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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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(For the fiscal year ended) (Commission file number)
NATIONAL COMMERCE BANCORPORATION
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(Exact name of registrant as specified in its charter)
Tennessee 62-0784645
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Commerce Square, Memphis, Tennessee 38150 (901)523-3242
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(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
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(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
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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
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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.
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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.
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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.
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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
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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.
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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
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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
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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
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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
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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-
<PAGE>
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%.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- -------- --------- ------- -------- --------- ------- -------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
========= ========= =========
</TABLE>
(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-
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ----------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------- -------- -------- -------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
==== ==== ====
</TABLE>
-12-
<PAGE>
INTEREST RATE SENSITIVITY TABLE BY REPRICING DATES
<TABLE>
<CAPTION>
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
------- ------- ------------ ------------ ----------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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-
<PAGE>
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%.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ==== ====== ====== ====== ======
</TABLE>
(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-
<PAGE>
SECURITIES PORTFOLIO
- --------------------
The following table sets forth the aggregate book value of investment securities
at the dates indicated.
<TABLE>
<CAPTION>
December 31
-------------------------------
1997 1996 1995
--------- --------- ---------
(in thousands of dollars)
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
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%.
<TABLE>
<CAPTION>
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
------- ------ ------- ------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ========
</TABLE>
-15-
<PAGE>
LOAN PORTFOLIO
- --------------
The following table shows the Company's gross loan distribution at the end of
the last five years.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
(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.
<TABLE>
<CAPTION>
Maturing
Within After 1 But After
1 Year Within 5 Yrs 5 Years Total
------- ------------ ------- -------
(in thousands of dollars)
<S> <C> <C> <C> <C>
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
======= ============ ======= =======
</TABLE>
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.
<TABLE>
<CAPTION>
After 1 but After
Within 5 Yrs 5 Years
-------------- ---------
(in thousands of dollars)
<S> <C> <C>
Predetermined interest rate................ 67,321 168,638
Floating or adjustable interest rates...... 271,427 140,344
------- -------
Total................................. 338,748 308,982
======= =======
</TABLE>
-16-
<PAGE>
NONACCRUAL, PAST DUE, AND RESTRUCTURED
- --------------------------------------
The following table summarizes the Company's nonaccrual, past due, and
restructured loans (all of which are domestic):
<TABLE>
<CAPTION>
December 31
---------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
(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-
<PAGE>
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
-19-
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1997 1996 1995
----- ---------------- -----
Amount Rate Amount Rate Amount Rate
--------- ----- --------- ----- --------- -----
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
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
========= ========= =========
</TABLE>
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):
<TABLE>
<CAPTION>
Time remaining until maturity Amount
- ----------------------------- ------
<S> <C>
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
=======
</TABLE>
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.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
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%
</TABLE>
* 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-
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands of Dollars)
<S> <C> <C> <C>
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%
</TABLE>
-21-
<PAGE>
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-
<PAGE>
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
<TABLE>
<CAPTION>
Name Age Office Held
---- --- ------------
<S> <C> <C>
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
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Fourth Third Second First
------ ------ ------ ------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
* 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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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.
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
1996-1997 1995-1996
1997 -------------------- 1996 -------------------- 1995
Average Increase (Decrease) Average Increase (Decrease) Average
In Thousands Balance Amount % Balance Amount % Balance
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
======================================================================================================================
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
MARKET RISK DISCLOSURE
<TABLE>
<CAPTION>
Principal Amount Maturing In Fair Value
-------------------------------------------------------------------------------------------
Dollar Amounts in Thousands 1998 1999 2000 2001 2002 Thereafter Total December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
National Commerce Bancorporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For Year Ended December 31
---------------------------------
In Thousands 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===============================================================================================================
</TABLE>
See notes to consolidated financial statements.
