UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended June 30, 2002.
Commission File Number 1-15773
NBC CAPITAL CORPORATION
(Exact name of registrant as specified in its charter.)
Mississippi 64-0694775
(State of other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
NBC Plaza, P. O. Box 1187, Starkville, Mississippi 39760
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (662) 323-1341
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
Common Stock, $1 Par Value - 6,156,660 shares as of June 30, 2002.
PART I - FINANCIAL INFORMATION
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME FOR
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
(Amounts in thousands, except per share data)
2002 2001
_______ _______
INTEREST INCOME:
Interest and Fees on Loans $20,670 $27,726
Interest And Dividends On Investment Securities 9,874 8,893
Other Interest Income 107 687
_______ _______
Total Interest Income 30,651 37,306
INTEREST EXPENSE:
Interest on Deposits 9,003 16,762
Interest on Borrowed Funds 2,819 3,008
_______ _______
Total Interest Expense 11,822 19,770
_______ _______
Net Interest Income 18,829 17,536
Provision for Loan Losses 1,260 1,360
Net Interest Income After Provision for
Loan Losses 17,569 16,176
NON-INTEREST INCOME:
Income from Fiduciary Activities 878 854
Service Charges on Deposit Accounts 3,331 2,821
Insurance Commission and Fee Income 1,965 1,868
Mortgage Loan Fee Income 641 613
Other Non-Interest Income 1,576 1,384
_______ _______
Total Non-Interest Income 8,391 7,540
Gains (Losses) on Securities 91 212
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 9,792 9,276
Expense of Premises and Fixed Assets 2,316 2,320
Other Non-Interest Expense 4,155 4,564
_______ _______
Total Non-Interest Expense 16,263 16,160
_______ _______
Income Before Income Taxes 9,788 7,768
Income Taxes 2,581 1,747
_______ _______
NET INCOME $ 7,207 $ 6,021
======= =======
Net Earnings Per Share:
Basic $ 1.17 $ 0.91
======= =======
Diluted $ 1.17 $ 0.91
======= =======
NBC CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
Jun. 30, 2002 Dec. 31, 2001
(Unaudited) (Audited)
ASSETS:
Cash and Balances Due From Banks:
Noninterest -Bearing Balances $ 29,155 $ 28,752
Interest-bearing Balances 1,213 1,263
__________ __________
Total Cash and Due From Banks 30,368 30,015
Held-To-Maturity Securities (Market value of
$48,186 at June 30, 2002 and $50,623 at
December 31, 2001) 45,078 47,683
Available-For-Sale Securities 326,213 293,043
__________ __________
Total Securities 371,291 340,726
Federal Funds Sold and Securities Purchased
Under Agreement to Resell 767 13,510
Loans 597,743 622,940
Less: Reserve for Loan Losses (7,044) (6,753)
__________ __________
Net Loans 590,699 616,187
Bank Premises and Equipment (Net) 15,188 15,377
Interest Receivable 8,117 8,352
Intangible Assets 2,796 2,857
Other Assets 26,347 23,778
__________ __________
TOTAL ASSETS $1,045,573 $1,050,802
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 99,579 $ 101,569
Interest Bearing Deposits 691,490 709,134
__________ __________
Total Deposits 791,069 810,703
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 22,897 16,625
Other Borrowed Funds 107,187 110,594
Interest Payable 1,700 2,284
Other Liabilities 13,951 7,669
__________ __________
TOTAL LIABILITIES 936,804 947,875
__________ __________
Shareholders' Equity:
Common Stock $1 Par Value, Authorized
10,000,000 shares, Issued 7,212,662 7,213 7,213
Surplus and Undivided Profits 123,736 120,061
Accumulated Other Comprehensive Income 4,644 1,650
Treasury Stock, at Cost (26,824) (25,997)
__________ __________
TOTAL SHAREHOLDERS' EQUITY 108,769 102,927
