-----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, DfuhAEtRXCLYmsUx+oEnswBTMe8Yltls8jJmavQrozjhUMaKKuXkTu5JhIo23AIx liWQxPH8vCX+BYmrkyqpfA== 0000950168-02-000459.txt : 20020415 0000950168-02-000459.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950168-02-000459 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020326 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-16607 FILM NUMBER: 02585286 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: UNITED TENNESSEE BANSHARES CORP DATE OF NAME CHANGE: 19780525 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 10-K 1 d10k.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________________ to ______________________ COMMISSION FILE NUMBER: 0-6094 NATIONAL COMMERCE FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Tennessee 62-0784645 - ---------------------------------------- ------------------------------------ (State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
One Commerce Square, Memphis, Tennessee 38150 - -------------------------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (901) 523-3434 Former Name of Registrant: National Commerce Bancorporation Securities issued pursuant to Section 12(b) of the Act: None ---- Securities issued pursuant to Section 12(g) of the Act: Common Stock, $2 par value -------------------- 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. [X] Yes [_] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 20, 2002 was $5,344,679,812. On March 20, 2002, there were 205,930,037 outstanding shares of the Registrant's $2.00 par value Common Stock. DOCUMENT INCORPORATED BY REFERENCE PORTIONS OF THE PROXY STATEMENT OF REGISTRANT FOR THE ANNUAL MEETING OF SHAREHOLDERS HELD ON APRIL 24, 2002 ARE INCORPORATED IN PART III OF THIS REPORT. ================================================================================ CROSS REFERENCE INDEX
Page PART I. ---- Item 1. Business............................................................................. 3 Description.......................................................................... 3 Average Balance Sheets............................................................... 14 Net Interest Income Analysis -- Taxable Equivalent Basis............................. 14 Net Interest Income and Volume/Rate Variance -- Taxable Equivalent Basis............. 15 Investment Securities Portfolio...................................................... 20 Investment Securities -- Maturity/Yield Schedule..................................... 20 Types of Loans....................................................................... 18 Maturities and Sensitivities of Loans to Changes in Interest Rates................... 18 Nonperforming and Risk Assets........................................................ 26 Loan Loss Experience................................................................. 24 Average Deposits..................................................................... 21 Maturity Distribution of Large Denomination Time Deposits............................ 30 Return on Equity and Assets.......................................................... 8 Short-Term Borrowings................................................................ 46 Item 2. Properties........................................................................... 7 Item 3. Legal Proceedings.................................................................... 7 Item 4. Submission of Matters to a Vote of Security Holders.................................. 7 PART II. Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters............. 8 Item 6. Selected Financial Data.............................................................. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 32 Item 8. Financial Statements and Supplementary Data.......................................... 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 63 PART III. Item 10. Directors and Executive Officers of the Registrant................................... 63 Item 11. Executive Compensation............................................................... 63 Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 63 Item 13. Certain Relationships and Related Transactions....................................... 63 PART IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 63
2 ITEM 1. BUSINESS REGISTRANT National Commerce Financial Corporation ("NCF") is a registered bank holding company headquartered in Memphis, Tennessee. NCF's principal business is providing banking and other financial services through its banking and non-banking subsidiaries. NCF is the parent holding company of National Bank of Commerce ("NBC") and NBC Bank, FSB (collectively referred to as the "Subsidiary Banks"). NCF is a 49% owner of First Market Bank, FSB. First Market Bank is based in Richmond, Virginia and operates 24 branch offices in the Richmond area. Additionally, NCF owns all of the outstanding common stock of TransPlatinum Service Corp. ("TransPlatinum"), Commerce Capital Management, Inc., U.S.I. Alliance Corp., First Mercantile Trust, First Mercantile Capital Management, Inc. ("First Mercantile Capital"), National Commerce Capital Trust I, National Commerce Capital Trust II, Senior Housing Crime Prevention Foundation Investment Corporation and Monroe Properties. The principal assets of NCF are all of the outstanding shares of common stock of its subsidiaries. NCF's principal sources of revenue are the interest income and dividends it receives from the Subsidiary Banks. At December 31, 2001, NCF had consolidated assets of approximately $19.3 billion. In July 2000, NCF merged with the former CCB Financial Corporation ("CCBF"), an $8.8 billion bank holding company headquartered in Durham, North Carolina, whose primary subsidiary was Central Carolina Bank and Trust Company ("CCB"). In the merger, CCB became a wholly-owned subsidiary of NCF. The transaction was accounted for as a purchase. On December 31, 2001, CCB was merged into NBC. The former offices of CCB continue to operate under the name of Central Carolina Bank, a division of NBC. In November 2001, NCF acquired SouthBanc Shares, Inc., a $660 million South Carolina financial institution with 10 branch offices. In August 2001, NCF acquired First Vantage-Tennessee, a $165 million financial institution located in Knoxville, Tennessee. Both transactions were accounted for as purchases. In February 2002, NBC acquired 37 former Wachovia and First Union branches from Wachovia Bank, N.A. and First Union National Bank. In the transaction, NBC acquired loans of approximately $452 million and deposits of approximately $1.4 billion. SUBSIDIARY BANKS NBC is a nationally chartered bank headquartered in Memphis, Tennessee with its operations headquarters in Durham, North Carolina. NBC offers commercial and retail banking, savings and trust services through 234 CCB offices located in North Carolina and South Carolina and 147 NBC offices located in Tennessee, Mississippi, Arkansas, Georgia, Virginia and West Virginia. In addition, it offers trust services through a subsidiary located in Florida. NBC had approximately $19.1 billion in assets at December 31, 2001. NBC provides a full range of financial products including demand and time deposits; secured and unsecured commercial and consumer loans; safe deposit boxes; trust services for corporations, employee benefit plans and individuals; and certain insurance and securities brokerage services. NBC Bank, FSB is a federally chartered bank headquartered in Memphis, Tennessee. It offers commercial and retail banking through 2 offices located in DeSoto County, Mississippi. NBC Bank, FSB had approximately $27 million in assets at December 31, 2001. NON-BANK SUBSIDIARIES NCF has nine wholly-owned non-bank subsidiaries: TransPlatinum, Commerce Capital Management, Inc., U.S.I. Alliance, First Mercantile Trust, First Mercantile Capital, National Commerce Capital Trust I, National Commerce Capital Trust II, Senior Housing Crime Prevention Foundation Investment Corporation and Monroe Properties. TransPlatinum provides financial services to the trucking and petroleum industries and bankcard services to merchants. Commerce Capital Management, Inc. is an investment advisor registered with the Securities and Exchange Commission under the Investment Advisor's Act of 1940. U.S.I. Alliance and Senior Housing Crime Prevention Foundation Investment Corporation are providers of security programs for the long-term care industry. First Mercantile Trust provides processing and other services for retirement plans. First Mercantile Capital provides professional money management services for employee benefit plans. National Commerce Capital Trust I and National Commerce Capital Trust II are special purpose entities formed to offer capital trust pass-through securities. Monroe Properties is an inactive subsidiary that has held foreclosed real estate. NBC has fifteen wholly-owned non-bank subsidiaries: National Commerce Bank Services, Inc. ("NCBS") and its wholly-owned subsidiary, BankersMart, provide retail banking consulting services to other financial institutions. 3 NBC Insurance Services, Inc. provides life, property and casualty insurance and annuities and through its division, CCBi, provides full brokerage services through an independent discount brokerage firm. Kenesaw Leasing Inc. and J & S Leasing, Inc, are both equipment-leasing firms. The following subsidiaries hold loans or are the parent companies of companies that hold loans: National Commerce Real Estate Holding Company and its wholly-owned subsidiary, Commerce Real Estate Holding Company and its wholly-owned subsidiary, Commerce Real Estate Company, a real estate investment trust; NBC Capital North, Inc. and its wholly-owned subsidiary Corcoran Holdings, Inc, a real estate investment trust and its wholly-owned subsidiary, Watts Properties, Inc., a real estate investment trust; NBC Market South, Inc. and its wholly-owned subsidiary, NBC Management Co., Inc.; and NBC Investco, Inc. and its wholly-owned subsidiary, CCBDE, Inc., an investment holding company. Salem Trust Company provides institutional trust services in Florida. Sprunt Insurance, LTD. is an inactive company formed for reinsurance of private mortgage insurance headquartered in the British Virgin Islands. United Service Corporation, United Investment Services and Mortgage First Service Corporation were acquired in the SouthBanc acquisition. United Service Corporation develops real estate, United Investment Services and Mortgage First Service Corporation are in the process of winding down. Southland Associates, Inc. holds an investment in a commercial title agency. Additionally, NBC owns 80% of Fenesco Financial Enterprises, Inc. D/B/A NBC Capital Markets Group ("Capital Markets") which provides retail and institutional brokerage services. TransPlatinum has two wholly-owned subsidiaries that provide financial services to the transportation industry. FleetOne, L.L.C. is a provider of fuel cards and related services and Prime Financial Services, Inc. is a receivables financing company. BUSINESS SEGMENTS Management monitors NCF performance as two business segments, traditional banking and financial enterprises. The traditional banking segment includes sales and distribution of financial products and services to individuals. These products and services include loan products such as residential mortgage, home equity lending, automobile and other personal financing needs. Traditional banking also offers various deposit products that are designed for customers' saving and transaction needs. This segment also includes lending and related financial services provided to small- and medium-sized corporations. Included among these services are several specialty services such as real estate finance, asset-based lending and residential construction lending. Traditional banking also includes management of the investment portfolio and non-deposit based funding. The financial enterprises segment is comprised of trust services and investment management, transaction processing, retail banking consulting/in-store licensing and broker/dealer activities. See Note 17 to the Consolidated Financial Statements for segment information. COMPETITION Vigorous competition exists in all major geographic and product areas where NCF is presently engaged in business. The Subsidiary Banks compete with other major commercial banks, diversified financial institutions such as thrift institutions, money market and other mutual funds, securities firms, mortgage companies, leasing companies, finance companies and a variety of financial services and advisory companies.Competitors are not limited to companies located in NCF's immediate geographic markets as an increased variety of financial services are being offered on the Internet. Larger competing financial institutions may be able to offer services and products that are not cost-efficient for our Subsidiary Banks to offer. Moreover, larger competitors have access to greater financial resources that allow higher lending limits than the Subsidiary Banks. In the fourth quarter of 1999, the Gramm-Leach-Bliley Act became law. The Gramm-Leach-Bliley Act permits bank holding companies to become financial holding companies and, by doing so, affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or complementary thereto. A bank holding company may become a financial holding company (a "FHC") if each of its subsidiary banks is (i) well-capitalized under the FDICIA prompt corrective actions provisions, (ii) well-managed and (iii) has at least a satisfactory rating under the Community Reinvestment Act. No prior regulatory approval is required for a FHC to acquire a company, other than a bank or savings association, engaged in activities permitted under the Gramm-Leach-Bliley Act. Activities cited by the Gramm-Leach-Bliley Act as being "financial in nature" include: securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. 