SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission File Number 1-15773
NBC Capital Corporation
(Exact name of registrant as specified in its charter)
Mississippi 64-0694775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
NBC Plaza, Starkville, Mississippi 39759
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(662) 323-1341
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common stock, $1 par value
Name of each exchange on which registered: American Stock Exchange
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 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 registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to the Form 10-K. ( )
Aggregate market value of the voting stock held by nonaffiliates as of
February 14, 2003, was approximately:
$157,964,207
___________________________
(based on most recent sale)
Indicate the number of shares outstanding of each of the issuers'
classes of common stock as of the latest practicable date:
Common Stock, $1 par value - 8,182,878 shares outstanding as
of February 14, 2003.
Documents incorporated by reference -
Portions of the Proxy Statement dated April 10, 2003
are incorporated by reference into Part III.
FORM 10-K
INDEX
Part I
______
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security
Holders
Part II
_______
Item 5. Market for the Company's Common Stock and Related
Shareholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7.A. Quantitative and Qualitative Disclosures About
Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Matters
Part III
________
Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Part IV
_______
Item 14. Controls and Procedures
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K
PART I
______
ITEM 1 - BUSINESS
Forward Looking Statements
From time to time, NBC Capital Corporation (the Company) may
publish forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with terms of the safe
harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may
affect the operations, performances, development and results of the
Company's business include, but are not limited to, the following:
risks from changes in economic and industry conditions; changes in
interest rates; risks inherent in making loans including repayment
risks and value of collateral; dependence on senior management; and
recently-enacted or proposed legislation. Statements contained in
this filing regarding the demand for the Company and its subsidiaries'
products and services, changing economic conditions, interest rates,
and numerous other factors, may be forward-looking statements and
are subject to uncertainties and risks. 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.
NBC Capital Corporation
The Company is a financial holding company which was organized
under the laws of the State of Mississippi. On July 2, 1984, the
Company acquired all of the outstanding common stock of the National
Bank of Commerce (NBC), a national banking corporation. For the year
ended December 31, 2002, the Company's subsidiaries accounted for
approximately 99% of the Company's consolidated income and
consolidated expenses.
National Bank of Commerce
NBC was originally formed through a series of mergers which
began in 1972 and concluded on October 1, 1974. In March, 1991, NBC
acquired the assets and assumed the liabilities of the Bank of
Philadelphia. In 1994, the Company acquired NBC of Tuscaloosa
(formerly First State Bank of Tuscaloosa). On December 31, 1998,
the Company acquired all the outstanding common stock of First
National Corporation of West Point ("FNC") in exchange for 864,736
shares of the Company's common stock. The acquisition was accounted
for as a pooling of interest. FNC was merged into the Company and
FNC's wholly-owned subsidiary banks, First National Bank of West Point
and National Bank of the South, were merged into NBC. Concurrently,
the Company's subsidiary, NBC of Tuscaloosa, was merged into NBC
(formerly NBC of Mississippi). As a result of the acquisition and
reorganization, NBC was the resulting financial institution. Also,
First National Finance Company, a wholly-owned finance company
subsidiary of FNC became a wholly-owned subsidiary of the Company.
On August 31, 1999, the Company acquired all the outstanding stock
of FFBS Bancorp, Inc. (FFBS). FFBS was the holding company of its
wholly-owned savings bank, First Federal Bank for Savings (First
Federal), Columbus, Mississippi. The Company exchanged 1,396,162
shares of its common stock and a nominal amount of cash in lieu of
fractional shares for each common share of FFBS. First Federal was
merged into NBC with NBC as the surviving institution. The
transaction was accounted for as a pooling of interests and historical
financial statements of the Company were restated to give effect of
the acquisition. On September 30, 1999, NBC acquired the insurance
agencies of Galloway-Wiggers Insurance Agency, Inc., Kyle Chandler
Insurance Agency, Inc., Galloway-Chandler-McKinney, Inc., and Napier
Insurance Agency, Inc. NBC exchanged 173,184 of the Company's common
stock for all of the issued and outstanding stock of the insurance
agencies. The insurance agencies were combined into a wholly-owned
subsidiary of NBC, Galloway-Chandler-McKinney Insurance Agency, Inc.
(GCM). The acquisition was accounted for as a pooling of interests.
The historical financial statements of the Company were not restated
as the changes would have been immaterial. On April 28, 2000, GCM
acquired Heritage Insurance Agency, Ltd., an independent insurance
agency located in Starkville, Mississippi, for $47,025 in cash and
14,028 shares of the Company's common stock. The acquisition was
accounted for as a purchase.
NBC is the largest commercial bank domiciled in the north
central area of the state known as the Golden Triangle. A total of
twenty-seven banking facilities and an operation/administration center
serves the communities of Aberdeen, Amory, Brooksville, Caledonia,
Columbus, Hamilton, Maben, New Hope, Philadelphia, West Point and
Starkville. This area extends into six Mississippi counties with a
radius of approximately 65 miles from the home office in Starkville.
The Bank also serves the Tuscaloosa, Alabama, area with a main office
and four branch locations.
NBC is engaged in the general banking business and activities
closely related to banking as authorized by the banking laws and
regulations of the United States. There were no significant changes
in the business activities of NBC during 2002.
NBC provides a complete line of wholesale and retail services
including mortgage loans and trusts. The customer base is well
diversified and consists of business, industry, agriculture,
government, education and individual accounts. Profitability and
growth have been consistent throughout the history of the bank.
NBC utilizes a written Asset/Liability Management Policy which
calls for a static gap position of no more than a plus or minus 10% of
aggregate assets over a 24-month period.
There has been no disposition of any material amounts of assets
nor has there been a material change in the mode of conducting business.
No major changes in operations are planned for the near future.
NBC Service Corporation
NBC Service Corporation (Service) is a wholly-owned subsidiary
of NBC and was formed to provide additional financial services that
otherwise might not be provided by NBC. For the years 2002 and 2001,
its primary activity was limited to its investment in Commerce National
Insurance Company (CNIC) of which Service owns 79%. Commerce National
Insurance Company is a credit life insurance company whose primary
source of income is from premiums on credit life insurance on loans
issued by NBC. For the year 2002, NBC discontinued credit life insurance
on loans. As a result, plans are for CNIC to be dissolved and liquidated
in 2003.
Galloway-Chandler-McKinney Insurance Agency, Inc.
Galloway-Chandler-McKinney Insurance Agency, Inc. (GCM) is a
wholly-owned subsidiary of NBC. GCM operates as an independent
insurance agency with its primary source of revenue coming from
commissions and premiums on the sale of property and casualty insurance,
title insurance, life insurance, annuities, and other commercial lines.
GCM is the result of the insurance agencies acquired on September 30,
1999, and April 28, 2000, as previously described. GCM has locations in
Columbus, West Point, Amory, Starkville, and Aberdeen, Mississippi.
At December 31, 2002, GCM had total assets of approximately $3.0 million,
and for the year ended December 31, 2002, reported gross revenues of
approximately $4.1 million.
NBC Insurance Services of Alabama, Inc.
NBC Insurance Services of Alabama is a wholly-owned subsidiary of NBC
and was formed in 1999 for the purpose of selling annuity products in the
State of Alabama. For the years ended December 31, 2002 and 2001, its
activities were not significant.
First National Finance
First National Finance (Finance), a wholly-owned subsidiary of the
Company, is a finance company that provides lending and financing services
to consumers. It engages in consumer financing, and its loans are of a
smaller amount and a higher interest rate than those of NBC. Its loan
portfolio totaled approximately $640,000 at December 31, 2002. Finance
is located in West Point, Mississippi. Finance was acquired as part of
the FNC acquisition previously mentioned.
Competition
NBC and its subsidiaries currently serve six counties and eleven
municipalities in North Central Mississippi. Over this same area, the
bank competes directly with numerous competing banking institutions,
credit unions, finance companies, brokerage firms, mortgage companies
and insurance companies. The competing banking institutions range in
asset size from approximately $270 million to in excess of $40 billion.
NBC is the largest bank domiciled in its immediate service area. Asset
size of competitive banks is that of the parent bank and not the branch.
Several other competitors are branches or divisions of nationwide and
regional companies with more resources than the Company and its
subsidiaries.
NBC also serves the City of Tuscaloosa, Alabama, with a main office
and four branch locations. The bank competes with approximately eight
other financial institutions, most of which are larger. The other
institutions range in size from approximately $90 million to $45 billion.
Asset size of the competitive banks is that of the parent bank and not of
the branch. In Tuscaloosa, NBC also competes with numerous credit
unions, finance companies, etc., many of which are branches of nationwide
companies.
Supervision and Regulation
The Company and its subsidiary bank are subject to state and federal
banking laws and regulations which impose specific requirements or
restrictions on and provide for general regulatory oversight with respect
to virtually all aspects of operations. These laws and regulations are
generally intended to protect depositors, not shareholders. To the extent
that the following summary describes statutory or regulatory provisions,
it is qualified in its entirety by reference to the particular statutory
and regulatory provisions. Any change in applicable laws or regulations
may have a material effect on the business and prospects of the Company.
Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and following with
Federal Deposit Insurance Corporation Improvement Act (FDICIA), which
was enacted in 1991, numerous additional regulatory requirements have
been placed on the banking industry, and additional changes have been
proposed. The operations of the Company and its subsidiaries may be
affected by legislative changes and the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent
of the effect on its business and earnings that fiscal or monetary
policies, economic control, or new federal or state legislation may
have in the future.
The Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956 (the Act) and a financial holding
company under the Gramm-Leach-Bliley Financial Modernization Act of 1999
(the "GLB Act") and is registered as such with the Board of Governors of
the Federal Reserve System (the Federal Reserve Board). As a financial
holding company, the Company is required to file with the Federal
Reserve Board an annual report and such other information as may be
required. The Federal Reserve Board also performs examinations of the
Company. In addition, the Federal Reserve Board has the authority to
regulate provisions of certain holding company debt.
The Act restricts the Company's nonbanking activities to those
which are determined by the Federal Reserve Board to be financial in
nature, incidental to such financial activity, or complementary to a
financial activity. The Act does not place territorial restrictions on
the activities of nonbank subsidiaries of holding companies. The
Company's banking subsidiaries are subject to limitations with respect
to transactions with affiliates.
The Act requires every holding company to obtain the prior
approval of the Federal Reserve Board before acquiring substantially
all the assets of or direct or indirect ownership or control of more
than 5% of the voting shares of any bank which is not already
majority-owned. The Act also prohibits a holding company, with
certain exceptions, from engaging in or acquiring direct or indirect
control of more than 5% of the voting shares of any company engaged in
non-banking activities. One of the principal exceptions to these
prohibitions is for engaging in or acquiring shares of a company
engaged in activities found by the Federal Reserve Board by order or
regulation to be so closely related to banking or managing banks as to
be a proper incident thereto. The Act permits the acquisition by a
holding company of more than 5% of the outstanding voting shares
of a bank located outside the state in which the operations of its
banking subsidiaries are principally conducted, subject to certain state
laws, including the establishment by states of a minimum age of their
local banks before such banks can be acquired by an out-of-state
institution. The Act and regulations of the Federal Reserve Board also
prohibit a holding company and its subsidiaries from engaging in certain
tie-in arrangements in connection with any extension of credit or
provision of any property or services.
In addition, and subject to certain exceptions, the Bank Holding
Company Act and the Change in Bank Control Act require Federal Reserve
approval prior to any person or company acquiring "control" of a
holding company. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting
securities of a bank holding company. Control is rebuttably presumed
to exist if a person acquires 10% or more, but less than 25%, of any
class of voting securities and either the company has registered
securities under Section 12 of the Securities Exchange Act of 1934 or
no other person owns a greater percentage of that class of voting
securities immediately after the transaction.
In accordance with Federal Reserve Board policy, the Company is
expected to act as a source of financial strength to the subsidiaries.
The Federal Reserve Board may require a holding company to terminate
any activity or relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve Board's
determination that such activity or control constitutes a serious risk
to the financial soundness or stability of any subsidiary depository
institution of the holding company. Further, federal bank regulatory
authorities have additional discretion to require a holding company to
divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's
financial condition.
Dividends paid by the Company are substantially provided from
dividends from NBC. Generally, the approval of the OCC is required if
the total of all dividends declared by a bank in any calendar year
exceeds the total of its net profits for that year combined with its
retained net profits of the preceding two years. In March, 2001, NBC
obtained approval to pay a dividend of $24.2 million to the Company
which was used to acquire 976,676 shares of the Company's common
stock from its largest stockholder and related parties. For the year
2003, NBC has available approximately $7.1 million plus its net income
for that year to pay as dividends.
The Federal Reserve Board, FDIC and OCC have established risk-based
capital guidelines for holding companies, such as the Company, and its
subsidiary bank. The capital-based regulatory framework contains five
categories of compliance with regulatory capital requirements, including
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." The
Company's strategy related to risk-based capital is to maintain capital
levels which will be sufficient to qualify the Company's bank subsidiary
for the "well capitalized" category under the guidelines set forth by the
FDICIA. Maintaining capital ratios at the "well capitalized" level avoids
certain restrictions which, for example, could impact the Company's bank
subsidiary's FDIC assessment, trust services and asset/liability
management. At December 31, 2002, the Tier 1 and total capital ratios,
respectively, of the Company (consolidated) and NBC (individually) were
well above the minimum 6% and 10% levels required to be categorized
as a "well capitalized" insured depository institution.
The FDIC, OCC and Federal Reserve Board have historically had
common capital adequacy guidelines involving minimum (a) leverage
capital and (b) risk-based capital requirements:
(a) The first requirement establishes a minimum ratio of capital
as a percentage of total assets. The FDIC, OCC and Federal Reserve
Board require institutions to maintain a minimum leverage ratio of
Tier 1 capital (as defined) to total average assets based on the
institution's rating under the regulatory CAMELS rating system.
Institutions with CAMELS ratings of one that are not anticipating or
experiencing significant growth and have well-diversified risk are
required to maintain a minimum leverage ratio of 3 percent. An
additional 100 to 200 basis points are required for all but these
most highly rated institutions. At December 31, 2002, the Company's
leverage capital ratio was 9.9%.
(b) The second requirement also establishes a minimum ratio of
capital as a percentage of total assets, but gives weight to the
relative risk of each asset. The FDIC, OCC and Federal Reserve Bank
require institutions to maintain a minimum ratio of Tier 1 capital to
risk-weighted assets of 3.0 percent. Banks must also maintain a
minimum ratio of total capital to risk-weighted assets of 8.0 percent.
At December 31, 2002, the Company's Tier 1 and total capital ratios
were 16.5% and 17.4%, respectively.
The primary supervisory authority of NBC is the OCC. The OCC
regulates or monitors virtually all areas of operations, including
security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances
of securities, payment of dividends, interest rates payable on deposits,
interest rates or fees chargeable on loans, establishment of branches,
corporate reorganizations, maintenance of books and records, and adequacy
of staff training to carry on safe lending and deposit gathering
practices. The OCC also imposes limitations on the aggregate investment
in real estate, bank premises, and furniture and fixtures. In addition
to regular examinations, the institution must furnish to its regulator
quarterly reports containing a full and accurate statement of its affairs.
Banks are subject to the provisions of Section 23A of the Federal
Reserve Act, which place limits on the amount of loans or extensions of
credit to, or investments in, or certain other transactions with,
affiliates and on the amount of advances to third parties collateralized
by the securities or obligations of affiliates. The aggregate of all
covered transactions is limited in amount, as to any one affiliate, to
10% of the bank's capital and surplus and, as to all affiliates combined,
to 20% of the bank's capital and surplus. Furthermore, within the
foregoing limitations as to amount, each covered transaction must meet
specified collateral requirements. Compliance is also required with
certain provisions designed to avoid the taking of low quality assets.
Banks are also subject to the provisions of Section 23B of the
Federal Reserve Act which, among other things, prohibit an institution
from engaging in certain transactions with certain affiliates unless the
transactions are on terms substantially the same, or at least as
favorable to such institution or its subsidiaries, as those prevailing
at the time for comparable transactions with non-affiliated companies.
The Bank is subject to certain restrictions on extensions of credit to
executive officers, directors, certain principal shareholders, and their
related interests. Such extensions of credit (i) must be made on
substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with third
parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
The GLB Act was signed into law in November, 1999, and allows banks
to engage in a wider range of nonbanking activities, including greater
authority to engage in securities and insurance activities through the
use of "financial holding companies." The expanded powers, which became
effective March 11, 2000, generally are available to banks only if the
bank and its bank subsidiaries remain well-capitalized and well-managed,
and have a satisfactory CRA rating. Under the GLB Act, a national bank
may engage in expanded financial activities through a "financial
subsidiary," provided the aggregate assets of all of its financial
subsidiaries do not exceed the lesser of 45 percent of the bank's assets
or $50 billion. A financial subsidiary may underwrite any financial
product other than insurance and may sell any financial product, including
title insurance. A national bank itself may not sell title insurance,
however, unless the state in which the bank is located permits state banks
to sell title insurance.
National banks are required by the National Bank Act to adhere to
branch office banking law. NBC may open branches throughout Mississippi
or Alabama with the prior approval of the OCC. In addition, with prior
regulatory approval, the subsidiary bank is able to acquire existing
banking operations in Mississippi and Alabama. Furthermore, federal
legislation permits interstate branching. The law also permits out of
state acquisitions by bank holding companies (subject to veto by new state
law), interstate branching by banks if allowed by state law, interstate
merging by banks, and de novo branching by national banks if allowed by
state law. Effective June 1, 1997, the Interstate Banking Act allows
banks with different home states to merge, unless a particular state opts
out of the statute. In addition, beginning June 1, 1997, the Interstate
Banking Act permitted national and state banks to establish de novo
branches in another state if there is a law in that state which applies
equally to all banks and expressly permits all out-of-state banks to
establish such branches.
The Community Reinvestment Act (CRA) requires that, in connection
with examinations of financial institutions within their respective
jurisdictions, the Federal Reserve, the FDIC, or the OCC shall evaluate
the record of the financial institutions in meeting the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions.
These factors are also considered in evaluating mergers, acquisitions,
and applications to open a branch or facility.
Interest and certain other charges collected or contracted by Banks
are often subject to state usuary laws and certain federal laws
concerning interest rates. The loan operations are also subject to
certain federal laws applicable to credit transactions. These include
but are not limited to the federal Truth-In-Lending Act, governing
disclosures of credit terms to consumer borrowers; the Home Mortgage
Disclosure Act of 1975, requiring financial institutions to provide
information to enable the public and public officials to determine
whether a financial institution will be fulfilling its obligation to
help meet the housing needs of the community it serves; the Equal Credit
Opportunity Act, prohibiting discrimination on the basis of race, creed
or other prohibited factors in extending credit; and the rules and
regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. The deposit
operations also are subject to certain laws and regulations, included
but not limited to, the Right to Financial Privacy Act, which imposes
a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of
financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that
act, which governs automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use
of automated teller machines and other electronic banking services.
A subsidiary bank of a holding company is subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of
credit to the holding company or its subsidiary, on investments in
stock or other securities thereof and on the taking of such stock or
securities as collateral for loans to any borrower.
NBC is a member of the FDIC and its deposits are insured as provided
by law.
CNIC, GCM, and NBC Insurance Services of Alabama, Inc. are subject
to regulation by the applicable state agencies. These agencies set
reserve requirements, reporting standards, and establish regulations,
all of which affect business operations.
