-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T+DlQ/8SO7yx73Of0D47U9Qq0kl0AfXac6dAFZ8ohhILErMhiuenfa8FryUa+5cH IjNMs0QLwygfrKSlBdrsYA== 0000931763-01-501476.txt : 20010815 0000931763-01-501476.hdr.sgml : 20010815 ACCESSION NUMBER: 0000931763-01-501476 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMMERCE FINANCIAL CORP CENTRAL INDEX KEY: 0000101844 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 620784645 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16607 FILM NUMBER: 1711790 BUSINESS ADDRESS: STREET 1: ONE COMMERCE SQ CITY: MEMPHIS STATE: TN ZIP: 38150 BUSINESS PHONE: 9014156416 MAIL ADDRESS: STREET 1: ONE COMMERCE SQ CITY: MEMPHIS STATE: TN ZIP: 38150 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL COMMERCE BANCORPORATION DATE OF NAME CHANGE: 19950822 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TENNESSEE BANCSHARES CORP DATE OF NAME CHANGE: 19780820 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TENNESSEE BANSHARES CORP DATE OF NAME CHANGE: 19780525 10-Q 1 d10q.txt FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 period ended June 30, 2001 Commission File Number: 0-6094 NATIONAL COMMERCE FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of issuer as specified in charter) Tennessee 62-0784645 - ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation) One Commerce Square, Memphis, Tennessee 38150 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (901) 523-3434 Indicate by check mark whether the registrant (1) has filed all reports re- quired 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 regis- trant was required to file such reports), and (2) has been subject to such fil- ing requirements for the past 90 days. [_] Yes [X] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes ofcommon stock, as of the latest practicable date. Common Stock, $2 Par value 204,507,598 shares - ------------------------------------ ------------------------------------ (Class of Stock) (Shares outstanding as of August 10, 2001) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- National Commerce Financial Corporation and Subsidiaries INDEX TO FORM 10-Q Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets June 30, 2001 and December 31, 2000................... 3 Consolidated Statements of Income Three and Six Months Ended June 30, 2001 and 2000..... 4 Consolidated Statements of Cash Flows Six Months Ended June 30, 2001 and 2000............... 5 Notes to Consolidated Financial Statements As of and for the Six Months Ended June 30, 2001 and 2000.................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 20 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K....................... 21 Signatures...................................................... 22
PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2001 and December 31, 2000
(Unaudited) June 30, December 31, ---------------------- In Thousands Except Share Data 2001 2000 - --------------------------------------------------- ---------------------- Assets Cash and due from banks $ 522,147 446,712 Time deposits in other banks 39,787 32,183 Federal funds sold and other short-term investments 125,178 52,572 Investment securities: Available for sale 2,501,885 2,401,526 Held to maturity (fair values of $1,649,292 and $1,984,700) 1,645,528 2,016,795 Trading account securities 59,746 74,417 Loans 11,236,246 11,008,419 Less allowance for loan losses 145,659 143,614 - --------------------------------------------------- ---------------------- Net loans 11,090,587 10,864,805 - --------------------------------------------------- ---------------------- Premises and equipment 202,511 204,903 Goodwill 910,421 934,467 Core deposit intangibles 258,042 287,707 Other assets 596,858 429,705 - --------------------------------------------------- ---------------------- Total assets $17,952,690 17,745,792 - ----------------------------------------------------------------------------- Liabilities Deposits: Demand (non-interest-bearing) $ 1,518,771 1,366,178 Savings, NOW and money market accounts 4,566,990 4,474,114 Jumbo and brokered certificates of deposits 1,692,260 2,006,741 Consumer time deposits 4,206,756 4,132,598 - --------------------------------------------------- ---------------------- Total deposits 11,984,777 11,979,631 Short-term borrowed funds 1,116,482 1,212,903 Federal Home Loan Bank advances 1,950,869 1,649,055 Long-term debt 39,376 39,379 Other liabilities 431,024 450,064 - --------------------------------------------------- ---------------------- Total liabilities 15,522,528 15,331,032 - --------------------------------------------------- ---------------------- Capital trust pass-through securities 42,639 49,922 Stockholders' equity Preferred stock, no par value. Authorized 5,000,000 shares; none issued -- -- Common stock, $2 par value. Authorized 400,000,000 shares; 204,359,873 and 205,246,098 shares issued 408,720 410,492 Additional paid-in capital 1,733,388 1,765,723 Retained earnings 220,229 165,829 Accumulated other comprehensive income (loss) 25,186 22,794 - --------------------------------------------------- ---------------------- Total stockholders' equity 2,387,523 2,364,838 - --------------------------------------------------- ---------------------- Total liabilities and stockholders' equity $17,952,690 17,745,792 - -----------------------------------------------------------------------------
Commitments and contingencies See accompanying notes to consolidated financial statements. 3 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income Three and Six Months Ended June 30, 2001 and 2000 (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------ In Thousands Except Per Share Data 2001 2000 2001 2000 - ---------------------------------------- ------------------------------------ Interest income Interest and fees on loans $ 239,072 95,367 485,221 183,243 Interest and dividends on investment securities: U.S. Treasury 796 471 1,437 872 U.S. Government agencies and corporations 48,454 29,472 99,182 57,147 States and political subdivisions (primarily tax-exempt) 2,350 1,686 4,909 3,401 Equity and other securities 17,636 12,022 37,951 24,033 Interest and dividends on trading account securities 761 520 1,659 996 Interest on time deposits in other banks 317 28 711 127 Interest on federal funds sold and other short-term investments 634 2,826 2,041 4,995 - ---------------------------------------- ------------------------------------ Total interest income 310,020 142,392 633,111 274,814 - ---------------------------------------- ------------------------------------ Interest expense Deposits 114,007 49,744 244,166 96,256 Short-term borrowed funds 9,578 17,427 25,409 29,794 Federal Home Loan Bank advances 23,688 12,634 47,104 24,684 Long-term debt 646 92 1,288 184 - ---------------------------------------- ------------------------------------ Total interest expense 147,919 79,897 317,967 150,918 - ---------------------------------------- ------------------------------------ Net interest income 162,101 62,495 315,144 123,896 Provision for loan losses 6,304 3,865 12,684 6,042 - ---------------------------------------- ------------------------------------ Net interest income after provision for loan losses 155,797 58,630 302,460 117,854 - ---------------------------------------- ------------------------------------ Other income Service charges on deposit accounts 30,460 8,521 57,750 16,063 Trust and custodian fees 13,382 2,362 27,264 4,712 Other service charges and fees 9,064 5,837 17,800 10,849 Broker/dealer revenue and other commissions 16,202 3,677 31,268 8,416 Other operating 9,435 4,042 17,618 8,342 Investment securities gains 575 127 1,295 128 - ---------------------------------------- ------------------------------------ Total other income 79,118 24,566 152,995 48,510 - ---------------------------------------- ------------------------------------ Other expense Personnel 62,447 21,362 122,347 42,268 Net occupancy 9,159 3,899 18,481 7,471 Equipment 6,135 1,874 11,970 3,640 Losses on interest rate swaps -- 2,917 672 7,682 Goodwill amortization 12,046 1,527 24,120 2,883 Core deposit intangibles amortization 14,622 1,722 29,664 3,194 Other operating 40,515 14,760 75,489 28,799 - ---------------------------------------- ------------------------------------ Total other expenses 144,924 48,061 282,743 95,937 - ---------------------------------------- ------------------------------------ Income before income taxes 89,991 35,135 172,712 70,427 Income taxes 34,456 11,194 64,887 22,494 - ---------------------------------------- ------------------------------------ Net income $ 55,535 23,941 107,825 47,933 - ------------------------------------------------------------------------------ Earnings per common share Basic $ .27 .22 .52 .44 Diluted .27 .22 .52 .43 Weighted average shares outstanding Basic 205,433 109,425 205,532 108,851 Diluted 207,891 111,151 208,218 110,444
See accompanying notes to consolidated financial statements. 4 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended June 30, 2001 and 2000 (Unaudited)
In Thousands 2001 2000 - ----------------------------------------------------- ------------------------ Operating activities Net income $ 107,825 47,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 55,399 9,365 Provision for loan losses 12,684 6,042 Net gain on sales of investment securities (1,295) (128) Losses on interest rate swaps 672 7,682 Deferred income taxes 5,370 (4,443) Changes in: Trading account securities 14,671 (7,366) Other assets (164,093) (6,908) Other liabilities (15,887) (15,125) Other operating activities, net 1,046 (6,726) - ----------------------------------------------------- ------------------------ Net cash provided by operating activities 16,392 30,326 - ----------------------------------------------------- ------------------------ Investing activities Proceeds from: Maturities and issuer calls of investment securities held to maturity 463,423 -- Sales of investment securities available for sale 64,875 34,068 Maturities and issuer calls of investment securities available for sale 646,200 -- Purchases of: Investment securities held to maturity (90,967) (141,506) Investment securities available for sale (810,079) (136,991) Premises and equipment (8,155) (2,065) Net originations of loans (229,545) (173,281) Net cash acquired in business combinations -- 3,427 - ----------------------------------------------------- ------------------------ Net cash provided (used) by investing activities 35,752 (416,348) - ----------------------------------------------------- ------------------------ Financing activities Net increase in deposit accounts 2,545 135,319 Net increase (decrease) in short-term borrowed funds (96,421) 292,624 Net increase in FHLB advances 299,014 19,398 Net increase in long-term debt -- 7 Repurchase and retirement of capital trust pass- through securities (7,303) 6 Issuances of common stock from exercise of stock options, net 10,731 2,182 Issuances of common stock and other -- 1,406 Purchase and retirement of common stock (51,585) (17,167) Cash dividends paid (53,480) (22,834) - ----------------------------------------------------- ------------------------ Net cash provided by financing activities 103,501 410,941 - ----------------------------------------------------- ------------------------ Net increase in cash and cash equivalents 155,645 24,919 Cash and cash equivalents at beginning of period 531,467 261,296 - ----------------------------------------------------- ------------------------ Cash and cash equivalents at end of period $ 687,112 286,215 - ------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid during the period $ 329,254 150,338 - ------------------------------------------------------------------------------ Income taxes paid during the period $ 35,164 15,138 - ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 5 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements As of and for the Six Months Ended June 30, 2001 and 2000 (Unaudited) (1) Consolidation and Presentation The accompanying unaudited consolidated financial statements of National Commerce Financial Corporation ("NCFC") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accord- ingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the financial po- sition, results of operations and cash flows of NCFC on a consolidated basis, and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with NCFC's Amended Annual Report on Form 10-K/A for the year ended December 31, 2000. Op- erating results for the three- and six-month periods ended June 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Consolidation NCFC is a bank holding company that provides diverse financial services through a regional network of banking affiliates and a national network of nonbanking affiliates. NCFC has two principal lines of business which are op- erated as business segments: traditional banking and financial enterprises. Financial enterprises include transaction processing, trust and asset manage- ment, retail banking consulting and capital markets. NCFC's wholly-owned bank subsidiaries include Central Carolina Bank and Trust Company ("CCB"), National Bank of Commerce, ("NBC") and NBC Bank, FSB (collectively, the "Subsidiary Banks"). The consolidated financial statements also include the accounts and results of operations of the wholly-owned non-bank subsidiaries of NCFC: TransPlatinum Service Corp., Commerce Capital Management, Inc., First Mercan- tile Trust, First Mercantile Capital Management, Inc., U.S.I. Alliance, Senior Housing Crime Prevention Foundation Investment Corporation, National Commerce Capital Trust I and Monroe Properties. Additionally, both CCB and NBC have subsidiaries that provide a variety of services including retail banking con- sulting, trust, investment advisory, insurance, broker/dealer and leasing services. All significant intercompany transactions and accounts are elimi- nated in consolidation. Earnings Per Share Basic earnings per share ("EPS") excludes dilution and is computed by di- viding net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding plus dilutive stock op- tions (as computed under the treasury stock method) assumed to have been exer- cised during the period. Comprehensive Income Comprehensive income is the change in equity during the period from trans- actions and other events and circumstances from non-owner sources. Total com- prehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) for the six months ended June 30, 2001 and 2000 and accumulated other comprehensive income (loss) as of June 30, 2001, December 31, 2000 and June 30, 2000 are comprised of unrealized gains and losses on certain investments in debt and equity securities and certain hedging instruments. (2) Restatements As a result of technical violations of pooling of interest rules regarding treasury share repurchases and stock options, NCFC has restated its historical financial statements for the presentation of nine business combinations as purchases rather than as poolings of interests as previously reported. The reasons for, and financial impact of, the adjustments are described in NCFC's Annual Report on Form 10-K/A for the fiscal period ended December 31, 2000. 