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 September 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 (I.R.S. Employer of incorporation) Identification No.) 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 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $2 Par value 203,494,824 shares -------------------------- ---------------------------- (Class of Stock) (Shares outstanding as of November 9, 2001) National Commerce Financial Corporation and Subsidiaries INDEX TO FORM 10-Q Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets September 30, 2001 and December 31, 2000 3 Consolidated Statements of Income Three and Nine Months Ended September 30, 2001 and 2000 4 Consolidated Statements of Cash Flows Nine Months Ended September 30, 2001 and 2000 5 Notes to Consolidated Financial Statements As of and for the Nine Months Ended September 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
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements National Commerce Financial Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS September 30, 2001 and December 31, 2000
(Unaudited) September 30, December 31, In Thousands Except Share Data 2001 2000 -------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 547,899 446,712 Time deposits in other banks 31,643 32,183 Federal funds sold and other short-term investments 11,982 52,572 Investment securities: Available for sale 2,794,233 2,401,526 Held to maturity (fair values of $1,649,292 and $1,984,700) 1,489,414 2,016,795 Trading account securities 131,374 74,417 Loans 11,516,651 11,008,419 Less allowance for loan losses 150,487 143,614 -------------------------------------------------------------------------------------------------------------------------- Net loans 11,366,164 10,864,805 -------------------------------------------------------------------------------------------------------------------------- Premises and equipment 202,222 204,903 Goodwill 909,541 934,467 Core deposit intangibles 249,035 287,707 Other assets 748,047 429,705 -------------------------------------------------------------------------------------------------------------------------- Total assets $ 18,481,554 17,745,792 ========================================================================================================================== LIABILITIES Deposits: Demand (non-interest-bearing) $ 1,564,212 1,366,178 Savings, NOW and money market accounts 4,834,686 4,474,114 Jumbo and brokered certificates of deposits 1,329,640 2,006,741 Consumer time deposits 4,216,670 4,132,598 -------------------------------------------------------------------------------------------------------------------------- Total deposits 11,945,208 11,979,631 Short-term borrowed funds 1,308,387 1,212,903 Federal Home Loan Bank advances 2,243,509 1,649,055 Long-term debt 39,375 39,379 Other liabilities 487,569 450,064 -------------------------------------------------------------------------------------------------------------------------- Total liabilities 16,024,048 15,331,032 -------------------------------------------------------------------------------------------------------------------------- Capital trust pass-through securities 42,642 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; 204,032,413 and 205,246,098 shares issued 408,064 410,492 Additional paid-in capital 1,726,548 1,765,723 Retained earnings 247,153 165,829 Accumulated other comprehensive income 33,099 22,794 -------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 2,414,864 2,364,838 -------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 18,481,554 17,745,792 --------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 8) See accompanying notes to consolidated financial statements. 3 National Commerce Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Three and Nine Months Ended September 30, 2001 and 2000 (Unaudited)
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- In Thousands Except Per Share Data 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 235,072 250,045 720,293 433,288 Interest and dividends on investment securities: U.S. Treasury 772 2,472 2,209 3,345 U.S. Government agencies and corporations 47,911 56,407 147,093 113,553 States and political subdivisions (primarily tax-exempt) 2,037 2,498 6,946 5,899 Equity and other securities 15,340 13,160 53,291 37,193 Interest and dividends on trading account securities 591 656 2,251 1,652 Interest on time deposits in other banks 299 783 1,010 910 Interest on federal funds sold and other short-term investments 470 3,069 2,510 8,063 --------------------------------------------------------------------------------------------------------------------------- Total interest income 302,492 329,090 935,603 603,903 --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 102,057 132,028 346,223 228,283 Short-term borrowed funds 8,602 21,934 34,011 51,728 Federal Home Loan Bank advances 25,586 25,643 72,690 50,327 Long-term debt 646 648 1,934 832 --------------------------------------------------------------------------------------------------------------------------- Total interest expense 136,891 180,253 454,858 331,170 --------------------------------------------------------------------------------------------------------------------------- Net interest income 165,601 148,837 480,745 272,733 Provision for loan losses 9,623 5,098 22,307 11,139 --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 155,978 143,739 458,438 261,594 --------------------------------------------------------------------------------------------------------------------------- OTHER INCOME Service charges on deposit accounts 29,639 26,640 87,389 42,703 Other service charges and fees 9,427 9,247 27,227 20,096 Trust and employee benefit plan income 11,422 14,275 38,686 18,987 Broker/dealer revenue and other commissions 15,114 9,649 46,382 18,065 Other operating 11,042 7,402 28,660 15,744 Investment securities gains 2,588 4,522 3,883 4,650 --------------------------------------------------------------------------------------------------------------------------- Total other income 79,232 71,735 232,227 120,245 --------------------------------------------------------------------------------------------------------------------------- OTHER EXPENSE Personnel 58,063 57,241 180,410 99,510 Net occupancy 9,610 10,119 28,091 17,590 Equipment 6,399 6,464 