__________ __________
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $1,045,573 $1,050,802
========== ==========
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)
(Amounts in thousands)
2002 2001
________ ________
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,207 $ 6,021
Adjustments to Reconcile Net Income to
Net Cash
Depreciation and Amortization 1,052 1,280
Deferred Income Taxes (Credits) (3,223) (1,964)
Provision for Loan Losses 1,260 1,360
Loss (Gain) on Sale of Securities (91) (212)
(Increase) Decrease in Interest
Receivable 235 723
(Increase) Decrease in Other Assets (1,024) (10,743)
Increase (Decrease) in Interest Payable (584) (14)
Increase (Decrease) in Other Liabilities 6,282 3,820
________ ________
Net Cash Provided by Operating Activities 11,114 271
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Securities 20,304 29,826
Proceeds from Sale of Securities 4,909 30,701
Purchase of Securities (51,151) (107,193)
(Increase) Decrease in Loans 24,228 8,212
(Additions) Disposal of Bank Premises and
Equipment (738) (875)
Net Cash Used in Investing Activities (2,448) (39,329)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Deposits (19,634) 10,533
Dividend Paid on Common Stock (3,460) (3,531)
Increase (Decrease) in Borrowed Funds 2,865 50,613
Purchase of Treasury Stock (827) (24,392)
________ ________
Net Cash Provided by Financing Activities (21,056) 33,223
Net Increase (decrease) in Cash and Cash
Equivalents (12,390) (5,835)
Cash and Cash Equivalents at Beginning
of Year 43,525 45,150
________ ________
Cash and Cash Equivalents at the End of
the Period $ 31,135 $ 39,315
======== ========
Interest $ 12,406 $ 19,784
======== ========
NBC CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include the
accounts of NBC Capital Corporation ("Corporation") and its subsidiaries,
National Bank of Commerce and First National Finance Company. All significant
intercompany accounts and transactions have been eliminated. In the normal
decision making process, management makes certain estimates and assumptions
that affect the reported amounts that appear in these statements. Although
management believes that the estimates and assumptions are reasonable and are
based on the best information available, actual results could differ.
In the opinion of management, all adjustments necessary for the fair
presentation of the financial statement presented in this report have been
made. Such adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Generally Accepted Accounting
Principles have been condensed or omitted.
Note 1. Accounting Pronouncements
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." According to this Statement, goodwill and those
intangible assets that have indefinite lives are not amortized, but tested
for impairment. Statement No. 142 is effective for years beginning after
December 15, 2001. Management is of the opinion the impact of the adoption
of the Statement on the Corporation's consolidated financial statements is
not significant. If Statement 142 had been in effect for all periods
presented, its impact on net income and net income per share would have
been as follows for the quarter and six-month period ended June 30, 2001:
Quarter Period
Ended Ended
June 30,2001
(In thousands, except per share data)
Reported net income $2,673 $6,021
Add:
Goodwill Amortization 66 132
Adjusted Net Income $2,739 $6,153
Basic and Diluted net income per share:
Reported net income $ 0.43 $ 0.91
Goodwill amortization .01 $ .02
Adjusted net income $ 0.44 $ 0.93
Note 2. Stock Options
The Corporation accounts for stock options in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, no compensation expense is recognized for stock
options granted.
