-----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, WkBBhSsvhyzMQu8yhyFkw0uVE8FAfYFD1RPEdpT293RIIah4T8nwOUInsf2d9YHc 69aBNA4ihfH/IpeltS4d4A== 0000931763-98-000761.txt : 19980330 0000931763-98-000761.hdr.sgml : 19980330 ACCESSION NUMBER: 0000931763-98-000761 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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: SEC FILE NUMBER: 000-06094 FILM NUMBER: 98575491 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, 1997 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 6, 1998, was approximately $1,476,550,000. The number of shares of common stock outstanding, as of March 6, 1998, was 49,137,390. 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 1998 Annual Meeting of Shareholders of National Commerce Bancorporation are incorporated by reference into Part III. Portions of the 1997 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, Roanoke, Virginia ("Roanoke"), (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"), Memphis, Tennessee (9) Monroe Properties, Inc. ("Monroe") Memphis, Tennessee and National Commerce Capital Trust I ("Trust I"), Memphis, Tennessee. NCBC provides NBC, Nashville, Knoxville, and Roanoke ("the Banks"), Commerce Capital, Brooks Montague, TransPlatinum, USI, Monroe and Trust I with advice and counsel relating to financial and employee benefit matters, performs certain record-keeping functions relating to compliance with accounting and regulatory requirements and provides assistance in obtaining additional financing. 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 branch facility in Somerville, Tennessee. NBC has five active, wholly owned, non-banking subsidiaries, Commerce General Corporation ("Commerce General"), Commerce Finance Company ("Commerce Finance"), NBC Capital Markets Group, Inc. ("Capital Markets") NBC Insurance Services, Inc. ("NBC Insurance") and National Commerce Bank Services, Inc. ("NCBS"). Commerce General provides a variety of data processing services to the Banks and other commercial enterprises. Commerce Finance emphasizes second- and third-mortgage loans. Capital Markets was chartered as Commerce Investment Corporation in September 1986 to serve the needs of individual investors as a broker-dealer of investment products, including stocks, bonds, municipal obligations, mutual funds and unit investment trusts. The name was changed to NBC Capital Markets Group, Inc. effective January 1, 1997. NBC Insurance provides life, property and casualty insurance and annuities through NBC's in-store retail banking system. NCBS provides supermarket banking services to other financial institutions. -2- 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 three traditional branches. The Nashville Bank also operates four 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 14 SUPER MONEY MARKET branch locations and one traditional branch location in the Knoxville area with one branch location in Pigeon Forge, Tennessee, 14 branch locations in the Raleigh-Durham, North Carolina area, five 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 in Southaven, Mississippi and one branch in Paris, Tennessee. The Knoxville Bank has one branch each in the following Georgia locations: Calhoun, Canton, Cumming, Dalton, Ft. Oglethorpe, Gainesville, Moultrie, and Rome. The Knoxville Bank also operates one stand-alone ATM in the Knoxville area. The Knoxville Bank also offers loans on an indirect basis through area automobile dealers. The Knoxville Bank has two subsidiaries, Kenesaw Leasing, Inc. and J & S Leasing, Inc., both equipment leasing firms. On July 13, 1993, the Company acquired First Federal Savings Bank, a $4.8 million institution located in Belzoni, Mississippi. The name was changed to NBC Bank, FSB, and its business expanded into Virginia. In early 1998, the Belzoni, Mississippi branch was sold and Roanoke now has eight SUPER MONEY MARKET branches in the Roanoke, Virginia area. NCBC, through NCBS, has executed SUPER MONEY MARKET sublicense agreements with other financial institutions. Currently, agreements have been executed covering locations in over 48 states and foreign countries, including Peru, Canada, Australia, Chile, Colombia, Guam and Portugal. As of year end, NCBS has assisted various banks with over 1,068 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, Tennessee. On February 29, 1996, NCBC acquired the remaining 70% of TransPlatinum. -3- U.S.I. Alliance Corp. was organized in November 1995, and commenced business in February, 1996. USI primarily leases personal lockboxes in long-term care facilities. National Commerce Capital Trust I was organized in March 1997 as a special purpose company to offer floating rate capital trust pass-through securities. Substantially all employees of the Company are also employees of one or more of its direct or indirect subsidiaries. NATIONAL BANK OF COMMERCE: From its inception in 1873, and through the granting of its charter as a national bank in 1933, NBC has operated a full-service commercial bank and trust business in metropolitan Memphis, Tennessee. As of December 31, 1997, NBC operated 13 traditional branches and 20 SUPER MONEY MARKET facilities, 17 in metropolitan Memphis and one in Cleveland, Tennessee, two in Jackson, Tennessee and one branch in Somerville, Tennessee. At December 31, 1997, NBC had $2,075,787,000 in deposits and was the third largest bank in the Memphis service area (population approximately 1,000,000) and the sixth largest bank in Tennessee, measured by deposits. Memphis is the largest city in Tennessee and is the center of a diversified distribution, commercial and agricultural area. NBC provides complete banking facilities and services to the Mid-South area through various divisions and departments, described below. The retail banking activity is carried on through the Branch Banking Division, the Money Market Division, the Executive Banking Division, and the Consumer Services Division. NBC'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 NBC is provided by its Human Resource, Marketing, Operations and Financial/Administrative Divisions. Retail Services: NBC provides its customers with a variety of retail banking services. Among such services are checking accounts and savings programs, night depository services, safe deposit facilities and several consumer loan programs, including installment loans for the purchase of consumer goods and revolving lines of credit. Customers are provided with current information regarding these services through NBC's marketing program. NBC has installed 48 ATMs (24-hour tellers), including ATMs located at Plough, Inc., Graceland, Methodist Hospital, Memphis International Airport, University of Memphis campus, Southern College of Optometry, Sitel Corporation, an Amoco Station and Rhodes College campus. At year end, consumer loans and leasing activity accounted for approximately 36% 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, 1997, NBC had consumer lines of credit totaling $76,091,000. NBC sold substantially all of its credit card portfolio in fourth quarter 1997 and now offers various credit card plans through MBNA Corp. Commercial Services: NBC provides a variety of services for commercial enterprises, including checking accounts, certificates of deposit, cash management services, short-term loans for seasonal or working capital purposes, and term loans for fixed assets and expansion purposes. In addition to these general services, NBC also provides accounts receivable and inventory -4- financing, commodity loans and commercial loans tailored to an individual customer's needs. Secured and unsecured commercial loans and commodity loans, at December 31, 1997, accounted for approximately 31% of the loans made by NBC. Real estate construction and long-term mortgage loans (including first mortgage refinance loans) accounted for approximately 33% of NBC's outstanding loans at December 31, 1997. 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 financial services as well as advice in various fields of banking policy and operations. Aggregate balances of correspondent banks at NBC averaged approximately $45,781,000 in 1997. 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, 1997, the Trust Division administered assets valued at approximately $2,904,000,000. International Services: NBC has established 11 accounts with foreign banks, primarily in Europe, to handle international trade relationships. Two foreign banks have accounts with NBC for the same purpose. NBC does not now, nor does it intend to, engage in speculative trading of foreign currencies. Non-Bank Subsidiaries: In addition to computer services for NBC, Commerce General offers hospital processing. During the year ended December 31, 1997, approximately 83% of the total revenues of 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 Capital Markets. At December 31, 1997, Capital Market's capital totaled $16,733,000. 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, 1997 Commerce Finance had two offices and employed 2 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. National Commerce Bank Services, Inc. provides supermarket banking services to other financial institutions 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, 1997, NBC had $3,206,008,000 in assets. According to December 31, 1997 call reports, one of the other banks in metropolitan Memphis is 4.4 times larger and another is approximately 1.5 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. -5- 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, 1997, NBC and its subsidiaries employed approximately 193 officers, 514 other full-time employees, 74 part -time employees and 46 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 $10,000 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 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 three traditional branches and 22 SUPER MONEY MARKET facilities located within Kroger stores and four stand-alone ATMs in the Nashville area. At December 31, 1997, the Nashville Bank employed 38 officers, 95 other full-time employees, 18 part-time employees and 24 peak-time employees to provide banking services during the hours when most 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, 1997, the Nashville Bank had total consolidated assets of $505,836,000. 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. 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 14 SUPER MONEY MARKET branch locations and one traditional branch location in the Knoxville area with one branch location in Pigeon Forge, Tennessee, 14 branch locations in the Raleigh-Durham, North Carolina area, five 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 in Southaven, Mississippi and one branch in Paris, Tennessee. The Knoxville Bank has one branch each in the following Georgia locations: Calhoun, Canton, Cumming, Dalton, Ft. Oglethorpe, Gainesville, Moultrie, and Rome. Like Nashville, the Knoxville Bank employees are provided with the same benefits that all Company employees have available to them. At December 31, 1997, the Knoxville Bank employed 44 officers, 122 other full-time employees, 16 part-time employees and 7 peak-time employees. At year-end 1997, the Knoxville Bank had total assets of $756,076,000. 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, 1997 Kenesaw's capital -6- totaled $1,604,000 and J & S's capital was $1,073,000. NBC BANK, FSB (ROANOKE): NBC Bank, FSB 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. At December 31, 1997, Roanoke employed 13 officers, 36 other full-time employees, and 2 part-time employees. The same Company benefits are provided to these employees. At year-end 1997, Roanoke had total assets of $254,236,000. Roanoke 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 $690,000,000. At December 31, 1997, Commerce Capital had 5 full-time employees. Commerce Capital's employees are covered under the same Company benefits. Commerce Capital competes with a number of other investment counselors, insurance companies, banks, and other money managers, many of which are substantially larger. 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 $164,000,000. At December 31, 1997, Brooks Montague had three 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, Tennessee. On February 29, 1996, NCBC acquired the remaining 70% of TransPlatinum. As of December 31, 1997, TransPlatinum had 3 officers, 52 full- time employees, and 10 part-time employees. TransPlatinum competes with 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, 1997, USI had 2 officers and 1 other full-time employee. NATIONAL COMMERCE CAPITAL TRUST I: National Commerce Capital Trust I was organized in March 1997 as a -7- special purpose company to offer floating rate capital trust pass-through securities. At December 31, 1997, Trust I had $49,883,827 in outstanding securities issued. SUPERVISION AND REGULATION NCBC and its subsidiaries are subject to a number of federal and state laws and regulations. As a bank holding company, NCBC is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "Act"), which is administered by the Federal Reserve Board (the "Board"). Under the Act, the Company is generally prohibited from directly engaging in any activities other than banking, managing or controlling banks, and those activities that the Board considers closely related and incidental to banking. Generally, bank holding companies from any state can now acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Effective January 1, 1991, Tennessee amended its reciprocal interstate banking statute to allow a bank or bank holding company in any other state to acquire a Tennessee bank or bank holding company as long as a Tennessee bank or bank holding would have a similar acquisition opportunity in that state. Effective June 1, 1997 banks also became eligible to branch across state lines by acquisition, merger or de novo, (unless state law would permit such interstate branching at an earlier date), providing certain conditions are met including that applicable state law must expressly permit de novo interstate branching. The Act requires that a bank holding company obtain the prior approval of the Board before merging or consolidating with another bank holding company. Furthermore, unless a bank holding company already owns or controls a majority of the shares of a bank or another bank holding company, Board approval is required for any transaction, if following such transaction, the bank holding company directly or indirectly owns or controls more than 5% of the shares of such bank or bank holding company. A bank holding company and its non-bank subsidiaries must also seek the prior approval of the Board to acquire all or substantially all of the assets of a bank. Under the Act, a bank holding company is required to file with the Board an annual report and any additional information required by the Board. The Board may examine the Company's and each of its direct subsidiaries' records, including 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 N of the Notes to Consolidated Financial Statements in the 1997 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 -8- 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 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 -9- 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 (Roanoke), 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. 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 each of the three years in the period ended December 31, 1995 through 1997. Interest income and yields on non-taxable investment securities have been calculated on a fully taxable-equivalent basis assuming a tax rate of 35%.
