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 September 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 - 8,199,254 shares as of September 30, 2002.
2
PART I - FINANCIAL INFORMATION
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME FOR
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
(Amounts in thousands, except per share data)
2002 2001
_______ _______
INTEREST INCOME:
Interest and Fees on Loans $30,596 $40,407
Interest And Dividends On Investment Securities 15,001 13,505
Other Interest Income 146 850
_______ _______
Total Interest Income 45,743 54,762
INTEREST EXPENSE:
Interest on Deposits 13,203 23,915
Interest on Borrowed Funds 4,288 4,657
_______ _______
Total Interest Expense 17,491 28,572
Net Interest Income 28,252 26,190
Provision for Loan Losses 2,015 1,540
_______ _______
Net Interest Income After Provision for
Loan Losses 26,237 24,650
_______ _______
NON-INTEREST INCOME:
Income from Fiduciary Activities 1,317 1,280
Service Charges on Deposit Accounts 5,143 4,279
Insurance Commission and Fee Income 3,046 2,874
Mortgage Loan Fee Income 990 960
Other Non-Interest Income 2,310 2,110
_______ _______
Total Non-Interest Income 12,806 11,503
Gains (Losses) on Securities 279 321
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 14,681 13,760
Expense of Premises and Fixed Assets 3,517 3,450
Other Non-Interest Expense 6,495 6,730
_______ _______
Total Non-Interest Expense 24,693 23,940
_______ _______
Income Before Income Taxes 14,629 12,534
Income Taxes 3,823 3,060
_______ _______
NET INCOME $10,806 $ 9,474
======= =======
Net Earnings Per Share:
Basic $ 1.31 $ 1.10
======= =======
Diluted $ 1.31 $ 1.10
======= =======
Note 1: The 2001 Earnings Per Share amounts have been restated for
the 4 for 3 stock split, accounted for as stock dividend,
that occurred during the third quarter of 2002.
3
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME FOR
QUARTER ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
(Amounts in thousands, except per share data)
2002 2001
_______ _______
INTEREST INCOME:
Interest and Fees on Loans $ 9,926 $12,681
Interest And Dividends On Investment Securities 5,127 4,612
Other Interest Income 39 163
_______ _______
Total Interest Income 15,092 17,456
INTEREST EXPENSE:
Interest on Deposits 4,200 7,153
Interest on Borrowed Funds 1,469 1,649
_______ _______
Total Interest Expense 5,669 8,802
_______ _______
Net Interest Income 9,423 8,654
Provision for Loan Losses 755 180
_______ _______
Net Interest Income After Provision for
Loan Losses 8,668 8,474
_______ _______
NON-INTEREST INCOME:
Income from Fiduciary Activities 439 426
Service Charges on Deposit Accounts 1,812 1,458
Insurance Commission and Fee Income 1,081 1,006
Mortgage Loan Fee Income 349 347
Other Non-Interest Income 734 726
Total Non-Interest Income 4,415 3,963
Gains (Losses) on Securities 188 109
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 4,889 4,484
Expense of Premises and Fixed Assets 1,201 1,130
Other Non-Interest Expense 2,340 2,166
_______ _______
Total Non-Interest Expense 8,430 7,780
Income Before Income Taxes 4,841 4,766
Income Taxes 1,242 1,313
_______ _______
NET INCOME $ 3,599 $ 3,453
======= =======
Net Earnings Per Share
Basic $ 0.44 $ 0.42
Diluted $ 0.44 $ 0.42
Note 1: The 2001 Earnings Per Share amounts have been restated for
the 4 for 3 stock split, accounted for as a stock dividend,
that occurred during the third quarter of 2002.