Had compensation for the stock options been determined based on FASB Statement
No. 123, "Accounting for Stock Based Compensation," net income and per share
amounts would have been as follows:
Quarter Ended
June 30,
2002 2001
______ ______
Net income:
As reported $3,679 $2,673
Pro forma 3,634 2,665
Basic net earnings per share:
As reported $ .60 $ .43
Pro forma .59 .43
Diluted net earnings per share:
As reported $ .60 $ .43
Pro forma .59 .43
Six Months Ended
June 30
2002 2001
______ ______
Net income:
As reported $7,207 $6,021
Pro forma 7,123 6,013
Basic net earnings per share:
As reported $ 1.17 $ .91
Pro forma 1.16 .91
Diluted net earnings per share:
As reported $ 1.17 $ .91
Pro forma 1.16 .91
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2002
DISCLOSURE REGARDING FORWARD LOOKING INFORMATION
The following provides a narrative discussion and analysis of significant
changes in the Corporation's results of operations and financial condition for
the quarter and the six-month period ended June 30, 2002. Certain information
included in this discussion contains forward-looking statements and information
that are based on management's conclusions, drawn from certain assumptions and
information currently available. The Private Securities Litigation Act of 1995
encourages the disclosure of forward-looking information by management by
providing a safe harbor for such information. This discussion includes
"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. Although the Corporation believes that the
expectations reflected in such forward-looking statements are reasonable, such
forward-looking statements are based on numerous assumptions (some of which may
prove to be incorrect) and are subject to risks and uncertainties which could
cause the actual results to differ materially from the Corporation's
expectations. The forward-looking statements made in this document are based
on management's beliefs, as well as assumptions made by and information
currently available to management. When used in the Corporation's documents,
the words "anticipate," "estimate," "expect," "objective," "projection,"
"forecast," "goal" and similar expressions are intended to identify forward-
looking statements. In addition to any assumptions and other factors referred
to specifically in connection with forward-looking statements, factors that
could cause the Corporation's actual results to differ materially from those
contemplated in any forward-looking statements include, among others,
increased competition, regulatory factors, economic conditions, changing
interest rates, changing market conditions, availability or cost of capital,
employee workforce factors, cost and other effects of legal and administrative
proceedings, and changes in federal, state or local laws and regulations. The
Corporation undertakes no obligation to update or revise any forward-looking
statements, whether as a result of changes in actual results, changes in
assumptions or other factors affecting such statements.
The two major trends that can have a material impact on the Corporation's
financial condition and results of operations are the trend in interest rates
and the overall trend in the economy. Currently, management expects, based on
the available information, that interest rates will trend upward and the
overall economy in its market will improve somewhat during the later half of
2002. The Corporation's 2002 projections, budgets and goals are based on these
expectations. If these trends move differently than expected in either
direction or speed, it could have a material impact on the Corporation's
financial condition and results of operations. The areas of the Corporation's
operations most directly impacted would be the net interest margin, loan and
deposit growth and the provision for loan losses.
ACCOUNTING ISSUES
Note A of the Notes to Consolidated Financial Statements included in the
Corporation's Form 10-K for the year ended December 31, 2001 (herein
incorporated by reference), contains a summary of the Corporation's
accounting policies. Management is of the opinion that Note A, read in
conjunction with all other information in the annual report, including
management's letter to shareholders and management's discussion and analysis,
is sufficient to provide the reader with the information needed to understand
the Corporation's financial condition and results of operations. This
information is also sufficient to enable the reader to identify the areas
in which management is required to make the most difficult, subjective and/or
complex judgments.
In the normal course of business, the Corporation's wholly-owned subsidiary,
National Bank of Commerce, makes loans to related parties, including directors
and executive officers of the Corporation and their relatives and affiliates.
These loans are made in the ordinary course of business and on substantially
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other parties. Also, they are
consistent with sound banking practices and within the applicable regulatory
and lending limitations imposed by the national banking laws and regulations.
The Corporation does not have investments in any unconsolidated entities over
which it exercises management or control. The Corporation does not have
relationships with limited or special purpose entities that it relies on to
provide financing, liquidity or market and credit risk support.
RESULTS OF OPERATIONS
First two quarters of 2002 compared to the first two quarters of 2001
Earnings for the first two quarters of 2002 increased by 19.7% to $7.21
million or $1.17 per share. This compares to $6.02 million or $.91 per share
for the first two quarters of 2001. On an annualized basis, these 2002 totals
equate to a 1.4% return on average assets and a 13.8% return on average
equity. For this same period in 2001, return on average assets was 1.2% and
return on average equity was 11.3%.