1997 1996 1995 ---------------------------- ---------------------------- --------------------------- 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)............................ 2,513,327 229,866 9.15% 2,130,810 191,860 9.00% 1,718,424 160,980 9.37% Taxable securities including trading account................................. 1,461,883 98,308 6.72 1,296,692 85,597 6.60 1,119,057 75,627 6.76 Non-taxable investment securities(2)..... 138,669 11,456 8.26 143,706 11,881 8.27 154,755 13,101 8.47 Federal funds sold and securities purchased under agreements to resell.... 16,500 1,049 6.36 23,388 1,425 6.09 25,383 1,486 5.85 Time deposits in other banks............. 18,211 974 5.35 16,984 924 5.44 16,881 1,002 5.94 --------- ------- ---- --------- ------- ---- --------- ------- ---- Total interest-earning assets............ 4,148,590 341,653 8.24 3,611,580 291,687 8.08 3,034,500 252,196 8.31 --------- ------- ---- --------- ------- ---- --------- ------- ---- Non-interest earning assets: Cash and due from banks.................. 137,251 119,604 112,304 Premises & equipment, net................ 24,306 19,160 17,869 Other assets............................. 132,827 94,020 75,448 Allowance for loan losses................ (38,122) (32,250) (25,830) --------- --------- --------- TOTAL ASSETS............................. 4,404,852 3,812,114 3,214,291 ========= ========= =========
(1) For the purposes of these computations, non-accruing loans are included in the daily average loan amounts outstanding and income on such loans is recognized as received. There were no foreign loans outstanding. (2) These items are affected by fully taxable-equivalent adjustments. Reference is made to page 29 of the Annual Report to Shareholders for the corresponding unadjusted amounts as presented in the financial statements. -11-
1997 1996 1995 ---------------------------- ----------------------------- ---------------------------- 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..................... 261,931 3,239 1.24% 256,561 3,963 1.54% 247,002 4,843 1.96% Savings deposits.................... 1,043,212 42,672 4.09 902,148 38,301 4.25 782,714 32,971 4.21 Time deposits....................... 1,321,247 73,248 5.54 1,187,861 65,701 5.53 1,025,093 58,877 5.74 Federal funds purchased and securities sold under agreements to repurchase........... 445,863 22,665 5.08 336,727 16,546 4.91 264,214 13,482 5.10 Federal Home Loan Bank advances..... 405,308 23,032 5.68 417,316 23,025 5.52 294,833 15,809 5.36 Long-term debt...................... 156,152 9,316 5.97 60,284 3,565 5.91 6,382 458 7.18 --------- ------- ---- --------- ------- ---- --------- ------- ---- Total interest bearing liabilities.. 3,633,713 174,172 4.79 3,160,897 151,101 4.78 2,620,238 126,440 4.83 --------- ------- ---- --------- ------- ---- --------- ------- ---- Non-interest bearing liabilities: Domestic demand deposits............ 328,423 305,989 284,744 Other............................... 71,109 49,402 36,832 Capital Trust Preferred Securities.. 38,079 Stockholders' equity................ 333,528 295,826 272,477 --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............... 4,404,852 3,812,114 3,214,291 ========= ========= ========= Net interest earnings............... 167,481 140,586 125,756 ======= ======= ======= Net yield on interest-earning assets............................. 4.04% 3.89% 4.14% ==== ==== ====
-12- INTEREST RATE SENSITIVITY TABLE BY REPRICING DATES
Within After 3 Mos. After 6 Mos. After 1 Yr. Non December 31, 1997 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.................... 884,663 77,647 117,287 229,038 1,224,515 75,817 - 2,608,967 Securities.................... 688,432 110,268 227,026 135,267 245,638 211,523 - 1,618,154 Other earning assets.......... 139,634 - - - - - - 139,634 Other assets................. - - - - - - 325,256 325,256 --------- ------- ------- ------- --------- -------- -------- --------- Total funding uses.......... 1,712,729 187,915 344,313 364,305 1,470,153 287,340 325,256 4,692,011 --------- ------- ------- ------- --------- -------- -------- --------- Funding sources: Interest-bearing deposits..... 608,607 278,791 339,206 432,710 787,521 386,659 - 2,833,494 Other borrowings.............. 830,354 3,346 4,058 7,928 167,718 6,189 - 1,019,593 Demand deposits............... - - - - - - 417,748 417,748 Other liabilities............ - - - - - - 69,028 69,028 Interest rate swaps........... (60,000) - - - 60,000 - - - Stockholders' equity.......... - - - - - - 352,148 352,148 --------- ------- ------- ------- --------- -------- -------- --------- Total funding sources......... 1,378,961 282,137 343,264 440,638 1,015,239 392,848 838,924 4,692,011 --------- ------- ------- ------- --------- -------- -------- Interest-rate sensitivity GAP.............. 333,768 (94,222) 1,049 (76,333) 454,914 (105,508) (513,668) --------- ------- ------- ------- --------- -------- -------- Cumulative interest-rate sensitivity GAP.............. 333,768 239,456 240,595 164,262 619,176 513,668 GAP to total assets........... 7.11% ( 2.01%) .02% (1.63%) 9.70% (2.25%) (10.95%) Cumulative GAP to total assets....................... 7.11% 5.10% 5.13% 3.50% 13.20% 10.95%
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. 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 1997, both six-month and one-year gaps were within these parameters. -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%.
1997 Compared to 1996 1996 Compared to 1995 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..................... 34,777 3,228 38,006 574 36,962 (6,082) 30,880 (1,526) Taxable securities including trading account............ 11,124 1,588 12,711 198 11,717 (1,747) 9,970 (284) Non-taxable investment securities.................. (411) (14) (425) 1 (917) (303) (1,220) 22 Federal funds sold and securities purchased under agreements to resell.................... (437) 61 (376) (19) (128) 67 (61) (5) Time deposits in other banks. 66 (16) 50 (1) 6 (84) (78) (1) ------ ------ ------ ---- ------ ------ ------ ------ Total interest earning assets...................... 45,119 4,847 49,966 753 47,640 (8,149) 39,491 (1,794) ------ ------ ------ ---- ------ ------ ------ ------ Interest paid on: Demand deposits.............. 79 (803) (724) (16) 194 (1,074) (880) (40) Savings deposits............. 5,849 (1,478) 4,371 (227) 5,017 313 5,330 48 Time deposits................ 7,427 120 7,547 13 8,867 (2,043) 6,824 (342) Federal funds purchased and securities sold under agreements to repurchase... 5,528 591 6,119 186 3,545 (481) 3,064 (138) Federal Home Loan Bank advances.................... (662) 669 7 (19) 6,732 484 7,216 196 Long-term debt............... 5,715 36 5,751 58 3,173 (66) 3,107 (685) ------ ------ ------ ---- ------ ------ ------ ------ Total interest bearing liabilities................. 23,936 (865) 23,071 (5) 27,528 (2,867) 24,661 (961) ------ ------ ------ ---- ------ ------ ------ ------ Net interest earnings........ 21,183 5,712 26,895 758 20,112 (5,282) 14,830 833 ====== ====== ====== ==== ====== ====== ====== ======
(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 ------------------------------- 1997 1996 1995 --------- --------- --------- (in thousands of dollars) Securities: U.S. Treasury...................... 38,589 30,234 18,582 U.S. Government agencies and corporations..................... 1,270,297 1,190,922 1,027,932 States of the U.S. and political subdivisions..................... 138,409 140,708 149,975 Other securities................... 170,859 156,035 82,157 --------- --------- --------- Total................ 1,618,154 1,517,899 1,278,646 ========= ========= =========
The following table sets forth the maturities at December 31, 1997, 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.............. 2,000 6.01% 36,589 6.53% -- -- -- -- U.S. Government agencies and corporations.......... 640,195 6.55 162,050 6.59 439,238 7.27% 28,814 5.77% States of the U.S. and political subdivisions.... 4,718 10.17 48,615 7.74 48,984 8.12 36,092 9.07 Other...................... 70,837 6.84 19,098 6.64 30,842 6.64 50,082 6.64 ------- ----- ------- ---- ------- ------- -------- -------- Total.................. 717,750 266,352 519,064 114,988 ======= ======= ======= ========
-15- LOAN PORTFOLIO - -------------- The following table shows the Company's gross loan distribution at the end of the last five years.
December 31 ----------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands of dollars) Commercial, financial, and agricultural........... 512,534 466,830 399,580 356,035 350,539 Real estate - construction... 241,334 170,188 122,720 91,424 66,929 Real estate - mortgage....... 781,826 602,064 520,657 501,489 429,544 Consumer(1)(2)............... 1,045,420 1,086,104 871,407 630,927 535,417 Lease financing.............. 30,046 22,790 18,678 14,818 13,870 --------- --------- --------- --------- --------- Total................... 2,611,160 2,347,976 1,933,042 1,594,693 1,396,299 ========= ========= ========= ========= =========
(1)Included within "Consumer" loans are revolving lines of credit secured by home equities. (2)The Company sold approximately $63 million or substantially all of its credit card receivables in fourth quarter 1997. The following table shows the amounts of loans (excluding real estate mortgages, consumer loans and lease financing) outstanding as of December 31, 1997, 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........... 84,776 190,678 237,080 512,534 Real estate - construction... 21,362 148,070 71,902 241,334 ------- ------------ ------- ------- Total................... 106,138 338,748 308,982 753,868 ======= ============ ======= =======
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, 1997.
After 1 but After Within 5 Yrs 5 Years -------------- --------- (in thousands of dollars) Predetermined interest rate................ 67,321 168,638 Floating or adjustable interest rates...... 271,427 140,344 ------- ------- Total................................. 338,748 308,982 ======= =======
-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 --------------------------------- 1997 1996 1995 1994 1993 ----- ----- ----- ----- ----- (in thousands of dollars) Nonaccrual loans.......... -- -- -- -- -- Accruing loans past due 90 days or more......... 3,134 3,482 3,252 2,432 2,063 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. 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, 1997, 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, 1997. There were no foreign loans.
