UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the quarterly period ended June 30, 2003.
Commission File Number 1-15773
NBC CAPITAL CORPORATION
(Exact name of registrant as specified in its charter.)
Mississippi 64-0694775
(State of other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
NBC Plaza, P. O. Box 1187, Starkville, Mississippi 39760
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (662) 323-1341
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
Common Stock, $1 Par Value - 8,170,478 shares as of June 30, 2003.
PART I - FINANCIAL INFORMATION
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME FOR
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
(Amounts in thousands, except per share data)
2003 2002
________ ________
INTEREST INCOME:
Interest and Fees on Loans $ 17,338 $ 20,670
Interest and Dividends on Investment Securities 9,077 9,874
Other Interest Income 165 107
________ ________
Total Interest Income 26,580 30,651
INTEREST EXPENSE:
Interest on Deposits 6,966 9,003
Interest on Borrowed Funds 2,623 2,819
________ ________
Total Interest Expense 9,589 11,822
________ ________
Net Interest Income 16,991 18,829
Provision for Loan Losses 1,490 1,260
________ ________
Net Interest Income after Provision for
Loan Losses 15,501 17,569
________ ________
NON-INTEREST INCOME:
Income from Fiduciary Activities 904 878
Service Charges on Deposit Accounts 3,683 3,331
Insurance Commission and Fee Income 2,256 1,965
Mortgage Loan Fee Income 1,159 641
Other Non-Interest Income 1,576 1,576
________ ________
Total Non-Interest Income 9,578 8,391
Gains on Securities 1,368 91
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 9,993 9,792
Expense of Premises and Fixed Assets 2,347 2,316
Other Non-Interest Expense 4,517 4,098
________ ________
Total Non-Interest Expense 16,857 16,206
________ ________
Income Before Income Taxes 9,590 9,845
Income Taxes 2,504 2,602
________ ________
NET INCOME $ 7,086 $ 7,243
======== ========
Net Earnings Per Share:
Basic $ 0.87 $ 0.88
======== ========
Diluted $ 0.87 $ 0.88
======== ========
Dividends Declared Per Common Share $ 0.44 $ 0.44
======== ========
Note 1: The 2002 statement has been restated to reflect the adoption of FASB
No. 147," Acquisition of Certain Financial Institutions".
Note 2: The 2002 Earnings Per Share amounts have been restated for the 4-for-3
stock split, accounted for as a stock dividend, that occurred during
the third quarter of 2002.
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME FOR
QUARTER ENDED JUNE 30, 2003 AND 2002
(Unaudited)
(Amounts in thousands, except per share data)
2003 2002
________ ________
INTEREST INCOME:
Interest and Fees on Loans $ 8,617 $ 10,092
Interest and Dividends on Investment Securities 4,258 5,055
Other Interest Income 71 24
________ ________
Total Interest Income 12,946 15,171
INTEREST EXPENSE:
Interest on Deposits 3,338 4,277
Interest on Borrowed Funds 1,300 1,389
________ ________
Total Interest Expense 4,638 5,666
________ ________
Net Interest Income 8,308 9,505
Provision for Loan Losses 740 630
________ ________
Net Interest Income after Provision for
Loan Losses 7,568 8,875
________ ________
NON-INTEREST INCOME:
Income from Fiduciary Activities 492 439
Service Charges on Deposit Accounts 1,890 1,731
Insurance Commission and Fee Income 1,038 1,064
Mortgage Loan Fee Income 719 238
Other Non-Interest Income 816 841
________ ________
Total Non-Interest Income 4,955 4,313
Gains on Securities 667 0
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 5,011 4,932
Expense of Premises and Fixed Assets 1,154 1,170
Other Non-Interest Expense 2,277 2,075
________ ________
Total Non-Interest Expense 8,442 8,177
Income before Income Taxes 4,748 5,011
Income Taxes 1,245 1,313
________ ________
NET INCOME $ 3,503 $ 3,698
======== ========
Net Earnings Per Share
Basic $ 0.43 $ 0.45
======== ========
Diluted $ 0.43 $ 0.45
======== ========
Dividends Declared Per Common Share $ 0.22 $ 0.22
======== ========
Note 1: The 2002 statement has been restated to reflect the adoption of FASB
No. 147, "Acquisition of Certain Financial Institutions".
Note 2: The 2002 Earnings Per Share amounts have been restated for the 4-for-3
stock split, accounted for as a stock dividend, that occurred during
the third quarter of 2002.
