 1,382 1,912 1,586 Total charge-offs 12,620 12,037 13,008 10,436 7,328 Recoveries of loans previously charged off: Commercial, financial and agricultural 75 1,164 78 73 70 Real estate - construction 473 197 57 244 44 Real estate - mortgage 222 51 33 71 73 Consumer 2,639 2,232 2,238 1,985 1,531 Lease financing 584 420 560 533 518 Total recoveries 3,993 4,064 2,966 2,906 2,236 Net charge-offs 8,627 7,973 10,042 7,530 5,092 Increase due to acquisitions --- 3,836 625 288 --- Decrease due to loan sale --- --- --- (403) --- Provision for loan losses 15,206 10,079 17,363 14,444 10,106 Balance at end of period $59,597 $53,018 $47,076 $39,130 $32,331 Ratio of net charge-offs to average loans Outstanding during the period .24% .26% .38% .34% .28%
4 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The allowance for loan losses has been allocated according to the amount deemed to be reasonably necessary to provide for probable losses incurred within the following categories of loans for each of the five years ended December 31:
In Thousands 1999 1998 1997 1996 1995 % of % of % of % of % of Loans in Loans in Loans in Loans in Loans in Category Category Category Category Category To Total To Total To Total To Total To Total Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans Commercial, financial and agricultural $10,309 17% $ 9,637 18% $ 9,051 19% $ 7,621 19% $ 6,569 20% Real estate - construction 4,229 7 4,303 8 4,595 10 3,018 8 2,194 7 Real estate - mortgage 24,286 41 19,645 37 14,622 31 10,582 27 9,100 28 Consumer 20,274 34 18,965 36 18,288 39 17,541 45 14,162 44 Lease financing 499 1 468 1 520 1 368 1 306 1 Total $59,597 100% $53,018 100% $47,076 100% $39,130 100% $32,331 100%
5 Following is a comparison of non-earning assets and accruing loans past due 90 days or more for the years ended December 31:
In Thousands 1999 1998 1997 1996 1995 Non-accrual loans $ --- $ 560 $ 481 $ 88 $ --- Renegotiated loans --- 101 157 323 587 Other real estate owned 271 442 --- 2 335 Total non-earning assets $ 271 $1,103 $ 638 $ 413 $ 922 Accruing loans past due 90 days or more $5,470 $4,536 $3,449 $3,709 $3,331 Percentage of total loans .14% .13% .13% .15% .16%
There were $271,000, $1,103,000 and $638,000 of non-performing assets at December 31, 1999, 1998 and 1997, respectively. All of the non-accrual and renegotiated loans were collateralized and there were no significant commitments to lend any of these debtors additional funds. Loans and lease financing receivables are considered to be in non-accrual status if they are maintained on a cash basis because of deterioration in the financial position of the borrower, payment in full of interest or principal is not expected or principal or interest has been in default for a period of 90 days or more unless the obligation is both well secured and in the process of collection. A non-accrual asset may be restored to an accrual status when none of its principal and interest is due and unpaid or when it otherwise becomes well secured and in the process of collection. At December 31, 1999, the Company had no problem loans for which payments are being made, but the borrowers currently were experiencing severe financial difficulties. Any such loans would be subject to constant management attention and their classification would be reviewed monthly. 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. Other income (excluding securities gains or losses) increased $6,535,000 or 7.4 percent in 1999, compared to $1,712,000 or 2.0 percent in 1998 and $13,369,000 or 18.4 percent in 1997. Included in other income was a pre-tax gain of $4,009,000 related to branch transactions with First American Corp. (Tennessee). Excluding this transaction, other income increased 2.9 percent over the 1998 total of $87,768,000. Securities losses totaled $1,789,000 in 1999, gains totaled $224,000 in 1998 and losses totaled $127,000 in 1997. Other expenses (excluding the provision for loan losses) increased by $6,359,000 or 4.3 percent in 1999, 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 $17,318,000 or 13.2 percent in 1998, primarily for the same reasons. 6 Other expenses (excluding merger related expenses of approximately $2,100,000) increased $4,259,000 or 2.9 percent in 1999, compared to $17,318,000 or 13.2 percent in 1998 and $20,453,000 or 18.4 percent in 1997. The merger related expenses were primarily incurred during the fourth quarter for professional fees, computer system conversions, staff retention incentives, due diligence and negotiations with acquisition candidates. The Company's efficiency ratio, the ratio of non-interest expenses to net revenues, was 43.08 percent for the year excluding merger related expenses (43.70 percent including the expenses) compared to 49.28 percent in 1998 and 49.23 percent in 1997. 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 1998-1999 1997-1998 1999 Increase 1998 Increase 1997 Average (Decrease) Average (Decrease) Average In Thousands Balance Amount % Balance Amount % Balance FUNDING USES Interest-earning assets: Loans, net of unearned discounts $3,600,337 $ 559,675 18.4% $3,040,662 $ 389,999 14.7% $2,650,663 Securities: Taxable 2,111,065 443,120 26.6 1,667,945 208,764 14.3 1,459,181 Non-taxable 205,485 45,612 28.5 159,873 9,857 6.6 150,016 Trading account securities 42,285 (8,878) (17.4) 51,163 20,375 66.2 30,788 Federal funds sold and securities purchased under agreements to resell 67,923 23,361 52.4 44,562 20,577 85.8 23,985 Interest-bearing deposits with banks 24,016 4,690 24.3 19,326 870 4.7 18,456 Total interest-earning assets 6,051,111 1,067,580 21.4 4,983,531 650,442 15.0 4,333,089 Other uses 403,737 29,282 7.8 374,455 97,114 35.0 277,341 Total funding uses $6,454,848 $1,096,862 20.5% $5,357,986 $747,556 16.2% 4,610,430 FUNDING SOURCES Interest-bearing liabilities: Interest-bearing deposits $3,796,794 $ 564,762 17.5% $3,232,032 $448,556 16.1% $2,783,476 Short-term borrowings 683,304 207,157 43.5 476,147 30,284 6.8 445,863 Other borrowed funds and long-term debt 841,497 186,218 28.4 655,279 86,961 15.3 568,318 Total interest-bearing liabilities 5,321,595 958,137 22.0 4,363,458 565,801 14.9 3,797,657 Non-interest-bearing deposits 467,645 24,250 5.5 443,395 91,513 26.0 351,882 Capital trust pass-through securities 49,903 12 0.0 49,891 11,812 31.0 38,079 Stockholders' equity 498,546 99,811 25.0 398,735 51,352 14.8 347,383 Other sources 117,159 14,652 14.3 102,507 27,078 35.9 75,429 Total funding sources $6,454,848 $1,096,862 20.5% $5,357,986 $747,556 16.2% $4,610,430
7 Average loans, the largest use of funds, increased $560 million or 18.4 percent in 1999 and $390 million or 14.7 percent in 1998. Increases in consumer loans, real estate construction and mortgage loans and commercial loans were the primary reasons for the increases in 1999 and 1998. For 1999 and 1998 the growth in all loan categories primarily reflects increased demand and consumer loan promotions. Total securities (excluding the trading account), another major use of funds, increased by $489 million or 26.7 percent in 1999. Taxable securities increased by $443 million or 26.6 percent, reflecting increases in both fixed- and variable-rate federal agency securities. Non-taxable securities increased by $46 million or 28.5 percent, reflecting increased investment in bank-qualified municipal investments. Total securities increased by $219 million or 13.6 percent in 1998. The 1998 increase reflects increases in both fixed- and variable-rate federal agency securities and non-taxable securities. The Company accounts for securities in accordance with SFAS 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 decreased the securities portfolio by $6.8 million and decreased stockholders' equity by $4.2 million at December 31, 1999, and increased the securities portfolio by $2.3 million and increased stockholders' equity by $1.4 million at December 31, 1998. Trading account securities decreased by $8.9 million or 17.4 percent in 1999 and increased $20 million or 66.2 percent in 1998. These changes are a result of brokerage activities at NBC Capital Markets Group, Inc. 8 Federal funds sold and securities purchased under agreements to resell increased by $23.4 million or 52.4 percent in 1999 and $20.6 million or 85.8 percent in 1998, representing excess funds not otherwise employed in loans or investment securities. Time deposits in other banks increased by $4.7 million or 24.3 percent in 1999 and increased by $1 million or 4.7 percent in 1998. This is a readily manageable asset and balances are maintained at levels which are based on operating needs. Total interest-earning assets increased by $1,067.6 million or 21.4 percent in 1999, compared to an increase of $650.4 million or 15.0 percent in 1998. As described below, the growth in 1999 and 1998 was funded primarily by increases in interest-bearing deposits, other borrowed funds and stockholders' equity. Total average deposits increased by $589 million or 16.0 percent in 1999, compared to an increase of $540.1 million or 17.2 percent in 1998. Total interest-bearing deposits increased $564.8 million or 17.5 percent and total non-interest-bearing deposits increased $24.3 million or 5.5 percent in 1999, reflecting current market trends, compared to an increase of $448.6 million or 16.1 percent in interest-bearing deposits and an increase of $91.5 million or 26.0 percent in non-interest-bearing deposits in 1998. Federal funds purchased and securities sold under agreements to repurchase increased $207.1 million or 43.5 percent in 1999, compared to an increase of $30.3 million or 6.8 percent in 1998. 