UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 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 by check mark whether the registrant is an accelerated filer as
defined in the Securities and Exchange Act of 1934 rule 12b-2.
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 - 8,171,811 shares as of September 30, 2003.
PART I - FINANCIAL INFORMATION
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME FOR
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
(Amounts in thousands, except per share data)
2003 2002
_______ _______
INTEREST INCOME:
Interest and Fees on Loans $25,663 $30,596
Interest and Dividends on Investment Securities 13,046 15,001
Other Interest Income 227 146
_______ _______
Total Interest Income 38,936 45,743
INTEREST EXPENSE:
Interest on Deposits 9,984 13,203
Interest on Borrowed Funds 3,875 4,288
_______ _______
Total Interest Expense 13,859 17,491
_______ _______
Net Interest Income 25,077 28,252
Provision for Loan Losses 2,170 2,015
_______ _______
Net Interest Income after Provision for
Loan Losses 22,907 26,237
NON-INTEREST INCOME:
Income from Fiduciary Activities 1,371 1,317
Service Charges on Deposit Accounts 5,697 5,143
Insurance Commission and Fee Income 3,438 3,046
Mortgage Loan Fee Income 1,838 990
Other Non-Interest Income 2,407 2,310
_______ _______
Total Non-Interest Income 14,751 12,806
Gains on Securities 1,362 279
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 14,969 14,681
Expense of Premises and Fixed Assets 3,539 3,517
Other Non-Interest Expense 6,761 6,410
_______ _______
Total Non-Interest Expense 25,269 24,608
_______ _______
Income Before Income Taxes 13,751 14,714
Income Taxes 3,550 3,855
_______ _______
NET INCOME $10,201 $10,859
======= =======
Net Earnings Per Share:
Basic $ 1.25 $ 1.32
======= =======
Diluted $ 1.25 $ 1.32
======= =======
Dividends Per Common Share $ 0.68 $ 0.65
======= =======
Note 1: The 2002 statement has been restated to reflect the adoption of
FASB No. 147," Acquisition of Certain Financial Institutions".
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME FOR
QUARTER ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
(Amounts in thousands, except per share data)
2003 2002
_______ _______
INTEREST INCOME:
Interest and Fees on Loans $ 8,325 $ 9,926
Interest and Dividends on Investment Securities 3,969 5,127
Other Interest Income 62 39
_______ _______
Total Interest Income 12,356 15,092
INTEREST EXPENSE:
Interest on Deposits 3,018 4,200
Interest on Borrowed Funds 1,252 1,469
_______ _______
Total Interest Expense 4,270 5,669
_______ _______
Net Interest Income 8,086 9,423
Provision for Loan Losses 680 755
_______ _______
Net Interest Income after Provision for
Loan Losses 7,406 8,668
_______ _______
NON-INTEREST INCOME:
Income from Fiduciary Activities 467 439
Service Charges on Deposit Accounts 2,014 1,812
Insurance Commission and Fee Income 1,182 1,081
Mortgage Loan Fee Income 679 349
Other Non-Interest Income 831 734
_______ _______
Total Non-Interest Income 5,173 4,415
_______ _______
Gain (Loss) on Securities (6) 188
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 4,976 4,889
Expense of Premises and Fixed Assets 1,192 1,201
Other Non-Interest Expense 2,244 2,312
_______ _______
Total Non-Interest Expense 8,412 8,402
_______ _______
Income before Income Taxes 4,161 4,869
Income Taxes 1,046 1,253
_______ _______
NET INCOME $ 3,115 $ 3,616
======= =======
Net Earnings Per Share
Basic $ 0.38 $ 0.44
======= =======
Diluted $ 0.38 $ 0.44
======= =======
Dividends Per Common Share $ 0.24 $ 0.22
======= =======
Note 1: The 2002 statement has been restated to reflect the adoption of
FASB No. 147," Acquisition of Certain Financial Institutions".