Year Ended December 31 ------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (in thousands of dollars) Balance at beginning of period..................... 35,514 29,010 24,310 21,467 17,356 Charge-offs: Commercial, financial, and agricultural............. 250 12 1 442 1,167 Real estate - construction.... 95 70 199 2122 652 Real estate - mortgage........ 222 74 97 232 207 Consumer...................... 10,850 8,270 5,366 4,088 3,783 Lease financing............... 1,382 1,912 1,586 1,500 1,0131 ------ ------ ------ ------ ------ Total charge-offs............ 12,799 10,338 7,249 6,474 6,840 ------ ------ ------ ------ ------ Recoveries of loans previously charged-off: Commercial, financial, and agricultural............. 73 20 55 47 420 Real estate - construction.... 57 244 44 83 359 Real estate - mortgage........ 33 61 73 121 47 Consumer...................... 2,221 1,965 1,509 1,494 1,237 Lease financing............... 560 533 518 495 474 ------ ------ ------ ------ ------ Total recoveries............. 2,944 2,823 2,199 2,240 2,537 ------ ------ ------ ------ ------ Net charge-offs................ 9,855 7,515 5,050 4,234 4,303 Increase due to acquisition.... 625 288 - - 22 Decrease due to loan sale...... - (403) - - - Provision for loan losses(1)... 17,013 14,134 9,750 7,077 8,392 ------ ------ ------ ------ ------ Balance at end of period....... 43,297 35,514 29,010 24,310 21,467 ====== ====== ====== ====== ====== Ratio of net-charge-offs to average loans outstanding during the period............. .39% .35% .29% .28% .34%
(1) 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 --------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ 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........... 8,659 20% 7,813 20% 7,264 21% 6,887 22% 6,622 25% Real estate: Construction............... 4,330 9 3,196 7 3,006 6 2,731 6 2,644 5 Mortgage................... 6,495 30 5,327 26 3,567 27 3,352 31 3,277 31 Consumer.................... 21,649 40 17,402 46 12,737 45 9,457 40 7,716 38 Lease financing............. 2,164 1 1,776 1 2,436 1 1,883 1 1,208 1 ------ --- ------ --- ------ --- ------ --- ------ --- Total..................... 43,297 100% 35,514 100% 29,010 100% 24,310 100% 21,467 100% ====== === ====== === ====== === ====== === ====== ===
-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 ---------------------------------------------------- 1997 1996 1995 ----- ---------------- ----- Amount Rate Amount Rate Amount Rate --------- ----- --------- ----- --------- ----- (in thousands of dollars) Non-interest bearing demand deposits... 328,423 - 305,989 - 284,744 - Interest bearing demand deposits....... 261,931 1.24% 256,561 1.54% 247,002 1.96% Savings deposits....................... 1,043,212 4.09 902,148 4.25 782,714 4.21 Time deposits.......................... 1,321,247 5.54 1,187,861 5.53 1,025,093 5.74 --------- ---- --------- ---- --------- ---- Total............................. 2,954,813 2,652,559 2,339,553 ========= ========= =========
At December 31, 1997, 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................................................. 317,359 Over 3 through 6 months.......................................... 164,686 Over 6 through 12 months......................................... 135,535 Over 12 months................................................... 3,284 ------- Total......................................................... 620,864 =======
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 ----------------------------- 1997 1996 1995 ------- ----- ----- Return on average total assets................................ 1.58% 1.51% 1.53% Return on average equity*..................................... 20.92% 19.44% 18.00% Dividend payout percent....................................... 33.33% 34.35% 36.08% Average equity to assets percent.............................. 7.57% 7.76% 8.48% Tier 1 capital to total assets (leverage ratio)............... 8.69% 7.66% 7.91% Tier 1 capital to risk-weighted assets........................ 12.61% 11.05% 12.30% Total capital to risk-weighted assets......................... 13.86% 12.30% 13.52%
* 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 -------------------------------- 1997 1996 1995 -------- -------- -------- (In Thousands of Dollars) Federal funds purchased and securities sold under agreements to repurchase: Balance at year-end............................... 423,573 298,410 404,746 Weighted average interest rate payable at year-end........................... 5.04% 5.09% 5.46% Maximum amount outstanding at any month end.............................. 540,622 398,898 404,746 Average outstanding balance (total daily outstanding principal balance divided by 365)....................................... 445,863 336,727 264,214 Weighted average interest rate (related interest expense divided by the average outstanding balance).......................... 5.08% 4.91% 5.10%
-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, 1997, NBC operated 13 traditional branches (including the main office branch) and 16 SUPER MONEY MARKET branch facilities in Shelby County, Tennessee; one traditional branch in Somerville, Tennessee; one Super Money Market in 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. Nine of the 14 traditional branches operated by NBC are leased. In addition, the building housing one branch is owned by NBC but subject to a ground lease. Leases on the 10 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, 1997. 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. NBC Capital Markets Group, Inc. occupies approximately 12,7000 square feet of NBC's space in the Complex and pays approximately $167,000 per year for this space. Additionally, Commerce Capital leases approximately 2,900 square feet in the Complex totaling approximately $54,219 in annual rent in 1997. Brooks Montague leases approximately 1,200 square feet in a Chattanooga building totaling approximately $14,400 in annual rent in 1997. 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 1997, Nashville paid approximately $819,000 for licensed space and administrative office space. NBC Bank, FSB (Knoxville) 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 1997, Knoxville paid approximately $1,143,000 for licensed space and administrative office space. NBC Bank, FSB (Roanoke) 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. In 1997, FSB paid approximately $249,000 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 subsidiaries and a Company affiliate are located at 7770 Poplar Avenue. The Bartlett Branch operation is located at 6005 Stage Road. -22- 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 60 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, Director of National Commerce Bank Services, Inc., Commerce Capital, Commerce General, and Brooks Montague Lewis E. Holland 55 Vice Chairman, Treasurer and Chief Financial Officer of the Company and President and Director of NBC, Chairman of the Board of Commerce Capital Management, Inc., Director of Brooks Montague, National Commerce Bank Services, NBC Capital Markets and Kenesaw Leasing, Inc. and J&S Leasing, Inc., USI Alliance Corp., and TransPlatinum Service Corp. William R. Reed, Jr. 51 Vice Chairman of the Company; Director of NBC, Chairman and CEO of Nashville Bank of Commerce, NBC Bank, FSB (Knoxville) and NBC Bank, FSB (Roanoke), Chairman of NBC Insurance Services, Inc., Director of Kenesaw Leasing
-23-
Gary L. Lazarini 56 Executive Vice President of NBC, Investments and Chairman of NBC Capital Markets Group, Inc., Director of Commerce Capital Mackie H. Gober 51 Executive Vice President of NCBC, Director of NBC and NCBS, Chairman and Director of Commerce Finance Company and Commerce General Corporation Gus B. Denton 57 Secretary of the Company and Executive Vice President and Secretary of NBC, Director of Commerce General Corporation Tom W. Scott 54 President of Commerce General Corporation, Director of TransPlatinum Service Corp. Jacques D. Driscoll 38 Senior Vice President of Marketing of the Company
Of the foregoing officers, Messrs. Garrott, Holland, and Reed are also a directors 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. Holland was elected Vice Chairman and Director of the Company in June 1997. He was Executive Vice President of the Company from August 1995 until June 1997. He was elected Treasurer of the Company in June 1995 and elected Vice President and Chief Financial Officer of the Company and Director of NBC effective July 1994. He was elected President of NBC effective January 1998 and director of NBC effective July 1994. He has been director of Commerce Capital since January 1995, Brooks Montague since July 1995, NCBS since January 1996, USI since February 1996, TransPlatinum since March 1996, Kenesaw Leasing since July 1997 and both J&S and NBC Insurance since January 1997. He was Vice Chairman and Chief Financial Officer of NBC from July 1994 until June 1995 and was Executive Vice President of NBC from June 1995 until August 1995. Prior to that time, he was a partner with Ernst & Young LLP. Mr. Reed was elected Vice Chairman and Director of the Company in June 1997 and was Executive Vice President of the Company from August 1995 until June 1997; was Chairman and President of Commerce Finance Company from January 1996 until January 1998. 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 (Roanoke) since July 1994. He was President of NBC Bank, FSB (Roanoke) from July 1994 to January 1996. -24- 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 NBC Capital Markets Group, Inc. since January 1991 and was President since from 1995 until November 1996. Mr. Gober was elected Executive Vice President of the Company in January 1998 and was President of NBC from August 1995 until January 1998. He was Executive Vice President and Retail Credit Group Head of NBC from January 1992 until August 1995. He was elected Chairman of Commerce Finance Company in January 1998 and was President of Commerce Finance Company from September 1992 until August 1995. Mr. Denton was elected Secretary of the Company in June 1995. Mr. Driscoll was elected Senior Vice President of Marketing of the Company in September 1996. Prior to that time he was President of First Insurance from 1995 until 1996, Group Manager of First Bank System from 1994 to 1995, and Sales and Marketing Manager of First Bank System from 1993 to 1994. -25- 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 ------ ------ ------ ------ 1997: High............. $35.75 $27.63 $23.63 $23.00 Low.............. 27.19 22.88 19.25 17.88 Cash dividends... .13 .11 .11 .11 1996: High............. $19.19 $16.75 $15.88 $15.50 Low.............. 16.63 15.50 14.88 12.75 Cash dividends... .11 .10 .10 .10
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, 1997, there were approximately 2,800 stockholders of record. ITEM 6. SELECTED FINANCIAL DATA. Not Covered by Auditors' Report In Thousands of Dollars, Except Per Share and Ratio Data
1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- Net interest income............ $ 162,821 $ 135,466 $ 120,025 $ 110,021 $ 100,393 Net income..................... 69,780 57,513 49,035 44,342 39,406 Per common share data:* Basic earnings per share..... 1.42 1.17 .99 .91 .81 Diluted earnings per share... 1.38 1.15 .97 .89 .79 Cash dividends declared...... .46 .40 .35 .31 .28 Book value................... 7.21 6.43 5.98 4.57 4.82 Total average equity........... 333,528 295,826 272,477 239,903 211,007 Total average assets........... 4,404,852 3,812,114 3,214,291 2,845,135 2,387,210 Average debt: Federal Home Loan Bank advances.............. 405,308 417,316 294,833 262,125 139,533 Other borrowed funds and long term debt......... 156,152 60,284 6,382 6,384 6,372 Capital trust pass- through securities......... 38,079 - - - - Ratios: Average equity to average assets.............. 7.57% 7.76% 8.48% 8.43% 8.84% Return on average equity...................... 20.92 19.44 18.00 18.48 18.68 Return on average assets...................... 1.58 1.51 l.53 l.56 1.65
* After retroactive adjustment for all stock dividends and stock splits declared through December 31, 1997. The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128 "Earnings Per Share". -26- 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 27 in the Registrant's 1997 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 28 through 44 in the Registrant's 1997 Annual Report to Shareholders are incorporated herein by reference. Quarterly Results of Operations on page 44 of the Registrant's 1997 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 1998 Annual Meeting of Shareholders under the caption "Management of the Company". ITEM 11. EXECUTIVE COMPENSATION. The information under the caption "Compensation of Management and Other Information" in the Registrant's Proxy Statement for the 1998 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 1998 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Certain Transactions with Directors and Management" in the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders is incorporated herein by reference. -27- 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 is and (c) 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 filed as Exhibit 4.1 to the Registrant's Form 10-K for the year ended December 31, 1996 (File No. 0-6094) and incorporated herein by reference. 10.1 Form of Promissory Notes of NBC payable to The Mallory Partners, filed as Exhibit 10.1 to the Registrant's Form 10-K for the year ended December 31, 1987 (File No. 0-6094) and incorporated herein by reference. 10.2 Employment Agreement 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.
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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.