On October 26, 2001, President Bush signed into law the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"). The USA Patriot
Act broadened anti-money laundering requirements on financial institutions,
including national banks such as NBC. Among its provisions, the USA Patriot
Act requires a financial institution: (i) to establish an anti-money
laundering program, (ii) to establish due diligence policies, procedures and
controls with respect to its private banking accounts and correspondent
banking accounts involving foreign individuals and certain foreign banks and
(iii) to avoid establishing, maintaining, administering or managing
correspondent accounts in the United States for, or on behalf of, a foreign
bank that does not have a physical presence in any country. In addition,
the USA Patriot Act contains a provision encouraging cooperation among
financial institutions, regulatory authorities and law enforcement
authorities with respect to individuals, entities and organizations engaged
in, or reasonably suspected of engaging in, terrorist acts or money
laundering activities. The federal banking agencies have begun proposing
and implementing regulations interpreting the USA Patriot Act. It is not
anticipated that the USA Patriot Act will have a significant impact on the
financial condition or results of operations of NBC.
The Company's common stock is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Consequently, the Company is subject to the information, proxy
solicitation, insider trading, and other restrictions and requirements
of the SEC under the Exchange Act.
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002 (the "Sarbanes-Oxley Act"), which attempts to strengthen the
independence of public company auditors by, among other things,
(i) prohibiting public company auditors from providing certain non-audit
services to their audit clients, (ii) requiring a company's audit
committee to preapprove all audit and non-audit services being provided
by its independent auditor, (iii) requiring the rotation of audit partners
and (iv) prohibiting an auditor from auditing a client that has as its
chief executive officer, chief financial officer, chief accounting officer
or controller a person that was employed by the auditor during the
previous year.
The Sarbanes-Oxley Act also seeks to enhance the responsibility of
corporate management by, among other things, (i) requiring the chief
executive officer and chief financial officer of public companies to
provide certain certifications in their periodic reports regarding the
accuracy of the periodic reports filed with the Securities and Exchange
Commission, (ii) prohibiting officers and directors of public companies
from fraudulently influencing an accountant engaged in the audit of the
company's financial statements, (iii) requiring chief executive officers
and chief financial officers to forfeit certain bonuses in the event of a
misstatement of financial results, (iv) prohibiting officers and directors
found to be unfit from serving in a similar capacity with other public
companies, and (v) prohibiting officers and directors from trading in the
company's equity securities during pension blackout periods. In addition,
public companies with securities listed on a national securities exchange
or association must satisfy the following additional requirements:
(i) the company's audit committee must appoint and oversee the company's
auditors; (ii) each member of the company's audit committee must be
independent; (iii) the company's audit committee must establish procedures
for receiving complaints regarding accounting, internal accounting controls
and audit-related matters; (iv) the company's audit committee must have
the authority to engage independent advisors; and (v) the company must
provide appropriate funding to its audit committee, as determined by the
audit committee.
The Sarbanes-Oxley Act contains several provisions intended to
enhance the quality of financial disclosures of public companies,
including provisions that (i) require that financial disclosures reflect
all material correcting adjustments identified by the company's auditors,
(ii) require the disclosure of all material off-balance sheet transactions,
(iii) require the Securities and Exchange Commission to issue rules
regarding the use by public companies of pro forma financial information,
(iv) with certain limited exceptions, including an exception for financial
institutions making loans in compliance with federal banking regulations,
prohibit public companies from making personal loans to its officers and
directors, (v) with certain limited exceptions, require directors, officers
and principal shareholders of public companies to report changes in their
ownership in the company's securities within two business days of the
change, (vi) require a company's management to provide a report of its
assessment of the internal controls of the company in its annual report,
(vii) require public companies to adopt codes of conduct for senior
financial officers and (viii) require companies to disclose whether the
company's audit committee has a financial expert as a member.
The Sarbanes-Oxley Act imposes criminal liability for certain acts,
including altering documents involving federal investigations, bankruptcy
proceedings, corporate audits and increases the penalties for certain
offenses, including mail and wire fraud. In addition, the Sarbanes-Oxley
Act gives added protection to corporate whistle-blowers.
While certain provisions of the Sarbanes-Oxley Act have already become
effective, many provisions in the Sarbanes-Oxley Act will become effective
over the course of 2003. Although the Company anticipates that it will
incur additional expense in complying with the provisions of the Sarbanes-
Oxley Act and the regulations promulgated by the Securities and Exchange
Commission thereunder, the Company does not expect that such compliance
will have a material impact on the Company's financial condition or
results of operations.
Governmental Monetary Policies
As a bank chartered under the laws of the United States, NBC is a
member of the Federal Reserve System. Its earnings are affected by the
fiscal and monetary policies of the Federal Reserve System which
regulates the national money supply in order to mitigate recessionary
and inflationary pressures. The techniques used by the Federal Reserve
System include setting the reserve requirements of depository
institutions and establishing the discount rate on member bank
borrowings. The Federal Reserve System also conducts open market
operations in United States Government securities.
The policies of the Federal Reserve System and other regulatory
agencies have a direct effect on the amount of bank loans and deposits,
and the interest rates charged and paid thereon. While the impact these
policies may have upon the future business and earnings of the financial
institutions cannot be accurately predicted, such policies can materially
affect the earnings of commercial banks.
Critical Accounting Policies
The most significant accounting policies followed by the Company are
presented in Note A to the consolidated financial statements. The
allowance for loan losses is based upon management's assessment of the
probable loan losses inherent in the loan portfolio and, as such, is
considered a critical accounting policy. The determination of the
allowance requires significant judgment and is based upon various factors,
many of which are subjective. Note A to the consolidated financial
statements discloses the methodology used by management to determine the
allowance.
Sources and Availability of Funds
The materials essential to the business of the Company and its
subsidiaries consist primarily of funds derived from deposits and other
borrowings in the financial markets. The availability of funds is
primarily dependent upon the economic policies of the government, the
economy in general and the institution's ability to compete in the market
place.
Seasonability
Neither the Company nor any of its subsidiaries are dependent upon
any seasons.
Dependence Upon A Single Customer
Neither the Company nor any of its subsidiaries are dependent upon
a single customer or any small group of customers.
Executive Officers
The executive officers of the Company and its bank subsidiary,
NBC, are listed below. The title indicates a position held in the
Company and the bank.
Name and Title Age Five Year Experience
_____________________________ ___ ____________________________________
L. F. Mallory, Jr. 60 Chairman and Chief Executive Officer,
Chairman and Chief Executive NBC Capital Corporation and NBC
Officer, NBC Capital
Corporation and NBC
Mark A. Abernathy 46 President and Chief Operating Officer,
President and Chief NBC Capital Corporation and NBC
Operating Officer, NBC
Capital Corporation and NBC
Hunter M. Gholson 70 Secretary of NBC Capital Corporation
Secretary and NBC
Richard T. Haston 56 Executive Vice President, Chief
Executive Vice President, Financial Officer, and Treasurer,
CFO, and Treasurer, NBC NBC Capital Corporation, and
Capital Corporation and Executive Vice President and
Executive Vice President Chief Financial Officer, NBC
and CFO, NBC
Bobby L. Harper 61 Chairman of Executive Committee, NBC
Chairman of the Executive Capital Corporation and NBC.
Committee, NBC Capital Columbus Regional Bank President,
Corporation and NBC and NBC since September, 2002;
Columbus Regional Bank Executive Vice President, Banking
President, NBC Center Administration, NBC
January, 1999 - September, 2002;
President of NBC Columbus Banking
Center from January, 1981 -
January, 1999
Tommy M. Tomlinson 49 Vice President, NBC Capital
Vice President, NBC Capital Corporation since January, 1999.
Corporation and Starkville Starkville Regional Bank
Regional Bank President, NBC President, NBC, since September,
2002; Executive Vice President,
Credit Administration, NBC, from
January, 1999 - September, 2002;
Executive Vice President and
Senior Credit Officer of the
Starkville Banking Center, NBC
from January, 1996 - December,
1998
Thomas J. Prince, Jr. 61 Vice President, NBC Capital
Vice President, NBC Capital Corporation and Executive Vice
Corporation and Executive President, Division Manager of
Vice President, Division Consumer Financial Service, NBC,
Manager of Consumer Financial since April, 1998; President,
Services NBC NBC Aberdeen Banking Center
from January, 1985 - April, 1998
Donald J. Bugea, Jr. 49 Vice President, NBC Capital
Vice President, NBC Capital Corporation and Executive Vice
Corporation and Executive President and Investment
Vice President and Investment Officer, NBC
Officer, NBC
John R. Davis 47 Vice President, NBC Capital
Vice President, NBC Capital Corporation and Senior Vice
Corporation and Senior Vice President and Trust Officer,
President and Trust Officer, NBC since January, 1999, Vice
NBC President and Trust Officer
of NBC from January, 1991 -
December, 1998
Clifton B. Fowler 54 Vice President, NBC Capital
Vice President, NBC Capital Corporation, Executive Vice
Corporation and Executive President, Commercial Banking
Vice President, Commercial of NBC in 2002; previously
Banking, NBC President, NBC Starkville
Banking Center
Marcus Mallory 35 Vice President, NBC Capital
Vice President, NBC Capital Corporation and Executive Vice
Corporation and Executive President, Credit Administration,
Vice President, Credit NBC since August, 2002; Senior
Administration, NBC Vice President, Senior Credit
Officer, NBC Columbus Banking
Center from June, 1997 -
September, 2002
Terry Jones 57 Vice President, NBC Capital
Vice President, NBC Capital Corporation, Chief Information
Corporation, Chief Officer, NBC since December,
Information Officer, NBC 2001, Senior Vice President,
Chief Information Officer, NBC,
from January, 2000 - August,
2002; Senior Vice President,
Director of Information Systems,
NBC, from June, 1997 -
January, 2000
Personnel
At December 31, 2002, NBC had approximately 430 full-time
employees, Finance had 3 full-time employees and GCM had approximately
44 full-time employees. The Company, Service, and CNIC had no
employees at December 31, 2002.
ITEM 2 - PROPERTIES
The Company, Service and CNIC owned no properties at December 31,
2002. GCM and Finance operate out of leased office buildings.
The following listing describes the locations and general character
of the Bank-owned properties:
Approximate
Office Space
Type Location (Square Feet)
______________________________ _________________________ _____________
NBC:
Main Office Starkville, Mississippi 35,000
University Branch Starkville, Mississippi 1,485
Motor Branch Starkville, Mississippi 2,000
Operations Center Starkville, Mississippi 26,000
Starkville Crossing Starkville, Mississippi 2,000
Main Office Columbus, Mississippi 36,000
Mortgage Loan Center Columbus, Mississippi 14,000
North Columbus Branch Columbus, Mississippi 1,440
Fairlane Branch Columbus, Mississippi 2,400
Bluecutt Road Branch Columbus, Mississippi 3,200
New Hope Branch New Hope, Mississippi 1,500
Caledonia Branch Caledonia, Mississippi 1,000
Main Office Aberdeen, Mississippi 11,026
Maple Street Branch Aberdeen, Mississippi 998
Highway 45 North Branch Aberdeen, Mississippi 1,205
Main Office Amory, Mississippi 8,550
Medical and Industrial
Center Branch Amory, Mississippi 950
Main Office Brooksville, Mississippi 3,000
Main Office Hamilton, Mississippi 1,800
Main Office Maben, Mississippi 4,000
Main Office Philadelphia, Mississippi 6,000
Northside Branch Philadelphia, Mississippi 300
Southside Branch Philadelphia, Mississippi 450
Westside Branch Philadelphia, Mississippi 3,250
Main Office Tuscaloosa, Alabama 30,000
Northport Branch Tuscaloosa, Alabama 3,018
University Branch Tuscaloosa, Alabama 2,480
North Tuscaloosa Branch Tuscaloosa, Alabama 3,250
Highway 69 South Branch Tuscaloosa, Alabama 2,000
Main Office West Point, Mississippi 18,000
East Main Branch West Point, Mississippi 1,900
Highway 45 South Branch West Point, Mississippi 1,520
Highway 45 North Branch West Point, Mississippi 825
In the opinion of management, all properties are in good condition
and are adequate to meet the needs of the communities they serve.
ITEM 3 - LEGAL PROCEEDINGS
There are no pending proceedings of a material nature to which the
Company, or its subsidiaries, are a party.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
_______
ITEM 5 - MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) Reference is made to Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations, under the
caption, "Market Information."
(b) At December 31, 2002, the Company had 2,627 security holders.
(c) Dividends on common stock were declared quarterly in 2002 and 2001
and totaled as follows:
(In thousands)
December 31,
______________
2002 2001
______ ______
Dividends declared, $.87 per share $7,123 $ -
Dividends declared, $.82 per share - 6,998
______ ______
$7,123 $6,998
====== ======
Also, in the year 2002, the Company declared a 4-for-3 stock split
accounted for as a stock dividend. All per share information has
been restated to reflect the stock split.
ITEM 6 - SELECTED FINANCIAL DATA
Years Ended December 31,
2002 2001 2000 1999 1998
__________ __________ __________ ________ ________
(In thousands, except per share data)
INCOME DATA
Interest and
fees on loans $ 40,022 $ 51,852 $ 57,535 $ 52,219 $ 52,955
Interest and
dividends on
securities 19,814 17,968 14,052 12,430 13,416
Other interest
income 215 950 1,148 2,440 1,953
__________ __________ __________ ________ ________
Total interest
income 60,051 70,770 72,735 67,089 68,324
Interest expense 22,876 36,001 34,978 30,998 32,744
__________ __________ __________ ________ ________
Net interest
income 37,175 34,769 37,757 36,091 35,580
Provision for
loan losses 2,790 1,720 1,280 1,769 3,187
__________ __________ __________ ________ ________
Net interest
income after
provision for
loan losses 34,385 33,049 36,477 34,322 32,393
__________ __________ __________ ________ ________
Service charges
on deposit
accounts 7,110 5,942 5,306 5,230 4,720
Other income 10,936 10,524 8,456 7,824 4,871
__________ __________ __________ ________ ________
Total noninterest
income 18,046 16,466 13,762 13,054 9,591
__________ __________ __________ ________ ________
Salaries and
employee
benefits 19,827 18,156 17,260 17,545 16,024
Occupancy and
equipment
expense 4,728 4,616 4,539 4,213 3,778
Other expenses 8,863 9,344 9,118 12,211 9,299
__________ __________ __________ ________ ________
Total noninterest
expenses 33,418 32,116 30,917 33,969 29,101
__________ __________ __________ ________ ________
Income before
income taxes 19,013 17,399 19,322 13,407 12,883
Income taxes 4,792 4,261 5,277 2,899 2,881
__________ __________ __________ ________ ________
Net income $ 14,221 $ 13,138 $ 14,045 $ 10,508 $ 10,002
========== ========== ========== ======== ========
PER SHARE DATA (1)
Net income -
basic $ 1.73 $ 1.54 $ 1.47 $ 1.10 $ 1.07
Net income -
diluted 1.73 1.54 1.47 1.10 1.06
Dividends .87 .82 .73 .65 .55
FINANCIAL DATA
Total assets $1,077,456 $1,050,802 $1,009,515 $973,570 $937,147
Net loans 578,678 616,187 637,800 613,557 576,731
Total deposits 817,447 810,703 804,804 752,810 776,955
Total
shareholders'
equity 111,107 102,927 120,123 111,251 111,868
(1) Restated for 4-for-3 stock split.
(2) Financial data includes accounts of significant pooled acquisitions
for all years presented.
(3) Merger-related expenses amounted to $2.5 million after tax in 1999
and $1.8 million after tax in 1998.
SUPPLEMENTAL STATISTICAL INFORMATION
I. DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
A. Average balance sheets (consolidated):
The following table presents, for the years indicated, condensed
daily average balance sheet information.
(In Thousands)
Assets 2002 2001 2000
__________ __________ ________
Cash and due from banks $ 25,711 $ 26,462 $ 28,968
Securities:
Taxable 250,970 185,076 133,497
Non-taxable 123,380 132,200 118,341
__________ __________ ________
Total securities 374,350 317,276 251,838
Federal funds sold and other
interest-bearing assets 12,986 22,816 17,962
Loans 591,297 629,248 630,851
Less allowance for loan losses 7,122 8,507 10,093
__________ __________ ________
Net loans 584,175 620,741 620,758
Other assets 61,060 54,571 44,728
__________ __________ ________
Total Assets $1,058,282 $1,041,866 $964,254
========== ========== ========
(In Thousands)
Liabilities and 2002 2001 2000
Stockholders' Equity __________ __________ ________
Deposits:
Noninterest-bearing $ 99,199 $ 96,249 $ 94,038
Interest-bearing 701,654 714,491 685,287
__________ __________ ________
Total deposits 800,853 810,740 779,325
Federal funds purchased and
securities sold under
agreements to repurchase 19,430 19,159 18,734
Borrowed funds 115,209 96,605 39,781
Other liabilities 15,528 13,167 10,806
__________ __________ ________
Total liabilities 951,020 939,671 848,646
Stockholders' equity 107,262 102,195 115,608
__________ __________ ________
Total Liabilities and
Stockholders' Equity $1,058,282 $1,041,866 $964,254
========== ========== ========
B. Analysis of Net Interest Earnings
The table below shows, for the periods indicated, an analysis of
net interest earnings, including the average amount of interest-
earning assets and interest-bearing liabilities outstanding during
the period, the interest earned or paid on such amounts, the
average yields/rates paid and the net yield on interest-earning
assets:
($ In Thousands)
Average Balance
____________________________
2002 2001 2000
________ ________ ________
EARNING ASSETS
Loans $591,297 $629,248 $630,851
Federal funds sold and
other interest-bearing
assets 12,986 22,816 17,962
Securities:
Taxable 250,970 185,076 133,497
Nontaxable 123,380 132,200 118,341
________ ________ ________
Totals 978,633 969,340 900,651
________ ________ ________
INTEREST-BEARING LIABILITIES
Interest-bearing deposits 701,654 714,491 685,287
Borrowed funds, federal funds
purchased and securities sold
under agreements to repurchase 134,639 115,764 58,515
________ ________ ________
Totals 836,293 830,255 743,802
________ ________ ________
Net Amounts $142,340 $139,085 $156,849
======== ======== ========
($ In Thousands) Yields Earned
Interest for the Year And
Ended December 31, Rates Paid (%)
_______________________ ______________
2002 2001 2000 2002 2001 2000
_______ _______ _______ ____ ____ ____
EARNING ASSETS
Loans $40,022 $51,852 $57,535 6.77 8.24 9.12
Federal funds sold and
other interest-bearing
assets 215 950 1,148 1.66 4.16 6.39
Securities:
Taxable 13,675 11,165 7,966 5.45 6.03 5.97
Nontaxable 6,139 6,803 6,086 4.98 5.15 5.14
_______ _______ _______ ____ ____ ____
Totals $60,051 $70,770 $72,735 6.14 7.30 8.08
======= ======= ======= ==== ==== ====
($ In Thousands) Yields Earned
Interest for the Year And
Ended December 31, Rates Paid (%)
_______________________ ______________
2002 2001 2000 2002 2001 2000
_______ _______ _______ ____ ____ ____
INTEREST-BEARING
LIABILITIES
Interest-bearing
deposits $17,171 $29,866 $31,559 2.45 4.18 4.61
Borrowed funds, federal
funds purchased and
securities sold under
agreements to
repurchase 5,705 6,135 3,419 4.24 5.30 5.84
_______ _______ _______ ____ ____ ____
Totals 22,876 36,001 34,978 2.74 4.34 4.70
_______ _______ _______ ==== ==== ====
Net interest income $37,175 $34,769 $37,757
======= ======= =======
Net yield on earning assets 3.80 3.59 4.19
==== ==== ====
(1) Interest and yields on tax-exempt obligations are not on a
fully taxable equivalent basis.
(2) For the purpose of these computations, nonaccruing loans
are included in the average loan balances outstanding.
(3) Interest income on loans includes related fees.