18,369 10,104 Goodwill amortization 12,060 11,941 36,180 14,824 Core deposit intangibles amortization 14,389 15,881 44,053 19,075 Conversion/merger expenses 3,122 44,765 3,122 44,765 Losses on interest rate swaps -- 12,324 672 20,006 Other operating 39,562 36,175 115,051 64,974 --------------------------------------------------------------------------------------------------------------------------- Total other expenses 143,205 194,910 425,948 290,848 --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 92,005 20,564 264,717 90,991 Income taxes 34,394 14,775 99,281 37,269 --------------------------------------------------------------------------------------------------------------------------- Net income $ 57,611 5,789 165,436 53,722 --------------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE Basic $ .28 .03 .81 .38 Diluted .28 .03 .80 .38 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 204,308 205,458 205,120 141,289 Diluted 206,723 207,268 207,712 142,954
See accompanying notes to consolidated financial statements. 4 National Commerce Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2001 and 2000 (Unaudited)
In Thousands 2001 2000 --------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 165,436 53,722 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 78,564 44,918 Provision for loan losses 22,307 11,139 Net gain on sales of investment securities (3,883) (4,650) Losses on interest rate swaps 672 20,006 Deferred income taxes 24,780 32,450 Changes in: Trading account securities (56,957) (11,585) Other assets (329,682) (123,422) Other liabilities 34,652 42,199 Other operating activities, net (639) 1 --------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities (64,750) 64,778 --------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from: Maturities and issuer calls of investment securities held to maturity 624,843 -- Sales of investment securities available for sale 78,482 1,403,904 Maturities and issuer calls of investment securities available for sale 962,975 137,821 Purchases of: Investment securities held to maturity (92,720) (1,781,768) Investment securities available for sale (1,390,515) -- Premises and equipment (10,819) (10,377) Net originations of loans (392,209) (411,343) Net cash acquired (paid) in business combinations (12,641) 318,633 --------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (232,604) (343,130) --------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase (decrease) in deposit accounts (171,600) 228,967 Net increase (decrease) in short-term borrowed funds 81,441 106,201 Net increase in FHLB advances 590,412 366,955 Repurchase and retirement of capital trust pass-through securities (7,303) -- Issuances of common stock from exercise of stock options, net 13,571 3,938 Issuances of common stock and other -- 311 Purchase and retirement of common stock (64,943) (25,726) Cash dividends paid (84,167) (49,548) --------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 357,411 631,098 --------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 60,057 352,746 Cash and cash equivalents at beginning of period 531,467 261,296 --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 591,524 614,042 --------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid during the period $ 495,519 299,433 --------------------------------------------------------------------------------------------------------------------------- Income taxes paid during the period $ 79,495 22,707 ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 5 National Commerce Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the Nine Months Ended September 30, 2001 and 2000 (Unaudited) (1) CONSOLIDATION AND PRESENTATION The accompanying unaudited consolidated financial statements of National Commerce Financial Corporation ("NCF") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, 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 position, results of operations and cash flows of NCF 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 NCF's Amended Annual Report on Form 10-K/A for the year ended December 31, 2000. Operating results for the three- and nine-month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. CONSOLIDATION NCF is a bank holding company that provides diverse financial services through a regional network of banking affiliates and a national network of nonbanking affiliates. NCF has two principal lines of business which are operated as business segments: traditional banking and financial enterprises. Financial enterprises include transaction processing, trust and asset management, retail banking consulting and capital markets. NCF'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 NCF: TransPlatinum Service Corp., Commerce Capital Management, Inc., First Mercantile 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 consulting, trust, investment advisory, insurance, broker/dealer and leasing services. All significant intercompany transactions and accounts are eliminated in consolidation. NCF acquired Piedmont Bancorp, Inc. in April 2000; CCB Financial Corporation, First Mercantile Trust and First Mercantile Capital in July 2000; and First Vantage-Tennessee in August 2001 in transactions accounted for as purchases. Accordingly, the results of operations of these acquired companies are included in NCF's operating results only from the dates of acquisition. EARNINGS PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing 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 options (as computed under the treasury stock method) assumed to have been exercised during the period. COMPREHENSIVE INCOME Comprehensive income is the change in equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income for the nine months ended September 30, 2001 and 2000 and accumulated other comprehensive income as of September 30, 2001, December 31, 2000 and September 30, 2000 are comprised of unrealized gains and losses on certain investments in debt and equity securities and certain hedging instruments. 6 National Commerce Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) RESTATEMENTS As a result of technical violations of pooling of interest rules regarding treasury share repurchases and stock options, NCF 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 NCF's Annual Report on Form 10-K/A for the fiscal period ended December 31, 2000. As a result of the foregoing, NCF'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, including condensed financial statements for the nine months ended September 30, 2000, are included in NCF's Annual Report on Form 10-K/A for the fiscal period ended December 31, 2000. Management believes that NCF's consolidated financial statements, as restated, include all adjustments necessary for a fair presentation of NCF's financial position as of September 30, 2000 and its results of operations for the nine months then ended. (3) LOANS A summary of loans at September 30, 2001 and December 31, 2000 follows:
