-----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, DNi2uE4Y8eIKY/DWCnfgGP3f3Yj7kqPO98zeX8lokW85OpfsqcOzfjsAEMRiRsCD ahrK7oADSmyHQjNNjxg+Kw== 0000931763-97-000337.txt : 19970320 0000931763-97-000337.hdr.sgml : 19970320 ACCESSION NUMBER: 0000931763-97-000337 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970319 SROS: NASD 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-06094 FILM NUMBER: 97559516 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-K 1 FORM 10-K 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 [FEE REQUIRED] December 31, 1996 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)523-3242 - --------------------------------------------- ------------- (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 ----- ----- The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 7, 1997, was approximately $842,550,000. The number of shares of common stock outstanding, as of March 7, 1997, was 24,537,475. 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 ----- DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual Proxy Statement relating to the 1997 Annual Meeting of Shareholders of National Commerce Bancorporation are incorporated by reference into Part III. Portions of the 1996 National Commerce Bancorporation Annual Report are incorporated by reference into Parts I and II. -1- PART I. This Annual Report on Form 10-K may contain or incorporate by reference statements which may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Prospective investors are cautioned that any such forward-looking statements are not guarantees for future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include significant fluctuations in interest rates, inflation, economic recession, significant changes in the federal and state legal and regulatory environment, significant underperformance in the Company's portfolio of outstanding loans, and competition in the Company's markets. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. 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) Nashville Bank of Commerce, Nashville, Tennessee ("Nashville" or "the Nashville Bank"), (3) NBC Bank, FSB, Knoxville, Tennessee ("Knoxville" or "the Knoxville Bank"), (4) NBC Bank, FSB, Belzoni, Mississippi ("Belzoni"), (5) Commerce Capital Management, Inc., Memphis, Tennessee ("Commerce Capital"), (6) Brooks, Montague & Associates, Inc, Chattanooga, Tennessee ("Brooks Montague"), (7) TransPlatinum Service Corp., Nashville, Tennessee ("TransPlatinum"), (8) U.S.I. Alliance Corp. ("USI") and (9) Monroe Properties, Inc ("Monroe"). NCBC provides NBC, Nashville, Knoxville, and Belzoni ("the Banks"), Commerce Capital, Brooks Montague, TransPlatinum, and USI 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. NBC furnishes a full range of banking and trust services through 29 branch and SUPER MONEY MARKET(R) facilities in Memphis and Shelby County, Tennessee, two SUPER MONEY MARKET facilities located in Jackson, Tennessee, one SUPER MONEY MARKET facility located in Cleveland, Tennessee, and one SUPER MONEY MARKET facility located in Brownsville, Tennessee. NBC has three active, wholly owned, non-banking subsidiaries, Commerce General Corporation ("Commerce General"), Commerce Finance Company ("Commerce Finance"), and NBC Capital Markets Group, Inc. ("Capital Markets"). Commerce General provides a variety of data processing services to the Banks and other commercial enterprises. 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. The Nashville Bank was organized in September 1985 to operate full-service banking facilities in Kroger supermarkets within the Nashville area. The SUPER MONEY MARKET branches offer a wide variety of personal banking services. The Nashville Bank is a state chartered bank with 22 SUPER MONEY MARKET branch locations and one traditional branch and has a dormant subsidiary, Commerce Corporate Advisors, Inc. Another subsidiary, National Commerce Bank Services, Inc. ("NCBS"), provides supermarket banking services to other financial institutions. The Nashville Bank also operates three stand-alone automated teller machines ("ATMs") in the Nashville area. 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. The Knoxville Bank has 12 SUPER MONEY MARKET branch locations and one traditional branch location in the Knoxville area with one branch location in Pigeon Forge, Tennessee, twelve branch locations in the Raleigh-Durham, North Carolina area, three branches in Greensboro, North Carolina, one branch in Greenville, North Carolina, three branches in Winston-Salem, North Carolina, one branch location in Olive Branch, Mississippi, one branch location in Horn Lake, Mississippi and two branches in Calhoun, Georgia. The Knoxville Bank also operates one stand-alone ATM in the Knoxville area. The Knoxville Bank also offers loans -2- 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. In addition to one office in Belzoni, Mississippi, FSB has eight SUPER MONEY MARKET branches in the Roanoke, Virginia area. NCBC has executed SUPER MONEY MARKET sublicense agreements with other financial institutions. Currently, agreements have been executed covering locations in over 45 states and Puerto Rico, Peru, Canada, Australia, Japan, Great Britain and Portugal. As of year end NCBC, through NCBS, has assisted various banks with over 720 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 and Brooks Montague are registered as investment advisors with the Securities and Exchange Commission. The primary function of Monroe Properties, Inc is to be used in connection with the acquisition of real estate through foreclosure or deed in lieu of foreclosure. In September of 1995, NCBC acquired 30% of TransPlatinum Service Corp. which offers financial services to the trucking and petroleum industries and bankcard services to merchants. TransPlatinum is located in Nashville, TN. On February 29, 1996, NCBC acquired the remaining 70% of TransPlatinum. U.S.I. Alliance Corp. was organized in November, 1995, and commenced business in July, 1996. USI primarily leases personal lockboxes in long-term care facilities. 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. As of December 31, 1996, NBC operated 13 traditional branches and 20 SUPER MONEY MARKET facilities, 16 in metropolitan Memphis and one each in Brownsville, Tennessee and Cleveland, Tennessee, and two in Jackson, Tennessee. At December 31, 1996, NBC had $1,959,875,000 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 -3- Market Division, the Executive Banking Division, and the Consumer Services Division. The Bank's Commercial Banking Group is composed of seven divisions: the Metropolitan Lending Division, the Leasing Division, the Asset Based Lending Division, the Real Estate Lending Division, the National Accounts Division, the Correspondent Banking Division and the Mortgage Lending Division ("NBC Mortgage"). Trust services are provided by the Trust Division. Staff support for the Bank is provided by its Personnel, 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, credit card plans and revolving lines of credit. Customers are provided with current information regarding these services through NBC's marketing program. NBC has installed 46 ATMs (24-hour tellers), including ATMs located at Plough, Inc., Hickory Ridge Mall, Graceland, Methodist Hospital, Memphis International Airport, University of Memphis campus and Rhodes College campus. At year end, consumer loans and leasing activity accounted for approximately 51% 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 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, 1996, NBC had credit card accounts receivable and consumer lines of credit totaling $132,728,000. 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, 1996, accounted for approximately 37% of the loans made by NBC. Real estate construction and long-term mortgage loans (including first mortgage refinance loans) accounted for approximately 12% of NBC's outstanding loans at December 31, 1996. Correspondent Banking: NBC has correspondent relationships with approximately 160 banks located in Tennessee, Arkansas, Missouri, Florida, Mississippi, Kentucky, and Alabama to which it provides a range of correspondent banking services as well as advice in various fields of banking policy and operations. Aggregate balances of correspondent banks at NBC averaged approximately $37,270,000 in 1996. 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, 1996, the Trust Division administered assets valued at approximately $2,217,000,000. International Services: NBC has established 11 accounts with foreign banks, primarily in Europe, to handle international trade relationships. Four 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 offers hospital and clinic processing to several customers. During the year ended December 31, 1996, approximately 83% of the total revenues of -4- Commerce General were derived from services provided to NBC and 17% from services provided to other customers. NBC Capital Markets Group, Inc. (formerly named Commerce Investment Corporation) provides investment services to individual and institutional investors. In 1991, the institutional investor activity of NBC's Investment Division was merged into Commerce Investment. At December 31, 1996, Capital Market's capital totaled $14,786,000. 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. At December 31, 1996 Commerce Finance had two offices and employed 3 officers and 3 full-time employees. 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 insurance and annuities through NBC's in-store retail banking system. 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, 1996, NBC had $2,924,981,000 in assets. According to December 31, 1996 call reports, one of the other banks in metropolitan Memphis is 4.5 times larger and another is approximately 2 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 area. 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, 1996, the Bank and its subsidiaries employed approximately 256 officers, 583 other full-time employees, 65 part -time employees and 67 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 and an Employee Stock Ownership Plan ("ESOP"). 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 $9,500 by making contributions to this plan. The Company may also make contributions to this plan for the benefit of participating employees. During 1996, the Company's approved a plan to merge the ESOP into the TIRA. NASHVILLE BANK OF COMMERCE: Nashville Bank of Commerce was organized to compete in retail banking in the Nashville trade area. The Nashville Bank operates one traditional branch and 22 SUPER MONEY MARKET facilities located within Kroger stores and three stand- alone ATMs in the Nashville area. At December 31, 1996, the Nashville Bank employed 28 officers, 87 other full-time employees, 13 part-time employees and 22 peak-time employees to provide banking services during the hours when most -5- grocery shopping occurs. Employees of the Nashville Bank are provided with the same benefits that all Company employees have available to them. At December 31, 1996, the Nashville Bank had total consolidated assets of $521,108,000. Nashville Bank of Commerce 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: National Commerce Bank Services, Inc. provides supermarket banking services to other financial institutions. During 1994, the Knoxville Bank's 50% ownership was transferred to the Nashville Bank, resulting in NCBS being a wholly-owned subsidiary of the Nashville Bank. At December 31, 1996 NCBS's capital totaled $13,940,000. The Nashville Bank's other subsidiary, Commerce Corporate Advisors, Inc., is currently dormant. NBC BANK, FSB (KNOXVILLE): 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. The Knoxville Bank has 12 SUPER MONEY MARKET branch locations and one traditional branch location in the Knoxville area with one branch location in Pigeon Forge, Tennessee, twelve branch locations in the Raleigh-Durham, North Carolina area, three branches in Greensboro, North Carolina, one branch in Greenville, North Carolina, three branches in Winston-Salem, North Carolina, one branch location in Olive Branch, Mississippi, one branch location in Horn Lake, Mississippi and two branches in Calhoun, Georgia. Like Nashville, the Knoxville Bank employees are provided with the same benefits that all Company employees have available to them. At December 31, 1996, the Knoxville Bank employed 44 officers, 122 other full-time employees, 7 part-time employees and 12 peak-time employees. At year-end 1996, the Knoxville Bank had total assets of $572,804,000. 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, 1996 Kenesaw's capital totaled $1,163,000. J & S was acquired effective January 1, 1997. NBC BANK, FSB (BELZONI): Belzoni was acquired to expand its retail banking activities through supermarket branches in other states. Eight SUPER MONEY MARKET branches are located in Kroger supermarkets in Virginia, and one office is located in Belzoni, Mississippi. At December 31, 1996, Belzoni employed 7 officers, 42 other full-time employees, and 2 part-time employees. The same Company benefits are provided to these employees. At year-end 1996, the Belzoni had total assets of $250,841,000. 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 $700,000,000. At December 31, 1996, Commerce Capital had 8 full-time and 1 part-time employee. 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. -6- BROOKS, MONTAGUE & ASSOCIATES, INC.: The Company acquired all of the outstanding stock of Brooks, Montague & Associates, Inc. on February 15, 1994. Brooks Montague provides specialized investment management services primarily to individuals, charitable accounts and corporate retirement plans. Assets presently managed are approximately $126,000,000. At December 31, 1996, Brooks Montague had four full-time employees. Brooks Montague's employees are covered under the same Company benefits. Brooks Montague competes primarily with other regionally based investment management firms, many of which are substantially larger. TRANSPLATINUM SERVICE CORP.: In September of 1995, NCBC acquired 30% of TransPlatinum Service Corp. which offers financial services to the trucking and petroleum industries and bankcard services to merchants. TransPlatinum is located in Nashville, TN. On February 29, 1996, NCBC acquired the remaining 70% of TransPlatinum. As of December 31, 1996, TransPlatinum had 3 officers, 55 full-time employees, and 14 part-time employees. TransPlatinum competes with major larger companies offering similar services on a nation-wide basis. 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, 1996, USI had 3 officers and 3 other full-time employees. 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. Banks also will be able to branch across state lines by acquisition, merger or de novo, effective June 1, 1997 (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. -7- 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 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 M of the Notes to Consolidated Financial Statements in the 1996 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 resolved 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 interstate barriers on such acquisitions by bank holding companies. With certain -8- 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. The Nashville Bank is a state non-member bank operating under the rules and regulations of the FDIC and the Tennessee Department of Financial Institutions. 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. and Brooks, Montague & Associates, Inc. are registered with the Securities and Exchange Commission and are investment advisers pursuant to the Investment Advisers Act of 1940, as amended. All regulatory agencies require periodic audits and regularly scheduled reports of financial information. -9- 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. -10- 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 the periods 1994 through 1996. Interest income and yields on non-taxable investment securities have been calculated on a fully taxable-equivalent basis assuming a tax rate of 35%.
1996 1995 1994 ---------------------------- -------------------------- -------------------------- 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) 2,130,810 191,860 9.00% 1,718,424 160,980 9.37% 1,505,716 129,340 8.59 Taxable securities including trading account 1,296,692 85,597 6.60 1,119,057 75,627 6.76 982,788 56,327 5.73 Non-taxable investment securities(2) 143,706 11,881 8.27 154,755 13,101 8.47 147,753 13,679 9.26 Federal funds sold and securities purchased under agreements to resell 23,388 1,425 6.09 25,383 1,486 5.85 18,018 793 4.40 Time deposits in other banks 16,984 924 5.44 16,881 1,002 5.94 18,807 741 3.94 --------- ------- ---- --------- ------- ---- --------- ------- ---- Total interest-earning assets 3,611,580 291,687 8.08 3,034,500 252,196 8.31 2,673,082 200,880 7.51 --------- ------- ---- --------- ------- ---- --------- ------- ---- Non-interest earning assets: Cash and due from banks 119,604 112,304 110,070 Premises & equipment, net 19,160 17,869 17,246 Other assets 94,020 75,448 68,013 Allowance for loan losses (32,250) (25,830) (23,276) --------- --------- --------- TOTAL ASSETS 3,812,114 3,214,291 2,845,135 ========= ========= =========
(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 27 of the Annual Report to Shareholders for the corresponding unadjusted amounts as presented in the financial statements. -11-
1996 1995 1994 ---------------------------- -------------------------- -------------------------- 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 256,561 3,963 1.54% 247,002 4,843 1.96% 250,945 4,898 1.95% Savings deposits 902,148 38,301 4.25 782,714 32,971 4.21 645,219 21,655 3.36 Time deposits 1,187,861 65,701 5.53 1,025,093 58,877 5.74 863,925 36,527 4.23 Federal funds purchased and securities sold under agreements to repurchase 336,727 16,546 4.91 264,214 13,482 5.10 265,191 9,737 3.67 Federal Home Loan Bank advances 417,316 23,025 5.52 294,833 15,809 5.36 262,125 11,883 4.53 Long-term debt 60,284 3,565 5.91 6,382 458 7.18 6,384 399 6.25 --------- ------- ---- --------- ------- ---- --------- ------ ---- Total interest bearing liabilities 3,160,897 151,101 4.78 2,620,238 126,440 4.83 2,293,789 85,099 3.71 --------- ------- ---- --------- ------- ---- --------- ------ ---- Non-interest bearing liabilities: Domestic demand deposits 305,989 284,744 282,468 Other 49,402 36,832 28,975 Stockholders' equity 295,826 272,477 239,903 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 3,812,114 3,214,291 2,845,135 ========= ========= ========= Net interest earnings 140,586 125,756 115,781 ======== ======= ======= Net yield on interest-earning assets 3.89% 4.14% 4.33% ==== ==== ====
-12-
INTEREST RATE SENSITIVITY TABLE BY REPRICING DATES Within After 3 Mos. After 6 Mos. After 1 Yr. Non December 31, 1996 0-30 31-90 But Within But Within But Within After Interest (In Thousands of Dollars) Days Days 6 Mos. 1 Year 5 Years 5 Years Bearing Total --------- -------- -------- -------- --------- ------- -------- --------- Funding uses: Loans, net 703,794 129,925 85,541 159,923 968,497 300,293 - 2,347,973 Securities 629,901 53,754 139,178 12,699 408,076 274,291 - 1,517,899 Other earning assets 62,820 - - - - - - 62,820 Other assets - - - - - - 271,717 271,717 --------- -------- -------- -------- --------- ------- -------- --------- Total funding uses 1,396,515 183,679 224,719 172,622 1,376,573 574,584 271,717 4,200,409 --------- -------- -------- -------- --------- ------- -------- --------- Funding sources: Interest-bearing deposits 477,774 325,294 337,835 331,828 1,021,105 129,918 - 2,623,754 Other borrowings 699,206 9,225 5,052 66,215 54,340 16,546 - 850,584 Demand deposits - - - - - - 352,676 352,676 Other liabilities - - - - - - 60,066 60,066 Interest rate swaps - - - - - - - - Stockholders' equity - - - - - - 313,329 313,329 --------- -------- -------- -------- --------- ------- -------- --------- Total funding sources 1,176,980 334,519 342,887 398,043 1,075,445 146,464 726,071 4,200,409 ---------- -------- -------- -------- -------- -------- -------- --------- Interest-rate sensitivity GAP 219,535 (150,840) (118,168) (225,421) 301,128 428,120 (454,354) ---------- -------- -------- -------- -------- -------- -------- Cumulative interest-rate sensitivity GAP 219,535 68,695 (49,473) (274,894) 26,234 454,354 GAP to total assets 5.23% ( 3.59%) (2.81%) (5.37%) 7.17% 10.19% (10.82%) Cumulative GAP to total assets 5.23% 1.64% (1.18%) (6.54%) .62% 10.82%
The Company's Interest Rate Sensitivity Table was prepared using contractual maturities and repricing dates when they exist and are enforceable. Management adjustments have been applied to allow for prepayment or other variances from stated maturities or repricing intervals. The management adjustments have been formulated considering historical experience and market projections and will change when appropriate to allow for current and projected interest rate scenarios. Due to the historical volatility of interest rates, the Company addresses the problem with an Asset Liability Management Committee comprised of senior management personnel from each key banking function. The committee's goal is to stabilize earnings by limiting the gap position between assets and liabilities repricing within one year to 15% of assets. The committee has determined by historical experience and simulation modeling that a gap of 15% will not produce excessive earnings variances in most rate environments. The committee meets regularly to address the current gap position and evaluate the assumptions and projections used to calculate interest rate risk. -13- CHANGES IN INTEREST INCOME AND EXPENSE - -------------------------------------- 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%.