NBC CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
Jun. 30, 2003 Dec. 31, 2002
_____________ _____________
(Unaudited) (Audited)
(Amounts in Thousands)
ASSETS:
Cash and Due From Banks:
Noninterest-Bearing Balances $ 35,350 $ 27,865
Interest-bearing Balances 821 567
__________ __________
Total Cash and Due From Banks 36,171 28,432
Held-To-Maturity Securities (Market value of
$46,877 at June 30, 2003 and $46,975 at
December 31, 2002) 43,080 43,792
Available-For-Sale Securities 355,071 349,991
__________ __________
Total Securities 398,151 393,783
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 27,433 28,486
Loans 570,674 584,707
Less: Reserve for Loan Losses (6,042) (6,029)
__________ __________
Net Loans 564,632 578,678
Bank Premises and Equipment (Net) 14,567 14,816
Interest Receivable 6,879 7,605
Goodwill 2,853 2,853
Other Assets 23,075 22,803
__________ __________
TOTAL ASSETS $1,073,761 $1,077,456
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-Interest Bearing $ 106,924 $ 103,502
Interest-Bearing Deposits 702,558 713,945
__________ __________
Total Deposits 809,482 817,447
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 16,850 25,599
Other Borrowed Funds 118,712 112,941
Interest Payable 1,380 1,626
Other Liabilities 14,765 8,736
__________ __________
TOTAL LIABILITIES 961,189 966,349
__________ __________
Shareholders' Equity:
Common Stock $1 Par Value, Authorized
50,000,000 shares, Issued
9,615,806 shares 9,616 9,616
Surplus and Undivided Profits 128,187 124,710
Accumulated Other Comprehensive Income 2,518 4,122
Treasury Stock, at Cost (27,749) (27,341)
__________ __________
TOTAL SHAREHOLDERS' EQUITY 112,572 111,107
__________ __________
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $1,073,761 $1,077,456
========== ==========
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(Unaudited)
(Amounts in thousands)
2003 2002
__________ __________
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,086 $ 7,243
Adjustments to Reconcile Net Income to Net
Cash:
Depreciation and Amortization 996 1,016
Deferred Income Taxes (Credits) 1,797 (3,223)
Provision for Loan Losses 1,490 1,260
Loss (Gain) on Sale of Securities (1,368) (91)
(Increase) Decrease in Interest
Receivable 726 235
(Increase) Decrease in Other Assets (1,329) (1,010)
Increase (Decrease) in Interest Payable (246) (584)
Increase (Decrease) in Other
Liabilities 6,029 6,268
__________ __________
Net Cash Provided by Operating Activities 15,181 11,114
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Securities 82,661 20,304
Proceeds from Sale of Securities 102,142 4,909
Purchase of Securities (190,233) (51,151)
(Increase) Decrease in Loans 12,556 24,228
(Additions) Disposal of Bank Premises and
Equipment (658) (738)
__________ __________
Net Cash Provided by (Used in) Investing
Activities 6,468 (2,448)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Deposits (7,965) (19,634)
Dividend Paid on Common Stock (3,599) (3,460)
Increase (Decrease) in Borrowed Funds (2,978) 2,865
Purchase of Treasury Stock (430) (827)
Other Financing Activities 9 0
__________ __________
Net Cash Provided by (Used in)Financing
Activities (14,963) (21,056)
__________ __________
Net Increase (Decrease) in Cash and Cash
Equivalents 6,686 (12,390)
Cash and Cash Equivalents at Beginning of Year 56,918 43,525
__________ __________
Cash and Cash Equivalents at End of Period $ 63,604 $ 31,135
========== ==========
Cash paid during the period for:
Interest $ 9,835 $ 12,406
========== ==========
Income Taxes $ 2,679 $ 2,985
========== ==========
Note 1: The 2002 statement has been restated to reflect the adoption of FASB
No. 147," Acquisition of Certain Financial Institutions".
NBC CAPITAL CORPORATION NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include the
accounts of NBC Capital Corporation ("Corporation") and its subsidiaries,
National Bank of Commerce and First National Finance Company. All
significant intercompany accounts and transactions have been eliminated.
In the normal decision making process, management makes certain estimates
and assumptions that affect the reported amounts that appear in these
statements. Although management believes that the estimates and
assumptions are reasonable and are based on the best information
available, actual results could differ.
In the opinion of management, all adjustments necessary for the fair
presentation of the financial statements presented in this report have
been made. Such adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Generally Accepted Accounting
Principles have been condensed or omitted.
Note 1. Accounting Pronouncements
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
had an unidentified intangible asset that 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 the second quarter's other operating
expense by $29,000 and caused net income for that quarter to increase by
approximately $19,000. For the six-month period ended June 30, this
restatement has reduced other operating expenses by $57,000 and increased
net income by $36,000. This change did not cause the earnings per share to
change.
At June 30, 2003, 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 FASB Statement No. 142.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure". This Statement amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for voluntary change to the fair value
based method of accounting for stock-based employee compensation. Since the
Corporation accounts for its stock-based compensation under APB No. 25, the
Statement did
not impact the Corporation's consolidated financial statements.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133. Since
the Corporation neither has derivative contracts nor engages in hedging
activities, the Statement did not impact the Corporation's consolidated
financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity".
This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. Currently, the Corporation does not have financial
instruments that fall within the scope of the Statement and therefore, this
Statement currently has no impact on the Corporation's consolidated financial
statements.