C. Increase (Decrease) in Interest Income and Interest Expense
The following table analyzes the changes in both the rate and volume
components of net interest revenue:
(In Thousands) (In Thousands)
2002 Over 2001 2001 Over 2000
___________________________ _________________________
Change Due To: Change Due To:
___________________________ _________________________
Total Rate Volume Total Rate Volume
________ ________ _______ _______ _______ _______
EARNING ASSETS
Loans $(11,830) $ (8,841) $(2,989) $(5,683) $(5,540) $ (143)
Federal funds
sold and other
interest-bearing
assets (735) (428) (307) (198) (881) 683
Securities:
Taxable 2,510 (929) 3,439 3,199 88 3,111
Nontaxable (664) (219) (445) 717 4 713
________ ________ _______ _______ _______ _______
Totals $(10,719) $(10,417) $ (302) $(1,965) $(6,329) $ 4,364
======== ======== ======= ======= ======= =======
(In Thousands) (In Thousands)
2002 Over 2001 2001 Over 2000
__________________________ ________________________
Change Due To: Change Due To:
__________________________ ________________________
Total Rate Volume Total Rate Volume
________ ________ ______ _______ _______ ______
INTEREST-BEARING
LIABILITIES
Interest-bearing
deposits $(12,695) $(12,167) $ (528) $(1,693) $(4,004) $2,311
Interest on borrowed
funds and federal
funds purchased and
securities sold
under agreements to
repurchase (430) (1,327) 897 2,717 (396) 3,113
________ ________ ______ _______ _______ ______
Totals $(13,125) $(13,494) $ 369 $ 1,024 $(4,400) $5,424
======== ======== ====== ======= ======= ======
NOTE: (1) Change in volume is the change in volume times the previous
year's rate.
(2) Change in rate is the change in rate times the previous year's
balance.
(3) The change in interest due to both rate and volume has been
allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of change to each.
II. INVESTMENT PORTFOLIO
A. The following tables present the book values of securities as of
the dates indicated:
(In Thousands)
December 31,
____________________________
2002 2001 2000
________ ________ ________
U. S. Treasury $ 302 $ 306 $ 4,544
U. S. Government agencies and
mortgage-backed securities 259,548 185,751 137,684
States and political subdivisions 106,212 113,871 124,011
Other 27,721 40,798 15,551
________ ________ ________
Total book value $393,783 $340,726 $281,790
======== ======== ========
B. The following table sets forth the maturities of investment and
mortgage-backed securities (carrying values) at December 31,
2002, and the weighted average yield of such securities:
($ In Thousands)
Weighted Average Yield
_______________________________________________
0 - 1 Yield 1 - 5 Yield 5 - 10 Yield
Year (%) Years (%) Years (%)
_______ _____ ________ _____ _______ _____
Securities:
U. S. Treasury $ 100 2.75% $ 202 2.25% $ - -
U. S. Govern-
ment agencies 402 5.80% 774 3.36% 273 5.04%
Nontaxable
municipals 12,720 7.65% 59,321 7.60% 10,496 8.84%
Taxable
municipals - - 1,192 6.66% 128 7.18%
Other 2,252 6.86% 2,102 5.91% 1,466 5.81%
_______ _______ _______
Total $15,474 $63,591 $12,363
======= ======= =======
10+ Yield
Years (%)
_______ _____
Nontaxable
municipals $22,201 9.15%
Taxable
municipals 154 7.37%
Equities 21,569 4.87%
Other 332 6.45%
_______
Total $44,256
=======
Book Yield
Value (%)
________ _____
Mortgage-
backed
securities $258,099 5.49%
========
NOTE: Interest and yields on tax-exempt obligations are on a
taxable equivalent basis.
Average yield on floating rate securities was determined
using the current yield.
Table includes securities classified as available-for-
sale and held-to-maturity at carrying values.
The majority of mortgage-backed securities are backed by
U. S. Government agencies.
C. Investment securities in excess of 10% of stockholders' equity.
At December 31, 2002, there were no securities from any issuers
in excess of 10% of stockholders' equity that were not securities
of the U. S. Government or U. S. Government agencies or
corporations.
III. LOAN PORTFOLIO
A. Type of loans
The amount of loans outstanding by type at the indicated dates
are shown in the following table:
(In Thousands)
December 31,
________________________________________________
Type 2002 2001 2000 1999 1998
______________ ________ ________ ________ ________ ________
Commercial,
financial and
agriculture $103,327 $101,630 $103,045 $101,503 $ 81,365
Real estate -
construction 30,028 31,461 33,638 26,185 27,253
Real estate -
mortgage 364,875 387,667 402,987 390,205 366,219
Installment
loans to
individuals 77,692 94,424 105,564 101,624 104,470
Other 8,785 7,758 2,255 4,234 7,526
________ ________ ________ ________ ________
Total loans $584,707 $622,940 $647,489 $623,751 $586,833
======== ======== ======== ======== ========
B. Maturities and sensitivities of loans to changes in interest
rates:
(In Thousands)
December 31, 2002
____________________________
Maturing or Repricing
____________________________
After
1 Year
Within Through Over
Type 1 Year 5 Years 5 Years Total
_______________________ ________ ________ ________ ________
Commercial, financial
and agricultural $ 78,834 $ 22,646 $ 1,847 $103,327
Real estate -
construction 26,859 3,019 150 30,028
________ ________ ________ ________
$105,693 $ 25,665 $ 1,997 $133,355
======== ======== ======== ========
(In Thousands)
December 31, 2002
____________________________
Maturing or Repricing
____________________________
After
1 Year
Within Through Over
Type 1 Year 5 Years 5 Years Total
________________________ ________ ________ ________ ________
Loans with:
Predetermined interest
rates $ 25,393 $ 25,665 $ 1,997 $ 53,055
Floating interest
rates 80,300 - - 80,300
________ ________ ________ ________
$105,693 $ 25,665 $ 1,997 $133,355
======== ======== ======== ========
C. Nonperforming loans
1. The following table states the aggregate amount of loans
which were nonperforming in nature:
(In Thousands)
December 31,
______________________________________
Type 2002 2001 2000 1999 1998
__________________ ______ ______ ______ ______ ______
Loans accounted
for on a
nonaccrual basis $1,274 $2,050 $1,384 $ 270 $ 927
====== ====== ====== ====== ======
Accruing loans
past due 90 days
or more $2,700 $1,850 $2,356 $2,975 $2,902
====== ====== ====== ====== ======
Renegotiated
"troubled" debt $ 304 $ 665 $ 294 $ 132 $ 337
====== ====== ====== ====== ======
2. There were no loan concentrations in excess of 10% of total
loans at December 31, 2002. However, lending activities are
affected by the economic trends within the areas served by
the Company and its subsidiaries. This, in turn, can be
influenced by the areas' larger employers, such as
Mississippi State University, University of Alabama, Bryan
Foods, Columbus Air Force Base, and the Mercedes-Benz
Automotive Plant.
3. There were no outstanding foreign loans at December 31,
2002.
4. Loans classified for regulatory purposes or for internal
credit review purposes that have not been disclosed in
the above table do not represent or result from trends or
uncertainties that management expects will materially
impact the financial condition of the Company or its
subsidiary banks, or their future operating results,
liquidity, or capital resources.
5. If all nonaccrual loans had been current throughout their
terms, interest income would have not been significantly
different for the years ended 2002, 2001 and 2000.
6. Management stringently monitors loans that are classified
as nonperforming. Nonperforming loans include nonaccrual
loans, loans past due 90 days or more, and loans renegotiated
or restructured because of a debtor's financial difficulties.
Loans are generally placed on nonaccrual status if any of the
following events occur: 1) the classification of a loan as
nonaccrual internally or by regulatory examiners,
2) delinquency on principal for 90 days or more unless
management is in the process of collection, 3) a balance
remains after repossession of collateral, 4) notification
of bankruptcy, or 5) management's judgment that nonaccrual
is appropriate.
7. At December 31, 2002, the recorded investment in loans
identified as impaired totaled approximately $1.2 million.
The allowance for loan losses related to these loans approxi-
mated $596,000. The average recorded investment in
impaired loans during the year ended December 31, 2002, was
$1.8 million. Total interest recognized on impaired loans
and the amount recognized on a cash basis were not
significant.
D. Other interest-bearing assets
There were no other interest-bearing non-performing assets
at December 31, 2002.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. An analysis of the loan loss experience for the periods
indicated is as follows:
($ In Thousands)
December 31,
___________________________________________
2002 2001 2000 1999 1998
_______ _______ _______ _______ _______
Beginning balance $ 6,753 $ 9,689 $10,194 $10,102 $ 8,528
_______ _______ _______ _______ _______
Charge-offs:
Domestic:
Commercial,
financial and
agricultural (708) (2,840) (499) (566) (575)
Real estate (1,240) (780) (206) (444) (451)
Installment
loans and
other (2,226) (1,580) (1,497) (1,047) (960)
_______ _______ _______ _______ _______
Total charge-offs (4,174) (5,200) (2,202) (2,057) (1,986)
_______ _______ _______ _______ _______
Recoveries:
Domestic:
Commercial,
financial and
agricultural 39 119 55 89 124
Real estate 64 61 17 25 76
Installment
loans and
other 557 364 345 266 173
_______ _______ _______ _______ _______
Total recoveries 660 544 417 380 373
_______ _______ _______ _______ _______
Net charge-offs (3,514) (4,656) (1,785) (1,677) (1,613)
_______ _______ _______ _______ _______
Provision charged
to operations 2,790 1,720 1,280 1,769 3,187
_______ _______ _______ _______ _______
Ending balance $ 6,029 $ 6,753 $ 9,689 $10,194 $10,102
======= ======= ======= ======= =======
Ratio of net
charge-offs to
average loans
outstanding .59 .74 .29 .28 .28
Ratio of allowance
for loan losses
to loans
outstanding at
year end 1.03 1.08 1.50 1.63 1.72
B. Determination of Allowance for Loan Losses
The determination of the allowance for loan losses requires
significant judgment. The balance of the allowance for loan
losses reflects management's best estimate of probable loan
losses related to specifically identified loans, as well as
probable incurred loan losses in the remaining portfolio.
Reference should be made to Note A-6 to the consolidated
financial statements included herein as Item 8 and to Item 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following schedule sets forth the components of the allowance
for loan losses at December 31, 2002 and 2001. This allocation
is based upon the consistent, quarterly evaluation of the adequacy
of the allowance for loan losses. The entire allowance for loan
losses is available to absorb loan losses in any category.
2002 2001
__________________ __________________
Allowance Allowance
Loan For Loan Loan For Loan
Balance Losses Balance Losses
(In thousands) ________ ________ ________ ________
Allocated component:
Impaired loans $ 1,230 $ 596 $ 2,471 $ 1,353
Graded loans 24,867 2,302 33,221 2,674
Homogeneous pools 156,837 980 187,751 1,071
Other loans 401,773 1,683 399,497 1,271
Unallocated component - 468 - 384
________ ________ ________ ________
$584,707 $ 6,029 $622,940 $ 6,753
======== ======== ======== ========
The allowance allocated to impaired loans for the years 2002 and
2001 was based upon the estimated fair value of the underlying
collateral. Graded loans are those loans that exhibit some form
of weakness. Allocations to this group are based upon the
historical loan loss experience of the grades assigned and upon
specific allocations to specific loans. An allowance is allocated
to the various pools of loans considered to be homogenous based
upon the historical loan losses of each pool. Other loans consist
of those loans not graded or impaired or considered homogenous.
These loans are grouped by risk assignments which are based upon
consideration of collateral values, borrower financial condition
and performance, debt service capacity, cash flows, market share,
and other indicators. Allocations of the allowance to these loans
are based upon historical loan loss experience of the risk
assignment.
C. Loans and Risk Descriptions
Real Estate Loans
NBC originates loans secured by commercial real estate, one-
to-four family residential properties, and multi-family dwelling
units (5 or more units). At December 31, 2002, these loans
totaled $395 million or approximately 68% of the loan portfolio.
NBC originates commercial real estate loans up to 80% of the
appraised value. Currently, it is the philosophy to originate
these loans only to selected known borrowers and on properties in
the market area.
Of primary concern in commercial real estate lending is the
borrower's credit worthiness and the feasibility and cash flow
potential of the project. To monitor cash flows of borrowers,
annual financial statements are obtained from the borrower and
loan guarantors, if any. Although many banks have had
significant losses in commercial real estate lending, NBC,
historically, has sustained few losses, and those losses were
not significant relative to the size of the entire commercial
real estate loan portfolio at the time.
NBC originates loans secured by first and junior liens on
one-to-four family residences in their lending areas. Typically,
such loans are single family homes that serve as the primary
residence of the borrower. Generally, these loans are originated
in amounts up to 80% of the appraised value or selling price of
the property. In the past, very few losses from these types of
loans have been experienced.
Loans for multi-family (5 or more) residential properties are
generally secured by apartment buildings. Loans secured by
income properties are generally larger and involve greater risk
than residential loans because payments are often dependent on
the successful operation or management of the properties. As a
result, these types of loans may be more sensitive to adverse
conditions in the real estate market or the economy. Cash flow
and financial statements are obtained from the borrowers and any
guarantors. Also, rent rolls are often obtained.
Consumer and Other Loans
NBC offers consumer loans in the form of home improvement loans,
mobile home loans, automobile loans and unsecured personal loans.
These loans totaled $78 million or 13% of total loans at
December 31, 2002. Consumer loans are originated in order to
provide a wide range of financial services to customers and
because the terms and normally higher interest rates on such
loans help maintain a profitable spread between the average loan
yield and the cost of funds.
In connection with consumer loan applications, the borrower's
income statement and credit bureau report are reviewed. In
addition, the relationship of the loan to the value of the
collateral is considered. All automobile loan applications
are reviewed, as well as the value of the unit which secured
the loan. NBC intends to continue to emphasize the origination
of consumer loans. Management believes that its loan loss
experience in connection with its consumer loan portfolio is
favorable in comparison to industry averages.
NBC makes commercial business loans on both a secured and
unsecured basis with terms which generally do not exceed five
years. Non-real estate commercial loans primarily consist of
short-term loans for working capital purposes, inventories,
seasonal loans, lines of credit and equipment loans. A personal
guaranty of payment by the principals of any borrowing entity is
often required and the financial statements and income tax returns
of the entity and its guarantors are reviewed. At December 31,
2002, NBC's commercial business loans represented approximately
16% of its total loan portfolio.
D. In the year 2001, NBC experienced an unusual and unexpected loan
loss of $2 million (reference should be made to Item 7 - Manage-
ment's Discussion and Analysis of Financial Condition and Results
of Operations), which is included in the commercial, financial
and agricultural category in Table IV.A. Loan losses in 2003 for
all loan categories, as a percentage of average loans, are
expected to approximate that of 2002.
V. DEPOSITS
($ In Thousands)
2002 2001 2000
______________ ______________ ______________
Amount Rate Amount Rate Amount Rate
________ ____ ________ ____ ________ ____
A. Average
deposits:
Domestic:
Noninterest-
bearing $ 99,199 - $ 96,249 - $ 94,038 -
Interest-
bearing
demand (1) 296,313 1.5% 296,160 2.9% 254,458 3.6%
Savings 40,996 .8% 39,196 1.5% 48,414 2.1%
Time 364,345 3.5% 379,135 5.4% 382,415 5.6%
Foreign N/A N/A N/A
________ ________ ________
Total $800,853 $810,740 $779,325
======== ======== ========
(1) Includes Money Market accounts
B. Other categories
None
C. Foreign deposits
Not material
D. Time certificates of deposit of $100,000 or more and maturities
at December 31, 2002
(In Thousands)
3 6
Months Months
3 Through Through Over
Months 6 12 12
Total Or Less Months Months Months
________ _______ _______ _______ _______
Time certificates
of deposit of
$100,000 or more $164,625 $51,413 $28,262 $23,868 $61,082
======== ======= ======= ======= =======
E. Foreign office time deposits of $100,000 or more
Not applicable
VI. RETURN ON EQUITY AND ASSETS
The following financial ratios are presented for analytical
purposes:
December 31,
______________________
2002 2001 2000
______ ______ ______
Return on assets (net income divided by
total average assets) 1.3 1.3 1.4
Return on equity (net income divided by
average equity) 13.3 12.5 12.2
Dividend payout ratio (dividends per share
divided by basic net income per share) 50.3 53.2 49.5
Equity to asset ratio (average equity
divided by average total assets) 10.1 9.8 12.0
VII. SHORT-TERM BORROWINGS
2002 2001 2000
____________ ____________ ____________
($ In Thousands)
Securities Securities Securities
Sold Under Sold Under Sold Under
Agreement to Agreement to Agreement to
Repurchase Repurchase Repurchase
____________ ____________ ____________
Balance at year end $25,599 $16,625 $16,326
Weighted average interest
rate at year end 1.10% 2.23% 4.15%
Maximum amount outstanding
at any month end for the
year $26,328 $21,765 $17,831
Average amount outstanding
during the year 19,430 18,922 17,049
Weighted average interest
rate during the year 1.61% 3.45% 4.16%
VIII. CAPITAL ADEQUACY DATA
Total consolidated capital of the Company was as follows:
($ In Thousands)
December 31,
__________________
2002 2001
________ ________
Total stockholders' equity (excluding
unrealized gain/loss) $106,985 $101,277
Allowance for loan losses, as allowed 6,029 6,753
________ ________
Total primary capital 113,014 108,030
Other secondary capital - -
________ ________
Total capital 113,014 108,030
Less intangible assets and other
adjustments, net (2,273) (1,415)
________ ________
Total capital, as defined for
regulatory purposes $110,741 $106,615
======== ========
Tier 1 and total capital as a percentage of "risk-weighted" assets
at December 31, 2002 and 2001, are as follows:
December 31,
______________
2002 2001
______ ______
Tier 1 capital percentage 16.5% 15.0%
Total capital percentage 17.4% 16.0%
The Company's capital ratios exceed the minimum capital requirements at
December 31, 2002, and management expects this to continue.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following provides a narrative discussion and analysis of significant
changes in the Corporation's results of operations and financial condition.
This discussion should be read in conjunction with the consolidated
financial statements, including the notes thereto, and the supplemental
financial data included elsewhere in this report, including the five-year
summary of Selected Financial Data and management's letter to shareholders
at the beginning of this Annual Report.
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 that 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 remain at
their current levels during the first half of 2003 and trend upward
slightly during the latter half of the year, and the overall economy in
its market will remain relatively flat throughout the year. The
Corporation's 2003 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 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 and 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 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. See Note O in the Notes to Consolidated Financial Statement and
the Corporation's Proxy Statement for additional details concerning related
party transactions.
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 institution if the loan is
subject to the insider lending restrictions of section 22(h) of the Federal
Reserve Act. All loans to executive officers made by the Corporation's bank
subsidiary are subject to the above referenced section of the Federal Reserve
Act.
Note A of the Notes to Consolidated Financial Statements contains a listing
of all the Corporation's affiliated companies. 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.
Effective January 1, 2002, the Corporation adopted Financial Accounting
Standards Board Statement No. 142, "Goodwill and Other Intangible Assets".
This Statement eliminated the requirement to amortize goodwill; however, it
does require periodic testing for impairment. As a result of the adoption of
the Statement, the Corporation did not amortize goodwill during 2002. The
Corporation completed its transitional impairment test in accordance with
Statement No. 142 in January 2002. No significant impairment write down was
recorded as a result of that test.
Additionally, the Corporation adopted FASB Statement No. 147, "Acquisition of
Certain Financial Institutions" which became effective October 1, 2002. This
Statement applies to unidentified intangible assets resulting from the
acquisition of less-than-whole financial institutions. The Corporation's
unidentified intangible asset resulted from such an acquisition. Management
determined that the acquisition met the requirements of a business
combination and, in accordance with FASB Statement No. 147, the related
unidentified intangible asset was reclassified as goodwill and accounted for
in accordance with FASB Statement No. 142. As a result, the Corporation
reversed all related amortization expense recognized after FASB Statement No.