4 A national bank may also engage, subject to limitation on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment. A bank must engage in these activities through a financial subsidiary or the bank, if the bank is well-capitalized, well-managed and has at least a satisfactory Community Reinvestment Act rating. Subsidiary banks of a FHC or national banks with financial subsidiaries must continue to be well-capitalized and well-managed in order to continue to engage in activities that are financial in nature. In addition, an FHC or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the FHC or the bank has at least a satisfactory Community Reinvestment Act rating. The Gramm-Leach-Bliley Act will change the competitive environment of NCF and its subsidiaries in substantial and unpredictable ways. We cannot accurately predict the ultimate effect that this legislation, or implementing regulations, will have upon the financial condition or results of operations of NCF or any of its subsidiaries. INTERSTATE BANKING AND BRANCHING Federal law permits, bank holding companies to acquire banks and bank holding companies located in any state, subject to certain concentration limits and other requirements. Any subsidiary bank of a bank holding company may receive deposits, renew time deposits, make loans, service loans and receive loan payments as an agent for any other bank subsidiary, wherever located, of that bank holding company. Banks may acquire branch offices outside their home states by merging with out-of-state banks, purchasing branches in other states and establishing de novo branch offices in other states. The ability of banks to acquire branch offices through purchase or opening of other branches is contingent, however, on the host state having adopted legislation "opting in" to those applicable provisions of federal law. In addition, the ability of a bank to merge with a bank located in another state is contingent on the host state not having adopted legislation "opting out" of those applicable provisions of federal law. SUPERVISION AND REGULATION Bank holding companies and their subsidiaries are subject to extensive federal and state regulation. This regulatory framework is intended primarily toprotect depositors and the federal deposit insurance funds and not security holders or other owners of the institutions. The following is a summary of regulations and statutes affecting NCF and its subsidiaries. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to NCF or its subsidiaries may have a material effect on its businesses. BANK HOLDING COMPANY REGULATION As a bank holding company, NCF is subject to regulation under the Bank Holding Company Act, and to inspection, examination and supervision by the Federal Reserve Board. Under the Bank Holding Company Act ("BHCA"), bank holding companies generally may not acquire the ownership or control of more than 5% of the voting shares, or substantially all the assets, of any company, including a bank or another bank holding company, without the Federal Reserve Board's prior approval. Generally, bank holding companies may engage only in banking and other activities that are determined by the Federal Reserve Board to be closely related or incidental to banking. However, in the event a bank holding company has elected to become a FHC, it would no longer be subject to the general requirement that it obtain the Federal Reserve Board's approval prior to acquiring more than 5% of the voting shares, or substantially all of the assets, of a company that is not a bank or bank holding company. Moreover, as a FHC, it would be permitted to engage in activities that are jointly determined by the Federal Reserve Board and the Treasury Department to be "financial in nature or incidental to such financial activity." FHC's may also engage in activities that are determined by the Federal Reserve Board to be "complementary to financial activities." There are a number of obligations and restrictions imposed by law on a bank holding company. These safety and soundesss measures are designed to minimize potential loss to depositors and the Federal Deposit Insurance Corporation ("FDIC") insurance funds. For example, if an insured banking subsidiary becomes "undercapitalized", the parent bank holding company is required to guarantee (subject to certain limits) the subsidiary's compliance with the terms of any capital restoration plan filed with the federal banking agency that is its primary regulator. Also, a bank holding company is required to serve as a source of financial strength to its banking subsidiaries and to commit resources to support such institutions in circumstances where it might not do so absent such policy. Under the BHCA, the Federal Reserve Board has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness and stability of a banking subsidiary of the bank holding company. Bank holding companies are required to comply with the Federal Reserve Board's risk-based capital guidelines which require a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital is required to be Tier 1 capital. In 5 addition to the risk-based capital guidelines, the Federal Reserve Board has adopted a minimum leverage capital ratio under which a bank holding company must maintain a level of Tier 1 capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a leverage capital ratio of at least 1% to 2% above the stated minimum. REGULATION OF BANKING SUBSIDIARIES NBC is a national bank chartered under the National Banking Act and, as such, is subject to regulation and examination primarily by the Office of the Comptroller of the Currency (the "OCC") and, secondarily, by the FDIC and the Federal Reserve Board. NBC Bank, FSB and First Market Bank, FSB are federal savings banks primarily regulated by the Office of Thrift Supervision (the "OTS"). NCF and the Subsidiary Banks have other subsidiaries that are subject to governmental regulation and supervision. Commerce Capital Management, Inc. is registered with the SEC as an investment adviser pursuant to the Investment Advisers Act of 1940, as amended. Capital Markets, as a registered securities broker/dealer under the Exchange Act and member of the National Association of Securities Dealers, is subject to regulation by the SEC and the NASD. Salem Trust Company, as a Florida trust company that provides institutional trust services, is subject to regulation and examination primarily by the Florida banking regulators. Sprunt Insurance Company, Ltd., headquartered in the British Virgin Islands, was formed to reinsure private mortgage insurance on mortgage loans originated by CCB but is currently not reinsuring private mortgage insurance. This company is subject to regulation and examination under the laws of the British Virgin Islands. All regulatory agencies require periodic audits and regularly scheduled reports of financial information. Almost every aspect of the operations and financial condition of the Subsidiary Banks are subject to extensive regulation and supervision and to various requirements and restrictions under federal and state law. These include requirements governing capital adequacy, liquidity, earnings, dividends, reserves against deposits, management practices, branching, loans, investments and provision of services. The federal banking agencies have broad enforcement powers over the Subsidiary Banks. These agencies have the power to terminate deposit insurance, to impose substantial fines and other civil and criminal penalties, and to appoint a conservator or receiver if any of a number of conditions are met. INSURANCE ASSESSMENT The Subsidiary Banks' deposits are insured up to regulatory limits by the FDIC.These deposits are subject to deposit insurance assessments to maintain the Bank Insurance Fund ("BIF") and/or the Savings Association Insurance Fund ("SAIF") administered by the FDIC. The FDIC has adopted regulations establishing a permanent risk-related deposit insurance assessment system. Under this system, the FDIC places each insured bank in one of nine risk categories based on the bank's capitalization and supervisory evaluations provided to the FDIC by the institution's primary federal regulator. Each insured bank's insurance assessment rate is then determined by the risk category in which it is classified by the FDIC. The annual insurance premiums on bank deposits insured by the BIF and the SAIF vary between $0.00 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $.27 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories. The Deposit Insurance Funds Act of 1996 provides for additional assessments against insured depository institutions to fund the operations of Financing Corporation ("FICO") funding. The FDIC established the FICO assessment rates effective January 1, 1999 at $.012 per $100 annually for BIF-assessable deposits and $.061 per $100 annually for SAIF-assessable deposits. The FICO assessments do not vary depending upon a depository institution's capitalization or supervisory evaluations. In March 2002, the FDIC Board of Directors alerted the financial insitutions industry to the possibility of higher deposit insurance premiums in the second half of 2002. The higher premiums, if imposed, would likely affect only deposit assessments for deposits insured under the BIF and the amount of any such increase would be at most 5 basis points. The FDIC Board of Directors will revisit the issue in the second quarter of 2002. FISCAL AND MONETARY POLICY Banking is a business which depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loan and securities holdings, constitutes the major portion of its earnings. Thus, the earnings and growth of NCF and its Subsidiary Banks are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve Board. The Federal Reserve Board regulates the supply of money through various means, including open market dealings in United States government securities, setting the discount rate at which banks may borrow from 6 the Federal Reserve Board, and setting the reserve requirements on deposits. The nature and timing of any changes in such policies and their effect on NCF and its subsidiaries cannot be predicted. EXECUTIVE OFFICERS OF THE REGISTRANT All officers of NCF are elected or appointed by the board of directors to hold their offices at the pleasure of the board, subject to the terms of employment agreements that are filed or incorporated as Exhibits to this Annual Report. At February 28, 2002, the executive officers of NCF were as follows:
Name Age Office Held ---- --- ----------- Thomas M. Garrott... 64 Chairman of the Board and Director Ernest C. Roessler.. 60 President, Chief Executive Officer and Director William R. Reed, Jr. 55 Chief Operating Officer Sheldon M. Fox...... 41 Chief Financial Officer J. Scott Edwards.... 56 Chief Administrative Officer Richard L. Furr..... 52 President, Central Carolina Bank David T. Popwell.... 42 Executive Vice President and Secretary
The above officers have served as executive officers of NCF for more than five years except for the following: Mr. Roessler served as Chairman of the Board, President and Chief Executive Officer of CCBF prior to July 2000; Mr. Fox served as Executive Vice President and Chief Financial Officer of CCBF prior to July 2000. Prior to October 1998, he was a Partner with KPMG LLP; Messrs. Edwards and Furr served as Senior Executive Vice Presidents of CCBF prior to July 2000; and Mr. Popwell was elected Executive Vice President of NCF in August 1998 and Secretary in October 1999. Prior to that time, he was an attorney with Baker, Donelson, Bearman and Caldwell for more than five years. EMPLOYEE RELATIONS As of December 31, 2001, NCF and its subsidiaries employed 5,463 full-time equivalent employees. NCF and its subsidiaries are not parties to any collective bargaining agreements and employee relations are considered to be good. ITEM 2. PROPERTIES NCF's principal executive offices are located in leased space at One Commerce Square, Memphis, Tennessee. NCF's Customer Service Center is a leased building located in Durham, North Carolina. The Subsidiary Banks operate 407 banking offices, approximately 182 of which are either leased buildings or leased property on which the Subsidiary Banks have constructed banking offices. The Subsidiary Banks and First Market Bank, FSB have 483 ATM locations in operation. ITEM 3. LEGAL PROCEEDINGS Certain legal claims have arisen in the normal course of business in which NCF and certain of its Subsidiary Banks have been named as defendants. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management and counsel, any such liability will have no material effect on NCF's financial position or results of operations. In addition to legal actions in the normal course of business, a thrift institution acquired by CCB Financial Corporation and subsequently merged into CCB filed a claim against the United States of America in the Court of Federal Claims in 1995. The complaint seeks compensation for exclusion of supervisory goodwill from the calculation of regulatory capital requirements as a result of enactment of the Financial Institution Reform, Recovery and Enforcement Act of 1989 ("FIRREA"). During the 1980's, in order to induce healthy thrift institutions to buy troubled thrifts, regulatory agencies allowed the thrifts to count supervisory goodwill as regulatory capital on their balance sheets and amortize the purchase over several decades. Supervisory goodwill represented the difference between the purchase price and the actual value of an insolvent thrift's tangible assets. However, when the FIRREA legislation was enacted in 1989, the acquiring thrifts were required to write-off their supervisory goodwill more rapidly, effectively wiping out a significant part of their regulatory capital. Over 100 lawsuits have been filed by the acquiring thrifts seeking compensation from the United States for the losses suffered from capital restrictions. The thrift institution's supervisory goodwill arose from acquisitions in 1982. NCF is vigorously pursuing this litigation. The amount of recovery, if any, which could result if NCF were to prevail in its suit cannot be determined at this time. Legal expenses incurred in pursuit of the claim have not been significant. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There has been no submission of matters to a vote of stockholders during the quarter ended December 31, 2001. 7 PART II. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS See "Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations for NCF's stock prices and dividends declared during 2001 and 2000 and discussion of other shareholder matters. On January 15, 2002, a dividend of $.15 per share was declared for payment on April 1, 2002 to stockholders of record as of March 8, 2002. As of December 31, 2001, there were 17,800 shareholders of record. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with NCF's Consolidated Financial Statements and the accompanying notes presented elsewhere herein. Results of operations from all entities acquired through business combinations accounted for as purchases are included in the consolidated results of operations from the date of acquisition. The 2000 merger with CCB Financial Corporation significantly impacts the selected financial data presented below as average balances and earnings from the net assets acquired are included for the full year 2001 and approximately one-half year in 2000. 8 Five Year Summary of Selected Financial Data