NBC CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
Sept. 30, 2003 Dec. 31, 2002
______________ _____________
(Unaudited) (Audited)
(Amounts in Thousands)
ASSETS:
Cash and Due From Banks:
Noninterest-Bearing Balances $ 26,013 $ 27,865
Interest-bearing Balances 822 567
__________ __________
Total Cash and Due From Banks 26,835 28,432
Held-To-Maturity Securities (Market value of
$43,596 at September 30, 2003 and $46,975
at December 31, 2002) 40,804 43,792
Available-For-Sale Securities 340,128 349,991
__________ __________
Total Securities 380,932 393,783
Federal Funds Sold and Securities Purchased
Under Agreements to Resell 420 28,486
Loans 584,884 576,325
Less: Reserve for Loan Losses (6,238) (6,029)
__________ __________
Net Loans 578,646 570,296
Bank Premises and Equipment (Net) 14,750 14,816
Interest Receivable 5,995 7,605
Goodwill 2,853 2,853
Other Assets 29,349 31,185
__________ __________
TOTAL ASSETS $1,039,780 $1,077,456
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Non-Interest Bearing Deposits $ 104,923 $ 103,502
Interest-Bearing Deposits 681,502 713,945
__________ __________
Total Deposits 786,425 817,447
Federal Funds Purchased and Securities Sold
Under Agreements to Repurchase 22,184 25,599
Other Borrowed Funds 111,765 112,941
Interest Payable 1,254 1,626
Other Liabilities 8,461 8,736
__________ __________
TOTAL LIABILITIES 930,089 966,349
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 129,340 124,710
Accumulated Other Comprehensive Income (1,544) 4,122
Treasury Stock, at Cost (27,721) (27,341)
__________ __________
TOTAL SHAREHOLDERS' EQUITY 109,691 111,107
__________ __________
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $1,039,780 $1,077,456
========== ==========
Note 1: Certain 2002 amounts have been reclassified to conform to 2003
classifications.
NBC CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(Unaudited)
(Amounts in thousands)
2003 2002
________ ________
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 10,201 $ 10,806
Adjustments to Reconcile Net Income to Net Cash
Depreciation and Amortization 1,460 1,593
Deferred Income Taxes (Credits) 5,908 (3,918)
Provision for Loan Losses 2,170 2,015
Loss (Gain) on Sale of Securities (1,362) (279)
(Increase) Decrease in Interest Receivable 1,610 760
(Increase) Decrease in Other Assets (1,282) (2,082)
Increase (Decrease) in Interest Payable (372) (435)
Increase (Decrease) in Other Liabilities (275) 7,592
________ ________
Net Cash Provided by Operating Activities 18,058 16,052
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Securities 133,529 36,013
Proceeds from Sale of Securities 109,545 33,158
Purchase of Securities (237,446) (107,295)
(Increase) Decrease in Loans (10,520) 27,493
(Additions) Disposal of Bank Premises and
Equipment (1,263) (1,019)
________ ________
Net Cash Provided by (Used in) Investing Activities (6,155) (11,650)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (Decrease) in Deposits (31,022) (4,259)
Dividend Paid on Common Stock (5,560) (5,248)
Increase (Decrease) in Borrowed Funds (4,591) 11,407
Purchase of Treasury Stock (430) (1,053)
Other Financing Activities 37 0
________ ________
Net Cash Provided by (Used in) Financing Activities (41,566) 847
Net Increase (Decrease) in Cash and Cash
Equivalents (29,663) 5,249
Cash and Cash Equivalents at Beginning of Year 56,918 43,525
________ ________
Cash and Cash Equivalents at End of Period $ 27,255 $ 48,774
======== ========
Cash paid during the period for:
Interest $ 14,231 $ 17,926
======== ========
Income Taxes $ 3,823 $ 3,889
======== ========
Note 1: The 2002 statement has been restated to reflect the adoption of
FASB No. 147," Acquisition of Certain Financial Institutions".
Note 2: Certain 2002 amounts have been reclassified to conform to 2003
classifications.
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 Financial Accounting Standards Board "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. This reversal reduced the third quarter's other
operating expense by $28,000 and caused net income for that quarter to
increase by approximately $17,000. For the nine-month period ended
September 30, 2002, this restatement reduced other operating expenses by
$85,000 and increased net income by $53,000. This change did not cause the
earnings per share to change.
At September 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
Accounting Principles Board "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; 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 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 what the effect
on net income and earnings per share would have been if the Corporation
had applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.