6 (2) Restatements -- Continued As a result of the foregoing, NCFC's 2000 consolidated financial statements have been restated for the interim periods of 2000 and 1999, and fiscal years 2000, 1999 and 1998. The restated financial statements for the periods, in- cluding condensed financial statements for the six months ended June 30, 2000, are included in NCFC's Annual Report on Form 10-K/A for the fiscal period ended December 31, 2000. Management believes that NCFC's consolidated finan- cial statements, as restated, include all adjustments necessary for a fair presentation of NCFC's financial position as of June 30, 2000 and its results of operations for the six months then ended. (3) Loans A summary of loans at June 30, 2001 and December 31, 2000 follows:
In Thousands 2001 2000 - -------------------------------------- ---------------------- Commercial, financial and agricultural $ 1,305,261 1,223,032 Real estate-construction 2,058,044 1,907,533 Real estate-mortgage 6,322,347 5,959,114 Consumer 1,352,879 1,730,940 Revolving credit 61,189 58,840 Lease financing 153,769 145,883 - -------------------------------------- ---------------------- Gross loans 11,253,489 11,025,342 Less unearned income 17,243 16,923 - -------------------------------------- ---------------------- Total loans $11,236,246 11,008,419 - --------------------------------------------------------------
(4) Allowance for Loan Losses Following is the activity in the allowance for loan losses during the six months ended June 30, 2001 and 2000:
In Thousands 2001 2000 - ------------------------------------------ ---------------- Balance at beginning of period $143,614 59,597 Provision charged to operations 12,684 6,041 Addition from acquired institutions -- 1,131 Recoveries of loans previously charged-off 3,723 1,848 Loan losses charged to allowance (14,362) (6,556) - ------------------------------------------ ---------------- Balance at end of period $145,659 62,061 - -------------------------------------------------------------
(5) Risk Assets Following is a summary of risk assets at June 30, 2001, December 31, 2000, and June 30, 2000:
June 30, December 31, June 30, In Thousands 2001 2000 2000 - --------------------------------------- -------------------------- Nonaccrual loans $11,780 7,219 1,377 Other real estate acquired through loan foreclosures 7,787 5,652 1,309 Restructured loans -- 2,232 -- Accruing loans 90 days or more past due 29,397 26,362 6,142 - --------------------------------------- -------------------------- Total risk assets $48,964 41,465 8,828 - ----------------------------------------------------------------------
(6) Comprehensive Income The following table presents the components of other comprehensive income and the related tax effects allocated for the six months ended June 30, 2001 and 2000:
2001 2000 -------------------------------------------------- Before Tax Net of Before Tax Net of tax (expense) tax tax (expense) tax In Thousands amount benefit amount amount benefit amount - -------------------------- -------------------------------------------------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during holding period $5,248 (2,073) 3,175 (5,269) 2,081 (3,188) Less: Reclassification adjustment for gains realized in net income 1,295 (512) 783 128 (51) 77 - -------------------------- -------------------------------------------------- Other comprehensive income (loss) 2,392 (3,265) Net income 107,825 47,933 - -------------------------- -------------------------------------------------- Comprehensive income $110,217 44,668 - -------------------------------------------------------------------------------
7 (7) Per Share Data The following schedule reconciles the numerators and denominators of the basic and diluted EPS computations for the three and six months ended June 30, 2001 and 2000. Dilutive common shares arise from the potentially dilutive ef- fect of NCFC's stock options outstanding.
Three Months Six Months Ended June 30, Ended June 30, --------------- --------------- In Thousands Except Per Share Data 2001 2000 2001 2000 - --------------------------------- ------------------------------- Basic EPS Average common shares outstanding 205,433 109,425 205,532 108,851 Net income $55,535 23,941 107,825 47,933 Earnings per share .27 .22 .52 .44 - ------------------------------------------------------------------ Diluted EPS Average common shares outstanding 205,433 109,425 205,532 108,851 Average dilutive common shares 2,458 1,726 2,686 1,593 - --------------------------------- ------------------------------- Adjusted average common shares 207,891 111,151 208,218 110,444 - --------------------------------- ------------------------------- Net income $55,535 23,941 107,825 47,933 Earnings per share .27 .22 .52 .43 - ------------------------------------------------------------------
(8) Contingencies Certain legal claims have arisen in the normal course of business, which, in the opinion of management and counsel, will have no material adverse effect on the financial position of NCFC or its subsidiaries. (9) Segment Information Traditional Banking This segment includes sales and distribution of financial products and services to consumer and corporate customers. These products and services in- clude loan products such as residential mortgages, home equity loans, automo- bile and other personal loan products. Traditional banking also offers various deposit products that are designed for customers' saving and transaction needs. This segment also includes financial services provided to large and me- dium-sized corporations including real estate finance, asset-based lending and residential construction lending. Traditional banking also includes management of NCFC's investment portfolio and non-deposit based funding. Financial Enterprises This segment is comprised of trust services and investment management, transaction processing, retail banking consulting/in-store licensing and in- stitutional broker/dealer activities. The accounting policies of the individual segments are the same as those of NCFC. Transactions between business segments are conducted at fair value and are eliminated for reporting consolidated financial position and results of operations. There are no significant intersegment revenues. Net interest in- come is presented on a taxable-equivalent basis. Expenses for centrally pro- vided services such as data processing, human resources, accounting and other back-office support functions and management overhead are allocated to each segment based upon various statistical information. 8 (9) Segment Information -- Continued The following tables present condensed income statements and average assets for each reportable segment.