Years Ended December 31 ---------------------------------------------- 2001 2000 1999 1998 In Thousands Except Per Share Data ----------- ---------- --------- --------- SUMMARY OF OPERATIONS Interest income $ 1,222,865 937,976 455,974 379,730 Interest expense 571,752 517,204 229,334 193,005 - ------------------------------------------------------------------------ ----------- ---------- --------- --------- Net interest income 651,113 420,772 226,640 186,725 Provision for loan losses 29,199 16,456 16,921 10,710 - ------------------------------------------------------------------------ ----------- ---------- --------- --------- Net interest income after provision 621,914 404,316 209,719 176,015 Other income 318,253 184,982 90,322 83,588 Net investment securities gains (losses) 6,635 4,509 (3,095) (804) Other expenses (469,739) (304,593) (151,149) (136,440) - ------------------------------------------------------------------------ ----------- ---------- --------- --------- Income before taxes, non-recurring items and amortization of intangibles 477,063 289,214 145,797 122,359 Income taxes 160,370 95,289 48,167 41,302 - ------------------------------------------------------------------------ ----------- ---------- --------- --------- Operating cash earnings (1) 316,693 193,925 97,630 81,057 Non-recurring items, after-tax: Merger-related expenses (7,304) (50,466) -- -- Unrealized (losses)gains on interest rate swaps -- (50,198) 907 -- Gain on sale of credit card receivables -- -- -- -- Amortization of intangibles, after-tax: Goodwill (48,240) (26,884) (3,479) (1,043) Core deposit intangibles (35,853) (21,067) (2,426) (1,147) - ------------------------------------------------------------------------ ----------- ---------- --------- --------- Net income in accordance with GAAP $ 225,296 45,310 92,632 78,867 - ------------------------------------------------------------------------ ----------- ---------- --------- --------- PER SHARE DATA Basic net income $ 1.10 .29 .88 .79 Diluted net income 1.09 .28 .87 .77 Cash dividends .56 .48 .38 .32 Book value 11.97 11.52 6.00 4.03 Average shares outstanding: Basic 204,972 157,387 104,947 99,678 Diluted 207,484 159,254 106,807 101,984 AVERAGE BALANCES Assets $17,907,012 12,401,982 6,358,828 5,383,017 Loans 11,332,177 7,427,320 3,489,625 3,040,662 Earning assets 15,636,578 11,033,301 5,905,404 4,983,531 Goodwill 920,738 520,525 66,922 20,357 Core deposit intangibles 263,273 163,899 26,299 14,267 Deposits 11,950,703 8,158,282 4,120,703 3,675,427 Trust preferred securities and long-term debt 93,656 72,529 66,275 152,994 Interest-bearing liabilities 13,624,276 9,707,525 5,255,601 4,413,349 Stockholders' equity 2,418,149 1,522,217 542,259 419,437 SELECTED PERIOD END BALANCES Assets $19,273,713 17,745,792 6,913,786 5,811,054 Loans 11,974,765 11,008,419 3,985,789 3,197,673 Allowance for loan losses 156,401 143,614 59,597 49,122 Goodwill 946,157 934,467 96,213 46,188 Core deposit intangibles 251,464 287,707 18,939 9,634 Deposits 12,619,479 11,979,631 4,495,900 3,947,275 Trust preferred securities and long-term debt 282,018 89,301 56,281 56,268 Stockholders' equity 2,455,331 2,364,838 649,241 408,549 RATIOS Return on average assets 1.26% .37 1.46 1.47 Return on average equity 9.32 2.98 17.08 18.80 Net interest margin, taxable equivalent 4.36 4.02 4.07 4.35 Net loan losses to average loans .21 .20 .24 .26 Dividend payout ratio 50.91 165.52 42.61 40.51 Average equity to average assets 13.50 12.27 8.53 7.79 RATIOS EXCLUDING NON-RECURRING ITEMS AND AMORTIZATION OF INTANGIBLES Return on average tangible assets (2) 1.89% 1.65 1.56 1.52 Return on average tangible equity (2) 25.66 23.15 21.74 21.06 - ------------------------------------------------------------------------ ----------- ---------- --------- ---------
1997 In Thousands Except Per Share Data --------- SUMMARY OF OPERATIONS Interest income 336,993 Interest expense 176,841 - ------------------------------------------------------------------------ --------- Net interest income 160,152 Provision for loan losses 17,013 - ------------------------------------------------------------------------ --------- Net interest income after provision 143,139 Other income 74,485 Net investment securities gains (losses) (80) Other expenses (120,237) - ------------------------------------------------------------------------ --------- Income before taxes, non-recurring items and amortization of intangibles 97,307 Income taxes 31,907 - ------------------------------------------------------------------------ --------- Operating cash earnings (1) 65,400 Non-recurring items, after-tax: Merger-related expenses -- Unrealized (losses)gains on interest rate swaps -- Gain on sale of credit card receivables 4,800 Amortization of intangibles, after-tax: Goodwill (210) Core deposit intangibles (210) - ------------------------------------------------------------------------ --------- Net income in accordance with GAAP 69,780 - ------------------------------------------------------------------------ --------- PER SHARE DATA Basic net income .71 Diluted net income .69 Cash dividends .23 Book value 3.60 Average shares outstanding: Basic 97,998 Diluted 101,368 AVERAGE BALANCES Assets 4,404,852 Loans 2,513,327 Earning assets 4,148,590 Goodwill 5,038 Core deposit intangibles 4,806 Deposits 2,954,813 Trust preferred securities and long-term debt 201,089 Interest-bearing liabilities 3,671,792 Stockholders' equity 333,528 SELECTED PERIOD END BALANCES Assets 4,692,011 Loans 2,608,967 Allowance for loan losses 43,297 Goodwill 4,942 Core deposit intangibles 4,935 Deposits 3,251,242 Trust preferred securities and long-term debt 206,136 Stockholders' equity 352,148 RATIOS Return on average assets 1.58 Return on average equity 20.92 Net interest margin, taxable equivalent 3.97 Net loan losses to average loans .39 Dividend payout ratio 32.39 Average equity to average assets 7.57 RATIOS EXCLUDING NON-RECURRING ITEMS AND AMORTIZATION OF INTANGIBLES Return on average tangible assets (2) 1.49 Return on average tangible equity (2) 20.20 - ------------------------------------------------------------------------ ---------
(1) NCF analyzes its performance on a net income basis in accordance with accounting principles generally accepted in the United States, as well as on an operating cash basis before non-recurring items and amortization of intangibles referred to as "operating cash earnings." Operating cash earnings are presented as supplemental information to enhance the reader's understanding of, and highlight trends in, NCF's financial results excluding the impact of these items. Operating cash earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. (2) Average tangible assets and equity are determined as average total assets or equity, respectively, less average unamortized goodwill and core deposit intangibles. - -------------------------------------------------------------------------------- 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 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 NBC, a $19.1 billion national bank based in Tennessee and NBC Bank, FSB, a $27 million federal savings bank based in Mississippi (collectively, the "Subsidiary Banks"). Additionally, NCF owns 49 percent of First Market Bank, FSB, a $703.4 million federal savings bank based in Virginia. NCF's 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 registered investment advisor; First Mercantile Trust, a provider of processing and other services for retirement plans; 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 and National Commerce Capital Trust II, special purpose entities formed to offer capital trust pass-through securities; and Monroe Properties, an inactive subsidiary that has held foreclosed real estate. Additionally, NBC has subsidiaries that provide a variety of services including retail bank consulting, trust, investment advisory, insurance, broker/dealer and leasing services. TransPlatinum has wholly-owned subsidiaries which provide additional financial services to the transportation industry. This discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes appearing elsewhere in this report. In July 2000, NCF merged with the former CCB Financial Corporation, an $8.8 billion bank holding company headquartered in Durham, North Carolina, whose primary subsidiary was CCB. The transaction was accounted for as a purchase. CCB became a wholly-owned subsidiary of NCF. On December 31, 2001, CCB was merged into NBC. The former offices of CCB continue to operate under the name of Central Carolina Bank, a division of NBC. 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 are discussed below. RISK FACTORS Every company faces certain business risks that must be managed to achieve desired financial results. We perceive the following to be our significant risk factors: . 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. . In 2001, we 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. . The events of September 11, 2001, in New York and Washington, D.C., as well as the United States' war on terrorism, may have an unpredictable effect on economic conditions in general and in our primary market areas. If the recovery of the domestic economy does not occur as quickly as anticipated or is less robust than anticipated, we could experience a decline in credit quality which could have a material adverse effect on our earnings. 10 . In February 2002, we consummated the acquisition of 37 branch offices and related ATM's from Wachovia. We may lose deposits or be unable to attract new deposits to these branches. Moreover, we may lose key employees in these branches who control key customer relationships. As part of the acquisition, we recorded core deposit intangibles and goodwill that would be subject to future impairment. Integration may also divert management's attention from operational matters, which could adversely affect results of operations. These risks may hinder our ability to attain the level of financial operating performance we have historically achieved. . 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. The NCF Parent Company relies on dividends from its subsidiaries as a primary source of funds to pay dividends to shareholders and cover debt service. Federal banking law restricts the ability of our Subsidiary Banks to pay dividends to the Parent Company. Although we expect to continue receiving dividends from our Subsidiary Banks sufficient to meet our current and anticipated cash needs, a decline in the profitability of the Subsidiary Banks could result in restrictions on the payment of future dividends to the Parent Company. 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. CRITICAL ACCOUNTING POLICIES Our consolidated financial statements are prepared in accordance with accounting policies generally accepted in the United States which require that we make estimates and assumptions (see Note 1 to the Consolidated Financial Statements) that affect the amounts reported in those financial statements. We believe that our determination of the allowance for loan losses involves a higher degree of judgment and complexity than our other significant accounting policies. The allowance for loan losses is maintained at a level we consider adequate to provide for estimated probable losses inherent in the loan portfolio and is increased though a provision for loan losses charged against earnings. The allowance is comprised of specific loan allocations, allocations for non-accrual and classified loans and general allocations by loan type. The allowance is a significant estimate and we regularly evaluate it for adequacy. The use of different estimates or assumptions could produce different levels of allowance and provisions for loan losses. Additionally, an extended economic downturn could result in additional provision to the allowance per loan losses. Determining the fair value of net assets acquired through business combinations, including the recognition of intangible assets, is another area that involves a high degree of judgment and complexity. Certain assets, such as loans held for sale, are accounted for at the lower of cost or market value. Some of these assets do not have readily available market quotations and require our estimation of their fair value. Additionally, certain recorded assets, such as goodwill and core deposit intangibles, are subject to impairment. As of December 31, 2001, we have unamortized goodwill totaling $946.1 million and core deposit intangibles totaling $251.4 million. With the acquisition of the Wachovia branches in 2002, we will record additional goodwill and core deposit intangibles. These intangible assets will be evaluated for impairment periodically. ACQUISITIONS In November 2001, NCF acquired SouthBanc Shares, Inc., a $660 million South Carolina financial institution with 10 branch offices. Also in August 2001, NCF acquired First Vantage-Tennessee, a $165 million financial institution located in Knoxville, Tennessee. Both transactions were accounted for as purchases. Results of operations of these acquired companies have been included in NCF's consolidated statements of income from the dates of acquisition. In February 2002, NBC acquired 37 former Wachovia and First Union branches. In the transaction, NBC acquired loans of approximately $452 million and deposits of approximately $1.4 billion. In a March 2000 transaction, TransPlatinum Service Corp. acquired Prime Financial Services, Inc., a receivables financing company serving the transportation industry. NCF acquired Piedmont Bancorp, Inc., a $151 million bank holding company headquartered in Hillsborough, North Carolina in April 2000. In addition to the CCB Financial Corporation merger, NCF acquired First Mercantile Trust and First Mercantile Capital in July 2000. These transactions ("the 2000 acquisitions") resulted in the issuance of 97.3 million shares of common stock. Each of these transactions has been accounted for as a purchase, and, accordingly, results of operations of the acquired companies have been included in the consolidated statements of income from the date of purchase. 