Note 2. Stock Options
The Corporation has a stock-based employee compensation plan which is accounted
for under the recognition and measurement principles of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is
reflected in net income, as all stock options granted under these plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share as if the Corporation had applied the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
(Amounts in thousands except for per share data)
Quarter Ended
June 30,
2003 2002
______ ______
Net income, as reported $3,503 $3,698
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (59) (45)
______ ______
Pro forma net income $3,444 $3,653
====== ======
Basic net earnings per share:
As reported $ .43 $ .45
Pro forma .42 .44
Diluted net earnings per share:
As reported $ .43 $ .45
Pro forma .42 .44
Six Months Ended
June 30,
2003 2002
______ ______
Net income, as reported $7,086 $7,243
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (124) (84)
______ ______
Pro forma net income $6,962 $7,159
====== ======
Basic net earnings per share:
As reported $ .87 $ .88
Pro forma .85 .87
Diluted net earnings per share:
As reported $ .87 $ .88
Pro forma .85 .87
Note 3. Stock Split
During the third quarter of 2002, the Corporation had a four-for-three
(4-for-3) stock split. This stock split was accounted for as a stock
dividend. All per share amounts and the weighted average number of shares
outstanding reported in this Form 10-Q have been restated to reflect this
stock split.
Note 4. Comprehensive Income
The following table discloses Comprehensive Income for the periods
reported in the Consolidated Statements of Income:
Quarter Ended
June 30,
2003 2002
(In thousands)
______ ______
Net Income $3,503 $3,698
Other Comprehensive Income (loss) net of tax:
Reclassification adjustment for gain
included in net income (417) 0
Unrealized gains (losses) on securities 1,107 4,900
______ ______
690 4,900
______ ______
Comprehensive Income $4,193 $8,598
====== ======
Accumulated Comprehensive Income $2,518 $4,644
====== ======
Six Months Ended
June 30,
2003 2002
(In thousands)
______ ______
Net Income $7,086 $ 7,243
Other Comprehensive Income (Loss) net of tax:
Reclassification adjustment for gain
included in net income (855) (57)
Unrealized gains (losses) on securities (749) 3,051
______ _______
(1,604) 2,994
______ _______
Comprehensive Income $5,482 $10,237
====== =======
Accumulated Comprehensive Income $2,518 $ 4,644
====== =======
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
JUNE 30, 2003
DISCLOSURE REGARDING FORWARD LOOKING INFORMATION
The following provides a narrative discussion and analysis of significant
changes in the Corporation's results of operations and financial condition for
the quarter and six-month period ended June 30, 2003. Certain information
included in this discussion contains forward-looking statements and
information that are based on management's conclusions, drawn from certain
assumptions and information currently available. The Private Securities
Litigation Act of 1995 encourages the disclosure of forward-looking
information by management by providing a safe harbor for such information.
This discussion includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Corporation
believes that the expectations reflected in such forward-looking statements
are reasonable, such forward-looking statements are based on numerous
assumptions (some of which may prove to be incorrect) and are subject to
risks and uncertainties which could cause the actual results to differ
materially from the Corporation's expectations. The forward-looking
statements made in this document are based on management's beliefs, as well
as assumptions made by and information currently available to management.
When used in the Corporation's documents, the words "anticipate," "estimate,"
"expect," "objective," "projection," "forecast," "goal" and similar
expressions are intended to identify forward-looking statements. In addition
to any assumptions and other factors referred to specifically in connection
with forward-looking statements, factors that could cause the Corporation's
actual results to differ materially from those contemplated in any forward-
looking statements include, among others, increased competition, regulatory
factors, economic conditions, changing interest rates, changing market
conditions, availability or cost of capital, employee workforce factors,
cost and other effects of legal and administrative proceedings, and changes
in federal, state or local laws and regulations. The Corporation undertakes
no obligation to update or revise any forward-looking statements, whether as
a result of changes in actual results, changes in assumptions or other
factors affecting such statements.
The two major trends that can have a material impact on the Corporation's
financial condition and results of operations are the trend in interest rates
and the overall trend in the economy. Currently, management expects, based on
the available information, that interest rates will remain at their current
levels and the overall economy in its market will remain relatively flat
throughout the remainder of 2003. The Corporation's 2003 projections, budgets
and goals are based on these expectations. If these trends move differently
than expected in either direction and/or speed, they could have a material
impact on the Corporation's financial condition and results of operations. It
is also a risk if interest rates continue at current levels for an extended
period of time. If this happens, as existing loans in the portfolio mature,
they will be paying off at an older, higher interest rate. The new loans that
will be replacing them will be made at much lower interest rates. Rates on
deposits are at a level that will make it very difficult to offset this loss in
yield with a reduced cost of deposits. This situation, if it occurs, will put
additional pressure on the Corporation's net interest margin and net income.
The areas of the Corporation's operations most directly impacted by all of the
above described situations would be the net interest margin, loan and deposit
growth and the provision for loan losses.
ACCOUNTING ISSUES
Note A of the Notes to Consolidated Financial Statements included in the
Corporation's Form 10-K for the year ended December 31, 2002, contains a
summary of the Corporation's accounting policies. Management is of the
opinion that Note A, read in conjunction with all other information in the
annual report, including management's letter to shareholders and management's
discussion and analysis, is sufficient to provide the reader with the
information needed to understand the Corporation's financial condition and
results of operations. This information is also sufficient to enable the
reader to identify the areas in which management is required to make the
most difficult, subjective and /or complex judgments.
In the normal course of business, the Corporation's wholly-owned subsidiary,
National Bank of Commerce, makes loans to related parties, including directors
and executive officers of the Corporation and their relatives and affiliates.