(Amounts in thousands except for per share data)
Quarter Ended
September 30,
2003 2002
(In Thousands)
______________
Net income, as reported $3,115 $3,616
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (28) (65)
______________
Pro forma net income $3,087 $3,551
==============
Basic net earnings per share:
As reported $ .38 $ .44
Pro forma .38 .44
Diluted net earnings per share:
As reported $ .38 $ .44
Pro forma .38 .44
Nine Months Ended
September 30,
2003 2002
(In Thousands)
________________
Net income, as reported $10,201 $10,859
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (152) (150)
________________
Pro forma net income $10,049 $10,709
================
Basic net earnings per share:
As reported $ 1.25 $ 1.32
Pro forma 1.23 1.30
Diluted net earnings per share:
As reported $ 1.25 $ 1.32
Pro forma 1.23 1.30
Note 3. Comprehensive Income
The following table discloses Comprehensive Income for the periods
reported in the Consolidated Statements of Income:
Quarter Ended
September 30,
2003 2002
(In thousands)
_______________
Net Income $ 3,115 $3,616
Other Comprehensive Income (Loss), net of tax:
Reclassification adjustment for (gain) loss
included in net income 4 (118)
Unrealized gains (losses) on securities (4,066) 824
_______________
(4,062) 706
_______________
Comprehensive Income (Loss) $ (947) $4,322
===============
Accumulated Comprehensive Income (Loss) $(1,544) $5,350
===============
Nine Months Ended
September 30,
2003 2002
(In thousands)
________________
Net Income $10,201 $10,859
Other Comprehensive Income (Loss), net of tax:
Reclassification adjustment for (gain) loss
included in net income (851) (174)
Unrealized gains (losses) on securities (4,815) 3,874
________________
(5,666) 3,700
________________
Comprehensive Income $ 4,535 $14,559
================
Accumulated Comprehensive Income $(1,544) $ 5,350
================
PART I. ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
SEPTEMBER 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 nine-month period ended September 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.
There is also a risk that when rates begin to move up, new and existing
borrowers will want to fix rates on loans at the lower end of this up cycle.
During a rising rate environment, the rates on deposits will increase as time
deposits mature. These situations, if they occur, 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 three quarters of 2003 compared to the first three quarters of 2002:
Earnings for the first three quarters of 2003 decreased by 6.1% to
$10.2 million, or $1.25 per share. This compares to $10.86 million, or
$1.32 per share, for the first three quarters of 2002. On an annualized
basis, these 2003 totals equate to a 1.3% return on average assets and a
12.3% return on average equity. For this same period in 2002, return on
average assets was 1.4% and return on average equity was 13.6%.
Net interest income for the first nine months of 2003 was $25.08 million,
compared to $28.25 million for 2002. This represents a decrease of 11.2%.
This decrease resulted from a forty-eight basis point decrease in the net
interest margin. The primary reason for the decrease in margin was that the
Corporation lost 100 basis points from the repricing of its earning assets
from the first nine months of 2002 to the first nine months of 2003, while
it was only able to decrease its cost of funds by 61 basis points. This
decline was partially offset by a $12.6 million or 1.3% increase in average
earning assets. However, all of 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 $595.5 million
during the first nine months of 2002 to $566.5 million during the first
nine months of 2003. During these same periods, the average balances of the
investment securities portfolio increased from $369.7 million to $397.0
million, and average balances of federal funds sold increased from $10.9
million to $25.4 million. This change in the mix of average earning assets
had a negative impact on margin because the yield on the loan portfolio for
the first nine months of 2003 was 6.06%, while the yields on the investment
portfolio and federal funds sold were only 4.39% and 1.20%, respectively.
This change in mix 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 of these
factors put pressure on the Corporation's ability to grow loans and 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. Overall, loan quality remains good. Classified assets to
capital were 12.5% at September 30, 2003, compared to 16.2% at September 30,
2002. The percentage of loans past due 30 days or more was 1.73% at
September 30, 2003, compared to 2.26% at September 30, 2002. The Reserve for
Loan Losses as a percentage of total loans increased from 1.03% of net loans
at the end of 2002 to 1.07% at the end of the third quarter of 2003. During
the first nine months of 2003, net charge-offs totaled $1,961,000, compared
to $2,111,000 for the same period of 2002. At the end of the third quarter
of 2003, the ratio of non-performing loans to total loans remained low at
..49%, compared to .70% at December 31, 2002 and .68% at September 30, 2002.