Net interest income for the first two quarters of 2002 was $18.23 million
compared to $17.54 million for the same period of 2001. This represents an
increase of 7.4%. This increase resulted from a twenty-eight basis point
increase in the net interest margin. This increase in margin was partially
offset by a .4% decrease in average earning assets. The primary reason for the
increase in margin was that the Corporation was able to decrease its cost of
funds by 192 basis points from the first half of 2001 to the first half of
2002. During the same time period it lost 135 basis points from the repricing
of its earning assets. The small decrease in earning assets resulted from low
loan demand due to the slow economy during the second half of 2001 and the
first half of 2002. The stable rate environment of the first six-months of
2002 helped from the standpoint that it allowed the repricing of the deposits
to catch up with the repricing of the loans that occurred throughout 2001 and
to a lesser extent during the first half of 2002. Management believes that if
the Federal Reserve will continue the flat to slightly increasing rate
environment for the remainder of the year, the Corporation's net interest
income should improve as the margin continues to increase. For additional
information, see the table entitled "Analysis of Net Interest Earnings" at the
end of this section.
The Corporation's Provision for Loan Losses is utilized to replenish the
Reserve for Loan Losses on its balance sheet. The reserve is maintained at a
level deemed adequate by the Board of Directors after its evaluation of the
risk exposure contained in the Corporation's loan portfolio. The methodology
used to make this determination is performed on a quarterly basis. An overall
analysis of the portfolio is performed by the senior credit officers and the
loan review staff. As a part of this evaluation, certain loans are
individually reviewed to determine if there is an impairment of the bank's
ability to collect the loan and the related interest. This determination is
generally made based on collateral value. If it is determined that an
impairment exist, a specific portion of the reserve is allocated to these
individual loans. All other loans are grouped into homogeneous pools and risk
exposure is determined by considering the following list of factors (this list
is not all inclusive and the factors reviewed may change as circumstances
change): Historical loss experiences; trends in delinquencies and non-accruals
and national, regional and local economic conditions. These economic
conditions would include, but not be limited to, general real estate
conditions, the current interest rate environment and trends, unemployment
levels and other information, as deemed appropriate. Classified assets to
capital was 17.1% at June 30, 2002, compared to 21.0% at June 30, 2001. The
percentage of loans past due 30 days or more was 2.03%. The Reserve for Loan
Losses as a percentage of total loans has increased from 1.08% at the end of
2001 to 1.18% at the end of the second quarter of 2002. Overall, loan quality
remains good. At the end of the second quarter of 2002, the ratio of non-
performing loans to total loans remained low at .56%. This compares to .63%
at December 31, 2001 and June 30, 2001. Management is committed to not
relaxing its underwriting standards. Based on these evaluations, the reserve
amounts maintained at the end of the second quarter of 2002 and at the end of
2001 were deemed adequate to cover exposure within the Corporation's loan
portfolio.
During the first half of 2002, net charge-offs totaled $969,000 compared to
$3,002,000 for the same period of 2001. The reason for the decreased charge-
offs during 2002, was that in June 2001, the Corporation charged-off a $2
million dollar loan that had defaulted. This loan had previously not been
classified as a problem loan and there were special circumstances surrounding
its default. The Corporation has filed a claim with its bonding company to
recover the entire $2 million; however, it is too early to predict whether
there will be a recovery.
The Provision for Loan Losses has decreased from $1,360,000 during the first
half of 2001 to $1,260,000 in the same period of 2002. If it had not been for
the special one time provision of $1 million during June 2001, resulting from
the above mention charge-off, the provision for 2001 would have been $360,000.
The level of the normal provision for the first half of 2002 was increased due
to the overall condition of the economy and the continued softness of the
Corporation's markets to a level management anticipates will protect the
Corporation from any unforeseen deterioration in the quality of the loan
portfolio.