4
NBC CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
Sept. 30, 2002 Dec. 31, 2001
______________ _____________
(Unaudited) (Audited)
(Amounts in thousands, except share
amounts)
ASSETS:
Cash and Balances Due From Banks:
Noninterest-Bearing Balances $ 31,304 $ 28,752
Interest-bearing Balances 965 1,263
__________ __________
Total Cash and Due From Banks 32,269 30,015
Held-To-Maturity Securities (Market
value of $48,385 at September 30,
2002 and $50,623 at December 31,
2001) 44,697 47,683
Available-For-Sale Securities 340,038 293,043
__________ __________
Total Securities 384,735 340,726
Federal Funds Sold and Securities
Purchased Under Agreement to Resell 16,505 13,510
Loans 594,115 622,940
Less: Reserve for Loan Losses (6,657) (6,753)
__________ __________
Net Loans 587,458 616,187
Bank Premises and Equipment (Net) 14,995 15,377
Interest Receivable 7,592 8,352
Intangible Assets 2,768 2,857
Other Assets 26,847 23,778
__________ __________
TOTAL ASSETS $1,073,169 $1,050,802
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-Interest Bearing $ 100,705 $ 101,569
Interest Bearing Deposits 705,739 709,134
__________ __________
Total Deposits 806,444 810,703
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase 20,468 16,625
Other Borrowed Funds 118,158 110,594
Interest Payable 1,849 2,284
Other Liabilities 15,227 7,669
__________ __________
TOTAL LIABILITIES 962,146 947,875
__________ __________
Shareholders' Equity:
Common Stock $1 Par Value, Authorized
10,000,000 shares, Issued 9,615,806
shares at September 30, 2002 and
7,212,662 shares at December 31,
2001 9,616 7,213
Surplus and Undivided Profits 123,097 120,061
Accumulated Other Comprehensive Income 5,350 1,650
Treasury Stock, at Cost (27,040) (25,997)
__________ __________
TOTAL STOCKHOLDERS' EQUITY 111,023 102,927
__________ __________
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $1,073,169 $1,050,802
========== ==========
5
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(Unaudited)
(Amounts in thousands)
2002 2001
________ ________
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 10,806 $ 9,474
Adjustments to Reconcile Net Income to
Net Cash:
Depreciation and Amortization 1,593 1,921
Deferred Income Taxes (Credits) (3,918) (3,653)
Provision for Loan Losses 2,015 1,540
Loss (Gain) on Sale of Securities (279) (321)
(Increase) Decrease in Interest
Receivable 760 1,386
(Increase) Decrease in Other Assets (1,269) (9,454)
Increase (Decrease) in Interest Payable (435) (445)
Increase (Decrease) in Other Liabilities 7,558 5,573
________ ________
Net Cash Provided by Operating Activities 16,831 6,021
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Securities 36,013 46,667
Proceeds from Sale of Securities 33,158 30,380
Purchase of Securities (107,295) (107,145)
(Increase) Decrease in Loans 26,714 20,900
(Additions) Disposal of Bank Premises and
Equipment (1,019) (1,053)
________ ________
Net Cash Used in Investing Activities (12,429) (10,251)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Deposits (4,259) (13,592)
Dividend Paid on Common Stock (5,248) (5,268)
Increase (Decrease) in Borrowed Funds 11,407 47,058
Purchase of Treasury Stock (1,053) (24,954)
________ ________
Net Cash Provided by Financing Activities 847 3,244
Net Increase (Decrease) in Cash and Cash
Equivalents 5,249 (986)
Cash and Cash Equivalents at Beginning of
Year 43,525 45,150
________ ________
Cash and Cash Equivalents at the End of
the Period $ 48,774 $ 44,164
======== ========
Interest $ 17,926 $ 29,017
======== ========
Income Taxes $ 3,889 $ 2,190
======== ========
6
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 nine month
period ended September 30, 2001:
Quarter Period
Ended Ended
_________________
Sept. 30, 2001
_________________
(In thousands, except per share data)
Reported net income $3,453 $9,474
Add:
Goodwill Amortization 66 198
_______________
Adjusted Net Income $3,519 $9,671
_______________
Basic and Diluted net income per share:
Reported net income $ 0.42 $ 1.10
Goodwill amortization .01 $ .03
_______________
Adjusted net income $ 0.43 $ 1.13
_______________
7
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
September 30,
2002 2001
______ ______
Net income:
As reported $3,599 $3,453
Pro forma 3,534 3,413
Basic net earnings per share:
As reported $ .44 $ .42
Pro forma .43 .41
Diluted net earnings per share:
As reported $ .44 $ .42
Pro forma .43 .41
Nine Months Ended
September 30
2002 2001
______ ______
Net income:
As reported $10,806 $9,474
Pro forma 10,656 9,427
Basic net earnings per share:
As reported $ 1.31 $ 1.10
Pro forma 1.30 1.09
Diluted net earnings per share:
As reported $ 1.31 $ 1.10
Pro forma 1.29 1.09
Note 3. Stock Split
At its July meeting, the Corporation's Board of Directors approved a four-
for-three (4 for 3) stock split. This stock split was accounted for as a
stock dividend. The new shares were distributed on September 9, 2002, to
shareholders of record at the close of business on August 16, 2002. The
Corporation paid cash in lieu of fractional shares resulting from this
spilt. As a result of the split, all per share amounts and the weighted
average number of shares outstanding reported in this Form 10-Q, have been
restated to reflect this stock split.