Traditional Financial In Thousands banking Enterprises Total - ----------------------------------- ---------------------------------- Quarter ended June 30, 2001: Net interest income $ 164,384 4,591 168,975 Provision for loan loss 6,304 -- 6,304 - ----------------------------------- ---------------------------------- Net interest income after provision 158,080 4,591 162,671 Non-interest income 41,693 37,425 79,118 Non-interest expense 116,829 28,095 144,924 - ----------------------------------- ---------------------------------- Income before income taxes 82,944 13,921 96,865 Income taxes 35,901 5,429 41,330 - ----------------------------------- ---------------------------------- Net income $ 47,043 8,492 55,535 - ----------------------------------------------------------------------- Average assets $17,070,933 522,368 17,604,925 Quarter ended June 30, 2000: Net interest income $ 63,520 3,311 66,831 Provision for loan loss 3,865 -- 3,865 - ----------------------------------- ---------------------------------- Net interest income after provision 59,655 3,311 62,966 Non-interest income 11,775 12,791 24,566 Non-interest expense 38,670 9,391 48,061 - ----------------------------------- ---------------------------------- Income before income taxes 32,760 6,711 39,471 Income taxes 12,834 2,696 15,530 - ----------------------------------- ---------------------------------- Net income $ 19,926 4,015 23,941 - ----------------------------------------------------------------------- Average assets $ 7,146,029 423,017 7,569,046 Six months ended June 30, 2001: Net interest income $ 320,605 8,583 329,188 Provision for loan loss 12,684 -- 12,684 - ----------------------------------- ---------------------------------- Net interest income after provision 307,921 8,583 316,504 Non-interest income 81,204 71,791 152,995 Non-interest expense 228,651 54,092 282,743 - ----------------------------------- ---------------------------------- Income before income taxes 160,474 26,282 186,756 Income taxes 68,633 10,298 78,931 - ----------------------------------- ---------------------------------- Net income $ 91,841 15,984 107,825 - ----------------------------------------------------------------------- Average assets $17,070,933 522,368 17,593,301 Six months ended June 30, 2000: Net interest income $ 126,641 5,867 132,508 Provision for loan loss 6,042 -- 6,042 - ----------------------------------- ---------------------------------- Net interest income after provision 120,599 5,867 126,466 Non-interest income 21,269 27,241 48,510 Non-interest expense 76,756 19,181 95,937 Income before income taxes 65,112 13,927 79,039 Income taxes 25,597 5,510 31,107 - ----------------------------------- ---------------------------------- Net income $ 39,515 8,417 47,932 - ----------------------------------------------------------------------- Average assets $ 7,120,882 398,225 7,519,107
(10) Subsequent Events On July 16, 2001, NCFC announced that it had executed an agreement for NCFC to acquire SouthBanc Shares, Inc., a $660 million financial institution with ten locations in South Carolina. The acquisition is subject to regulatory ap- proval and is expected to close in the fourth quarter of 2001. The transaction is anticipated to be accounted for as a purchas NCFC announced on August 13, 2001 that it had signed a definitive agreement to acquire 37 First Union and Wachovia branches and corresponding ATMs in North Carolina, South Carolina, Georgia and Virginia. The branch acquisition repre- sents approximately $1.5 billion in deposits and complements NCFC's existing branch network in the Southeast and expands its presence in the Carolinas. The branch acquisition is contingent upon completion of the proposed First Union and Wachovia merger, and is expected to close in the first quarter of 2002, subject to the approval of the appropriate regulatory authorities. 9 The branches are to be divested as part of the First Union and Wachovia merger approval process to meet the U.S. Department of Justice's antitrust guidelines. The sale will include deposits, loans and related premises and equipment. NCFC has also agreed to offer employment to divested branch person- nel. Branches in North Carolina and South Carolina will operate under the name Central Carolina Bank, and locations in Virginia and Georgia will take on the National Bank of Commerce name. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our objective is to provide a concise but complete understanding of the fi- nancial condition and results of operations of National Commerce Financial Corporation ("NCFC" which also may be referred to as "we", "us" or "our") and its wholly-owned subsidiaries for the six months ended June 30, 2001 and 2000. NCFC is a registered bank holding company which provides diverse financial services through a regional network of banking subsidiaries and a national network of nonbank subsidiaries. Our banking subsidiaries are Central Carolina Bank and Trust Company ("CCB"), a $10.6 billion state-chartered bank based in North Carolina, National Bank of Commerce ("NBC"), a $7.2 billion national banking association based in Tennessee, and NBC Bank, FSB, a $22 million fed- eral savings bank with branches in Mississippi (collectively, the "Subsidiary Banks"). Additionally, NCFC owns 49 percent of First Market Bank, FSB, a $665 million institution based in Virginia. Our other wholly-owned subsidiaries are TransPlatinum Service Corp., a provider of financial services to the trucking and petroleum industries and bankcard services to merchants; Commerce Capital Management, Inc., an investment advisor; First Mercantile Trust ("First Mer- cantile"), a provider of processing and other services for retirement plans; First Mercantile Capital Management, Inc. ("First Mercantile Capital"), a pro- vider of professional money management services for employee benefit plans; U.S.I. Alliance and Senior Housing Crime Prevention Foundation Investment Cor- poration, providers of security programs in the long-term care industry; Na- tional Commerce Capital Trust I, a special purpose entity formed to offer floating-rate capital trust pass-through securities; and Monroe Properties, an inactive subsidiary that has held foreclosed real estate. Additionally, both CCB and NBC have wholly-owned subsidiaries that provide a variety of services including retail banking consulting, trust, investment advisory, insurance, broker/dealer and leasing services. This discussion and analysis is intended to complement the unaudited financial statements and footnotes and the supple- mental financial data appearing elsewhere in this Form 10-Q, and should be read in conjunction therewith. The following discussion contains certain forward-looking statements as de- fined in the Private Securities Litigation Reform Act of 1995. These forward- looking statements relate to anticipated future operating and financial per- formance measures, including net interest margin, credit quality, business initiatives, growth opportunities and growth rates, among other things. Words such as "expects," "plans," "estimates," "projects," "objectives" and "goals" and similar expressions are intended to identify these forward-looking state- ments. We caution readers that such forward-looking