11 RESULTS OF OPERATIONS Performance Overview The 2000 acquisitions provided NCF with an expanded customer base, additional avenues of revenue generation and opportunities for greater operating efficiencies which we began to realize in 2001. With regulatory changes allowing new competition into the financial services industry, we continually monitor the services and products offered as well as investigate new sources of revenue. We believe that our multi-channel distribution strategy will serve us well in our ever-changing competitive environment. Our delivery channels include in-store and traditional branches, direct mail, telephone, ATM and internet banking. We feel that these options allow us to deliver high-quality products, customer service and convenience at a low cost. The comparability of net income for 2001 and 2000 was significantly impacted by the CCB merger in July 2000 as only six months of its operations are included in our 2000 income but a full year of earnings are included in 2001. Comparisons between the two years were also impacted by significant merger costs and other non-recurring expenses recorded in 2000, as discussed below. Net income in 2001 totaled $225.3 million compared to 2000's $45.3 million which equated to $1.09 per diluted share in 2001 versus $.28 in 2000. Net income per diluted share was $.87 in 1999. Returns on average assets and average stockholders' equity in 2001 were 1.26 percent and 9.32 percent, respectively, compared to 2000's .37 percent and 2.98 percent. These ratios were 1.46 percent and 17.08 percent in 1999. Items identified as non-recurring were comprised of: . In 2001, we recognized $11.4 million of merger-related expense to effect the SouthBanc and First Vantage mergers and the acquisition of 37 divested Wachovia branches (which was consummated in February 2002). To effect the mergers in 2000, we incurred $70.7 million of merger-related expense which included severance and other employee benefit costs, excess facilities costs and system conversion costs. . In 2000, we recognized $77.2 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 the year during a rising interest rate environment. By entering into these contracts, we reduced our interest rate sensitivity to wholesale funding. When the rate environment changed in the latter half of 2000, we incurred losses on the swaps which were recognized as a charge to earnings. The swaps were terminated in the first quarter of 2001. In 1999, we recognized $1.5 million of unrealized gains on similar interest rate swap contracts. These contracts were called in the first quarter of 2000. . In 1997, we realized gains of $8 million on the sale of credit card receivables. As further discussed under the heading "Other Accounting Matters," effective January 1, 2002 we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." As a result, goodwill associated with corporate acquisitions will no longer be amortized, but rather will be tested for impairment no less frequently than annually. Goodwill amortization totaled $48.2 million in 2001 or $.23 per diluted share. Core deposit intangibles recorded in acquisitions will continue to be amortized over the estimated remaining life of the deposit base assumed. Operating Cash Earnings Non-recurring items and the amortization of intangibles that arose from acquisitions significantly impact our earnings. Management monitors our performance on both a net income basis determined in accordance with accounting principles generally accepted in the United States, as well as on an operating cash basis before intangibles amortization and non-recurring items. We refer to this measure of performance as "operating cash earnings". Operating cash earnings are presented in this report as supplemental information to enhance the reader's understanding of, and highlight trends in, our financial results excluding the impact of intangibles amortization and non-recurring items. Operating cash earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. Intangibles amortization and non-recurring items excluded from net income to derive operating cash earnings may be significant and may not be comparable to other companies. Excluding these items, our diluted operating cash earnings per share totaled $1.53 compared to 2000's $1.22 and operating cash returns on average tangible assets and average tangible equity were 1.89 percent and 25.66 percent compared to 2000's 1.65 percent and 23.15 percent. Table 1 provides a summary of the non-recurring items and intangibles amortization over the prior 5 years. 12 TABLE 1 Operating Cash Earnings
Years Ended December 31 ---------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------------- -------------- --------------- ------------- --------------- Before After Before After Before After Before After Before After In Thousands Except Per Share Data Tax Tax Tax Tax Tax Tax Tax Tax Tax Tax - ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------ Net income $225,296 45,310 92,632 78,867 69,780 Non-recurring items: Merger-related expense $11,364 7,304 70,657 50,466 -- -- -- -- -- -- Losses (gains) on interest rate swaps -- -- 77,227 50,198 (1,499) (907) -- -- -- -- Gains on sale of credit card receivables -- -- -- -- -- -- -- -- (8,000) (4,800) Intangibles amortization: Goodwill 48,240 48,240 26,884 26,884 3,479 3,479 1,043 1,043 210 210 Core deposit intangibles 58,775 35,853 34,536 21,067 3,977 2,426 1,880 1,147 344 210 - ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------ Operating cash earnings $316,693 193,925 97,630 81,057 65,400 - ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------ Effect on diluted earnings per share: Net income $ 1.09 .28 .87 .77 .69 Non-recurring items: Merger-related expense $ .05 .04 .44 .32 -- -- -- -- -- -- Losses (gains) on interest rate swaps -- -- .48 .32 (.01) (.01) -- -- -- -- Gains on sale of credit card receivables -- -- -- -- -- -- -- -- (.08) (.05) Intangibles amortization: Goodwill .23 .23 .17 .17 .03 .03 .01 .01 -- -- Core deposit intangibles .28 .17 .22 .13 .04 .02 .02 .01 -- -- - ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------ Operating cash earnings $ 1.53 1.22 .91 .79 .64 - ------------------------------------------ ------- -------- ------ ------- ------ ------ ------ ------ ------ ------
Net Interest Income Net interest income is one of the major determining factors in a financial institution's performance as it is generally the principal source of earnings. It is impacted by the volume, yield/cost and relative mix of both earning assets and interest-bearing and non-interest-bearing sources of funds. The difference between earning asset yields (with a taxable equivalent adjustment made to provide comparability between tax-exempt and taxable income) and the average rate paid for interest-bearing funds is measured by the interest rate spread and net interest margin. The tragic events of September 11/th dramatically accelerated a weakening economic environment. The long-term impact of reduced consumer confidence, corporate job reductions and increased costs of security are still being assessed but are expected to result in decreased spending and negative gross domestic product growth 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 example, the Federal Reserve cut the target federal funds rate during the fourth quarter of 2001 by 125 basis points to combat recession fears and slowdowns in the economy. The prime rate our Subsidiary Banks charge has fallen from 9.50 percent at December 31, 2000 to 4.75 percent at December 31, 2001. / With the liability sensitive nature of our balance sheet, in times of falling interest rates, the decrease in interest expense from the 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 4.36 percent for 2001 compared to 2000's 4.02 percent. Our interest rate spread widened to 3.82 percent compared to 2000's 3.38 percent. See Table 2 for an analysis of the net interest margin. While a liability-sensitive balance sheet is accretive to net interest income in periods of falling interest rates, management wants to control the downside effect that would be experienced when interest rates begin to rise again. Consequently, following the termination of interest rate swaps we entered into in 2000, management restructured $1.2 billion of wholesale liabilities (non-core funding) to make our balance sheet less liability sensitive. Our Asset/Liability Management Committee, comprised of senior management, continually monitors our interest sensitivity and liquidity. Based on its view of existing and expected market conditions, it adopts strategies that are intended to optimize net interest income to the extent possible while minimizing the risk associated with changes in interest rates. See Table 3 for an analysis of the impact of changes in volume and rate on our net interest margin. 13 The following analysis of average balances and net interest income is significantly impacted by the July 2000 acquisitions of CCB. CCB's average balances and net interest income are included for the full year 2001 and approximately one-half year in 2000. TABLE 2 Average Balances and Net Interest Income Analysis
Years Ended December 31 ------------------------------------------------------------------------------------- 2001 2000 1999 ----------------------------- --------------------------- -------------------------- INTEREST AVERAGE Interest Average Interest Average Taxable Equivalent Basis -- AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/ In Thousands (1) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate - --------------------------------------- ----------- ---------- ------- ---------- -------- ------- --------- -------- ------- EARNING ASSETS: Loans (2) $11,332,177 957,939 8.45% 7,427,320 698,614 9.41 3,489,625 306,213 8.77 U.S. Treasury and U.S. Government agencies and corporations (3) 2,997,402 205,741 6.87 2,488,612 177,307 7.12 1,510,661 100,628 6.66 States and political subdivisions 165,652 13,729 8.29 158,693 12,815 8.08 137,523 11,521 8.38 Equity and other securities (3) 984,023 69,383 7.05 754,632 59,581 7.90 637,899 43,064 6.75 Trading account securities 67,389 3,230 4.79 40,064 2,482 6.20 42,285 2,336 5.52 Federal funds sold and other short-term investments 62,065 2,927 4.72 136,043 8,893 6.54 63,804 4,877 7.64 Time deposits in other banks 27,870 1,257 4.51 27,937 1,597 5.72 23,607 951 4.03 - --------------------------------------- ----------- ---------- ------- ---------- -------- ------- --------- -------- ------- Total earning assets 15,636,578 1,254,206 8.02% 11,033,301 961,289 8.71 5,905,404 469,590 7.95 ---------- ------- -------- ------- -------- ------- NON-EARNING ASSETS: Cash and due from banks 401,214 293,618 174,582 Premises and equipment 205,401 123,688 42,337 Goodwill 920,738 520,525 66,922 Core deposit intangibles 263,273 163,899 26,299 All other assets, net 479,808 266,951 143,284 - --------------------------------------- ----------- ---------- --------- Total assets $17,907,012 12,401,982 6,358,828 - --------------------------------------- ----------- ---------- --------- INTEREST-BEARING LIABILITIES: Savings and time deposits $10,502,689 429,623 4.09% 7,227,569 364,433 5.04 3,673,287 153,120 4.17 Short-term borrowed funds 1,079,070 39,066 3.62 1,159,814 69,577 6.00 683,833 31,177 4.56 Federal Home Loan Bank advances 1,948,861 97,838 5.02 1,247,613 77,912 6.24 832,206 41,432 4.98 Trust preferred securities and long-term debt 93,656 5,225 5.58 72,529 5,282 7.28 66,275 3,605 5.44 - --------------------------------------- ----------- ---------- ------- ---------- -------- ------- --------- -------- ------- Total interest-bearing liabilities 13,624,276 571,752 4.20% 9,707,525 517,204 5.33 5,255,601 229,334 4.36 - --------------------------------------- ---------- ------- -------- ------- -------- ------- OTHER LIABILITIES AND STOCKHOLDERS' EQUITY: Demand deposits 1,448,014 930,713 447,416 Other liabilities 416,573 241,527 113,552 Stockholders' equity 2,418,149 1,522,217 542,259 - --------------------------------------- ----------- ---------- --------- Total liabilities and stockholders' equity $17,907,012 12,401,982 6,358,828 - --------------------------------------- ----------- ---------- --------- NET INTEREST INCOME AND NET INTEREST MARGIN (4) $ 682,454 4.36% 444,085 4.02 240,256 4.07 - --------------------------------------- ---------- ------- -------- ------- -------- ------- INTEREST RATE SPREAD (5) 3.82% 3.38 3.59 - --------------------------------------- ------- ------- -------