These loans are made in the ordinary course of business and on substantially
the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with other parties. Also, they are
consistent with sound banking practices and within the applicable regulatory
and lending limitations imposed by the national banking laws and regulations.
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 loans are
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.
The Corporation does not have investments in any unconsolidated entities over
which it exercises management or control. The Corporation does not have
relationships with limited or special purpose entities that it relies on to
provide financing, liquidity or market and credit risk support.
RESULTS OF OPERATIONS
First two quarters of 2003 compared to the first two quarters of 2002
Earnings for the first two quarters of 2003 decreased by 2.2% to $7.09
million, or $.87 per share. This compares to $7.24 million, or $.88 per
share, for the first two quarters of 2002. On an annualized basis, these
2003 totals equate to a 1.3% return on average assets and a 12.7% return
on average equity. For this same period in 2002, return on average assets
was 1.4% and return on average equity was 13.8%.
Net interest income for the first half of 2003 was $16.99 million,
compared to $18.83 million for 2002. This represents a decrease of 9.8%.
This decrease resulted from a forty-five basis point decrease in the net
interest margin. The primary reason for the decrease in margin was that
the Corporation lost 95 basis points from the repricing of its earning
assets from the first half of 2002 to the first half of 2003, while it was
only able to decrease its cost of funds by 58 basis points. This decline
was partially offset by a $20.2 million or 2.1% increase in average
earning assets. However, all the growth in average earning assets came in
the areas of the investment securities portfolio and federal funds sold,
as loans continued to decline. Average loans declined from $598.3 million
during the first half of 2002 to $566.6 million during the first half of
2003. During these same periods, the average balances of the investment
securities portfolio increased from $362.3 million to $400.4 million, and
average balances of federal funds sold increased from $12.3 million to
$26.1 million. This change in the mix of average earning assets also had
a negative impact on margin because the yield on the loan portfolio for
the first half of 2003 was 6.17%, while the yields on the investment
portfolio and federal funds sold were only 4.57% and 1.27%, respectively.
This mix change occurred because of the Corporation's need to grow earning
assets during a time of very soft loan demand and an overall slow economy
in its market area. The Corporation continued to lose mortgage loans from
its portfolio as the adjustable rate loans in the portfolio refinanced to
fixed rate loans and were sold into the secondary market. In the area of
consumer loans, there was continued competition from sources offering low
or, in the case of automobiles, zero rate loans. All these factors put
pressure on the Corporation's ability to maintain or increase margins and
net interest income. Management believes that if the Federal Reserve
continues the current low rate environment for the remainder of the year,
the Corporation's net interest income will continue to come under
pressure. For additional information, see the table entitled "Analysis of
Net Interest Earnings" at the end of this section.
The Corporation's Provision for Loan Losses is utilized to replenish the
Reserve for Loan Losses on its balance sheet. The reserve is maintained at
a level deemed adequate by the Board of Directors after its evaluation of
the risk exposure contained in the Corporation's loan portfolio. The
methodology used to make this determination is performed on a quarterly
basis. An overall analysis of the portfolio is performed by the senior
credit officers and the loan review staff. As a part of this evaluation,
certain loans are individually reviewed to determine if there is an
impairment of the Corporation'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 each affected loan. All
other loans are grouped into homogeneous pools, and risk exposure is
determined by considering the following list of factors (this list is not
all inclusive and the factors reviewed may change as circumstances
change): historical loss experiences; trends in delinquencies and non-
accruals; and national, regional and local economic conditions. These
economic conditions would include, but not be limited to, general real
estate conditions, the current interest rate environment and trends,
unemployment levels and other information, as deemed appropriate.
Classified assets to capital were 12.0% at June 30, 2003, compared to
17.1% at June 30, 2002. The percentage of loans past due 30 days or more
was 1.71% at June 30, 2003. The Reserve for Loan Losses as a percentage of
total loans has increased from 1.03% of net loans at the end of 2002 to
1.06% at the end of the second quarter of 2003. During the first half of
2003, net charge-offs totaled $1,477,000, compared to $969,000 for the
same period of 2002. Overall, loan quality remains good. At the end of the
second quarter of 2003, the ratio of non-performing loans to total loans
remained low at .47%. This compares to .70% at December 31, 2002 and .56%
at June 30, 2002. Also, at June 30, 2003, the coverage of the reserve for
loan losses to non-performing loans was 229%, compared to 210% at June 30,
2002. Management is committed to not relaxing its underwriting standards.
Based on these evaluations, the reserve amounts maintained at the end of
the second quarter of 2003 and at the end of 2002 were deemed adequate to
cover exposure within the Corporation's loan portfolio.
The Provision for Loan Losses has increased from $1,260,000 during the first
half of 2002 to $1,490,000 in the same period of 2003. The level of the
provision for the first half of 2003 was increased due to a more conservative
stance regarding the portion of the provision allocated to the consumer loan
portfolio in light of the continuation of the soft economy and the heavy job
losses in some of the Corporation's markets. In the opinion of management,
the current level of the provision should be sufficient to protect the
Corporation from any unforeseen deterioration in the quality of the loan
portfolio.