Non-interest income grew 11.3% resulting from a 2.8% increase in income from
the Company's Trust and Financial Management activities, an 18.1% increase in
income from deposit accounts, and a 4.6% increase in fees from mortgage-
related activities. The solid increase in income from deposit accounts largely
resulted from a new program related to fees on overdrafts. This program is
part of our upgrade in the technology platform that includes more
sophisticated account modeling. Mortgage fee income benefited from the
continued demand for loans in this low interest rate environment. Although
the demand for mortgage refinancings has moderated in recent months, the
demand for new loans remains strong. As a result, the pipeline for new
mortgage loans remains strong into the third quarter. Other non-interest
income increased by $192,000 or 13.9%. Approximately 58% of this increase came
from an increase in earnings from a $10 million purchase of Bank Owned Life
Insurance during the second quarter of 2001. The remaining portion of the
increase was equally divided between Check Card Income, ATM Income and Retail
Investment Income. Insurance commissions, fees and premiums increased by
$97,000 or 5.2%. This change in insurance commissions, fees and premiums
relates directly to the volume of insurance product sold during these periods.
The Corporation recognized $91,000 in security gains during the first half of
2002, compared to gains of $212,000 during the first half of 2001. The gains
in both periods resulted from securities that had been purchased at a discount
being called because of the low rate environment.
Non-interest expenses for the first half of 2002 increased by less than 1%
over the same period of 2001. This small increase resulted from a continued
focus on managing these expenses. Salaries and employee benefits were up
5.6%, primarily due to higher benefit cost and bonus accruals. The benefit
cost increased due to the effects of a lower rate environment on the present
value calculations and low returns in the pension plan's investment portfolio
due to a weak equity market. This increase was somewhat offset by reductions
in other operating expenses and net premises expenses. Other operating
expenses decreased by approximately $409,000 or 9.0%. This decline was
primarily form a $269,000 decline in legal expenses and a $132,000 reduction
in the amortization on goodwill, which is no longer allowed under Generally
Accepted Accounting Principals.
Changes in the Corporation's income tax expense have generally paralleled
changes in income. The Corporation's effective tax rate increased from 22.5%
for the first half of 2001 to 26.4% for the first half of 2002. This increase
in the effective tax rate resulted primarily from a decline in the portfolio
of tax exempt securities and the relationship of tax-exempt income to total
pre-tax income. The Corporation's ability to reduce income tax expense by
acquiring additional tax-free investments is limited by the Alternative
Minimum Tax Provision, the market supply of acceptable municipal securities,
the level of tax exempt yields and the Corporation's normal liquidity and
balance sheet structure requirements.
Second quarter of 2002 compared to the second quarter of 2001
Earnings for the second quarter of 2002 increased by 37.6% to $3.68 million or
$.60 per share. This compares to $2.67 million or $.43 per share for the
second quarter of 2001. On an annualized basis, these 2002 totals equate to a
1.4% return on average assets and a 13.9% return on average equity. For this
same period in 2001, return on average assets was 1.0% and return on average
equity was 10.7%.
Net interest income for the second quarter of 2002 was $9.51 million compared
to $8.49 million for 2001. This represents an increase of 12.0%. This
increase resulted from a forty-eight basis point increase in the net interest
margin. This increase in margin was somewhat offset by a $15.1 million
decrease in average earning assets. The primary reason for the increase in
margin was that the Corporation was able to decrease its cost of funds by 194
basis points from the second quarter of 2001 to the second quarter of 2002.
During the same time period it lost 120 basis points from the repricing of its
earning assets. The decrease in earning assets was caused by a decline in the
loan balances during the second half of 2001 and the first half of 2002. See
the section of Management Discussion and Analysis captioned "Financial
Condition" for additional discussion concerning the change in loan balances.