1996 Compared to 1995 1995 Compared to 1994 Increase (decrease) Due to (1) Increase (decrease) Due to (1) ------------------------------------------------ ---------------------------------------- Volume Rate Net Rate/Volume Volume Rate Net Rate/Volume ------ ---- --- ----------- ------ ---- --- ----------- (In Thousands of Dollars) Interest earned on: Loans:(2) Domestic 36,962 (6,082) 30,880 (1,526) 19,282 12,358 31,640 1,655 Taxable securities including trading account 11,717 (1,747) 9,970 (284) 8,426 10,874 19,300 1,399 Non-taxable investment securities (917) (303) (1,220) 22 628 (1,206) (578) (55) Federal funds sold and securities purchased under agreements to resell to resell (128) 67 (61) (5) 383 310 693 107 Time deposits in other banks 6 (84) (78) (1) (82) 343 261 (38) ------ ------ ------ ------- ------ ------ ------ ----- Total interest earning assets 47,640 (8,149) 39,491 (1,794) 28,637 22,679 51,316 3,068 ------ ------ ------ ------- ------ ------ ------ ----- Interest paid on: Demand deposits 194 (1,074) (880) (40) (77) 22 (55) 0 Savings deposits 5,017 313 5,330 48 5,156 6,160 11,316 1,177 Time deposits 8,867 (2,043) 6,824 (342) 7,645 14,705 22,350 2,443 Federal funds purchased and securities sold under agreements to repurchase 3,545 (481) 3,064 (138) (36) 3,781 3,745 (14) Federal Home Loan Bank advances 6,732 484 7,216 196 1,594 2,332 3,926 271 Long-term debt 3,173 (66) 3,107 (685) - 59 59 - ------ ------ ------ ------- ------ ------ ------ ----- Total interest bearing liabilities 27,528 (2,867) 24,661 (961) 14,282 27,059 41,341 3,877 ------ ------ ------ ------- ------ ------ ------ ----- Net interest earnings 20,112 (5,282) 14,830 833 14,355 (4,380) 9,975 (809) ====== ====== ====== ======= ====== ====== ====== =====
(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. -14- SECURITIES PORTFOLIO - -------------------- The following table sets forth the aggregate book value of investment securities at the dates indicated.
December 31 ------------------------------- 1996 1995 1994 --------- --------- --------- (in thousands of dollars) Securities: U.S. Treasury 30,234 18,582 120,326 U.S. Government agencies and corporations 1,190,922 1,027,932 844,782 States of the U.S. and political subdivisions 140,708 149,975 161,297 Other securities 156,035 82,157 29,408 --------- --------- --------- Total 1,517,899 1,278,646 1,156,285 ========= ========= =========
The following table sets forth the maturities at December 31, 1996, 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%.
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 ------ ------ ------- ------- ------- -------- -------- --------- Securities: U.S. Treasury 10,044 5.25% 20,190 5.91% - - - - U.S. Government agencies and corporations 27,077 6.24 293,702 6.80 405,044 6.86% 465,099 6.44% States of the U.S. and political subdivisions 2,076 5.55 39,023 6.89 49,848 7.75 49,761 8.90 Other - - 55,036 6.32 52,501 6.54 48,498 6.75 ------ ----- ------- ---- ------- ------- -------- -------- Total 39,197 407,951 507,393 563,358 ====== ======= ======= ========
-15- LOAN PORTFOLIO - -------------- The following table shows the Company's gross loan distribution at the end of the last five years.
December 31 ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (in thousands of dollars) Commercial, financial, and agricultural 466,830 399,580 356,035 350,539 354,491 Real estate - construction 170,188 122,720 91,424 66,929 68,238 Real estate - mortgage 602,064 520,657 501,489 429,544 275,732 Consumer(1) 1,086,104 871,407 630,927 535,417 489,773 Lease financing 22,790 18,678 14,818 13,870 12,423 --------- --------- --------- --------- --------- Total 2,347,976 1,933,042 1,594,693 1,396,299 1,200,657 ========= ========= ========= ========= =========
(1)Included within "Consumer" loans are revolving lines of credit secured by home equities. The following table shows the amounts of loans (excluding real estate mortgages, consumer loans and lease financing) outstanding as of December 31, 1996, 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 16,233 229,127 221,470 466,830 Real estate - construction 16,876 95,272 58,040 170,188 ------ ------- ------- ------- Total 33,109 324,399 279,510 637,018 ====== ======= ======= =======
The following table shows the amounts of loans (excluding real estate mortgages, consumer loans and leasing financing) due after one year classified, according to the sensitivity to changes in interest rates as of December 31, 1996.
After 1 but After Within 5 Yrs 5 Years -------------- --------- (in thousands of dollars) Predetermined interest rates 115,025 138,786 Floating or adjustable interest rates 209,374 140,724 ------- ------- Total 324,399 279,510 ======= =======
-16- NONACCRUAL, PAST DUE, AND RESTRUCTURED - -------------------------------------- The following table summarizes the Company's nonaccrual, past due, and restructured loans (all of which are domestic):
December 31 ------------------------------------ 1996 1995 1994 1993 1992 ----- ----- ----- ----- -------- (in thousands of dollars) Nonaccrual loans - - - - 7,092(1) Accruing loans past due 90 days or more 3,482 3,252 2,432 2,063 1,848 Non-performing restructured loans - - - - - Performing restructured - - - 1,984 -
Substantially all of the nonaccrual and restructured loans were collateralized, and there were no significant commitments to lend any of these debtors additional funds. (1)Included in the 1992 non-accrual loan totals is a loan secured by real estate of $4 million, which was current as to principal and interest and had performed as agreed since inception. It was so classified based on a highly technical interpretation of current regulations. See Note A of financial statements in the Annual Report to Shareholders for management's policy for placing loans on nonaccrual status. Loans and lease financing receivables are considered to be in nonaccrual status if: (1) they are maintained on a cash basis because of deterioration in the financial position of the borrower, (2) payment in full of interest or principal is not expected, or (3) 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 nonaccrual 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. Potential Problem Loans - ----------------------- At December 31, 1996, the Company had no problem loans for which payments were 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. -17- SUMMARY OF LOAN LOSS EXPERIENCE - ------------------------------- This table summarizes the Company's loan loss experience for each of the five years ended December 31, 1996. There were no foreign loans.
Year Ended December 31 ------------------------------------------ 1996 1995 1994 1993 1992 ------- ------- ------- ------- ------ (in thousands of dollars) Balance at beginning of period 29,010 24,310 21,467 17,356 13,254 Charge-offs: Commercial, financial, and agricultural 12 1 442 1,167 2,632 (1) Real estate - construction 70 199 2122 652 1,163 Real estate - mortgage 74 97 232 207 1,052 (1) Consumer 8,270 5,366 4,088 3,783 4,317 Lease financing 1,912 1,586 1,500 1,0131 1,063 ------ ------ ------ ------ ------ Total charge-offs 10,338 7,249 6,474 6,840 10,227 ------ ------ ------ ------ ------ Recoveries of loans previously charged-off: Commercial, financial, and agricultural 20 55 47 420 56 Real estate - construction 244 44 83 359 268 Real estate - mortgage 61 73 121 47 45 Consumer 1,965 1,509 1,494 1,237 1,094 Lease financing 533 518 495 474 323 ------ ------ ------ ------ ------ Total recoveries 2,823 2,199 2,240 2,537 1,786 ------ ------ ------ ------ ------ Net charge-offs 7,515 5,050 4,234 4,303 8,441 Increase due to acquisition 288 - - 22 - Decrease due to loan sale (403) - - - - Provision for loan losses(2) 14,134 9,750 7,077 8,392 12,543 ------ ------ ------ ------ ------ Balance at end of period 35,514 29,010 24,310 21,467 17,356 ====== ====== ====== ====== ====== Ratio of net-charge-offs to average loans outstanding during the period .35% .29% .28% .34% .76%
(1) During 1992, $2,300,000 of the charge-offs in these categories resulted from charge-offs to two local borrowers, one loan to a manufacturing concern and another to a project related to a hotel project. During 1991, $2,000,000 of the charge-offs resulted from charge-offs to two local borrowers, one loan to a remanufacturing concern and another to a project related to local government entities. (2) The factors which influenced management's judgment in determining the amount of the provision for loan losses charged to operating expense included the results of a credit review of the loan portfolio, past loan loss experience, current economic conditions and other factors, all of which formed a basis for determining the adequacy of the allowance for loan losses. The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. -18- 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 the possibility of losses incurred within the following categories of loans for each for the five years indicated.
December 31 -------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------------- ---------------- ---------------- ---------------- ---------------- Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans Amount in each Amount in each Amount in each Amount in each Amount in each of category of category of category of category of category allow- to total allow- to total allow- to total allow- to total allow- to total ance loans ance loans ance loans ance loans ance loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (in thousands of dollars) Commercial, financial, and agricultural 7,813 20% 7,264 21% 6,887 22% 6,622 25% 4,033 29% Real estate: Construction 3,196 7 3,006 6 2,731 6 2,644 5 2,408 6 Mortgage 5,327 26 3,567 27 3,352 31 3,277 31 2,663 23 Consumer 17,402 46 12,737 45 9,457 40 7,716 38 7,484 41 Lease financing 1,776 1 2,436 1 1,883 1 1,208 1 768 1 ------ --- ------ --- ------ --- ------ --- ------ --- Total 35,514 100% 29,010 100% 24,310 100% 21,467 100% 17,356 100% ====== === ====== === ====== === ====== === ====== ===
-19- 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 ---------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ---------------- Amount Rate Amount Rate Amount Rate --------- ----- --------- ----- --------- ----- (in thousands of dollars) Non-interest bearing demand deposits 305,989 - 284,744 - 282,468 - Interest bearing demand deposits 256,561 1.54% 247,002 1.96% 250,945 1.95% Savings deposits 902,148 4.25 782,714 4.21 645,219 3.36 Time deposits 1,187,861 5.53 1,025,093 5.74 863,925 4.23 --------- ---- --------- ---- --------- ---- Total 2,652,559 2,339,553 2,042,557 ========= ========= =========
At December 31, 1996, outstanding maturities of time deposits of $100,000 or more issued by domestic offices (which consist entirely of time certificates of deposit) are summarized below (in thousands of dollars):
Time remaining until maturity Amount - ---------------------------------------------------------------------------- 3 months or less 255,692 Over 3 through 6 months 172,588 Over 6 through 12 months 132,917 Over 12 months 8,400 ------- Total 569,597 =======
RETURN ON EQUITY AND ON TOTAL ASSETS - -------------------------------------------------------------------------- The following table shows consolidated operating and capital ratios for the Company for each of the last three years.
Year Ended December 31 ----------------------- 1996 1995 1994 ----- ---- ---- Return on average total assets 1.51% 1.53% 1.56% Return on average equity* 19.44% 18.00% 18.48% Dividend payout percent 34.35% 36.08% 35.03% Average equity to assets percent 7.76% 8.48% 8.43% Tier 1 capital to total assets (leverage ratio) 7.33% 7.91% 8.56% Tier 1 capital to risk-weighted assets 11.05% 12.30% 13.62% Total capital to risk-weighted assets 12.30% 13.52% 14.87%
* exclusive of mark-to-market adjustment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Registrant's Annual Report for discussion of minimum capital requirements. -20- 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 ---------------------------- 1996 1995 1994 -------- -------- ------- (In Thousands of Dollars) Federal funds purchased and securities sold under agreements to repurchase: Balance at year-end 298,410 404,746 275,136 Weighted average interest rate payable at year-end 5.09% 5.46% 5.75% Maximum amount outstanding at any month end 398,898 404,746 310,243 Average outstanding balance (total daily outstanding principal balance divided by 365) 336,727 264,214 265,191 Weighted average interest rate (related interest expense divided by the average outstanding balance) 4.91% 5.10% 3.67%
-21- ITEM 2. PROPERTIES. Main Office: NBC leases as its main office approximately 40% -- 187,500 rentable square feet -- of the Commerce Square Complex (the "Complex"), which includes a thirty-two story office building known as Commerce Square Tower, a nine-story parking garage and a building known as NBC's main office building. NBC owns two parcels of land (approximately 74.25 feet by 148.5 feet) adjacent to the Complex which house a building that is presently used by the Bank for storage. Other Offices: As of December 31, 1996, NBC operated 13 traditional branches (including the main office branch) and 16 SUPER MONEY MARKET branch facilities in Shelby County, Tennessee and one each in Johnson City, Tennessee; Kingsport, Tennessee; Brownsville, Tennessee; and Cleveland, Tennessee and two in Jackson, Tennessee. NBC intends to continue opening branches at such time and places as management deems prudent and feasible, subject to approval of regulatory authorities. Eight of the 13 traditional branches operated by NBC are leased. In addition, the building housing one branch is owned by NBC but subject to ground leases. Leases on the 9 branches have remaining terms ranging from one month to 21 years (excluding renewal options). The average unexpired portion of the lease terms at December 31, 1996 is 7 years, including ground leases. The remaining four branches are owned in fee. Aggregate annual rentals on the 9 leased branch properties including NBC space in Commerce Square Complex, the SUPER MONEY MARKET branch facilities and the free-standing ATM locations amounted to approximately $3,346,000 at December 31, 1996. Commerce General occupies approximately 9,700 square feet of NBC's space in the Complex and pays approximately $131,000 per year for this space. Commerce Investment occupies approximately 10,000 square feet of NBC's space in the Complex and pays approximately $251,000 per year for this space. Additionally, Commerce Capital leases approximately 2,900 square feet in the Complex totaling approximately $61,600 in annual rent in 1996. Brooks Montague leases approximately 1,200 square feet in a Chattanooga building totaling approximately $14,000 in annual rent in 1996. Nashville Bank has been granted the right to operate branches in area Kroger stores. Initial terms of the license agreements are for one year, with multiple renewal options. In 1996, Nashville paid approximately $710,000 for licensed space and administrative office space. Knoxville Bank also has been granted the right to operate branches in area Kroger stores in the Knoxville, Tennessee; Raleigh/Durham, North Carolina; Greensboro, North Carolina; Winston-Salem, North Carolina; and North Georgia areas. Initial terms of the license agreements are for one year, with multiple renewal options. In 1996, Knoxville paid approximately $677,000 for licensed space and administrative office space. NBC Bank, FSB has been granted the right to operate branches in area Kroger stores in Roanoke, Virginia and Blacksburg, Virginia. Initial terms of the license agreements are for one year, with multiple renewal options. FSB also leases space for the office in Belzoni, Mississippi. In 1996, FSB paid approximately $232,000 for licensed and leased space. NBC owns property at 1895 Union Avenue, 309 Monroe Avenue and 5049 Summer Avenue in Memphis, and 7770 Poplar Avenue in Germantown, Tennessee and 6005 Stage Road in Bartlett, Tennessee, suburbs of Memphis in Shelby County. The property at 1895 Union is the location of Union Avenue Branch operations. The Cloverleaf Branch operation is located at 5049 Summer Avenue. The Consumer Lending and Indirect Loan operations area is located at 309 Monroe, which is also being used for parking for NBC employees. The Germantown Branch operation, the operations of the residential and commercial construction lending, mortgage lending, aircraft lending areas and satellite operations of one of the Bank's -22- subsidiaries and a Company affiliate are located at 7770 Poplar Avenue. The Bartlett Branch operation is located at 6005 Stage Road. 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 59 Chairman of the Board, President, Chief Executive Officer and Director of the Company and Chairman of the Board, Chief Executive Officer and Director of NBC, National Commerce Bank Services, Inc., Commerce Capital, Commerce General, and Brooks Montague Gary L. Lazarini 55 Executive Vice President of NBC, Investments and Chairman and President of NBC Capital Markets Group, Inc., Director of Commerce Capital Gus B. Denton 56 Secretary of the Company and Executive Vice President and Secretary of NBC, Director of Commerce General Corporation Mackie H. Gober 50 President of NBC, Director of NBC, Commerce Finance Company and NCBS Lewis E. Holland 54 Executive Vice President, Treasurer and Chief Financial Officer of the Company and Director of NBC, Chairman of the Board of Commerce Capital Management, Inc. and Commerce Acquisition Corp., Director of Brooks Montague, National Commerce Bank Services, NBC Capital Markets and Kenesaw Leasing, Inc.