Non-interest income grew 14.1%, resulting from a 10.6% increase in fee
income from deposit accounts, a 14.8% increase in insurance commission and
fee income, a 3.0% increase in income from fiduciary activities and an
80.8% increase in fees from mortgage-related activities. The solid
increase in income from deposit accounts largely resulted from increased
account activity, more uniform application of account-based fees, and
selected fee increases. The increase in insurance commission and fee
income resulted from an increased volume in all lines of the insurance
business and improved profit sharing from carriers due to lower loss
levels and increased underwriting volume. The increase in income from
fiduciary activities resulted primarily from higher fees related to a
general rise in value in the equity markets, which directly affected the
value of assets under management. Mortgage fee income benefited from the
continued demand for home loans in this low interest rate environment.
The pipeline for mortgage loans, both new home loans and refinancing of
existing loans, remains strong into the third quarter, as interest rates
remain at historically low levels.
The Corporation recognized $1,368,000 in securities gains during the first
half of 2003, compared to gains of $91,000 during the first half of 2002.
The gains in 2002 resulted from securities that had been purchased at a
discount being called because of the low rate environment. In the first
half of 2003, the Corporation took advantage of a very unusual interest
rate environment that allowed certain securities to be sold at a gain and
replaced with similar securities with yields at or above the level of the
securities sold. This opportunity resulted from the rapid prepayment of
some mortgage-backed securities which reduced their yields and average
lives and made them attractive at premium prices to short term investors.
The Corporation took advantage of this opportunity to improve portfolio
yields without extending maturities beyond acceptable levels, and at the
same time, to recognize gains. Management believes the opportunities for
similar gains during the second half of the year will depend on the
continuation of the rate environment that caused this aberration in
security pricing and yields. The Corporation plans to take advantage of
this situation as long as it is available.
Non-interest expenses for the first half of 2003 increased by 4.0% over
the same period of 2002. This small increase resulted from a continued
focus on managing these expenses. Salaries and employee benefits were up
2.1%, primarily due to higher employee medical insurance costs and a 1.4%
increase in salary expenses resulting from normal raises. Expenses
associated with premises and fixed assets increased by $31,000, or 1.3%,
due to increases in property taxes and utilities. Other non-interest
expenses increased by $419,000, or 10.2%. This increase 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 income. The Corporation's effective tax rate decreased from 26.4%
for the first half of 2002 to 26.1% for the first half of 2003. This decrease
in the effective tax rate for the period resulted primarily from the mix of
income from tax-free investments and the percentage relationship of tax-free
income to total pre-tax income. The Corporation's ability to reduce income tax
expense by acquiring additional tax-free investments is limited by the
alternative minimum tax provision, the market supply of acceptable municipal
securities, the level of tax exempt yields and the Corporation's normal
liquidity and balance sheet structure requirements.
Second quarter of 2003 compared to the second quarter of 2002
Earnings for the second quarter of 2003 decreased by 5.3% to $3.50 million, or
$.43 per share. This compares to $3.70 million, or $.45 per share, for the
second quarter of 2002. On an annualized basis, the 2003 net income equates
to a 1.3% return on average assets and a 12.6% return on average equity. For
this same period in 2002, return on average assets was 1.4% and return on
average equity was 13.9%.
Net interest income for the second quarter of 2003 was $8.31 million,
compared to $9.51 million for 2002. This represents a decrease of 12.6%.
This decrease resulted from a fifty-five basis point decrease in the net
interest margin. The primary reason for the decrease in margin was that
the Corporation lost 99 basis points from the repricing of its earning
assets from the second quarter of 2002 to the second quarter of 2003,
while it was only able to decrease its cost of funds by 55 basis points.
The decline in margin was partially offset by a $13.1 million or 1.4%
increase in average earning assets. However, all the growth in average
earning assets came in the area of the investment securities portfolio and
federal funds sold, as loans continued to decline. Average loans declined
from $593.4 million during the second quarter of 2002 to $565.3 million
during the second quarter of 2003. During these same periods, the average
balances of the investment securities portfolio increased from $369.7
million to $392.8 million and federal funds sold increased from $5.4
million to $23.4 million. This change in the mix of average earning
assets also had a negative impact on margin because the yield on the loan
portfolio for the second quarter of 2003 was 6.11%, while the yield on the
investment portfolio was 4.34% and the yield on federal funds sold was
1.22%. This mix change occurred because of the Corporation's need to grow
earning assets during a time of very soft loan demand and an overall slow
economy in its market area. The Corporation continued to lose mortgage
loans from its portfolio as the adjustable rate loans in the portfolio
refinanced to fixed rate loans and were sold into the secondary market.
In the area of consumer loans, there was continued competition from
sources offering low or, in the case of automobiles, zero rate loans. All
these factors put pressure on the Corporation's ability to maintain or
increase margins and net interest income. Management believes that if the
Federal Reserve continues the current low rate environment for the
remainder of the year, the Corporation's net interest income will continue
to come under pressure. For additional information, see the table entitled
"Analysis of Net Interest Earnings" at the end of this section.