The stable rate environment of the second quarter of 2002 helped from the
standpoint that it allowed the repricing of the deposits to continue to catch
up with the repricing of the loans that occurred throughout 2001 and to a
lesser extent during the first half of 2002. Management believes that if the
Federal Reserve will continue the flat to slightly increasing rate environment
for the remainder of the year, the Corporation's margin should continue to
improve. This, along with the addition of earning assets during the third
quarter, will allow the Corporation's net interest income to continue to
improve over the prior year. For additional information, see the table
entitled "Analysis of Net Interest Earnings" at the end of this section.
The Provision for Loan Losses has decreased from $1,180,000 during the second
quarter of 2001 to $630,000 in the same quarter of 2002. As previously
mentioned in the discussion, the Corporation recorded a special one-time
provision of $1 million during the second quarter of 2001. If not for this
special provision, the second quarter 2001 provision would have been $180,000
compared to a provision of $630,000 for the second quarter of 2002. The level
of the provision for the second quarter of 2002 was increased, due to the
overall condition of the economy and the continued softness of the
Corporation's markets, to a level management anticipates will protect the
Corporation from any unforeseen deterioration in the quality of the loan
portfolio.
Non-interest income grew 8.5% resulting primarily from a 2.8% increase in
income from the Company's Trust and Financial Management activities and a
20.3% increase in income from deposit accounts. The solid increase in income
from deposit accounts largely resulted from a new program related to fees on
overdrafts. This program is part of an upgraded technology platform that
includes more sophisticated account modeling. Other non-interest income
increased by $103,000 or 14.0%. This increase was spread among several
accounts, non of which individually increased by a material amount. Insurance
commissions, fees and premiums increased by $76,000 or 7.7%. This change in
insurance commissions, fees and premiums relates directly to the volume of
insurance product sold during these periods. These increases were partially
offset by a $144,000 or 37.7% decrease in mortgage loan fee income. During
the second quarter, the demand for mortgage refinancing moderated since many
homeowners had already refinanced their mortgages during the last year.
Although the demand for mortgage refinancings has slowed in recent months, the
demand for new loans remains strong. The closing cycle for new home loans is
longer than for refinanced mortgages and this fact, along with fewer
refinancings, are reflected in the lower income during the quarter. Even
though the mortgage fee income is down, the pipeline for new mortgage loans
remains strong into the third quarter and there appears to be an increased
interest in refinancings as interest rates remain at these very low levels.
The Corporation recognized no securities gains(losses) during the second
quarter of 2002, compared to a gain of $163,000 during the second quarter of
2001. The gains in 2001 resulted from securities that had been purchased at a
discount being called because of the low rate environment.
Non-interest expenses for the second quarter of 2002 increased by less than 1%
over the same period of 2001. This small increase resulted from a continued
focus on managing these expenses. Salaries and employee benefits were up
5.6%, primarily due to higher benefit cost and bonus accruals. The benefit
cost increase was in the pension expense area and was due to the effects of a
lower rate environment on the present value calculations and low returns in
the investment portfolio of the plan due to a weak equity market. The expense
of premises and equipment increase by $33,000 or 2.9% due to increased
expenditures for maintenance and repairs during the quarter. These increases
were somewhat offset by a reduction in other operating expenses of $268,000 or
11.3%. This reduction came from a $128,000 reduction in legal expenses, a
$55,000 reduction in advertising expense and $66,000 from the elimination of
the amortization of goodwill.
Changes in the Corporation's income tax expense have generally paralleled
changes in income. The Corporation's effective tax rate increased from 18.2%
for the second quarter of 2001 to 26.2% for the second quarter of 2002. This
increase in the effective tax rate for the quarter resulted primarily from a
decline in the portfolio of tax exempt securities and the percentage
relationship that tax-exempt income had to total pre-tax income. The
Corporation's ability to reduce income tax expense by acquiring additional
tax-free investments is limited by the Alternative Minimum Tax Provision, the
market supply of acceptable municipal securities, the level of tax exempt
yields and the Corporation's normal liquidity and balance sheet structure
requirements. The rate for the second quarter of 2002 is a more normal rate
for the Corporation and should remain close to this level for the remainder of
the year, assuming the balance sheet mix of assets remains relatively constant.