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10.18 Employment Agreement dated as of August 19, 1996, by and between National Commerce Bancorporation and Jacques Driscoll. 13 Registrant's 1997 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 -30- 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 12, 1998 /s/ Thomas M. Garrott - -------------- ---------------------------- Dated Thomas M. Garrott Chairman of the Board (Principal Executive Officer) March 12, 1998 /s/ Lewis E. Holland - -------------- ---------------------------- Dated Lewis E. Holland Vice Chairman, Treasurer, and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ G. Mark Thompson /s/ Lewis E. Holland - ----------------------------- ----------------------------- Director Director /s/ R. Grattan Brown, Jr. - ----------------------------- Director /s/ James E. McGehee, Jr. - ----------------------------- Director /s/ William R. Reed, Jr. - ----------------------------- Director /s/ Harry J. Phillips, Sr. - ----------------------------- Director /s/ Bruce E. Campbell, Jr. - ----------------------------- Director /s/ Thomas C. Farnsworth, Jr. - ----------------------------- Director Dated: March 12, 1998 -------------- -31- ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) and (2), and (c) LIST OF FINANCIAL STATEMENTS CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 1997 NATIONAL COMMERCE BANCORPORATION MEMPHIS, TENNESSEE -32- 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, 1997, are incorporated by reference in Item 8: Report of Independent Auditors Consolidated Balance Sheets--December 31, 1997 and 1996 Consolidated Statements of Income--Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity--Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements--December 31, 1997 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. -33- EXHIBIT INDEX Exhibit Description of Exhibit - ------- ------------------------- 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). 4.1 Specimen Stock Certificate filed as Exhibit 4.1 to the Registrant's Form 10-K for the year ended December 31, 1996 (File No. 0-6094). 10.1 Form of Promissory Notes of National Bank of Commerce payable to The Mallory Partners filed as Exhibit 10.1 to the Registrant's Form 10-K for the year ended December 31, 1987 (File No. 0-6094). 10.2 Employment Agreement dated as of 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, 1992 (File No. 0-6094). 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). 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). 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). -1- 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). 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). 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). 10.9 Lewis E. Holland, filed as Exhibit 10.14 to the Registrant's Form 10-K for the year ended December 31, 1994 (File No. 0-6094). 10.10 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). 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). 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). 10.13 1986 Stock Option Plan, filed as Exhibit A to the Registrant's Proxy Statement for the 1987 Annual Meeting of Shareholders. 10.14 1990 Stock Plan, filed as Exhibit A to the Registrant's Proxy Statement for the 1990 Annual Meeting of Shareholders. 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). 10.16 1994 Stock Plan, filed as Exhibit A to the Registrant's Proxy Statement for the 1994 Annual Meeting of Shareholders. -2- 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). 10.18 Employment Agreement dated as of August 19, 1996, by and between National Commerce Bancorporation and Jacques Driscoll. 13 Registrant's 1997 Annual Report to Shareholders. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule * incorporated herein by reference -3- EX-10.18 2 JACQUES DRISCOLL EMPLOYMENT AGREE. DATED 8-19-96 EXHIBIT 10.18 NATIONAL BANK OF COMMERCE August 16, 1996 Mr. Jacques Driscoll 7557 101st Street Dellwood, MN 55110 Dear Jacques, We are pleased to confirm our offer and your acceptance of the position of Sr. Vice President, Marketing for National Commerce Bancorporation at an annual base salary of $140,000. You will also be appointed as a member of the Board of Directors of the new NCBC insurance subsidiary. In addition, you will be eligible for a recruitment signing bonus of $30,000, with another guaranteed bonus of $30,000 to be paid in January 1997. You will also receive 25,000 shares of stock options as of the date of your employment with NCBC and will vest in 20% increments over the next five years. In 1997, you will be eligible to receive up to 50% of your base salary as an incentive bonus, subject to achieving specified goals and objectives. In this position you will report to Bill Reed. National Commerce Bancorporation offers a comprehensive benefits package including insurance, retirement, and profit sharing. You will be eligible to participate in all employee benefit programs as specified in the attached Benefit Summary sheet. You will also be eligible for up to four weeks of paid vacation time in each calendar year. If NCBC should be sold or acquired by the end of calendar year 1998, and you should not retain the same or equivalent position, NCBC will provide a lump sum payment equal to two times your annual base salary at the time of your termination. To facilitate the earliest possible relocation of you and your family to Memphis, NCBC will provide a full relocation package according to the attached guidelines that will be managed by Armstrong Relocation. These benefits are available only as managed by Armstrong. All relocation benefits that have a taxable consequence for you will be grossed up by NCBC. This offer is contingent upon your successful completion of drug testing as required for all NCBC positions. We trust that you will make a significant contribution to the growth and progress of National Commerce Bancorporation and that you will find the challenge and opportunity you desire. We look forward to working with you in the coming years. Please indicate your acceptance of your offer by signing this original letter as indicated below and returning it to me by August 20, 1996. If you have any questions, please feel free to contact me. Sincerely, I accept the position and its terms as outlined in this letter and my application for employment. /s/Kathy H. Starkey Signature /s/Jacques Driscoll - ------------------- ------------------- Kathy H. Starkey Date 8-19-96 Sr. Vice President, Human Resources ------- National Commerce Bancorporation Memphis, Tennessee 38150/Telephone (901)523-3434/Cable:NABACO EX-13 3 ANNUAL REPORT TO SHAREHOLDERS NATIONAL COMMERCE BANCORPORATION AND SUBSIDIARIES 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, 1997. RESULTS OF OPERATIONS For the year ended December 31, 1997, net income totaled $69,780,000, a $12,267,000 or 21.3 percent increase over 1996 net income of $57,513,000. Net income increased by $8,478,000 or 17.3 percent in 1996. Basic earnings per share were $1.42 in 1997, compared to $1.17 in 1996 and $.99 in 1995. Diluted earnings per share were $1.38 in 1997, compared to $1.15 in 1996 and $.97 in 1995. Per share amounts reported are on a new basis as required by SFAS No. 128 which was effective for financial statements issued after December 15, 1997. For 1997, return on average assets was 1.58 percent, compared to 1.51 percent in 1996 and 1.53 percent in 1995. Return on average equity (excluding unrealized gains or losses on investment securities) was 20.92 percent in 1997, compared to 19.44 percent in 1996 and 18.00 percent in 1995. [Dividends per share graph appears here] [Return on assets graph appears here] Net interest income, the difference between interest earned on loans and investments and interest paid on interest-bearing liabilities, increased by $26,895,000 or 19.1 percent in 1997 and 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 1997 reflects a $49,966,000 or 17.1 percent increase in interest income, and a $23,071,000 or 15.3 percent increase in total interest expense. The increase in interest income was the result of a $382,571,000 or 18.0 percent increase in average loans and a $158,523,000 or 11.2 percent increase in average investment securities, and an increase in the average yield on earning assets from 8.08 percent in 1996 to 8.24 percent in 1997. The increased volume of average earning assets (partially funded by an increase of $64,194,000 in average non-interest- bearing liabilities, net of non-interest-earning assets) positively impacted interest income by approximately $44 million, while the increased yield on average earning assets positively impacted interest income by approximately $6 million. Interest expense increased in 1997, reflecting a $472,816,000 or 15.0 percent increase in average outstanding interest-bearing liabilities, and an increase in the cost of interest-bearing liabilities from 4.78 percent in 1996 to 4.79 percent in 1997. The increase in the rate paid on interest-bearing liabilities had minimal effect on interest expense and the increase in average outstandings negatively affected interest expense by approximately $23 million. The 1996 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 4.04 percent in 1997, compared to 3.89 percent in 1996 and 4.14 percent in 1995. The yield on earning assets was 8.24 percent in 1997, compared to 8.08 percent in 1996 and 8.31 percent in 1995. The cost of interest-bearing liabilities was 4.79 in 1997, compared to 4.78 percent in 1996 and 4.83 percent in 1995. 1 The Company's provision for loan losses was $17,013,000 for 1997, compared to $14,134,000 for 1996 and $9,750,000 for 1995. The 1997 provision was primarily the result of loan growth. Net loan charge-offs were $9,855,000 (.39 percent of average loans, net of unearned discounts) in 1997, compared to $7,515,000 (.35 percent of average loans, net of unearned discounts) in 1996, and $5,050,000 (.29 percent of average loans) in 1995. The allowance for loan losses at December 31, 1997, was $43,297,00 or 1.66 percent of loans, net of unearned discounts, compared to $35,514,000 or 1.51 percent of loans at December 31, 1996, and $29,010,000 or 1.50 percent of net loans at December 31, 1995. Following is a comparison of non-earning assets and accruing loans past due 90 days or more for the years ended December 31, 1997, 1996 and 1995: In Thousands 1997 1996 1995 - ----------------------------------------------------------- Non-accrual loans $ --- $ --- $ --- Renegotiated loans --- --- --- Other real estate owned --- --- 30 - ----------------------------------------------------------- Total non-earning assets $ --- $ --- $ 30 - ----------------------------------------------------------- Accruing loans past due 90 days or more $3,134 $3,482 $3,252 Percentage of total loans 0.12% 0.15% 0.17% =========================================================== There were no non-performing assets at December 31, 1997, or December 31, 1996. At December 31, 1995, the allowance for loan losses was 967 times non- performing assets. 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. [Return on equity graph appears here] Non-interest income (excluding securities gains or losses) increased $12,853,000 or 18.5 percent in 1997. Included in 1997 non-interest income was a net gain of $8 million relating to the sale of substantially all of the Company's credit card receivables. Included in 1996 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 million relating to bank premises transactions. The net income impact of the credit card sale was an after-tax gain of $1,784,000 ($.04 per share) for the year and the fourth quarter of 1997. All other sources of non-interest income including broker-dealer revenue, trust service income, service charge income, fuel card processing income and in-store banking licensing income increased a net of $10,766,000 or 16.9 percent. Non-interest income (excluding securities gains or losses) increased $17,286,000 or 32.2 percent in 1996, primarily as a result of the gains discussed above, and increases in broker-dealer revenue, trust service income, service charge income, fuel card processing income and in- store banking licensing income. Securities losses totaled $80,000 in 1997, and securities gains totaled $3,000 in 1996. [Average equity/assets graph appears here] Non-interest expenses (excluding the provision for loan losses) increased by $19,585,000 or 18.9 percent in 1997, 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 $13,339,000 or 14.5 percent in 1996, primarily for the same reasons. 2 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
1996-1997 1995-1996 1997 -------------------- 1996 -------------------- 1995 Average Increase (Decrease) Average Increase (Decrease) Average In Thousands Balance Amount % Balance Amount % Balance - ---------------------------------------------------------------------------------------------------------------------- FUNDING USES Interest-earning assets: Loans, net of unearned discounts $2,513,327 $382,517 18.0 $2,130,810 412,386 24.0% $1,718,424 Securities: Taxable 1,431,095 163,560 12.9 1,267,535 167,196 15.2 1,100,339 Non-taxable 138,669 (5,037) (3.5) 143,706 (11,049) (7.1) 154,755 Trading account securities 30,788 1,631 5.6 29,157 10,439 55.8 18,718 Federal funds sold and securities purchased under agreements to resell 16,500 (6,888) (29.5) 23,388 (1,995) (7.9) 25,383 Time deposits in banks 18,211 1,227 7.2 16,984 103 0.6 16,881 - ---------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 4,148,590 537,010 14.9 3,611,580 577,080 19.0 3,034,500 Other uses 256,262 55,728 27.8 200,534 20,743 11.5 179,791 - ---------------------------------------------------------------------------------------------------------------------- Total funding uses 4,404,852 592,738 15.5 3,812,114 597,823 18.6% $3,214,291 ====================================================================================================================== FUNDING SOURCES Interest-bearing liabilities: Interest-bearing deposits 2,626,390 279,820 11.9 2,346,570 291,761 14.2% $2,054,809 Federal funds purchased and securities sold under agreements to repurchase 445,863 109,136 32.4 336,727 72,513 27.4 264,214 Other borrowed funds and long-term debt 561,460 83,860 17.6 477,600 176,385 58.6 301,215 - ---------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,633,713 472,816 15.0 3,160,897 540,659 20.6 2,620,238 Non-interest-bearing deposits 328,423 22,434 7.3 305,989 21,245 7.5 284,744 Capital trust pass through securities 38,079 38,079 100.0 --- --- --- --- Stockholders' equity 333,528 37,702 12.7 295,826 23,349 8.6 272,477 Other sources 71,109 21,707 43.9 49,402 12,570 34.1 36,832 - ---------------------------------------------------------------------------------------------------------------------- Total funding sources $4,404,852 $592,738 15.5% $3,812,114 597,823 18.6% $3,214,291 ======================================================================================================================