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 $186.2 million or 28.4 percent in 1999, compared to an increase of $87 million or 15.3 percent in 1998. 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. 9 LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT The Company manages interest rate risk with an Asset/Liability Management Committee comprised of senior management personnel from each key banking function. 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 due from 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 and home equity 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. Estimating the amount of interest rate risk requires assumptions about the future. The nature of the assumptions causes all representations of risk to be estimates. These estimates will be different from actual results for many reasons, including but not limited to, changes in the growth of the overall economy which will impact volume growth in the company, changing credit spreads, market interest rates moving in patterns other than the patterns chosen for analysis, changes in customer preferences, changes in tactical and strategic plans and initiatives and changes in Federal Reserve policy. Stress testing is performed on all market risk measurement analyses to help understand the relative sensitivity of key assumptions and thereby better understand the Company's risk profile. The adjacent market risk tables provide information about the Company's financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For loans, securities and liabilities with contractual maturities, the tables present principal cash flows and related weighted average interest rates by contractual maturities as well as the Company's historical experience of the impact of interest rate fluctuations on the prepayment of residential and home equity loans and mortgage-backed securities. For core deposits (e.g. DDA, interest checking, savings and money market deposits) that have no contractual maturity the tables present principal cash flows and, as applicable, related weighted average interest rates based on the Company's historical experience, management's judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. 10 Weighted average variable rates are based on the implied forward rates in the yield curve at the reporting date:
1999 Market Risk Disclosure In Thousands Approximate Principal Amount Maturing In Fair Value 2000 2001 2002 2003 2004 Thereafter Total December 31, 1999 Rate-sensitive assets: Fixed interest rate loans $ 680,181 $585,661 $556,706 $445,672 $372,717 $406,611 $3,047,550 $3,111,000 Average interest rate 8.53% 8.51% 8.44% 8.31% 8.24% 8.41% 8.43% Variable interest rate loans $ 612,200 $ 47,192 $ 58,484 $ 42,030 $ 42,457 $138,669 $ 941,031 $ 941,000 Average interest rate 8.94% 7.22% 8.40% 8.49% 8.50% 8.50% 8.72% Fixed interest rate securities $ 536,974 $775,583 $454,549 $146,623 $113,208 $ 29,691 $2,056,627 $1,935,000 Average interest rate 6.92% 6.56% 6.47% 6.50% 6.54% 6.36% 6.61% Variable interest rate securities $ 23,712 $ 6,838 $ 6,594 $ 6,239 $ 6,066 $237,529 $ 286,978 $ 287,000 Average interest rate 6.30% 6.50% 6.50% 6.50% 6.50% 6.50% 6.48% Rate-sensitive liabilities: Non-interest-bearing checking $ 274,881 $ 44,178 $ 46,675 $ 41,737 $ 46,675 $ --- $ 454,146 $ 454,000 Average interest rate --- --- --- --- --- --- --- Savings and interest-bearing checking $ 562,609 $285,829 $283,268 $291,122 $284,636 --- $1,707,464 $1,708,000 Average interest rate 3.10% 3.10% 3.10% 3.10% 3.10% --- 3.10% Time deposits $1,979,762 $289,915 $ 20,681 $ 11,508 $ 4,811 $ 27,613 $2,334,290 $2,317,000 Average interest rate 5.08% 5.27% 5.69% 5.45% 5.08% 4.19% 5.10% Fixed interest rate borrowings $ 343,684 $324,824 $ 45,352 $ 6,847 --- --- $ 720,707 $ 719,000 Average interest rate 4.96% 5.09% 5.18% 5.37% --- --- 5.03% Variable interest rate borrowings $ 883,038 --- --- --- --- --- $ 883,038 $ 883,000 Average interest rate 4.66% --- --- --- --- --- 4.66% Rate-sensitive derivative financial instruments*: Pay fixed/receive variable Interest rate swaps $ 650,000 Average pay rate 4.97% Average receive rate 5.71% Pay variable/receive fixed Interest rate swaps $ 40,000 Average pay rate 5.49% Average receive rate 6.84%
* Interest rate swaps are cancelable after one year. 11 1998 Market Risk Disclosure In Thousands
Approximate Fair Value Principal Amount Maturing In December 31, 1999 2000 2001 2002 2003 Thereafter Total 1998 Rate-sensitive assets: Fixed interest rate loans $ 514,196 $458,567 $481,546 $358,591 $369,870 $135,104 $2,317,874 $2,407,000 Average interest rate 8.56% 8.95% 8.75% 8.76% 8.38% 8.40% 8.67% Variable interest rate loans $ 592,424 $ 51,002 $ 43,138 $ 48,510 $ 57,014 $262,082 $1,054,170 $1,106,000 Average interest rate 8.25% 7.75% 7.75% 7.75% 7.75% 7.75% 8.09% Fixed interest rate securities $1,060,661 $ 64,198 $100,429 $ 85,502 $ 70,017 $244,477 $1,625,284 $1,631,000 Average interest rate 6.55% 6.10% 6.17% 6.59% 6.23% 6.26% 6.45% Variable interest rate securities $ 26,493 $ 13,514 $ 13,364 $ 11,028 $ 10,012 $455,022 $ 529,433 $ 528,000 Average interest rate 6.36% 6.18% 6.18% 6.17% 6.16% 6.16% 6.17% Rate-sensitive liabilities: Non-interest-bearing checking $ 291,679 $ 46,878 $ 49,527 $ 44,287 $ 49,527 42,488 $ 524,386 $ 524,000 Average interest rate --- --- --- --- --- --- --- --- Savings and interest-bearing checking $ 563,268 $286,164 $283,600 $291,463 $284,970 $ 77,877 $1,787,342 $1,787,000 Average interest rate 3.16% 3.16% 3.16% 3.16% 3.16% 3.16% 3.16% Time deposits $1,337,339 $356,798 $ 17,106 $ 10,094 $ 6,524 $155,397 $1,883,258 $1,913,000 Average interest rate 5.30% 5.67% 5.83% 5.93% 5.71% 4.70% 5.35% Fixed interest rate borrowings $ 17,199 $ 12,624 $ 9,824 $ 10,352 $ 6,611 $681,372 $ 737,982 $ 738,000 Average interest rate 5.46% 5.41% 5.40% 5.40% 5.37% 4.94% 4.98% Variable interest rate borrowings $ 441,829 $150,000 --- --- --- $ 7,549 $ 599,378 $ 599,000 Average interest rate 4.26% 5.60% --- --- --- --- 4.55% 4.55% Rate-sensitive derivative financial instruments*: Pay fixed/receive variable Interest rate swaps $ 110,000 Average pay rate 5.20% Average receive rate 5.53%
* Interest rate swaps are cancelable after one year. 12 CAPITAL RESOURCES Total average assets increased by 20.5 percent in 1999, 16.2 percent in 1998 and 15.6 percent in 1997. Correspondingly, total average equity capital increased by 25.0 percent in 1999, 14.8 percent in 1998 and 12.8 percent in 1997. A significant factor in the growth of realized stockholders' equity was the successful secondary offering of 3,564,529 shares of the Company's common stock resulting in net proceeds of $80,248,000 during the second quarter of 1999. The sale resulted in the Company having even stronger capital ratios. (See Consolidated Statements of Stockholders' Equity on page 30.) The percentage of average equity capital to average assets was 7.72 in 1999, 7.44 percent in 1998 and 7.53 percent in 1997. The internal capital growth rate was 13.55 percent in 1999, 14.16 percent in 1998 and 14.37 percent in 1997. These growth rates are the result of a return on average equity of 21.51 percent in 1999, 22.07 percent in 1998 and 20.86 percent in 1997. A stock repurchase program was authorized in 1996 for 8 million shares over two years and in 1997 for 6 million shares over the two years ended 1998 and 1999 for purposes of offsetting stock issuances planned for stock option and other employee benefit plans. During 1999, 1,051,500 shares of common stock were repurchased at a cost of $22,925,000, compared to 1,856,560 shares of common stock repurchased in 1998 at a cost of $33,936,284 and 1,406,690 shares of common stock repurchased in 1997 at a cost of $18,129,000. The Company's management plans to continue its efforts to increase the return on average equity while maintaining a consistent dividend ratio as a percentage of net income in order to achieve continued internal capital growth. The Company accounts for securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This resulted in a decrease of $4.2 million to 1999 year-end stockholders' equity and an increase of $1.4 million to 1998 year-end stockholders' equity. The following ratios in the table on selected capital information do not include the effect of SFAS No. 115 on Tier 1 capital, total capital or total risk- weighted assets. 13 At December 31, 1999, 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, 1999.