In Thousands 2001 2000 ------------------------------------------------------------------------------------------------------------------ Commercial, financial and agricultural $ 1,300,819 1,223,032 Real estate-construction 2,104,567 1,907,533 Real estate-mortgage 6,521,943 5,959,114 Consumer 1,390,120 1,730,940 Revolving credit 61,896 58,840 Lease financing 155,381 145,883 ------------------------------------------------------------------------------------------------------------------- Gross loans 11,534,726 11,025,342 Less unearned income 18,075 16,923 ------------------------------------------------------------------------------------------------------------------- Total loans $ 11,516,651 11,008,419 -------------------------------------------------------------------------------------------------------------------
(4) ALLOWANCE FOR LOAN LOSSES Following is the activity in the allowance for loan losses during the nine months ended September 30, 2001 and 2000:
In Thousands 2001 2000 ------------------------------------------------------------------------------------------------------------------- Balance at beginning of period $ 143,614 59,597 Provision charged to operations 22,307 11,139 Addition from acquired institutions 1,331 82,228 Recoveries of loans previously charged-off 5,360 3,695 Loan losses charged to allowance (22,125) (13,149) ------------------------------------------------------------------------------------------------------------------- Balance at end of period $ 150,487 143,510 -------------------------------------------------------------------------------------------------------------------
7 National Commerce Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) RISK ASSETS Following is a summary of risk assets at September 30, 2001, December 31, 2000, and September 30, 2000:
September 30, December 31, September 30, In Thousands 2001 2000 2000 -------------------------------------------------------------------------------------------------------------------- Nonaccrual loans $ 15,466 7,219 26,432 Other real estate acquired through loan foreclosures 8,347 5,652 3,219 Restructured loans -- 2,232 2,235 Accruing loans 90 days or more past due 32,426 26,362 7,949 -------------------------------------------------------------------------------------------------------------------- Total risk assets $ 56,239 41,465 39,835 --------------------------------------------------------------------------------------------------------------------
(6) COMPREHENSIVE INCOME The following table presents the components of other comprehensive income and the related tax effects allocated for the nine months ended September 30, 2001 and 2000:
2001 2000 ---------------------------------- ------------------------------------- Before Net Before Net tax Tax of tax tax Tax of tax In Thousands amount expense amount amount expense amount ------------------------------------------------------------------------------------------------------------------------- Unrealized gains on securities: Unrealized gains arising during holding period $ 20,649 (7,995) 12,654 13,555 (5,354) 8,201 Less: Reclassification adjustment for gains realized in net income 3,883 (1,534) 2,349 4,650 (1,837) 2,813 ------------------------------------------------------------------------------------------------------------------------- Other comprehensive income 10,305 5,388 Net income 165,436 53,722 ------------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 175,741 59,110 -------------------------------------------------------------------------------------------------------------------------
(7) PER SHARE DATA The following schedule reconciles the numerators and denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2001 and 2000. Dilutive common shares arise from the potentially dilutive effect of NCF's stock options outstanding.
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------------------------- In Thousand Except Per Share Data 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------------------- BASIC EPS Average common shares outstanding 204,308 205,458 205,120 141,289 Net income $ 57,611 5,789 165,436 53,722 Earnings per share .28 .03 .81 .38 --------------------------------------------------------------------------------------------------------------- DILUTED EPS Average common shares outstanding 204,308 205,458 205,120 141,289 Average dilutive common shares 2,415 1,810 2,592 1,665 --------------------------------------------------------------------------------------------------------------- Adjusted average common shares 206,723 207,268 207,712 142,954 Net income $ 57,611 5,789 165,436 53,722 Earnings per share .28 .03 .80 .38 ---------------------------------------------------------------------------------------------------------------
8 National Commerce Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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 NCF 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 include loan products such as residential mortgages, home equity loans, automobile 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 medium-sized corporations including real estate finance, asset-based lending and residential construction lending. Traditional banking also includes management of NCF'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 institutional broker/dealer activities. The accounting policies of the individual segments are the same as those of NCF. 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 income is presented on a taxable-equivalent basis. Expenses for centrally provided 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. The following tables present condensed income statements and average assets for each reportable segment.