-23- William R. Reed, Jr. 50 Executive Vice President of the Company; Director of NBC and National Commerce Bank Services, Inc., Chairman of Nashville Bank of Commerce, NBC Bank, FSB (Knoxville); Chairman of Commerce General Corporation; Chairman and President of Commerce Finance Company and Chairman and CEO of NBC Bank, FSB (Belzoni), Director of Kenesaw Leasing Tom W. Scott 53 President of Commerce General Corporation, Director of TransPlatinum Service Corp.
Of the foregoing officers, Mr. Garrott is also a director of the Company. The above officers have served in the capacities shown for more than five years except for the following: Mr. Garrott became Chairman of the Board, President, and Chief Executive Officer of the Company and Chairman of the Board and Chief Executive Officer of NBC in May, 1993. Prior to that time, he served as President and Chief Operating Officer of the Company and NBC. Mr. Lazarini was elected Executive Vice President of NBC in January, 1992, and prior to that time was Senior Vice President. He has served as Chairman of the Board of Commerce Investment Corporation since January, 1991 and President since January, 1995. Mr. Denton was elected Secretary of the Company in June, 1995. Mr. Gober was elected President of NBC in August, 1995. He was Executive Vice President and Retail Credit Group Head of NBC from January, 1992 until August, 1995 and prior to that time was Senior Vice President. He was President of Commerce Finance Company from September, 1992 until August, 1995. Mr. Holland was elected Executive Vice President of the Company in August, 1995; Treasurer of the Company in June, 1995 and elected Vice President and Chief Financial Officer of the Company and Director of NBC effective July, 1994. He was Vice Chairman and Chief Financial Officer of NBC from July, 1994 until August, 1995. Prior to that time, he was a partner with Ernst & Young LLP. Mr. Reed was elected Executive Vice President of the Company in August, 1995; Chairman and President of Commerce Finance Company in January, 1996. He was Vice Chairman of NBC from January, 1992 to August, 1995 and prior to that he was Executive Vice President of NBC from May, 1988. He has been Chairman of the Board and Director of NBC Bank, FSB (Knoxville) since July 1986, President since May 1988, and Chief Executive Officer from November, 1994 to May, 1995. Mr. Reed has been President and Director of Nashville Bank of Commerce since September 1985, Chairman of the Board from May, 1988 to May, 1995 and Chief Executive Officer since November, 1994. He has been Chairman and Chief Executive Officer of NBC Bank, FSB (Belzoni) since July 1994. He was President of NBC Bank, FSB (Belzoni) from July, 1994 to January, 1996. -24- 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 ------ ------ ------ ------ 1996: High $38.38 $33.50 $31.75 $31.00 Low 33.25 31.00 29.75 25.50 Cash dividends .22 .19 .19 .19 1995: High $26.88 $26.13 $25.50 $25.00 Low 24.50 24.25 23.75 23.00 Cash dividends .19 .17 .17 .17
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 December 31, 1996, there were approximately 2,700 stockholders of record. ITEM 6. SELECTED FINANCIAL DATA. Not Covered by Auditors' Report In Thousands of Dollars, Except Per Share and Ratio Data
1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Net interest income 135,466 120,025 110,021 100,393 92,619 Net income 57,513 49,035 44,342 39,406 33,993 Per common share data:* Net income 2.30 1.94 1.77 1.58 1.38 Cash dividends declared .79 .70 .62 .55 .47 Book value 12.85 11.95 9.14 9.64 8.22 Total average equity 295,826 272,477 239,903 211,007 180,690 Total average assets 3,812,114 3,214,291 2,845,135 2,387,210 2,135,258 Ratios: Average equity to average assets 7.76% 8.48% 8.43% 8.84% 8.46% Return on average equity 19.44 18.00 18.48 18.68 18.81 Return on average assets 1.51 l.53 l.56 1.65 1.59
* After retroactive adjustment for all stock dividends and stock splits declared through December 31, 1996. -25- 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 20 through 25 in the Registrant's 1996 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The report of independent auditors and consolidated financial statements on pages 26 through 43 in the Registrant's Annual Report to Shareholders are incorporated herein by reference. Quarterly Results of Operations on page 42 of the 1996 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 1997 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 1997 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 "Principal Shareholders" in the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Certain Transactions with Management" in the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders is incorporated herein by reference. -26- PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) and (2) The response to this portion of Item 14 and (c) is submitted as a separate section of this report. (a)(3) Listing of Exhibits: Exhibit No. Description - ----------- ----------- 3.1 Charter of National Commerce Bancorporation as amended and restated. 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 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 as of October 1, 1991, by and between National Bank of Commerce and Bruce E. Campbell, Jr., filed as Exhibit 10.5 to the Registrant's Form 10-K for the year ended December 31, 1987 (File No. 0-6094) and incorporated herein by reference. 10.3 Employment Agreement dated as of January 1, 1992, by and between National Bank of Commerce and John S. Evans, filed as Exhibit 10.6 to the Registrant's Form 10-K for the year ended December 31, 1992 (File No. 0-6094) and incorporated herein by reference. 10.4 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. 10.5 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. 10.6 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. -27- 10.7 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. 10.8 Deferred Compensation Agreement 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. 10.9 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, 1994 (File No. 0-6094) and incorporated herein by reference. 10.10 Split Dollar Insurance Plan filed as Exhibit 10c(3) to the Registrant's Form 10-K for the year ended December 31, 1984 (File No. 0-6094) and incorporated herein by reference. 10.11 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. 10.12 1982 Incentive Stock Option Plan, as amended. (filed as Exhibit 10.8 to the Registrant's Form 10-K for the year ended December 31, 1988 (File No. 0-6094)) and incorporated herein by reference. 10.13 1986 Stock Option Plan, filed as Exhibit A to the Registrant's Proxy Statement for the 1987 Annual Meeting of Shareholders and incorporated herein by reference. 10.14 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. 10.15 Form of Amendment to 1986 Stock Option Plan, filed as Exhibit 10.10 to the Registrant's Form 10-K for the year ended December 31, 1988 (File No. 0-6094) and incorporated herein by reference. 10.16 1994 Stock Plan, filed as Exhibit A to the Registrant's Proxy Statement for the 1994 Annual Meeting of Shareholders and incorporated herein by reference. 10.17 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. -28- 11 Statement re: Earnings Per Share. 13 Registrant's 1996 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 -29- 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 14, 1997 /s/ Thomas M. Garrott - -------------- ---------------------------- Dated Thomas M. Garrott Chairman of the Board (Principal Executive Officer) March 14, 1997 /s/ Lewis E. Holland - -------------- ---------------------------- Dated Lewis E. Holland Executive Vice President, Treasurer, and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ John D. Canale, III /s/ Frank G. Barton, Jr. - ----------------------------- ----------------------------- Director Director /s/ Rudi E. Scheidt /s/ R. Grattan Brown, Jr. - ----------------------------- ----------------------------- Director Director /s/ G. Mark Thompson /s/ Bruce E. Campbell, Jr. - ----------------------------- ----------------------------- Director Director /s/ James E. McGehee, Jr. /s/ Edmond D. Cicala - ----------------------------- ----------------------------- Director Director /s/ Thomas C. Farnsworth, Jr. /s/ W. Neely Mallory, Jr. - ----------------------------- ----------------------------- Director Director /s/ R. Lee Jenkins /s/ Harry J. Phillips, Sr. - ----------------------------- ----------------------------- Director Director /s/ Sidney A. Stewart, Jr. - ----------------------------- Dated: March 14, 1997 -------------- -30- ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) and (2), and (c) LIST OF FINANCIAL STATEMENTS CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 1996 NATIONAL COMMERCE BANCORPORATION MEMPHIS, TENNESSEE -31- FORM 10-K -- ITEMS 14(a)(1) and (2) NATIONAL COMMERCE BANCORPORATION AND SUBSIDIARIES 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, 1996, are incorporated by reference in Item 8: Report of Independent Auditors Consolidated Balance Sheets--December 31, 1996 and 1995 Consolidated Statements of Income--Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity--Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements--December 31, 1996 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. -32- EX-3.1 2 CHARTER EXHIBIT 3.1 RESTATED CHARTER OF NATIONAL COMMERCE BANCORPORATION UNDER SECTION 48-20-107 OF THE TENNESSEE BUSINESS CORPORATION ACT Pursuant to the provisions of Section 48-20-107 of the Tennessee Business Corporation Act, the undersigned corporation adopts the following Restated Charter: FIRST. The name of this Corporation is NATIONAL COMMERCE BANCORPORATION. SECOND. The address of the principal office of this Corporation in the State of Tennessee is One Commerce Square, Memphis, Tennessee, County of Shelby, 38150. THIRD. (a) The complete address of the Corporation's registered office in Tennessee is One Commerce Square, Memphis, Tennessee, County of Shelby, 38150. (b) The name of the registered agent to be located at the address listed in part (a) of this Article Third is Charles A. Neale. FOURTH. The general nature of the business to be transacted by this Corporation is: (1) To acquire by purchase, subscription or otherwise, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge or otherwise dispose of or deal in and with any of the shares of the capital stock (whether such shares be voting or nonvoting), or any voting trust certificates in respect of the shares of capital stock, scrip, warrants, rights, bonds, debentures, notes, trust receipts, and other securities, obligations, choses in action and evidences of indebtedness or interest issued or created by banks, trust companies or other corporations, joint stock companies, syndicates, associations, firms, trusts or persons, public or private, or by the government of the United States of America, or by any state or other governmental agency, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including the right to execute consents and vote thereon, and to do any and all acts and things necessary or advisable for the preservation, protection, improvement and enhancement in value thereof. (2) To the extent permitted by law, to promote, finance, aid and assist, financially and otherwise, any bank, trust company, other corporation, association, joint stock company, syndicate, firm, trust or person, public or private, governmental agency or other entity, of which any stock, share, voting trust certificate, bond, mortgage, debenture, note, right, warrant, scrip, commercial paper, chose in action, contract, evidence of indebtedness or other obligation or security is held directly or indirectly by or for the Corporation, or in the business, financing or welfare of which the Corporation shall have any interest; and in connection therewith and to the extent permitted by law, to guarantee or become surety for the performance of any undertaking or obligations of such entity; to guarantee by endorsement or otherwise the payment of the principal of or interest or dividends on or sinking fund payments with respect to any such security of any such entity or any other payments whatsoever to be made by it; and to join in any reorganization with respect to such entity. (3) To pay for any property, securities, rights or interests acquired by the Corporation in cash or other property, rights or interests held by the Corporation or by issuing and delivering in exchange therefor its own property, stock, shares, bonds, debentures, notes or warrants for capital stock, certificates of indebtedness, obligations or other securities howsoever evidenced. (4) To acquire by purchase, gift, lease, exchange or otherwise, real and personal property, or either, situated either within or without the State of Tennessee; and to lease, sell, or otherwise dispose of or encumber the same; to turn the same to account as may seem expedient; and, in particu lar, to prepare building sites, and to construct, reconstruct, alter, improve, manage and maintain buildings of all kinds including bank buildings, general office buildings, and other structures. (5) To conduct a general real estate business, whether as principal or as agent or in any other capacity whatsoever, in the purchase, sale, lease, exchange, and management of real estate and the negotiation of loans thereon; to buy, sell, deal, and trade in mortgages or other liens on or interest in real estate. (6) To conduct a general insurance agency and insurance brokerage business of all kinds including but not limited to fire, life, accident, fidelity, plate glass, boiler, theft, health, hospitalization, burglary, marine, airplane, credit, and all other kinds of insurance whatsoever, and in all its branches. (7) To engage in and carry on either as principal or as agent, or in any other capacity whatsoever, the business of rendering management services and advice to any and all types of business enterprise and activity in connection with the operation, management, supervision, control, personnel policies, purchasing, selling, advertising, financing, and all other phases of operation. (8) To borrow or raise money for any of the purposes of the Corporation and from time to time without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds and other negotiable or non-negotiable instruments and evidences of indebtedness therefor, to make and enter into indentures or trust agreements, to make and issue its debenture bonds or certificates of indebtedness, payable to bearer or otherwise, with or without interest coupons attached, and in addition to such interest, until such debenture bond or certificate of indebtedness is discharged but not thereafter, with or without participation in the earnings, or a share of the earnings of the Corporation, and to secure the payment of any of the foregoing evidences of indebtedness and of the interest thereof by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the Corporation whether at the time owned or thereafter acquired, and to sell, pledge, exchange or otherwise dispose of such obligations of the Corporation for its corporate purposes. (9) To loan to any person, firm or corporation any of its surplus funds, either with or without security. (10) In general, to carry on any other business in connection with the foregoing, and to have and exercise all the powers conferred by the laws of Tennessee upon corporations formed under the Tennessee Business Corporation Act, and amendments thereto, and to do any and all of the things hereinbefore set forth to the same extent as natural persons might or could do, it being hereby specifically provided that the enumeration of certain specific powers herein -2- shall not be held to limit or restrict in any manner such general powers; provided, however, and notwithstanding any provision in this Restated Charter or any amendment thereof to the contrary, so long as the Corporation is subject to the provisions of the United States Bank Holding Company Act of 1956 or acts amendatory thereof, the Corporation shall not engage in any activities prohibited thereby, unless it is determined that any such activity is exempt therefrom or the prohibition is otherwise inapplicable thereto. The objects and purposes specified in the foregoing Article Fourth shall, except where otherwise expressed, be in nowise limited or restricted by reference to or inference from the terms of any other clause hereof, but the objects and purposes specified in each of the foregoing clauses of this Article Fourth shall be regarded as independent objects and purposes. FIFTH. This Corporation shall have the authority to issue a maximum of 75,000,000 shares of common stock, par value $2.00 per share, which shares collectively shall have unlimited voting rights and the right to receive the net assets of the Corporation upon dissolution. No holder of any class of this Corporation's common stock shall have preemptive rights. Members of the Board of Directors, other than directors elected to fill vacancies caused by an increase in the number of directors or by the removal, death or resignation of existing directors, shall be elected by the shareholders only and shall be elected by a plurality of the votes cast in any such election. Except as otherwise provided by the laws of the State of Tennessee, as now in effect or hereafter amended, the Bylaws of the Corporation may be amended or repealed or additional Bylaws may be adopted by the Board of Directors by a vote of a majority of the entire Board of Directors. The Corporation is hereby authorized to issue 5,000,000 shares of preferred stock without par value and subject to the following designations, preferences, limitations and relative rights: I. So long as any of the preferred stock is outstanding, no dividends (other than (i) dividends on common stock payable in common stock, (ii) dividends payable in stock junior to the preferred stock both as to dividends and upon liquidation, and (iii) cash in lieu of fractional shares in connection with any such dividends) shall be paid or declared in cash or otherwise, nor shall any other distribution be made on the common stock or any other securities junior to the preferred stock as to dividends, unless (a) there shall be no arrearages in dividends on the preferred stock for all previous dividend periods, and the full dividend on the preferred stock for the current dividend period shall have been or shall then be paid or declared and funds set aside therefor, and (b) the Corporation shall not be in default on its obligation to redeem any of the preferred stock called for redemption. Subject to the foregoing provisions, such dividends as may be determined by the Board of Directors may be declared and paid from time to time on the common stock or on any stock junior to the preferred stock, without any right or participation therein by the holders of the preferred stock. II. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary ("liquidation"), the holders of the preferred stock shall be entitled to receive an amount per share equal to the amount fixed and determined by the Board of Directors in the resolution establishing the preferred stock, plus an amount equal to all dividends accrued on the preferred stock to the -3- date fixed for the payment in liquidation, before any distribution shall be made to the holders of the common stock or any stock junior to the preferred stock as to the distribution of assets upon liquidation. If the assets of the Corporation are insufficient to permit the payment of the full preferential amounts payable to the holders of the preferred stock, then the assets available for distribution to holders of the preferred stock shall be distributed ratably to the holders of the preferred stock, in proportion to the full preferential amounts payable on their respective shares upon liquidation. III. This Restated Charter does not establish series of the preferred stock and does not fix and determine variations in the relative rights and preferences as between series of the preferred stock. There is hereby expressly vested in the Board of Directors of the Corporation the authority to divide the class of preferred stock authorized in this Restated Charter into series, and to fix and determine, in the manner provided by law, the relative rights and preferences of the shares of any series so established. The Board of Directors is also authorized to make any changes in the designations, terms, limitations or relative rights or preferences of any series of the preferred stock, before the issuance of any shares of that series, in the manner provided by law. SIXTH. The amount of capital with which this Corporation will begin business shall be Five Thousand Dollars ($5,000. 00). SEVENTH. The Board of Directors of the Corporation shall consist of not less than three (3) and not more than twenty-five (25) natural persons. The exact number of directors shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. The Board of Directors shall be divided into three (3) classes, as nearly equal in number as possible, with the term of office of one class expiring each year. At the annual meeting of shareholders in 1983, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, and upon expiration of such one-year term and thereafter, such class of directors shall be eligible to hold office for terms of three (3) years. At the annual meeting of shareholders in 1983, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting, and upon the expiration of such two-year term and thereafter, such class of directors shall be eligible to hold office for terms of three (3) years. At the annual meeting of shareholders in 1983, directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting, and thereafter such class of directors shall continue to be eligible to hold office for terms of three (3) years. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board for any reason, including the removal of directors, may be filled by the Board of Directors acting by a majority of directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which the director shall have been chosen and until a successor shall be elected and qualified. Notwithstanding any other provision of this Restated Charter or the Bylaws of the Corporation, and notwithstanding specification of some lesser percentage by law, any one or more directors or the entire Board of Directors of the -4- Corporation may be removed for cause, at any time, by the affirmative vote of at least two-thirds of the entire Board of Directors. Notwithstanding any provision of this Restated Charter or of the Bylaws of this Corporation, and notwithstanding the specification of some lesser percentage by law, the affirmative vote of the holders of two-thirds or more of the outstanding shares of each class of stock of the Corporation entitled to vote thereon shall be required to amend, alter, change or repeal any provision of this Article Seventh; provided, however, that if a two-thirds majority of the entire Board of Directors shall adopt a resolution setting forth a proposed amendment to this Article Seventh and directing that it be submitted to a vote at a meeting of shareholders, then such amendment shall be approved upon receiving the affirmative vote of the holders of a majority of all the outstanding shares of each class of stock of the Corporation entitled to vote thereon. EIGHTH. Any action which the Board of Directors of this Corporation may properly take may be taken without a meeting. If all directors consent to taking such action without a meeting, the affirmative vote of the number of directors that would be necessary to authorize or take such action at a meeting shall be the act of the Board. The action must be evidenced by one or more written consents setting forth the action so taken, signed by each member of the Board of Directors, indicating each signing director's vote or abstention on the action, and shall be included in the minutes or filed with the corporate records reflecting the action taken. The Corporation shall have the right to purchase its own shares in accordance with Sections 48-16-302 and 48-16-401 of the Tennessee Business Corporation Act. The Board of Directors may authorize and the Corporation may make certain distributions to its shareholders, in accordance with Section 48-16-401 of the Tennessee Business Corporation Act. NINTH. SECTION 1. Certain Definitions. ------------------- For the purpose of this Article Ninth, the terms: A. "Business Combination" means any merger, consolidation, or amalgamation of the Corporation or any of its subsidiaries with any Person; any sale, lease, exchange, mortgage, pledge, transfer or other disposition to or with any Person of net assets of the Corporation having an aggregate fair market value in excess of $5,000,000; the issuance or transfer by the Corporation or any of its subsidiaries of any securities of the Corporation to any Person in exchange for cash, securities or other property having a fair market value in excess of $5,000,000; a liquidation of the Corporation proposed by any Person; any reclassification of securities or recapitalization of the Corporation. B. "Interested Shareholder" means any Person, other than the Corporation or any of its subsidiaries, who (i) is the beneficial owner, directly or indirectly, of more than 5% of the voting power of any class of outstanding voting stock; or (ii) is an Affiliate of the Corporation and at anytime within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 5% or more of the voting power of any class of the then outstanding voting stock. C. "Affiliate" has the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on January 1, 1983. D. "Minimum Price Per Share" shall mean the higher of (i) the highest gross per share price paid or agreed to be paid by the Interested Shareholder for any shares of common stock of the Corporation acquired -5- or agreed to be acquired by it (1) within the four-year period immediately prior to the first public announcement of the Business Combination (the "Announcement Date"), or (2) in the transaction in which it became an Interested Shareholder, whichever is higher, or (ii) the fair market value per share of common stock of the Corporation on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder, whichever is higher. The calculation of the Minimum Price Per Share shall require appropriate adjustments for capital changes, including without limitation stock splits, stock dividends and reverse stock splits. E. "Person" shall mean any individual, firm, partnership, trust, business association, corporation, or other entity. SECTION 2. Vote Required for Business Combinations. --------------------------------------- In addition to any affirmative vote required by law or this Restated Charter, and except as otherwise expressly provided in Section 3 of this Article Ninth, any Business Combination shall require the affirmative vote of the holders of at least two-thirds of the outstanding shares of each class of capital voting stock of the Corporation. SECTION 3. When Higher Vote is Not Required. -------------------------------- The provisions of Section 2 of this Article Ninth shall not be applicable to (i) any Business Combination not with or involving any Interested Shareholders or an Affiliate of an Interested Shareholder if the conditions of the following Paragraph A are met, in which event such Business Combination shall require only such affirmative vote as is required by law and any other provi sion of this Restated Charter, or (ii) any Business Combination with or involving an Interested Shareholder or an Affiliate of an Interested Shareholder if all of the conditions in both of the following Paragraphs A and B are met, in which event such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Restated Charter. A. Approval by the Board of Directors. The Business Combination shall ---------------------------------- have been approved by at least two-thirds of the entire Board of Directors of the Corporation at anytime prior to the consummation of the Business Combination. B. Price and Form of Consideration. Both of the following conditions ------------------------------- shall have been met: (i) The aggregate amount of the cash and the fair market value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of outstanding capital voting stock of the Corporation in such Business Combination shall be at least equal to the Minimum Price Per Share. (ii) The consideration to be received by holders of a particular class of outstanding voting stock shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class of voting stock. If the Interested Shareholder has paid for shares of any class of voting stock with varying forms of consideration, the form of consider ation for such class of voting stock shall be either cash or the form used to acquire the largest number of shares of such class of voting stock previously acquired by it. SECTION 4. Determination of Certain Matters. -------------------------------- Notwithstanding any other provision of this Restated Charter or the Bylaws of the Corporation, the directors of the Corporation -6- shall have the power and duty to determine for the purposes of this Article Ninth, on the basis of information known to them after reasonable inquiry, (A) whether a Person is an Interested Shareholder, (B) the number of shares of voting stock beneficially owned by any Person, (C) whether a Person is an Affiliate of another, and (D) whether the net assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any of its subsidiaries in any Business Combination has, an aggregate fair market value of $5,000,000 or more. SECTION 5. No Effect on Fiduciary Obligations of Interested Shareholders. ------------------------------------------------------------- Nothing contained in this Article Ninth shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. SECTION 6. Amendment, Repeal and Other Matters. ----------------------------------- Notwithstanding any provisions of this Restated Charter or the Bylaws of the Corporation, and notwithstanding the specification of some lesser percentage by law, the affirmative vote of the holders of two-thirds or more of the outstanding shares of each class of stock of the Corporation entitled to vote thereon shall be required to amend, alter, change or repeal any provision of this Article Ninth; provided, however, that if at least two-thirds majority of the entire Board of Directors shall adopt the resolution setting forth the proposed amendment to this Article Ninth and directing that it be submitted to a vote at a meeting of the shareholders, then such amendment shall be approved upon receiving the affirmative vote of the holders of a majority of the outstanding shares of each class of stock of the Corporation entitled to vote thereon. TENTH. The Corporation is to have perpetual existence. The Corporation is for profit. ELEVENTH. Special meetings of shareholders may be called by the Chairman, President or a Vice President, or by a majority of the members of the Board of Directors acting with or without a meeting, upon notice to the shareholders being delivered not less than ten (10) days nor more than two (2) months before the date of the meeting. Such notice shall include a description of the purpose or purposes for which the meeting is called and shall be effective when mailed postpaid and correctly addressed to the shareholder's address shown in the Corporation's current record of shareholders. Special meetings of shareholders also may be called by the holders of at least ten percent (10%) of all the votes entitled to be cast on any issue proposed to be considered at such meeting upon request in writing, signed, dated and delivered either in person or by registered or certified mail, return receipt requested, to the Secretary of the Corporation by such shareholders at least ninety (90) days before the date of the meeting. Upon receipt of such request, it shall be the duty of such Secretary forthwith to cause to be given to the shareholders entitled thereto notice of such meeting, which notice shall be given on a date not more than one (1) month after the date such request was delivered to such Secretary, as such Secretary may fix and shall be effective when mailed postpaid and correctly addressed to the shareholder's address shown in the Corporation's current record of shareholders. TWELFTH. No director of this Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except: (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; or (iii) for -7- unlawful distributions under Section 48-18-304 of the Tennessee Business Corporation Act. NATIONAL COMMERCE BANCORPORATION By: /s/ Gus B. Denton ---------------------------- Gus B. Denton, Secretary -8- EX-4.1 3 SPECIMEN STOCK CERTIFICATE - -------------------------------------------------------------------------------- COMMON COMMON - --------------- ------------- NATIONAL COMMERCE ----------------- BANCORPORATION SEE REVERSE FOR CERTAIN DEFINITIONS INCORPORATED UNDER THE LAWS OF THE STATE OF TENNESSEE CUSIP 635449 10 1 This Certifies that is the owner of FULL-PAID AND NON-ASSESSABLE SHARES EACH OF $2.00 PAR VALUE OF THE COMMON STOCK OF NATIONAL COMMERCE BANCORPORATION transferable on the books of the corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. The Shares represented hereby are issued and shall be held subject to all of the provisions of the Certificate of Incorporation and amendments thereto, to all of which the holder by acceptance hereof assents. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile signatures of the Corporation's duly authorized officers. Dated /s/ Walter B. Howell, Jr. /s/ Thomas M. Garrott --------------------------- --------------------------- Treasurer Chairman of the Board NATIONAL COMMERCE BANCORPORATION The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenant in common UNIF GIFT MIN ACT - ......Custodian...... TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as Act................. tenants in common (State) Additional abbreviations may also be used though not in the above list. For value received, hereby sell, assign and transfer unto -------------- PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------- - -------------------------------------- - -------------------------------------------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- shares - ---------------------------------------------------------------------- of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney - ----------------------------------------------------------------------- to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated --------------------- ------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED ------------------------------------------- THE SIGNATURES SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-11 4 COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11. Statement Re: Earnings Per Share * National Commerce Bancorporation and Subsidiaries - ------------------------------------------------- Year Ended December 31 ------------------------------ 1996 1995 1994 -------- -------- -------- (amounts in thousands, except per share amounts) Primary: Average shares outstanding 24,547 24,690 24,476 Less leveraged ESOP shares (110) (53) (75) Net effect of the assumed exercise of stock options - based upon the treasury stock method using average market price 612 612 650 ------- ------- ------- Total 25,049 25,249 25,051 ======= ======= ======= Net income $57,513 $49,035 $44,342 Per share amount $ 2.30 $ 1.94 $ 1.77 ======= ======= ======= Fully diluted: Average shares outstanding 24,547 24,690 24,476 Less leveraged ESOP shares (110) (53) (75) Net effect of the assumed exercise of stock options - based on the treasury stock method using higher of year-end or average market price 661 628 664 ------- ------- ------- Total 25,098 25,265 25,065 ======= ======= ======= Net income $57,513 $49,035 $44,342 Per share amount $ 2.29 $ 1.94 $ 1.77