(1) The taxable equivalent basis is computed using 35% federal and applicable state tax rates in 2001, 2000 and 1999. (2) The average loan balances include non-accruing loans. (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. - -------------------------------------------------------------------------------- The 2001 growth in the earning asset portfolio was primarily due to the 2000 acquisitions' assets being included for a full year in 2001 and approximately six months in 2000. Our mix of earning assets shifted to higher yielding categories, with loans constituting 72.5 percent of average earning assets during 2001 compared to 2000's 67.3 percent and 1999's 59.1 percent. Management anticipates continued loan growth in 2002. Average earning assets as a percentage of average tangible assets (average total assets reduced by goodwill and core deposit intangibles) has maintained at 94 percent over the last three years. 14 Deposits are our primary source of funding earning asset growth. Core deposits totaled $11.2 billion at December 31, 2001 compared to $10 billion the prior year. Approximately $563 million of the core deposit growth was due to acquisitions consummated in 2001. Substantially all deposits originate within the Subsidiary Banks' market areas. As discussed earlier, we decided in 2001 to reduce our levels of time deposits greater than $100,000. Due in part to the adverse equity market returns experienced in 2001, our deposit growth rates were higher in 2001 than in prior years where we were competing with other savings and investment opportunities that generated greater returns. We use both short- and long-term borrowings to fund growth of earning assets in excess of deposit growth. Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase and master notes. Long-term borrowings include trust preferred securities, subordinated debt and FHLB advances. The increase in long-term borrowings reflects favorable funding costs during 2001's declining interest rate environment relative to the rate reductions for shorter-term borrowings or large denomination deposits. TABLE 3 Volume and Rate Variance Analysis
Years Ended December 31 ------------------------------------------------------- 2001 2000 --------------------------- -------------------------- VOLUME RATE TOTAL Volume Rate Total Taxable Equivalent Basis -- In Thousands (1) (2) VARIANCE VARIANCE VARIANCE Variance Variance Variance - ----------------------------------------------------------- -------- -------- -------- -------- -------- -------- INTEREST INCOME: Loans $336,611 (77,286) 259,325 368,565 23,836 392,401 U.S. Treasury and U.S. Government agencies and corporations 34,886 (6,452) 28,434 69,287 7,392 76,679 States and political subdivisions 574 340 914 1,719 (425) 1,294 Equity and other securities 16,715 (6,913) 9,802 8,554 7,963 16,517 Trading account securities 1,408 (660) 748 (128) 274 146 Federal funds sold and short-term investments (3,946) (2,020) (5,966) 4,808 (792) 4,016 Time deposits in other banks (4) (336) (340) 197 449 646 - ----------------------------------------------------------- -------- -------- -------- -------- -------- -------- Increase (decrease) in interest income 386,244 (93,327) 292,917 453,002 38,697 491,699 - ----------------------------------------------------------- -------- -------- -------- -------- -------- -------- INTEREST EXPENSE: Savings and time deposits 143,022 (77,832) 65,190 173,832 37,481 211,313 Short-term borrowed funds (4,555) (25,956) (30,511) 26,416 11,984 38,400 Federal Home Loan Bank advances 16,166 3,760 19,926 24,209 12,271 36,480 Trust preferred securities and long-term debt 1,337 (1,394) (57) 366 1,311 1,677 - ----------------------------------------------------------- -------- -------- -------- -------- -------- -------- Increase (decrease) in interest expense 155,970 (101,422) 54,548 224,823 63,047 287,870 - ----------------------------------------------------------- -------- -------- -------- -------- -------- -------- INCREASE (DECREASE) IN NET INTEREST INCOME $230,274 8,095 238,369 228,179 (24,350) 203,829 - ----------------------------------------------------------- -------- -------- -------- -------- -------- --------
(1) The taxable equivalent basis is computed using 35% federal and applicable state tax rates. (2) The rate/volume variance for each category has been allocated on a consistent basis between rate and volume variances based on the percentage of the rate or volume variance to the sum of the absolute value of the two variances. - -------------------------------------------------------------------------------- Non-Interest Income and Expense Our levels of non-interest income are, and will continue to be, a significant factor in determining our financial success. Non-interest income from our Financial Enterprises segment provides the largest percentage of non-interest income. This segment is comprised of our transaction processing, asset management, broker/dealer and retail banking consulting businesses. Financial Enterprises generated 51.3 percent of total non-interest income in 2001 compared to 2000's 49.3 percent. Service charges on deposit accounts continue to be our largest source of non-interest income from our Banking segment. Non-interest income as a percentage of total revenues (taxable equivalent basis) grew to 32 percent in 2001 compared to 2000's 30 percent and 1999's 27 percent. To increase our levels of non-interest income, we have invested in several fee-related businesses. We believe that these businesses offer high returns, high earnings growth and will be a stable source of fee income. These fee-related businesses include Fenesco Financial Enterprise, Inc. D/B/A NBC Capital Markets ("Capital Markets"), a provider of retail and institutional brokerage services; First Mercantile Trust, a provider of retirement plan administration, record-keeping and individual investment services to 2,200 companies; our Chapter 13 bankruptcy trustee services which provide reporting and cash management services nationally; and, National Commerce Bank Services, a provider of in-store/retail banking consulting to over 300 financial institutions and 50 retailers. Not only will these businesses generate fee income, but we believe that they will be a significant source of referral business to our traditional banking subsidiaries. 15 All categories of non-interest income and expense were significantly impacted by the 2000 acquisitions as their revenues and expenses were included in our results only from their dates of acquisition. Service charges on deposit accounts as a percentage of average deposits were 1.0 percent in 2001 compared to 2000's .8 percent and 1999's .5 percent. We review our service charge structure periodically to ensure that our charges are competitive with the marketplace. Trust and custodian fees increased to $51.1 million in 2001 from $33 million in 2000 and $8.1 million in 1999 due to trust businesses acquired and growth of assets managed. For the six months that their operations were included in 2000's operating results, First Mercantile and CCB collectively contributed $25.3 million of the $33 million of trust and custodian fees recognized in 2000. Including these trust operations for the full year 2001 was the primary reason for 2001's increased trust and custodian fees. Managed and custodial assets totaled $13.2 billion and $10.5 billion at December 31, 2001 and 2000, respectively. We anticipate further growth in the Trust area as trust offices/operations acquired in 2000 and new offices opened in 2001 continue to mature. Broker/dealer revenue and other commissions income totaled $68 million in 2001, $28.8 million in 2000 and $18.1 million in 1999. Institutional broker/dealer revenue increased $30.6 million from 2000's $20.5 million due to higher volume of transactions. As interest rates declined during 2001, many investments were called and institutions that had held those investments in their portfolio, purchased securities from Capital Markets to replace the called investments. The 2000 acquisitions contributed $6.4 million of broker/dealer revenue and other commissions income in 2000 and the remainder of 2000's increase over 1999 was due to internal growth. Retail brokerage services are offered through an affiliation with an independent brokerage firm. Management anticipates stronger growth in retail brokerage operations with an expected improved equity market environment and a decline in institutional broker/dealer revenues due to a flat or increasing interest rate environment. Personnel expense is our largest non-interest expense. We devote significant resources to attracting and retaining qualified personnel. With our sales-oriented focus, more and more of our employee compensation plan is geared toward incentive pay for high performance. Table 4 presents various operating cash efficiency ratios for the prior five years (excluding the impact of amortization of intangibles and non-recurring items). Our goal is to achieve an operating cash efficiency ratio of less than 45 percent in 2002. TABLE 4 Operating Cash Efficiency Ratios
Years Ended December 31 ------------------------------ 2001 2000 1999 1998 1997 ----- ----- ----- ----- ----- As a percentage of average tangible assets: Non-interest income (1) 1.94% 1.62 1.39 1.55 1.69 - -------------------------------------------------------------------------------------- ----- ----- ----- ----- ----- Personnel expense 1.49 1.37 1.32 1.35 1.29 Occupancy and equipment expense .37 .38 .33 .32 .35 Other operating expense (2) .95 .85 .76 .88 1.11 - -------------------------------------------------------------------------------------- ----- ----- ----- ----- ----- Total non-interest expense 2.81 2.60 2.41 2.55 2.75 - -------------------------------------------------------------------------------------- ----- ----- ----- ----- ----- Net overhead (non-interest expense less non-interest income) .87% .98 1.02 1.00 1.06 - -------------------------------------------------------------------------------------- ----- ----- ----- ----- ----- Non-interest expense as a percentage of net interest income and noninterest income (3) 46.63% 48.08 46.15 45.56 50.49 - -------------------------------------------------------------------------------------- ----- ----- ----- ----- -----
(1) Excludes the gain on sale of credit card receivables. (2) Excludes the amortization of intangibles, losses on interest rate swaps, and merger-related expense. (3) Presented using taxable equivalent net interest income. The taxable equivalent basis is computed using a 35% federal tax rate and applicable state tax rates. - -------------------------------------------------------------------------------- Income Taxes Income tax expense was $133.4 million in 2001 compared to $34.6 million in 2000 and $47.2 million in 1999. NCF's effective income tax rates were 37.2 percent, 43.3 percent and 33.8 percent in 2001, 2000 and 1999, respectively. The higher effective tax rate in 2000 is attributable to non-deductible merger-related expense. Net deferred tax liabilities totaled $135.2 million as of December 31, 2001. NCF has determined that no valuation allowance for deferred tax assets was warranted at December 31, 2001. Fourth Quarter Results During the fourth quarter of 2001, we recorded net income of $59.9 million or $.29 per diluted share compared to 2000's net loss of $8.4 million. Non-recurring merger-related expense totaling $5.4 million (after-tax) was recorded during the fourth quarter of 2001. In 2000's fourth quarter, non-recurring losses on interest rate swaps of $37.8 million (after-tax) and merger-related expense of $15.8 million (after-tax) were recorded. Excluding the effect of these non-recurring items and amortization of intangibles, diluted operating cash earnings per share totaled $.42 compared to 2000's $.32 per diluted share. Income statements for each of the quarters in the five-quarter period ended December 31, 2001 are included in Table 5. 16 TABLE 5 Income Statements for Five Quarters Ended December 31, 2001
Three Months Ended --------------------------------------------- In Thousands Except Per Share Data 12/31/01 9/30/01 6/30/01 3/31/01 12/31/00 - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- Total interest income $287,262 302,492 310,020 323,091 334,073 Total interest expense 114,826 137,425 148,543 170,958 183,231 - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- NET INTEREST INCOME 172,436 165,067 161,477 152,133 150,842 Provision for loan losses 6,892 9,623 6,304 6,380 5,317 - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- NET INTEREST INCOME AFTER PROVISION 165,544 155,444 155,173 145,753 145,525 - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- Service charges on deposits 34,061 29,639 30,460 27,290 26,063 Trust and custodian fees 12,498 11,422 13,382 13,882 13,977 Other service charges and fees 9,476 9,427 9,064 8,736 9,823 Broker/dealer revenue and other commissions 21,624 15,114 16,202 15,066 10,751 Other operating 12,250 11,042 9,435 8,183 8,773 Securities gains (losses), net 2,752 2,588 575 720 (141) - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- Total other income (1) 92,661 79,232 79,118 73,877 69,246 - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- Personnel 69,155 58,063 62,447 59,900 60,626 Net occupancy and equipment 15,008 16,009 15,294 15,157 16,924 Other operating 45,051 39,028 39,891 34,736 37,668 - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- Total other expenses (1) 129,214 113,100 117,632 109,793 115,218 - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- INCOME BEFORE TAXES, NON-RECURRING ITEMS AND AMORTIZATION OF INTANGIBLES 128,991 121,576 116,659 109,837 99,553 Income taxes 42,690 41,224 40,159 36,297 32,907 - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- Operating cash earnings (1) 86,301 80,352 76,500 73,540 66,646 Non-recurring items, after-tax: Merger-related expenses (5,400) (1,904) -- -- (15,773) Unrealized losses (gains) on interest rate swaps -- -- -- -- (37,794) Amortization of intangibles, after-tax: Goodwill (12,060) (12,060) (12,046) (12,074) (12,060) Core deposit intangibles (8,981) (8,777) (8,919) (9,176) (9,431) - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- NET INCOME IN ACCORDANCE WITH GAAP $ 59,860 57,611 55,535 52,290 (8,412) - ------------------------------------------------------------------------ -------- ------- ------- ------- -------- EARNINGS PER COMMON SHARE Net income (loss): Basic $ .29 .28 .27 .25 (.04) Diluted .29 .28 .27 .25 (.04) Operating cash earnings (1): Basic .42 .39 .37 .36 .32 Diluted .42 .39 .37 .35 .32