8
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 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 nine-month period ended September 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, the overall legal climate in
which the Corporations operates 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. Following the 50 basis point reduction
in November, management expects, based on the available information, that
interest rates will remain unchanged during the last quarter of 2002 and trend
upward during 2003 and the overall economy in its market will improve somewhat
during 2003. The above mentioned rate reduction will put additional pressure on
the Corporation's net interest margin for the remaining portion 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.
9
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, such as the provision
for loan losses, 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.
Under Section 402 of the Sarbanes-Oxley Act of 2002, loans to executive
officers are generally prohibited. However, the rule does not apply to any
loan made or maintained by an insured depository institutions if the loans are
subject to the insider lending restrictions of section 22(h) of the Federal
Reserve Act. All loans to executive officers by the Corporation's bank
subsidiary are subject to the above referenced section of the Federal Reserve
Act.
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 three quarters of 2002 compared to the first three quarters of 2001
Earnings for the first three quarters of 2002 increased by 14.1% to $10.81
million or $1.31 per share. This compares to $9.47 million or $1.10 per
share for the first three quarters of 2001. On an annualized basis, these
2002 totals equate to a 1.4% return on average assets and a 13.6% return
on average equity. For this same period in 2001, return on average assets
was 1.2% and return on average equity was 12.0%.
Net interest income for the first three quarters of 2002 was $28.25
million compared to $26.19 million for the same period of 2001. This
represents an increase of 7.9%. This increase resulted from a twenty-seven
basis point increase in the net interest margin and a .2% increase 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 178 basis
points from the first three quarters of 2001 to the first three quarters
of 2002. During the same time period it lost 126 basis points from the
10
repricing of its earning assets. The small increase in earning assets was
the result of low loan demand due to the slow economy during the last
quarter of 2001 and the first nine months of 2002. The stable rate
environment during the first nine months of 2002 helped from the
standpoint that it allowed the repricing of deposits to catch up with the
repricing of loans that occurred throughout 2001 and to a lesser extent
during the first nine months of 2002. The 50 basis point reduction in
rates in November will put additional pressure on the Corporation's margin
during the last quarter of 2002. 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 exists, 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
were 16.2% at September 30, 2002, compared to 20.6% at September 30, 2001.
The percentage of loans past due 30 days or more was 2.26%. The Reserve
for Loan Losses as a percentage of total loans has increased from 1.08% at
the end of 2001 to 1.12% at the end of the third quarter of 2002. Overall,
loan quality remains good. At the end of the third quarter of 2002, the
ratio of non-performing loans to total loans remained low at .68%. This
compares to .63% at December 31, 2001 and .70% at September 30, 2001.
Management is committed to not relaxing its underwriting standards. Based
on these evaluations, the reserve amounts maintained at the end of the
third quarter of 2002 and at the end of 2001 were deemed adequate to cover
exposure within the Corporation's loan portfolio.
During the first nine months of 2002, net charge-offs totaled $2.1 million
compared to $3.6 million 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 increased from $1,540,000 during the first
nine months of 2001 to $2,015,000 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 mentioned charge-off, the provision for 2001 would
have been $540,000. The level of the provision for the first nine months of
2002 was increased, due to the overall condition of the economy and the
11
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 2.9% increase in income
from the Company's Trust and Financial Management activities, a 20.2%
increase in income from deposit accounts, and a 3.1% 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 had
moderated during the second quarter, the continued decline in mortgage
rates has caused the demand to increase once again. Also, during this
period, the demand for new loans remained strong. As a result, the
pipeline for both new and refinanced mortgage loans remains strong into
the fourth quarter. Other non-interest income increased by $200,000 or
9.5%. Approximately 52% 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. Approximately 31% of the increase came from an increase
in ATM Income and the remaining portion came from Check Card Income.