Traditional Financial In Thousands Banking Enterprises Total ------------------------------------------------------------------------------------------------------------------- Quarter ended September 30, 2001: Net interest income $ 168,669 4,798 173,467 Provision for loan loss 9,623 -- 9,623 ------------------------------------------------------------------------------------------------------------------- Net interest income after provision 159,046 4,798 163,844 Non-interest income 43,298 35,934 79,232 Non-interest expense 116,360 26,845 143,205 ------------------------------------------------------------------------------------------------------------------- Income before income taxes 85,984 13,887 99,871 Income taxes 36,843 5,417 42,260 ------------------------------------------------------------------------------------------------------------------- Net income $ 49,142 8,470 57,611 ------------------------------------------------------------------------------------------------------------------- Average assets $ 17,354,164 545,454 17,899,618 Quarter ended September 30, 2000: Net interest income $ 153,551 3,108 156,659 Provision for loan loss 5,098 -- 5,098 ------------------------------------------------------------------------------------------------------------------- Net interest income after provision 148,453 3,108 151,561 Non-interest income 42,102 29,633 71,735 Non-interest expense 172,872 22,038 194,910 ------------------------------------------------------------------------------------------------------------------- Income before income taxes 17,683 10,703 28,386 Income taxes 18,337 4,260 22,597 ------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (654) 6,443 5,789 ------------------------------------------------------------------------------------------------------------------- Average assets $ 16,652,810 425,524 17,078,334
9 National Commerce Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) SEGMENT INFORMATION - continued
Traditional Financial In Thousands Banking Enterprises Total ------------------------------------------------------------------------------------------------------------------- Nine months ended September 30, 2001: Net interest income $ 489,274 13,381 502,655 Provision for loan loss 22,307 -- 22,307 ------------------------------------------------------------------------------------------------------------------- Net interest income after provision 466,967 13,381 480,348 Non-interest income 124,502 107,725 232,227 Non-interest expense 345,011 80,937 425,948 ------------------------------------------------------------------------------------------------------------------- Income before income taxes 246,458 40,169 286,627 Income taxes 105,476 15,715 121,191 ------------------------------------------------------------------------------------------------------------------- Net income $ 140,982 24,454 165,436 ------------------------------------------------------------------------------------------------------------------- Average assets $ 17,168,020 528,523 17,696,543 Nine months ended September 30, 2000: Net interest income $ 280,191 8,975 289,166 Provision for loan loss 11,139 -- 11,139 ------------------------------------------------------------------------------------------------------------------- Net interest income after provision 269,052 8,975 278,027 Non-interest income 63,371 56,874 120,245 Non-interest expense 249,629 41,219 290,848 ------------------------------------------------------------------------------------------------------------------- Income before income taxes 82,794 24,630 107,424 Income taxes 43,932 9,770 53,702 ------------------------------------------------------------------------------------------------------------------- Net income $ 38,862 14,860 53,722 ------------------------------------------------------------------------------------------------------------------- Average assets $ 10,259,575 407,325 10,666,900
(10) SUBSEQUENT EVENTS On July 16, 2001, NCF announced that it had executed an agreement for NCF to acquire SouthBanc Shares, Inc., a financial institution with ten locations and $660 million of assets located in South Carolina. The acquisition is subject to regulatory approval and is expected to close in the fourth quarter of 2001. The transaction is anticipated to be accounted for as a purchase. NCF 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 includes approximately $1.5 billion in deposits and complements NCF's existing branch network in the Southeast and expands its presence in the Carolinas. The branch acquisition is expected to close in the first quarter of 2002, subject to the approval of the appropriate regulatory authorities. The branches were required to be divested for the First Union and Wachovia merger to meet the U.S. Department of Justice's antitrust guidelines. The sale will include deposits, loans and related premises and equipment. NCF has also agreed to offer employment to divested branch personnel. Branches in North Carolina and South Carolina will operate under the name Central Carolina Bank and locations in Virginia and Georgia will take the National Bank of Commerce name. 10 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 financial condition and results of operations of National Commerce Financial Corporation ("NCF" which also may be referred to as "we", "us" or "our") and its wholly-owned subsidiaries for the nine months ended September 30, 2001 and 2000. NCF 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 $10.8 billion state-chartered bank based in North Carolina, National Bank of Commerce ("NBC"), a $7.7 billion national banking association based in Tennessee, and NBC Bank, FSB, a $24 million federal savings bank with branches in Mississippi (collectively, the "Subsidiary Banks"). Additionally, NCF owns 49 percent of First Market Bank, FSB, a $723.8 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 Mercantile"), a provider of processing and other services for retirement plans; First Mercantile Capital Management, Inc. ("First Mercantile Capital"), a provider of professional money management services for employee benefit plans; U.S.I. Alliance and Senior Housing Crime Prevention Foundation Investment Corporation, providers of security programs in the long-term care industry; National 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 supplemental 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 defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to anticipated future operating and financial performance 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 statements. 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 deposit 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. Moreover, 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 material adverse effect on our earnings. . We continue to integrate CCB following our merger with CCB Financial Corporation in July 2000, and costs incurred in such continuing integration and difficulties we might experience in effecting the integration could have a material adverse effect on our efficiency ratio and our product delivery, which could adversely affect our earnings. 