(1) NCF analyzes its performance on a net income basis in accordance with accounting principles generally accepted in the United States, as well as on an operating cash basis before non-recurring items and amortization of intangibles referred to as "operating cash earnings." Operating cash earnings are presented as supplemental information to enhance the reader's understanding of, and highlight trends in, NCF's financial results excluding the impact of these items. Operating cash earnings should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. - -------------------------------------------------------------------------------- 17 FINANCIAL POSITION Loans Loans are the largest category of earning assets and generate the highest yields. Loan growth and maintenance of a high quality loan portfolio are key ingredients to improving our earnings. We believe our strategy of lending to small- to medium-sized commercial customers and consumers allows a higher interest rate spread which helps support the net interest margin as well as limiting our credit losses. Table 6 presents the year-end breakdown of the major categories of the loan portfolio for the previous five years based upon regulatory classifications. The 2000 acquisitions contributed over $6 billion to outstanding loans. TABLE 6 Loan Portfolio
As of December 31 ---------------------------------------------------- In Thousands 2001 2000 1999 1998 1997 - -------------------------------------- ----------- ---------- --------- --------- --------- Commercial, financial and agricultural $ 1,325,049 1,223,032 689,945 592,136 512,534 Real estate -- construction 2,195,516 1,907,533 283,033 242,993 241,334 Real estate -- mortgage 6,926,805 5,959,114 1,625,374 1,153,717 781,826 Consumer 1,329,721 1,730,940 1,356,824 1,181,659 1,045,420 Revolving credit 61,713 58,840 -- -- -- Lease financing 152,918 145,883 33,405 29,568 30,046 - -------------------------------------- ----------- ---------- --------- --------- --------- Total gross loans 11,991,722 11,025,342 3,988,581 3,200,073 2,611,160 Less: Unearned income 16,957 16,923 2,792 2,400 2,193 - -------------------------------------- ----------- ---------- --------- --------- --------- Total loans $11,974,765 11,008,419 3,985,789 3,197,673 2,608,967 - -------------------------------------- ----------- ---------- --------- --------- ---------
Loans in the commercial, financial and agricultural category consist primarily of short-term and/or floating rate commercial loans made to small- to medium-sized companies. There is no substantial loan concentration in any one industry or to any one borrower. Real estate-construction loans are primarily made to commercial developers and residential contractors on a floating rate basis. Cash flow analyses for each project are the primary decision factor, with additional reliance upon collateral values. We expect moderate growth in these categories during 2002 while maintaining our focus on quality credit underwriting. Real estate-mortgage loans consist of loans secured by first or second deeds of trust on primary residences ($3.7 billion or 54% of total real estate-mortgage loans), multifamily residential properties and commercial properties. Our general policy is to sell current originations of 30-year, fixed-rate residential mortgages and retain only certain loans in the portfolio. Consequently, we expect very modest growth in 2002 in the first lien residential mortgage segment. However, in the second lien/home equity line segment, we expect higher growth rates. Consumer loans consist primarily of loans secured by automobiles and other consumer personal property. Lending officers consider the customer's debt obligations, ability and willingness to repay and general economic trends in their decision to extend credit. We anticipate continued declines in our consumer indirect lending portfolio having exited our affiliation with State Farm during 2001. Revolving credit includes overdraft protection and traditional credit card products. We expect only moderate growth during 2002. The leasing portfolio is not concentrated in any one line of business or type of equipment. We anticipate moderate growth in this category during 2002. TABLE 7 Maturities and Sensitivities of Loans to Changes in Interest Rates
As of December 31, 2001 ------------------------------------ Commercial, Financial and Real Estate- In Thousands Agricultural Construction Total -------------------------------------- ------------- ------------ --------- Due in one year or less $ 584,644 329,567 914,211 Due after one year through five years: Fixed interest rates 339,051 497,772 836,823 Floating interest rates 126,751 329,839 456,590 Due after five yeras: Fixed interest rates 103,009 227,589 330,598 Floating interest rates 171,594 810,749 982,343 -------------------------------------- ------------- ------------ --------- Total $1,325,049 2,195,516 3,520,565 -------------------------------------- ------------- ------------ ---------
18 Securities We segregate debt and equity securities that have readily determinable fair values into one of three categories for accounting and reporting purposes. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Trading securities totaled $197.2 million at December 31, 2001, which result exclusively from our institutional broker/dealer business. Debt securities that we have the positive intent and ability to hold until maturity are classified as held to maturity securities and are reported at amortized cost. Securities held to maturity totaled $900.8 million, comprising 20 percent of the total investment securities portfolio at December 31, 2001. Debt and equity securities not classified as either trading or held to maturity are classified as available for sale and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity, net of taxes. At December 31, 2001, securities available for sale totaled $3.6 billion, which represented 80 percent of the total investment securities portfolio. See Table 8 for additional information about our investment securities portfolio. The mark-to-market adjustment for available for sale securities totaled $22.1 million in net unrealized gains at December 31, 2001. After considering applicable tax benefits, the mark-to-market adjustment resulted in a $12.7 million increase to total stockholders' equity. As of December 31, 2000, the mark-to-market adjustment for unrealized gains on available for sale securities totaled $38.5 million and resulted in a net $22.8 million increase to stockholders' equity after applying applicable taxes. We do not currently anticipate selling a significant amount of the securities available for sale in the near future. Future fluctuations in stockholders' equity may occur due to changes in the market values of debt and equity securities classified as available for sale. 19 TABLE 8 Investment Securities Portfolio
As of December 31 ------------------------------------------ 2001 2000 -------------------- -------------------- AMORTIZED CARRYING Amortized Carrying In Thousands COST VALUE Cost Value - --------------------------------------------------- ---------- ---------- --------- ---------- SECURITIES AVAILABLE FOR SALE U.S. Treasury $ 44,194 46,065 54,580 55,295 U.S. Government agencies and corporations 3,036,377 3,051,893 1,550,026 1,582,051 States and political subdivisions 86,466 88,987 111,222 113,831 Debt and equity securities 422,541 424,761 647,182 650,349 - --------------------------------------------------- ---------- ---------- --------- ---------- Total securities available for sale $3,589,578 3,611,706 2,363,010 2,401,526 - --------------------------------------------------- ---------- ---------- --------- ---------- MATURITY AND YIELD SCHEDULE AS OF DECEMBER 31, 2001 WEIGHTED CARRYING AVERAGE VALUE YIELD (1) ---------- ---------- U.S. Treasury: Within 1 year $ 34,471 6.52% After 1 but within 5 years 11,594 8.11 - --------------------------------------------------- ---------- ---------- Total U.S. Treasury 46,065 6.89 - --------------------------------------------------- ---------- ---------- U.S. Government agencies and corporations: Within 1 year 1,163 7.88 After 1 but within 5 years 1,410,261 5.10 After 5 but within 10 years 378,898 6.25 After 10 years (2) 1,261,571 6.13 - --------------------------------------------------- ---------- ---------- Total U.S. Government agencies and corporations 3,051,893 5.67 - --------------------------------------------------- ---------- ---------- States and political subdivisions: Within 1 year 15,754 17.15 After 1 but within 5 years 26,469 7.37 After 5 but within 10 years 38,172 8.78 After 10 years 8,592 8.91 - --------------------------------------------------- ---------- ---------- Total State and political subdivisions 88,987 9.88 - --------------------------------------------------- ---------- ---------- Debt and equity securities 424,761 5.93 - --------------------------------------------------- ---------- ---------- Total securities available for sale $3,611,706 5.81% - --------------------------------------------------- ---------- ---------- As of December 31 ------------------------------------------ 2001 2000 -------------------- -------------------- CARRYING Carrying VALUE FAIR VALUE Value Fair Value ---------- ---------- --------- ---------- SECURITIES HELD TO MATURITY U.S. Government agencies and corporations $ 408,593 415,701 1,434,282 1,407,912 States and political subdivisions 65,008 66,572 75,702 77,109 Debt securities 427,149 431,410 506,811 499,679 - --------------------------------------------------- ---------- ---------- --------- ---------- Total securities held to maturity $ 900,750 913,683 2,016,795 1,984,700 - --------------------------------------------------- ---------- ---------- --------- ---------- MATURITY AND YIELD SCHEDULE AS OF DECEMBER 31, 2001 WEIGHTED CARRYING AVERAGE VALUE YIELD (1) ---------- ---------- U.S. Government agencies and corporations: After 1 but within 5 years $ 93,015 5.93% After 5 but within 10 years 115,390 5.71 After 10 years (2) 200,188 5.95 - --------------------------------------------------- ---------- ---------- Total U.S. Government agencies and corporations 408,593 5.90 - --------------------------------------------------- ---------- ---------- States and political subdivisions: Within 1 year 1,965 24.21 After 1 but within 5 years 24,464 8.70 After 5 but within 10 years 38,054 8.62 After 10 years 525 7.06 - --------------------------------------------------- ---------- ---------- Total State and political subdivisions 65,008 9.12 - --------------------------------------------------- ---------- ---------- Debt securities 427,149 6.96 - --------------------------------------------------- ---------- ---------- Total securities held to maturity $ 900,750 6.64% - --------------------------------------------------- ---------- ----------
(1) Where applicable, the weighted average yield is computed on a taxable equivalent basis using a 35% federal tax rate and applicable state tax rates. (2) The amount shown consists primarily of mortgage-backed securities which have monthly curtailments of principal even though the final maturity of each security is in excess of 10 years. 20 Deposits Interest-bearing deposits as a percentage of total deposits have been stable over the past three years at 88 to 89 percent. Non-interest bearing deposits to total deposits improved 1 percent in 2001 due to introduction of a free-checking product and the deposit mix of our 2001 acquisitions. See Table 9 for average deposits by type for the three-year period ended December 31, 2001. Table 9 is significantly impacted by the July 2000 acquisitions of CCB. CCB's average balances are included for the full year 2001 and approximately one-half year in 2000. TABLE 9 Average Deposits
Years Ended December 31 ------------------------------------------------------- 2001 2000 1999 ------------------ ----------------- ----------------- AVERAGE AVERAGE Average Average Average Average In Thousands BALANCE RATE Balance Rate Balance Rate - -------------------------------------- ----------- ------- --------- ------- --------- ------- SAVINGS AND TIME DEPOSITS: Savings, NOW and money market accounts $ 4,665,362 2.98% 2,960,959 3.85 1,641,984 3.63 Time 5,837,327 5.48 4,266,610 6.31 2,031,303 5.08 - -------------------------------------- ----------- ------- --------- ------- --------- ------- Total savings and time deposits 10,502,689 4.09% 7,227,569 5.04 3,673,287 4.17 ---- ---- ---- DEMAND DEPOSITS 1,448,014 930,713 447,416 - -------------------------------------- ----------- --------- --------- Total deposits $11,950,703 8,158,282 4,120,703 - -------------------------------------- ----------- --------- ---------
Borrowings In December 2001, we issued $200 million of trust preferred securities whose proceeds will be used for additional capital infusion into the Subsidiary Banks and other corporate purposes. The trust preferred securities qualify as Tier 1 capital under the risk-based capital guidelines. FHLB advances increased $657.5 million from December 31, 2000 due to the previously discussed re-positioning of our liability-sensitive balance sheet and to fund loan growth. The new borrowings are primarily FHLB advances with maturities in excess of one year. CAPITAL RESOURCES Equity Capital Management plans to continue its efforts to increase the return on average equity while providing stockholders with a reasonable cash return. A stock repurchase plan was authorized beginning in 1996 for purposes of offsetting stock issuances planned for stock option and other employee benefit plans. During the three years ended December 31, 2001, over 7 million shares have been repurchased, of which 4.3 million were repurchased in 2001 at an average cost of $24.02 per share. Management plans to maintain a dividend payout ratio between 30 and 40 percent of operating cash earnings in order to achieve continued internal capital growth. Our average tangible equity to average tangible assets ratio remains strong at 7.4 percent and 7.1 percent for 2001 and 2000, respectively. NCF's stock is traded on the New York Stock Exchange under the symbol NCF. The stock prices listed in Table 10 represent the high, low and closing sales prices and cash dividends declared per share for the indicated periods. TABLE 10 Stock Prices and Dividends