11
<PAGE>
National Commerce Bancorporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Additional Securities
Number of Common Paid-in Retained Gains
Dollar Amounts in Thousands Shares Stock Capital Earnings (Losses) Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1997
---------------------------
<S> <C> <C>
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
</TABLE>
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
-----------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
==============================================================================
</TABLE>
December 31, 1997
-----------------
Held-to-maturity Securities
---------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
===============================================================================
</TABLE>
-15-
<PAGE>
December 31, 1996
-----------------
Available-for-sale Securities
-----------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
==============================================================================
</TABLE>
December 31, 1996
-----------------
Held-to-maturity Securities
---------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
================================================================================
</TABLE>
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
-----------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
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
==============================================================
</TABLE>
December 31, 1997
-----------------
Held-to-maturity Securities
---------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
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
======================================= ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
December 31
------------------------
<S> <C> <C>
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
==================================================================
</TABLE>
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-
<PAGE>
Note F - Allowance for Loan Losses
Changes in the allowance for loans losses were as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
<S> <C> <C> <C>
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
======================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
December 31
----------------
<S> <C> <C>
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
==================================================================
</TABLE>
Note I - Deposits
Analyses of deposits outstanding by category were as follows:
<TABLE>
<CAPTION>
December 31
----------------------
<S> <C> <C>
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
====================================================================
</TABLE>
The time deposit maturities at December 31 for the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------
<S> <C>
1998 $1,347,990
1999 129,831
2000 18,930
2001 10,387
2002 6,282
Thereafter 6,471
- ---------------------------------------------------------------------
Total $1,519,891
=====================================================================
</TABLE>
Note J - Lease Commitments
The Company leases land, certain bank premises and equipment. Total rental
expense for all operating leases is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
- ------------------------
<S> <C> <C> <C>
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
======================== ====== ====== ======
</TABLE>
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-
<PAGE>
<TABLE>
<CAPTION>
In Thousands
- --------------
<S> <C>
1998 $ 5,342
1999 4,639
2000 4,048
2001 3,706
2002 3,083
Thereafter 14,338
- -------------- -------
Total $35,156
============== =======
</TABLE>
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:
<TABLE>
<CAPTION>
In Thousands
- --------------
<S> <C>
1998 $ 67,002
1999 268,821
2000 27,647
2001 9,837
2002 10,382
Thereafter 6,195
- -------------- --------
Total $389,884
============== ========
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------
</TABLE>
-19-
<PAGE>
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:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
-------------------
<TABLE>
<CAPTION>
In Thousands 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------------------
</TABLE>
-20-
<PAGE>
Year Ended December 31
----------------------
<TABLE>
<CAPTION>
In Thousands 1997 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
December 31
----------------------------
<S> <C> <C> <C>
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)
- ---------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
- -----------------------------------------------------
<S> <C> <C> <C>
Non-interest expense
Broker/dealer commissions $2,818 $3,446 $3,484
Sales promotion expense $4,607 $5,900 ---
FDIC assessment --- --- $2,725
</TABLE>
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:
<TABLE>
<CAPTION>
In Thousands 1997 1996 1995
- ---------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
December 31
-----------------------
<S> <C> <C>
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
- -------------------------------------------------------------------
</TABLE>
Income taxes varied from the amount computed at the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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%
- ----------------------------------------------------------------------------------
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
In Thousands 1997 1996
- --------------------------------------------------
<S> <C> <C>
Loan commitments $669,307 $560,095
Standby letters of credit 39,465 $ 41,428
Commercial letters of credit 2,064 $ 3,691
- --------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
In Thousands 1997 1996
- -------------------------------------------------
<S> <C> <C>
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 ---
- --------------------------------------------------
</TABLE>
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-
<PAGE>
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 :
<TABLE>
<CAPTION>
The Company NBC
Actual Actual
In Thousands ---------------- --------------
<S> <C> <C> <C> <C>
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%
</TABLE>
Note T - National Commerce Bancorporation Financial Information (Parent Company
Only)
<TABLE>
<CAPTION>
Balance Sheets
<S> <C> <C>
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
- --------------------------------------------------------------------------
</TABLE>
*Eliminated in consolidation.
<TABLE>
<CAPTION>
Statements of Income
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------
</TABLE>
*Eliminated in consolidation.
-24-
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Note U - Quarterly Results of Operations (Unaudited)
Quarter
-------------------------------------
In Thousands, Except Per Share Amounts First Second Third Fourth
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- --------------------------------------------------------------------------------------------
</TABLE>
* 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-
<PAGE>
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.
<PAGE>
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
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