SELECTED CAPITAL INFORMATION December 31 In Thousands 1999 1998 Capital: Stockholders' equity $ 557,378 $ 424,191 Capital trust pass-through securities 49,909 49,896 Less: Unrealized gains (losses) in other comprehensive income (3,238) 1,398 Goodwill and other deductions 21,168 8,604 Tier 1 capital 589,357 464,085 Qualifying allowance for loan losses 58,957 49,951 Total capital $ 648,314 $ 514,036 Total risk-weighted assets $4,715,947 $3,993,024 Ratios: Total capital to risk-weighted assets 13.75% 12.87% Tier 1 capital to risk-weighted assets 12.50 11.62 Tier 1 capital to total assets (leverage ratio) 8.86 7.94 Average equity to assets 7.72 7.44
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. YEAR 2000 The Company developed and implemented a comprehensive action plan for identifying and addressing the technical and business risks associated with the century date change. The project plan followed procedures recommended by banking regulators and addressed computer hardware, computer software, telecommunications, business partners, funds providers, facilities and contingency plans. Due to an early start and capable project team the plan was successfully executed and the century date change passed without incident. Management will continue to monitor all business processes, including interaction with customers, vendors and other third parties to identify and address any Year 2000 issues that may occur. Costs to be incurred for ongoing monitoring and support activities are not expected to be material to the consolidated results of operations or consolidated financial position. 14 CONSOLIDATED BALANCE SHEETS National Commerce Bancorporation and Subsidiaries
December 31 In Thousands 1999 1998 ASSETS Cash and cash equivalents: Interest-bearing deposits with other banks $ 21,156 $ 20,335 Cash and non-interest-bearing deposits 179,082 236,159 Federal funds sold and securities purchased under agreements to resell 61,058 79,368 Total cash and cash equivalents 261,296 335,862 Available-for-sale securities 553,928 777,615 Held-to-maturity securities 1,759,383 1,377,102 Trading account securities 30,294 62,737 Loans, net of unearned discounts 3,985,789 3,372,044 Less allowance for loan losses 59,597 53,018 Net loans 3,926,192 3,319,026 Premises and equipment, net 47,830 45,527 Broker/dealer customer receivables 25,047 2,505 Other assets 202,203 169,917 Total assets $6,806,173 $6,090,291 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest-bearing $ 454,146 $ 524,386 Interest-bearing 4,041,754 3,670,600 Total deposits 4,495,900 4,194,986 Short-term borrowings 883,038 599,378 Federal Home Loan Bank advances 714,335 731,610 Accounts payable and accrued liabilities 99,241 83,858 Other borrowed funds and long-term debt 6,372 6,372 Total liabilities 6,198,886 5,616,204 Off-balance sheet items, commitments and contingent liabilities Capital trust pass-through securities 49,909 49,896 STOCKHOLDERS' EQUITY Preferred stock, no par value -- authorized 5,000,000 shares, none issued Common stock, par value $2 per share - authorized 175,000,000 shares, issued and outstanding 108,223,286 in 1999 and 104,528,285 in 1998 216,446 209,056 Additional paid-in capital 90,230 27,322 Retained earnings 253,940 186,415 Accumulated other comprehensive income (loss) (3,238) 1,398 Total stockholders' equity 557,378 424,191 Total liabilities and stockholders' equity $6,806,173 $6,090,291
See notes to consolidated financial statements. 15 CONSOLIDATED STATEMENTS OF INCOME National Commerce Bancorporation and Subsidiaries
Year Ended December 31 1999 1998 1997 In Thousands, Except Per Share Amounts INTEREST INCOME Loans $311,293 $275,890 $243,079 Securities: Taxable 136,424 110,649 98,268 Non-taxable 12,108 8,451 8,038 148,532 119,100 106,306 Trading account securities 2,282 3,073 1,857 Other 5,921 5,045 2,716 Total interest income 468,028 403,108 353,958 INTEREST EXPENSE Deposits 158,477 142,967 126,741 Short-term borrowings 31,212 23,206 23,062 Federal Home Loan Bank advances 41,432 27,904 23,032 Long-term debt 369 6,135 9,316 Total interest expense 231,490 200,212 182,151 Net interest income 236,538 202,896 171,807 Provision for loan losses 15,206 10,079 17,363 Net interest income after provision for loan losses 221,332 192,817 154,444 OTHER INCOME Trust service income 10,139 10,135 9,284 Service charges on deposits 21,705 19,747 17,673 Other service charges and fees 20,674 17,500 13,069 Broker/dealer revenue 18,092 20,441 13,115 Realized gains (losses) on available-for-sale securities (1,789) 224 (127) Other 23,693 19,945 32,915 Total other income 92,514 87,992 85,929 OTHER EXPENSES Salaries and employee benefits 76,343 70,712 60,934 Occupancy expense 14,086 12,643 11,162 Furniture and equipment expense 7,500 6,265 5,356 Other 57,329 59,279 54,129 Total other expenses 155,258 148,899 131,581 Income before income taxes 158,588 131,910 108,792 Income taxes 51,354 43,890 36,338 Net income $107,234 $ 88,020 $ 72,454 Net income per common share-basic $1.00 $.85 $.72 Net income per common share-diluted $.99 $.83 $.69 Weighted average shares outstanding-basic 106,749 103,636 101,083 Weighted average shares outstanding-diluted 108,823 105,970 104,454
See notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY National Commerce Bancorporation and Subsidiaries
Accumulated Number Additional Other of Common Paid-in Retained Comprehensive In Thousands, Except Share Amounts Shares Stock Capital Earnings Income (Loss) Total Balance at December 31, 1996 27,470,688 $ 54,941 $ 57,339 $209,468 $ 1,230 $322,978 Add (deduct): Net income 72,454 72,454 Net unrealized gain on available-for-sale securities -- net of taxes of $653 1,020 1,020 Comprehensive income 73,474 Common stock issued upon exercise of stock options 517,120 1,034 2,482 3,516 Cash dividends declared ($.23 per share) (22,529) (22,529) Tax benefit of stock options exercised 5,109 5,109 Shares repurchased/cancelled (699,845) (1,400) (16,729) (18,129) Other 59,020 119 134 (222) 31 2 for 1 stock split effected in the form of a dividend 24,590,490 49,181 --- (49,181) --- --- Balance at December 31, 1997 51,937,473 103,875 48,335 209,990 2,250 364,450 Add (deduct): Net income 88,020 88,020 Net unrealized loss on available-for-sale securities -- net of taxes of $(558) (852) (852) Comprehensive income 87,168 Common stock issued upon exercise of stock options 943,427 1,887 514 2,401 Cash dividends declared ($.32 per share) (31,532) (31,532) Tax benefit of stock options exercised 7,886 7,886 Shares repurchased/cancelled (1,236,030) (2,472) (31,464) (33,936) 2 for 1 stock split effected in the form of a dividend 49,764,186 99,528 (99,528) --- Common stock issued in connection with immaterial poolings of interests 3,075,929 6,151 781 19,771 --- 26,703 Other 43,300 87 1,270 (306) 1,051 Balance at December 31, 1998 104,528,285 209,056 27,322 186,415 1,398 424,191 Add (deduct): Net income 107,234 107,234 Net unrealized loss on available-for-sale securities -- net of taxes of $(3,546) (5,566) (5,566) Accumulated net unrealized loss on available-for-sale securities (4,168) April 1, 1999, cumulative effect of adjustment for change in accounting method, net of taxes $(277) (452) Unrealized gain on cash flow hedging instruments -- net of taxes of $846 1,382 Accumulated net unrealized gain on cash flow hedging instruments 930 930 Comprehensive income 102,598 Common stock issued upon exercise of stock options 1,063,472 2,127 2,761 4,888 Stock offering 3,564,529 7,129 73,119 80,248 Cash dividends declared ($.375 per share) (39,697) (39,697) Tax benefit of stock options exercised 6,964 6,964 Shares repurchased/cancelled (1,051,500) (2,103) (20,822) (22,925) Other 118,500 237 886 (12) 1,111 Balance at December 31, 1999 108,223,286 $216,446 $ 90,230 $253,940 $ (3,238) $557,378
See notes to consolidated financial statements. 17 CONSOLIDATED STATEMENTS OF CASH FLOWS National Commerce Bancorporation and Subsidiaries