Insurance commissions, fees and premiums increased by $172,000 or 6.0%.
This change in insurance commissions, fees and premiums relates directly
to the volume of insurance product sold during these periods.
The Corporation recognized $279,000 in security gains during the first
nine months of 2002, compared to gains of $321,000 during the same period
of 2001. A large portion of the 2002 gains came as a result of being able
to sell some of the lower yielding securities in the portfolio at a gain
and reinvesting at a higher yield. The Corporation was able to do this
because of the unusually low rates of 2002. 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 first nine months of 2002 increased by 3.1%
over the same period of 2001. This small increase resulted from a
continued focus on managing these expenses. Salaries and employee
benefits were up 6.7%, primarily due to higher benefit cost and bonus
accruals. Approximately 70% of the increase resulted from bonus accruals
in 2002. The Corporation neither accrued nor did it pay any bonuses in
2001. 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 a reduction in other operating expenses.
Other operating expenses decreased by approximately $235,000 or 3.5%.
This decline was primarily from a $198,000 decline 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
24.4% for the first nine months of 2001 to 26.1% for the first nine months
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.
12
Third quarter of 2002 compared to the third quarter of 2001
Earnings for the third quarter of 2002 increased by 4.2% to $3.60 million
or $.44 per share. This compares to $3.45 million or $.42 per share for
the third quarter of 2001. On an annualized basis, these 2002 totals
equate to a 1.4% return on average assets and a 13.1% return on average
equity. For this same period in 2001, return on average assets was 1.3%
and return on average equity was 13.6%. The return on average equity
declined because the average stockholders' equity increased by a larger
amount during this period than net income.
Net interest income for the third quarter of 2002 was $9.42 million
compared to $8.65 million for 2001. This represents an increase of 8.9%.
This increase resulted from a twenty-five basis point increase in the net
interest margin and a $16.4 million increase 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 151 basis points from the third
quarter of 2001 to the third quarter of 2002. During the same time period
it lost 107 basis points from the repricing of its earning assets. The
increase in earning assets came in the securities portfolio, as the demand
for loans remained weak. 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
third quarter of 2002 helped from the standpoint that it allowed the
repricing of deposits to continue to catch up with the repricing of loans
that occurred throughout 2001 and to a lesser extent during the first nine
months of 2002. The 50 basis point reduction in rates in November will
put additional pressure on the Corporation's margin during the last
quarter of 2002. For additional information, see the table entitled
"Analysis of Net Interest Earnings" at the end of this section.
The Provision for Loan Losses has increased from $180,000 during the third
quarter of 2001 to $755,000 in the same quarter of 2002. The loan loss
provision for this quarter is approximately $125,000 higher than the
average for the first two quarters of 2002 because of a more conservative
stance regarding the provision in our consumer finance operations in light
of the continued soft economy. The level of the overall provision for the
third 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 11.4% resulting primarily from a 3.1% increase in
income from the Company's Trust and Financial Management activities and a
24.3% 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. Insurance
commissions, fees and premiums increased by $75,000 or 7.5%. This change
in insurance commissions, fees and premiums relates directly to the volume
of insurance product sold during these periods. During the third quarter,
the demand for mortgage loan refinancing increased to 2001 levels as
homeowners took advantage of the continued decline in mortgage rates to
refinance their mortgages. This resurgence in refinancing activity, along
with an increase in new mortgage loan activity allowed the Corporation to
13
maintain a comparable level of Mortgage Loan Fee Income in the third
quarter of 2002 as compared to the third quarter of 2001. The mortgage
loan pipeline remains strong into the fourth quarter.