142 was applied. This reversal required the Corporation to restate each of
the first three quarters of 2002, by reversing the previously recorded
amortization. This reversal reduced each quarter's other operating expense
by $28,000 and caused net income in each quarter to increase by approximately
$18,500. This change did not cause the Earnings Per Share to change in any
quarter.
At December 31, 2002, the Corporation had approximately $2.8 million of
goodwill on its Balance Sheet, including approximately $800,000 of
unidentified intangible assets reclassified as goodwill, which will remain at
that level unless it becomes impaired under the definition of impairment in
FAS 142. The amortization of goodwill during 2001 and 2000 was approximately
$333,000 or $.04 per share and $327,000 or $.03 per share, respectively.
In June 2002, the FASB issued Statement No. 146, "Accounting for the Cost
Associated with Exit or Disposal Activities". The adoption of the Statement
is not expected to have a material impact on the Corporation's consolidated
financial statements.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since 1998, the total assets of the Corporation have increased 15.0%. During
this same period, loans have increased .3%, while deposits grew by 5.2%.
During 1999, net loans grew by $36.8 million, while deposits declined by
approximately $24.1 million. Approximately 79% of this decline in deposits
occurred during the last sixty days of 1999. This situation required the
Corporation to look to other funding sources such as reallocating funds from
lower yielding assets and additional borrowings from the Federal Home Loan
Bank. During 2000, this trend reversed as the equity markets turned down and
cash began flowing back into the banking system. As a result, the
Corporation was able to fund its net loan growth of approximately $24.2
million with a growth in deposits of approximately $52 million. During 2001,
net loans declined by $21.6 million, mostly as a result of a decline in the
Adjustable Rate Mortgage ("ARM") loans that the Corporation carried in its
loan portfolio. The reason for the decline was the interest rate
environment. During that period the Federal Reserve lowered rates eleven
times, totaling 4.75%. Because of these lower rates, many homeowners
refinanced their existing ARM loans to fixed rate loans. Due to the
interest rate risk, the Corporation does not normally carry fixed rate
mortgage loans on its books. As a result of this decline in loans and an
overall soft loan demand, the Corporation did not need to aggressively price
deposits, and therefore, had a modest $5.9 million growth in deposits during
the year. This interest rate environment continued into 2002, as the rates
remained at historically low levels, actually declining an additional 50
basis points in November. The mortgage-refinancing trend continued
throughout 2002, and as a result, the Corporation's mortgage loan portfolio
declined further. Also, the softness in the economy and the very low, or in
the case of the auto industry, zero rate loans resulted in an overall decline
in the Corporation's consumer loan portfolio. Even though other parts of the
loan portfolio actually increased during the year, the increase was not
enough to offset the decline in the mortgage and consumer portfolios. As a
result, the Corporation experienced its second consecutive year of a
declining loan portfolio, as loans decreased by 6.1%. With this continued
decline in loans, the Corporation continued its position of not aggressively
pricing deposits. As a result, deposits grew by .8% for the year. See the
section entitled "Liquidity, Asset / Liability Management" for additional
comments on sources and uses of cash during 2002.
Shareholders' Equity has represented a consistent strength of the Corporation
throughout the years, as noted in the summary of Selected Financial Data.
Shareholders' equity has decreased slightly (0.7%) since 1998. During 1999
and 2000, Shareholder's Equity increased from $111.9 million to $120.1 million,
or 7.4%. The decline in 2001 resulted primarily from the purchase of
approximately $25 million of outstanding shares owned beneficially by two long
time shareholders at $18.83 per share (post split price). This purchase was
partially offset by income, net of dividend, and an increase in the market
value of "Available-for-Sale Securities", the cumulative effect of which caused
Accumulated Other Comprehensive Income to increase by approximately $1.7
million. In 2002, Shareholders' Equity increased by $8.2 million, or 7.9%
from $102.9 million to $111.1 million. This increase came from income, net of
dividends, and a $2.5 million increase in Accumulated Other Comprehensive
Income. Accumulated Other Comprehensive Income is composed of unrealized
gains (losses), net of taxes on "Available-for-Sale Securities" ($1,650,000 and
$4,122,000 at December 31, 2001 and 2002, respectively) and is reported as part
of Shareholders' Equity, as required under FASB 115.
In 1999, net income increased by $506,000, even though the Corporation
incurred approximately $2.5 million of merger related expenses (net of taxes)
associated with the acquisitions of FFBS Bancorp, Inc., ("FFBS") and Galloway-
Chandler-McKinney Insurance Agency, Inc. ("GCM"). In 1998 and 1999, fully
diluted earnings per share were $1.06 and $1.10, respectively, after being
impacted by approximately $.20 in 1998 and $.27 in 1999, of non-recurring
merger costs. In 2000, fully diluted earnings per share increased by 33.6% to
$1.47 per share, as net income increased from $10.5 million in 1999 to $14.0
million in 2000. In 2001, net income declined to $13.1 million; however, fully
diluted earnings per share increased to $1.54, a 4.8% increase, due to 10.8%
fewer weighted average shares outstanding as a result of the previously
mentioned repurchase of the Corporation's stock. In 2001, net income was
negatively impacted by an additional $1 million provision made to the
Corporation's allowance for loan losses to replenish the allowance for a large
commercial loan charge-off. This charge-off will discussed in more detail
later in this analysis. The following paragraphs discuss the increase in net
income in 2002, compared to 2001. The 1998 earnings per share amounts have
been restated to reflect the 1999 merger with FFBS. All earnings per share
amounts have been restated to reflect the four for three stock split,
accounted for as a stock dividend, that occurred during the third quarter of
2002.
Regular cash dividends have increased in each of the years outlined in the
summary of Selected Financial Data. The 1998 dividends per share amount has
been restated to reflect the 1999 merger with FFBS and all dividends per
share have been restated to reflect the four for three stock split, accounted
for as a stock dividend, that occurred during the third quarter of 2002.
Net interest income ("NII"), the primary source of earnings for the
Corporation, represents income generated from earning assets, less the interest
expense of funding those assets. NII declined by 7.9% in 2001 and increased by
6.9% in 2002. Changes in NII may be divided into two components; first, the
change in average earning assets (volume component) and second, the change in
the net interest spread (rate component). Net interest spread represents the
difference between yields on earning assets and rates paid on interest-bearing
liabilities.
The year 2001 was a unique year for the banking industry. During the year,
the Federal Reserve reduced interest rates eleven times, for a total of 475
basis points. Even though most thought rates would decline during 2001, few,
if any, expected rates to decline that far, that fast. This rate decline did
not stop the general state of the economy from continuing to slow throughout
the year. With this slow down in the economy, the Corporation experienced a
substantial decline in loan demand, as businesses went into a defensive
position. In this environment, the competition for quality credits increased.
This situation caused many of the fixed rate loans that were in the portfolio
to be refinanced at lower rates during the year. Also, at the beginning of the
year, approximately 45 percent of the loan portfolio was composed of variable
rate loans. These two factors caused an overall decline in loan yields during
2001.
As mentioned later in this discussion, the Corporation's policy is to
maintain a basically neutral gap position for its balance sheet. The
Corporation began 2001 with a twelve-month liability sensitive position of
$57.7 million or 5.7% of assets, well within its policy of plus or minus 10%.
Even though a liability sensitive position was appropriate for this declining
rate environment, the speed and amount of the declines caused the variable
loans to reprice more quickly than the cost of liabilities could be reduced,
putting a great deal of downward pressure on the Corporation's margin during
the year. Even though management began repricing deposits downward during
January, it was the third and fourth quarters before the rates stabilized
enough for the reduction in rates paid on deposit to catch up with the decline
in yields and for the margin to stabilize and begin to increase.
In 2001, NII declined 7.9% as the net interest spread declined from 3.38% in
2000 to 2.96%. The primary reason for this decline was a decrease in average
loan yields of approximately 88 basis points. This decrease in loan yields
was partially offset by a decrease in the average cost of deposits of 43 basis
points and a decrease in the cost of other borrowed funds of 54 basis points.
The volume component of NII also helped offset this decline in loan yields,
as average-earning assets grew $68.7 million, or 7.6%.
In 2002, NII increased by 6.9% from $34.8 million to $37.2 million. This
increase resulted from improvement in both the rate and volume components
of NII. During the year the margin increased from 3.59% in 2001 to 3.80%
in 2002. Even though yields on earning assets continued to decline during
the year, the Corporation was able to more than offset the decline by
continuing to decease the cost of funds during the stable rate, low loan
demand environment of 2002. As can be seen in following table, yields on
earning assets declined by 116 basis points from 7.30% to 6.14%. This
loss was more that offset by a decline of 160 basis points in cost of
funds from 4.34% in 2001 to 2.74% in 2002. Also, the Corporation was able
to grow earning assets by $9.3 million or 1.3% during 2002. All of this
growth came in the area of investment securities.
If rates were to continue downward, it will become very difficult for the
Corporation to continue to lower deposit rates much below their current
level. As a result, if multiple rate reductions occur, the margin will
again come under extreme pressure because asset yields will be decreasing
and the Corporation's ability to reduce its deposit cost will be limited.
The table below shows, for the periods indicated, an analysis of NII,
including the average amount of interest-earning assets and interest-
bearing liabilities outstanding during the period, the interest earned or
paid on such amounts, the average yields/rates paid and the net yield on
interest-earning assets on both a book and tax equivalent basis:
($ In Thousands)
Average Balance
________ ________
Year Year
Ended Ended
12/31/02 12/31/01
________ ________
EARNING ASSETS:
Loans $591,297 $629,248
Federal funds sold and
other interest-bearing
assets 12,986 22,816
Securities:
Taxable 250,970 185,076
Nontaxable 123,380 132,200
________ ________
Totals $978,633 $969,340
======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits $701,654 $714,491
Borrowed funds, federal funds
purchased and securities sold
under agreements to repurchase
and other 134,639 115,764
________ ________
Totals $836,293 $830,255
======== ========
($ In Thousands)
Interest Yields Earned
For and Rates Paid (%)
Year Year Year Year
Ended Ended Ended Ended
12/31/02 12/31/01 12/31/02 12/31/01
________ ________ ________ ________
EARNING ASSETS:
Loans $ 40,022 $ 51,852 6.77 8.24
Federal funds sold and other
interest-bearing assets 215 950 1.66 4.16
Securities:
Taxable 13,675 11,165 5.45 6.03
Nontaxable 6,139 6,803 4.98 5.15
________ ________ ________ ________
Totals $ 60,051 $ 70,770 6.14 7.30
======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits $ 17,171 $ 29,866 2.45 4.18
Borrowed funds, federal
funds sold, securities
sold under agreements to
repurchase and other 5,705 6,135 4.24 5.30
________ ________ ________ ________
Totals 22,876 36,001 2.74 4.34
________ ________ ________ ________
Net interest income $ 37,175 $ 34,769
======== ========
Net yield on earning assets 3.80 3.59
________ ________
Note: Yields on a tax equivalent basis would be:
Nontaxable securities 7.66 7.92
________ ________
Total earning assets 6.47 7.68
________ ________
Net yield on earning assets 4.14 3.96
________ ________
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 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.) Even though there has
been increased competition for good quality credits in the Corporation's
market, the quality of our portfolio remains strong. Net charge-offs for
2000, 2001 and 2002 were .28%, .74% and .59% of average net loans outstanding
for each year, respectively. See Note D in the Notes to Consolidated Financial
Statements for additional information concerning the transactions in the
Reserve for Loan Losses for the three-year period ended December 31, 2002.
Had it not been for a single $2 million loan charged off in June of 2001 (this
loan will be discussed in more detail in the following paragraph), the ratio
for 2001 would have been .42% of average net loans. The ratio of classified
loans to capital has decreased from 18.1% at December 31, 2001 to 13.2% at
December 31, 2002. The Reserve for Loan Losses as a percentage of total loans
has declined from 1.08% of total loans at the end of 2001 to 1.03% at the end
of 2002. Based on these evaluations, the reserve amounts maintained at the
end of 2001 and 2000 were deemed adequate to cover exposure within the
Corporation's loan portfolio.
The Provision for Loan Losses increased from $1,280,000 in 2000 to $1,720,000
in 2001 and to $2,790,000 in 2002. In 2001, the provision was increased to
$1,720,000, as net charge-offs increased from $1.9 million in 2000 to $4.7
million in 2001. The primary reason for the increased charge-offs in 2001
was that in June, the Corporation charged-off a $2 million commercial loan
that defaulted. This loan had previously not been classified as a problem
loan and there were special circumstances surrounding the default. The
Corporation has filed a claim with its bonding company to recover the
entire $2 million; however, it can not predict whether there will be a
recovery. In 2002, the provision was increased to $2,790,000. In total,
the net charge-offs decreased to $3.5 million in 2002. However, when
compared to 2001, exclusive of the special charge-off, the level of
charge-offs actually increased in 2002. This increase can be attributed
to the overall condition of the economy and the continued softening in the
market, especially in the consumer sector. Due to this continued softness
in the economy and the forecast of a long, slow recovery, management intends
to again increase the provision for loan losses in 2003 to a level that we
anticipate will protect the Corporation from any unforeseen deterioration in
the quality of the loan portfolio.
Non-interest income includes various service charges, fees and commissions
collected by the Corporation, including insurance commissions earned by
GCM, the wholly owned insurance agency subsidiary of National Bank of
Commerce. During 2002, non-interest income grew 9.6% from $16.5 million to
$18.0 million. This increase resulted from the Corporation's continued
focus on diversifying its income sources so that it can be less dependent on
net interest income. Approximately 74% of the total increase came from a
$1.2 million or a 19.7% increase in service charges on deposit accounts.
This increase resulted primarily from an upgrade in the technology platform
that includes more sophisticated account modeling. This gave management
the tools needed to better monitor and more uniformly apply the account-
based fees across all deposit accounts on a consistent basis. Insurance
commissions, fees and premiums increased by $234,000, or 6.1%. This change
in insurance commissions, fees and premiums relates directly to the volume
of insurance product sold during these periods. Other service charges and
fees also increased by $157,000, or 5.3%. This increase came from three
areas. First, mortgage loan fee income increased by $37,000 to a level of
$1,501,000. Mortgage activity benefited from the continued demand for
loans in this low interest rate environment. Also the demand for mortgage
refinancing, which had moderated during the first half of the year, began
to increase once again during the last half of the year as interest rates
fell. Also, during the year, the demand for new loans was strong. With
this high level of activity at year-end, the pipeline for both new and
refinanced mortgage loans remains strong going into 2003. The other two
areas that caused the increase in other service charges and fees were ATM
Income, which increased by 27.1%, and Check Card Income, which increased
by 20.6%. Trust Department income increased by 3.2% to $1.8 million.
Even though the Trust Department was able to continue to grow its assets
under management during the year, its income is generated based on the
market value of these assets. Therefore, its growth in income was limited
by the overall conditions in the equity markets as they continued to
decline throughout 2002. During 2001, non-interest income grew 19.6% to
$16.5 million. Several different sources contributed to this increase.
Service charges on deposit accounts increased by 12% to $5.9 million as a
result of an on-going effort by management to better bill and collect
fees. The Corporation's Trust Department income increased by 6.3% to $1.7
million. This increase was smaller than the prior year's increase. The
activities in this area grew steadily during 2001; however, as mentioned,
the amount of income collected from management fees is directly related to
the market value of the account assets, which in many cases was negatively
impacted by the decline in the equity markets during 2001. Additionally,
other non-interest income increased by $1.8 million, or 69%. This
increase came primarily from two sources. First, the fees from mortgage-
related activities increased 205.7%, or $984,000, as a result of an
interest rate environment that produced heavy refinancing activity
throughout the year. Second, earnings from a $10 million purchase of Bank
Owned Life Insurance ("BOLI") caused this category of other non-interest
income to increase by $621,000. This purchase of BOLI was executed to
help cover the increasing cost of employee benefits. These increases were
partially offset by a decline of 8.3%, or $347,000, in Insurance
Commissions, Fees and Premiums. This decline in Insurance Commissions,
Fees and Premiums relates directly to the volume of insurance products
sold. During the first quarter of 2001, a great deal of time and effort
was spent handling claims that resulted from a major storm that hit the
service area. This took away from time that would have been spent
developing new business. Also, GCM experienced a reduction in incentive
rebates from its insurance carriers because of underwriting losses that
resulted from the storm.
The Corporation recognized $457,000 in securities gains during 2002,
compared to $459,000 in 2001 and a loss of $22,000 for 2000.
Approximately 80% of the 2002 gain came in the second half of the year.
With approximately 74% of available-for-sale securities portfolio composed
of mortgage backed securities, a unique situation developed during the
second half of 2002. As mortgage rates continued to stay low during most
of 2002 and then drop again with the Fed rate cut in November, the
prepayment speed on the mortgages behind these securities increased. This
caused the average lives on these securities to shorten from the 5 to 7
year ranges they were in when purchased, to ranges of 2 to 3 years. With
the low interest rate environment there was a high demand for securities
with 2 to 3 year estimated average life. This gave the Corporation the
opportunity to sell these securities at a profit and replace them with
securities with the same 5 to 7 year average life that were originally
purchased. Not only did these transactions create a gain; they also
allowed the Corporation to improve the yields on the particular securities
sold by approximately 70 basis points. This environment continued into
2003, and the Corporation intends to take advantage of this situation for
as long as it exists. The gain in 2001 resulted primarily from several
securities that had been purchased at a discount being called, at par
value, because of the low interest rate environment.
Non-interest expense represents ordinary overhead expenses, including
salaries, bonuses and benefits. The Corporation maintains a formal salary
administration program that considers extensive comparative salary data and
other indices supplied by a leading outside consulting firm. This data is
utilized to assure that salaries are in line and competitive with comparable
jobs in the marketplace. Incentive bonuses that were expensed in 2002 and
2000 were paid to employees based on the attainment of predetermined profit
goals. The predetermined profit goals were not reached in 2001; therefore,
no significant bonuses were accrued. Overall, non-interest expense increased
by approximately $1.3 million or, 4.1%, during 2002. This entire increase
can be attributed to increases in salaries and benefits. Salaries increased
by 7.3%, or $1.1 million. Approximately 86% of this increase came from
bonuses and related expenses that were accrued in 2002. As stated above, no
bonuses were accrued in 2001. The remaining portion of the salary increase
is due to normal salary increases for the year. Employee benefits increased
by 18.1%, or $568,000 in 2002. Like most companies, NBC experienced an
increase in medical insurance premiums during the year. Also, the benefit
cost increased due the effects on the Defined Benefit Plan of the lower rate
environment on the present value calculations and low returns in the plan's
investment portfolio due to the weak equity markets. Additionally, net
occupancy expense and furniture and equipment expense increased by $112,000
or 2.4%. This small increase came primarily from higher maintenance and
repair cost during the year. These increases were partially offset by a
$481,000, or 5.1%, decrease in other expenses. During 2001, non-interest
expense increased by approximately $1.2 million or, 3.9%. This increase
resulted primarily from a $896,000, or 5.2%, increase in Salaries and
Employee Benefits and a $226,000, or 2.5%, increase in Other Operating
Expenses. Salaries and Employee Benefits increased as the result of an
increase in employee benefit cost and a reduction in the FASB 91 deferral
because of the reduction in loan volume. Salaries were basically unchanged
during the year. The Corporation made significant changes in its employee
benefits that became effective at the beginning of 2001. Management knew
that these changes would increase the cost of benefits in the early years,
but would eventually allow management to better control and possibly reduce
the cost of benefits in future years. To offset these increases, the
Corporation purchased the Bank-Owned Life Insurance. The increase in Other
Operating Expenses resulted from increases in several expense categories,
none of which were individually considered to be material.