Also, at September 30, 2003, the coverage of the reserve for loan losses to
non-performing loans was 218%, compared to 165% at September 30, 2002.
Management is committed to not relaxing its underwriting standards. Based
on these evaluations, the reserve amounts maintained at the end of the
third quarter of 2003 and at the end of 2002 were deemed adequate to cover
exposure within the Corporation's loan portfolio.
The Provision for Loan Losses increased from $2,015,000 during the first nine
months of 2002 to $2,170,000 in the same period of 2003. The level of the
provision for the first nine months 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 reflect
probable losses inherent in the loan portfolio.
Non-interest income grew 15.2%, resulting from a 10.8% increase in fee income
from deposit accounts, a 12.9% increase in insurance commission and fee
income, a 4.1% increase in income from fiduciary activities, an 85.7% increase
in fees from mortgage-related activities and a 4.2% increase in other
non-interest income. 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, an overall increase in premiums in the industry 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 increase in other non-interest
income resulted primarily from a 229.9% increase in retail investment income
to $254,000.
The Corporation recognized $1,362,000 in securities gains during the first
nine months of 2003, compared to gains of $279,000 during the first nine
months of 2002. During 2002 and 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 fourth quarter of 2003 will
depend on the level of long term interest rates during the quarter and their
effect on the prepayment speeds of the mortgage-backed securities in the
investment portfolio. The Corporation will take advantage of this
situation, if it occurs.
Non-interest expenses for the first nine months of 2003 increased by 2.7%
over the same period of 2002. This small increase resulted from a continued
focus on managing these expenses. Salaries and employee benefits were up
2.0%, primarily due to higher pension costs and a 1.1% increase in salary
expenses resulting from normal raises, offset by lower incentive pay and
bonus accruals. Expenses associated with premises and fixed assets
increased by $22,000, or .6%, due to increases in property taxes and
utilities. Other non-interest expenses increased by $351,000, or 5.5%.
This increase resulted from increases in several expense categories;
however, the only category with a material change was marketing, which
increased 48.6%, or $145,000. The reason for the increase was the start of
a new "Branding" campaign.
Changes in the Corporation's income tax expense have generally paralleled
changes in income. The Corporation's effective tax rate decreased from
26.2% for the first nine months of 2002 to 25.8% for the first nine months
of 2003. This decrease 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.
Third quarter of 2003 compared to the third quarter of 2002:
Earnings for the third quarter of 2003 decreased by 13.9% to $3.12 million,
or $.38 per share. This compares to $3.62 million, or $.44 per share, for
the third quarter of 2002. On an annualized basis, the 2003 net income
equates to a 1.2% return on average assets and a 11.2% return on average
equity. For this same period in 2002, return on average assets was 1.4%
and return on average equity was 13.2%.
Net interest income for the third quarter of 2003 was $8.09 million,
compared to $9.42 million for 2002. This represents a decrease of 14.2%.
This decrease resulted from a 49 basis point decrease in the net interest
margin. The primary reason for the decrease in margin was that the
Corporation lost 109 basis points from the repricing of its earning assets
from the third quarter of 2002 to the third quarter of 2003, while it was
only able to decrease its cost of funds by 68 basis points. This decline
in margin was also affected by a $2.8 million or .3% decrease in average
earning assets, along with a change in the mix of these assets. Average
investment securities, federal funds sold and other interest bearing
accounts increased and average loans continued to decline. Average loans
declined from $590.1 million during the third quarter of 2002 to $566.2
million during the third quarter of 2003. During these same periods, the
average balances of the investment securities portfolio increased from
$384.6 million to $390.2 million and federal funds sold and other
interest bearing accounts increased from $8.3 million to $23.9 million.