11 . We have recently restated our earnings for 1998 through 2000 due to technical violations of pooling-of-interest rules, and any failure to meet consensus 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 currently 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 regulations 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. 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 September 30, 2001 and 2000 NCF acquired Piedmont Bancorp, Inc. in April 2000, CCB Financial Corporation in July 2000 and First Mercantile and First Mercantile Capital in July 2000 in transactions accounted for as purchases. These companies are referred to collectively in the remainder of this discussion as the "Acquired Companies". Amortization of the goodwill and core deposit intangibles recorded in these transactions had a significant impact on the results of operations of both the 2001 and 2000 third quarters as discussed below. Additionally, we acquired First Vantage-Tennessee, a $165 million financial institution located in Knoxville, Tennessee in August 2001 in a transaction that was also accounted for as a purchase. Net income for the three months ended September 30, 2001 totaled $57.6 million compared to 2000's $5.8 million. Third quarter 2000 income included pre-tax conversion/merger expenses related to the Acquired Companies of $44.8 million and a pre-tax loss on interest rate swaps of $12.3 million. Basic and diluted income per share totaled $.28 in third quarter 2001 and $.03 in the third quarter of 2000. Annualized returns on average assets and stockholders' equity were 1.28% and 9.46%, respectively, in 2001 compared to 2000's .13% and .98%. 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. Taxable equivalent net interest income was $173.4 million in the third quarter of 2001, compared to $156.7 million for the third quarter of 2000, a 10.7% increase. During the third quarter of 2001, the Federal Reserve decreased the target federal funds rate twice by a total of 75 basis points, which followed 150 and 125 basis point declines in the first and second quarters of 2001, respectively. Upon each action by the Federal Reserve, the Subsidiary Banks lowered their prime lending rate to keep pace with the changes in funding costs. The Subsidiary Banks' prime rates have fallen from 9.50% at December 31, 2000 to 6.00% at September 30, 2001 and compare to the September 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 4.43% for the third quarter of 2001 compared to third quarter 2000's 4.20% and the 4.40% from second quarter 2001. Our interest rate spread widened to 3.91% compared to the third quarter 2000's 3.49% and second quarter 2001's 3.81%. The tragic events of September 11/th/ dramatically accelerated a weakening economic environment. The short- and long-term impact of reduced consumer confidence, corporate job reductions and increased costs of security cannot be currently assessed but are expected to translate into decreased spending and negative gross domestic product growth for the rest of 2001 and possibly into 2002. Additionally, the U.S. economic downturn is expected to negatively impact the international economy. All of these factors may have a negative effect on our earnings and asset quality. Management believes that tempering forces may improve the long-term outlook. For 12 Table 1 National Commerce Financial Corporation and Subsidiaries AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS Three Months Ended September 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) $11,370,853 237,958 8.31% 10,469,060 253,399 9.64 U.S. Treasury and agency obligations (3) 3,034,442 51,553 6.79 3,237,725 60,609 7.49 States and political subdivision obligations 157,226 3,463 9.24 188,746 3,812 8.08 Other securities 911,581 16,000 7.02 729,463 14,560 7.98 Trading securities 54,379 594 4.37 40,187 668 6.65 Federal funds sold and other short-term investments 52,369 491 3.72 185,855 3,081 6.60 Time deposits in other banks 29,021 299 4.09 47,860 783 6.50 ---------------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 15,609,871 310,358 7.91 14,898,896 336,912 9.01 ------------------- ------------------ Non-earning assets: Cash and due from banks 425,874 376,580 Premises and equipment 203,270 193,787 Goodwill 911,204 911,137 Core deposit premium 253,732 300,926 All other assets, net 495,667 397,008 ----------------------------------------------------------------------------------------------------- Total assets $17,899,618 17,078,334 ===================================================================================================== Interest-bearing liabilities: Savings and time deposits $10,386,353 102,057 3.90% 10,009,798 132,028 5.25 Short-term borrowed funds 1,047,314 8,602 4.34 1,411,844 21,934 6.20 FHLB advances 2,090,236 25,586 4.86 1,532,451 25,643 6.66 Long-term debt 39,376 646 6.58 37,952 648 6.86 ---------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 13,563,279 136,891 4.00 12,992,045 180,253 5.52 ------------------- ------------------ Other liabilities and stockholders' equity: Demand deposits 1,491,593 1,282,276 Other liabilities 386,222 413,713 Capital trust pass-through securities 42,640 49,917 Stockholders' equity 2,415,884 2,340,383 ----------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $17,899,618 17,078,334 ===================================================================================================== Net interest income and net interest margin (4) $ 173,467 4.43% 156,659 4.20 ============================================================================================================================ Interest rate spread (5) 3.91% 3.49 ============================================================================================================================
(1) The taxable equivalent basis is computed using 35% federal and applicable state tax rat 2001 and 2000. (2) The average loan balances include non-accruing loans. Loan fees of $4,992,000 and $3,806,000 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 example, the Federal Reserve cut the target federal funds rate in October 2001 by an additional 50 basis points and may further cut short-term interest rates to combat recession fears and slowdowns in the economy. U.S. Government spending is starting to rise through aid to New York City, bail-outs of the aviation industry and build-up of U.S. military forces. Additionally, a more general economic stimulus package is currently being negotiated between the Bush Administration and Congress. PROVISION FOR LOAN LOSSES The provision for loan losses during the third quarter of 2001 was $9.6 million compared to $6.3 million in the second quarter of 2001 and $5.1 million in the third quarter of 2000. Net loan charge-offs totaled $6.1 million in the third quarter of 2001, $4.7 million in the second quarter of 2001 and $4.7 million in the third quarter of 2000 which represent .21%, .17%, and .18% net charge-offs to average loans (annualized) for the respective periods. The allowance for loan losses as a percent of total loans and leases was 1.31% at September 30, 2001. At September 30, 2000, the allowance amounted to 1.32% of total loans and leases. We track a number of key performance indicators in establishing the allowance for loan losses. As discussed previously, the U.S. economy continues to show signs of weakening and while general economic conditions have deteriorated, our portfolio quality indicators have not deteriorated as dramatically. As a result, our allowance for loan losses remained stable at 1.31% of loans outstanding compared to 1.30% at June 30, 2001. The allocation of components of the allowance at September 30, 2001 are consistent with the amounts at June 30, 2001. The following table summarizes indicators of portfolio quality and the allowance for loan losses as of and for the quarters ended September 30, June 30 and March 31, 2001 and September 30, 2000 (dollars in thousands):