Changes in the Corporation's income tax expense have generally paralleled
changes in pre-tax income. The Corporation's effective tax rates were 27.3%
in 2000, 24.5% in 2001 and 25.2% in 2002. The small increase in the
effective tax rate in 2002 resulted from a $8.8 million dollar decrease in
the average balance of assets that provide either tax-free or tax advantaged
earnings. The decrease in the effective rate in 2001 resulted from a $14
million increase in the average balance of assets that provide either
tax-free or tax advantaged earnings. 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.
LIQUIDITY, ASSET/LIABILITY MANAGEMENT
Liquidity may be defined as the ability of the Corporation to meet cash
flow requirements created by decreases in deposits and/or other sources of
funds or increases in loan demand. The Corporation has not experienced any
problems with liquidity over any of the years noted, and anticipates that
all liquidity requirements will be met comfortably in the future. The
Corporation's traditional sources of funds from deposit increases,
maturing loans and investments and earnings have generally allowed it to
consistently generate sufficient funds for liquidity needs. As the result
of a $38.2 million decrease in loans and a $6.7 million increase in
deposits, the Corporation's loan/deposit ratio has decreased from 76.8% in
2001 to 71.5% in 2002. In addition, the Corporation increased its
borrowing from the Federal Home Loan Bank during 2002 by approximately
$2.0 million and other borrowed funds by $9.0 million. With the very soft
loan demand, this positive flow of funds was used primarily to purchase
additional investment securities. During 2002, the investment security
portfolio increased from $340.7 million to $393.8 million, representing a
$53.1 million, or 15.6%, increase. An additional $15.0 million was placed
in Federal Funds Sold. All the remaining liquidity needs for the year
were provided from normal operating activities.
The Corporation offers repurchase agreements to accommodate excess funds
of some of its larger depositors. Management believes that these repurchase
agreements stabilize traditional deposit sources as opposed to risking the
potential loss of these funds to alternative investment arrangements.
Repurchase Agreements, which are viewed as a source of funds to the
Corporation, totaled $25.6 million and $16.6 million at December 31, 2002
and 2001, respectively. The level of repurchase agreement activity is
limited by the availability of investment portfolio securities to be
pledged against the accounts. Due to the limited amount of repurchase
agreements and the fact that the underlying securities remain under the
control of National Bank of Commerce, the exposure of the Corporation for
this service is not considered material.
The following table shows the contractual obligations for the Corporation
as of December 31, 2002:
Obligations Due in
___________ less Due in Due in Due
than 1 1-3 3-5 after 5
(In Thousands) Total year years years years
____________ ________ _______ _______ _______ _______
Long-term debt $111,906 $25,757 $51,846 $25,039 $ 9,264
Operating leases 2,852 279 720 236 1,617
Securities sold under
repurchase agreements 25,599 25,599
Other borrowings 1,035 1,035
________ _______ _______ _______ _______
Total cash obligations $141,392 $52,670 $52,566 $25,275 $10,881
======== ======= ======= ======= =======
The following table shows the other commercial commitments for the
Corporation as of December 31, 2002:
Commercial Commitments Expires
______________________ in less Expires Expires Expires
than 1 in 1-3 in 3-5 after 5
(In Thousands) Total year years years years
____________ ________ _______ _______ _______ _______
Lines of Credit (unfunded
commitments) $76,217 $59,380 $ 5,510 $ 1,967 $ 9,360
Commercial and similar
letters of credit $6,018 $2,041 $1,363 $2,614
____________________________________________
The Corporation believes that normal earnings and other traditional sources
of cash flow, along with additional borrowings from the Federal Home Loan
Bank, if necessary, will provide the cash to allow it to meet these
obligations with no adverse effect on liquidity. At December 31, 2002, the
Corporation had the ability to borrow approximately $48 million from the
Federal Home Loan Bank and had other short-term borrowing lines (Federal
Funds Purchased Lines) of approximately $75 million from upstream
correspondent banks.
The Corporation has no plans for the refinancing or redemption of any
liabilities other than normal maturities and payments relating to the
borrowings from the Federal Home Loan Bank. The Corporation does not have
plans at this time for any discretionary spending that would have a
material impact on liquidity other than its announced stock repurchase
program. At December 31, 2002, the Corporation had the authority, at its
discretion, to purchase 330,583 additional shares of its common stock. If
purchased at the year-end closing price of $25.20, this purchase would
require approximately $8.3 million. Any purchases under this program will
be made over an unknown period of time, and the necessary funds will be
provided from normal sources.
Under regulations controlling financial holding companies and 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 December 31, 2002, there were no borrowings between the Corporation
and its subsidiary bank.
The Corporation has maintained a consistent and disciplined asset/
liability management policy during each of the years noted in the summary.
This policy focuses on interest rate risk and sensitivity. During 2002,
the Corporation did not engage in any non-exchange-traded contracts such
as currency or interest rate swaps, nor did it purchase or hold any
derivative securities.
The primary objective of rate sensitivity management is to maintain net
interest income growth while reducing exposure to adverse fluctuations in
rates. The Corporation utilizes an Asset/Liability Management Committee
that evaluates and analyzes the Corporation's pricing, asset/liability
maturities and growth, and balance sheet mix strategies in an effort to
make informed decisions that will increase income and limit interest rate
risk. The committee uses simulation modeling as a guide for its decision
making. Modeling techniques are also utilized to forecast changes in net
income and the economic value of equity under assumed fluctuations in
interest rate levels.
Due to the potential volatility of interest rates, the Corporation's goal
is to stabilize the net interest margin by maintaining a neutral rate
sensitive position. At year-end 2002, the Corporation's balance sheet
reflected approximately $51.6 million more in rate sensitive assets than
liabilities that were scheduled to reprice within one year. This
represents 4.8% of total assets and would indicate that the Corporation is
slightly asset sensitive. This computation results from a static gap
analysis that weights assets and liabilities equally. It is the
Corporation's policy to maintain a static gap position of no more than a
plus or minus 10% of aggregate assets over a moving twenty-four month
period. The Corporation's position is considered essentially neutral when
using simulation modeling that provides different weighting for assets and
liabilities. Management believes that interest rates will increase
slightly during the second half of 2003. As a result, it is felt that the
Corporation's current position places it in the correct interest rate risk
posture for a rising rate environment. Management does not believe that
it is in the Corporation's best interest to speculate on changes in
interest rate levels. Although earnings could be enhanced if predictions
were correct, they could also be put at significant risk if interest rates
move against predictions.
CAPITAL
Retained earnings have served as the Corporation's exclusive source of
capital growth over the five years noted in the summary of Selected
Financial Data. In 1999, total Stockholders' Equity showed a decline of
approximately $600,000. The reason for this decline was that Accumulated
Other Comprehensive Income, which is composed primarily of unrealized
gains (losses) on available-for-sale securities, moved from a gain of
$1.4 million in 1998 to a loss of $2.6 million in 1999. This movement
resulted from an increasing rate environment during 1999, which caused a
decline in market value of these investment securities. The interest
rate trend reversed in 2000, and as a result, the Accumulated Other
Comprehensive Income improved from a loss of $2.6 million to a loss of
only $68,000. This, along with net income, net of dividends, resulted in
Stockholder's Equity increasing from $111.3 million at the end of 1999 to
$120.1 million at the end of 2000. In 2001, Shareholder's Equity
decreased by $17.2 million or 14.3%. This decrease resulted from a large
repurchase of stock during the first quarter and the normal payment of
dividends. These decreases were partially offset by the net income for
the year and a continued downward trend in interest rates, which caused
the Accumulated Other Comprehensive Income to increase from a loss of
$68,000 at December 31 2000, to a gain of $1,650,000 at December 31,
2001. In 2002, Shareholders' Equity increased by $8.2 million from
$102.9 million to $111.1 million. This represented an increase of 7.9%.
This increase came primarily from two sources. First, the Corporation
generated net income of $14.2 million, from which it paid approximately
$7.1 million in dividends. The second primary cause of this increase
was that the interest rate climate continued downward during 2002,
causing the market value of the available-for-sale securities to
increase. As a result, Accumulated Other Comprehensive Income
increased from $1,650,000 at December 31, 2001 to $4,122,000 at
December 31, 2002. Offsetting these increases was the purchase of
approximately $1.3 million in Treasury Stock. Common Stock also shows
an increase of approximately $2.4 million. However, this was the result
of a four-for-three stock split, accounted for as a stock dividend,
during the third quarter of 2002. This increase in Common Stock was
offset by a charge to Retained Earnings and had no impact on Total
Shareholders' Equity.
During 2002, the amount of Treasury Stock increased from $25,997,000 to
$27,341,000 as the number of shares held in the treasury increased from
1,029,702 to 1,428,352. This increase in the shares held in treasury
stock came from stock purchased through the Repurchase Program first
announced in July of 2001 and extended in July of 2002. The initial
plan approved the repurchase of 310,000 shares or up to 5% of the common
stock. This total increased to 413,333 as the result of the four for
three stock split that occurred during the third quarter of 2002.
During 2002, 27,300 shares were purchased under this program prior to
the above referenced stock split for approximately $855,000 or an
average of $31.31 per share on a pre-split basis. As a result of the
split, 352,000 of additional shares were placed in treasury stock at no
additional cost. Following the split, an additional 20,350 shares were
purchased under the repurchase plan for approximately $517,000, or an
average price of $25.39. On a post-split basis, the average purchase
price of stock purchased during 2002 was $24.16 per share. During
fourth quarter, 11,800 shares were purchased at an average price of
$25.45 per share. Also during 2002, the Corporation issued 1,000
shares upon the exercise of stock options granted under a plan carried
over from FFBS. At December 31, 2002, the Corporation could purchase
an additional 330,583 shares under its Stock Repurchase Program. During
the year ended December 31, 2002, the Corporation used Sterne, Agee &
Leach, Inc. and FTN Financial Securities Corp. to purchase these shares
under the Stock Repurchase Plan in the open market in accordance with
Securities and Exchange Commission Rule 10b-18.
Current regulatory requirements call for a basic leverage ratio of 5.0%
for an institution to be considered "well-capitalized." At the end of
2002, NBC maintained a 9.9% leverage ratio, which means it significantly
exceeded the ratio required for a "well-capitalized" institution.
Regulatory authorities also evaluate a financial institution's capital
under certain risk-weighted formulas (high-risk assets would require a
higher capital allotment, lower risk assets a lower capital allotment).
In this context, a "well-capitalized" bank is required to have a Tier 1
risk-based capital ratio (excludes reserve for loan losses) of 6.0% and
a total risk-based capital ratio (includes reserve for loan losses) of
10.0%. At the end of 2002, the Corporation had a Tier 1 ratio of 16.5%
and a total risk-based capital ratio of 17.4%, again placing the
Corporation well above the level required for a "well-capitalized"
institution.
The Corporation's capital position obviously exceeds regulatory
requirements, even for "well-capitalized" institutions. Even though
capital has decreased 0.7% since 1998 and assets grew by 15.0%; the
capital to asset ratio remained high at 10.3%, as of December 31, 2002.
Management still considers this level of capital to be excessive in
relation to the amount needed to support the assets of the Corporation.
As a result, management is continuing to consider alternatives to safely
leverage the remaining excess capital in an effort to increase the
earnings of the Corporation and improve Return on Average Equity.
Some of the items under consideration are the additional purchase of the
Corporation's stock, acquisitions and additional arbitrage transactions.
There are no material commitments for the use of capital resources that
cannot be funded through currently available liquidity sources.
MARKET INFORMATION
The Corporation's stock is listed on the American Stock Exchange ("AMEX")
and is traded under the symbol NBY. SunTrust Bank, Atlanta acts as
Transfer Agent for the Corporation. The following table sets forth, for
the periods indicated, the range of sales prices of the Corporation's
common stock as reported on AMEX for 2001 and 2002 and the dividends
declared for each period. Please note that all 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.
CASH DIVIDEND
DECLARED PER
YEAR QUARTER HIGH LOW QUARTER
_______________________________________________________
2001 First $16.880 $14.160 $0.19
Second 22.090 16.090 0.21
Third 25.310 20.440 0.21
Fourth 24.380 22.430 0.21
2002 First $23.480 $21.490 $0.21
Second 28.500 22.610 0.22
Third 28.200 24.280 0.22
Fourth 26.700 24.800 0.22
ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed only to U.S. dollar interest rate changes and,
accordingly, the Company manages exposure by considering the possible
changes in the net interest margin. The Company does not have any trading
instruments nor does it classify any portion of the investment portfolio
as held for trading. The Company does not engage in any hedging
activities or enter into any derivative instruments with a higher degree
of risk than collateralized mortgage obligations which are commonly held
securities generally collateralized by pools of GNMA, FNMA, or FHLMC pass-
through securities. Finally, the Company has no exposure to foreign
currency exchange rate risk, commodity price risk, and other market risks.
The following table reflects the year-end position of the Company's
interest-earning assets and interest-bearing liabilities which can either
reprice or mature within the designated time period. The interest rate
sensitivity gaps can vary from day-to-day and are not necessarily a
reflection of the future. In addition, certain assets and liabilities
within the same designated time period may nonetheless reprice at
different times and at different levels.
($ In Thousands)
December 31, 2002
________________________________________
Interest Sensitive Within (Cumulative)
________________________________________
Total of
Within Within Within Interest-
3 12 5 Earning
Months Months Years Assets
________ ________ ________ __________
Interest-earning assets:
Loans $258,310 $393,865 $524,792 $ 584,707
Investment and
mortgage-backed
securities 52,266 229,324 329,572 393,783
Federal funds sold
and other 29,053 29,053 29,053 29,053
________ ________ ________ __________
Totals 339,629 652,242 883,417 1,007,543
________ ________ ________ __________
Interest-bearing
liabilities:
Deposits 368,907 548,226 708,393 713,945
Borrowed funds 33,073 52,391 129,296 138,540
________ ________ ________ __________
401,980 600,617 837,669 882,485
________ ________ ________ __________
Sensitivity gap:
Dollar amount (62,351) 51,625 45,748 125,058
Percent of total
interest-earning
assets (6.19%) 5.12% 4.54% 12.4%
The matching of assets and liabilities may be analyzed by examining
the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate
sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap
is defined as the difference between the amount of interest-earning
assets anticipated, based upon certain assumptions, to mature or
reprice within that time period. A gap is considered positive when
the amount of interest rate sensitive assets maturing within a
specific time frame exceeds the amount of interest rate sensitive
liabilities maturing within that same time frame. During a period
of falling interest rates, a negative gap would tend to result in
an increase in net interest income while a positive gap would tend
to adversely affect net interest income. In a rising interest rate
environment, an institution with a positive gap would generally be
expected, absent the effects of other factors, to experience a
greater increase in the yield of its assets relative to the costs
of its liabilities and thus an increase in the institution's net
interest income would result whereas an institution with a negative
gap could experience the opposite results.
At December 31, 2002, total interest-earning assets maturing or
repricing within one year were more than interest-bearing liabilities
maturing or repricing within the same time period by approximately
$51.6 million (cumulative), representing a positive cumulative one
year gap of 5.12% of earning assets. Management of the Company
believes this position to be acceptable in the current interest
rate environment.
Banking regulators have issued advisories concerning the
management of interest rate risk (IRR). The regulators consider that
effective interest rate management is an essential component of safe
and sound banking practices. To monitor its IRR, the Company's risk
management practices include (a) Risk Management, (b) Risk Monitoring
and (c) Risk Control. Risk Management consists of a system in which
a measurement is taken of the amount of earnings at risk when interest
rates change. The Company does this by first preparing a "base
strategy" which is the position of the bank and its forecasted
earnings based upon the current interest rate environment or, most
likely, interest rate environment. The IRR is then measured based
upon hypothetical changes in interest rates by measuring the impact
such a change will have on the "base strategy."
Risk monitoring consists of evaluating the "base strategy" and
the assumptions used in its development based upon the current
interest rate environment. This evaluation is performed quarterly by
management or more often in a rapidly changing interest rate
situation and monitored by an Asset/Liability Management Committee.
Risk control is utilized based upon the setting of guidelines as
to the tolerance for interest rate exposure. These guidelines are set
by senior management and approved by the board of directors. Assuming
a 300 basis points increase over the next twelve months, the December,
2002, model reflects net income declining by .6%. A 300 basis points
decline would result in an 11.6% decrease in net income. Utilizing a
rate shock model, a 200 basis point increase in interest rates results
in a 14.8% decrease in market value equity, and a 200 basis point
decrease results in a 3.9% increase in market value equity. The
guidelines allow for no more than a + - 10% change in income, and no
more than a + - 25% change in market value equity. However, at
December 31, 2002, management believes the changes in income and
market value equity as reflected in the models are acceptable in the
current rate environment.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NBC CAPITAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 2002 AND 2001
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
NBC Capital Corporation
We have audited the accompanying consolidated balance sheets of NBC
Capital Corporation ("the Corporation") and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated statements
of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the consolidated financial position
of NBC Capital Corporation and subsidiaries as of December 31, 2002 and
2001, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002,
in conformity with accounting principles generally accepted in the
United States of America.
As discussed in the notes to the consolidated financial statements, the
Corporation and its subsidiaries adopted Financial Accounting Standards
Board Statement No. 142, "Goodwill and Other Intangibles," effective
January 1, 2002.
/S/ T. E. LOTT & COMPANY
Starkville, Mississippi
January 17, 2003
NBC CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
__________ __________
ASSETS (In thousands)
Cash and due from banks $ 27,865 $ 28,752
Interest-bearing deposits with banks 567 1,263
Federal funds sold 28,486 13,510
__________ __________
Total cash and cash equivalents 56,918 43,525
__________ __________
Securities available-for-sale 349,991 293,043
Securities held-to-maturity (estimated
fair value of $46,975 in 2002 and
$50,623 in 2001) 43,792 47,683
__________ __________
Total securities 393,783 340,726
__________ __________
Loans 584,707 622,940
Less allowance for loan losses (6,029) (6,753)
__________ __________
Net loans 578,678 616,187
__________ __________
Interest receivable 7,605 8,352
Premises and equipment 14,816 15,377
Goodwill 2,853 2,857
Other assets 22,803 23,778
__________ __________
Total Assets $1,077,456 $1,050,802
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Noninterest-bearing deposits $ 103,502 $ 101,569
Interest-bearing deposits 713,945 709,134
__________ __________
Total deposits 817,447 810,703
__________ __________
Interest payable 1,626 2,284
Securities sold under agreements to
repurchase 25,599 16,625
Other borrowed funds 112,941 110,594
Other liabilities 8,736 7,669
__________ __________
Total liabilities 966,349 947,875
__________ __________
Shareholders' equity:
Common stock - $1 par value, authorized
10,000,000 shares in 2002 and 2001;
issued 9,615,806 shares in 2002 and
7,212,662 in 2001 9,616 7,213
Surplus 51,413 51,429
Retained earnings 73,297 68,632
Accumulated other comprehensive income 4,122 1,650
Treasury stock, at cost (27,341) (25,997)
__________ __________
Total shareholders' equity 111,107 102,927
__________ __________
Total Liabilities and Shareholders' Equity $1,077,456 $1,050,802
========== ==========
The accompanying notes are an integral part of these statements.