The Provision for Loan Losses increased from $630,000 during the second
quarter of 2002 to $740,000 in the same quarter of 2003. The level of the
provision increased due to a more conservative stance regarding the portion of
the provision allocated to the consumer loan portfolio in light of the
continuation of the soft economy and the heavy job losses in some of the
Corporation's markets. In the opinion of management, the current level of the
provision should be sufficient to protect the Corporation from any unforeseen
deterioration in the quality of the loan portfolio.
Non-interest income grew 14.9%, resulting from a 9.2% increase in income
from deposit accounts, a 12.1% increase in income from fiduciary
activities and a 202.1% increase in fees from mortgage-related activities.
The solid increase in income from deposit accounts largely resulted from
increased account activity, more uniform application of account-based
fees, and selected fee increases. The increase in income from fiduciary
activities resulted primarily from higher fees related to the impact of
the equity markets on the value of assets under management. Mortgage fee
income benefited from the record demand for loans in this low interest
rate environment. The month of June was the single largest month that the
Corporation has experienced in all categories of mortgage lending (numbers
of mortgage loans closed, total principal of loans closed and mortgage
loan fees generated). The pipeline for mortgage loans, both new home
loans and refinancing of existing loans, remains strong into the third
quarter, as interest rates remain at historically low levels. The
Corporation experienced slight declines in insurance commission and fee
income and in other non-interest income from the second quarter of 2002 to
the second quarter of 2003. These declines were 2.4% and 3.0%,
respectively. The decline in other non-interest income was the result of
small declines in several accounts, none of which were individually
material.
The Corporation recognized $667,000 in securities gains during the second
quarter of 2003. There were no gains recognized during the second quarter
of 2002. In the second quarter of 2003, the Corporation took advantage of
a very unusual interest rate environment that allowed certain securities
to be sold at a gain and replaced with similar securities with yields at
or above the level of the securities sold. This opportunity resulted from
the rapid prepayment of some mortgage-backed securities which reduced
their yields and average lives and made them attractive at premium prices
to short term investors. The Corporation took advantage of this
opportunity to improve portfolio yields without extending maturities
beyond acceptable levels, and at the same time, to recognize gains. As
previously stated, if opportunities for similar gains are available during
the second half of the year, the Corporation plans to take advantage of
them.
Non-interest expenses for the second quarter of 2003 increased by 3.2%
over the same period of 2002. This small increase resulted from a
continued focus on managing these expenses. Salaries and employee
benefits were up 1.6%, primarily due to higher employee insurance costs
and pension expense. Other non-interest expenses increased by $202,000, or
9.7%. This increase 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 income. The Corporation's effective tax rate remained unchanged
from the second quarter of 2002 to the second quarter of 2003. The
Corporation's ability to reduce income tax expense by acquiring additional
tax-free investments is limited by the alternative minimum tax provision, the
market supply of acceptable municipal securities, the level of tax exempt
yields and the Corporation's normal liquidity and balance sheet structure
requirements.
FINANCIAL CONDITION
The Corporation's balance sheet shows a slight decrease in total assets
from $1.08 billion to $1.07 billion during the first half of 2003. During
this period, loans declined by $14.0 million. There were several reasons
for the continued decline in loans. These include the continued
refinancing of variable rate mortgage loans to fixed rate loans (which the
Corporation does not hold in its portfolio), tighter underwriting
standards in the consumer loan portfolio, continued competition from low
and zero rate loans, especially from the automobile industry, and the pay-
off of two business loans of approximately $11 million. One of these
loans was a commercial line of credit in its "clean up" period and the
other moved into its permanent financing phase with a government agency.
Because of lower loan demand, the Corporation decided not to aggressively
price deposits, resulting in an $8.0 million decline in deposits and an
$8.7 million decline in securities sold under agreements to repurchase.
The Corporation increased its Federal Home Loan Bank borrowings by $5.8
million to take advantage of very low borrowing rates and to replace the
borrowings that were paid during the period. The Corporation used its
excess cash flow to increase the investment securities portfolio by $4.4
million. Other liabilities increased $6.0 million. The primary reason for
this increase was that a security purchased for the investment portfolio
in June did not settle until July. Since the security was recorded on a
trade date basis, the liability for this security was placed in other
liabilities at June 30.
Shareholders' equity increased from $111.1 million to $112.6 million
during the first half of 2003. During this period the Accumulated Other
Comprehensive Income component of Shareholders' Equity decreased from an
unrealized gain of $4,122,000 at December 31, 2002 to an unrealized gain
of $2,518,000 at June 30, 2003. Part of the reason for the decline was that
during the period, approximately $1,368,000 of gross gains were
actually realized. After adjusting for these realized gains, the market
value of the remaining portfolio declined by approximately $749,000, net
of taxes. See Note 4 to the Consolidated Financial Statements in this
document for additional information concerning the changes in
comprehensive income. Also, during the first half of 2003, the
Corporation declared dividends of approximately $3,597,000. Additionally,
the Corporation repurchased 18,000 shares of its common stock in the open
market under the announced stock repurchase plan for approximately
$430,000, or an average purchase price per share of $23.86. These declines
were more than offset with the net earnings for the first half of the
year.