Year Ended December 31 In Thousands 1999 1998 1997 OPERATING ACTIVITIES Net income $ 107,234 $ 88,020 $ 72,454 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 15,206 10,079 17,363 Depreciation and amortization 9,996 8,240 6,006 Amortization of securities premiums and (accretion of discounts), net 154 (2,797) (847) Deferred income taxes (1,599) (1,418) (2,345) (Increase) decrease in trading account securities 32,443 35,595 (66,520) Realized securities (gains) losses 1,789 (224) 127 (Increase) decrease in broker/dealer customer receivables (22,542) 5,190 4,004 (Increase) decrease in other assets (24,495) 3,523 (23,765) Increase in accounts payable and accrued liabilities 25,299 16,552 13,806 Net cash provided by operating activities 143,485 162,760 20,283 INVESTING ACTIVITIES Available-for-sale securities: Proceeds from maturities of securities 130,349 546,120 352,112 Proceeds from sales of securities 265,466 224,982 88,587 Purchases of securities (183,183) (1,055,649) (117,747) Held-to-maturity securities: Purchases of securities (454,651) (828,168) (457,066) Proceeds from maturities of securities 72,370 617,791 38,709 Net increase in loans (622,372) (623,051) (290,262) Purchase of FleetOne (6,900) --- --- Purchases of premises and equipment (10,054) (19,496) (12,757) Net cash used in investing activities (808,975) (1,137,471) (398,424) FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts (150,118) 497,922 66,961 Net increase in certificates of deposit 451,032 252,562 233,666 Net increase in short-term borrowings 283,660 167,122 128,818 Net increase (decrease) in Federal Home Loan Bank advances (17,275) 341,726 (6,225) Repayment of bank notes --- (149,880) --- Net proceeds from issuance of capital trust pass-through securities --- --- 49,884 Proceeds from exercise of stock options 4,888 2,401 3,516 Cash dividends (39,697) (31,532) (22,529) Other 1,111 1,051 31 Repurchase of common stock (22,925) (33,936) (18,129) Stock offering 80,248 --- --- Net cash provided by financing activities 590,924 1,047,436 435,993 Increase (decrease) in cash and cash equivalents (74,566) 72,725 57,852 Cash and cash equivalents at beginning of year 335,862 263,137 205,285 Cash and cash equivalents at end of year $ 261,296 $ 335,862 $ 263,137 SUPPLEMENTAL DISCLOSURES Interest paid $ 237,412 $ 192,208 $ 180,170 Income taxes paid 53,315 33,878 32,266
See notes to consolidated financial statements. 18 Notes To Consolidated Financial Statements National Commerce Bancorporation and Subsidiaries December 31, 1999 (In Thousands, Except Share Data) Note A - Accounting Policies Nature of Operations National Commerce Bancorporation (NCBC or the Company) is a bank holding company that provides diverse financial services. NCBC provides financial services through a regional network of banking affiliates and a national network of non- banking affiliates. NCBC operates 162 bank locations in Tennessee, North Carolina, Virginia, West Virginia, Arkansas, Mississippi and Georgia. NCBC has three principal lines of business: retail banking, commercial banking and financial services. Financial services include transaction processing, in-store licensing and consulting, capital markets, trust and asset management and treasury services. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. The consolidated group provides financial services principally to domestic markets. All significant intercompany transactions have been eliminated in consolidation. Business Combinations All prior period consolidated financial statements have been restated to reflect material business combinations accounted for as poolings of interests and, accordingly, the financial position, results of operations and cash flows are presented as though the companies were combined for all historical periods. 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. 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 are excluded from earnings and reported in other comprehensive income. 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 fair value with changes in fair value recorded in earnings. Broker/dealer revenue 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. 19 Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances adjusted for charge-offs and the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past delinquent unless the credit is well secured and in processs of collection. Consumer and other retail loans are typically charged off no later than 120 days past due. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest for these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. The allowance for loan losses is evaluated based on a continuing assessment of problem loans, historical loss experience, new lending products, emerging credit trends, changes in the size and character of loan categories and other factors, including its risk rating system, regulatory guidance and economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. When the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the recorded balance has been reduced to zero, future cash receipts are applied to interest income, to the extent any interest has been foregone, and then are recorded as recoveries of any amounts previously charged off. Large groups of smaller balance, homogeneous loans are evaluated collectively for impairment. 20 Derivatives and Hedging Activities The Company records derivatives at fair value in other assets (other liabilities) depending on whether the fair value is an unrealized gain or loss. Derivatives that are not hedges are adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the derivatives are either offset through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company's derivatives are interest rate swaps utilized to hedge exposure to interest rate risk. Net interest received or paid on an interest rate agreement is recognized over the life of the contract as an adjustment to interest income (expense) of the hedged financial instrument. 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. Income Taxes 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. Each subsidiary provides for income taxes based on its contribution to income taxes (benefit) of the consolidated group. The Company and its subsidiaries file a consolidated tax return. Earnings Per Share All earnings per share amounts for all periods have been presented to conform to the Financial Accounting Standards Board (FASB) Statement No. 128 earnings per share requirements. In addition, all share and per share amounts have been retroactively restated for all stock dividends and splits declared through December 31, 1999. 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 Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. Cash and Cash Equivalents 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. Reclassification Certain account reclassifications have been made to the 1998 and 1997 financial statements to conform with the 1999 presentation, none of which are material. 21 Note B - Business Combinations On August 4, 1999, NCBC completed its merger with First Financial Corporation (FFC) of Mt. Juliet, Tennessee, in a transaction accounted for as a pooling of interests. Under the terms of the merger agreement, FFC shareholders received 2.8502 shares of NCBC stock for each share of FFC stock held. Approximately 2.9 million shares of NCBC common stock were issued in exchange for all of the FFC common stock outstanding. On August 20, 1999, NCBC completed its merger with Southeastern Mortgage of Tennessee, Inc. (SMTI) of Nashville, Tennessee, in a transaction accounted for as a pooling of interests. Under the terms of the merger agreement, SMTI shareholders received 99.625 shares of NCBC stock for each share of SMTI stock held. Approximately 200,000 shares of NCBC common stock were issued in exchange for all of the SMTI common stock outstanding. On December 31, 1999, NCBC completed the cash acquisition of FleetOne, LLC from Nashville-based Mapco, Inc. through NCBC's Nashville-based subsidiary TransPlatinum Service Corp. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements follow. Certain reclassifications were made to the FFC and SMTI financial statements to conform to NCBC's presentations.