FINANCIAL CONDITION
The Corporation's balance sheet shows a decrease in total assets from $1,051
million to $1,046 million during the first half of 2002. During this period,
loans declined by $25.2 million. There were several reasons for the continued
decline in loans; including the continuing refinancing of variable rate
mortgage loans to fixed rate loans (which the Corporation does not hold in its
portfolio), tighter underwriting standards in our personal loan portfolio, two
large commercial credits that were paid out during the first quarter and a
general trend of businesses using excess cash to reduce their debt. Because
of lower loan demand, the Corporation decided not to aggressively price
deposits, resulting in a $19.6 million decline in deposits. During this six-
month period, the Corporation also reduced its Federal Funds sold position by
$12.7 million and increased its total borrowings by $2.9 million. The
Corporation used this cash flow to increase the investment securities
portfolio by $30.6 million. The increase in other liabilities was primarily
due to an increase in accrued taxes payable in both the current and deferred
accounts and an increase in the Treasury Tax and Loan Account.
Stockholders' equity increased from $102.9 million to $108.8 million during
the first half of 2002. During this period there was an increase in the
market value of the available-for-sale portion of the investment securities
portfolio. This resulted in the Accumulated Other Comprehensive Income
component of Stockholders' Equity increasing from an unrealized gain of
$1,650,000 at December 31, 2001 to an unrealized gain of $4,644,000 at June
30, 2002. Surplus and Undivided Profits increase from $120.0 million at
December 31, 2001 to $123.7 at June 30, 2002. During this period, the
Corporation earned approximately $7.2 million in net profits. This was offset
by dividends during the first half of the year of $3.5 million. Also, the
Corporation repurchased 26,300 shares of its common stock in the open market
under the announced stock repurchase plan for approximately $827,000.
The Corporation's bank subsidiary is required to maintain a minimum amount of
capital to total risk weighted assets as defined by the banking regulators.
At June 30, 2002, the bank's Tier I, Tier II and Total Capital Ratios exceeded
the well-capitalized standards developed under the referenced regulatory
guidelines.
Dividends paid by the Corporation are provided from dividends received from
the subsidiary bank. Under the regulations controlling national banks, the
payment of dividends by the bank without prior approval from the Comptroller
of the Currency is limited in amount to the current year's net profit and the
retained net earnings of the two preceding years. To fund the 976,676 share
repurchase transaction in March of 2001, the Corporation's subsidiary bank
borrowed funds from the Federal Home Loan Bank and with special permission
from the Office of the Comptroller of the Currency, declared a special
dividend to the Corporation to purchase this stock. As a result, the
subsidiary bank is limited to its current year's net profits to pay dividends
to the Corporation during 2002, without obtaining further approval from the
Comptroller of Currency. At June 30, 2002, without approval, the subsidiary
bank was limited to approximately $2.8 million.
Also, under regulations controlling national banks, the bank is limited in the
amount it can lend to the Corporation and such loans are required to be on a
fully secured basis. At June 30, 2002, there were no borrowings between the
Corporation and its subsidiary bank.