The Corporation's bank subsidiary is required to maintain a minimum amount
of capital to total risk weighted assets as defined by the banking
regulators. At June 30, 2003, the bank's Tier I, Tier II and Total
Capital Ratios exceeded the well-capitalized standards developed under the
applicable regulatory guidelines.
Dividends paid by the Corporation are provided from dividends received
from the subsidiary bank. Under the regulations controlling national
banks, the payment of dividends by the bank without prior approval from
the Comptroller of the Currency is limited in amount to the current year's
net profit and the retained net earnings of the two preceding years. To
fund the 976,676 share repurchase transaction in March of 2001, the
Corporation's subsidiary bank borrowed funds from the Federal Home Loan
Bank and, with special permission from the Office of the Comptroller of
the Currency, declared a special dividend to the Corporation to purchase
this stock. As a result, the subsidiary bank is limited to its 2002 net
retained earnings and the current year's net profits to pay dividends to
the Corporation during 2003, without obtaining further approval from the
Comptroller of the Currency. At June 30, 2003, without approval, the
subsidiary bank's dividend paying ability was limited to approximately
$9.0 million.
Also, under regulations controlling national banks, the bank is limited in
the amount it can lend to the Corporation, and such loans are required to
be on a fully secured basis. At June 30, 2003, there were no borrowings
between the Corporation and its subsidiary bank.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of its business, the Corporation enters into
agreements with customers to loan money. When a loan agreement is
executed, the customer can either borrow the money immediately or draw
against the loan over a predetermined time period. If an unfunded
commitment is drawn against, the bank charges the customer the interest rate
established in the original agreement for the amount of the draw for
the time period outstanding. As of June 30, 2003, the amount of unfunded
commitments outstanding was $92,041,000.
Also, the Corporation provides Commercial Letters of Credit to its
customers. The Corporation charges the customer approximately one and
one-half percent of the face amount of a letter of credit as a fee for
issuance. This is a contingent obligation to make a loan to this customer
for up to the amount of the Letter of Credit and at a predetermined rate
of interest. As of June 30, 2003, the amount of outstanding Letters of
Credit was $6,177,000.
Both of these arrangements are subject to the same credit and underwriting
standards as any other loan agreement.
At any point in time, the Corporation does not know when or if these
commitments will be funded. Generally, if they are funded, they are
funded at various times over the commitment period. As a result, the
Corporation is able to fund them out of normal cash flow. If they were
all funded at the same time, the Corporation has short-term borrowing
lines in place to fund its cash needs.
From a profit standpoint, it would be in the best interest of the
Corporation for all of these outstanding commitments to be funded.
ANALYSIS OF NET INTEREST EARNINGS
The table below shows, for the periods indicated, an analysis of net
interest earnings, including the average amount of interest-earning assets
and interest-bearing liabilities outstanding during the period, the
interest earned or paid on such amounts, the average yields/rates paid and
the net yield on interest-earning assets:
($ In Thousands)
Average Balance
Quarter Six Months Year
ended ended ended
6/30/03 6/30/03 12/31/02
________ ________ ________
EARNING ASSETS:
Net loans $565,339 $566,576 $591,297
Federal funds sold and
other interest-bearing
assets 23,414 26,125 12,986
Securities:
Taxable 280,509 285,996 250,970
Nontaxable 112,304 114,366 123,380
________ ________ ________
Totals 981,566 993,063 978,633
________ ________ ________
INTEREST-BEARING
LIABILITIES:
Interest-bearing deposits 702,649 714,923 701,654
Borrowed funds, federal
funds purchased and other 133,324 132,684 134,639
________ ________ ________
Totals 835,973 847,607 836,293
________ ________ ________
Net amounts $145,593 $145,456 $142,340
======== ======== ========
($ In Thousands)
Interest Income
Quarter Six Months Year
ended ended ended
6/30/03 6/30/03 12/31/02
________ ________ ________
EARNING ASSETS:
Net loans $ 8,617 $ 17,338 $ 40,022
Federal funds sold
and other interest-
bearing assets 71 165 215
Securities:
Taxable 2,906 6,276 13,675
Nontaxable 1,352 2,801 6,139
________ ________ ________
Totals $ 12,946 $ 26,580 $ 60,051
======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits $ 3,337 $ 6,966 $ 17,171
Borrowed funds, federal
funds purchased and other 1,301 2,623 5,705
________ ________ ________
Totals 4,638 9,589 22,876
________ ________ ________
Net interest income $ 8,307 $ 16,991 $ 37,175
======== ======== ========
Yields Earned
And Rates Paid (%)
Quarter Six Months Year
ended ended ended
6/30/03 6/30/03 12/31/02
________ ________ ________
EARNING ASSETS:
Net loans 6.11% 6.17% 6.77%
Federal funds sold and other
interest-bearing assets 1.22% 1.27% 1.66%
Securities:
Taxable 4.15% 4.42% 5.45%
Nontaxable 4.83% 4.94% 4.98%
________ ________ ________
Totals 5.29% 5.40% 6.14%
======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 1.91% 1.96% 2.45%
Borrowed funds, federal funds
purchased and other 3.91% 3.99% 4.24%
________ ________ ________
Totals 2.23% 2.28% 2.74%
________ ________ ________
Net yield on earning assets 3.39% 3.45% 3.80%
Note: Yields on tax equivalent basis would be:
Nontaxable securities 7.43% 7.60% 7.66%
________ ________ ________
Total earning assets 5.59% 5.70% 6.47%
________ ________ ________
Net Yield on earning assets 3.69% 3.76% 4.14%
________ ________ ________
PART I. ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
PART I. ITEM 4
Controls and Procedures
June 30, 2003
It is the responsibility of the Chief Executive Officer and the Chief
Financial Officer to establish and maintain 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 as of June 30, 2003. It is the conclusion
of the Corporation's Chief Executive Officer and the Chief Financial
Officer that, as of June 30, 2003, the disclosure controls and procedures
of NBC Capital Corporation were functioning effectively to make known all
material information that requires disclosure in this filing. There have
been no significant changes in the Corporation's internal controls over
financial reporting that occurred during the Corporation's most recent
fiscal quarter that has materially affected, or would be reasonably likely
to materially affect, the Corporation's internal control over financial
reporting. Management believes that there were no significant
deficiencies or material weaknesses in the Corporation's internal controls
that required any corrective action.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2003 Annual Meeting of Shareholders was held on
May 20, 2003.