(Unaudited) Six Months Ended Year Ended Year Ended June 30, 1999 December 31, 1998 December 31, 1997 Net Interest Income NCBC $106,934 $192,618 $162,821 FFC 5,722 10,039 8,915 SMTI 79 239 71 $122,735 $202,896 $171,807 Other Income NCBC $ 43,840 $ 84,118 $ 82,405 FFC 1,345 2,524 2,043 SMTI 994 1,350 1,481 $ 46,179 $87,992 $85,929 Net Income NCBC $ 48,895 $ 85,141 $ 69,780 FFC 1,441 2,848 2,604 SMTI 167 31 70 $ 50,503 $88,020 $72,454
During 1998, the Company acquired four financial institutions with combined total assets of approximately $290,000. The Company accounted for these transactions as poolings of interests. However, due to the immaterial amount of the transactions, the Company's prior period financial statements were not restated to include the combined results of operations, financial position and cash flows of these entities. The Company issued 3,075,929 shares of common stock in connection with these acquisitions. 22 NOTE C - Securities The following is a summary of available-for-sale securities and held-to-maturity securities: December 31, 1999 Available-for-sale Securities
Net Unrealized Gains Fair Value (Losses) U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 104,487 $ (400) Obligations of states and political subdivisions 123,516 1,441 Mortgage-backed securities 261,408 (5,574) Total debt securities 489,411 (4,533) Other 64,517 --- Total $ 553,928 $(4,533)
December 31, 1999 Held-to-maturity Securities
Gross Gross Amortized Unrealized Unrealized Cost Gains (Losses) Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $1,025,735 $ --- $(59,262) $ 966,473 Obligations of states and political subdivisions 5,292 146 (13) 5,425 Other asset-backed securities 82,666 --- (7,037) 75,629 Mortgage-backed securities 645,690 4 (25,638) 620,056 Total $1,759,383 $ 150 $(91,950) $1,667,583
23 December 31, 1998 Available-for-sale Securities
Net Unrealized Fair Value Gains U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 328,543 $ 189 Obligations of states and political subdivisions 83,893 1,244 Mortgage-backed securities 306,274 816 Total debt securities 718,710 2,249 Equity securities 58,905 30 Total $ 777,615 $ 2,279
December 31, 1998 Held-to-maturity Securities
Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 568,596 $ 140 $ (400) $ 568,336 Obligations of states and political subdivisions 80,777 4,849 (12) 85,614 Other asset-based securities 68,039 1,598 (378) 69,259 Mortgage-backed securities 659,690 2,687 (3,894) 658,483 Total $1,377,102 $ 9,274 $(4,684) $1,381,692
24 The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 1999, 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, 1999 Available-for-sale Securities Amortized Cost Fair Value Due in one year or less $ 16,977 $ 17,004 Due after one year through five years 65,643 65,541 Due after five years through 10 years 130,047 131,101 Due after 10 years 14,424 14,486 227,091 228,132 Mortgage-backed securities 266,982 261,408 Equity securities 64,388 64,388 Total $ 558,461 $ 553,928 December 31, 1999 Held-to-maturity Securities Amortized Cost Fair Value Due in one year or less $ 100,000 $ 95,000 Due after one year through five years 28,972 28,247 Due after five years through 10 years 575,681 548,556 Due after 10 years 409,040 375,724 1,113,693 1,047,527 Mortgage-backed securities 645,690 620,056 Total $1,759,383 $1,667,583
The amortized cost of securities pledged to secure repurchase agreements and government, public and trust deposits was $1,914,616 and $1,484,527 at December 1999 and 1998, respectively. At December 31, 1999, the remaining net unrealized holding loss on securities reclassified from available for sale to held to maturity was $2,300. Consistent with the requirements of SFAS No. 115, the difference between the amortized cost of the security and its fair value at the date of transfer is amortize as a yield adjustment in accordance with SFAS No. 91. 25 Note D - Loans and Allowance for Loan Losses Analyses of loans outstanding by category were as follows:
December 31 1999 1998 Commercial, financial and agricultural $ 689,945 $ 613,557 Real estate - construction 283,033 273,968 Real estate - mortgage 1,625,374 1,250,698 Consumer 1,356,824 1,207,431 Lease financing 33,405 29,805 Unearned discounts (2,792) (3,415) 3,985,789 3,372,044 Allowance for loan losses 59,597 53,018 Net loans $3,926,192 $3,319,026
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 $54,780 and $40,049 at December 31, 1999 and 1998, respectively. During 1999, $112,047 of new loans to related parties were made and payments totaled $97,316. Changes in the allowance for loans losses were as follows:
Year Ended December 31 1999 1998 1997 Balance at beginning of year $ 53,018 $ 47,076 $ 39,130 Provision for loan losses 15,206 10,079 17,363 Increase due to acquisitions --- 3,836 625 Loans charged off (12,620) (12,037) (13,008) Recoveries of loans previously charged off 3,993 4,064 2,966 Balance at end of year $ 59,597 $ 53,018 $ 47,076
26 Note E - Derivatives and Hedging Activities On April 1, 1999, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company records the fair value of interest rate swaps designated as cash flow hedges in other assets or other liabilities with the offset to the other comprehensive income (OCI) component of stockholders' equity. The Company records the fair value of interest rate swaps used as fair value hedges in other assets or other liabilities with the offset to other income or other expenses The Company also marks the hedged item to market on the balance sheet with the offset to other income or other expenses. At adoption, the Company recorded its interest rate swaps designated as cash flow hedges with a fair value of $729 in other liabilities. OCI was reduced $452, net of taxes of $277, as a cumulative effect adjustment for an accounting change. The Company transferred approximately $302,000, par value, of held-to- maturity securities to the available-for-sale securities category with an unrealized gain of $7,622 as permitted by the statement upon adoption. The Company utilizes interest rate swap agreements to provide an exchange of interest payments computed on notional amounts that will offset any undesirable change in cash flows or fair value resulting from market rate changes on designated hedged transactions or items. The Company limits the credit risks of the interest rate agreements by initiating the transactions with counterparties with significant financial positions. The Company's interest rate agreements designated as cash flow hedges modify the interest payment characteristics of its outstanding debt and large time deposits (designated hedged transaction) from a floating- to a fixed-rate basis. These agreements involve the receipt of floating-rate amounts in exchange for fixed- rate payments over the life of the agreement without exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to interest expense related to the item specifically designated as being hedged at the start of the agreement. The related amount payable or receivable from counterparties is included in other liabilities or other assets. The fair value of interest rate swaps designated as cash flow hedges at December 31, 1999, was $1,499 and recorded in other assets. The offset was $930, net of taxes of $569, recorded in OCI. At December 31, 1999, the notional amounts of interest rate agreements designated as cash flow hedges were $650,000. At December 31, 1998, the notional amount of interest rate agreements were $110,000. The Company's interest rate agreements designated as fair value hedges help manage exposure of its outstanding fixed-rate, large time deposits (designated hedged item) to change in fair value. These agreements involve the receipt of fixed-rate amounts in exchange for floating-rate payments over the life of the agreement without exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rate change and is recognized as an adjustment to interest expense related to the item specifically designated as being hedged at the start of the agreement. The related amount payable or receivable from counterparties is included in other liabilities or other assets. The fair value of interest rate swaps designated as fair value hedges at December 31, 1999, was $850 and was recorded in other liabilities and other expenses. The offset was the reduction in the fair value of the designated large time deposits and other income. At December 31, 1999, the notional amounts of interest rate agreements designated as fair value hedges were $40,000. 27 Note F - Time Deposits The aggregate amount of time deposits in denominations of $100 or more at December 31, 1999 and 1998, were $1,337,068 and $925,005, respectively. The time deposit maturities at December 31, 1999, for the next five years and thereafter are as follows:
2000 $1,829,763 2001 439,915 2002 20,681 2003 11,508 2004 4,811 Thereafter 27,612 Total $2,334,290