September 30, June 30, March 31, September 30, 2001 2001 2001 2000 ------------------------------------------------------------------------------------------------------------- Loans outstanding $ 11,516,651 11,236,246 11,092,775 10,866,301 Ratio of allowance for loan losses to loans outstanding 1.31% 1.30 1.30 1.32 Average loans outstanding for the period $ 11,370,853 11,142,888 11,033,307 10,469,060 Ratio of annualized net charge-offs to average loans for the period .21% .17 .22 .18 Ratio of recoveries to charge-offs for the period 21.09% 26.29 25.63 28.01 Ratio of non-performing assets to: Loans outstanding and other assets acquired through loan foreclosures .21% .17 .15 .27 Total assets .13% .11 .09 .17 Ratio of total risk assets to: Loans outstanding and other assets acquired through loan foreclosures .49% .44 .36 .37 Total assets .30% .27 .23 .23 Allowance for loan losses to total risk assets 2.68x 2.97 3.57 3.60 =============================================================================================================
Management performs an analysis of the loan portfolio quarterly to determine 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 September 30, 2001 is adequate to absorb estimated probable losses inherent in the loan portfolio. The most recent regulatory agency examinations have not revealed any material problem credits that had not been previously 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, increased from $67.2 million in third quarter 2000 to $76.6 million in third quarter 2001. Institutional broker/dealer revenue and commissions generated by NCF's institutional broker, Capital Markets Group, Inc, 14 increased by $5.7 million, from $5.6 million to $11.3 million, due to higher volumes of broker/dealer transactions. Excluding Capital Markets, non-interest income in third quarter 2001 increased by $3.7 million, or 6% over third quarter 2000. Annualized noninterest income as a percentage of average assets improved to 1.88% for third quarter 2001 compared to 1.80% in the same period of 2000. Non-interest expenses increased to $140.1 million in third quarter 2001 from $137.8 million in third quarter 2000, after excluding non-recurring expenses comprised of the 2000 loss on interest rate swaps and conversion/merger expenses incurred in both quarters. Capital Markets' increased broker/dealer revenues resulted in $3.2 million higher expenses, primarily personnel costs. Excluding Capital Markets and the non-recurring expenses, non-interest expense in third quarter 2001 decreased $.9 million from third quarter 2000. Amortization of goodwill and core deposit intangibles totaled $26.4 million in the third quarter of 2001 compared to $27.8 million during the same period of 2000. As a result of the aforementioned changes, net overhead (noninterest expense less noninterest income and excluding non-recurring expenses and amortization of intangibles) as a percentage of average tangible assets decreased to .82% for the three months ended September 30, 2001 from .96% for the three months ended June 30, 2001 and .97% for the three months ended September 30, 2000. Our cash efficiency ratio (noninterest expense, less intangibles amortization and non-recurring expenses, as a percentage of taxable equivalent net interest income and noninterest income) was 44.97% for the three months ended September 30, 2001, 47.67% and 47.29% for the three months ended June 30 and March 31, 2001, respectively, and 48.16% for the three months ended September 30, 2000. The following schedule presents noninterest income and expense (excluding intangibles amortization and non-recurring expenses) as a percentage of average tangible assets for the three months ended September 30, June 30, and March 31, 2001 and September 30, 2000.
September 30, June 30, March 31, September 30, 2001 2001 2001 2000 ----------------------------------------------------------------------------------------------------------------- Noninterest income 1.88% 1.93 1.83 1.80 ----------------------------------------------------------------------------------------------------------------- Personnel expense 1.38 1.53 1.48 1.44 Occupancy and equipment expense .38 .37 .38 .42 Other operating expense, cash basis .94 .99 .88 .91 ----------------------------------------------------------------------------------------------------------------- Noninterest expense, cash basis 2.70 2.89 2.74 2.77 ----------------------------------------------------------------------------------------------------------------- Net overhead, cash basis .82% .96 .91 .97 =================================================================================================================
Conversion/merger expenses incurred in the third quarter of 2001 totaled $3.1 million and were related to NCF's acquisition of First Vantage-Tennessee and pending acquisitions of SouthBanc Shares, Inc. and the divested branches of First Union and Wachovia. Conversion/merger expenses incurred in the third quarter of 2000 totaled $44.8 million and were related to our merger with CCB Financial Corporation. During the third quarter of 2000, NCF recognized $12.3 million of unrealized losses on interest rate swaps which did not qualify for hedge accounting under SFAS No. 133. We entered into the swaps in the first half of 2000 during a rising interest rate environment to reduce our sensitivity to wholesale funding. When the rate environment changed in the latter half of 2000, we incurred losses on the swaps which were charged to earnings. The swaps were terminated in the first quarter of 2001 at a small loss. Results of Operations - Nine Months Ended September 30, 2001 and 2000 Results of operations for the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000 are impacted significantly by the previously discussed acquisitions of the Acquired Companies. The Acquired Companies were accounted for as purchases and consequently, NCF's 2000 results include the Acquired Companies' operating results only from the dates of acquisition. Additionally, significant amounts of amortization of goodwill and core deposit intangibles have been recognized since the dates of acquisition. Net income for the nine months ended September 30, 2001 totaled $165.4 million which resulted in basic earnings per share of $.81 in 2001 compared to 2000's $53.7 million or $.38 basic earnings per share. 