Average loans, the largest use of funds, increased $383 million or 18.0 percent in 1997 and $412 million or 24.0 percent in 1996. Increases in consumer loans, real estate construction and mortgage loans and commercial loans were the primary reasons for the increases in 1997 and 1996. For 1997 and 1996 the growth in all loan categories reflects increased demand and consumer loan promotions. Total securities (excluding the trading account), another major use of funds, increased by $158 million or 11.2 percent in 1997. Taxable securities increased by $163 million or 12.9 percent, reflecting increases in both fixed- and variable-rate federal agency securities. Non-taxable securities decreased by $5 million or 3.5 percent, reflecting decreased investment in bank-qualified municipal investments. Total securities increased by $156 million or 12.4 3 percent in 1996. The 1996 increase reflects increases in both fixed- and variable-rate federal agency securities and non-taxable securities. The Company accounts for securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires an adjustment of the securities portfolio to market value for those designated as available for sale, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. This year-end adjustment increased the securities portfolio by $3.7 million and increased stockholders' equity by $2.3 million at December 31, 1997, and increased the securities portfolio by $2.0 million and increased stockholders' equity by $1.2 million at December 31, 1996. Trading account securities increased by $2 million or 5.6 percent in 1997 and $10 million or 55.8 percent in 1996. These changes are a result of trading at NBC Capital Markets Group, Inc. Federal funds sold and securities purchased under agreements to resell decreased by $7 million or 29.5 percent in 1997 and decreased by $2 million or 7.9 percent in 1996, representing excess funds not otherwise employed in loans or investment securities. [Efficiency ratio graph appears here] Time deposits in other banks increased by $1 million or 7.2 percent in 1997 and increased by $103,000 or 0.6 percent in 1996. This is a readily manageable asset and balances are maintained at levels which are based on operating needs. Total interest-earning assets increased by $537 million or 14.9 percent in 1997, compared to an increase of $577 million or 19.0 percent in 1996. As described below, the growth in 1997 and 1996 was funded primarily by increases in interest-bearing deposits, other borrowed funds and stockholders' equity in 1997 and 1996. Total average deposits increased by $302 million or 11.4 percent in 1997, compared to an increase of $313 million or 13.4 percent in 1996. Total interest- bearing deposits increased $280 million or 11.9 percent and total non-interest- bearing deposits increased $22 million or 7.3 percent in 1997, reflecting current market trends, compared to an increase of $292 million or 14.2 percent in interest-bearing deposits and an increase of $21 million or 7.5 percent in non-interest-bearing deposits in 1996. Federal funds purchased and securities sold under agreements to repurchase increased $109 million or 32.4 percent in 1997, compared to an increase of $73 million or 27.4 percent in 1996. These changes were primarily the result of the availability of overnight funds purchased from downstream correspondent banks. [Non-interest income pie graph appears here] Other borrowed funds, primarily Federal Home Loan Bank advances and bank notes, increased $84 million or 17.6 percent in 1997, compared to an increase of $176 million or 58.6 percent in 1996. 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. In March 1997, the Company issued $49,875,000 in floating rate capital trust pass-through securities ("capital securities"). The proceeds of this issue are being used by the Company for general corporate purposes and may be counted as Tier 1 capital. For 1998, the Company anticipates loan demand and deposit growth similar to that which occurred in 1997 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 Q. 4 LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT Due to the Company not utilizing significant derivative positions to manage interest rate risk, the Company manages interest rate risk with an Asset/ Liability Management Committee comprised of senior management personnel from each key banking function. The primary functions of asset/liability management are to assure adequate liquidity and to maintain an appropriate balance between interest-earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid rapidly fluctuating net interest margins and to promote consistent growth of net income through periods of changing interest rates. Cash and due from bank balances, federal funds sold, trading account securities and securities available for sale are the principal sources of short- term asset liquidity. Other sources of short-term liquidity include federal funds purchased and repurchase agreements, credit lines with other banks and borrowings from the Federal Home Loan Bank. Maturing loans and securities are the principal sources of long-term asset liquidity. Automobile and home equity loans are secondary liquidity sources as a result of active securitizations based on these products. [Year-end net loans graph appears here] 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 1997, both six-month and one-year cumulative gaps were within these parameters. [Loan type mix graph appears here] The following table provides information about the Company's financial instruments used for purposes other than trading that are sensitive to changes in interest rates. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted average interest rates by contractual maturities as well as the Company's historical experience of the impact of interest rate fluctuations on the prepayment of residential and home equity loans and mortgage-backed securities. For core deposits (e.g. DDA, interest checking, savings and money market deposits) that have no contractual maturity the table presents principal cash flows and, as applicable, related weighted average interest rates based on the Company's historical experience, management's judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. Weighted average variable rates are based on the implied forward rates in the yield curve at the reporting date: 5 MARKET RISK DISCLOSURE
Principal Amount Maturing In Fair Value ------------------------------------------------------------------------------------------- Dollar Amounts in Thousands 1998 1999 2000 2001 2002 Thereafter Total December 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------------- RATE-SENSITIVE ASSETS: Fixed interest rate loans $333,371 $381,479 $292,494 $209,302 $160,438 $417,861 $1,794,945 $1,825,000 Average interest rate 9.06% 8.71% 9.02% 9.04% 8.98% 8.97% 8.95% Variable interest rate loans $556,264 $ 49,570 $ 19,555 $ 21,738 $ 47,402 $109,493 $ 814,022 $ 817,000 Average interest rate 9.03% 8.50% 8.42% 8.50% 8.50% 8.50% 8.87% Fixed interest rate securities $730,655 $107,697 $ 29,666 $ 24,512 $ 33,765 $196,261 $1,122,556 $1,127,000 Average interest rate 6.94% 6.60% 6.08% 5.75% 5.86% 6.00% 6.67% Variable interest rate securities $ 8,656 $ 7,623 $ 6,483 $ 5,148 $ 5,419 $462,269 $ 495,598 $ 490,000 Average interest rate 6.52% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% Other interest-bearing assets $139,634 --- --- --- --- --- $ 139,634 $ 139,000 Average interest rate 6.32% --- --- --- --- --- 6.32% RATE-SENSITIVE LIABILITIES: Non-interest-bearing checking $ 296,107 $ 36,000 $ 38,000 $ 34,000 $ 13,641 --- $ 417,748 $ 401,000 Average interest rate --- --- --- --- --- --- --- Savings and interest-bearing checking $ 433,489 $220,000 $218,000 $224,000 $218,114 --- $1,313,603 $1,264,000 Average interest rate 3.24% 3.24% 3.24% 3.24% 3.24% --- 3.24% Time deposits $1,347,990 $129,831 $ 18,930 $ 10,387 $ 6,282 $6,471 $1,519,891 $1,502,000 Average interest rate 5.52% 6.18% 6.31% 6.01% 5.78% 5.90% 5.59% Fixed interest rate borrowings $ 16,997 $ 74,797 $ 12,651 $ 9,828 $ 10,442 $6,169 $ 130,884 $ 131,000 Average interest rate 5.48% 5.85% 5.60% 5.40% 5.40% 5.37% 5.69% Variable interest rate borrowings $ 888,709 --- --- --- --- --- $ 888,709 $ 870,000 Average interest rate 5.40% --- --- --- --- --- 5.40%
CAPITAL RESOURCES Total average assets increased by 15.5 percent in 1997, 18.6 percent in 1996 and 13.0 percent in 1995. Correspondingly, total average equity capital increased by 12.7 percent in 1997, 8.6 percent in 1996 and 13.6 percent in 1995. The percentage of average equity capital to average assets was 7.57 percent in 1997, 7.76 percent in 1996 and 8.48 percent in 1995. The internal capital growth rate was 14.17 percent in 1997, 12.89 percent in 1996 and 11.65 percent in 1995. These growth rates are the result of a return on average equity of 20.92 percent in 1997, 19.44 percent in 1996 and 18.00 percent in 1995. A stock repurchase program was authorized in 1996 for 4,000,000 shares over two years and in 1997 for 3,000,000 shares over two years for purposes of offsetting stock issuances planned for stock option and other employee benefit plans. During 1997, 703,345 shares of common stock were repurchased at a cost of $18,129,000, compared to 2,049,856 shares repurchased in 1996 at a cost of $30,581,000. [Allowances for loan losses graph appears here] 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 SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This resulted in an increase of $2.3 million to 1997 year-end stockholders' equity and an increase of $1.2 million to 1996 year-end stockholders' equity. 6 The following ratios in the table on selected capital information do not include the effect of SFAS No. 115 on Tier 1 capital, total capital or total risk-weighted assets. At December 31, 1997, 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, 1997. [Loss reserve to net loans graph appears here] SELECTED CAPITAL INFORMATION December 31 ------------------------ In Thousands 1997 1996 - -------------------------------------------------------------------- Capital: Stockholders' equity $ 352,148 $ 313,329 Capital trust pass-through securities 49,884 --- Less: Unrealized gains on securities, net of taxes 2,250 1,230 Goodwill and other deductions 8,670 4,118 - -------------------------------------------------------------------- Tier 1 capital 391,112 307,981 Qualifying allowance for loan losses 38,824 34,847 - -------------------------------------------------------------------- Total capital $ 429,936 $ 342,828 ==================================================================== Total risk-weighted assets $3,101,457 $2,787,088 ==================================================================== Ratios: Total capital to risk-weighted assets 13.86% 12.30% Tier 1 capital to risk-weighted assets 12.61 11.05 Tier 1 capital to total assets (leverage ratio) 8.69 7.66 Average equity to assets 7.57 7.76 ==================================================================== [Non-performing assets graph appears here] 7 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. [Accruing loans 90 days delinquent graph appears here] YEAR 2000 PREPARATIONS Management has developed a plan to modify the Company's information technology and equipment to recognize the year 2000 and has begun converting critical data processing systems. The Company has also initiated discussions with its significant vendors to ensure that those parties have appropriate plans to remediate year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. The Company is assessing the extent to which its operations are vulnerable and developing contingency plans should those organizations fail to remediate their systems properly. This project is not expected to have a significant effect on the Company's business operations. Currently, management expects the project to be substantially complete by early 1999. Incremental costs, which exclude the costs to upgrade and replace systems in the ordinary course of business, are not expected to be material to the Company's consolidated results of operations or financial position. [Net charge-offs to average total loans graph appears here] 8 National Commerce Bancorporation and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31 ------------------------ Dollar Amounts in Thousands 1997 1996 - ---------------------------------------------------------------------------- ASSETS Cash and cash equivalents: Interest-bearing deposits with other banks $18,293 17,789 Cash and non-interest-bearing deposits $ 206,191 164,894 Federal funds sold and securities purchased under agreements to resell 23,009 13,219 - ---------------------------------------------------------------------------- Total cash and cash equivalents 247,493 195,902 Available-for-sale securities (amortized cost - $404,745 at December 31, 1997, and $699,314 at December 31, 1996) 408,083 700,775 Held-to-maturity securities (market value - $1,208,922 at December 31, 1997, and $804,690 at December 31, 1996) 1,210,071 817,124 Trading account securities 98,332 31,812 Loans, net of unearned discounts 2,608,967 2,347,973 Less allowance for loan losses 43,297 35,514 - ---------------------------------------------------------------------------- Net loans 2,565,670 2,312,459 Premises and equipment, net 27,404 21,799 Broker/dealer customer receivables 7,695 11,699 Other assets 127,263 108,839 - ---------------------------------------------------------------------------- Total assets $4,692,011 $4,200,409 ============================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest-bearing $ 417,748 $ 352,676 Interest-bearing 2,833,494 2,623,754 - ---------------------------------------------------------------------------- Total deposits 3,251,242 2,976,430 Federal funds purchased and securities sold under agreements to repurchase 423,573 298,410 Broker/dealer customer payables 59 1,002 Accounts payable and accrued liabilities 68,969 59,064 Federal Home Loan Bank advances 389,884 396,109 Other borrowed funds and long-term debt 156,252 156,065 - ---------------------------------------------------------------------------- Total liabilities 4,289,979 3,887,080 Capital trust pass-through securities 49,884 --- 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 48,851,987 in 1997 and 48,770,404 shares in 1996 97,704 48,770 Additional paid-in capital 52,524 61,763 Retained earnings 199,670 201,566 Unrealized gains on securities, net of taxes 2,250 1,230 - ---------------------------------------------------------------------------- Total stockholders' equity 352,148 313,329 - ---------------------------------------------------------------------------- Total liabilities and stockholders' equity $4,692,011 $4,200,409 ============================================================================ See notes to consolidated financial statements. 