statements are necessarily estimates based on management's judgment, and obtaining the estimated results is subject to a number of risks and uncertainties. Such risks include: . Increases in interest rates could have a material adverse effect on our funding costs and our net interest margin and, consequently, our earnings per share. . Our markets are intensely competitive, and competition in loan and de- posit pricing, as well as the entry of new competitors in our markets through, among other means, de novo expansion and acquisitions could have a material adverse effect on our net interest margin, our ability to recruit and retain associates, our non-interest income and our ability to grow our banking and non-banking businesses at the same rate as we have historically grown. More- over, the Gramm-Leach-Bliley Act has removed many obstacles to bank holding companies entering other financial services businesses. Several larger bank holding companies could enter the transaction processing, asset management, securities brokerage and capital markets businesses in our markets, deploying capital resources that are significantly greater than ours. Such activities could adversely affect our banking and non-banking businesses and have a mate- rial adverse effect on our earnings. . We continue to integrate CCB following our merger with CCB Financial Cor- poration in July 2000, and costs incurred in such continuing integration and difficulties we might experience in effecting the integration could have a ma- terial adverse effect on our efficiency ratio and our product delivery, which could adversely affect our earnings. . We have recently restated our earnings for 1998 through 2000 due to tech- nical violations of pooling-of-interest rules, and any failure to meet consen- sus earnings estimates could have a more pronounced negative impact on our share price than if we had not restated our earnings for those years. . If the domestic economy suffers a longer and deeper slowdown than is cur- rently anticipated, we could experience a decline in credit quality which could have a material adverse effect on our earnings. . We are subject to regulation by federal and state banking agencies and authorities and the Securities and Exchange Commission. Changes in or new reg- ulations could make it more costly for us to do business or could force changes to the way we do business, which could have a material adverse effect on earnings. 10 A variety of factors, including those described above, could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in this report. We do not assume any obligation to update these forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. Results of Operations -- Three Months Ended June 30, 2001 and 2000 Results of operations for the three months ended June 30, 2001 as compared to the three months ended June 30, 2000 are impacted significantly by the pur- chase acquisitions of Piedmont Bancorp, Inc. in April, 2000, CCB Financial Corporation in July, 2000 and First Mercantile and First Mercantile Capital in July, 2000. These companies are referred to collectively in the remainder of this discussion as the "Acquired Companies". Net income for the three months ended June 30, 2001 totaled $55.5 million compared to 2000's $23.9 million. Second quarter 2000 income included a loss on interest rate swaps of $2.9 million. Basic and diluted income per share to- taled $.27 in second quarter 2001 and $.22 in the second quarter of 2000. Annualized returns on average assets and stockholders' equity were 1.27% and 9.19%, respectively, in 2001 compared to 2000's 1.27% and 14.22%. Net Interest Income Average Balances and Net Interest Income Analyses on a taxable equivalent basis for each of the periods are included in Table 1. Net interest income was $169 million in the second quarter of 2001, compared to $160.2 million for the first quarter of 2001, a 5.5% increase. During the second quarter of 2001, the Federal Reserve decreased the target federal funds rate three times by a total of 125 basis points after the 150 basis point decline in the first quarter of 2001. Changes in the federal funds rate generally affect other interest rates. The Subsidiary Banks' prime rates have fallen from 9.50% at December 31, 2000 to 6.75% at June 30, 2001 and compare to the June 30, 2000 prime rate of 9.50%. With the liability sensitive nature of our balance sheet, in times of falling interest rates, the decrease in interest expense from lower cost of interest-bearing liabilities exceeds the decrease in interest income from the lower yield on earning assets. Consequently, our net interest margin improved to 4.40% for the second quarter of 2001 compared to first quarter 2001's 4.17% and our interest rate spread widened to 3.81% compared to the first quarter's 3.50%. The net interest margin for the second quarter of 2000, which excludes the Acquired Companies, was 3.80% and the interest rate spread was 3.22%. Man- agement expects additional decreases in short-term interest rates in 2001 as the Federal Reserve acts to combat recession fears and perceived slowdowns in the economy. We expect that such actions will not impact our net interest in- come significantly. Provision for Loan Losses The provision for loan losses during the second quarter of 2001 was $6.3 million compared to $6.4 million in the first quarter of 2001 and $3.9 million in the second quarter of 2000. Net loan charge-offs (annualized) were .17%, .22% and .19% for the respective periods. The allowance for loan losses as a percent of total loans and leases was 1.30% at June 30, 2001 and March 31, 2001. At June 30, 2000, prior to the purchase of the Acquired Companies, the allowance amounted to 1.45% of total loans and leases. The Company tracks a number of key performance indicators in establishing the allowance for loan losses. Management believes that indicators of portfo- lio quality and general economic conditions have not changed significantly since March 31, 2001. Consequently, the allowance for loan losses and the al- location of components of the allowance at June 30, 2001 are consistent with the amounts at March 31, 2001. The following table summarizes indicators of portfolio quality and the allowance for loan losses at June 30, 2001 and March 31, 2001 and June 30, 2000 and for the quarters then ended (dollars in mil- lions):
June 30, March 31, June 30, 2001 2001 2000 - ------------------------------------------------- ------------------------- Loans outstanding $11,236 11,093 4,266 Ratio of allowance for loan losses to loans outstanding 1.30% 1.30 1.45 Average loans outstanding for the period $11,143 11,033 4,224 Ratio of annualized net charge-offs to average loans for the period .17% .22 .19 Ratio of recoveries to charge-offs for the period 26.29% 25.63 32.48 Ratio of non-performing assets to: Loans outstanding and other assets acquired through loan foreclosures .17% .15 .06 Total assets .11% .09 .04 Ratio of total risk assets to: Loans outstanding and other assets acquired through loan foreclosures .44% .36 .21 Total assets .27% .23 .12 Allowance for loan losses to total risk assets 2.97x 3.57 7.03 - -------------------------------------------------------------------------------