Prices Cash ------------------ Dividends High Low Close Declared ------ ----- ----- --------- 2001 FIRST QUARTER $27.44 21.56 24.81 .13 SECOND QUARTER 25.55 22.15 24.37 .13 THIRD QUARTER 27.05 22.00 26.10 .15 FOURTH QUARTER 26.10 22.29 25.30 .15 -------------- ------ ----- ----- --------- 2000 First Quarter $22.69 15.50 18.50 .11 Second Quarter 19.94 16.06 16.06 .11 Third Quarter 20.13 15.25 19.94 .13 Fourth Quarter 25.19 17.65 24.75 .13 -------------- ------ ----- ----- ---------
21 Regulatory Capital 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 percent 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 percent for Tier I capital and 8 percent 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. Table 11 discloses NCF's components of capital, risk-adjusted asset information and capital ratios. T A B L E 11 Capital Information and Ratios
As of December 31 ----------------------- In Thousands 2001 2000 ------------------------------ ----------- ---------- Tier I capital $ 1,492,718 1,169,780 Tier II capital: Allowable loan loss reserve 156,401 143,614 Subordinated debt 6,600 13,194 Other 76 -- ------------------------------ ----------- ---------- Total capital $ 1,655,795 1,326,588 ------------------------------ ----------- ---------- Risk-adjusted assets $13,516,622 12,292,660 Average regulatory assets 17,261,097 16,365,141 Tier I capital ratio 11.04% 9.52 Total capital ratio 12.25 10.79 Leverage ratio 8.65 7.15 ------------------------------ ----------- ----------
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 December 31, 2001. CORPORATE RISK PROFILE Managing the risks of our financial services businesses is essential for successful operations. Our primary risks are credit, interest rate, market and liquidity. Credit risk is the risk of not collecting principal and interest on loans or investments when due. Interest rate risk is the risk of economic loss resulting from adverse changes in interest rates. Market risks primarily arise from fluctuations in interest rates that may result in changes in the value of financial instruments that are accounted for on a mark-to-market basis, such as trading account securities. Liquidity risk is the possibility that we are unable to meet obligations to our depositors, shareholders or borrowers including deposit withdrawals, funding of loan commitments and payment of dividends. Credit Risk Management Our credit risk management begins with our loan underwriting policies. Our loan portfolio is comprised primarily of secured credits with no significant borrower or industry concentration. We have insignificant shared national credit exposure. Substantially all loans are made on a secured basis with the exception of certain revolving credit accounts and are generally originated for retention in the portfolio, with the exception of marketable mortgage loans. Lending officers of the Subsidiary Banks generally consider the cash flow or earnings power of the borrower as the primary source of repayment. The Subsidiary Banks do not engage in highly leveraged transactions or foreign lending activities. In evaluating loan credit risk, management considers changes, if any, in internal loan grades based on loan review, the nature and volume of the loan portfolio, actual and projected credit quality trends (including delinquency, charge-off and bankruptcy rates) and current economic conditions that may impact a borrower's ability to pay. Generally, the domestic economy has experienced slower growth rates than those of 2000. The stagnant economic growth is evidenced by the Federal Reserve Board's actions in 2001 to stimulate economic growth through a series of interest rate reductions. While our credit review procedures are proactive and take into account changing economic conditions, we did an extensive review of the industries we felt were most impacted by the declining economic environment experienced in the third to fourth quarters including hospitality, entertainment and aviation. Through our reviews, we confirmed that we did not have extensive concentrations of credit in these industries and that no specific customers in those industries required a credit review downgrade. 22 ALLOWANCE FOR LOAN LOSSES 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 the 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 pools of loans. Management responsible for credit and financial matters perform the assessment and establish the amount of the allowance for loan losses. Our quarterly evaluation process provides for self-correction through periodic adjustment of loss factors based on actual experience if unanticipated events are encountered within an individual or group of credits. The analysis of individual credit relationships is the first factor in the evaluation process. Individual credit relationships in excess of $500,000 or with specific credit characteristics are evaluated for collectibility and for potential impairment by our independent loan review staff. Impaired loans are measured using the approach specified by SFAS No. 114. Commercial, residential construction, small business and consumer loans not reviewed for impairment under SFAS 114, or not considered impaired after an SFAS 114 review, are considered on a portfolio basis as the second factor in the evaluation process. These loans are evaluated as pools of loans based on payment status for the consumer portfolio and an internal credit risk grading system for commercial and small business loans. An allowance is calculated for each consumer loan pool using loss factors based on a monthly analysis of delinquency trends and historical loss experience. Loss factors for the commercial and small business loan pools are based on average historical yearly loss experience. Various credit quality trends (i.e., internal grading changes, delinquencies, charge-offs, non-accruals, and criticized/classified assets), which may impact portfolio performance, are also considered in determining the loss factors for each loan pool. The third factor in the evaluation process is the unallocated allowance which considers factors including industry, borrower or collateral concentrations; changes in lending policies and underwriting; current loan volumes; experience of our lending staff; current general economic data and conditions; fraud risk; and risk inherent in the loss estimation process for pools of loans. Table 12 presents a summary of loss experience and the allowance for loan losses for the previous five years. Net charge-offs in the five-year period ended 2001 occurred primarily in the consumer loan portfolio. With our conservative underwriting of primarily small- to medium-sized, secured loans, we have maintained low net charge-off ratios in a challenging economic environment. Net charge-offs and the provision for loan losses were impacted significantly by the July 2000 merger with CCB. CCB's net charge-offs and provision are included for the full year 2001 and approximately one-half of 2000. 23 TABLE 12 Summary of Loan Loss Experience and the Allowance for Loan Losses
Years Ended December 31 -------------------------------------------------------- In Thousands 2001 2000 1999 1998 1997 - -------------------------------------------------------- ----------- ---------- --------- --------- --------- BALANCE AT BEGINNING OF YEAR $ 143,614 59,597 49,122 43,297 35,514 Loan losses charged to allowance: Commercial, financial and agricultural (4,486) (1,826) (896) (522) (250) Real estate -- construction (176) (29) (40) (946) (95) Real estate -- mortgage (1,951) (3,418) (2,346) (808) (222) Consumer (21,088) (12,354) (8,440) (8,430) (10,850) Revolving credit (2,496) (1,863) -- -- -- Lease financing (1,440) (193) (744) (943) (1,382) - -------------------------------------------------------- ----------- ---------- --------- --------- --------- Total loan losses charged to allowance (31,637) (19,683) (12,466) (11,649) (12,799) - -------------------------------------------------------- ----------- ---------- --------- --------- --------- Recoveries of loans previously charged-off: Commercial, financial and agricultural 816 258 66 1,152 73 Real estate -- construction 11 2 473 197 57 Real estate -- mortgage 55 878 222 51 33 Consumer 5,235 2,809 2,631 2,219 2,221 Revolving credit 1,258 819 -- -- -- Lease financing -- 250 584 420 560 - -------------------------------------------------------- ----------- ---------- --------- --------- --------- Total recoveries of loans previously charged-off 7,375 5,016 3,976 4,039 2,944 - -------------------------------------------------------- ----------- ---------- --------- --------- --------- Net charge-offs (24,262) (14,667) (8,490) (7,610) (9,855) Provision charged to operations 29,199 16,456 16,921 10,710 17,013 Allowance related to acquired financial institutions 7,850 82,228 2,044 2,725 625 - -------------------------------------------------------- ----------- ---------- --------- --------- --------- BALANCE AT END OF YEAR $ 156,401 143,614 59,597 49,122 43,297 - -------------------------------------------------------- ----------- ---------- --------- --------- --------- Loans outstanding at end of year $11,974,765 11,008,419 3,985,789 3,197,673 2,608,967 Ratio of allowance for loan losses to loans outstanding at end of year 1.31% 1.30 1.50 1.54 1.66 Coverage of allowance for loan losses to net charge-offs 6.45X 9.79 7.02 6.45 4.39 Average loans outstanding $11,332,177 7,427,320 3,489,625 3,040,662 2,513,327 Ratio of net charge-offs of loans to average loans .21% .20 .24 .25 .39 Ratio of recoveries to charge-offs 23.31 25.48 31.89 34.67 23.00
NCF's provision for loan losses increased from $16.5 million in 2000 to $29.2 million in 2001. The ratio of the allowance for loan losses to loans outstanding was 1.31 percent and 1.30 percent at December 31, 2001 and 2000, respectively. The increase in loan loss provision in 2001 as compared to 2000 was primarily attributable to an increase in net charge-offs of approximately $10 million in 2001 compared to 2000 (.21 percent of average loans compared to .20 percent in 2000) and growth in our total loan portfolio of approximately 3.6 percent, adjusted for the increase attributable to 2001 acquisitions. We experienced a favorable change in our loan mix whereby the loan segment with the highest losses historically, consumer loans, made up a smaller percentage of the total portfolio and two segments, real estate--construction and real estate--mortgage, which historically have had lower loss rates, made up a larger percentage of the portfolio. See Table 13 for an analysis of the percentage of each loan segment to total loans. Offsetting the favorable mix change, we felt that it was prudent to increase the unallocated portion of the allowance by $2.5 million in recognition of worsening economic conditions and higher levels of nonperforming assets and total risk assets. The 2000 provision for loan losses and the ratio of the allowance for loan losses to loans outstanding were impacted significantly by our merger with CCB. The decreases in the provision and the ratio of the allowance to loans outstanding reflected improvements in asset quality evidenced by the reduction in net charge-offs as a percentage of average loans, from .24 percent in 1999 to .20 percent in 2000, and a favorable change in mix of the loan portfolio. Both trends were direct results of the CCB merger; CCB experienced a lower ratio of net charge-offs to average loans than NCF and CCB's portfolio consists predominantly of real estate -- construction and real estate -- mortgage loans. These categories of loans have historically experienced a low level of net charge-offs; as a result, CCB's ratio of the allowance for loan losses to loans outstanding of 1.27 percent at the time the merger was completed was lower than NCF's ratio. As a result of the merger and other activity in the loan portfolio in 2000, the combined real estate -- construction and real estate -- mortgage portfolios increased from 48 percent of total loans at December 31, 1999 to 71 percent of total loans at December 31, 2000. Similarly, in 2000, the consumer loan portfolio, which had ac- 24 counted for approximately 80 percent of NCF's net charge-offs in past years, declined from 34 percent of total loans at December 31, 1999 to 16 percent at December 31, 2000. This decline is attributable to the relatively smaller consumer portfolio of CCB and also to a decision to exit our business affiliation with State Farm, which was a source of indirect auto loans. As a result of the improved mix and decline in net charge-off ratio, we reduced our unallocated allowance component by $5.1 million in 2000. The improved portfolio mix and decline in net charge-off ratio were partially offset by higher levels of total risk assets at December 31, 2000 as compared to December 31, 1999 and higher levels of internally classified assets, primarily in the commercial, financial and agricultural loan category. Management believes that the allowance for loan losses 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. Table 13 presents an allocation of the allowance for loan losses as of the end of the previous five years. In conjunction with the CCB merger into NBC in 2001, we conformed the factors used by the two banks. Presentation of prior years' allocations have not been restated. The allocation is based on the regulatory classification of our portfolios, which focuses on the loan collateral, and differs from our internal classification, which focuses on the purpose of the loan. TABLE 13 Allocation of the Allowance for Loan Losses
As of December 31 --------------------------------------------------------------------------- 2001 2000 1999 1998 ----------------- ------------------ ------------------ ------------------ Amount % of Amount % of Amount % of Amount % of of Loans of Loans of Loans of Loans Allowance in Each Allowance in Each Allowance in Each Allowance in Each In Thousands Allocated Category Allocated Category Allocated Category Allocated Category - -------------------------------------- --------- -------- --------- -------- --------- -------- --------- -------- Commercial, financial and agricultural $ 35,782 11.0% 33,866 11.1 7,471 17.3 4,675 18.5 Real estate -- construction 23,829 18.3 15,410 17.3 1,640 7.1 1,017 7.6 Real estate -- mortgage 25,203 57.8 20,183 54.1 15,324 40.8 11,366 36.1 Consumer 17,184 11.1 22,086 15.7 10,739 34.0 8,227 36.9 Revolving credit 3,144 .5 4,280 .5 -- -- -- -- Lease financing 2,028 1.3 1,011 1.3 1,492 .8 1,374 .9 Unallocated portion of allowance 49,231 -- 46,778 -- 22,931 -- 22,463 -- - -------------------------------------- --------- -------- --------- -------- --------- -------- --------- -------- Total $156,401 100.0% 143,614 100.0 59,597 100.0 49,122 100.0 - -------------------------------------- --------- -------- --------- -------- --------- -------- --------- --------