9 National Commerce Bancorporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 ----------------------------- In Thousands, Except Per Share Amounts 1997 1996 1995 - ------------------------------------------------------------------------------ INTEREST INCOME Loans $229,204 $190,879 $159,816 Taxable 96,421 83,797 74,365 Non-taxable 7,488 7,765 8,556 - ------------------------------------------------------------------------------ 103,909 91,562 82,921 Trading account securities 1,857 1,777 1,240 Other 2,023 2,349 2,488 - ------------------------------------------------------------------------------ Total interest income 336,993 286,567 246,465 - ------------------------------------------------------------------------------ INTEREST EXPENSE Deposits 119,159 107,965 96,691 Short-term borrowings 22,665 16,546 13,482 Federal Home Loan Bank advances 23,032 23,025 15,809 Long-term debt 9,316 3,565 458 - ------------------------------------------------------------------------------ Total interest expense 174,172 151,101 126,440 - ------------------------------------------------------------------------------ Net interest income 162,821 135,466 120,025 Provision for loan losses 17,013 14,134 9,750 - ------------------------------------------------------------------------------ Net interest income after provision for loan losses 145,808 121,332 110,275 - ------------------------------------------------------------------------------ OTHER INCOME Trust service income 9,284 8,719 8,296 Service charges on deposits 16,664 14,292 13,519 Other service charges and fees 12,819 10,902 5,264 Broker/dealer revenue 13,115 10,079 9,840 Investment securities gains (losses) (80) 3 228 Other 30,603 25,640 16,721 - ------------------------------------------------------------------------------ Total other income 82,405 69,635 53,868 - ------------------------------------------------------------------------------ OTHER EXPENSES Salaries and employee benefits 56,501 48,468 40,935 Occupancy expense 10,552 8,517 8,665 Furniture and equipment expense 4,851 3,848 3,510 Other 51,556 43,042 38,720 - ------------------------------------------------------------------------------ Total other expenses 123,460 103,875 91,830 - ------------------------------------------------------------------------------ Income before income taxes 104,753 87,092 72,313 Income taxes 34,973 29,579 23,278 - ------------------------------------------------------------------------------ Net income $ 69,780 $ 57,513 $ 49,035 ============================================================================== Net income per common share-basic* $1.42 $1.17 $.99 ============================================================================== Net income per common share-diluted* $1.38 $1.15 $.97 ============================================================================== Weighted average shares outstanding-basic 48,999 49,094 49,380 ============================================================================== Weighted average shares outstanding-diluted 50,684 50,098 50,498 ============================================================================== * The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," and to give retroactive recognition to all stock dividends and stock splits. See notes to consolidated financial statements. 10 National Commerce Bancorporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
For Year Ended December 31 --------------------------------- In Thousands 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 69,780 $ 57,513 $ 49,035 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 17,013 14,134 9,750 Provision for depreciation and amortization 5,453 3,227 4,249 Amortization of securities premiums and (accretion of discounts), net (422) 11 (460) Deferred income taxes (2,363) (1,079) (1,866) (Increase) decrease in trading account securities (66,520) (11,653) (6,652) Realized securities (gains) losses 80 (3) (228) (Increase) decrease in broker/dealer customer receivables 4,004 1,745 (12,314) Increase (decrease) in interest receivable 1,690 1,838 (5,532) Increase in other assets (18,300) (28,429) (6,363) Increase (decrease) in broker/dealer customer payables (943) (269) 872 Increase (decrease) in interest payable 1,765 (315) 10,907 Increase in accounts payable and accrued liabilities 12,784 23,388 2,368 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 24,021 60,108 43,766 INVESTING ACTIVITIES Available-for-sale securities: Proceeds from maturities of securities 347,836 78,456 101,157 Proceeds from sales of securities 81,351 289,492 512,112 Purchases of securities (109,081) (557,647) (276,553) Held-to-maturity securities: Purchases of securities (457,066) (149,707) (406,827) Proceeds from maturities of securities 38,709 94,738 9,731 Net increase in loans (270,224) (422,848) (343,718) Purchases of premises and equipment (10,499) (6,644) (4,455) - --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (378,974) (674,160) (408,553) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts, and savings accounts 52,767 249,372 66,154 Net increase (decrease) in certificates of deposit 222,045 152,288 354,226 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase 125,163 (106,336) 129,610 Net increase in Federal Home Loan Bank advances (6,225) 23,310 51,258 Net proceeds from issuance of bank notes --- 149,684 --- Net proceeds from issuance of capital trust pass-through securities 49,884 --- --- Proceeds from exercise of stock options 3,516 3,829 2,163 Cash dividends (22,529) (19,367) (17,300) Other 52 --- (2) Repurchase of common stock (18,129) (30,581) --- - --------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 406,544 422,199 586,109 - --------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 51,591 (191,853) 221,322 Cash and cash equivalents at beginning of year 195,902 387,755 166,433 - --------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 247,493 $ 195,902 $ 387,755 ===============================================================================================================
See notes to consolidated financial statements. 11 National Commerce Bancorporation and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized Additional Securities Number of Common Paid-in Retained Gains Dollar Amounts in Thousands Shares Stock Capital Earnings (Losses) Total - ---------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1995 24,547,121 $49,094 $ 77,785 $130,404 $(32,864) $224,419 - ---------------------------------------------------------------------------------------------------------------------- Add (deduct): Net income 49,035 49,035 Common stock issued upon exercise of stock options 287,460 575 1,588 2,163 Cash dividends declared ($.35 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 ($.40 per share) (19,367) (19,367) Tax benefit of stock options exercised 2,405 2,405 Change in unrealized gain on available-for-sale securities, net of taxes (3,297) (3,297) Shares repurchased/canceled (1,024,928) (2,050) (28,531) (30,581) Common stock issued for acquisitions 229,116 458 4,148 4,606 Other 1,542 1,542 - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 24,385,202 48,770 61,763 201,566 1,230 313,329 - ---------------------------------------------------------------------------------------------------------------------- Add (deduct): Net income 69,780 69,780 Common stock issued upon exercise of stock options 517,120 1,034 2,482 3,516 Cash dividends declared ($.46 per share) (22,529) (22,529) Tax benefit of stock options exercised 5,109 5,109 Change in unrealized gain on available-for-sale securities, net of taxes 1,020 1,020 Shares repurchased/cancelled (699,845) (1,400) (16,729) (18,129) Stock split effected in the form of a dividend 24,590,490 49,181 (49,181) Other 59,020 119 (101) 34 52 - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 48,851,987 $97,704 $ 52,524 $199,670 $ 2,250 $352,148 ======================================================================================================================
See notes to consolidated financial statements. 12 Notes To Consolidated Financial Statements National Commerce Bancorporation and Subsidiaries December 31, 1997 Note A - Significant Accounting Policies Basis of Presentation The accounting and reporting policies of the Company conform to generally accepted accounting principles and general practices within the financial services industry. 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. 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 Statement of Financial Accounting Standards (SFAS) 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. Earnings Per Share In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share," which replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented restated to conform to the SFAS No. 128 requirements. In addition, all share and per share amounts have been retroactively restated for stock dividends and splits declared through December 31, 1997. 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 SFAS 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 1997, 1996 and 1995, interest paid was $172,407,000, $151,416,000 and $115,533,000, respectively. During 1997, 1996 and 1995, income taxes paid were $30,783,000, $27,385,000 and $25,329,000, respectively. Reclassification Certain account reclassifications have been made to the 1996 and 1995 financial statements to conform with the 1997 presentation, none of which are material. -13- Stock-based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" which established new rules for the reporting and display of comprehensive income and its components; however, adoption in 1998 will have no impact on the Company's net income or stockholders' equity. SFAS No. 130 requires unrealized gains or losses on the Company's available-for- sale securities, which currently are reported in stockholders' equity, to be included in other comprehensive income and the disclosure of total comprehensive income. 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. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic area and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements retroactively in 1998. Management has not completed its review of the statement, but does not anticipate that its adoption will have a significant effect on the Company's annual and interim reporting. In February 1998, SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," was issued, superseding the disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 is effective for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements retroactively in 1998. SFAS No. 132 suggests a parallel format for presenting information about pensions and other postretirement benefits, but the information disclosed is not substantially different than what is required under current guidance. The Company does not anticipate that the adoption of this statement will have a significant impact 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 -14- 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 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, 1997 --------------------------- In Thousands Carrying Amount Fair Value - ------------------------------------------------------------------------------ Financial assets: Cash and cash equivalents $ 247,493 $ 247,493 Available-for-sale securities $ 408,083 $ 408,083 Held-to-maturity securities $1,210,071 $1,208,922 Trading account securities $ 98,332 $ 98,332 Net loans $2,565,670 $2,654,364 Financial liabilities: Deposits $3,251,242 $3,233,920 Federal funds purchased $ 423,573 $ 423,573 Federal Home Loan Bank advances, other borrowed funds and long-term debt $ 546,136 $ 530,473 Capital trust pass-through securities $ 49,884 $ 49,884 - ------------------------------------------------------------------------------ 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, other borrowed funds and long-term debt $ 552,174 $ 534,480
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, 1997 and 1996, were approximately $4,131,000 and $4,262,000, respectively. NOTE D - Securities The following is a summary of available-for-sale securities and held-to-maturity securities: December 31, 1997 ----------------- 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 $226,676 $ 829 $ (543) $226,962 Obligations of states and political subdivisions 65,275 1,544 (64) 66,755 Mortgage-backed securities 57,796 2,025 (11) 59,810 - ------------------------------------------------------------------------------ Total debt securities 349,747 4,398 (618) 353,527 Other 54,998 188 (630) 54,556 - ------------------------------------------------------------------------------ Total $404,745 $4,586 $(1,248) $408,083 ==============================================================================
December 31, 1997 ----------------- 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 $ 471,928 $ 198 $ (445) $ 471,681 Obligations of states and political subdivisions 71,654 4,373 (40) 75,987 Other asset-backed securities 116,303 713 (134) 116,882 Mortgage-backed securities 549,758 3,255 (8,641) 544,372 - ------------------------------------------------------------------------------- Total $1,209,643 $8,539 $(9,260) $1,208,922 ===============================================================================
-15- 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 ================================================================================
The amortized cost and estimated fair value of debt and marketable equity securities at December 31, 1997, 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, 1997 ----------------- Available-for-sale Securities -----------------------------
Amortized Estimated In Thousands Cost Fair Value - -------------------------------------------------------------- Due in one year or less $ 11,387 $ 11,490 Due after one year through five years 264,291 265,512 Due after five years through 10 years 15,706 14,619 Due after 10 years 567 2,096 - -------------------------------------------------------------- 291,951 293,717 Mortgage-backed securities 57,796 59,810 Other 54,998 54,556 - -------------------------------------------------------------- Total $404,745 $408,083 ==============================================================
December 31, 1997 ----------------- Held-to-maturity Securities ---------------------------