(b) Not Applicable
(c) At the 2003 annual meeting of shareholders, the
shareholders voted on a proposal to amend the
Corporation's articles of incorporation to increase the
number of authorized shares of common stock from 10
million to 50 million. This proposal passed with the
following votes being cast:
For 6,542,921
Against or Withheld 563,396
Abstentions 80,367
The shareholders also voted on a proposal to approve the
Corporation's 2003 Long-Term Incentive Plan. The
proposal passed with the following votes being cast:
For 5,897,767
Against or Withheld 235,536
Abstentions 1,053,381
(d) Not Applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i) Amendment to Articles of Incorporation
10.1 Executive Employment Agreement Dated June 1, 2003,
by and between NBC Capital Corporation and Lewis F.
Mallory, Jr.
10.2 Executive Employment Agreement Dated June 1, 2003,
by and between NBC Capital Corporation and Mark A.
Abernathy
10.3 Executive Employment Agreement Dated June 1, 2003,
by and between NBC Capital Corporation and Richard T.
Haston
11 Statement re computation of per-share earnings
31.1 Certificate pursuant to Rule 13a-14(a) or 15d-14(a)
of Securities Exchange Act of 1934 as adopted
pursuant to section 302 of Sarbanes-Oxley Act of
2002-Chief Executive Officer
31.2 Certificate pursuant to Rule 13a-14(a) or 15d-14(a)
of Securities Exchange Act of 1934 as adopted
pursuant to section 302 of Sarbanes-Oxley Act of
2002-Chief Financial Officer
32.1 Certificate pursuant to 18 U.S.C., Section 1350 as
adopted pursuant to section 906 of Sarbanes-Oxley
Act of 2002-Chief Executive Officer
32.2 Certificate pursuant to 18 U.S.C., Section 1350 as
adopted pursuant to section 906 of Sarbanes-Oxley
Act of 2002-Chief Financial Officer
(b) Form 8-K
A Form 8-K was filed to announce the release of a
quarterly earnings release for the quarter ended
June 30, 2003. The press release was made to the
public after the market close on July 21, 2003 and
included in a Current Report on Form 8-K filed on
July 22, 2003.
The financial information furnished herein has not been audited by
independent accountants; however, in the opinion of management, all
adjustments necessary for a fair presentation on the results of operations
for the three-month and the six-month periods ended June 30, 2003, have
been included.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NBC CAPITAL CORPORATION
Registrant
Date: August 13, 2003
/s/ Richard T. Haston
___________________________________
Richard T. Haston
Executive Vice President,
Chief Financial Officer and
Treasurer
EXHIBIT INDEX:
3(i) Amendment to Articles of Incorporation
10.1 Executive Employment Agreement Dated June 1, 2003, by
and between NBC Capital Corporation and Lewis F.
Mallory, Jr.
10.2 Executive Employment Agreement Dated June 1, 2003, by
and between NBC Capital Corporation and Mark A.
Abernathy
10.3 Executive Employment Agreement Dated June 1, 2003, by
and between NBC Capital Corporation and Richard T.
Haston
11 Statement re computation of per-share earnings
31.1 Certificate pursuant to Rule 13a-14(a) or 15d-14(a)
of Securities Exchange Act of 1934 as adopted
pursuant to section 302 of Sarbanes-Oxley Act of
2002-Chief Executive Officer
31.2 Certificate pursuant to Rule 13a-14(a) or 15d-14(a) of
Securities Exchange Act of 1934 as adopted pursuant to
section 302 of Sarbanes-Oxley Act of 2002-Chief
Financial Officer
32.1 Certificate pursuant to 18 U.S.C., Section 1350 as
adopted pursuant to section 906 of Sarbanes-Oxley Act
of 2002-Chief Executive Officer
32.2 Certificate pursuant to 18 U.S.C., Section 1350 as
adopted pursuant to section 906 of Sarbanes-Oxley Act
of 2002-Chief Financial Officer