The Corporation recognized $188 in securities gains (losses) during the
third quarter of 2002, compared to a gain of $109,000 during the third
quarter of 2001. A large portion of the third quarter 2002 gains came as
a result of being able to sell some of the lower yielding securities in
the portfolio at a gain and reinvesting at a higher yield. The
Corporation was able to do this because of the unusually low rates during
this period. 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 8.4%
over the same period of 2001. Salaries and employee benefits were up
9.0%, primarily due to higher benefit cost and bonus accruals. Bonus
accruals accounted for approximately 62% of this increase. The
Corporation neither accrued, nor did it pay any bonuses for 2001. The
remaining portion of the increase resulted from normal raises and
increased benefit cost. 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 $71,000 or 6.3% due to increased expenditures for
maintenance and repairs during the quarter. Other operating expenses also
increased by $174,000 or 8.0%. This increase came primarily from a
$60,000 increase in advertising expense and a $90,000 increase in loss on
the sale of repossessions and other real estate. Also included in this
change was a decline of $33,000 in the amortization of goodwill, which can
no longer be amortized under Generally Accepted Accounting Principals.
The changes in the remaining accounts classified in this category were not
of a material amount.
Changes in the Corporation's income tax expense have generally paralleled
changes in income. The Corporation's effective tax rate decreased from
27.5% for the third quarter of 2001 to 25.7% for the third quarter of 2002.
Both of these percentages are within the normal range for tax rates and
differ with the mix of income from municipal securities in the portfolio
and the percentage relationship of tax-free 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.
FINANCIAL CONDITION
The Corporation's balance sheet shows an increase in total assets from
$1,051 million to $1,073 million during the first nine months of 2002.
During this period, loans declined by $28.8 million. There were several
reasons for the continued decline in loans; including the continued
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 $4.3 million decline in deposits. During this nine-month
period, the Corporation increased its securities sold under agreements to
14
repurchase by $3.8 million and increased its total borrowings by $7.6
million. The Corporation used this cash flow to increase the investment
securities portfolio by $44.0 million, cash and due from banks by $2.3
million and its federal funds sold by $3.0 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 $111.0 million
during the first nine months of 2002. During this period, Common Stock
increased from $7.2 million to $9.6 million. This resulted from the four
for three (4 for 3) stock split discussed in Note 3. Since this split was
accounted for as a stock dividend, the $2.4 million in par value of the
split shares was moved from Retained Earnings to Common Stock. Also,
there was an increase in the market value of the available-for-sale
portion of the investment securities portfolio. This caused the
Accumulated Other Comprehensive Income component of Stockholders' Equity
to increase from an unrealized gain of $1,650,000 at December 31, 2001 to
an unrealized gain of $5,350,000 at September 30, 2002. Surplus and
Undivided Profits increased from $120.1 million at December 31, 2001 to
$123.1 at September 30, 2002. During this period, the Corporation earned
approximately $10.8 million in net profits. This was offset by cash
dividends during the first three quarters of $5.3 million and $2.4 million
for the stock split discussed above. Also, the Corporation repurchased
43,616 shares of its common stock in the open market under the announced
stock repurchase plan for approximately $1,043,000.
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 September 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 the Currency. At
September 30, 2002, without approval, the subsidiary bank was limited to
approximately $5.5 million.
Also, under regulations controlling national banks, the bank is limited in
the amount it can lend to the Corporation and such loans are required to
be on a fully secured basis. At September 30, 2002, there were no
borrowings between the Corporation and its subsidiary bank.
15
ANALYSIS OF NET INTEREST EARNINGS
The table below shows, for the periods indicated, an analysis of net
interest earnings, including the average amount of interest-earning assets
and interest-bearing liabilities outstanding during the period, the
interest earned or paid on such amounts, the average yields/rates paid and
the net yield on interest-earning assets.