This change in the mix of average earning assets had a negative impact on
margin because the yield on the loan portfolio for the third quarter of
2003 was 5.83%, while the yield on the investment portfolio was 4.04% and
the yield on federal funds sold and other interest bearing accounts was
1.03%. 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 of these factors put pressure on the Corporation's ability to grow
loans and to maintain 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 decreased from $755,000 during the third
quarter of 2002 to $680,000 in the same quarter of 2003. The level of the
provision decreased due to the overall improvement in the credit quality
of the Corporation's loan portfolio. As previously stated, classified
assets as a percentage of capital improved from 16.2% at September 30, 2002
to 12.5% at September 30, 2003. The percentage of loans past due 30 days or
more decreased from 2.26% to 1.73%. Also, the percentage of non-performing
loans to total loans decreased from .68% to .49%. All of these factors
were taken into consideration in making the decision to lower the provision
for the quarter. 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 17.2%, resulting from a 11.1% increase in income
from deposit accounts, a 6.4% increase in income from fiduciary activities, a
9.3% increase in insurance commission and fee income, a 94.6% increase in
fees from mortgage-related activities and a 13.2% increase in other non-
interest income. The solid increase in income from deposit accounts largely
resulted from increased account activity from the introduction of a new free
checking account, 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. The increase in insurance
commission and fee income resulted from a combination of increased
business activity and overall higher premiums in the insurance industry.
The increase in other non-interest income resulted primarily from an $86,000
increase in retail investment income and a $79,000 gain on the sale of
student loans. Mortgage fee income benefited from the record demand for
loans in this low interest rate environment. The month of August 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). During the month of
September, the rate environment changed as the long end of the interest rate
curve went up, causing mortgage rates to increase. This caused a drastic
decline in mortgage loan activity. As a result, the pipeline for mortgage
loans, both new home loans and refinancing of existing loans, declined
38.4% from June 30, 2003 to September 30, 2003. Even though rates have
dropped back to the lower levels, activity has not increased. Management
believes that the level of mortgage loan fee income for the fourth quarter
of 2003 will be approximately half the average level for the first three
quarters.
The Corporation recognized a securities loss of $6,000 during the third
quarter of 2003, compared to a gain of $188,000 during the third quarter of
2002. In the third quarter of 2002, 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. This opportunity was not available
during the third quarter of 2003. The loss in 2003 resulted from securities
that had been purchased at a premium being called at par.
Non-interest expenses for the third quarter of 2003 increased by only $10,000
over the same period of 2002. This small increase resulted from a continued
focus on managing these expenses. Salaries and employee benefits were up
1.8%, primarily due to higher pension expense. Expenses of premises and fixed
assets and other non-interest expenses decreased by .8% and 2.9%,
respectively. These decreases resulted from decreases 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 25.7%
in the third quarter of 2002 to 25.1% in the third 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 $1.04 billion during the first nine months of 2003. During
this period, loans increased by $8.6 million, or 1.5%. Consumer loans and
business loans continued to decline; however, increases in credit line loans
and real estate loans offset the decline. Due to the lack of loan demand in
its market area, the Corporation purchased approximately $50 million of
mortgage loans in the secondary market. Without these purchases, real
estate loans would have declined due to the continued refinancing of
variable rate mortgage loans to fixed rate loans (which the Corporation
does not hold in its portfolio). The consumer loans continued to decline
because of tighter underwriting standards and continued competition from
low and zero rate loans, especially from the automobile industry. The
decline in business loans from the end of the year was primarily due to
the pay-off of a large loan that moved into its permanent financing phase
with a government agency. Because of low loan demand and the large buildup
in the investment portfolio, the Corporation decided not to aggressively
price deposits, resulting in an $31.0 million decline in deposits and an
$3.4 million decline in federal funds purchased and securities sold under
agreements to repurchase. The Corporation also decreased its Federal Home
Loan Bank borrowings by $1.2 million. The funds to reduce these liabilities
and to purchase the above mentioned loans came primarily from a $12.9
million decrease in investment securities and a $28.0 million decrease in
federal funds sold. Changes in other categories of assets and liabilities
were not considered material in nature and resulted from normal business
activities.
Shareholders' equity decreased from $111.1 million to $109.7 million
during the first nine months 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
loss of $1,544,000 at September 30, 2003. Part of the reason for the decline
was that during the period, approximately $1,362,000 of gross gains were
actually realized. After adjusting for these realized gains, the market
value of the remaining portfolio declined by approximately $4,815,000, net
of taxes. See Note 3 to the Consolidated Financial Statements in this
document for additional information concerning the changes in comprehensive
income. Also, during the first three quarters of 2003, the Corporation
declared dividends of approximately $5,558,000. 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 partially
offset by net earnings for the first three quarters 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 September 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 a 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
September 30, 2003, without approval, the subsidiary bank's dividend paying
ability was limited to approximately $10.2 million.