Note G - Credit Facilities During 1999, the Company obtained numerous advances from the Federal Home Loan Bank totaling $475,000. The individual advances ranged from $25,000 to $150,000. They bear interest at either a variable rate equal to one-month Libor, or at a fixed rate for the first year after issue date, and thereafter may be converted, at the option of the Federal Home Loan Bank, to a floating- rate equal to three-month Libor. During 1999, the one-month Libor rate ranged from 4.8375 percent to 6.4275 percent. During 1999, the fixed rates ranged from 4.55 percent to 5.39 percent, and the three-month Libor rate ranged from 4.904 percent to 6.160 percent. Maturity dates ranged from October 25, 2000, to August 24, 2009. At December 31, 1999, the Company had pledged as collateral $897,232 of its loans secured by mortgages on one-to-four family residential properties and certain securities totaling $344,081. During 1998, the Company obtained numerous advances from the Federal Home Loan Bank totaling $675 million. The individual advances ranged from $10 million to $100 million. They bear interest at a fixed-rate for the first year after their issue date, and thereafter may be converted, at the option of the Federal Home Loan Bank, to a floating rate equal to three-month LIBOR. During 1998, the fixed rates ranged from 4.73 percent to 5.15 percent, and the three-month LIBOR rate ranged from 5.07 percent to 5.72 percent. Maturity dates ranged from January 29, 2008, to July 22, 2013. At December 31, 1998, the Company had pledged as collateral $567,761 of its loans secured by mortgages on one-to-four family residential properties and certain securities totaling $467,660. 28 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, 1999:
2000 $114,273 2001 9,947 2002 10,875 2003 4,054 2004 76 Thereafter 575,110 Total $714,335
Short-term borrowings consist primarily of federal funds purchased and securities sold under agreements to repurchase which totaled $883,038 and $591,829 at December 31, 1999 and 1998, respectively. Other borrowed funds and long-term debt at December 31, 1999 and 1998, consisted primarily of the following unsecured term notes of the Company's lead subsidiary National Bank of Commerce (NBC): 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 2000. At December 31, 1999, the rates ranged from 5.63 percent to 5.81 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 2000. At December 31, 1999, the rates ranged from 5.67 percent to 5.74 percent, maturing December 3 and December 17, 2007. $1,025 Total $6,372 At December 31, 1999, the Company had available $27 million in unsecured lines of credit with other financial institutions consisting of a $25 million line of credit which is contractual in nature and requires no compensating balances or fees and expires September, 30, 2000, and a $2 million line of credit which expires June 30, 2000. There were no borrowings against these lines during 1999. Note H - Floating Rate Capital Trust Pass-through Securities On March 20, 1997, National Commerce Trust I (the "Trust"), a Delaware business trust wholly owned by the Company, completed its sale of $50 million of Floating Rate Capital Trust Pass-through Securities (the "Capital Securities") which bear interest at a variable annual rate equal to LIBOR plus 0.98 percent (6.98 percent and 6.05 percent at December 31, 1999 and 1998, respectively). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of Floating Rate Junior Subordinated Deferred Interest Debentures due 2027 (the "Subordinated Debt Securities") of the Company. The Subordinated Debt Securities, which also bear interest at a variable annual rate equal to LIBOR plus 0.98 percent, are the sole assets of the Trust and are eliminated, along with the related income statement effects, in the consolidated financial statements. The Company is using the proceeds from the sale of the Subordinated Debt Securities for general corporate purposes. The Company has fully and unconditionally guaranteed all of the obligations of the Trust. The guarantee covers the distributions and payments on liquidation or redemption of the Capital Securities but only to the extent of funds held by the Trust. The Subordinated Debt Securities mature and become due and payable, together with any accrued and unpaid interest, if any, on April 1, 2027. The Subordinated Debt Securities are unsecured and are effectively subordinated to all existing and future liabilities of the Company. The Company has the right, at any time, so long as no event of default has occurred, to defer payments of interest on the Subordinated Debt Securities for a period not to exceed 20 consecutive quarters. The proceeds from the Capital Securities qualify as Tier 1 capital with respect to the Company under the risk-based capital guidelines established by the Federal Reserve. 29 Note I - Other Non-interest Expenses Components of other non-interest expense which exceed 1 percent of total revenues for the three years ended December 31, 1999, were as follows:
1999 1998 1997 Non-interest expense Broker/dealer commissions $ 6,677 $ 6,879 $2,818 Sales promotion expense $ 2,314 $2,495 $4,607
Note J - Income Taxes The components of the provision for income taxes for the three years ended December 31 were:
1999 1998 1997 Federal: Current $51,159 $43,799 $37,196 Deferred (credits) (1,599) (1,418) (2,345) 49,560 42,381 34,851 State 1,794 1,509 1,487 Income taxes $51,354 $43,890 $36,338
Significant components of the Company's net deferred tax assets and liabilities are summarized as follows: December 31 1999 1998 Deferred tax assets: Allowance for loan losses $22,821 $20,302 Net unrealized loss on available-for-sale securities 2,665 --- Other 320 838 Total deferred tax assets 25,806 21,140 Deferred tax liabilities: Net unrealized gain on available-for-sale securities --- 881 Interest rate swaps 569 --- Pension costs 2,630 2,261 SFAS No. 91 net deferred costs 2,811 3,368 Other 3,069 2,478 Total deferred tax liabilities 9,079 8,988 Net deferred tax asset $16,727 $12,152 30 Income taxes varied from the amount computed at the statutory federal income tax rate as follows:
1999 1998 1997 Amount % Amount % Amount % Federal income tax at statutory rate $55,506 35.00% $46,168 35.00% $38,077 35.00% Add (deduct): State income taxes, net of federal tax benefits 1,166 .74% 983 .75 967 .89 Non-taxable interest income (2,426) (1.53) (2,863) (2.17) (2,649) (2.43) Other items, net (2,892) (1.82) (398) (.30) (57) (.05) Income taxes $51,354 32.39% $43,890 33.28% $36,338 33.41%
Income taxes (credits) applicable to securities gains (losses) for 1999, 1998 and 1997 which are included in the provision for income taxes were $680, $86 and ($41), respectively. Note K - 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 of commitments at December 31 was as follows:
1999 1998 Loan commitments $947,068 $925,631 Standby letters of credit 72,733 43,665 Commercial letters of credit 888 2,286
31 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 counterparties 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 was as follows:
1999 1998 Forward contracts: Commitments to purchase $241,358 $280,840 Commitments to sell $247,987 $282,280 When issued contracts: Commitments to purchase $ 7,066 $ 1,500 Commitments to sell $ 8,713 --- Option contracts: Written option contracts $ 3,000 $ 8,000 Purchased option contracts $ 3,000 $ 8,000
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. The Company leases land, certain bank premises and equipment. Total rental expense for all operating leases is as follows:
Year Ended December 31 1999 1998 1997 Minimum rentals $7,485 $6,947 $6,219 Contingent rentals 424 292 155 Total $7,909 $7,239 $6,374
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, 1999:
2000 $ 6,854 2001 6,181 2002 5,073 2003 4,113 2004 3,484 Thereafter 11,395 Total $37,100
The various leases on the land and bank premises may be renewed for periods of five to 20 years upon the expiration of the respective leases. 32 Note L - Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31 1999 1998 1997 Numerator: Net income $107,234 $ 88,020 $ 72,454 Denominator: Denominator for basic earnings per share -- weighted average shares 106,749 103,636 101,083 Effect of dilutive securities: Employee stock options 2,074 2,334 3,371 Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 108,823 105,970 104,454 Basic earnings per share $ 1.00 $ .85 $ .72 Diluted earnings per share $ .99 $ .83 $ .69
Note M - Stock Options The Company's 1994 Stock Plan has reserved 8,200,000 shares of the Company's common stock for use under the Plan for the granting of options and restricted stock to key employees. Options become exercisable in equal parts over the succeeding five years from the date of grant. Under the ShareNCBC program of the 1994 Stock Plan, eligible officers may buy shares from the Company's discount brokerage subsidiary to qualify to participate in the program. If the officer holds the qualifying shares and remains employed for two years, such officer receives two options for each share purchased which become fully exercisable at the end of the two-year period. During 1999, the Company acquired First Financial Corporation, Mt. Juliet, Tennessee, and the following amounts are restated to reflect that company's options which were converted to NCBC options. The following amounts reflect the effect of all stock dividends and splits declared through 1999:
1999 1998 1997 Weighted Weighted Weighted average average average exercise exercise exercise Options price Options price Options price Outstanding at beginning of year 5,572,863 $ 8.482 6,543,042 $ 6.412 6,655,216 $4.812 Granted 1,101,100 $ 16.493 1,013,846 $ 16.201 1,658,813 $9.587 Exercised (1,380,322) $ 6.680 (1,640,197) $ 4.830 (1,629,063) $4.285 Cancelled (140,100) $ 14.076 (343,828) $ 9.262 (141,924) $6.490 Outstanding at end of year 5,153,541 $ 10.525 5,572,863 $ 8.482 6,543,042 $6.412 Exercisable at year end 3,232,541 $ 7.690 3,285,972 $ 6.586 3,886,925 $6.237 Unoptioned shares 772,026 1,764,926 2,429,244 Total shares reserved 5,925,567 7,337,789 8,972,286 Weighted average fair value of options granted during the year $6.360 $5.580 $ 5.540