Amortized Estimated In Thousands Cost Fair Value - --------------------------------------------------------------- Due in one year or less $ 435 $ 435 Due after one year through five years 4,401 4,412 Due after five years through 10 years 456,122 458,277 Due after 10 years 198,927 201,426 - --------------------------------------------------------------- 659,885 664,550 Mortgage-backed securities 549,758 544,372 - --------------------------------------- ---------- ---------- Total $1,209,643 $1,208,922 ======================================= ========== ==========
The amortized cost of securities pledged to secure repurchase agreements and government, public and trust deposits was $1,255,126,000 and $992,773,000 at December 1997 and 1996, respectively. Note E - Loans Analyses of loans outstanding by category were as follows:
December 31 ------------------------ In Thousands 1997 1996 - ------------------------------------------------------------------ Commercial, financial and agricultural $ 512,534 $ 466,830 Real estate - construction 241,334 170,188 Real estate - mortgage 781,826 602,064 Consumer 1,045,420 1,086,104 Lease financing 30,046 22,790 Unearned discounts (2,193) (3) - ------------------------------------------------------------------ 2,608,967 2,347,973 Allowance for loan losses (43,297) (35,514) - ------------------------------------------------------------------ Net loans $2,565,670 $2,312,459 ==================================================================
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 $66,910,000 and $44,696,000 at December 31, 1997 and 1996, respectively. During 1997, $69,705,000 of new loans to related parties were made and payments totaled $47,491,000. -16- Note F - Allowance for Loan Losses Changes in the allowance for loans losses were as follows:
Year Ended December 31 ------------------------------- In Thousands 1997 1996 1995 - ---------------------------------------------------------------------- Balance at beginning of year $35,514 $29,010 $24,310 Provision for loan losses 17,013 14,134 9,750 Increase due to acquisitions 625 288 --- Decrease due to loan sale --- (403) --- Loans charged off, net of recoveries of $2,944 in 1997, $2,823 in 1996 and $2,199 in 1995 (9,855) (7,515) (5,050) - ---------------------------------------------------------------------- Balance at end of year $43,297 $35,514 $29,010 ======================================================================
Note G - Non-performing Assets and Past Due Loans There were no non-accrual loans at December 31, 1997 or 1996. There were no restructured loans at December 31, 1997 or 1996. Accruing loans past due 90 days or more were $3,134,000 and $3,482,000 at December 31, 1997 and 1996, respectively. Note H - Premises and Equipment The following is a summary of the premises and equipment accounts:
December 31 ---------------- In Thousands 1997 1996 - ------------------------------------------------------------------ Land $ 2,911 $ 2,240 Premises 2,364 2,364 Furniture and equipment 35,140 29,828 Leasehold improvements 18,340 13,839 Construction in progress 161 146 - ------------------------------------------------------------------ 58,916 48,417 Less accumulated depreciation and amortization 31,512 26,618 - ------------------------------------------------------------------ Premises and equipment, net $27,404 $21,799 ==================================================================
Note I - Deposits Analyses of deposits outstanding by category were as follows:
December 31 ---------------------- In Thousands 1997 1996 - -------------------------------------------------------------------- Non-interest-bearing $ 417,748 $ 352,676 Money market checking 286,555 275,471 Savings 83,626 79,599 Money market savings 943,422 970,838 Certificates of deposit less than $100,000 899,027 728,249 Certificates of deposit $100,000 and over 620,864 569,597 - -------------------------------------------------------------------- Total $3,251,242 $2,976,430 ====================================================================
The time deposit maturities at December 31 for the next five years and thereafter are as follows:
(In thousands) - --------------------------------------------------------------------- 1998 $1,347,990 1999 129,831 2000 18,930 2001 10,387 2002 6,282 Thereafter 6,471 - --------------------------------------------------------------------- Total $1,519,891 =====================================================================
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 1997 1996 1995 - ------------------------ ------ ------ ------ Minimum rentals $6,043 $5,024 $4,456 Contingent rentals 155 852 823 - ------------------------ ------ ------ ------ Total $6,198 $5,876 $5,279 ======================== ====== ====== ======
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, 1997: -17-
In Thousands - -------------- 1998 $ 5,342 1999 4,639 2000 4,048 2001 3,706 2002 3,083 Thereafter 14,338 - -------------- ------- Total $35,156 ============== =======
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 1997, the Company obtained numerous advances from the Federal Home Loan Bank totaling $384 million. The advances ranged from $15 million to $130 million at floating interest rates equal to one month LIBOR, which ranged from 5.38 percent to 5.94 percent. Maturity dates ranged from January 14, 1998, until March 24, 2000. At December 31, 1997, the Company had pledged as collateral $346,489,000 of its loans secured by mortgages on one-to-four family residential properties and certain securities totaling $245,683,000. 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. 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, 1997:
In Thousands - -------------- 1998 $ 67,002 1999 268,821 2000 27,647 2001 9,837 2002 10,382 Thereafter 6,195 - -------------- -------- Total $389,884 ============== ========
Other borrowed funds and long-term debt at December 31, 1997 and 1996, 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 2000. At December 31, 1997, the rates ranged from 5.63 percent to 5.81 percent, maturing October 23 and December 11, 2007. $5,347 Term notes originated December 3 and December 17, 1987, bearing interest payable at calendar quarters with a variable rate which is repriced every three years based on the yield on United States Treasury notes. The next reprice date for the notes is 2000. At December 31, 1997, the rates ranged from 5.67 percent to 5.74 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 24th 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 5.47 percent to 6.03 percent during the year. This rate was approximately 6.03 percent at December 31, 1997. The notes are not redeemable or repayable prior to maturity. At December 31, 1997, the Company had available $27 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, 1998, and a $22 million line of credit which expires December 31, 2005. There were no borrowings against these lines during 1997. Note L - Floating Rate Capital Trust Pass-through Securities On March 20, 1997, National Commerce Trust I (the "Trust"), a Delaware business trust wholly owned by the Company, completed its sale of $50 million of Floating Rate Capital Trust Pass-through Securities (the "Capital Securities") which bear interest at a variable annual rate equal to LIBOR plus 0.98 percent (6.79 percent at December 31, 1997). -18- The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of Floating Rate Junior Subordinated Deferred Interest Debentures due 2027 (the "Subordinated Debt Securities") of the Company. The Subordinated Debt Securities, which also bear interest at a variable annual rate equal to LIBOR plus 0.98 percent, are the sole assets of the Trust and are eliminated, along with the related income statement effects, in the consolidated financial statements. The Company is using the proceeds from the sale of the Subordinated Debt Securities for general corporate purposes. The Company has fully and unconditionally guaranteed all of the obligations of the Trust. The guarantee covers the distributions and payments on liquidation or redemption of the Capital Securities but only to the extent of funds held by the Trust. The Subordinated Debt Securities mature and become due and payable, together with any accrued and unpaid interest, if any, on April 1, 2027. The Subordinated Debt Securities are unsecured and are effectively subordinated to all existing and future liabilities of the Company. The Company has the right, at any time, so long as no event of default has occurred, to defer payments of interest on the Subordinated Debt Securities for a period not to exceed 20 consecutive quarters. The proceeds from the Capital Securities qualify as Tier 1 capital with respect to the Company under the risk-based capital guidelines established by the Federal Reserve. Note M - Stock Options The Company's 1994 Stock Plan reserved 3,100,000 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 1,350,000 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 merged such amended and restated plan into the 1990 Stock Plan. Options became exercisable in equal parts over the succeeding five to 10 years under the 1986 and 1990 Plans. Under the Share NCBC program of the Plan, eligible officers may buy shares from the Company's discount brokerage subsidiary to qualify to participate in the program. If the officer holds the qualifying shares and remains employed for two years, such officer receives two options for each share purchased which become fully exercisable at the end of the two-year period. The Plans are restricted to eligible officers and key employees. In 1997 shareholders approved a two million share addition to the option reserve. The following amounts reflect the effect of all stock dividends and splits declared through 1997:
1997 1996 --------------------------- -------------------------- WEIGHTED Weighted AVERAGE average EXERCISE exercise OPTIONS PRICE Options price - --------------------------------------------------------------------------------------- Outstanding January 1 3,165,104 $ 4.095 3,443,032 $ 8.500 Granted 810,880 $19.252 532,826 $15.132 Exercised (810,530) $ 8.571 (713,590) $ 4.563 Cancelled (70,962) $12.979 (97,164) $11.259 - --------------------------------------------------------------------------------------- Outstanding December 31 3,094,492 $13.050 3,165,104 $ 9.704 - --------------------------------------------------------------------------------------- Exercisable at year end 1,872,886 $12.473 1,966,594 $ 9.224 Unoptioned shares 1,214,622 123,780 Total shares reserved 4,309,114 3,288,884 Weighted average fair value of options granted during the year $ 6.350 $ 4.400 - ---------------------------------------------------------------------------------------
-19- Exercise prices for options outstanding as of December 31, 1997, ranged from $4.666 to $35.625. The weighted average remaining contractual life of those options is approximately five and one-quarter years. Exercise prices for options outstanding as of December 31, 1996, ranged from $4.329 to $18.875. The weighted average remaining contractual life of those options was approximately six and one-half years. The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 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 SFAS No. 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 1997, 1996 and 1995, respectively: risk-free interest rates of 6.0 percent, 6.5 percent and 6.0 percent; dividend yields of 2.0 percent, 2.3 percent and 2.9 percent; volatility factors of the expected market price of the Company's common stock of .35, .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 for the years ended December 31 is as follows:
- ------------------------------------------------------------------- In Thousands, Except Per Share Amounts 1997 1996 1995 - ------------------------------------------------------------------- Pro forma net income $68,684 $57,255 $48,969 Pro forma earnings per share: Basic $ 1.40 $ 1.17 $ 0.99 Diluted $ 1.36 $ 1.14 $ 0.97
Note N - 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, 1997, $32,293,000 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, 1997, 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. There were no loans from the subsidiaries to the Company at December 31, 1997. Note O - 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 1997 1996 - -------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $40,889 at December 31, 1997, and $37,413 at December 31, 1996 $ 42,782 $ 39,020 - ------------------------------------------------------------------------- Projected benefit obligation for services rendered to date (50,211) (45,274) Plan assets at fair value (stocks and bonds) 59,076 48,243 - ------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 8,865 2,969 Unrecognized net assets (633) (1,696) Unrecognized net loss 2,225 7,676 Unrecognized prior service cost (1,580) (1,731) - ------------------------------------------------------------------------- Prepaid pension cost included in other assets $ 8,877 $ 7,218 - -------------------------------------------------------------------------
-20- Year Ended December 31 ----------------------
In Thousands 1997 1996 1995 - -------------------------------------------------------------------------- Net pension cost (credit) included the following components: Service cost - benefits earned during the period $ 1,496 $ 1,499 $ 1,210 Interest cost on projected benefit obligation 3,386 3,088 2,941 Actual gain on plan assets (13,548) (7,944) (6,254) Net amortization and deferral 8,302 3,438 2,193 - --------------------------------------------------------------------------- Net periodic pension expense (credit) ($364) $ 81 $ 90 - ---------------------------------------------------------------------------
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 7.25 percent and 4.50 percent, respectively, at December 31, 1997, and 7.75 percent and 4.25 percent, respectively, at December 31, 1996. The expected long-term rate of return on plan assets was 10.50 percent in 1997 and 10.25 percent in 1996. The assumed normal retirement age was 65 in 1997 and 1996. 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 1995. 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 $10,000. 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 P - Other Employee Benefits In addition to the Company's defined benefit pension plan, the Company sponsors retirement medical and life insurance plans that provide post- retirement healthcare and life insurance 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 1997 1996 1995 - --------------------------------------------------------------------------- Accumulated post-retirement benefit obligation (APBO): Retirees $(2,593) $(2,778) $(3,217) Fully eligible active plan participants --- --- (91) Other active plan participants --- --- (2,265) - --------------------------------------------------------------------------- Post-retirement benefit obligation in excess of plan assets (2,593) (2,778) (5,573) Unrecognized transition obligation 304 324 3,003 Unrecognized net loss 746 1,114 1,047 Unrecognized prior service cost (592) (634) --- Accrued expense $(2,135) $(1,974) $(1,523) - ---------------------------------------------------------------------------