ANALYSIS OF NET INTEREST EARNINGS
The table below shows, for the periods indicated, an analysis of net interest
earnings, including the average amount of interest-earning assets and interest-
bearing liabilities outstanding during the period, the interest earned or paid
on such amounts, the average yields/rates paid and the net yield on interest-
earning assets
($ In Thousands)
Average Balance
Quarter Six Months Year
ended ended ended
6/30/02 6/30/02 12/31/01
________ ________ ________
EARNING ASSETS:
Net loans $593,402 $598,303 $629,248
Federal funds sold and
other interest-bearing
assets 5,385 12,267 22,816
Securities
Taxable 246,720 236,053 185,076
Nontaxable 123,001 126,260 132,200
________ ________ ________
Totals 968,508 972,883 969,340
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 696,453 705,224 714,491
Borrowed funds, federal funds
purchased and other 130,430 129,090 115,764
________ ________ ________
Totals 826,883 834,314 830,255
________ ________ ________
Net amounts $141,625 $138,569 $139,085
======== ======== ========
($ In Thousands)
Interest Income
Quarter Six months Year
Ended ended ended
6/30/02 6/30/02 12/31/01
_______ _______ _______
EARNING ASSETS:
Net loans $10,092 $20,669 $51,852
Federal funds sold and other
interest-bearing assets 24 108 950
Securities:
Taxable 3,467 6,750 11,165
Nontaxable 1,588 3,124 6,803
_______ _______ _______
Totals $15,171 $30,651 $70,770
======= ======= =======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits $ 4,277 $ 9,003 $29,866
Borrowed funds, federal funds
purchased and other 1,389 2,819 6,135
_______ _______ _______
Totals 5,666 11,822 36,001
_______ _______ _______
Net interest income $ 9,505 $18,829 $34,769
======= ======= =======
Yields Earned
And Rates Paid (%)
Quarter Six months Year
Ended Ended Ended
06/30/02 06/30/02 12/31/01
________ ________ ________
EARNING ASSETS:
Net loans 6.82% 6.97% 8.24%
Federal funds sold and other
interest-bearing assets 1.83% 1.77% 4.16%
Securities:
Taxable 5.64% 5.77% 6.03%
Nontaxable 5.18% 4.99% 5.14%
________ ________ ________
Totals 6.28% 6.35% 7.30%
======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 2.46% 2.57% 4.18%
Borrowed funds, federal funds
purchased and other 4.27% 4.40% 5.30%
________ ________ ________
Totals 2.78% 2.86% 4.34%
________ ________ ________
Net yield on earning assets 3.94% 3.90% 3.59%
Note: Yields on tax equivalent basis would be:
Nontaxable securities 7.70% 7.68% 7.92%
________ ________ ________
Total earning assets 6.60% 6.70% 7.68%
Net Yield on earning assets 4.28% 4.25% 3.96%
________ ________ ________
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
National Bank of Commerce is a defendant in a lawsuit in which a class
is pursuing unspecified and punitive damages as a result of the
placement of collateral protection insurance. The Bank has vigorously
defended its position and, as of March 15, 2001, has reached a
preliminary settlement in the amount of $450,000. The settlement is
yet to be approved by the court. This settlement, if approved, will
not have a material impact on the future earnings of the Corporation.
There are no other pending proceedings of a material nature to which
the Corporation, or any of its subsidiaries, is a party.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Debt
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re computation of per-share earnings
99 Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Form 8-K
A Form 8-K, was filed to announce the continuation of the
Stock Repurchase Program originally announced on June 28,
2001. This Program authorized the repurchase of up to 5%,
or 310,000 shares of the Corporation's Common stock. As
of the date of this announcement, an additional 265,000
shares remained to be purchased. No financial statements
were required to be filed with the report. The extension
of this Program was announced on June 20, 2002 and
reported on Form 8-K filed on June 21, 2002.
A Form 8-K, was filed to announce a four for three
(4 for 3) stock split. The stock split will be effected
in the form of a stock dividend and the new shares will be
distributed on September 9, 2002 to shareholders of record
at the close of business on August 16,2002. No financial
statements were required to be filed with the report. The
stock split was announced on July 30, 2002 and reported on
Form 8-K filed on August 1, 2002.
The financial information furnished herein has not been audited by
independent accountants; however, in the opinion of management, all
adjustments necessary for a fair presentation on the results of operations
for the quarter and six month period ended June 30, 2002, have been included.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NBC CAPITAL CORPORATION
Registrant
August 12, 2002 /s/ Richard T. Haston
Date Richard T. Haston
Executive Vice President, Chief
Financial Officer and Treasurer