($ In Thousands)
Average Balance
Quarter Nine Months Year
ended ended ended
9/30/02 9/30/02 12/31/01
________ ________ ________
EARNING ASSETS:
Net loans $590,131 $595,547 $629,248
Federal funds sold and other
interest-bearing assets 8,310 10,922 22,816
Securities
Taxable 263,105 245,096 185,076
Nontaxable 121,487 124,652 132,200
________ ________ ________
Totals 983,033 976,217 969,340
________ ________ ________
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 695,202 701,847 714,491
Borrowed funds, federal
funds purchased and other 141,659 133,325 115,764
________ ________ ________
Totals 836,861 835,172 830,255
________ ________ ________
Net amounts $146,172 $141,045 $139,085
======== ======== ========
16
($ In Thousands)
Interest Income
Quarter Nine Months Year
ended ended ended
9/30/02 9/30/02 12/31/01
________ ________ ________
EARNING ASSETS:
Net loans $ 9,927 $ 30,596 $ 51,852
Federal funds sold and other
interest-bearing assets 38 146 950
Securities:
Taxable 3,611 10,361 11,165
Nontaxable 1,516 4,640 6,803
________ ________ ________
Totals $ 15,092 $ 45,743 $ 70,770
======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits $ 4,200 $ 13,203 $ 29,866
Borrowed funds, federal
funds purchased and other 1,469 4,288 6,135
________ ________ ________
Totals 5,669 17,491 36,001
________ ________ ________
Net interest income $ 9,423 $ 28,251 $ 34,769
======== ======== ========
17
Yields Earned
And Rates Paid (%)
Quarter Nine Months Year
ended ended ended
9/30/02 9/30/02 12/31/01
________ ________ ________
EARNING ASSETS:
Net loans 6.67% 6.87% 8.24%
Federal funds sold and other
interest-bearing assets 1.85% 1.79% 4.16%
Securities:
Taxable 5.45% 5.65% 6.03%
Nontaxable 4.95% 4.98% 5.14%
________ ________ ________
Totals 6.09% 6.26% 7.30%
======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 2.40% 2.52% 4.18%
Borrowed funds, federal
funds purchased and other 4.12% 4.30% 5.30%
________ ________ ________
Totals 2.69% 2.80% 4.34%
________ ________ ________
Net yield on earning assets 3.80% 3.87% 3.59%
Note: Yields on tax equivalent basis would be:
Nontaxable securities 7.61% 7.66% 7.92%
________ ________ ________
Total earning assets 6.42% 6.61% 7.68%
________ ________ ________
Net Yield on earning assets 4.13% 4.21% 3.96%
________ ________ ________
18
PART I. ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART I. ITEM 4
Controls and Procedures
September 30, 2002
It is the responsibility of the Chief Executive Officer and the Chief
Financial Officer to establish and maintain the disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for NBC
Capital Corporation. These disclosure controls and procedures have been
designed to ensure that material information relating to NBC Capital
Corporation, including its consolidated subsidiaries, is made known to
these officers by others within those entities, during the period covered
by this filing and up to and including the filing date of this report.
In accordance with Item 307a of Regulation S-K, these disclosure controls
and procedures were evaluated on October 15, 2002 (a date within 90 days
of the filing of this report). It is the conclusion of the Chief
Executive Officer and the Chief Financial Officer that, as of the date of
the evaluation, the disclosure controls and procedures of NBC Capital
Corporation are functioning effectively to make known all material
information that requires disclosure in this filing.
In response to Item 307b of Regulation S-K, there have been no significant
changes in the Corporation's internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
evaluation. Therefore, no corrective actions were necessary with regard
to significant deficiencies and material weaknesses.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
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 Certificate pursuant to 18 U.S.C., Section 1350
as adopted pursuant to section 906 of Sarbanes-Oxley
Act of 2002-Chief Executive Officer
99 Certificate pursuant to 18 U.S.C., Section 1350 as
adopted pursuant to section 906 of Sarbanes-Oxley Act
of 2002-Chief Financial Officer
(b) Form 8-K
A Form 8-K, was filed to announce a four for three
(4 for 3) stock split. The stock split was effected in
the form of a stock dividend and the new shares were
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 nine month period ended September 30, 2002, have been
included.
20
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
November 12, 2002 /s/ Richard T. Haston
Date Richard T. Haston
Executive Vice President, Chief
Financial Officer and Treasurer
CERTIFICATIONS
I, Lewis F. Mallory, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBC Capital
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date") and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
21
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002
/s/ Lewis F. Mallory, Jr.
_________________________________
Chairman of the Board and
Chief Executive Officer
I, Richard T. Haston, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NBC Capital
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
22
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date") and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Richard T. Haston
_________________________________
Executive Vice President and
Chief Financial Officer
EXHIBIT INDEX:
Page 24 11 Statement re computation of per-share earnings
Page 25 99 Certificate pursuant to 18 U.S.C., Section 1350 as
adopted pursuant to section 906 of Sarbanes-Oxley
Act of 2002-Chief Executive Officer
Page 26 99 Certificate pursuant to 18 U.S.C., Section 1350 as
adopted pursuant to section 906 of Sarbanes-Oxley
Act of 2002-Chief Financial Officer
23