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
________ ________ ________
(In thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $ 40,022 $ 51,852 $ 57,535
Interest and dividends on
securities:
Taxable 13,971 11,165 7,966
Tax-exempt 5,843 6,803 6,086
Other 215 950 1,148
________ ________ ________
Total interest income 60,051 70,770 72,735
________ ________ ________
INTEREST EXPENSE
Interest on time deposits of
$100,000 or more 5,086 7,788 7,692
Interest on other deposits 12,085 22,078 23,867
Interest on borrowed funds 5,705 6,135 3,419
________ ________ ________
Total interest expense 22,876 36,001 34,978
________ ________ ________
Net interest income 37,175 34,769 37,757
Provision for loan losses 2,790 1,720 1,280
________ ________ ________
Net interest income after
provision for loan losses 34,385 33,049 36,477
________ ________ ________
OTHER INCOME
Service charges on deposit
accounts 7,110 5,942 5,306
Insurance commissions, fees,
and premiums 4,091 3,857 4,204
Other service charges and fees 3,092 2,935 1,938
Trust Department income 1,772 1,717 1,616
Securities gains (losses), net 457 459 (22)
Other 1,524 1,556 720
________ ________ ________
Total other income 18,046 16,466 13,762
________ ________ ________
OTHER EXPENSE
Salaries 16,129 15,026 14,976
Employee benefits 3,698 3,130 2,284
Net occupancy expense 2,412 2,311 2,161
Furniture and equipment
expense 2,316 2,305 2,378
Other 8,863 9,344 9,118
________ ________ ________
Total other expense 33,418 32,116 30,917
________ ________ ________
Income before income taxes 19,013 17,399 19,322
Income taxes 4,792 4,261 5,277
________ ________ ________
Net income $ 14,221 $ 13,138 $ 14,045
======== ======== ========
Net income per share:
Basic $ 1.73 $ 1.54 $ 1.47
Diluted 1.73 1.54 1.47
The accompanying notes are an integral part of these statements.
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Accumu-
lated
Other
Compre- Compre-
hensive Common Retained Treasury hensive
Income Stock Surplus Earnings Stock Income Total
_______ ______ _______ ________ ________ ________ ________
(In thousands)
Balance, January 1,
2000 $7,213 $51,845 $ 55,410 $ (579) $(2,638) $111,251
Comprehensive income:
Net income for 2000 $14,045 - - 14,045 - - 14,045
Net change in
unrealized gains
on securities
available-for-sale,
net of tax 2,570 - - - - 2,570 2,570
_______
Comprehensive income $16,615
=======
Cash dividends
declared, $.73
per share - - (6,963) - - (6,963)
Purchase of treasury
stock - - - (1,164) - (1,164)
Treasury shares
issued for
acquisition - (184) - 479 - 295
Exercise of stock
options - (132) - 221 - 89
______ _______ ________ ________ ________ ________
Balance,
December 31, 2000 7,213 51,529 62,492 (1,043) (68) 120,123
Comprehensive income:
Net income for 2001 $13,138 - - 13,138 - - 13,138
Net change in
unrealized gains
on securities
available-for-sale,
net of tax 1,718 - - - - 1,718 1,718
_______
Comprehensive income $14,856
=======
Cash dividend
declared,
$.82 per share - - (6,998) - - (6,998)
Purchase of treasury
stock - - - (25,122) - (25,122)
Exercise of stock
options - (100) - 168 - 68
______ _______ ________ ________ ________ ________
Balance, December 31,
2001 7,213 51,429 68,632 (25,997) 1,650 102,927
Comprehensive income:
Net income for 2002 $14,221 - - 14,221 - - 14,221
Net change in
unrealized gains
on securities
available-for-sale,
net of tax 2,472 - - - - 2,472 2,472
_______
Comprehensive income $16,693
=======
4 for 3 stock split 2,403 - (2,403) - - -
Cash dividends
declared, $.87 per
share - - (7,123) - - (7,123)
Purchase of treasury
stock - - - (1,372) - (1,372)
Exercise of stock
options - (16) - 28 - 12
Purchase of
fractional shares - - (30) - - (30)
______ _______ ________ ________ ________ ________
Balance, December 31,
2002 $9,616 $51,413 $ 73,297 $(27,341) $ 4,122 $111,107
====== ======= ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
________ ________ ________
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,221 $ 13,138 $ 14,045
Adjustments to reconcile net income to
net cash:
Depreciation and amortization 2,031 2,558 2,458
Deferred income taxes 719 701 103
Provision for loan losses 2,790 1,720 1,280
Securities amortization and accretion, net 1,447 515 558
FHLB stock dividend (173) (201) (278)
(Gains) losses on sale of securities (457) (459) 22
Deferred credits 143 (63) (397)
Changes in:
Interest receivable 747 2,169 (1,674)
Other assets (1,627) 13,080) 992
Interest payable (658) 1,136) 607
Other liabilities 385 (99) (167)
________ ________ ________
Net cash provided by operating activities 19,568 5,763 17,549
________ ________ ________
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale (182,876) (159,165) (46,745)
Proceeds from sales of securities
available-for-sale 40,591 33,056 1,883
Proceeds from maturities and calls of
securities available-for-sale 88,229 67,859 16,930
Purchases of securities held-to-maturity - - (22,866)
Proceeds from maturities and calls of
securities held-to-maturity 3,891 2,113 2,894
(Increase) decrease in loans 35,651 22,225 (23,993)
Additions to premises and equipment (1,313) (1,125) (1,450)
Cash paid in business acquisition - - (47)
________ ________ ________
Net cash used in investing activities (15,827) (35,037) (73,394)
________ ________ ________
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits 6,744 5,899 51,994
Dividends paid on common stock (7,053) (7,062) (10,138)
Net change in securities sold under
agreement to repurchase 8,974 299 (12,340)
Proceeds from issuance of long-term
debt 44,500 75,200 50,000
Repayment of long-term debt (42,153) (21,633) (59,830)
Exercise of stock options 12 68 89
Acquisition of stock (1,372) (25,122) (1,164)
________ ________ ________
Net cash provided by financing activities 9,652 27,649 18,611
________ ________ ________
Net increase (decrease) in cash and cash
equivalents 13,393 (1,625) (37,234)
Cash and cash equivalents at beginning of
year 43,525 45,150 82,384
________ ________ ________
Cash and cash equivalents at end of year $ 56,918 $ 43,525 $ 45,150
======== ======== ========
The accompanying notes are an integral part of these statements
NBC CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE A - SUMMARY OF ACCOUNTING POLICIES
NBC Capital Corporation (the "Corporation"), and its subsidiaries, follow
accounting principles generally accepted in the United States of America,
including, where applicable, general practices within the banking industry.
1. Basis of Presentation
The consolidated financial statements include the accounts of the
Corporation and
National Bank of Commerce ("NBC"), a wholly-owned subsidiary of the
Corporation,
First National Finance Company, a wholly-owned subsidiary of the
Corporation,
Galloway-Chandler-McKinney Insurance Agency, Inc., a wholly-owned
subsidiary of NBC,
NBC Insurance Services of Alabama, Inc., a wholly-owned
subsidiary of NBC,
NBC Service Corporation, a wholly-owned subsidiary of NBC, and
Commerce National Insurance Company, a 79%-owned subsidiary of NBC
Service Corporation.
Significant intercompany accounts and transactions have been eliminated.
2. Nature of Operations
The Corporation is a financial holding company. Its primary asset is
its investment in its subsidiary bank. NBC provides full banking
services, including trust services. The bank operates under a
national bank charter and is subject to regulation of the Office of the
Comptroller of the Currency. The area served by NBC is the North
Central region of Mississippi with locations in ten communities
and the Tuscaloosa, Alabama area. Galloway-Chandler-McKinney Insurance
Agency, Inc., operates insurance agencies in the NBC servicing area.
NBC Insurance Services of Alabama, Inc., sells annuity contracts in the
State of Alabama. The primary asset of NBC Service Corporation is its
investment in Commerce National Insurance Company, a life insurance
company. First National Finance Company is a finance company located
in West Point, Mississippi.
3. Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. Securities
Investments in securities are classified into three categories and are
accounted for as follows:
Securities Available-for-Sale
Securities classified as available-for-sale are those securities that
are intended to be held for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified
as available-for-sale would be based on various factors, including
movements in interest rates, liquidity needs, security risk
assessments, changes in the mix of assets and liabilities and other
similar factors. These securities are carried at their estimated fair
value, and the net unrealized gain or loss is reported as accumulated
other comprehensive income, net of tax, until realized. Premiums and
discounts are recognized in interest income using the interest method.
Gains and losses on the sale of securities available-for-sale are
determined using the adjusted cost of the specific security sold.
Securities Held-to-Maturity
Securities classified as held-to-maturity are those securities for
which there is a positive intent and ability to hold to maturity.
These securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the interest method.
Trading Account Securities
Trading account securities are those securities which are held for
the purpose of selling them at a profit. There were no trading
account securities on hand at December 31, 2002 and 2001.
5. Loans
Loans are carried at the principal amount outstanding. Interest
income on loans is recognized based on the principal balance
outstanding and the stated rate of the loan.
A loan is considered to be impaired when it appears probable that
the entire amount contractually due will not be collected. Factors
considered in determining impairment include payment status,
collateral values, and the probability of collecting scheduled
payments of principal and interest when due. Generally, impairment
is measured on a loan by loan basis using the fair value of the
supporting collateral.
Loans are generally placed on a nonaccrual status when principal or
interest is past due ninety days or when specifically determined to
be impaired. When a loan is placed on nonaccrual status, interest
accrued but not received is generally reversed against interest
income. If collectability is in doubt, cash receipts on nonaccrual
loans are used to reduce principal rather than recorded as interest
income.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the
related loan.
6. Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed
adequate by management to absorb probable losses inherent in the
loan portfolio and is based on the size and current risk
characteristics of the loan portfolio, an assessment of individual
problem loans, actual and anticipated loss experience, current
economic events, including unemployment levels, and other pertinent
factors, including regulatory guidance and general economic
conditions. Determination of the allowance is inherently subjective
as it requires significant estimates, including the evaluation of
collateral supporting impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and
consideration of current economic trends, all of which may be
susceptible to significant change. Loan losses are charged off
against the allowance, while recoveries of amounts previously
charged off are credited to the allowance. A provision for loan
losses is charged to operations based on management's periodic
evaluation of the factors previously mentioned, as well as other
pertinent factors.
The allowance for loan losses consists of an allocated component and
an unallocated component. The components of the allowance for loan
losses represent an estimation done pursuant to either Financial
Accounting Standards Board (FASB) Statement No. 5, "Accounting for
Contingencies," or FASB Statement No. 114, "Accounting by Creditors
for Impairment of a Loan." The allocated component of the allowance
for loan losses reflects expected losses resulting from an analysis
developed through specific credit allocations for individual loans
and historical loss experience for each loan category. The specific
allocations are based on a regular review of all loans over a fixed-
dollar amount and where the internal credit rating is at or below a
predetermined classification. The historical loan loss element is
determined statistically using loss experience and the related
internal gradings of loans charged off. The analysis is performed
quarterly and loss factors are updated regularly based on actual
experience. The allocated component of the allowance for loan
losses also includes consideration of the amounts necessary for any
concentrations and changes in portfolio mix and volume.
The unallocated portion of the allowance reflects management's
estimate of probable inherent but undetected losses within the
portfolio due to uncertainties in economic conditions, changes in
collateral values, unfavorable information about a borrower's
financial condition, and other risk factors that have not yet
manifested themselves. In addition, the unallocated allowance
includes a component that explicitly accounts for the inherent
imprecision in the loan loss analysis. The historical loan loss
experiences used in the analysis may not be representative of actual
losses inherent in the portfolio that have not yet been realized.
7. Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
determined using the straight-line method at rates calculated to
depreciate or amortize the cost of assets over their estimated
useful lives.
Maintenance and repairs of property and equipment are charged to
operations, and major improvements are capitalized. Upon retirement,
sale, or other disposition of property and equipment, the cost and
accumulated depreciation are eliminated from the accounts, and any
gains or losses are included in operations.
8. Other Real Estate
Other real estate consists of properties acquired through foreclosure
and as held for sale property is recorded at the lower of the
outstanding loan balance or current appraisal less estimated costs to
sell. Any write-down to fair value required at the time of foreclosure
is charged to the allowance for loan losses. Subsequent gains or losses
on other real estate are reported in other operating income or expenses.
9. Goodwill and Other Intangible Assets
Goodwill represents the cost of acquired institutions in excess of the
fair value of the net assets acquired. Effective January 1, 2002, the
Corporation and its subsidiaries adopted FASB Statement No. 142,
"Goodwill and Other Intangible Assets," which eliminated the requirement
to amortize goodwill but instead requires periodic testing of goodwill
for impairment.
The Corporation and its subsidiaries adopted FASB Statement No. 147,
"Acquisition of Certain Financial Institutions" which was effective
October 1, 2002. The statement applies to unidentified intangible
assets resulting from the acquisition of less-than-whole financial
institutions. NBC's unidentified intangible asset resulted from such
an acquisition. Upon evaluation, NBC determined the acquisition met
the requirements of a business combination and, in accordance with
FASB Statement No. 147, the related unidentified intangible asset was
reclassified as goodwill and accounted for in accordance with FASB
Statement No. 142. As a result, NBC reversed all related amortization
expense recognized after FASB Statement No. 142 was applied.
Goodwill and any other intangible assets are reviewed annually for
possible impairment. If impaired, the asset is written down to its
estimated fair value. Prior to adopting Statements No. 142 and 147,
the Corporation and its subsidiaries amortized goodwill and other
intangible assets using the straight-line method over the estimated
benefit period.
10. Income Taxes
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently
payable plus deferred taxes related primarily to differences between
the bases of assets and liabilities as measured by income tax laws
and their bases as reported in the financial statements. The
deferred tax assets and liabilities represent the future tax
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
The Corporation and its subsidiaries (except for Commerce National
Insurance Company) file consolidated income tax returns. The
subsidiaries provide for income taxes on a separate return basis
and remit to the Corporation amounts determined to be payable.
11. Trust Assets
Except for amounts included in deposits, assets of the Trust
Department are not included in the accompanying balance sheets.
12. Advertising Costs
Advertising costs are expensed in the period in which they are
incurred. Advertising expense for the years ended December 31, 2002,
2001, and 2000, was approximately $601,000, $544,000, and $668,000,
respectively.
13. Employee Benefits
Employees hired prior to January 1, 2001, participate in a
noncontributory defined benefit pension plan. The plan calls for
benefits to be paid to eligible employees at retirement based
primarily upon years of service and compensation. Contributions to
the plan reflect benefits attributed to employees' services to date,
as well as services expected to be earned in the future. The annual
pension cost charged to expense is actuarially determined in
accordance with the provisions of FASB Statement No. 87, "Employers'
Accounting for Pensions." The plan was amended effective January 1,
2001, to close participation in the plan. Employees hired subsequent
to December 31, 2000, are not eligible to participate. Current
participants continue to accrue benefits, but benefits accrued are
offset by contributions to the profit sharing plan.
On January 1, 2001, the Corporation and its subsidiaries adopted a
defined contribution profit sharing plan. Employer contributions are
made annually equal to 3% of each participant's base pay. Participant
accounts will be 100% vested upon completion of five years of
service.
The Corporation and its subsidiaries provide a deferred compensation
arrangement [401(k)] plan whereby employees contribute a percentage
of their compensation. NBC makes matching contributions of fifty
percent of employee contributions of six percent or less for
employees with less than twenty years of service. For employees with
service of twenty years or more, the matching contribution is
seventy-five percent of employee contributions of six percent or
less.
Employees participate in a nonleveraged Employee Stock Ownership Plan
(ESOP) through which common stock of the Corporation is purchased at
its market price for the benefit of employees. Effective January 1,
2001, the ESOP plan was amended to freeze the plan and to allow no
new entrants into the ESOP. All participants at December 31, 2000,
became 100% vested in their accounts. The ESOP is accounted for in
accordance with Statement of Position 93-6, "Employers' Accounting
for Employee Stock Ownership Plans."
The Corporation and its subsidiary bank have various deferred income
and supplemental retirement plans for certain key executive and
senior officers. Life insurance contracts have been purchased which
may be used to fund payments under the plans. The estimated present
value of the projected payments under the deferred income plans is
being accrued to expense over the remaining expected term of each
participant's active employment. Accruals for the supplemental
retirement plans are based upon a predetermined rate or upon the
earnings of the related life insurance contracts.
The Corporation provides an employee stock benefit plan whereby
11,245 shares of the Corporation's stock have been assigned for the
benefit of certain key employees. Under the terms of the plan,
retirement or similar payments will be equal to the fair market value
of the stock plus all cash dividends paid since the adoption of the
agreement. An expense was recorded at the establishment date based
on the market value of the stock. The difference between any
increase or decrease in the value of the stock is recorded as an
adjustment to employee benefits expense.
14. Stock Options
Stock option grants are accounted for 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.
15. Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and amounts due from banks, interest-bearing
deposits with banks, and federal funds sold. Generally, federal
funds are sold for one to seven day periods.
16. Net Income Per Share
Basic net income per share computations are based upon the weighted
average number of common shares outstanding during the periods.
Diluted net income per share computations are based upon the weighted
average number of common shares outstanding during the periods plus
the dilutive effect of outstanding stock options.
Presented below is a summary of the components used to calculate
basic and diluted net income per share for the years ended December 31,
2002, 2001, and 2000 (as restated for stock split):
Years Ended December 31,
___________________________
2002 2001 2000
_______ _______ _______
(In thousands,
except per share data)
Basic Net Income Per Share
Weighted average common shares
outstanding 8,213 8,548 9,573
======= ======= =======
Net income $14,221 $13,138 $14,045
======= ======= =======
Basic net income per share $ 1.73 $ 1.54 $ 1.47
======= ======= =======
Diluted Net Income Per Share
Weighted average common shares
outstanding 8,213 8,548 9,573
Net effect of the assumed exercise
of stock options based on the
treasury stock method 15 - 7
_______ _______ _______
Total weighted average common shares
and common stock equivalents
outstanding 8,228 8,548 9,580
======= ======= =======
Net income $14,221 $13,138 $14,045
======= ======= =======
Diluted net income per share $ 1.73 $ 1.54 $ 1.47
======= ======= =======
17. Stock Split
On July 30, 2002, the Corporation announced a four-for-three stock
split that was effected in the form of a 33-1/3% stock dividend on
September 9, 2002. Shareholders' equity, as presented in the
consolidated financial statements, reflects the issuance of 2,403,144
shares of the Corporation's common stock. Per share and related
information for all periods has been restated to reflect the stock
split.
18. Off-Balance Sheet Financial Instruments
In the ordinary course of business, NBC enters into off-balance sheet
financial instruments consisting of commitments to extend credit,
credit card lines, commercial and similar letters of credit and
commitments to purchase securities. Such financial instruments are
recorded in the financial statements when they are exercised.
19. Business Segments
FASB Statement No. 131, "Disclosures About Segments of an Enterprise
and Related Information," requires public companies to report (i)
certain financial and descriptive information about their reportable
operating segments (as defined) and (ii) certain enterprise-wide
financial information about products and services, geographic areas,
and major customers. Management believes the Corporation's principal
activity is community banking and that any other activities are not
considered significant segments.
20. Reclassifications
Certain amounts reported in prior years have been reclassified to
conform with the 2002 presentation. These reclassifications did not
impact the Corporation's consolidated financial condition or results
of operations.
21. Accounting Pronouncements
In June, 2002, the FASB issued Statement No. 146, "Accounting for the
Costs Associated with Exit or Disposal Activities." Statement No.
146 addresses the financial accounting and reporting for costs
associated with exit or disposal activities and requires that a
liability for a cost associated with an exit or disposal activity can
be recognized when it is incurred and measured initially at fair
value. This new guidance will impact the timing of recognition and
the initial measurement of the amount of liabilities the Corporation
and its subsidiaries recognize in connection with exit or disposal
activities initiated after December 31, 2002, the effective date of
the statement. The adoption of this statement is not expected to
have a material impact on the Corporation's consolidated financial
statements.
In October, 2002, the FASB issued Statement No. 147, "Acquisition of
Certain Financial Institutions." Except for transactions between
mutual enterprises, this statement removes acquisitions of financial
institutions from the scope of both FASB Statement No. 72 and FASB
Interpretation No. 9 and requires that these transactions be
accounted for in accordance with FASB Statements No. 141, "Business
Combinations" and FASB Statement No. 142, "Goodwill and Other
Intangible Assets." Further, the statement amends FASB Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include in its scope long-term customer relationship
intangible assets of financial institutions. Consequently, such
assets are subject to the same impairment loss recognition and
measurement provisions that FASB Statement No. 144 requires for other
long-lived assets. As previously mentioned, the Corporation adopted
this statement in 2002.