11 Management performs an analysis of the loan portfolio quarterly to deter- mine the adequacy of the allowance for loan losses. The overall allowance analysis considers the results of detailed loan reviews, quantitative and qualitative indicators of the current quality of the loan portfolio and the inherent risk not captured in the reviews and assessments of individual loans or pools of loans. Based on its review, Management believes that the allowance for loan losses at June 30, 2001 is adequate to absorb estimated probable losses inherent in the loan portfolio. The most recent regulatory agency exam- inations have not revealed any material problem credits that had not been pre- viously identified; however, future regulatory examinations may result in the regulatory agencies requiring additions to the allowance for loan losses based on information available at the date of examination. Noninterest Income and Expense Non-interest income, excluding investment securities transactions, in- creased from $24.4 million in second quarter 2000 to $78.5 million in second quarter 2001. Approximately $44.3 million of the increase is attributable to the Acquired Companies. In addition, institutional broker/dealer revenue and commissions generated by NCFC's institutional broker, Capital Markets Group, Inc, increased by $8.5 million, from $3.3 million to $11.8 million, due to higher volumes of broker/dealer transactions. Excluding Capital Markets and growth resulting from the Acquired Companies, non-interest income in second quarter 2001 increased by $1.3 million, or 5.3% over second quarter 2000. Annualized noninterest income as a percentage of average assets improved to 1.93% for second quarter 2001 compared to 1.33% in the same period of 2000. Non-interest expenses increased to $144.9 million in second quarter 2001 from $45.1 million in second quarter 2000, after excluding the 2000 loss on interest rate swaps. Approximately $86.3 million of the increase is attribut- able to the Acquired Companies. In addition, Capital Markets' increased broker/dealer revenues resulted in $5.3 million higher expenses, primarily personnel costs. Excluding Capital Markets and growth resulting from the Ac- quired Companies, non-interest expense in second quarter 2001 increased by $8.2 million, or 18.2% over second quarter 2000 due in part to expansion of service delivery in the NCFC markets and general growth of our operations. Ad- ditionally, $3.5 million of expenses during the quarter were incurred in con- nection with the restatement of our prior financial statements and the retire- ment of a senior officer. As a result of the aforementioned changes, net overhead (noninterest ex- pense less noninterest income) as a percentage of average tangible assets in- creased to .96% for the three months ended June 30, 2001 from .91% for the three months ended March 31, 2001 and .94% for the three months ended June 30, 2000. Our cash efficiency ratio (noninterest expense, less goodwill and core deposit amortization, as a percentage of taxable equivalent net interest in- come and noninterest income) was 47.67% for the three months ended June 30, 2001, 47.29% for the three months ended March 31, 2001 and 45.84% for the three months ended June 30, 2000. The following schedule presents noninterest income and expense as a percentage of average tangible assets for the three months ended June 30, 2001, March 31, 2001 and June 30, 2000 (excluding good- will and core deposit amortization).
June 30, March 31, June 30, 2001 2001 2000 ----------------------- Noninterest income 1.93 1.83 1.33 - ------------------------------------ ----------------------- Personnel expense 1.53 1.48 1.16 Occupancy and equipment expense .37 .38 .31 Other operating expense, cash basis .99 .88 .80 - ------------------------------------ ----------------------- Noninterest expense, cash basis 2.89 2.74 2.27 - ------------------------------------ ----------------------- Net overhead, cash basis .96% .91 .94 - ----------------------------------------------------------------
12 T A B L E 1 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Average Balances and Net Interest Income Analysis Three Months Ended June 30, 2001 and 2000 (Taxable Equivalent Basis--Dollars in Thousands) (1)
2001 2000 ---------------------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate - ----------------------- ---------------------------------------------------- Earning assets: Loans (2) $11,142,888 242,174 8.71% 4,224,071 97,179 9.24 U.S. Treasury and agency obligations (3) 2,893,493 52,086 7.21 1,772,174 30,361 6.85 States and political subdivision obligations 168,315 2,802 6.68 126,701 2,582 7.94 Other securities (3) 1,028,326 18,059 7.03 693,034 13,220 7.63 Trading account securities 60,125 799 5.31 35,586 532 5.98 Federal funds sold and other short-term investments 52,800 657 4.99 170,119 2,827 6.68 Time deposits in other banks 25,166 317 5.04 13,026 27 0.86 - ----------------------- ---------------------------------------------------- Total earning assets (3) 15,371,113 316,894 8.26 7,034,711 146,728 8.37 ------------- ------------- Non-earning assets: Cash and due from banks 401,156 181,541 Premises and equipment 202,822 51,290 Goodwill 918,208 115,416 Core deposit premium 267,613 28,123 All other assets, net 444,013 157,965 - ----------------------- ----------- --------- Total assets $17,604,925 7,569,046 - ------------------------------------ --------- Interest-bearing liabilities: Savings and time deposits $10,417,256 114,007 4.39% 4,222,974 49,743 4.74 Short-term borrowed funds 984,703 9,578 4.07 1,158,699 17,427 5.82 Federal Home Loan Bank advances 1,878,033 23,688 5.06 852,073 12,635 5.96 Long-term debt 39,379 646 6.58 6,381 92 5.76 - ----------------------- ---------------------------------------------------- Total interest-bearing liabilities 13,319,371 147,919 4.45 6,240,127 79,897 5.15 ------------- ------------- Other liabilities and stockholders' equity: Demand deposits 1,417,129 512,678 Other liabilities 402,538 89,347 Capital trust pass- through securities 42,637 49,911 Stockholders' equity 2,423,250 676,983 - ----------------------- ----------- --------- Total liabilities and stockholders' equity $17,604,925 7,569,046 - ------------------------------------ --------- Net interest income and net interest margin (4) $168,975 4.40% 66,831 3.80 - ----------------------- ------------- ------------- Interest rate spread (5) 3.81% 3.22 - ----------------------- ---- ----