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 was amortized as negative prior service cost during in 1997. The retiree life insurance benefit was eliminated for retirements after December 31, 1996. Net periodic post-retirement benefits costs include the following components:
Year Ended December 31 ----------------------- In Thousands 1997 1996 1995 - ----------------------------------------------------------------------- Service cost $ 18 $ 189 $ 142 Interest cost 181 414 387 Net amortization and deferral 11 211 191 - ----------------------------------------------------------------------- Net periodic post-retirement benefits cost $ 210 $ 814 $ 720 - -----------------------------------------------------------------------
The weighted average annual assumed rate of increase in the per capita cost of covered enefits (i.e., healthcare cost trend rate) is 7.25 percent for 1997 and 10 percent for 1996 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 post-retirement benefit obligation as of December 31, 1997, by approximately $260,000 and the aggregate of the service and interest cost components of net periodic post-retirement benefit costs for 1997 by approximately $187,000. The weighted-average discount rate used in determining the accumulated post-retirement benefit obligation was 7.25 percent and 7.50 percent at December 31, 1997 and 1996, respectively. -21- 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. Components of other non-interest expense which exceed 1 percent of total revenues for the three years ended December 31 were as follows:
(In Thousands) 1997 1996 1995 - ----------------------------------------------------- Non-interest expense Broker/dealer commissions $2,818 $3,446 $3,484 Sales promotion expense $4,607 $5,900 --- FDIC assessment --- --- $2,725
Note Q - Income Taxes The Company accounts for income taxes using the liability method required by SFAS No. 109, "Accounting for Income Taxes." The components of the provision for income taxes for the three years ended December 31 were:
In Thousands 1997 1996 1995 - --------------------------------------------------- Federal: Current $36,077 $28,116 $23,008 Deferred (credits) (2,363) (1,079) (1,866) - -------------------------------------------------- 33,714 27,037 21,142 State 1,259 2,542 2,136 - -------------------------------------------------- Income taxes $34,973 $29,579 $23,278 - --------------------------------------------------
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 1997 1996 - ------------------------------------------------------------------- Deferred tax assets: Provision for loan losses over charge-offs $16,669 $13,450 Other 1,741 2,049 - ------------------------------------------------------------------- Total deferred tax assets 18,410 15,499 - ------------------------------------------------------------------- Deferred tax liabilities: Net unrealized gains on available-for- sale securities 1,439 786 Pension costs 2,036 1,885 SFAS No. 91 net deferred costs 3,299 2,755 Other 2,676 2,825 - ------------------------------------------------------------------- Total deferred tax liabilities 9,450 8,251 - ------------------------------------------------------------------- Net deferred tax assets $8,960 $7,248 - -------------------------------------------------------------------
Income taxes varied from the amount computed at the statutory federal income tax rate as follows:
1997 1996 1995 ----------------- ----------------- ----------------- In Thousands AMOUNT % Amount % Amount % - ---------------------------------------------------------------------------------- Federal income tax at statutory rate $36,665 35.00% $30,482 35.00% $25,310 35.00% Add (deduct): State income taxes net of federal tax benefits 820 .78 1,652 1.90 1,388 1.92 Non-taxable interest income (2,480) (2.37) (2,677) (3.07) (3,700) (5.12) Other items, net (32) (.02) 122 .13 280 .39 - ---------------------------------------------------------------------------------- Income taxes $34,973 33.39% $29,579 33.96% $23,278 32.19% - ----------------------------------------------------------------------------------
Income taxes (credits) applicable to securities gains (losses) for 1997, 1996 and 1995 which are included in the provision for income taxes were $30,800, $1,000 and $89,000, respectively. -22- Note R - 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 1997 1996 - -------------------------------------------------- Loan commitments $669,307 $560,095 Standby letters of credit 39,465 $ 41,428 Commercial letters of credit 2,064 $ 3,691 - --------------------------------------------------
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. At December 31, 1997, the notional amount of interest rate agreements was $60 million. 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, 1997, was as follows:
In Thousands 1997 1996 - ------------------------------------------------- Forward contracts: Commitments to purchase $ 93,475 $44,373 Commitments to sell $170,549 $45,976 When issued contracts: Commitments to purchase $ 7,799 $15,778 Commitments to sell $ 5,819 $17,287 Option contracts: Written option contracts $ 5,500 --- Purchased option contracts $ 5,500 --- - --------------------------------------------------
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 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. -23- 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, 1997, that the Company exceeds all capital adequacy requirements to which it is subject. As of December 31, 1997, 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 In Thousands ---------------- -------------- Amount Ratio Amount Ratio - ----------------------------------------------------------------- As of December 31, 1997 Total capital (to risk- weighted assets) $429,936 13.86% $265,883 12.43% Tier 1 capital (to risk- weighted assets) $391,112 12.61% $239,114 11.18% Tier 1 capital (to total assets) $391,112 8.69% $239,114 7.50% As of December 31, 1996 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 7.66% $206,223 7.15%
Note T - National Commerce Bancorporation Financial Information (Parent Company Only)
Balance Sheets December 31 --------------- In Thousands 1997 1996 - -------------------------------------------------------------------------- ASSETS Cash* $ 3,036 $ 205 Securities available for sale 29,414 --- Investments in : Bank subsidiaries* 294,660 273,541 Non-bank subsidiaries* 64,598 33,083 Other 16,343 7,030 - -------------------------------------------------------------------------- Total assets $408,051 $313,859 - -------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued liabilities $ 6,028 $ 530 Debenture payable 49,875 --- Stockholders' equity 352,148 313,329 - -------------------------------------------------------------------------- Total liabilities and stockholders' equity $408,051 $313,859 - --------------------------------------------------------------------------
*Eliminated in consolidation.
Statements of Income Year Ended December 31 ----------------------------- In Thousands 1997 1996 1995 - ----------------------------------------------------------------------------------- Income: Dividends from bank and thrift subsidiaries* $30,331 $47,045 $26,330 Dividends from non-bank subsidiaries* --- 5,500 2,500 Interest and other income from bank subsidiaries* 1,412 50 132 Other 311 (250) --- - ----------------------------------------------------------------------------------- 32,054 52,345 28,962 Expenses: Salaries and employee benefits 47 63 50 Interest on debenture 2,626 --- --- Other 1,176 (567) 2,138 - ----------------------------------------------------------------------------------- 3,849 (504) 2,188 Income before income taxes (credits) and equity in undistributed earnings of subsidiaries 28,205 52,849 26,774 Income taxes (credits) (706) 116 (808) - ----------------------------------------------------------------------------------- 28,911 52,733 27,582 Equity in undistributed net income of: Bank and thrift subsidiaries 29,290 (1,457) 15,653 Non-bank subsidiaries 11,579 6,237 5,800 - ----------------------------------------------------------------------------------- Net income $69,780 $57,513 $49,035 - -----------------------------------------------------------------------------------
*Eliminated in consolidation. -24- Statements of Cash Flows
Year Ended December 31 --------------------------- In Thousands 1997 1996 1995 - ------------------------------------------------------------------------------------------ Operating activities: Net income $ 69,780 $ 57,513 $ 49,035 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiaries (18,645) (4,780) (21,453) (Increase) decrease in other assets (9,313) 1,438 522 Increase (decrease) in liabilities 10,607 (810) 442 - ------------------------------------------------------------------------------------------ Net cash provided by operating activities 52,429 53,361 28,546 Investing activities: Investment in subsidiaries (32,766) (9,298) (12,000) Purchase of available-for-sale securities (29,617) --- --- ------------------------------------------------------------------------------------------ Net cash used in investing activities (62,383) (9,298) (12,000) Financing activities: Proceeds from debenture 49,875 --- --- Cash used to repurchase/retire stock (18,129) (30,581) --- Proceeds from exercise of stock options 3,516 3,829 2,163 Cash dividends paid (22,529) (19,367) (17,300) Other 52 --- --- - ------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 12,785 (46,119) (15,137) - ------------------------------------------------------------------------------------------ Increase (decrease) in cash 2,831 (2,056) 1,409 Cash at beginning of year 205 2,261 852 - ------------------------------------------------------------------------------------------ Cash at end of year $3,036 $205 $2,261 - ------------------------------------------------------------------------------------------
Note U - Quarterly Results of Operations (Unaudited) Quarter ------------------------------------- In Thousands, Except Per Share Amounts First Second Third Fourth - --------------------------------------------------------------------------------------------- 1997: Interest income $79,337 $83,519 $87,138 $86,999 Interest expense 41,434 43,656 45,115 43,967 Net interest income 37,903 39,863 42,023 43,032 Provision for loan losses 3,454 3,551 4,280 5,728 Other income 17,596 18,820 20,010 26,059 Securities gains (1) 30 2 (111) Other expenses 29,000 30,468 30,535 33,457 Income before income taxes 23,044 24,694 27,220 29,795 Income taxes 7,929 8,585 9,175 9,284 Net income $15,115 $16,109 $18,045 $20,511 Net income per common share*: Basic $ 0.31 $ 0.33 $ 0.37 $ 0.42 Diluted $ 0.30 $ 0.32 $ 0.36 $ 0.40 - --------------------------------------------------------------------------------------------- 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 16,932 Securities gains (losses) 25 (257) 194 41 Other expenses 24,421 27,356 25,579 26,519 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*: Basic $ 0.27 $ 0.28 $ 0.30 $ 0.32 Diluted $ 0.27 $ 0.27 $ 0.30 $ 0.31 - --------------------------------------------------------------------------------------------
* The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with SFAS No. 128, "Earnings Per Share." -25- EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21. Parent and Subsidiaries National Commerce Bancorporation and Subsidiaries - ------------------------------------------------- The following table shows the subsidiaries of NCBC, their jurisdiction of organization, and the percentage of voting securities owned by each subsidiary's parent as of December 31, 1997. Percentage of Voting Name Jurisdiction Securities of of Owned by Subsidiary Organization Parent Parent - ---------- ----------- -------- --------- National Bank of Commerce United States NCBC 100.00% Commerce General Corporation Tennessee NBC 100.00 NBC Capital Markets Group, Inc. Tennessee NBC 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 National Commerce Bank Tennessee NBC 100.00 Services, Inc. Commerce Finance Company Tennessee NBC 100.00 Commerce Acquisition Corp Tennessee NCBC 100.00 NBC Bank, FSB (Roanoke, VA) formerly Mississippi CAC 100.00 Belzoni, MS Brooks, Montague & Associates, Inc. Tennessee NCBC 100.00 TransPlatinum Service Corp. Tennessee NCBC 100.00 Kenesaw Leasing, Inc. Tennessee Knoxville 100.00 J&S Leasing, Inc. Tennessee Knoxville 100.00 National Commerce Capital Trust I Delaware NCBC 100.00 All of the above subsidiaries are included in the consolidated financial statements contained in the report. EX-23 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23. Consent of Independent Auditors National Commerce Bancorporation and Subsidiaries - ------------------------------------------------- We consent to the incorporation by reference in this Annual Report (Form 10-K) of National Commerce Bancorporation of our report dated February 13, 1998, included in the 1997 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 13, 1998, with respect to the consolidated financial statements of National Commerce Bancorporation incorporated herein by reference. /s/ Ernst & Young LLP --------------------- Memphis, Tennessee March 23, 1998 EX-27 6 FDS
9 1,000 12-MOS 12-MOS 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1994 JAN-01-1997 JAN-01-1996 JAN-01-1995 JAN-01-1994 DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1994 206,191 164,894 144,166 123,138 18,293 17,789 16,660 17,620 23,009 13,219 226,929 25,675 98,332 31,812 20,159 13,507 408,083 700,775 516,623 872,379 1,210,071 817,124 762,023 283,906 1,208,922 804,690 765,142 269,043 2,608,967 2,347,973 1,931,213 1,592,806 43,297 35,514 29,010 24,310 4,692,011 4,200,409 3,695,042 3,005,809 3,251,242 2,976,430 2,574,770 2,154,390 515,570 499,633 431,427 326,070 69,028 60,066 39,667 23,940 504,023 350,951 352,499 276,990 0 0 0 0 0 0 0 0 352,148 313,329 296,679 224,419 0 0 0 0 4,692,011 4,200,409 3,965,042 3,005,809 229,204 190,879 159,816 128,297 103,909 91,562 82,921 63,818 3,880 4,126 3,728 3,005 336,993 286,567 246,465 195,120 119,159 107,965 96,691 63,080 174,172 151,101 126,440 85,099 162,821 135,466 120,025 110,021 17,013 14,134 9,750 7,077 (80) 3 228 (498) 123,460 103,875 91,830 87,574 104,753 87,092 72,313 65,310 104,753 87,092 72,313 65,310 0 0 0 0 0 0 0 0 69,780 57,513 40,935 44,342 1.42 1.17 .99 .91 1.38 1.15 .97 .89 4.04 3.89 4.14 4.33 0 0 0 0 3,134 3,482 1,136 1,443 0 0 0 0 0 0 0 0 35,514 29,010 24,310 21,467 12,799 10,388 7,249 6,475 2,944 2,823 2,199 2,241 43,297 35,514 29,010 24,310 43,297 35,514 29,010 24,310 0 0 0 0 0 0 0 0
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