15 Annualized returns on average assets and stockholders' equity were 1.25% and 9.18%, respectively, in 2001 compared to 2000's .67% and 5.85%. 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 $8.9 billion during the 2001 period. The increase was primarily attributable to the Acquired Companies. The net interest margin increased 31 basis points to 4.34% for the 2001 period compared to 2000's 4.03% and the interest rate spread widened to 3.74% compared to 3.39% in 2000. PROVISION FOR LOAN LOSSES The provision for loan losses for the first nine months of 2001 was $22.3 million compared to $11.1 million in 2000. Net loan charge-offs totaled $16.8 million and $9.5 million for 2001 and 2000 and as a percentage of average loans (annualized) were .20% in both 2001 and 2000. NONINTEREST INCOME AND EXPENSE Non-interest income, excluding investment securities transactions, increased from $115.6 million in the first nine months of 2000 to $228.3 million in 2001. Of this increase, $86.1 million is due to the Acquired Companies and $20.6 million resulted from increased broker/dealer revenues generated by Capital Markets. Annualized noninterest income as a percentage of average tangible assets improved to 1.88% in 2001 compared to 1.58% in 2000. Non-interest expenses, after excluding the 2000 loss on interest rate swaps and merger/conversion expenses incurred in both periods, increased to $422.8 million for the first nine months of 2001 from $226.1 million for the same period in 2000. Of this increase, $169.8 million related to the Acquired Companies and $12.9 million was due to higher expenses incurred by Capital Markets. Amortization of goodwill and core deposit intangibles amounted to $80.2 million and $33.9 million, respectively, for the nine months of 2001 and 2000. Our cash efficiency ratio (noninterest expense, less intangibles amortization and non-recurring expenses, as a percentage of taxable equivalent net interest income and noninterest income) was 46.62% for the nine months ended September 30, 2001 and 46.94% for the nine months ended September 30, 2000. The following schedule presents noninterest income and expense (excluding intangibles amortization and non-recurring expenses) as a percentage of average tangible assets for the nine months of 2001 and 2000.
2001 2000 ----------------------------------------------------------------------------------------------------- Noninterest income 1.88% 1.58 ----------------------------------------------------------------------------------------------------- Personnel expense 1.46 1.31 Occupancy and equipment expense .38 .36 Other operating expense, cash basis .94 .85 ----------------------------------------------------------------------------------------------------- Noninterest expense, cash basis 2.78 2.52 ----------------------------------------------------------------------------------------------------- Net overhead, cash basis .90% .94 =====================================================================================================
Financial Condition; Liquidity and Capital Resources Total assets have increased to $18.5 billion at September 30, 2001 from $17.7 billion one year earlier. Quarterly average assets increased to $17.9 billion for the third quarter of 2001 from $17.1 billion for the same quarter in 2000. At September 30, 2001, total risk assets (consisting of nonaccrual loans, foreclosed real estate, restructured loans and accruing loans 90 days or more past due) amounted to $56.2 million or .49% of outstanding loans plus other assets acquired through loan foreclosures. This compares to $41.5 million or .38% at December 31, 2000 and $39.8 million or .37% at September 30, 2000. The largest increase in risk assets was experienced in nonaccrual loans (primarily in commercial and construction lending) and accruing loans 90 days or more past due (primarily in loans secured by 1-4 family residential properties). The allowance for loan losses to risk assets was 2.68x at September 30, 2001 compared to 3.46x at December 31, 2000 and 3.60x at September 30, 2000. Looking forward, management anticipates that further increases in nonperforming loans could be experienced over the next several quarters as a result of previously discussed economic conditions. 16 Table 2 National Commerce Financial Corporation and Subsidiaries AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS Nine Months Ended September 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) $ 11,183,586 729,487 8.72 % 6,252,886 440,373 9.40 U.S. Treasury and agency obligations (3) 2,939,998 157,940 7.17 2,234,642 138,501 7.13 States and political subdivision obligations 169,463 9,275 7.35 148,785 5,212 8.12 Equity securities and other securities (3) 1,022,784 54,879 7.15 708,240 26,250 7.68 Trading account securities 59,529 2,313 5.18 35,074 1,016 6.40 Federal funds sold and other short-term investments 68,398 2,609 5.10 166,582 4,995 6.48 Time deposits in other banks 27,475 1,010 4.92 23,784 3,989 5.11 --------------------------------------------------------------------------------------------------------------------------------- Total earning assets 15,471,233 957,513 8.27 9,569,993 620,336 8.65 ------------------------ --------------------- Non-earning assets: Cash and due from banks 391,440 252,282 Premises and equipment 203,873 97,925 Goodwill 919,791 378,905 Core deposit premium 267,846 118,940 All other assets, net 442,360 248,855 --------------------------------------------------------------------------------------------------------- Total assets $ 17,696,543 10,666,900 ========================================================================================================= Interest-bearing liabilities: Savings and time deposits $ 10,485,919 346,223 4.41 % 6,144,315 228,283 4.96 Short-term borrowed funds 1,070,108 34,011 4.34 1,160,313 51,728 5.97 FHLB advances 1,839,466 72,690 5.28 1,090,271 50,327 6.17 Long-term debt 39,378 1,934 6.58 16,983 832 6.58 --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 13,434,871 454,858 4.53 8,411,882 331,170 5.26 ------------------------ --------------------- Other liabilities and stockholders' equity: Demand deposits 1,398,349 775,154 Other liabilities 407,913 202,722 Capital trust pass-through securities 45,013 49,914 Stockholders' equity 2,410,397 1,227,228 --------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 17,696,543 10,666,900 ========================================================================================================= Net interest income and net interest margin (4) $ 502,655 4.34 % 289,166 4.03 ================================================================================================================================= Interest rate spread (5) 3.74 % 3.39 =================================================================================================================================