Also, under regulations controlling national banks, the bank is limited in
the amount it can lend to the Corporation, and such loans are required to be
on a fully secured basis. At September 30, 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 September 30, 2003, the amount of
unfunded commitments outstanding was $113,792,000.
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
September 30, 2003, the amount of outstanding letters of credit was
$5,372,000.
Both of these arrangements are subject to the same credit and underwriting
standards as any other loan agreement.
At any point in time, the Corporation does not know when or if these
commitments will be funded. Generally, if they are funded, they are funded
at various times over the commitment period. As a result, the Corporation is
able to fund them out of normal cash flow. If they were all funded at the
same time, the Corporation has short-term borrowing lines in place to fund
its cash needs.
From a profit standpoint, it would be in the best interest of the Corporation
for all of these outstanding commitments to be funded.
ANALYSIS OF NET INTEREST EARNINGS
The table below shows, for the periods indicated, an analysis of net interest
earnings, including the average amount of interest-earning assets and
interest-bearing liabilities outstanding during the period, the interest
earned or paid on such amounts, the average yields/rates paid and the net
yield on interest-earning assets:
($ In Thousands)
Average Balance
Quarter Nine Months Year
ended ended ended
9/30/03 9/30/03 12/31/02
________ ________ ________
EARNING ASSETS:
Net loans $566,194 $566,467 $591,297
Federal funds sold and other
interest-bearing assets 23,856 25,354 12,986
Securities
Taxable 282,480 284,843 250,970
Nontaxable 107,739 112,133 123,380
________ ________ ________
Totals 980,269 988,797 978,633
________ ________ ________
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 701,826 710,509 701,654
Borrowed funds, federal funds
purchased and other 140,750 135,402 134,639
________ ________ ________
Totals 842,576 845,911 836,293
________ ________ ________
Net amounts $137,693 $142,886 $142,340
======== ======== ========
($ In Thousands)
Interest Income
Quarter Nine Months Year
ended ended ended
9/30/03 9/30/03 12/31/02
________ ________ ________
EARNING ASSETS:
Net loans $ 8,325 $ 25,663 $ 40,022
Federal funds sold and other
interest-bearing assets 62 227 215
Securities:
Taxable 2,669 8,945 13,675
Nontaxable 1,300 4,101 6,139
________ ________ ________
Totals $ 12,356 $ 38,936 $ 60,051
======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits $ 3,018 $ 9,984 $ 17,171
Borrowed funds, federal funds
purchased and other 1,252 3,875 5,705
________ ________ ________
Totals 4,270 13,859 22,876
________ ________ ________
Net interest income $ 8,086 $ 25,077 $ 37,175
======== ======== ========
Yields Earned
And Rates Paid (%)
Quarter Nine Months Year
ended ended ended
9/30/03 9/30/03 12/31/02
________ ________ ________
EARNING ASSETS:
Net loans 5.83% 6.06% 6.77%
Federal funds sold and other
interest-bearing assets 1.03% 1.20% 1.66%
Securities:
Taxable 3.75% 4.20% 5.45%
Nontaxable 4.79% 4.89% 4.98%
________ ________ ________
Totals 5.00% 5.26% 6.14%
________ ________ ________
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 1.71% 1.88% 2.45%
Borrowed funds, federal funds
purchased and other 3.53% 3.83% 4.24%
________ ________ ________
Totals 2.01% 2.19% 2.74%
________ ________ ________
Net yield on earning assets 3.31% 3.39% 3.80%
Note: Yields on tax equivalent
basis would be:
Nontaxable securities 7.37% 7.52% 7.66%
________ ________ ________
Total earning assets 5.28% 5.56% 6.47%
________ ________ ________
Net yield on earning assets 3.56% 3.69% 4.14%
________ ________ ________
PART I. ITEM 3
Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
PART I. ITEM 4
Controls and Procedures
September 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 September 30, 2003. It is the
conclusion of the Corporation's Chief Executive Officer and the Chief
Financial Officer that, as of September 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 have 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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re computation of per-share earnings
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
September 30, 2003. The press release was made to
the public after the market close on October 20,
2003 and included in a Current Report on Form
8-K filed on October 20, 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 nine-month periods ended September 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: November 11, 2003
/s/ Richard T. Haston
____________________________
Richard T. Haston
Executive Vice President,
Chief Financial Officer and
Treasurer
EXHIBIT INDEX:
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