33 Exercise prices for options outstanding as of December 31, 1999, ranged from $2.556 to $26.125. The weighted average remaining contractual life of those options is approximately five years. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-based Compensation," 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 all years presented: risk-free interest rates of 6.0 percent; dividend yields of 2.0 percent; volatility factors of the expected market price of the Company's common stock of .35; 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 is as follows:
Year Ended December 31 1999 1998 1997 Pro forma net income $102,660 $85,600 $71,384 Pro forma earnings per share: Basic $ .96 $ .83 $ .71 Diluted $ .94 $ .81 $ .68
34 Note N - Pensions and Other Post-retirement Benefits The Company has a defined benefit non-contributory pension plan covering substantially all of its full-time employees who have served continuously for one year. Amounts determined under ERISA are funded annually. Benefits are based on compensation and years of service. Included in the assets of the plan as of December 31, 1999, were 417,428 shares of common stock of the Company with a market value of $9,470. In addition to the defined benefit pension plan, the Company sponsors retirement medical and life insurance plans that provide post-retirement healthcare and life insurance benefits. This 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. The following tables set forth the plan's status and amounts recognized in the Company's consolidated financial statements:
Pension Benefits Other Benefits 1999 1998 1999 1998 Change in benefit obligation: Benefit obligation at beginning of year $54,919 $50,211 $ 2,587 $ 2,593 Service cost 1,778 1,663 23 20 Interest cost 3,589 3,515 161 169 Actuarial loss (gains) 6,857 2,142 596 (208) Benefits paid (9,463) (5,841) (346) (120) Assumptions change (8,978) 1,625 428 133 Plan merger --- 1,604 --- --- Benefit obligation at end of year 48,702 54,919 3,449 2,587 Change in plan assets: Fair value of plan assets at beginning of year 59,114 59,076 --- --- Actual return on plan assets 5,093 (346) --- --- Employer contributions 384 4,214 --- --- Plan merger --- 2,011 --- --- Benefits paid (9,463) (5,841) --- --- Fair value of plan assets at end of year 55,128 59,114 --- --- Prepaid (accrued) benefits cost: Funded status of the plan (underfunded) 6,426 4,195 (3,449) (2,587) Unrecognized net loss 10,832 12,972 1,654 651 Unrecognized transition (asset) liability (20) (34) 263 283 Unrecognized prior service cost (859) (1,426) (507) (549) Prepaid (accrued) benefit cost $16,379 $15,707 $(2,039) $(2,202) Pension Benefits Other Benefits 1999 1998 1999 1998 Weighted average assumptions as of December 31: Discount rate 8.25% 6.75% 8.25% 6.75% Expected return on plan assets 11.00 11.00 n/a n/a Rate of compensation increase 3.50 3.50 n/a n/a
35 Components of net periodic benefit cost (income) were as follows:
Pension Benefits Other Benefits 1999 1998 1997 1999 1998 1997 Service cost $ 1,778 $ 1,663 $ 1,496 $ 23 $ 20 $ 18 Interest cost 3,589 3,515 3,386 161 169 181 Expected return on plan assets (5,093) 346 (13,548) --- --- --- Net amortization and deferral (756) (7,130) 8,302 (1) (2) 11 Net periodic benefit cost (income) $ (482) $(1,606) $ (364) $ 183 $ 187 $ 210
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 9.0 percent for 1999 and 1998. It is assumed to decrease gradually to 5.5 percent for 2005 and remain at that level thereafter. The assumed health care cost trend rate has a significant effect on the amounts reported. A 1 percentage point change in the assumed health care cost trend rate would have the following effects:
1 Percentage Point Increase 1 Percentage Point Decrease Effect on total of service and interest cost components in 1999 $23 $(18) Effect on post-retirement benefit obligation as of 1999 $344 $(285)
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. Taxable Income Reduction Account (TIRA) Plan participants can elect to defer a percentage of their annual earnings, subject to the maximum amount allowed of $10. The Company matches participants' basic contributions up to a specified percentage of basic contributions. Note O - 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, 1999, that the Company exceeds all capital adequacy requirements to which it is subject. 36 As of December 31, 1999, 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, 1999 Total capital (to risk- weighted assets) $648,314 13.75% $427,735 11.67% Tier 1 capital (to risk- weighted assets) $589,357 12.50% $384,195 10.48% Tier 1 capital (to total assets) $589,357 8.86% $384,195 7.03% As of December 31, 1998 Total capital (to risk- weighted assets) $514,036 12.87% $292,263 11.84% Tier 1 capital (to risk- weighted assets) $464,085 11.62% $262,987 10.65% Tier 1 capital (to total assets) $464,085 7.94% $262,987 6.71%
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, 1999, $51,723 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, 1999, the maximum amount available for transfer from the banking subsidiaries to the Company in the form of loans approximated 10.08 percent of consolidated net assets. There were no loans from the subsidiaries to the Company at December 31, 1999. 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, 1999 and 1998, were approximately $5,484 and $9,253, respectively. 37 Note P - Segment Information National Commerce Bancorporation operates several major lines of business. The commercial banking segment includes lending and related financial services to large and medium sized corporations. Included among these are several specialty services such as real estate finance, asset based lending and residential construction. The retail banking segment includes sales and distribution of financial products and services to individuals. These include loan products such as residential mortgages, home equity lending, automobile and other personal financing needs. Retail banking also offers various deposit products that are designed for customers' saving and transaction needs. The financial services segment includes trust, asset management, insurance and brokerage activities. Financial services also includes balance sheet management activities including oversight of the investment portfolio, non-deposit based funding and interest rate risk management and income from transaction processing, in-store consulting/licensing and specialty leasing. The accounting policies of the individual segments are the same as those of the Company described in Note A. Transactions between business segments are conducted at fair value and are eliminated for reporting consolidated financial position and results of operations. Each segment's balance sheet is adjusted to reflect its net funding position. Assets are increased if excess funds are provided; liabilities are increased if funds are needed to support assets. Each segment's net interest income is affected by the internal transfer rate assigned to its net funding position. Interest income for tax-exempt loans and securities is adjusted to a taxable equivalent basis. Expenses for centrally provided services such as deposit servicing, data processing, technology and loan servicing and underwriting are allocated to each segment based upon various statistical information. Other indirect costs, such as management overhead and corporate support, are also allocated to each segment based upon various statistical information. The portion of the provision for loan losses that is not related to specific net charge-offs is allocated to the segment based upon loan growth. There are no significant intersegment revenues. Performance is assessed primarily on net interest margin by the chief operating decision makers. 38 The following tables present condensed income statements and average assets for each reportable segment. This presentation reflects management's determination that it operates in three separate business segments. Management has determined that treasury, which has previously been reported as a separate segment, should be combined with the financial services segment.
National Commerce Bancorporation Year Ended December 31, 1999 Commercial Retail Financial Banking Banking Services Total Net interest income $ 52,424 $ 105,584 $ 92,145 $ 250,153 Provision for loan losses (1,830) (12,983) (393) (15,206) Net interest income after provision for loan losses 50,594 92,601 91,752 234,947 Other income 3,773 11,755 76,986 92,514 Other expenses (15,108) (41,026) (99,124) (155,258) Income before income taxes 39,259 63,330 69,614 172,203 Income taxes (13,220) (23,483) (28,266) (64,969) Net income $ 26,039 $ 39,847 $ 41,348 $ 107,234 Average assets $1,039,745 $2,851,995 $2,563,108 $6,454,848 Year Ended December 31, 1998 Commercial Retail Financial Banking Banking Services Total Net interest income $ 52,489 $ 116,034 $ 40,962 $ 209,485 Provision for loan losses (1,250) (8,637) (192) (10,079) Net interest income after provision for loan losses 51,239 107,397 40,770 199,406 Other income 3,772 16,563 67,657 87,992 Other expenses (15,194) (76,649) (57,056) (148,899) Income before income taxes 39,817 47,311 51,371 138,499 Income taxes (14,546) (17,272) (18,661) (50,479) Net income $ 25,271 $ 30,039 $ 32,710 $ 88,020 Average assets $ 932,829 $2,382,985 $2,042,172 $5,357,986 Year Ended December 31, 1997 Commercial Retail Financial Banking Banking Services Total Net interest income $ 43,222 $ 102,615 $ 30,926 $ 176,763 Provision for loan losses (4,926) (12,163) (274) (17,363) Net interest income after provision for loan losses 38,296 90,452 30,652 159,400 Other income 3,836 20,591 61,502 85,929 Other expenses (12,951) (66,085) (52,545) (131,581) Income before income taxes 29,181 44,958 39,609 113,748 Income taxes (10,622) (16,336) (14,336) (41,294) Net income $ 18,559 $ 28,622 $ 25,273 $ 72,454 Average assets $ 787,187 $2,067,638 $1,755,605 $4,610,430