NOTE B - ACQUISITIONS
On April 28, 2000, NBC acquired Heritage Insurance Agency, Ltd.
(Heritage), an independent insurance agency located in Starkville,
Mississippi, for $47,025 in cash, and 14,028 shares of the
Corporation's common stock issued from treasury. Simultaneously with
the acquisition, Heritage was merged into Galloway-Chandler-McKinney
Insurance Agency, Inc. The acquisition of Heritage was accounted for
as a purchase business combination, and the results of operations of
Heritage, which are not material, have been included in the
consolidated financial statements from the acquisition date.
NOTE C - SECURITIES
A summary of amortized cost and estimated fair value of securities
available-for-sale and securities held-to-maturity at December 31,
2002 and 2001, follows:
December 31, 2002
____________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ __________ __________ _________
(In thousands)
Securities available-
for-sale:
U. S. Treasury
securities $ 300 $ 2 $ - $ 302
Obligations of other
U. S. Government
agencies 1,402 47 - 1,449
Obligations of states
and municipal
subdivisions 59,989 2,432 1 62,420
Mortgage-backed
securities 252,827 5,315 43 258,099
Equity securities 23,219 - 1,650 21,569
Other securities 5,980 178 6 6,152
_________ __________ __________ _________
$ 343,717 $ 7,974 $ 1,700 $ 349,991
========= ========== ========== =========
Securities held-to-
maturity:
Obligations of states
and municipal
subdivisions $ 43,792 $ 3,218 $ 35 $ 46,975
========= ========== ========== =========
December 31, 2001
____________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
_________ __________ __________ _________
(In thousands)
Securities available-
for-sale:
U. S. Treasury
securities $ 300 $ 6 $ - $ 306
Obligations of other
U. S. Government
agencies 4,354 185 - 4,539
Obligations of states
and municipal
subdivisions 64,588 1,604 4 66,188
Mortgage-backed
securities 180,484 1,485 757 181,212
Equity securities 27,511 - 140 27,371
Other securities 13,285 142 - 13,427
_________ __________ __________ _________
$ 290,522 $ 3,422 $ 901 $ 293,043
========= ========== ========== =========
Securities held-to-
maturity:
Obligations of states
and municipal
subdivisions $ 47,683 $ 2,983 $ 43 $ 50,623
========= ========== ========== =========
The scheduled maturities of securities available-for-sale and securities
held-to-maturity at December 31, 2002, are as follows:
Available-for-Sale Held-to-Maturity
____________________ _____________________
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
_________ __________ __________ _________
(In thousands)
Due in one year or less $ 10,284 $ 10,439 $ 781 $ 801
Due after one year through
five years 45,134 47,287 6,280 6,665
Due after five years
through ten years 3,492 3,599 13,458 14,430
Due after ten years 2,781 2,847 23,273 25,079
Mortgage-backed securities
and other securities 282,026 285,819 - -
_________ __________ __________ _________
$ 343,717 $ 349,991 $ 43,792 $ 46,975
========= ========== ========== =========
Equity securities consist of investments in FNMA preferred stock and
stock of the Federal Reserve Bank and the Federal Home Loan Bank
(FHLB). The transferability of the Federal Reserve Bank and FHLB
stock is restricted.
Gross gains of $534,000, $480,000, and $ -0-, and gross losses of
$77,000, $21,000, and $22,000 were realized on securities available-
for-sale in 2002, 2001, and 2000, respectively.
Securities with a carrying value of $161,435,000 and $193,986,000 at
December 31, 2002 and 2001, respectively, were pledged to secure
public and trust deposits and for other purposes as required or
permitted by law.
NOTE D - LOANS
Loans outstanding include the following types:
December 31,
___________________
2002 2001
________ ________
(In thousands)
Commercial, financial and agricultural $103,327 $101,630
Real estate - construction 30,028 31,461
Real estate - mortgage 364,875 387,667
Installment loans to individuals 77,692 94,424
Overdrafts 1,194 789
Net deferred costs and fees 631 775
Other 6,960 6,194
________ ________
584,707 622,940
Allowance for loan losses (6,029) (6,753)
________ ________
$578,678 $616,187
======== ========
Transactions in the allowance for loan losses are summarized as follows:
Years Ended December 31,
______________________________
2002 2001 2000
________ ________ ________
(In thousands)
Balance at beginning of year $ 6,753 $ 9,689 $ 10,194
Additions:
Provision for loan losses charged
to operating expense 2,790 1,720 1,280
Recoveries of loans previously
charged off 660 544 417
________ ________ ________
10,203 11,953 11,891
Deductions:
Loans charged off 4,174 5,200 2,202
________ ________ ________
Balance at end of year $ 6,029 $ 6,753 $ 9,689
======== ======== ========
At December 31, 2002 and 2001, the recorded investment in loans
considered to be impaired totaled approximately $1,230,000 and
$2,471,000, respectively. The allowance for loan losses related to
these loans approximated $596,000 and $1,353,000 at December 31, 2002
and 2001, respectively. The average recorded investment in impaired
loans during the years ended December 31, 2002 and 2001, was
approximately $1.8 million and $4.1 million, respectively. For the
years ended December 31, 2002 and 2001, the amount of income
recognized on impaired loans was immaterial. At December 31, 2002
and 2001, nonaccrual loans amounted to approximately $1,274,000 and
$2,050,000, respectively, and loans past due ninety days or more and
still accruing interest amounted to approximately $2,700,000 and
$1,900,000, respectively.
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated
depreciation and amortization as follows:
Estimated December 31,
Useful Lives __________________
In Years 2002 2001
____________ ________ ________
(In thousands)
Premises:
Land - $ 3,404 $ 3,404
Buildings, construction and
improvements 10 - 50 16,535 16,308
________ ________
19,939 19,712
Equipment 3 - 10 8,548 11,688
________ ________
28,487 31,400
Less accumulated depreciation
and amortization (13,671) (16,023)
________ ________
$ 14,816 $ 15,377
======== ========
The amount charged to operating expenses for depreciation was
$1,875,000 for 2002, $2,032,000 for 2001, and $1,922,000 for 2000.
During the year 2002, the Corporation and its subsidiaries retired
fully depreciated equipment with an original cost of approximately $4
million.
NOTE F - DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or
more for 2002 and 2001 was $164,625,000 and $147,885,000,
respectively.
At December 31, 2002, the scheduled maturities of time deposits
included in interest-bearing deposits are as follows (in thousands):
2003 $ 227,620
2004 62,412
2005 49,861
2006 36,326
2007 6,016
Thereafter 5,552
_________
$ 387,787
=========
NOTE G - BORROWED FUNDS
Securities sold under agreements to repurchase generally mature
within one to seven days from the transaction date. Information
concerning securities sold under agreements to repurchase is
summarized as follows:
2002 2001
________ ________
($ In thousands)
Balance at year end $ 25,599 $ 16,625
Average balance during the year 19,430 18,922
Average interest rate during the year 1.61% 3.45%
Maximum month-end balance during the year 26,328 21,765
Securities underlying the repurchase agreements remain under the
control of NBC.
Other borrowed funds consisted of the following at December 31:
2002 2001
________ ________
(In thousands)
FHLB advances $111,906 $109,911
Treasury tax and loan note 1,035 683
________ ________
$112,941 $110,594
======== ========
Advances from the FHLB consist of monthly amortizing borrowings with
maturity dates ranging from June, 2004, through August, 2012.
Interest is payable monthly at rates ranging from 3.53% to 7.29%.
Advances due to the FHLB are collateralized by a blanket lien on the
bank's first mortgage loans. FHLB advances available and unused at
December 31, 2002, totaled $47.8 million. The treasury tax and loan
note generally matures within one to sixty days from the transaction
date. Interest is paid at an adjustable rate as set by the U. S.
Government.
Annual principal repayment requirements on FHLB borrowings at
December 31, 2002, are as follows:
Year Amount
____ ______
(In thousands)
2003 $25,757
2004 26,398
2005 25,448
2006 20,275
2007 4,764
Thereafter 9,264
NOTE H - OTHER ASSETS AND OTHER LIABILITIES
Other assets and other liabilities at December 31, 2002 and 2001,
consisted of the following:
December 31,
___________________
2002 2001
________ ________
(In thousands)
Other assets:
Cash surrender value of life insurance $ 15,121 $ 14,316
Deferred income tax benefits - 1,373
Prepaid pension 1,782 1,279
Other real estate 1,512 2,531
Prepaid expenses and other 4,388 4,279
________ ________
$ 22,803 $ 23,778
======== ========
Other liabilities:
Dividends payable $ 1,801 $ 1,731
Deferred income tax liability 611 -
Accrued expenses 4,416 3,745
Minority interest in subsidiary 1,663 1,606
Other 245 587
________ ________
$ 8,736 $ 7,669
======== ========
NOTE I - COMPREHENSIVE INCOME
In the calculation of comprehensive income, certain reclassification
adjustments are made to avoid double counting amounts that are
displayed as part of net income for a period that also had been
displayed as part of other comprehensive income. The disclosures of
the reclassification amounts are as follows:
Years Ended December 31,
______________________________
2002 2001 2000
________ ________ ________
(In thousands)
Net change in unrealized gains:
Net unrealized gains on
securities available-for-sale $ 4,216 $ 3,113 $ 3,887
Reclassification adjustment for
(gains) losses on securities
available-for-sale (457) (459) 22
________ ________ ________
Net change in unrealized gains on
securities available-for-sale
before tax 3,759 2,654 3,909
________ ________ ________
Income tax expense:
Net unrealized gains on
securities available-for-sale $ (1,436) $ (1,080) $ (1,323)
Reclassification adjustment for
gains (losses) on securities
available-for-sale 171 171 (8)
________ ________ ________
Total income tax expense (1,265) (909) (1,331)
________ ________ ________
Net change in unrealized gains on
securities available-for-sale,
net of tax before minority
interest 2,494 1,745 2,578
Minority interest in net change (22) (27) (8)
________ ________ ________
$ 2,472 $ 1,718 $ 2,570
======== ======== ========
NOTE J - INCOME TAXES
The provision for income taxes including the tax effects of securities
transactions [2002 - $171,375; 2001 - $171,247; 2000 - $(8,254)] is as
follows:
Years Ended December 31,
______________________________
2002 2001 2000
________ ________ ________
(In thousands)
Current tax expense $ 4,073 $ 3,560 $ 5,174
Deferred tax expense 719 701 103
________ ________ ________
$ 4,792 $ 4,261 $ 5,277
======== ======== ========
The difference between the total expected tax expense at the federal
tax rate of 34% and the reported income tax expense is as follows:
Years Ended December 31,
______________________________
2002 2001 2000
________ ________ ________
(In thousands)
Tax on income before income taxes $ 6,464 $ 5,916 $ 6,569
Increase (decrease) resulting from:
Tax-exempt income (2,349) (2,597) (2,231)
Nondeductible expenses 251 442 442
State income taxes, net of federal
benefit 530 462 540
Tax credits (72) - -
Other, net (32) 38 (43)
________ ________ ________
$ 4,792 $ 4,261 $ 5,277
======== ======== ========
The components of the net deferred tax included in the consolidated
balance sheets as of December 31, 2002 and 2001, are as follows:
December 31,
_________________
2002 2001
_______ _______
(In thousands)
Deferred tax assets:
Allowance for loan losses $ 2,261 $ 2,532
Employee benefits 731 676
Other 933 1,049
_______ _______
Total deferred tax assets 3,925 4,257
_______ _______
Deferred tax liabilities:
Premises and equipment (1,185) (818)
Unrealized gain on securities available-for-sale (2,125) (860)
Other (1,226) (1,206)
_______ _______
Total deferred tax liabilities (4,536) (2,884)
_______ _______
Net deferred tax asset (liability) $ (611) $ 1,373
======= =======
NOTE K - GOODWILL AND OTHER INTANGIBLE ASSETS
The Corporation and its subsidiaries adopted FASB Statements No. 142,
"Goodwill and Other Intangible Assets" and No. 147, "Acquisitions of
Certain Financial Institutions" effective January 1, 2002. Had the
statements been adopted effective January 1, 2000, the consolidated
net income and the basic and diluted net income per share would have
been as follows:
Years Ended December 31,
___________________________
2002 2001 2000
_______ _______ _______
(In thousands,
except per share amounts)
Reported net income $14,221 $13,138 $14,045
Add back goodwill amortization - 262 256
Add back amortization of unidentified
intangible asset - 71 71
_______ _______ _______
Adjusted net income $14,221 $13,471 $14,372
======= ======= =======
Basic net income per share:
Reported net income $ 1.73 $ 1.54 $ 1.47
Amortization - .04 .03
_______ _______ _______
$ 1.73 $ 1.58 $ 1.50
======= ======= =======
Diluted net income per share:
Reported net income $ 1.73 $ 1.54 $ 1.47
Amortization - .04 .03
_______ _______ _______
Adjusted net income $ 1.73 $ 1.58 $ 1.50
======= ======= =======
Upon adoption of FASB Statements No. 142 and 147, the carrying value
of goodwill associated with business acquisitions was approximately
$2 million and the carrying value of the unidentified intangible
asset reclassified as goodwill was $841,050. The Corporation
completed its transitional impairment test in accordance with
Statement No. 142 in January, 2002, with no significant impairment
identified.
NOTE L - STOCK OPTIONS
In connection with a business combination in 1999, the Corporation
assumed stock options which were previously granted and converted
those options, based upon the appropriate exchange ratio, into
options to acquire the Corporation's common stock. All options were
granted with an exercise price of $8.57 per share (as adjusted by the
exchange ratio).
In June, 2001, the Corporation established the 2001 Long-Term
Compensation Plan that is administered by a committee appointed by
the Corporation's Board of Directors. Employees eligible to receive
incentives under the plan are those designated, individually or by
groups or categories, by the committee. The plan is a nonqualified
stock option plan. The number of shares of Corporation common stock
that may be issued under the plan cannot exceed 313,333 (stock split
adjusted). The committee may grant options to designated employees
at an exercise price not less than the fair market value of the
common stock at the date of the grant and the number of shares
subject to the option must be designated at the grant date. The
option term is determined by the committee, but cannot exceed ten
years. Vesting is in equal amounts over a four year period. In
June, 2001, grants for 112,000 shares were issued at an option price
of $20.75 per share, and in June, 2002, grants for 117,868 shares
were issued at an option price of $24.11.
A summary of the status of the Corporation's stock option plans for
the three years ended December 31, 2002, follows:
2002 2001 2000
__________________ _________________ _________________
Weighted Weighted Weighted
Number Average Number Average Number Average
Of Exercise Of Exercise Of Exercise
Options Price Options Price Options Price
________ ________ _______ ________ _______ ________
Options
outstanding,
beginning of
year 114,357 $ 20.50 10,372 $ 8.57 20,729 $ 8.57
Options granted 117,868 24.11 112,000 20.75 - -
Options
exercised (1,333) 8.57 (8,015) 8.57 (10,357) 8.57
Options
cancelled - - -
________ _______ _______
Options
outstanding,
end of year 230,892 22.41 114,357 20.50 10,372 8.57
======== ======= =======
Options
exercisable
at end
of year 29,019 20.32 2,357 8.57 10,372 8.57
======== ======= =======
Weighted
average fair
value of
options
granted
during year $ 4.64 $ 4.30 -
======== ======= =======
The following table summarizes information about stock options
outstanding at December 31, 2002:
Remaining
Contractual
Exercise Price Number Outstanding Life In Years Number Exercisable
______________ __________________ _____________ __________________
$8.57 1,024 .5 1,024
20.75 112,000 8.5 28,000
24.11 117,868 9.4 -
Had compensation cost for the stock option plans been determined
based on the fair value of the options at the grant dates consistent
with FASB Statement No. 123, "Accounting for Stock-Based
Compensation," the Corporation's net income and income per share
would have been reduced to the pro forma amounts indicated below:
Years Ended December 31,
_________________________
2002 2001 2000
_______ _______ _______
(In thousands,
except per share data)
Net income - as reported $14,221 $13,138 $14,045
Net income - pro forma 14,007 13,051 14,045
Primary net income per share - as reported 1.73 1.54 1.47
Primary net income per share - pro forma 1.71 1.53 1.47
Fully diluted net income per share -
as reported 1.73 1.54 1.47
Fully diluted net income per share -
pro forma 1.70 1.53 1.47
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes options pricing model with the
following weighted average assumptions in 2002 and 2001,
respectively: dividend yield of 3.62% for each year; expected
volatility of 22% and 21%; risk-free interest rates of 4.5% and 5.1%;
and expected lives of 6.75 and 7.07 years. Pro forma amounts for the
year ended December 31, 2000, were not different than the reported
amounts.
NOTE M - EMPLOYEE BENEFITS
The following table sets forth the defined benefit plan's funded
status and amounts recognized in the Corporation's consolidated
financial statements at December 31, 2002 and 2001:
December 31,
________________
2002 2001
_______ _______
($ In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 9,536 $ 7,747
Service cost 454 390
Interest cost 652 622
Actuarial loss 269 498
Beginning of year measurement loss 102 837
Administrative expenses paid (62) (68)
Benefits paid (364) (490)
_______ _______
Benefit obligation at end of year 10,587 9,536
_______ _______
Change in plan assets:
Fair value of plan assets at beginning of
year 8,220 8,853
Return on plan assets (758) (422)
Employer contributions 864 346
Administrative expenses paid (63) (68)
Benefits paid (364) (490)
_______ _______
Fair value of plan assets at end of year 7,899 8,219
_______ _______
Funded status (2,688) (1,317)
Unrecognized net actuarial loss 5,778 4,044
Unrecognized prior service cost (1,308) (1,448)
_______ _______
Prepaid benefit cost $ 1,782 $ 1,279
======= =======
Weighted average assumptions:
Discount rate 6.75% 7.00%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 5.00%
Components of net periodic benefit cost:
Service cost 454 390
Interest cost 652 622
Expected return on plan assets (767) (764)
Amortization of prior service costs (140) (140)
Recognized net actuarial loss 162 87
_______ _______
Net periodic benefit cost $ 361 $ 195
======= =======
No contributions were made to the Corporation's nonleveraged ESOP in
each of the three years ended December 31, 2002. At December 31,
2002 the plan held 406,093 shares of the Corporation's common stock.
Contributions to the 401(k) plan amounted to $417,475 in 2002,
$401,175 in 2001, and $278,534 in 2000. Expense for the defined
contribution plan totaled $451,439 in 2002 and $303,000 in 2001.
Expenses under the deferred income and supplemental retirement plans,
net of increases in the cash surrender value of life insurance
contracts, were not material in each of the three years ended
December 31, 2002.
NOTE N - TREASURY STOCK
Shares held in treasury totaled 1,428,352 at December 31, 2002, and
1,029,702 at December 31, 2001. Upon the exercise of stock options,
1,333, 6,011, and 7,768 treasury shares were issued in 2002, 2001,
and 2000, respectively, and an additional 14,028 treasury shares were
issued in 2000 in connection with the acquisition of Heritage.
On June 28, 2001, the Corporation announced a one-year stock
repurchase program of up to 5%, or 413,333 (stock split adjusted)
shares of the Corporation's common stock. Stock repurchases were
carried out through open market purchases, block trades, and in
negotiated private purchases. After one year, the Board of Directors
approved the continuation of the program and at December 31, 2002,
330,583 shares remained to be purchased.
In March, 2001, the Corporation repurchased 976,676 shares of its
common stock from parties representing the largest block of stock
controlled by related shareholders. The purchase price of $24.5
million was financed by borrowings from the FHLB.