- ------------ * Reflects all stock splits and stock dividends declared through December 31, 1996. EX-13 5 REGISTRANT'S 1996 A/R TO SHAREHOLDERS Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion is to focus on important factors affecting the Company's financial condition and results of operations. Reference should be made to the consolidated financial statements (including the notes thereto), the selected financial data and other consolidated financial statements presented elsewhere in this report for an understanding of the following discussion and analysis. In this discussion, net interest income and net interest margin are presented on a fully taxable equivalent basis. All per share data is adjusted to reflect all stock dividends and stock splits declared through December 31, 1996. RESULTS OF OPERATIONS For the year ended December 31, 1996, net income totaled $57,513,000, a $8,478,000 or 17.3 percent increase over 1995 net income of $49,035,000. Net income increased by $4,693,000 or 10.6 percent in 1995. Earnings per share were $2.30 in 1996, compared to $1.94 in 1995 and $1.77 in 1994. For 1996, return on average assets was 1.51 percent, compared to 1.53 percent in 1995 and 1.56 percent in 1994. Return on average equity (excluding unrealized gains or losses on investment securities) was 19.44 percent in 1996, compared to 18.00 percent in 1995 and 18.48 percent in 1994. Net interest income, the difference between interest earned on loans and investments and interest paid on interest-bearing liabilities, increased by $14,830,000 or 11.8 percent in 1996 and increased by $9,975,000 or 8.6 percent in 1995. The increase in 1996 reflects a $39,491,000 or 15.7 percent increase in interest income, and a $24,661,000 or 19.5 percent increase in total interest expense. The increase in interest income was the result of a $412,386,000 or 24.0 percent increase in average loans and a $156,147,000 or 12.4 percent increase in average securities, partially offset by a decrease in the average yield on earning assets from 8.31 percent in 1995 to 8.08 percent in 1996. The increased volume of average earning assets (partially funded by an increase of $36,421,000 in average non-interest-bearing liabilities, net of non-interest- earning assets) positively impacted interest income by approximately $48 million, while the decreased yield on average earning assets negatively impacted interest income by approximately $9 million. Interest expense increased in 1996, reflecting a $540,659,000 or 20.6 percent increase in average outstanding interest-bearing liabilities, partially offset by a decrease in the cost of interest-bearing liabilities from 4.83 percent in 1995 to 4.78 percent in 1996. The decrease in the rate paid on interest-bearing liabilities positively affected interest expense by approximately $2 million and the increase in average outstandings negatively affected interest expense by approximately $26 million. The 1995 increase in net interest income was primarily the result of an increase in earning assets and an increase of $36 million in average non- interest-bearing liabilities, net of non-interest-earning assets. The net interest margin (taxable equivalent net interest income as a percentage of average earning assets) was 3.89 percent in 1996, compared to 4.14 percent in 1995 and 4.33 percent in 1994. The yield on earning assets was 8.08 percent in 1996, compared to 8.31 percent in 1995 and 7.51 percent in 1994. The cost of interest-bearing liabilities was 4.78 in 1996, compared to 4.83 percent in 1995 and 3.71 percent in 1994. The Company's provision for loan losses was $14,134,000 for 1996, compared to $9,750,000 for 1995 and $7,077,000 for 1994. The 1996 provision was primarily the result of loan growth. Net loan charge-offs were $7,515,000 (.35 percent of average loans, net of unearned discounts) in 1996, compared to $5,050,000 (.29 percent of average loans) in 1995 and $4,234,000 (.28 percent of average loans) in 1994. The allowance for loan losses at December 31, 1996, was $35,514,000 or 1.51 percent of loans, net of unearned discounts, compared to $29,010,000 or 1.50 percent of net loans at December 31, 1995, and $24,310,000 or 1.53 percent of net loans at December 31, 1994. Following is a comparison of non-earning assets and loans past due 90 days or more for the years ended December 31, 1996, 1995 and 1994: In Thousands 1996 1995 1994 Non-accrual loans $ - $ - $ - Renegotiated loans - - - Other real estate owned - 30 61 ------ ------ ------ Total non-earning assets $ - $ 30 $ 61 ====== ====== ====== Accruing loans past due 90 days or more $3,482 $3,252 $2,432 Percentage of total loans 0.15% 0.17% 0.15% At December 31, 1996, there were no non-performing assets. At December 31, 1995, the allowance for loan losses was 967 times non-performing assets, compared to 399 times at December 31, 1994. Based on the regulatory definition, the Company has no "Highly Leveraged Transactions" (HLTs). The Company also has no loans involving syndicated leveraged buyouts (LBOs). Management believes that the allowance for loan losses is adequate to provide for inherent losses in the loan portfolio. Non-interest income (excluding securities gains or losses) increased $17,286,000 or 32.2 percent in 1996. The Company's broker-dealer revenue increased $239,000 or 2.4 percent and mortgage banking origination revenue increased $1,288,000 or 96.8 percent, reflecting current market conditions. Also included in non- interest income was a pre-tax gain of $2,900,000 relating to the sale of certain assets, primarily loans, of the Company's Commerce Finance subsidiary, and a pre-tax gain of $3,000,000 relating to bank premises transactions. All other sources of non-interest income, including trust service income, service charge income, fuel card processing income and in-store banking licensing income increased a net of $9,859,000 or 23.2 percent. Securities gains totaled $3,000 in 1996, compared to $228,000 in 1995. Non-interest income (excluding securities gains or losses) increased by $3,202,000 or 6.3 percent in 1995, primarily as a result of decreases in broker-dealer revenue and mortgage banking origination revenue, partially offset by increases in trust service income, service charges on deposit accounts and in-store banking licensing income. Non-interest expenses (excluding the provision for loan losses) increased by $13,339,000 or 14.5 percent in 1996, primarily reflecting increased employment and other expenses relating to new products and locations, and increased promotional expenses of new loan and deposit gathering campaigns. Total non- interest expenses increased by $4,256,000 or 4.9 percent in 1995, primarily the result of increases related to the new automobile indirect lending and corporate cash management businesses, start-up expenses at the Company's North Carolina operation of NBC Bank, FSB (Knoxville), full year expenses at the Company's Virginia operation of NBC Bank, FSB (Belzoni) and Commerce Finance Company, the Company's consumer finance subsidiary. The reduction in FDIC assessment was a result of refunds and reduced premiums in 1995 due to a change in rate schedules. FINANCIAL CONDITION The Company functions as a financial intermediary, and as such its financial condition should be examined in terms of trends in its sources and uses of funds. The following comparison of daily average balances indicates how the Company has managed its sources and uses of funds: SOURCES AND USES OF FUNDS TRENDS
1995-1996 1994-1995 1996 Increase 1995 Increase 1994 AVERAGE (Decrease) Average (Decrease) Average In Thousands BALANCE Amount % Balance Amount % Balance ---------- --------- ---------- ---------- --------- ---------- ---------- FUNDING USES Interest-earning assets: Loans, net of unearned discounts $2,130,810 $412,386 24.0% $1,718,424 $212,708 14.1% $1,505,716 Securities: Taxable 1,267,535 167,196 15.2 1,100,339 142,454 14.9 957,885 Non-taxable 143,706 (11,049) (7.1) 154,755 7,002 4.7 147,753 Trading account securities 29,157 10,439 55.8 18,718 (6,185) (24.8) 24,903 Federal funds sold and securities purchased under agreements to resell 23,388 (1,995) (7.9) 25,383 7,365 40.9 18,018 Time deposits in banks 16,984 103 0.6 16,881 (1,926) (10.2) 18,807 ---------- -------- ---------- -------- ---------- Total interest-earning assets 3,611,580 577,080 19.0 3,034,500 361,418 13.5 2,673,082 Other uses 200,534 20,743 11.5 179,791 7,738 4.5 172,053 ---------- -------- ---------- -------- ---------- Total funding uses $3,812,114 $597,823 18.6% $3,214,291 $369,156 13.0% $2,845,135 ========== ======== ========== ======== ========== FUNDING SOURCES Interest-bearing liabilities: Interest-bearing deposits $2,346,570 $291,761 14.2% $2,054,809 $294,720 16.7% $1,760,089 Federal funds purchased and securities sold under agreements to repurchase 336,727 72,513 27.4 264,214 (977) (0.4) 265,191 Other borrowed funds and long-term debt 477,600 176,385 58.6 301,215 32,706 12.2 268,509 ---------- -------- ---------- -------- ---------- Total interest-bearing liabilities 3,160,897 540,659 20.6 2,620,238 326,449 14.2 2,293,789 Non-interest-bearing deposits 305,989 21,245 7.5 284,744 2,276 0.8 282,468 Stockholders' equity 295,826 23,349 8.6 272,477 32,574 13.6 239,903 Other sources 49,402 12,570 34.1 36,832 7,857 27.1 28,975 ---------- -------- ---------- -------- ---------- Total funding sources $3,812,114 $597,823 18.6% $3,214,291 $369,156 13.0% $2,845,135 ========== ======== ========== ======== ==========
Average loans, the largest use of funds, increased $412 million or 24.0 percent in 1996 and $213 million or 14.1 percent in 1995. Increases in consumer loans, real estate construction and mortgage loans and commercial loans were the primary reasons for the increases in 1996, and increases in real estate mortgage loans and consumer loans were the primary reasons for the 1995 loan increase. For 1996 the growth in all loan categories reflects increased demand and consumer loan promotions. The 1995 growth in real estate mortgage loans reflects growth in first mortgage refinancing loans. The growth in consumer loans reflects increased indirect installment loan activity in both years. Total securities (excluding the trading account), another major use of funds, increased by $156 million or 12.4 percent in 1996. Taxable securities increased by $167 million or 15.2 percent, reflecting increases in both fixed and variable rate federal agency securities. Non-taxable securities decreased by $11 million or 7.1 percent, reflecting decreased investment in bank-qualified municipal investments. Total securities increased by $149 million or 13.5 percent in 1995. The 1995 increase reflects increases in both fixed- and variable-rate federal agency securities and non-taxable securities. The Company accounts for securities in accordance with Financial Accounting Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires an adjustment of the securities portfolio to market value for those designated as available for sale, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. This year-end adjustment increased the securities portfolio by $2.0 million and increased stockholders' equity by $1.2 million at December 31, 1996, and increased the securities portfolio by $7.4 million and increased stockholders' equity by $4.5 million at December 31, 1995. Trading account securities increased by $10 million or 55.8 percent in 1996 and decreased by $6 million or 24.8 percent in 1995. These changes are a result of trading inventory levels needed by NBC Capital Markets Group, Inc. Federal funds sold and securities purchased under agreements to resell decreased by $2 million or 7.9 percent in 1996, and increased by $7 million or 40.9 percent in 1995, representing excess funds not otherwise employed in loans or investment securities. Time deposits in other banks increased by $103,000 or 0.6 percent in 1996, and decreased by $2 million or 10.2 percent in 1995. This is a readily manageable asset and balances are maintained at levels which are based on operating needs. Total interest-earning assets increased by $577 million or 19.0 percent in 1996, compared to an increase of $361 million or 13.5 percent in 1995. As described below, the growth in 1996 and 1995 was funded primarily by increases in interest-bearing deposits, other borrowed funds and stockholders' equity in 1996 and 1995. Total average deposits increased by $313 million or 13.4 percent in 1996, compared to an increase of $297 million or 14.5 percent in 1995. Total interest-bearing deposits increased $292 million or 14.2 percent and total non- interest-bearing deposits increased $21 million or 7.5 percent in 1996, reflecting current market trends, compared to an increase of $295 million or 16.7 percent in interest-bearing deposits and an increase of $2 million or 0.8 percent in non-interest-bearing deposits in 1995. Federal funds purchased and securities sold under agreements to repurchase increased $73 million or 27.4 percent in 1996, compared to a decrease of $1 million or 0.4 percent in 1995. These changes were primarily the result of the availability of overnight funds purchased from downstream correspondent banks. Other borrowed funds, primarily Federal Home Loan Bank advances and bank notes, increased $176 million or 58.6 percent in 1996, compared to an increase of $33 million or 12.2 percent in 1995. Approximately $54 million of this increase was due to a new program of floating rate bank notes issued through the Company's banking subsidiary National Bank of Commerce. These advances and notes are partially the result of asset/liability management decisions matching certain earning assets (first mortgage and consumer installment loans) against these advances at positive rate spreads. For 1997, the Company anticipates loan demand and deposit growth similar to that which occurred in 1996 due to expansion in existing Tennessee markets and continued expansion into Virginia, North Carolina, Mississippi and Georgia. Above normal operating expense increases are expected in the Company's thrift subsidiaries due to planned continued expansion. However, the Company expects continued back-office expense control and continued increases in non-interest income. The resulting pre-tax income should be sufficient to realize the benefits of the Company's deferred tax assets referenced in Note P. LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT The primary functions of asset/liability management are to assure adequate liquidity and to maintain an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid rapidly fluctuating net interest margins and to promote consistent growth of net income through periods of changing interest rates. Cash and bank balances, federal funds sold, trading account securities and securities available for sale are the principal sources of short-term asset liquidity. Other sources of short-term liquidity include federal funds purchased and repurchase agreements, credit lines with other banks and borrowings from the Federal Home Loan Bank. Maturing loans and securities are the principal sources of long-term asset liquidity. Automobile, home equity and credit card loans are secondary liquidity sources as a result of active securitizations based on these products. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds, on which rates change daily, and loans which are tied to the Prime rate are much more interest rate sensitive than long-term, fixed-rate securities and fixed-rate loans. Similarly, time deposits of $100,000 and over and money market certificates and accounts are much more interest rate sensitive than savings accounts. The shorter term interest rate sensitivities are the key to measurement of the interest sensitivity gap, or difference between interest-sensitive-earning assets or interest-sensitive-bearing liabilities or vice versa. Trying to minimize this gap is a continual challenge in a changing interest rate environment and one of the objectives of the Company's asset/liability management strategy. Company policy states that the six-month cumulative gap shall be no more than 12 percent of total assets and the one-year cumulative gap, no more than 15 percent. At year-end 1996, both six-month and one-year cumulative gaps were within these parameters. CAPITAL RESOURCES Total average assets increased by 18.6 percent in 1996, 13.0 percent in 1995 and 19.2 percent in 1994. Correspondingly, total average equity capital increased by 8.6 percent in 1996, 13.6 percent in 1995 and 13.7 percent in 1994. The percentage of average equity capital to average assets was 7.76 percent in 1996, 8.48 percent in 1995 and 8.43 percent in 1994. The internal capital growth rate was 12.89 percent in 1996, 11.65 percent in 1995 and 12.16 percent in 1994. These growth rates are the result of a return on average equity of 19.44 percent in 1996, 18.00 percent in 1995 and 18.48 percent in 1994. The capital ratios were reduced due to utilization of excess capital for a stock repurchase program which was authorized in 1996 for 2,000,000 shares over two years. During 1996, 1,024,928 shares of common stock were repurchased at a cost of $30,581,000. The Company's management plans to continue its efforts to increase the return on average equity while maintaining a consistent dividend ratio in order to achieve continued internal capital growth. The Company accounts for securities in accordance with FAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This results in an increase of $1.2 million to 1996 year-end stockholders' equity and an increase of $4.5 million to 1995 year-end stockholders' equity. The following ratios in the table on selected capital information do not include the effect of FAS No. 115 on Tier 1 capital, total capital or total risk- weighted assets. At December 31, 1996, the Company did not have any material commitments which would require an expenditure of capital funds. However, there are regulatory constraints placed on the Company's capital. The FDIC Improvement Act (FDICIA), effective December 19, 1992, established capital levels for the five capital categories created by the law. These capital categories range from the highest category, well-capitalized institutions, to the lowest category, critically under-capitalized institutions. The federal banking regulatory agencies each issued substantially the same regulations on a joint basis to establish a uniform approach to the capital categories and supervisory procedures. Well- capitalized institutions are required to maintain a total capital to risk- weighted assets ratio of at least 10 percent, a Tier 1 capital to risk-weighted assets ratio of at least 6 percent and a Tier 1 capital to total assets (leverage ratio) of at least 5 percent. As indicated in the table of selected capital information, the Company and its banking subsidiaries exceeded all minimum required capital ratios for well-capitalized institutions at December 31, 1996. SELECTED CAPITAL INFORMATION December 31 ------------------------ In Thousands 1996 1995 ----------- ----------- Capital: Stockholders' equity $ 313,329 $ 296,679 Less: Unrealized gains on securities, net of taxes 1,230 4,527 Goodwill and other deductions 4,118 9 ---------- ---------- Tier 1 capital 307,981 292,143 Qualifying allowance for loan losses 34,847 29,010 ---------- ---------- Total capital $ 342,828 $ 321,153 ========== ========== Total risk-weighted assets $2,787,088 $2,374,668 ========== ========== Ratios: Total capital to risk-weighted assets 12.30% 13.52% Tier 1 capital to risk-weighted assets 11.05 12.30 Tier 1 capital to total assets (leverage ratio) 7.33 7.91 Average equity to assets 7.76 8.48 IMPACT OF INFLATION AND CHANGING PRICES The majority of assets and liabilities of a financial institution are monetary in nature and therefore differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Another significant effect of inflation is on other expenses, which tend to rise during periods of general inflation. Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates. As discussed previously, management's strategy is to attempt to maintain an essentially balanced position between interest-sensitive assets and liabilities in order to protect against wide interest rate fluctuations. CONSOLIDATED BALANCE SHEETS National Commerce Bancorporation and Subsidiaries