(1) The taxable equivalent basis is computed using 35% federal and applicable state tax rates in 2001 and 2000. (2) The average loan balances include non-accruing loans. Loan fees of $5,585,000 and $2,832,000 for 2001 and 2000, respectively, are included in interest income. (3) The average balances for debt and equity securities exclude the effect of their mark-to-market adjustment, if any. (4) Net interest margin is computed by dividing net interest income by total earning assets. (5) Interest rate spread equals the earning asset yield minus the interest- bearing liability rate. - -------------------------------------------------------------------------------- 13 Results of Operations -- Six Months Ended June 30, 2001 and 2000 Results of operations for the six months ended June 30, 2001 as compared to the six months ended June 30, 2000 are impacted significantly by the previ- ously discussed purchase of the Acquired Companies. Net income for the six months ended June 30, 2001 totaled $107.8 million which resulted in basic earnings per share of $.52 in 2001 compared to 2000's $47.9 million or $.44 basic earnings per share. Annualized returns on average assets and stockhold- ers' equity were 1.24% and 9.03%, respectively, in 2001 compared to 2000's 1.30% and 14.51%. Net Interest Income Average Balances and Net Interest Income Analyses on a taxable equivalent basis for each of the periods are included in Table 2. Average earning assets increased by $8.5 billion during the 2001 period. The increase was attribut- able to the Acquired Companies. The net interest margin increased 42 basis points to 4.28% for the 2001 period compared to 2000's 3.86% and the interest rate spread widened to 3.65% compared to 3.29% in 2000. Provision for Loan Losses The provision for loan losses for the first six months of 2001 was $12.7 million compared to $6 million in 2000. Net loan charge-offs as a percentage of average loans (annualized) were .19% in 2001 and .23% in 2000. Noninterest Income and Expense Non-interest income, excluding investment securities transactions, in- creased from $48.4 million in the first six months of 2000 to $151.7 million in 2001. Of this increase, $86.1 million is due to the Acquired Companies and $14.8 million resulted from increased broker/dealer revenues generated by Cap- ital Markets. Annualized noninterest income as a percentage of average tangi- ble assets improved to 1.88% in 2001 compared to 1.34% in 2000. Non-interest expenses increased to $282.7 million in 2001 from $95.9 million for the same period in 2000. Of this increase, $169.8 million related to the Acquired Com- panies and $9.7 million was due to higher expenses incurred by Capital Mar- kets. Our cash efficiency ratio (noninterest expense, less goodwill and core de- posit amortization, as a percentage of taxable equivalent net interest income and noninterest income) was 47.48% for the six months ended June 30, 2001 and 45.40% for the six months ended June 30, 2000. The following schedule presents noninterest income and expense as a percentage of average tangible assets for the six months ended June 30, 2001 and 2000 (excluding goodwill and core de- posit amortization).
2001 2000 ---------- Noninterest income 1.88% 1.34 - ------------------------------------ ---------- Personnel expense 1.50 1.17 Occupancy and equipment expense .37 .31 Other operating expense, cash basis .94 .79 - ------------------------------------ ---------- Noninterest expense, cash basis 2.81 2.27 - ------------------------------------ ---------- Net overhead, cash basis .93 .93 - -----------------------------------------------
14 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Average Balances and Net Interest Income Analysis Six Months Ended June 30, 2001 and 2000 (Taxable Equivalent Basis--Dollars in Thousands) (1)
2001 2000 ---------------------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate - ----------------------- ---------------------------------------------------- Earning assets: Loans (2) $11,088,400 491,529 8.93% 4,121,633 186,974 9.12 U.S. Treasury and agency obligations (3) 2,891,993 106,387 7.21 1,727,589 58,852 6.85 States and political subdivision obligations 175,682 5,812 6.68 128,584 5,212 7.94 Other securities (3) 1,079,308 38,878 7.20 697,512 26,250 7.53 Trading account securities 62,147 1,720 5.53 32,489 1,016 6.25 Federal funds sold and other short-term investments 76,562 2,118 5.58 156,839 4,995 6.40 Time deposits in other banks 26,676 711 5.37 11,615 127 2.21 - ----------------------- ---------------------------------------------------- Total earning assets (3) 15,400,768 647,155 8.45 6,876,261 283,426 8.27 ------------- ------------- Non-earning assets: Cash and due from banks 373,937 189,451 Premises and equipment 204,180 49,468 Goodwill 924,156 109,865 Core deposit premium 275,020 26,947 All other assets, net 415,240 173,964 - ----------------------- ----------- --------- Total assets $17,593,301 7,425,956 - ------------------------------------ --------- Interest-bearing liabilities: Savings and time deposits $10,536,525 244,166 4.67% 4,190,335 96,256 4.62 Short-term borrowed funds 1,081,694 25,409 4.89 1,033,166 29,794 5.82 Federal Home Loan Bank advances 1,712,002 47,104 5.55 866,751 24,684 5.73 Long-term debt 39,379 1,288 6.57 6,481 184 5.76 - ----------------------- ---------------------------------------------------- Total interest-bearing liabilities 13,369,600 317,967 4.80 6,096,733 150,918 4.98 ------------- ------------- Other liabilities and stockholders' equity: Demand deposits 1,350,954 518,806 Other liabilities 418,933 95,971 Capital trust pass- through securities 46,220 49,911 Stockholders' equity 2,407,594 664,535 - ----------------------- ----------- --------- Total liabilities and stockholders' equity $17,593,301 7,425,956 - ------------------------------------ --------- Net interest income and net interest margin (4) $329,188 4.28% 132,508 3.86 - ----------------------- ------------- ------------- Interest rate spread (5) 3.65 3.29 - ----------------------- ---- ----
(1) The taxable equivalent basis is computed using 35% federal and applicable state tax rates in 2001 and 2000. (2) The average loan balances include non-accruing loans. Loan fees of $10,758,000 and $5,390,000 for 2001 and 2000, respectively, are included in interest income. (3) The average balances for debt and equity securities exclude the effect of their mark-to-market adjustment, if any. (4) Net interest margin is computed by dividing net interest income by total earning assets. (5) Interest rate spread equals the earning asset yield minus the interest- bearing liability rate. - -------------------------------------------------------------------------------- 15 Financial Condition; Liquidity and Capital Resources Total assets have increased $10.4 billion since June 30, 2000 with the ma- jority of the increase attributable to the Acquired Companies. Corresponding- ly, average assets have increased $10 billion from $7.6 billion for the quar- ter ended June 30, 2000 to $17.6 billion for the quarter ended June 30, 2001. Federal Home Loan Bank advances have increased $301.8 million since Decem- ber 31, 2000, primarily to fund loan growth and to replace other sources of borrowed funds. At June 30, 2001, total risk assets (consisting of nonaccrual loans, fore- closed real estate, restructured loans and accruing loans 90 days or more past due) amounted to $49.0 million or .44% of outstanding loans plus other assets acquired through loan foreclosures. This compares to $41.5 million or .38% at December 31, 2000 and $8.8 million or .21% at June 30, 2000, prior to purchase of the Acquired Companies. The allowance for loan losses to risk assets was 2.97x at June 30, 2001 compared to 3.46x at December 31, 2000 and 7.03x at June 30, 2000. Our capital position has historically been strong as evidenced by the ratio of average tangible equity to average tangible assets of 7.37% and 7.24% for the six months ended June 30, 2001 and 2000, respectively. The unrealized gains on investment securities available for sale, net of applicable tax ex- pense, increased $2.4 million from December 31, 2000 to result in an after-tax unrealized gain at June 30, 2001 of $25.2 million. As of June 30, 2001, unrealized gains on investment securities available for sale, net of applica- ble tax expense, increased book value per share by $.12. On July 18, 2001, NCFC's Board of Directors declared a quarterly cash divi- dend of $.15 per common share. The dividend is payable October 1, 2001, to stockholders of record as of September 14, 2001. On July 25, 2001, NCFC's com- mon stock was listed on the New York Stock Exchange and began trading under the symbol NCF. Prior to that date, NCFC's common stock was traded on the Nasdaq National Market under the symbol NCBC. Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines requiring a minimum leverage ratio relative to total assets and minimum capital ratios relative to risk-adjusted assets. The minimum leverage ratio is 3% if the holding company has the highest regulatory rating and meets other requirements but the leverage ratio required may be raised from 100 to 200 basis points if the holding company does not meet these requirements. The minimum risk-adjusted capital ratios are 4% for Tier I capi- tal and 8% for total capital. Additionally, the Federal Reserve may set capi- tal requirements higher than the minimums we have described for holding compa- nies whose circumstances warrant it. NCFC and the Subsidiary Banks continue to maintain higher capital ratios than required under regulatory guidelines. The following table discloses NCFC's components of capital, risk-adjusted asset information and capital ratios at June 30, 2001: Tier I capital $ 1,236,453 Tier II capital: Allowable loan loss allowance 145,659 Subordinated debt 13,201 Other 85 ------------------------------ ---------------- Total capital $ 1,395,398 ---------------------------------------------- Risk-adjusted assets $12,545,400 Average regulatory assets 16,372,982 Tier I capital ratio 9.86% Total capital ratio 11.12 Leverage ratio 7.55
---------------------------------------------------------- Each of the Subsidiary Banks are subject to similar risk-based and leverage capital requirements adopted by their applicable federal banking agency. Each was in compliance with the applicable capital requirements as of June 30, 2001. Impact of Recently Issued Accounting Standards In July, 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other In- tangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase business combination must meet to be recognized and reported apart from good- will, noting that any purchase price allocable to an assembled workforce may not be 16 accounted for separately. Statement 142 will require that goodwill and intan- gible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to the estimated residual values, and reviewed for impairment in accor- dance with Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. NCFC is required to adopt the provisions of Statement 141 immediately, ex- cept with regard to business combinations initiated prior to July 1, 2001, which it expects to account for using the pooling-of-interests method, and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any in- tangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. Goodwill and intangi- ble assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require, upon adoption of Statement 142, that NCFC eval- uate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to may any necessary reclassifications in order to conform with the new criteria in statement 141 for recognition apart form goodwill. Upon adoption of Statement 142, NCFC will be required to reas- sess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period ad- justments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, NCFC will be required to test the intangible asset for impairment in ac- cordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first in- terim period. In connection with the transitional goodwill impairment evaluation, State- ment 142 will require NCFC to perform an assessment of whether there is an in- dication that goodwill is impaired as of the date of adoption. To accomplish this, NCFC must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. NCFC will then have up to six months from the date of adop- tion to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and NCFC must perform the second step of the transi- tional impairment test. In the second step, NCFC must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets (recognized and unrecognized) and lia- bilities in a manner similar to a purchase price allocation in accordance with Statement 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in ac- counting principle in NCFC's statement of income. As of the date of adoption, NCFC expects to have unamortized goodwill in the amount of $886.3 million and unamortized identifiable intangible assets in the amount of $230.1 million, all of which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill totalled $26.9 million and $24.1 million for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. Because of the extensive effort needed to comply with adoption of Statements 141 and 142, it is not practicable to reasonably estimated the impact of adopting these Statements on NCFC's consolidated financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest in- come in future periods. NCFC's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of NCFC's loan and de- posit portfolios is such that a significant rise or decline in interest rates may adversely impact net market values and net interest income. NCFC is not subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with the Asset/Liability Management Com- mittee ("ALCO"), comprised of senior management. ALCO regularly reviews NCFC's interest rate risk position and adopts balance sheet strategies that are in- tended to optimize net interest income while maintaining market risk within a set of Board-approved guidelines. During the quarter ended March 31, 2001, NCFC terminated $1.5 billion notional amount of pay fixed/receive variable interest rate swap agreements. Management believes that there have been no other significant changes in mar- ket risk as disclosed in NCFC's Amended Annual Report on Form 10-K/A for the year ended December 31, 2000. 17 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K A Current Report on Form 8-K dated March 20, 2001 was filed March 26, 2001 under Item 4 reporting a change in accountants. This report was amended on Form 8-K/A filed June 11, 2001 and further amended on Form 8-K/A filed July 9, 2001. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the under- signed thereunto duly authorized. National Commerce Financial Corporation /s/ Ernest C. Roessler By_______________________________________ Ernest C. Roessler President and Chief Executive Officer Date: August 13, 2001 /s/ Sheldon M. Fox By_______________________________________ Sheldon M. Fox Chief Financial Officer Date: August 13, 2001 /s/ Mark A. Wendel By_______________________________________ Mark A. Wendel Senior Vice President and Chief Accounting Date: August 13, 2001 19 -----END PRIVACY-ENHANCED MESSAGE-----