NOTE O - RELATED PARTY TRANSACTIONS
In the normal course of business, loans are made to directors and
executive officers and to companies in which they have a significant
ownership interest. In the opinion of management, these loans are
made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other parties, and are consistent with sound
banking practices and are within applicable regulatory and lending
limitations. The activity in loans to current directors, executive
officers, and their affiliates during 2002 is summarized as follows:
December 31,
________________
2002 2001
_______ _______
(In thousands)
Loans outstanding at beginning of year $23,211 $11,634
New loans 26,367 14,498
Repayments (10,433) (2,921)
_______ _______
Loans outstanding at end of year $39,145 $23,211
======= =======
Also, in the normal course of business, the Corporation and its
subsidiaries enter into transactions for services with companies and
firms whose principals are directors and shareholders.
NOTE P - REGULATORY MATTERS
Any dividends paid by the Corporation are provided from dividends
received from its subsidiary bank. Under regulations controlling
national banks, the payment of any dividends by a bank without prior
approval of the Comptroller of the Currency is limited to the current
year's net profits (as defined by the Comptroller of the Currency)
and retained net profits of the two preceding years.
The Corporation and its subsidiary bank are subject to regulatory
capital requirements administered by 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
Corporation's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and its subsidiary bank must meet
specific capital guidelines that involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgment by regulators
about components, risk weightings, and other related factors.
To ensure capital adequacy, quantitative measures have been
established by regulators and these require the Corporation and its
bank subsidiary to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined) to risk-
weighted assets (as defined), and of Tier I capital to adjusted
average total assets (leverage). Management believes, as of
December 31, 2002, that the Corporation and its subsidiary bank exceed
all capital adequacy requirements.
At December 31, 2002, NBC was categorized by regulators as well-
capitalized under the regulatory framework for prompt corrective
action. A financial institution is considered to be well-capitalized
if it has a total risk-based capital ratio of 10% or more, has a Tier
I risk-based capital ratio of 6% or more, and has a Tier I leverage
capital ratio of 5% or more. There are no conditions or anticipated
events that, in the opinion of management, would change the
categorization.
The actual capital amounts and ratios at December 31, 2002 and 2001,
are presented in the following table. No amount was deducted from
capital for interest-rate risk exposure.
NBC Capital
Corporation
(Consolidated) NBC
_______________ _______________
Amount Ratio Amount Ratio
________ _____ ________ _____
($ In thousands)
December 31, 2002:
Total risk-based $110,741 17.4% $108,521 17.1%
Tier I risk-based 104,712 16.5% 102,562 16.1%
Tier I leverage 104,712 9.9% 102,562 9.7%
December 31, 2001:
Total risk-based $106,615 16.0% $103,763 15.7%
Tier I risk-based 99,862 15.0% 97,040 14.6%
Tier I leverage 99,862 9.7% 97,040 9.4%
The minimum amounts of capital and ratios as established by banking
regulators at December 31, 2002 and 2001, were as follows:
NBC Capital
Corporation
(Consolidated) NBC
_______________ _______________
Amount Ratio Amount Ratio
________ _____ ________ _____
($ In thousands)
December 31, 2002:
Total risk-based $ 50,958 8.0% $ 50,829 8.0%
Tier I risk-based 25,454 4.0% 25,414 4.0%
Tier I leverage 31,838 3.0% 31,793 3.0%
December 31, 2001:
Total risk-based $ 53,174 8.0% $ 53,001 8.0%
Tier I risk-based 26,595 4.0% 26,500 4.0%
Tier I leverage 30,946 3.0% 30,890 3.0%
NBC is required to maintain average reserve balances in the form of
cash or deposits with the Federal Reserve Bank. The reserve balance
varies depending upon the types and amounts of deposits. At
December 31, 2002 and 2001, the required reserve balance on deposit
with the Federal Reserve Bank was approximately $600,000 and $500,000,
respectively.
NOTE Q - COMMITMENTS AND CONTINGENT LIABILITIES
The consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal
course of banking business and which involve elements of credit risk,
interest rate risk, and liquidity risk. The commitments and
contingent liabilities are commitments to extend credit, credit card
lines, and commercial and similar letters of credit. A summary of
commitments and contingent liabilities at December 31, 2002 and 2001,
is as follows:
Contractual Amount
_______________
December 31,
________________
2002 2001
_______ _______
(In thousands)
Commitments to extend credit $70,833 $89,460
Credit card lines 5,384 5,416
Commercial and similar letters of credit 6,018 4,880
Commitments to extend credit, credit card lines, and commercial and
similar letters of credit include some exposure to credit loss in the
event of nonperformance of the customer. The credit policies and
procedures for such commitments are the same as those used for
lending activities. Because these instruments have fixed maturity
dates and because a number expire without being drawn upon, they
generally do not present any significant liquidity risk. No
significant losses on commitments were incurred during the three
years ended December 31, 2002, nor are any significant losses as a
result of these transactions anticipated.
NBC leases various banking premises and equipment under operating
leases with minimum lease payments of approximately $250,000 for each
of the next five years and a total of approximately $1.6 million due
after five years.
NBC is a defendant in various pending and threatened legal actions
arising in the normal course of business. In the opinion of
management, based upon the advice of legal counsel, the ultimate
disposition of these matters will not have a material effect on the
Corporation's consolidated financial statements.
NOTE R - CONCENTRATIONS OF CREDIT
Most of the loans, commitments and letters of credit of NBC have been
granted to customers in its market areas. Generally, such customers
are also depositors. Investments in state and municipal securities
also involve governmental entities within the bank's market areas.
The concentrations of credit by type of loan are set forth in Note D.
The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Letters of credit were granted
primarily to commercial borrowers.
NOTE S - SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended December 31,
____________________________
2002 2001 2000
________ ________ ________
(In thousands)
Cash paid during the year for:
Interest $ 23,534 $ 37,138 $ 34,376
Income taxes, net of refunds 4,612 2,895 4,924
Non-cash activities:
Transfers of loans to other
real estate 1,075 2,269 1,113
NOTE T - DISCLOSURE ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with FASB Statement No. 107,
"Disclosures About Fair Value of Financial Instruments." The
estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market
data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts that could be realized in a current market exchange. The use
of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
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:
Cash and Cash Equivalents - For such short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Securities - For securities held as investments, fair value equals
market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans - The fair value of loans is estimated by discounting the
future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the
same remaining maturities.
Deposits - The fair values of demand deposits are, as required by
Statement No. 107, equal to the carrying value of such deposits.
Demand deposits include noninterest-bearing demand deposits, savings
accounts, NOW accounts, and money market demand accounts. The fair
value of variable rate term deposits, those repricing within six
months or less, approximates the carrying value of these deposits.
Discounted cash flows have been used to value fixed rate term
deposits and variable rate term deposits repricing after six months.
The discount rate used is based on interest rates currently being
offered on comparable deposits as to amount and term.
Short-Term Borrowings - The carrying value of any federal funds
purchased, securities sold under agreements to repurchase and other
short-term borrowings approximates their carrying values.
FHLB and Other Borrowings - The fair value of the fixed rate
borrowings are estimated using discounted cash flows, based on
current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amount of any variable rate borrowings
approximates their fair values.
Off-Balance Sheet Instruments - Fair values of off-balance sheet
financial instruments are based on fees charged to enter into similar
agreements. However, commitments to extend credit do not represent a
significant value until such commitments are funded or closed.
Management has determined that these instruments do not have a
distinguishable fair value and no fair value has been assigned.
December 31, 2002 December 31, 2001
___________________ ___________________
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
________ _________ ________ _________
Financial Instruments: (In thousands)
Assets:
Cash and cash
equivalents $ 56,918 $ 56,918 $ 43,525 $ 43,525
Securities available-
for-sale 349,991 349,991 293,043 293,043
Securities held-to-
maturity 43,792 46,975 47,683 50,623
Loans 578,678 579,209 616,187 617,419
Liabilities:
Noninterest-bearing
deposits 103,502 103,502 101,569 101,569
Interest-bearing
deposits 713,945 715,910 709,134 709,772
Securities sold under
agreements to
repurchase 25,599 25,599 16,625 16,625
FHLB and other
borrowings 112,941 112,767 110,594 110,229
NOTE U - CONDENSED PARENT COMPANY STATEMENTS
Balance sheets as of December 31, 2002 and 2001, and statements of
income and cash flows for the years ended December 31, 2002, 2001 and
2000, of NBC Capital Corporation (parent company only) are presented
below:
BALANCE SHEETS
December 31,
__________________
2002 2001
________ ________
(In thousands)
Assets
Cash and cash equivalents $ 734 $ 1,385
Investment in subsidiaries 109,713 100,898
Other assets 2,842 2,703
________ ________
$113,289 $104,986
======== ========
Liabilities and Shareholders' Equity
Dividends payable and other liabilities $ 2,182 $ 2,059
Shareholders' equity 111,107 102,927
________ ________
$113,289 $104,986
======== ========
STATEMENTS OF INCOME
Years Ended December 31,
____________________________
2002 2001 2000
________ ________ ________
(In thousands)
Income
Dividends from subsidiaries $ 8,123 $ 31,199 $ 8,136
Other 14 73 130
________ ________ ________
8,137 31,272 8,266
Expense 407 459 127
________ ________ ________
Income before income taxes and equity in
undistributed earnings of subsidiaries 7,730 30,813 8,139
Income tax benefit 147 122 4
________ ________ ________
Income before equity in undistributed
earnings of subsidiaries 7,877 30,935 8,143
Equity in undistributed earnings of
subsidiaries in excess of (less than)
dividends 6,344 (17,797) 5,902
________ ________ ________
Net income $ 14,221 $ 13,138 $ 14,045
======== ======== ========
STATEMENTS OF CASH FLOWS
Years Ended December 31,
____________________________
2002 2001 2000
________ ________ ________
(In thousands)
Cash Flows From Operating Activities
Net income $ 14,221 $ 13,138 $ 14,045
Equity in subsidiaries' earnings in
excess of (less than) dividends (6,344) 17,797 (5,902)
Other, net (174) 97 2,981
________ ________ ________
Net cash provided by operating
activities 7,703 31,032 11,124
________ ________ ________
Cash Flows From Investing Activities - - (47)
________ ________ ________
Cash Flows From Financing Activities
Dividends paid on common stock (7,053) (7,062) (10,138)
Acquisition of stock (1,372) (25,122) (1,164)
Other, net 71 68 89
________ ________ ________
Net cash used in financing activities (8,354) (32,116) (11,213)
________ ________ ________
Net decrease in cash and cash equivalents (651) (1,084) (136)
Cash and cash equivalents at beginning
of year 1,385 2,469 2,605
________ ________ ________
Cash and cash equivalents at end
of year $ 734 $ 1,385 $ 2,469
======== ======== ========
NOTE V - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS AND PER SHARE
AMOUNTS (UNAUDITED)
Three Months Ended
______________________________________
Mar. 31 June 30 Sept. 30 Dec. 31
________ ________ ________ ________
(In thousands, except per share data)
2002
____
Total interest income $ 15,480 $ 15,171 $ 15,092 $ 14,308
Total interest expense 6,156 5,666 5,669 5,385
________ ________ ________ ________
Net interest income 9,324 9,505 9,423 8,923
Provision for loan losses 630 630 755 775
________ ________ ________ ________
Net interest income after
provision for loan losses 8,694 8,875 8,668 8,148
Total noninterest income,
excluding securities gains 4,078 4,313 4,415 4,783
Securities gains 91 - 188 178
Total noninterest expenses 8,029 8,178 8,401 8,810
Income taxes 1,288 1,313 1,254 937
________ ________ ________ ________
Net income $ 3,546 $ 3,697 $ 3,616 $ 3,362
======== ======== ======== ========
Per share:
Net income $ .43 $ .45 $ .44 $ .41
Net income, diluted .43 .45 .44 .41
Cash dividends declared .21 .22 .22 .22
2001
____
Total interest income $ 18,975 $ 18,331 $ 17,456 $ 16,008
Total interest expense 9,929 9,841 8,802 7,429
________ ________ ________ ________
Net interest income 9,046 8,490 8,654 8,579
Provision for loan losses 180 1,180 180 180
________ ________ ________ ________
Net interest income after
provision for loan losses 8,866 7,310 8,474 8,399
Total noninterest income,
excluding securities gains 3,566 3,974 3,963 4,504
Securities gains 49 163 109 138
Total noninterest expenses 7,981 8,179 7,780 8,176
Income taxes 1,152 595 1,313 1,201
________ ________ ________ ________
Net income $ 3,348 $ 2,673 $ 3,453 $ 3,664
======== ======== ======== ========
Per share:
Net income $ .35 $ .32 $ .42 $ .44
Net income, diluted .35 .32 .42 .44
Cash dividends declared .19 .21 .21 .21
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
Not applicable.
PART III
________
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Reference is made to the material under the captions, "Election of
Directors" of the Company's proxy statement, dated April 10, 2003, which
is incorporated herein by reference, and to "Executive Officers" included
in Part I, Item 1, of this report.
ITEM 11 - EXECUTIVE COMPENSATION
Reference is made to the caption, "Executive Compensation" of the
Company's proxy statement, dated April 10, 2003, which is incorporated
herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the caption, "Stock Ownership of Directors,
Officers, and Principal Shareholders," of the Company's proxy statement,
dated April 10, 2003, which is incorporated herein by reference.
Equity Compensation Plan Information:
(a) Number of
Securities
Number of Remaining
Securities to Available for
Be Issued Upon Weighted- Future Issuance
Exercise of Average Price Under Equity
Outstanding Of Outstanding Compensation
Plan Category Options Options Plans
___________________ ______________ ______________ ______________
(a) (b) (c)
Equity compensation
plans approved by
security holders 1,024 $ 8.57 -
Equity compensation
plans not approved
by security
holders 229,868 $22.47 83,465
(b) Note L - Stock Options of the notes to the consolidated financial
statements and the information contained under the caption, "Stock
Option Plan" of the Company's proxy statement, dated April 10,
2003, should also be read in connection with this item.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to, "Certain Relationships, Related Transactions
and Indebtedness" of the Company's proxy statement, dated April 10, 2003,
which is incorporated herein by reference.
ITEM 14 - DISCLOSURES AND CONTROLS
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 February 18, 2003 (a date within
90 days of the filing of this report). It is the conclusion of the Chief
Executive 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.
PART IV
_______
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial Statements
The following consolidated financial statements and report of
independent auditors of NBC Capital Corporation and subsidiaries
are included in this Form 10-K (Item 8) of the registrant for the
year ended December 31, 2002.
Report of Independent Auditors
Consolidated Balance Sheets--December 31, 2002 and 2001
Consolidated Statements of Income--Years Ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Shareholders' Equity--Years Ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows--Years Ended
December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedules not included have been omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
3(a)&(c). Exhibits:
1. - 2. None
3.1 Articles of Incorporation of NBC Capital
Corporation (included as Exhibit B to NBC Capital
Corporation's Definitive Proxy Statement dated
March 20, 1998, and filed with the Commission on
March 18, 1998, Commission File No. 0-12885,
which Exhibit B is incorporated herein by
reference).
3.2 By-laws of NBC Capital Corporation (included as
Exhibit 3(b) to NBC Capital Corporation's
Registration Statement on Form S-4A, filed with
the Commission on November 4, 1998, Commission
File No. 333-65545, which Exhibit 3(b) is
incorporated herein by reference.
4. - 9. None
10.1 Employment Agreement dated January 31, 1991,
between National Bank of Commerce and L. F.
Mallory, Jr., as previously filed.
10.2 Agreement and Plan of Merger by and between NBC
Capital Corporation and FFBS Bancorp, Inc., dated
February 3, 1999 (included as Appendix A to the
Proxy Statement-Prospectus dated May 7, 1999,
forming part of the Company's Registration
Statement on Form S-4 filed with the Commission
on March 30, 1999, Commission File No.
333-75293) and incorporated herein by reference.
10.3 Plan of Reorganization and Merger by and between
National Bank of Commerce and First Federal Bank
for Savings dated February 3, 1999 (included as
Appendix A to the Proxy Statement-Prospectus
dated May 7, 1999, forming part of the Company's
Registration Statement on Form S-4 filed with the
Commission on March 30, 1999, Commission File No.
333-75293) and incorporated herein by reference.
10.4 Merger Agreement by and between NBC Capital
Corporation and National Bank of Commerce and
Galloway-Wiggers Insurance Agency, Inc.,
Galloway-Chandler-McKinney Insurance, Inc.,
Galloway-Chandler-McKinney Insurance Agency of
Amory, Inc., Kyle Chandler Insurance Agency,
Inc., and Napier Insurance Agency, Inc. (included
as Exhibit 99.2 on Form 10Q filed with the
Commission on August 10, 1999, Commission File
No. 0-12885) and incorporated herein by
reference.
10.5 1993 Incentive Stock Option Plan and 1993 Stock
Option Plan for Outside Directors of FFBS
Bancorp, Inc., assumed by NBC Capital Corporation
(incorporated by reference to Exhibit A of Form
S-8 filed September 20, 1999) and incorporated
herein by reference.
10.6 Employment Agreement Dated January 2, 2001, by
and Between National Bank of Commerce and
Richard T. Haston (incorporated by reference
to Exhibit 10.7 of Form 10-K filed March 30,
2001).
10.7 Employment Agreement Dated January 2, 2001, by
and Between National Bank of Commerce and
Mark A. Abernathy (incorporated by reference
to Exhibit 10.8 of Form 10-K filed March 30,
2001).
10.8 2001 Long-Term Incentive Compensation Plan
(incorporated by reference to Exhibit 4 of
Form S-8 filed August 8, 2001) and incorporated
herein by reference.
10.9 Salary Reduction Thrift Plan (incorporated by
reference to Exhibit 4.3 of Form S-8 filed
December 13, 2001) and incorporated herein by
reference.
11. - 20. None
21. Subsidiaries of Company
22. None
23. Consent of Independent Auditors
99. Section 906 Certifications
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 2002.
(d) Financial statement schedules - None.
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.
NBC CAPITAL CORPORATION
(Registrant)
/s/ L. F. MALLORY, JR.
By _______________________________________
L. F. Mallory, Jr.
Chairman of Board and Chief Executive
Officer
/s/ RICHARD T. HASTON
By _______________________________________
Richard T. Haston
Executive Vice President, CFO, and
Treasurer (Chief Financial and
Accounting Officer)
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 capacity and on the dates indicated.
/S/ RALPH E. POGUE /S/ J. NUTIE DOWDLE
_________________________________ _______________________________
(Director) (Director)
/S/ ROBERT L. CALVERT, III /S/ SAMMY J. SMITH
_________________________________ _______________________________
(Director) (Director)
/S/ HARRY STOKES SMITH /S/ ROBERT S. JONES
_________________________________ _______________________________
(Director) (Director)
/S/ JAMES D. GRAHAM /S/ R. S. CALDWELL, JR.
_________________________________ _______________________________
(Director) (Director)
/S/ JAMES C. GALLOWAY, JR. /S/ R. D. MILLER
_________________________________ _______________________________
(Director) (Director)
/S/ HENRY WEISS
_________________________________
(Director)
Date: March 19, 2003
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES/OXLEY ACT OF 2002
_________________________________
I, L. F. Mallory, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of NBC Capital Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual 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.
/s/ L. F. MALLORY, JR.
By _____________________________
L. F. Mallory, Jr.
Chairman of Board and
Chief Executive Officer
Date: March 18, 2003
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES/OXLEY ACT OF 2002
_________________________________
I, Richard T. Haston, CFO, certify that:
1. I have reviewed this annual report on Form 10-K of NBC Capital Corporation;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual 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.
/S/ RICHARD T. HASTON
By _____________________________
Richard T. Haston
Executive Vice President,
CFO, and Treasurer
Date: March 18, 2003