(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 $15,783,000 and $9,229,000 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. 17 Federal Home Loan Bank advances have increased $594.5 million since December 31, 2000, primarily to fund loan growth and to replace other sources of borrowed funds. This source of liquidity had an average rate of 5.28% for the nine months ended September 30, 2001. Our capital position has historically been strong as evidenced by the ratio of average tangible equity to average tangible assets of 7.41% and 7.17% for the nine months ended September 30, 2001 and 2000, respectively. The unrealized gains on investment securities available for sale, net of applicable tax expense, increased $10.3 million from December 31, 2000 to result in an after-tax unrealized gain at September 30, 2001 of $33.1 million. As of September 30, 2001, unrealized gains on investment securities available for sale, net of applicable tax expense, increased book value by $.17 per share. On September 17, 2001, NCF resumed a previously announced share repurchase program. During the third quarter of 2001, 570,000 shares of common stock were acquired at an average cost of $23.44 and subsequently retired. The share repurchase program has continued into the fourth quarter; the remaining authorization allows for approximately 4 million shares to be repurchased through December 31, 2002. During the nine months ended September 30, 2001, 2.7 million NCF shares had been repurchased and retired. On October 16, 2001, NCF's Board of Directors declared a quarterly cash dividend of $.15 per common share. The dividend is payable January 2, 2002, to stockholders of record as of December 7, 2001. On July 25, 2001, NCF's common stock was listed on the New York Stock Exchange and began trading under the symbol NCF. Prior to that date, NCF'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 capital and 8% for total capital. Additionally, the Federal Reserve may set capital requirements higher than the minimums we have described for holding companies whose circumstances warrant it. NCF and the Subsidiary Banks continue to maintain higher capital ratios than required under regulatory guidelines. The following table discloses NCF's components of capital, risk-adjusted asset information and capital ratios at September 30, 2001 (dollars in thousands): Tier I capital $ 1,265,004 Tier II capital: Allowable loan loss reserve 150,487 Subordinated debt 13,201 Other 24 ---------------------------------------------------------- Total capital $ 1,428,716 ========================================================== Risk-adjusted assets $13,020,372 Average regulatory assets 16,664,634 Tier I capital ratio 9.72% Total capital ratio 10.97 Leverage ratio 7.59 ==========================================================
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 September 30, 2001. 18 Impact of Recently Issued Accounting Standards In July, 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible 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 goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. Statement 142 will require that goodwill and intangible 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 accordance with Statement 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. NCF is required to adopt the provisions of Statement 141 immediately, except 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 intangible 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 intangible 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 NCF evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, NCF will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments 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, NCF will be required to test the intangible asset for impairment in accordance 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 interim period. In connection with the transitional goodwill impairment evaluation, Statement 142 will require NCF to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, NCF 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. NCF will then have up to six months from the date of adoption 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 NCF must perform the second step of the transitional impairment test. In the second step, NCF 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 liabilities 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 accounting principle in NCF's statement of income. As of the date of adoption, NCF 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 totaled $26.9 million and $36.2 million for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adoption of Statements 141 and 142, it is not 19 practicable to reasonably estimate the impact of adopting these Statements on NCF's consolidated financial statements at the date of this report; however, management does not anticipate that any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. In August 2001, FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes both Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement 142, as discussed above. NCF is required to adopt Statement 144 no later than the year beginning after December 15, 2001, and plans to adopt its provisions for the quarter ending March 31, 2002. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on our financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on NCF's financial statements. 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 income in future periods. NCF's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of NCF's loan and deposit portfolios is such that a significant rise or decline in interest rates may adversely impact net market values and net interest income. NCF is not subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with the Asset/Liability Management Committee ("ALCO"), comprised of senior management. ALCO regularly reviews NCF's interest rate risk position and adopts balance sheet strategies that are intended to optimize net interest income while maintaining market risk within a set of Board-approved guidelines. During the quarter ended March 31, 2001, NCF 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 market risk as disclosed in NCF's Amended Annual Report on Form 10-K/A for the year ended December 31, 2000. 20 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. 21 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 undersigned thereunto duly authorized. NATIONAL COMMERCE FINANCIAL CORPORATION --------------------------------------- Registrant Date: November 13, 2001 /s/ ERNEST C. ROESSLER ---------------------- Ernest C. Roessler President and Chief Executive Officer Date: November 13, 2001 /s/ SHELDON M. FOX ------------------ Sheldon M. Fox Chief Financial Officer Date: November 13, 2001 /s/ MARK A. WENDEL ------------------ Mark A. Wendel Senior Vice President and Chief Accounting Officer 22