December 31 ---------------------- Dollar Amounts in Thousands 1996 1995 ---------- ---------- ASSETS Cash and cash equivalents: Interest-bearing deposits with other banks $ 17,789 $ 16,660 Cash and non-interest-bearing deposits 164,894 144,166 Federal funds sold and securities purchased under agreements to resell 13,219 226,929 ---------- ---------- Total cash and cash equivalents 195,902 387,755 Available-for-sale securities (amortized cost - $699,314 at December 31, 1996, $509,759 at December 31, 1995) 700,775 516,623 Held-to-maturity securities (market value - $804,690 at December 31, 1996, and $765,142 at December 31, 1995) 817,124 762,023 Trading account securities 31,812 20,159 Loans, net of unearned discounts 2,347,973 1,931,213 Less allowance for loan losses 35,514 29,010 ---------- ---------- Net loans 2,312,459 1,902,203 Premises and equipment, net 21,799 18,382 Broker/dealer customer receivables 11,699 13,444 Other assets 108,839 74,453 ---------- ---------- Total assets $4,200,409 $3,695,042 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest-bearing $ 352,676 $ 331,436 Interest-bearing 2,623,754 2,243,334 ---------- ---------- Total deposits 2,976,430 2,574,770 Federal funds purchased and securities sold under agreements to repurchase 298,410 404,746 Broker/dealer customer payables 1,002 1,271 Accounts payable and accrued liabilities 59,064 38,396 Federal Home Loan Bank advances 396,109 372,799 Long-term debt 156,065 6,381 ---------- ---------- Total liabilities 3,887,080 3,398,363 STOCKHOLDERS' EQUITY Preferred stock, no par value -- authorized 5,000,000 shares, none issued Common stock, par value $2 per share - authorized 75,000,000 shares, issued and outstanding 24,385,202 in 1996 and 24,834,581 shares in 1995 48,770 49,669 Additional paid-in capital 61,763 80,605 Retained earnings 201,566 161,878 Unrealized gains on securities, net of taxes 1,230 4,527 ---------- ---------- Total stockholders' equity 313,329 296,679 Total liabilities and stockholders' equity $4,200,409 $3,695,042
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME National Commerce Bancorporation and Subsidiaries Year Ended December 31 ---------------------------- In Thousands, Except Per Share Amounts 1996 1995 1994 -------- -------- -------- INTEREST INCOME Loans $190,879 $159,816 $128,297 Securities: Taxable 83,797 74,365 54,836 Non-taxable 7,765 8,556 8,982 -------- -------- -------- 91,562 82,921 63,818 Trading account securities 1,777 1,240 1,471 Other 2,349 2,488 1,534 -------- -------- -------- Total interest income 286,567 246,465 195,120 -------- -------- -------- INTEREST EXPENSE Deposits 107,965 96,691 63,080 Short-term borrowings 16,546 13,482 9,737 Federal Home Loan Bank advances 23,025 15,809 11,883 Long-term debt 3,565 458 399 -------- -------- -------- Total interest expense 151,101 126,440 85,099 -------- -------- -------- Net interest income 135,466 120,025 110,021 Provision for loan losses 14,134 9,750 7,077 -------- -------- -------- Net interest income after provision for loan losses 121,332 110,275 102,944 -------- -------- -------- OTHER INCOME Trust service income 8,719 8,296 7,967 Service charges on deposits 14,292 13,519 14,359 Other service charges and fees 10,902 5,264 4,386 Broker/dealer revenue 10,079 9,840 10,213 Investment securities gains (losses) 3 228 (498) Other 26,934 16,721 13,513 -------- -------- -------- Total other income 70,929 53,868 49,940 -------- -------- -------- OTHER EXPENSES Salaries and employee benefits 48,468 40,935 39,114 Occupancy expense 8,517 8,665 7,447 Furniture and equipment expense 3,848 3,510 3,301 FDIC assessment 431 2,725 4,375 Other 43,905 35,995 33,337 -------- -------- -------- Total other expenses 105,169 91,830 87,574 -------- -------- -------- Income before income taxes 87,092 72,313 65,310 Income taxes 29,579 23,278 20,968 -------- -------- -------- Net income $ 57,513 $ 49,035 $ 44,342 ======== ======== ======== Net income per common share $2.30 $1.94 $1.77 Weighted average shares outstanding 25,049 25,249 25,051
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS National Commerce Bancorporation and Subsidiaries For Year Ended December 31 ---------------------------------- In Thousands 1996 1995 1994 ---------- ---------- ---------- OPERATING ACTIVITIES Net income $ 57,513 $ 49,035 $ 44,342 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 14,134 9,750 7,077 Provision for depreciation and amortization 3,227 4,249 3,359 Amortization of securities premiums and (accretion of discounts), net 11 (460) 409 Deferred income taxes (1,079) (1,866) (1,008) (Increase) decrease in trading account securities (11,653) (6,652) 49,617 Realized securities (gains) losses (3) (228) 498 (Increase) decrease in broker/dealer customer receivables 1,745 (12,314) 22,515 Increase (decrease) in interest receivable 1,838 (5,532) (4,438) Increase in other assets (28,429) (6,363) (5,673) Increase (decrease) in broker/dealer customer payables (269) 872 (13,219) Increase (decrease) in interest payable (315) 10,907 2,044 Increase in accounts payable and accrued liabilities 23,388 2,368 417 --------- --------- --------- Net cash provided by operating activities 60,108 43,766 105,940 INVESTING ACTIVITIES Available-for-sale securities: Proceeds from maturities of securities 78,456 101,157 213,724 Proceeds from sales of securities 289,492 512,112 82,936 Purchases of securities (557,647) (276,553) (283,964) Held-to-maturity securities: Purchases of securities (149,707) (406,827) (266,452) Proceeds from maturities of securities 94,738 9,731 --- Net increase in loans (422,848) (343,718) (200,785) Purchases of premises and equipment (6,644) (4,455) (5,306) --------- --------- --------- Net cash used in investing activities (674,160) (408,553) (459,847) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts, and savings accounts 249,372 66,154 257,162 Net increase (decrease) in certificates of deposit 152,288 354,226 (22,413) Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase (106,336) 129,610 27,605 Net increase in Federal Home Loan Bank advances 23,310 51,258 151,516 Net proceeds from issuance of bank notes 149,684 --- --- Proceeds from exercise of stock options 3,829 2,163 1,172 Cash dividends (19,367) (17,300) (15,183) Other --- (2) 85 Repurchase of common stock (30,581) --- --- --------- --------- --------- Net cash provided by financing activities 422,805 586,109 399,944 --------- --------- --------- Increase (decrease) in cash and cash equivalents (191,853) 221,322 46,037 Cash and cash equivalents at beginning of year 387,755 166,433 120,396 --------- --------- --------- Cash and cash equivalents at end of year $ 195,902 $ 387,755 $ 166,433 ========= ========= =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY National Commerce Bancorporation and Subsidiaries Unrealized Additional Securities Number of Common Paid-in Retained Gains Dollar Amounts in Thousands Shares Stock Capital Earnings (Losses) Total ----------- -------- --------- --------- --------- --------- Balance at January 1, 1994 24,392,581 $48,785 $ 76,383 $100,825 $ 9,084 $235,077 Add (deduct): Net income 44,342 44,342 Common stock issued upon exercise of stock options 128,066 256 916 1,172 Cash dividends declared ($.62 per share) (15,183) (15,183) Tax benefit of stock options exercised 459 459 Change in unrealized gain on available-for-sale securities, net of taxes (41,948) (41,948) Other 26,474 53 27 420 500 ---------- ------- -------- -------- -------- -------- Balance at December 31, 1994 24,547,121 49,094 77,785 130,404 (32,864) 224,419 Add (deduct): Net income 49,035 49,035 Common stock issued upon exercise of stock options 287,460 575 1,588 2,163 Cash dividends declared ($.70 per share) (17,300) (17,300) Tax benefit of stock options exercised 1,232 1,232 Change in unrealized losses on available-for-sale securities, net of taxes 37,391 37,391 Other (261) (261) ---------- ------- -------- -------- -------- -------- Balance at December 31, 1995 24,834,581 49,669 80,605 161,878 4,527 296,679 Add (deduct): Net income 57,513 57,513 Common stock issued upon exercise of stock options 346,433 693 3,136 3,829 Cash dividends declared ($.79 per share) (19,367) (19,367) Tax benefit of stock options exercised 2,405 2,405 Change in unrealized gain on available-for-sale securities, net of taxes (3,297) (3,297) Shares repurchased/canceled (1,024,928) (2,050) (28,531) (30,581) Common stock issued for acquisitions 229,116 458 4,148 4,606 Other 1,542 1,542 ---------- ------- -------- -------- -------- -------- Balance at December 31, 1996 24,385,202 $48,770 $ 61,763 $201,566 $ 1,230 $313,329 ========== ======= ======== ======== ======== ========
See notes to consolidated financial statements. Notes To Consolidated Financial Statements National Commerce Bancorporation and Subsidiaries December 31, 1996 Note A - Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of National Commerce Bancorporation and its subsidiaries (the Company). The consolidated group provides financial services principally to domestic markets. All significant intercompany transactions have been eliminated in consolidation. Securities In accordance with Financial Accounting Statement (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," securities available for sale are carried at market. The amortized cost of debt securities classified as available for sale is adjusted for amortization of premiums and accretion of discounts to maturity or, in the case of mortgage-backed securities, over the estimated life of the security. Unrealized gains or losses on these securities are included in stockholders' equity net of tax. Securities which the Company intends to hold until maturity are stated at cost adjusted for amortization of premiums and accretion of discounts. Trading account securities consist of securities inventories held for the purpose of brokerage activities and are carried at market. Trading account income includes the effects of adjustments to market values. The adjusted cost of the specific securities sold is used to compute gains or losses on the sale of securities. Interest Rate Swaps Net interest received or paid on an interest rate agreement that is a hedge against interest rate risks is recognized over the life of the contract as an adjustment to interest income (expense) of the hedged financial instrument. Interest Income Interest on loans is accrued and credited to operations based upon the principal amount outstanding. Generally, the accrual of income is discontinued when the full collection of principal or interest is in doubt or when the payment of principal or interest has become contractually 90 days past due unless the obligation is both well secured and in the process of collection. When interest accruals are discontinued, interest credited to income in the current year is reversed and interest accrued in the prior year is charged to the allowance for loan losses. Loan Fees and Costs Loan origination and commitment fees and certain direct costs are deferred and the net amount amortized as an adjustment of the related loans' yields, generally over the contractual life, or estimated economic life if shorter, of the related loans. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed generally by use of the straight-line method. Leasehold improvements are amortized over the period of the leases or the estimated lives of the improvements, whichever period is shorter. Provision for Loan Losses For financial reporting purposes, the provision for loan losses charged to operating expense is based upon a credit review of the loan portfolio, past loan loss experience, current economic conditions and other pertinent factors which form a basis for determining the adequacy of the allowance for loan losses. The allowance is maintained at a level believed adequate by management to absorb potential losses in the loan portfolio. Net Income Per Common Share The number of shares used to compute net income per common share is determined by use of the weighted average method including shares issuable under the stock option plans, when dilutive, and excluding leveraged shares under the Company's Employee Stock Ownership Plan (ESOP), all of which are adjusted retroactively for stock dividends and splits. Income Taxes The Company and its subsidiaries file a consolidated federal income tax return. Each subsidiary provides for income taxes on a separate- return basis and remits to or receives from the Company amounts currently payable or receivable. Income taxes have been provided using the liability method in accordance with FAS No. 109, "Accounting for Income Taxes." Cash Flow Information Cash equivalents include cash, due from banks, federal funds sold and securities purchased under agreements to resell. Generally, federal funds are sold for one-day periods and securities purchased under agreements to resell are for periods of less than two weeks. During 1996, 1995 and 1994, interest paid was $151,416,000, $115,533,000 and $83,055,000, respectively. During 1996, 1995 and 1994, income taxes paid were $27,385,000, $25,329,000 and $23,294,000, respectively. Reclassification Certain account reclassifications have been made to the 1995 and 1994 financial statements to conform with the 1996 presentation, none of which are material. Stock-based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Recent Accounting Pronouncement Issued in June 1996, FAS Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides new accounting and reporting standards for sales, securitizations and servicing of receivables and other financial assets and extinguishments of liabilities. The provisions of the Statement are to be applied to transactions occurring after December 31, 1996, even for transfers of assets pursuant to securitization transactions that previously were established. The Company does not believe that the adoption of this Statement will have a material effect on its consolidated financial condition or results of operations. Note B - Disclosures About Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. These fair values are provided for disclosure purposes only, and do not impact carrying values of financial statement amounts. Cash and Cash Equivalents The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Securities (Including Mortgage-backed Securities) Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Trading Account Assets Fair values for the Company's trading account assets (including off-balance-sheet instruments), which also are the amounts recognized in the balance sheet, are based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans Receivable For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential), credit card loans and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. Deposit Liabilities The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term Borrowings The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values. Long-term Borrowings The fair values of the Company's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Off-balance-sheet Instruments Fair values for the Company's swaps are based on current settlement values. The Company has commitments to extend credit and standby letters of credit. These types of credit are made at market rates; therefore, there would be no market risk associated with these credits which would create a significant fair value liability for the Company.
December 31, 1996 In Thousands Carrying Amount Fair Value --------------- ----------- Financial assets: Cash and cash equivalents $ 195,902 $ 195,902 Available-for-sale securities $ 700,775 $ 700,775 Held-to-maturity securities $ 817,124 $ 804,690 Trading account securities $ 31,812 $ 31,812 Net loans $2,312,459 $2,359,914 Financial liabilities: Deposits $2,976,430 $2,975,952 Federal funds purchased $ 298,410 $ 298,410 Federal Home Loan Bank advances and long-term debt $ 552,174 $ 534,480 Off-balance sheet financial instruments: Interest rate swaps in net receivable position (loss) --- --- December 31, 1996 In Thousands Carrying Amount Fair Value --------------- ----------- Financial assets: Cash and cash equivalents $ 387,755 $ 387,755 Available-for-sale securities $ 516,623 $ 516,623 Held-to-maturity securities $ 762,023 $ 765,142 Trading account securities $ 20,159 $ 20,159 Net loans $1,902,203 $1,958,071 Financial liabilities: Deposits $2,574,770 $2,578,229 Federal funds purchased $ 404,746 $ 404,746 Federal Home Loan Bank advances and long-term debt $ 379,180 $ 409,045 Off-balance sheet financial instruments: Interest rate swaps in net payable position (loss) $ 13 $ (116)
Note C - Restrictions on Cash and Due From Banks The Company's lead bank subsidiary is required to maintain reserve balances with the Federal Reserve Bank. The average amounts of those reserve balances for the years ended December 31, 1996 and 1995, were approximately $4,262,000 and $9,665,000, respectively. NOTE D - Securities The following is a summary of available-for-sale securities and held-to-maturity securities:
December 31, 1996 ---------------------------------------------- Available-for-sale Securities Gross Gross Amortized Unrealized Unrealized Estimated In Thousands Cost Gains Losses Fair Value --------- ---------- ----------- ---------- U.S. Treasury securities and obligations of U.S. government agencies and corporations $521,357 $ 776 $ (2,215) $519,918 Obligations of states and political subdivisions 67,872 1,347 (297) 68,922 Mortgage-backed securities 61,334 2,104 --- 63,438 -------- ------ -------- -------- Total debt securities 650,563 4,227 (2,512) 652,278 Equity securities 48,751 --- (254) 48,497 -------- ------ -------- -------- Total $699,314 $4,227 $ (2,766) $700,775 ======== ====== ======== ======== December 31, 1996 --------------------------------------------- Held-to-maturity Securities Gross Gross Amortized Unrealized Unrealized Estimated In Thousands Cost Gains Losses Fair Value --------- ---------- ----------- ---------- U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 48,300 --- $ (1,404) $ 46,896 Obligations of states and political subdivisions 71,789 2,595 (201) 74,183 Other asset-based securities 107,537 --- (716) 106,821 Mortgage-backed securities 588,942 799 (12,951) 576,790 -------- ------ -------- -------- Total $816,568 $3,394 $(15,272) $804,690 ======== ====== ======== ========
On December 27, 1995, the Company reclassified securities with an amortized cost of $415,469,000 (market value $418,061,000) from held to maturity to available for sale. The Company also reclassified securities with an amortized cost of $495,870,000 (market value $496,429,000) from available for sale to held to maturity. The reclassification was made pursuant to a reassessment of the securities portfolio based on the Financial Accounting Standards Board "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." In accordance with the provisions in the special report, the Company was allowed a one-time reclassification of the securities portfolio between the special report date of November 15, 1995, and December 31, 1995. There were no sales of held-to-maturity securities in 1996 or 1995. At December 31, 1995, the net unrealized gain on the securities reclassified was $559,000. Consistent with the requirements of FAS No. 115, the write-ups (downs) on the reclassified securities are being accreted back to the amortized cost of each specific security based upon its estimated average life. At December 31, 1996, the net unrealized gain on the securities reclassified on December 27, 1995, was $556,000.