39 Note Q - 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) and certain 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. 40 Off-balance-sheet Instruments 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, 1999 Carrying Amount Fair Value Financial assets: Cash and cash equivalents $ 261,296 $ 261,296 Available-for-sale securities $ 553,928 $ 553,928 Held-to-maturity securities $1,759,383 $1,667,583 Trading account securities $ 30,294 $ 30,294 Net loans $3,926,192 $3,992,208 Financial liabilities: Deposits $4,495,900 $4,478,706 Short-term borrowings $ 883,038 $ 883,038 Federal Home Loan Bank advances, other borrowed funds and long-term debt $ 720,707 $ 718,918 Capital trust pass-through securities $ 49,909 $ 49,909 December 31, 1998 Carrying Amount Fair Value Financial assets: Cash and cash equivalents $ 335,862 $ 335,862 Available-for-sale securities $ 777,615 $ 777,615 Held-to-maturity securities $1,377,102 $1,381,692 Trading account securities $ 62,737 $ 62,737 Net loans $3,319,026 $3,460,042 Financial liabilities: Deposits $4,194,986 $4,223,537 Short-term borrowings $ 599,378 $ 599,378 Federal Home Loan Bank advances, other borrowed funds and long-term debt $ 737,982 $ 737,909 Capital trust pass-through securities $ 49,896 $ 49,896
Note R - National Commerce Bancorporation Financial Information (Parent Company Only) Balance Sheets
December 31 1999 1998 Assets Cash* $ 22,511 $ 4,125 Securities available for sale 25,570 25,626 Investments in: Bank subsidiaries* 502,067 420,517 Non-bank subsidiaries* 14,035 5,356 Other 48,324 22,045 Total assets $ 612,507 $ 477,669 Liabilities and Stockholders' Equity Accounts payable and accrued liabilities $ 5,220 $ 3,582 Debenture payable 49,909 49,896 Stockholders' equity 557,378 424,191 Total liabilities and stockholders' equity $ 612,507 $ 477,669
*Eliminated in consolidation. Statements of Income
Year Ended December 31 1999 1998 1997 Income: Dividends from bank and thrift subsidiaries* $ 59,843 $ 67,402 $ 30,331 Dividends from non-bank subsidiaries* 1,001 1,000 --- Interest and other income from bank subsidiaries 1,338 19 1,412 Other 3,153 2,909 311 65,335 71,330 32,054 Expenses: Salaries and employee benefits 54 52 47 Interest on debenture 3,236 3,362 2,626 Other 1,449 4,050 1,176 4,739 7,464 3,849 Income before income taxes (credits) and equity in undistributed earnings of subsidiaries 60,596 63,866 28,205 Income taxes (credits) (104) (1,379) (706) 60,700 65,245 28,911 Equity in undistributed net income of: Bank and thrift subsidiaries 44,755 21,744 31,964 Non-bank subsidiaries 1,779 1,031 11,579 Net income $ 107,234 $ 88,020 $ 72,454
*Eliminated in consolidation. 41 Statements of Cash Flows
Year Ended December 31 1999 1998 1997 Operating activities: Net income $ 107,234 $ 88,020 $ 72,454 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiaries (46,534) (22,775) (21,319) (Increase) decrease in other assets (13,201) 2,270 (9,313) Increase (decrease) in liabilities 1,638 (2,446) 10,607 Realized securities losses 69 1,845 --- Net cash provided by operating activities 49,206 66,914 52,429 Investing activities: Investment in subsidiaries (48,331) (4,600) (32,766) Proceeds from sale of available-for-sale securities (6,114) 1,842 (29,617) Net cash used in investing activities (54,445) (2,758) (62,383) Financing activities: Stock offering 80,248 --- --- Proceeds from debenture --- --- 49,875 Cash used to repurchase/retire stock (22,925) (33,936) (18,129) Proceeds from exercise of stock options 4,888 2,401 3,516 Cash dividends paid (39,697) (31,532) (22,529) Other 1,111 --- 52 Net cash provided by (used in) financing activities 23,625 (63,067) 12,785 Increase in cash 18,386 1,089 2,831 Cash at beginning of year 4,125 3,036 205 Cash at end of year $ 22,511 $ 4,125 $ 3,036
Note S - Quarterly Results of Operations (Unaudited)
Quarter First Second Third Fourth 1999: Interest income $ 109,229 $ 112,970 $ 120,515 $ 125,314 Interest expense 53,854 55,610 60,067 61,959 Net interest income 55,375 57,360 60,448 63,355 Provision for loan losses 2,539 3,985 4,378 4,304 Other income 21,593 26,619 22,847 23,244 Securities gains (losses) 2 (2,035) 20 224 Other expenses 37,605 39,813 37,686 40,154 Income before income taxes 36,826 38,146 41,251 42,365 Income taxes 11,937 12,532 13,092 13,793 Net income $ 24,889 $ 25,614 $ 28,159 $ 28,572 Net income per common share: Basic $.24 $.24 $.26 $ .26 Diluted $.23 $.24 $.26 $ .26 1998: Interest income $ 92,761 $ 99,387 $ 102,371 $ 108,589 Interest expense 46,138 49,255 50,310 54,509 Net interest income 46,623 50,132 52,061 54,080 Provision for loan losses 987 2,750 3,082 3,260 Other income 22,037 22,008 21,813 21,910 Securities gains 2 43 137 42 Other expenses 36,422 37,166 37,383 37,928 Income before income taxes 31,253 32,267 33,546 34,844 Income taxes 10,536 10,986 10,702 11,666 Net income $ 20,717 $ 21,281 $ 22,844 $ 23,178 Net income per common share: Basic $.20 $.21 $.22 $ .22 Diluted $.20 $.20 $.22 $ .22
42 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders National Commerce Bancorporation We have audited the accompanying consolidated balance sheets of National Commerce Bancorporation and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of National Commerce Bancorporation and Subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Memphis, Tennessee Ernst & Young LLP January 27, 2000 43 EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21. Parent and Subsidiaries National Commerce Bancorporation and Subsidiaries ------------------------------------------------- The following table shows the subsidiaries of NCBC, their jurisdiction of organization, and the percentage of voting securities owned by each subsidiary's parent as of December 31, 1998.
Percentage of Voting Name Jurisdiction Securities of of Owned by Subsidiary Organization Parent Parent - ------------------------------------------------------------------------------ National Bank of Commerce United States NCBC 100.00% Commerce General Corporation Tennessee NBC 100.00 NBC Capital Markets Group, Inc. Tennessee NBC 80.00 NBC Bank, FSB (Knoxville) Tennessee NCBC 100.00 Commerce Capital Management, Inc. Tennessee NCBC 100.00 Monroe Properties, Inc. Tennessee NCBC 100.00 National Commerce Bank Tennessee NBC 100.00 Services, Inc. Commerce Finance Company Tennessee NBC 100.00 NBC Bank, FSB (Belzoni) Mississippi NCBC 100.00 TransPlatinum Service Corp. Tennessee NCBC 100.00 Kenesaw Leasing, Inc. Tennessee Knoxville 100.00 J&S Leasing, Inc. Tennessee Knoxville 100.00 National Commerce Capital Trust I Delaware NCBC 100.00 Southeastern Mortgage of Tennessee Tennessee Knoxville 100.00
All of the above subsidiaries are included in the consolidated financial statements con-tained in the report. EX-23 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23. Consent of Independent Auditors National Commerce Bancorporation and Subsidiaries - ------------------------------------------------- We consent to the incorporation by reference in this Annual Report (Form 10-K) of National Commerce Bancorporation of our report dated January 27, 2000, included in the 1999 Annual Report to Shareholders of National Commerce Bancorporation. We also consent to the incorporation by reference in the Registration Statements (Form S-8: Nos. 33-23100, 33-38552 and 33-88440; Form S-3: Nos 333-53587, 333- 60953 and 333-76499 and Form S-4: No. 333-30746) of National Commerce Bancorporation and in the related Prospectuses of our report dated January 27, 2000, with respect to the consolidated financial statements of National Commerce Bancorporation incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ Ernst & Young LLP --------------------- Ernst & Young LLP Memphis, Tennessee March 22, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS 12-MOS 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 DEC-31-1997 DEC-31-1996 JAN-01-1999 JAN-01-1998 JAN-01-1997 JAN-01-1996 DEC-31-1999 DEC-31-1998 DEC-31-1997 DEC-31-1996 179,082 236,159 212,291 170,306 21,156 20,335 18,537 18,035 61,058 79,368 32,309 16,944 30,294 62,737 98,332 31,812 553,928 777,615 448,098 743,246 1,759,383 1,377,102 1,210,071 817,126 1,557,583 1,381,692 1,208,922 804,690 3,985,789 3,372,044 2,753,130 2,472,285 59,597 53,018 47,076 39,130 6,806,173 6,090,291 4,912,965 4,388,853 4,495,900 4,194,986 3,444,502 3,143,875 986,365 599,935 524,253 504,661 106,880 83,858 75,737 66,388 667,289 787,321 504,023 350,951 0 0 0 0 0 0 0 0 557,378 424,191 364,450 322,978 0 0 0 0 6,806,173 6,090,291 4,912,965 4,388,853 311,293 275,890 243,079 202,891 148,532 119,100 106,306 94,034 8,203 8,118 4,573 4,635 468,028 403,108 353,958 301,560 158,477 142,967 126,741 114,423 73,013 57,245 55,410 43,602 236,538 202,896 171,807 143,535 15,206 10,079 17,363 14,444 (1,789) 224 (127) 14 155,258 148,899 131,581 111,128 158,588 131,910 108,792 90,664 158,588 131,910 108,792 90,664 0 0 0 0 0 0 0 0 107,234 88,020 72,454 59,886 1.00 .85 .72 .59 .99 .83 .69 .58 4.13 4.20 4.08 3.95 0 560 481 88 5,470 4,536 3,449 3,709 0 0 0 0 0 0 0 0 53,018 47,076 39,130 32,331 12,620 12,037 13,008 10,436 3,993 4,064 2,966 2,906 59,597 53,018 47,076 39,130 59,597 53,018 47,076 39,130 0 0 0 0 0 0 0 0 Restated for 1998 Restated for 1997 Restated for 1996
-----END PRIVACY-ENHANCED MESSAGE-----