December 31, 1995 ---------------------------------------------- Available-for-sale Securities Gross Gross Amortized Unrealized Unrealized Estimated In Thousands Cost Gains Losses Fair Value --------- ---------- ----------- ---------- U.S. Treasury securities and obligations of U.S. government agencies and corporations $114,624 $ 661 $ --- $115,285 Obligations of states and political subdivisions 78,100 1,955 (289) 79,766 Mortgage-backed securities 281,098 5,592 (1,045) 285,645 -------- ------ ------- -------- Total debt securities 473,822 8,208 (1,334) 480,696 Equity securities 35,937 --- (10) 35,927 -------- ------ ------- -------- Total $509,759 $8,208 $(1,344) $516,623 ======== ====== ======= ======== December 31, 1995 ---------------------------------------------- Held-to-maturity Securities Gross Gross Amortized Unrealized Unrealized Estimated In Thousands Cost Gains Losses Fair Value --------- ---------- ----------- ---------- U.S. Treasury securities and obligations of U.S. government agencies and corporations $131,289 $ 270 $ --- $131,559 Obligations of states and political subdivisions 71,722 3,035 (283) 74,474 Mortgage-backed securities 512,222 3,082 (2,466) 512,838 Total debt securities 715,233 6,387 (2,749) 718,871 Equity securities 46,231 40 --- 46,271 -------- ------ ------- -------- Total $761,464 $6,427 $(2,749) $765,142 ======== ====== ======= ========
The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
December 31, 1996 Available-for-sale Securities --------------------- Amortized Estimated In Thousands Cost Fair Value --------- ---------- Due in one year or less $ 11,845 $ 11,920 Due after one year through five years 241,978 242,878 Due after five years through 10 years 332,856 331,285 Due after 10 years 2,550 2,758 -------- -------- 589,229 588,841 Mortgage-backed securities 61,334 63,437 Equity securities 48,751 48,497 -------- -------- Total $699,314 $700,775 ======== ======== December 31, 1996 Held-to-maturity Securities -------------------- Amortized Estimated In Thousands Cost Fair Value --------- ---------- Due in one year or less $ 200 $ 200 Due after one year through five years 3,521 3,480 Due after five years through 10 years 69,364 68,429 Due after 10 years 154,541 155,791 -------- -------- 227,626 227,900 Mortgage-backed securities 588,942 576,790 -------- -------- Total $816,568 $804,690 ======== ========
The amortized cost of securities pledged to secure repurchase agreements and government, public and trust deposits was $992,773,000 and $915,854,000 at December 1996 and 1995, respectively. Note E - Loans Analyses of loans outstanding by category were as follows:
December 31 ------------------------ In Thousands 1996 1995 Commercial, financial and agricultural $ 466,830 $ 399,580 Real estate - construction 170,188 122,720 Real estate - mortgage 602,064 520,657 Consumer 1,086,104 871,407 Lease financing 22,790 18,678 Unearned discounts (3) (1,829) ---------- ---------- 2,347,973 1,931,213 Allowance for loan losses (35,514) (29,010) ---------- ---------- Net loans $2,312,459 $1,902,203 ========== ==========
The Company and its subsidiaries have granted loans to officers and directors of the Company and its subsidiaries and to their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $44,696,000 and $31,187,000 at December 31, 1996 and 1995, respectively. During 1996, $90,286,000 of new loans to related parties were made and payments totaled $76,777,000. Note F - Allowance for Loan Losses Changes in the allowance for loans losses were as follows:
Year Ended December 31 In Thousands 1996 1995 1994 ------- ------- ------- Balance at beginning of year $29,010 $24,310 $21,467 Provision for loan losses 14,134 9,750 7,077 Increase due to acquisitions 288 --- --- Decrease due to loan sale (403) --- --- Loans charged off, net of recoveries of $2,823 in 1996, $2,199 in 1995 and $2,240 in 1994 (7,515) (5,050) (4,234) ------- ------- ------- Balance at end of year $35,514 $29,010 $24,310 ======= ======= =======
Note G - Non-performing Assets and Past Due Loans The following table summarizes the Company's non-performing assets (all of which are domestic): December 31 ----------------- In Thousands 1996 1995 ------- ------- Non-accrual loans $ --- $ --- Other real estate owned --- 30 ------- ------- Total $ --- $ 30 ======= ======= There were no non-accrual loans at December 31, 1996 or 1995. There were no restructured loans at December 31, 1996 or 1995. Accruing loans past due 90 days or more were $3,482,000 and $3,252,000 at December 31, 1996 and 1995, respectively. Note H - Premises and Equipment The following is a summary of the premises and equipment accounts:
December 31 ---------------- In Thousands 1996 1995 ------- ------- Land $ 2,240 $ 2,240 Premises 2,364 2,364 Furniture and equipment 29,828 22,780 Leasehold improvements 13,839 13,262 Construction in progress 146 846 ------- ------- 48,417 41,492 Less accumulated depreciation and amortization 26,618 23,110 ------- ------- Premises and equipment, net $21,799 $18,382 ======= =======
Note I - Deposits Analyses of deposits outstanding by category were as follows:
December 31 ---------------------- In Thousands 1996 1995 ---------- ---------- Non-interest-bearing $ 352,676 $ 331,436 Money market checking 275,471 274,876 Savings 79,599 86,989 Money market savings 970,838 735,911 Certificates of deposit less than $100,000 728,249 677,733 Certificates of deposit $100,000 and over 569,597 467,825 ---------- ---------- Total $2,976,430 $2,574,770 ========== ==========
The time deposit maturities at December 31 for the next five years and thereafter are as follows: (In thousands) 1997 $1,173,842 1998 65,413 1999 21,022 2000 12,205 2001 9,030 Thereafter 16,334 ---------- $1,297,846 ========== Note J - Lease Commitments The Company leases land, certain bank premises and equipment. Total rental expense for all operating leases is as follows:
Year Ended December 31 -------------------------- In Thousands 1996 1995 1994 ------ ------ ------ Minimum rentals $5,024 $4,456 $3,996 Contingent rentals 852 823 848 ------ ------ ------ Total $5,876 $5,279 $4,844 ====== ====== ======
The contingent rentals are based on additional usage of equipment in excess of a specified minimum. Also, for land and bank premises, contingent rentals are based on escalation and parity clauses for real estate. Future minimum payments, by year and in the aggregate, under non-cancellable operating leases with initial or remaining terms of one year or more, consisted of the following at December 31, 1996:
In Thousands 1997 $ 4,567 1998 3,890 1999 3,651 2000 3,197 2001 2,845 Thereafter 16,863 ------- Total minimum lease payments $35,013 =======
The various leases on the land and bank premises may be renewed for periods of five to 70 years upon the expiration of the respective leases. Note K - Credit Facilities During 1996, the Company obtained numerous advances from the Federal Home Loan Bank totaling $280 million. The advances ranged from $20 million to $50 million at floating interest rates equal to one month LIBOR, which ranged from 5.38 percent to 5.56 percent. Maturity dates ranged from January 26, 1998, until November 6, 1998. At December 31, 1996, the Company had pledged as collateral $277,725,000 of its loans secured by mortgages on one-to-four family residential properties and certain securities totaling $305,916,000. During 1995, the Company obtained numerous advances from the Federal Home Loan Bank totaling $394 million. The advances ranged from $19 million to $50 million with interest rates from 5.50 percent to 5.94 percent. Maturity dates ranged from July 18, 1997, until August 18, 2000. At December 31, 1995, the Company had pledged as collateral $237,333,000 of its loans secured by mortgages on one-to-four family residential properties and certain securities totaling $233,407,000. Future minimum payments, by year and in the aggregate, related to the advances with initial or remaining terms of one year or more, consisted of the following at December 31, 1996:
In Thousands 1997 $165,225 1998 177,002 1999 14,822 2000 12,647 2001 9,837 Thereafter 16,577 -------- Total $396,110 ========
Long-term debt at December 31, 1996 and 1995, consisted primarily of the following unsecured term notes of the Company's lead subsidiary National Bank of Commerce (NBC): In Thousands Term notes originated October 23 and December 11, 1987, bearing interest payable at calendar quarters with a variable rate which is repriced every three years based on the yield on three-year United States Treasury notes. The next reprice date for the notes is 1997. At December 31, 1996, the rates ranged from 7.04 percent to 7.66 percent, maturing October 23 and December 11, 2007. $5,347 Term notes originated December 3 and December 17, 1987, bearing interest payable at calendar quarters with a variable rate which is repriced every three years based on the yield on United States Treasury notes. The next reprice date for the notes is 1997. At December 31, 1996, the rates ranged from 7.57 percent to 7.69 percent, maturing December 3 and December 17, 2007. $1,025 ------ Total $6,372 ====== On August 24, 1996, NBC issued $150 million in regular floating-rate bank notes due August 24, 1998, which are included in long-term debt. Interest is payable monthly on the 24/th/ day of each month. The interest rate for each interest period will be reset monthly based on the one-month London interbank offered rate plus a spread of .09 percent. The rates ranged from 5.52 percent to 5.75 percent during the year. This rate was approximately 5.75 percent at December 31, 1996. The notes are not redeemable or repayable prior to maturity. At December 31, 1996, the Company had available $7 million in unsecured lines of credit with other financial institutions consisting of a $5 million line of credit which is contractual in nature and requires no compensating balances or fees and expires May 31, 1997, and a $2 million line of credit which expires June 29, 1997. There were no borrowings against these lines during 1996. Note L - Stock Options During 1994, the shareholders approved the Company's 1994 Stock Plan, which reserved an additional 1,050,000 shares of the Company's common stock for use under the Plan. Options become exercisable in equal parts over the succeeding five years from the date of grant. Unoptioned shares under previous plans were transferred to reserved shares for the 1994 Plan. The 1990 Stock Plan reserved an additional 675,000 shares of the Company's common stock for the granting of options and restricted stock to key employees. The 1990 Plan amended the Company's 1986 Stock Option Plan and the 1982 Incentive Stock Option Plan and merged such amended and restated plans into the 1990 Stock Plan. Options became exercisable six months subsequent to the date of grant under the 1982 Plan and became exercisable in equal parts over the succeeding five to 10 years under the 1986 and 1990 Plans. At the discretion of the 1982 Plan's administering committee (the committee), stock appreciation rights were attached to some of the options, whereby the optionee may receive cash for the difference between the exercise price of the related option and the fair market value of the Company's common stock. The Plans are restricted to eligible officers and key employees. The committee recently authorized a one million share addition to the option reserve, pending shareholder approval in April 1997. The following amounts reflect the effect of all stock dividends and splits declared through 1996: 1996 1995 Weighted Weighted average average exercise exercise Options price Options price --------- ------- --------- ------- Outstanding January 1 1,721,516 $16.999 1,856,224 $15.313 Granted 266,413 $30.263 237,806 $24.572 Exercised (356,795) $ 9.125 (318,871) $ 9.189 Cancelled (48,582) $22.518 (53,643) $14.861 --------- ------- --------- ------- Outstanding December 31 1,582,552 $19.408 1,721,516 $16.999 ========= ======= ========= ======= Exercisable at year end 983,297 $18.448 1,137,336 $16.097 Unoptioned shares 61,890 328,928 Total shares reserved 1,644,442 2,050,444 Weighted average fair value of options granted during the year $ 8.19 $ 4.52 Exercise prices for options outstanding as of December 31, 1996, ranged from $8.66 to $36.00. The weighted average remaining contractual life of those options is approximately six and one-half years. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issues to Employees" (APB No. 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.5 percent and 6.0 percent; dividend yields of 2.3 percent and 2.9 percent; volatility factors of the expected market price of the Company's common stock of .30 and .18; and a weighted average expected life of the option of five years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows: In thousands, except per share data 1996 1995 ------- ------- Pro forma net income $57,255 $48,969 Pro forma earnings per share: Primary $ 2.29 $ 1.94 Note M - Debt and Dividend Restrictions In accordance with federal banking laws, certain restrictions exist regarding the ability of the banking subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. The approval of certain regulatory authorities is required to pay dividends in excess of earnings retained in the current year plus retained net earnings for the preceding two years. As of December 31, 1996, $39,108,000 of undistributed earnings of the banking subsidiaries, included in consolidated retained earnings, was available for distribution to the Company as dividends without prior regulatory approval. For the thrift subsidiaries the undistributed earnings are such that any dividend restrictions would not prevent the payment of routine dividends. Under Federal Reserve regulations, the banking subsidiaries are also limited as to the amount they may loan to affiliates, including the Company, unless such loans are collateralized by specified obligations. At December 31, 1996, the maximum amount available for transfer from the banking subsidiaries to the Company in the form of loans approximated 11 percent of consolidated net assets. Note N - Employee Benefit Plans The Company has a defined benefit non-contributory pension plan covering substantially all of its full-time employees who have served continuously for one year. Amounts determined under ERISA are funded annually. Benefits are based on compensation and years of service. The following tables set forth the plan's status and amounts recognized in the Company's consolidated financial statements: December 31 ---------------------- In Thousands 1996 1995 --------- --------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $37,413 at December 31, 1996, and $37,031 at December 31, 1995 $ 39,020 $ 39,713 Projected benefit obligation for services rendered to date (45,274) $(45,148) Plan assets at fair value (stocks and bonds) 48,243 43,491 ======== ======== Plan assets in excess of (under) projected benefit obligation 2,969 (1,657) Unrecognized net assets (1,696) (2,074) Unrecognized net loss 7,676 12,287 Unrecognized prior service cost (1,731) (1,604) -------- -------- Prepaid pension cost included in other assets $ 7,218 $ 6,952 ======== ======== In Thousands 1996 1995 1994 ------- -------- -------- Net pension cost included the following components: Service cost - benefits earned during the period $ 1,499 $ 1,210 $ 1,607 Interest cost on projected benefit obligation 3,088 2,941 2,652 Actual return on plan assets (gain) loss (7,944) (6,254) 787 Net amortization and deferral 3,438 2,193 (4,911) ------- -------- -------- Net periodic pension expense $ 81 $ 90 $ 135 ======= ======== ======== The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.75 percent and 4.25 percent, respectively, at December 31, 1996, and 7.25 percent and 4.25 percent, respectively, at December 31, 1995. The expected long-term rate of return on plan assets was 10.25 percent in 1996 and 1995. The assumed normal retirement age was 64 in 1996 and 1995. The Company and its subsidiaries previously maintained an Employee Stock Ownership Plan (ESOP) which was generally available to all full-time employees. Annual contributions to this plan, which were discretionary, were $400,000 in both 1995 and 1994. During 1996, the Company approved a plan to merge the ESOP into the Company's Taxable Income Retirement Account Plan (TIRA). TIRA Plan participants can elect to defer a percentage of their annual earnings, subject to the maximum amount allowed of $9,240. The Company matches participants' basic contributions up to a specified percentage of basic contributions. The TIRA Plan and the Retirement Plan net assets include equity securities of the Company. Note O - Other Employee Benefits In addition to the Company's defined benefit pension plan, the Company sponsors retirement medical and life insurance plans that provide postretirement healthcare and life insurance benefits. Employees must retire under the pension plan with at least 15 years of service and must have participated in the active medical plan for at least 10 years prior to retirement to be eligible for retiree medical plan benefits. The plan is contributory and contains other cost-sharing features such as deductibles and coinsurance. The Company's policy to fund the cost of medical benefits to employees varies by age and service at retirement. Employees must retire under the pension plan to be eligible for retiree life insurance benefits. The following table represents the plan's funded status reconciled with amounts recognized in the Company's statement of income:
December 31 ---------------------------- In Thousands 1996 1995 1994 -------- -------- -------- Accumulated postretirement benefit obligation (APBO): Retirees $(2,778) $(3,217) $(2,919) Fully eligible active plan participants --- (91) (62) Other active plan participants --- (2,265) (1,552) ------- ------- ------- Postretirement benefit obligation in excess of plan assets (2,778) (5,573) (4,533) Unrecognized transition obligation 324 3,003 3,180 Unrecognized net (gain) or loss 1,114 1,047 372 Unrecognized prior service cost (634) --- --- ------- ------- ------- Accrued expense $(1,974) $(1,523) $ (981) ======= ======= =======
Both the retiree medical and life insurance plans were amended during 1996. The amendment to the retiree medical plan reduced the APBO by $2,872,000. This amount was used to offset the unrecognized transition obligation of $2,238,000 and the remaining amount of $634,000 will be amortized as negative prior service cost beginning in 1997. The retiree life insurance benefit was eliminated for retirements after December 31, 1996. Net periodic postretirement benefits costs include the following components:
In Thousands 1996 1995 1994 ----- ----- ----- Service cost $ 189 $ 142 $ 149 Interest cost 414 387 330 Net amortization and deferral 211 191 202 ----- ----- ----- Net periodic postretirement benefits cost $ 814 $ 720 $ 681 ===== ===== =====
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e., healthcare cost trend rate) is 10 percent for 1996 and 1995 and is assumed to decrease gradually to 5.5 percent for 2005 and thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed healthcare cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by approximately $96,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1996 by approximately $235,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.50 percent at December 31, 1996 and 1995. The Company also provides healthcare and various other benefits primarily to its full-time employees through its Flex-Ability plan. This plan allows employees to choose the coverages they desire. The costs of these benefits are shared between the Company and the employee. This is accomplished by giving flex credits to participating employees to help reduce their costs. Expenses exceeding 1 percent of total revenue which are included in other expenses are broker-dealer commissions of $3,446,000, $3,484,000 and $3,874,000 paid to employees for the years ended December 31, 1996, 1995 and 1994, respectively, and 1996 sales promotion expense of $5,900,000. Note P - Income Taxes The Company accounts for income taxes using the liability method required by FAS No. 109, "Accounting for Income Taxes." The components of the provision for income taxes for the three years ended December 31 were:
In Thousands 1996 1995 1994 -------- -------- -------- Federal: Current $28,116 $23,008 $19,107 Deferred (credits) (1,079) (1,866) (1,008) ------- ------- ------- 27,037 21,142 18,099 State 2,542 2,136 2,869 ------- ------- ------- Income taxes $29,579 $23,278 $20,968 ======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax assets and liabilities are summarized as follows: December 31 ---------------------- In Thousands 1996 1995 -------- -------- Deferred tax assets: Provision for loan losses over charge-offs $13,450 $11,285 Other 2,049 1,620 ------- ------- Total deferred tax assets 15,499 12,905 ------- ------- Deferred tax liabilities: Net unrealized gains on available-for- sale securities $ 786 $ 2,896 Pension costs 1,885 1,895 FAS No. 91 net deferred costs 2,755 2,264 Other 2,825 1,791 ------- ------- Total deferred tax liabilities 8,251 8,846 ------- ------- Net deferred tax assets $ 7,248 $ 4,059 ======= ======= Income taxes varied from the amount computed at the statutory federal income tax rate as follows:
1996 1995 1994 --------------- ----------------- ----------------- In Thousands AMOUNT % Amount % Amount % ------- ----- ------- ------- ------- ------- Federal income tax at statutory rate $30,482 35.00% $25,310 35.00% $22,858 35.00% Add (deduct): State income taxes net of federal tax benefits 1,652 1.90 1,388 1.92 1,865 2.85 Non-taxable interest income (2,677) (3.07) (3,700) (5.12) (3,586) (5.49) Other items, net 122 .13 280 .39 (169) (.25) ------- ----- ------- ------- ------- ------- Income taxes $29,579 33.96% $23,278 32.19% $20,968 32.11% ======= ===== ======= ======= ======= =======
Income taxes (credits) applicable to securities gains (losses) for 1996, 1995 and 1994 which are included in the provision for income taxes were $1,000, $89,000 and $(194,000), respectively. Note Q - Commitments and Contingent Liabilities For purposes other than trading, the Company and its subsidiaries have various commitments and contingent liabilities, such as commitments to extend credit, letters of credit, guarantees and liability for assets held in trust, which arise in the normal course of business. Loan commitments are made to accommodate the financial needs of the Company's customers. Standby letters of credit commit the Company to make payments on behalf of customers when certain specified future events occur. Commercial letters of credit are issued to facilitate the purchase of foreign and domestic merchandise. Both types of letters of credit have credit risk essentially the same as that involved in extending loans to customers and are subject to the bank's normal credit policies. Collateral primarily consists of securities, cash, receivables, inventory and equipment. It is obtained based on management's credit assessment of the customer. Management does not anticipate any significant losses as a result of these transactions. The Company's maximum exposure to credit loss at December 31 was as follows:
In Thousands 1996 1995 -------- -------- Loan commitments $560,095 $789,210 Standby letters of credit $ 41,428 $ 20,792 Commercial letters of credit $ 3,691 $ 3,696
Interest rate agreements are designed to provide an exchange of interest payments computed on notional amounts that will offset all or part of any undesirable change in cash flows resulting from market rate changes on designated (hedged) transactions. The Company limits the credit risks of the interest rate agreements by initiating the transactions with counter parties with significant financial positions. The Company's agreements modify the interest characteristics of its outstanding debt from a fixed- to a floating-rate basis. These agreements involve the receipt of fixed-rate amounts in exchange for floating-rate interest payments over the life of the agreement without an exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. The related amount payable to or receivable from counterparties is included in other liabilities or assets. The fair values of the swap agreements are not recognized in the financial statements. The Company's broker-dealer subsidiary, for trading purposes, enters into transactions involving financial instruments with off-balance-sheet risk in order to meet the financing and hedging needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include forward contracts, when issued contracts and options written. All such contracts are for United States Treasury, federal agency or municipal securities. These financial instruments involve varying degrees of credit and market risk. The contract amounts of those instruments reflect the extent of involvement in particular classes of financial instruments. Risks arise from the possible inability of counter parties to meet the terms of their contracts and from movements in securities' market values and interest rates. The extent of the Company's involvement in financial instruments with off-balance-sheet risk as of December 31, 1996, was as follows:
In Thousands 1996 1995 ------- -------- Forward contracts: Commitments to purchase $44,373 $212,836 Commitments to sell $45,976 $217,847 When issued contracts: Commitments to purchase $15,778 $ 10,388 Commitments to sell $17,287 $ 10,633 Interest rate agreements (Notional amount) --- $150,000 Option contracts: Written option contracts --- $ 2,000 Purchased option contracts --- $ 2,000
The Company and its subsidiaries are involved in certain legal actions and claims arising in the ordinary course of business. Although the ultimate outcome cannot be ascertained at this time, it is the opinion of management (based on advice of legal counsel) that all litigation and claims should be resolved without material effect on the Company's financial position or results of operations. Note R - Line of Business - Services Offered The Company is engaged in a single line of business as a bank holding company. This encompasses several significant classes of services including traditional banking, investment services, trust services, investment advice, in-store banking to licensed banks, electronic payment systems and data processing services. The various services contributed to other income as follows:
(In thousands) 1996 1995 1994 ------- ------- ------- Banking $23,917 $19,970 $19,681 In-store banking to licensed banks 18,590 14,424 10,487 Investment services (broker/dealer) 10,079 9,840 10,213 Trust and investment advice 8,719 8,296 7,967 Electronic payment, data processing and card services 4,392 --- --- Other 5,232 1,338 1,592 ------- ------- ------- $70,929 $53,868 $49,940 ======= ======= =======
Note S - Regulatory Matters The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to total assets (as defined) of 8 percent, 4 percent and 4 percent, respectively. Management believes, as of December 31, 1996, that the Company exceeds all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent regulatory notification categorized the Company and its banking subsidiaries as well capitalized. Well-capitalized institutions are required to maintain a total capital to risk-weighted assets ratio of at least 10 percent, a Tier 1 capital to risk-weighted assets ratio of at least 6 percent and a Tier 1 capital to total assets (leverage ratio) of at least 5 percent. There are no conditions or events since that notification that management believes have changed the institution's category. The Company and NBC's actual capital amounts and ratios are presented in the following table:
The Company NBC Actual Actual ----------------------- ------------------- Amount Ratio Amount Ratio ------------ --------- --------- -------- As of December 31, 1996 (in thousands) Total capital (to risk- weighted assets) $342,828 12.30% $231,066 11.48% Tier 1 capital (to risk- weighted assets) $307,981 11.05% $206,223 10.24% Tier 1 capital (to total assets) $307,981 7.33% $206,223 7.15% As of December 31, 1995 Total capital (to risk- weighted assets) $321,153 13.52% $228,265 12.56% Tier 1 capital (to risk- weighted assets) $292,143 12.30% $207,203 11.41% Tier 1 capital (to total assets) $292,143 7.91% $207,203 8.06%
Note T - National Commerce Bancorporation Financial Information (Parent Company Only) Balance Sheets December 31 In Thousands 1996 1995 -------- -------- ASSETS Cash* $ 205 $ 2,261 Investments in: Bank subsidiaries* 273,541 267,749 Non-bank subsidiaries* 33,083 26,403 Other 7,030 1,606 -------- -------- Total assets $313,859 $298,019 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued liabilities $ 530 $ 1,340 Stockholders' equity 313,329 296,679 -------- -------- Total liabilities and stockholders' equity $313,859 $298,019 ======== ======== *Eliminated in consolidation.
Statements of Income Year Ended December 31 In Thousands 1996 1995 1994 -------- -------- -------- Income: Dividends from bank and thrift subsidiaries* $ 47,045 $ 26,330 $ 32,938 Dividends from non-bank subsidiaries* 5,500 2,500 3,500 Income from bank subsidiaries* 50 132 154 Other (250) --- 321 -------- -------- -------- 52,345 28,962 36,913 Expenses: Salaries and employee benefits 63 50 65 Other (567) 2,138 774 -------- -------- -------- (504) 2,188 839 Income before income taxes (credits) and equity in undistributed earnings of subsidiaries 52,849 26,774 36,074 Income taxes (credits) 116 (808) (142) -------- -------- -------- 52,733 27,582 36,216 Equity in undistributed net income of: Bank and thrift subsidiaries (1,457) 15,653 6,066 Non-bank subsidiaries 6,237 5,800 2,060 -------- -------- -------- Net income $ 57,513 $ 49,035 $ 44,342 ======== ======== ========
*Eliminated in consolidation. Statements of Cash Flows
Year Ended December 31 ------------------------------ In Thousands 1996 1995 1994 -------- -------- -------- Operating activities: Net income $ 57,513 $ 49,035 $ 44,342 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiaries (4,780) (21,453) (8,126) Decrease in other assets 1,438 522 1,914 Increase (decrease) in liabilities (810) 442 (795) -------- -------- -------- Net cash provided by operating activities 53,361 28,546 37,335 Investing activities: Investment in subsidiaries (9,298) (12,000) (26,298) Financing activities: Cash used to repurchase/retire stock (30,581) --- --- Proceeds from exercise of stock options 3,829 2,163 1,172 Cash dividends paid (19,367) (17,300) (15,183) Other --- --- 75 -------- -------- -------- Net cash used in financing activities (46,119) (15,137) (13,936) Increase (decrease) in cash (2,056) 1,409 (2,899) Cash at beginning of year 2,261 852 3,751 -------- -------- -------- Cash at end of year $ 205 $ 2,261 $ 852 ======== ======== ========
Note U - Quarterly Results of Operations (Unaudited)
Quarter ---------------------------------------- In Thousands, Except Per Share Data First Second Third Fourth -------- -------- -------- ------- 1996: Interest income $ 67,250 $ 70,445 $ 72,420 $76,452 Interest expense 34,919 36,615 39,026 40,541 Net interest income 32,331 33,830 33,394 35,911 Provision for loan losses 2,842 4,453 4,149 2,690 Other income 14,931 19,118 18,654 18,223 Securities gains (losses) 25 (257) 194 41 Other expenses 24,421 27,356 25,579 27,813 Income before income taxes 20,024 20,882 22,514 23,672 Income taxes 6,748 7,119 7,789 7,923 Net income $ 13,276 $ 13,763 $ 14,725 $15,749 Net income per common share $.53 $.55 $.59 $ .63 1995: Interest income $ 55,828 $ 57,042 $ 64,307 $69,288 Interest expense 28,031 28,669 32,987 36,753 Net interest income 27,797 28,373 31,320 32,535 Provision for loan losses 1,708 1,685 3,011 3,346 Other income 12,455 14,430 13,310 13,445 Securities gains 53 115 51 9 Other expenses 22,064 23,686 22,317 23,763 Income before income taxes 16,533 17,547 19,353 18,880 Income taxes 5,313 5,684 6,587 5,694 Net income $ 11,220 $ 11,863 $ 12,766 $13,186 Net income per common share $.45 $.47 $.51 $ .52
EX-21 6 SUBSIDIARIES OF 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, 1996. % 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 100.00 Nashville Bank of Commerce Tennessee NCBC 100.00 NBC Bank, FSB (Knoxville) Tennessee NCBC 100.00 Commerce Capital Management, Inc. Tennessee NCBC 100.00 Monroe Properties, Inc. Tennessee NCBC 100.00 Commerce Corporate Advisors, Inc. Tennessee Nashville 100.00 National Commerce Bank Tennessee Nashville 100.00 Services, Inc. Commerce Finance Company Tennessee NCBC 100.00 Commerce Acquisition Corp Tennessee NCBC 100.00 NBC Bank, FSB (Belzoni) Mississippi CAC 100.00 Brooks, Montague & Associates, Inc. Tennessee NCBC 100.00 TransPlatinum Service Corp. Tennessee NCBC 100.00 Kenesaw Leasing, Inc. Tennessee Knoxville 100.00 All of the above subsidiaries are included in the consolidated financial statements contained in the report. EX-23 7 ERNST & YOUNG CONSENT 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 February 14, 1997, included in the 1996 Annual Report to Shareholders of National Commerce Bancorporation. We also consent to the incorporation by reference in the Registration Statements pertaining to the National Commerce Bancorporation 1986, 1990 and 1994 Stock Plans (Form S-8 No. 33-25917, Form S-8 No. 33-38552, Form S-8 No. 33-88440) and pertaining to the National Bank of Commerce Taxable Income Reduction Account Plan (Form S-8 No. 33-23100) of our report dated February 14, 1997, with respect to the consolidated financial statements of National Commerce Bancorporation incorporated herein by reference. /s/ Ernst & Young LLP --------------------- Memphis, Tennessee March 13, 1997 EX-27 8 ARTICLE 9 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS 12-MOS DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 164,683 144,166 17,789 16,660 13,219 226,929 31,812 20,159 700,775 516,623 817,124 762,023 804,690 765,142 2,347,973 1,931,213 35,514 29,010 4,200,409 3,695,042 2,976,430 2,574,770 499,633 431,427 60,066 39,667 350,951 352,499 0 0 0 0 313,329 296,679 0 0 4,200,409 3,695,042 190,879 159,816 91,562 82,921 4,126 3,728 286,567 246,465 107,965 96,691 151,101 126,440 135,466 120,025 14,134 9,750 3 228 105,169 91,830 87,092 72,313 87,092 72,313 0 0 0 0 57,513 49,035 2.30 1.94 2.29 1.94 3.89 4.14 0 0 3,482 3,252 0 0 0 1,136 29,010 24,310 10,338 7,249 2,823 2,199 35,514 29,010 35,514 29,010 0 0 0 0
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