1997 ------------------ Amount % of of Loans Allowance in Each In Thousands Allocated Category - -------------------------------------- --------- -------- Commercial, financial and agricultural 1,934 19.6 Real estate -- construction 579 9.2 Real estate -- mortgage 7,223 30.0 Consumer 5,056 40.0 Revolving credit -- -- Lease financing 2,634 1.2 Unallocated portion of allowance 25,871 -- - -------------------------------------- --------- -------- Total 43,297 100.0 - -------------------------------------- --------- --------
The allocation for loan losses for commercial, financial and agricultural loans increased from $33.9 million in 2000 to $35.8 million in 2001, representing 2.70 percent of outstanding loans in 2001, down from 2.77 percent in 2000. The allocated portion related to the real estate -- construction segment increased from $15.4 million in 2000 to $23.8 million in 2001 primarily due to growth in the portfolio and a rise in delinquencies. The real estate -- construction portfolio continues to experience a low level of net charge-offs. The allocated allowance amounted to 1.09 percent of outstanding loans in 2001 compared to .81 percent in 2000 due to the increase in delinquencies and the conforming of factors between CCB and NBC mentioned earlier. The increase in the allocated loss reserves for real estate -- mortgage, from $20.2 million in 2000 to $25.2 million in 2001, reflect increases in commercial mortgage loans, second mortgages and home equity credit lines. These categories of loans have experienced higher losses than residential first mortgages. The allowance allocation amounts to .36 percent of outstanding loans in 2001 compared to .34 percent in 2000. The allocation for loan losses in the consumer loan segment decreased from $22.1 million in 2000 to $17.2 million in 2001 due primarily to the decline in our automobile portfolio. As noted earlier, our largest category of net charge-offs relates to consumer loans. The allowance for consumer loans amounts to 1.29 percent of outstanding loans in 2001, up slightly from 1.28 percent in 2000. The unallocated allowance increased from $46.8 million in 2000 to $49.2 million at December 31, 2001 due to increases in non-performing assets and total risk assets and in recognition of worsening economic conditions. At December 31, 2001, the unallocated reserve equaled .41 percent of total loans compared to .42 percent at December 31, 2000 and .58 percent for NCF at December 31, 1999, prior to the CCB merger. 25 In discussing the changes in the allocation of the allowance for loan losses between 1999 and 2000, the CCB merger on July 5, 2000, makes the year-to-year analysis somewhat more complex. The CCB loan portfolio comprised approximately 62 percent of the total loan portfolio at December 31, 2000; accordingly, the allocated portion of the allowance for loan losses related to all loan categories increased significantly from 1999 to 2000. The overall approach and methodology used in establishing the allowance for loan losses for CCB was substantially the same as that used by NCF during the period. The unallocated reserve increased by $23.9 million in 2000 from December 31, 1999's $22.9 million. This increase included the addition of CCB's $29 million unallocated reserve at the date the merger was consummated net of a decrease in the provision for unallocated loan losses of $5.1 million. The reduction in provision related to the unallocated reserve reflected the improved net charge-off profile and portfolio mix following the CCB merger, among other factors. Although the allocation of the allowance is an important management process, no portion of the allowance is restricted to any individual or group of loans; rather the entire allowance is available to absorb losses for the entire loan portfolio. ASSET QUALITY Non-performing assets (non-accrual loans and other real estate acquired through loan foreclosures) and total risk assets (non-performing assets plus accruing loans 90 days or more past due and restructured loans) at the end of each of the previous five years are presented in Table 14. CCB's non-performing and risk assets are not included prior to December 31, 2000. Non-performing and risk assets have both increased since December 2000 as a result of the economic conditions discussed earlier. Risk assets as a percentage of total loans outstanding plus other real estate were .68 percent at December 31, 2001 compared to .38 percent at December 31, 2000. Sixty percent of the non-accrual loans are loans secured by real estate: construction/land development, one-to-four family residential properties and commercial real estate. The next largest category of non-accrual loans is commercial and industrial. While accruing loans 90 days or more past due have increased $22.2 million over 2000's level, the majority of these loans are comprised of the three categories of loans secured by real estate listed previously. Consequently, we do not anticipate significant losses on these loans. Consumer loans are the next largest category. Our allowance for loan losses to risk assets was 1.91 times at December 31, 2001 compared to 3.46 times at December 31, 2000. Risk assets and the ratio of the allowance for loan losses to risk assets have been impacted significantly by our July 5, 2000 merger with CCB as its risk assets and allowance for loan losses are not included prior to December 31, 2000. CCB's allowance for loan losses represented 2.48 times total risk assets at the time of the merger. Non-performing assets and total risk assets are only one of several asset quality measures we analyze. Despite the increase throughout 2001 in these measures, our net charge-offs remained low at .21 percent of average loans in 2001 compared to .20 percent in 2000. Our allowance for loan losses was 6.45 times annual net charge-offs at December 31, 2001 compared to 9.79 times annual net charge-offs at December 31, 2000. TABLE 14 Non-Performing and Risk Assets
As of December 31 ---------------------------------- In Thousands 2001 2000 1999 1998 1997 - -------------------------------------------------------- ------- ------ ------ ----- ----- Nonaccrual loans $22,800 7,219 -- 533 -- Other real estate acquired through loan foreclosures 10,687 5,652 271 442 -- - -------------------------------------------------------- ------- ------ ------ ----- ----- Total non-performing assets 33,487 12,871 271 975 -- Restructured loans -- 2,232 -- -- -- Accruing loans 90 days or more past due 48,553 26,362 5,470 4,218 3,134 - -------------------------------------------------------- ------- ------ ------ ----- ----- Total risk assets $82,040 41,465 5,741 5,193 3,134 - -------------------------------------------------------- ------- ------ ------ ----- ----- Ratio of non-performing assets to: Loans outstanding and other real estate acquired through loan foreclosures .28% .12 .01 .03 -- Total assets .17 .07 -- .02 -- Ratio of total risk assets to: Loans outstanding and other real estate acquired through loan foreclosures .68 .38 .14 .16 .12 Total assets .43 .23 .08 .09 .07 Allowance for loan losses to total non-performing assets 4.67 11.16 219.92 50.38 -- Allowance for loan losses to total risk assets 1.91 3.46 10.38 9.46 13.82 - -------------------------------------------------------- ------- ------ ------ ----- -----
26 Our general non-accrual policy is to place credits in a non-accrual status when the collectibility of principal or interest is doubtful or when payment of principal or interest is 90 days or more past due (unless determined that the collectibility is not reasonably considered in doubt). Loans are considered impaired if it is probable that we will be unable to collect all amounts due under the terms of the loan agreement. The value of the impaired loan is based on discounted cash flows or the fair value of the collateral for a collateral-dependent loan. Any impairment losses are recognized through charges to the allowance for loan losses. At December 31, 2001 impaired loans amounted to $62.3 million, of which $14.9 million were not accruing interest. At December 31, 2000, these amounts were $12.5 million and $6 million, respectively. The related allowance for loan losses on these loans amounted to $16.8 million and $3.6 million at December 31, 2001 and 2000, respectively. Interest Rate Risk Management We are concerned with managing interest sensitivity so as to avoid significant net interest margin fluctuations while promoting consistent net income increases during periods of changing interest rates. Interest sensitivity is our primary market risk and is defined as the risk of economic loss resulting from adverse changes in interest rates. This risk of loss can be reflected in reduced potential net interest income in future periods. The structure of our loan and deposit portfolios is such that a significant increase or decline in interest rates may adversely impact net interest income. Responsibility for managing interest rate, market and liquidity risks rests with the Asset/Liability Management Committee ("ALCO") comprised of senior management. ALCO reviews interest rate and liquidity exposures and, based on its view of existing and expected market conditions, adopts balance sheet strategies that are intended to optimize net interest income to the extent possible while minimizing the risk associated with changes in interest rates. Interest rate sensitivity varies with different types of interest-earning assets and interest-bearing liabilities. Overnight federal funds, on which rates change daily, and loans which are tied to the prime rate are much more interest rate sensitive than fixed-rate securities and loans. Similarly, time deposits of $100,000 and over and money market accounts are much more interest rate sensitive than savings accounts. The shorter-term interest rate sensitivities are the key to measurement of the interest sensitivity gap, or difference between interest-sensitive earning assets and interest-sensitive liabilities. Trying to minimize this gap is a continual challenge in a changing interest rate environment and one of the objectives of the ALCO. ALCO uses Gap Analysis as one method to determine and monitor the appropriate balance between interest-sensitive assets and interest-sensitive liabilities. Gap Analysis measures the interest sensitivity of assets and liabilities at a given point in time. The interest sensitivity of assets and liabilities is based on the timing of contractual maturities and repricing opportunities. A positive interest-sensitive gap occurs when interest-sensitive assets exceed interest-sensitive liabilities. The reverse situation results in a negative gap. Management feels that an essentially balanced position (+/- 15 percent of tangible assets) between interest-sensitive assets and liabilities is necessary in order to protect against wide fluctuations in interest rates, which was achieved at December 31, 2001. An analysis of our interest sensitivity position at December 31, 2001 is presented in Table 15. At December 31, 2001, we had a cumulative "negative gap" (interest-sensitive liabilities and interest rate swaps exceed interest-sensitive assets) of $1.2 billion or 7.40 percent of total earning assets over a twelve-month horizon. The ratio of interest-sensitive assets to interest-sensitive liabilities and interest rate swaps was .87x. 27 T A B L E 15 Interest Sensitivity Analysis
As of December 31, 2001 (1) --------------------------------------------------------------------- 6 Months Beyond 1 30 Days 6 Months to 1 Year Total Year In Thousands Sensitive Sensitive Sensitive Sensitive Sensitive Total - ----------------------------- ---------- ---------- ---------- ---------- --------- ---------- EARNING ASSETS: Time deposits in other banks $ 31,118 -- -- 31,118 -- 31,118 Federal funds sold and other short-term investments 51,873 -- -- 51,873 -- 51,873 Investment securities (2) 587,924 707,844 543,502 1,839,270 2,651,058 4,490,328 Trading securities 197,214 -- -- 197,214 -- 197,214 Loans 4,050,204 870,268 942,369 5,862,841 6,111,924 11,974,765 - ----------------------------- ---------- ---------- ---------- ---------- --------- ---------- Total earning assets 4,918,333 1,578,112 1,485,871 7,982,316 8,762,982 16,745,298 - ----------------------------- ---------- ---------- ---------- ---------- --------- ---------- INTEREST-BEARING LIABILITIES: Savings deposits 1,192,982 625,869 625,869 2,444,720 2,785,901 5,230,621 Time deposits 1,009,868 2,672,921 1,068,315 4,751,104 905,614 5,656,718 Short-term borrowed funds 1,131,617 -- -- 1,131,617 10,000 1,141,617 FHLB advances and long-term debt 368,560 280,579 45,493 694,632 1,893,940 2,588,572 - ----------------------------- ---------- ---------- ---------- ---------- --------- ---------- Total interest-bearing liabilities 3,703,027 3,579,369 1,739,677 9,022,073 5,595,455 14,617,528 - ----------------------------- ---------- ---------- ---------- ---------- --------- ---------- INTEREST RATE SWAPS: Pay floating/receive fixed -- 200,000 -- 200,000 (200,000) -- - ----------------------------- ---------- ---------- ---------- ---------- --------- ---------- Total interest rate swaps -- 200,000 -- 200,000 (200,000) -- - ----------------------------- ---------- ---------- ---------- ---------- --------- ---------- Interest sensitivity gap $1,215,306 (2,201,257) (253,806) (1,239,757) - ----------------------------- ---------- ---------- ---------- ---------- Cumulative gap $1,215,306 (985,951) (1,239,757) - ----------------------------- ---------- ---------- ---------- Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities and interest rate swaps 1.33x .87 .87 - ----------------------------- ---------- ---------- ---------- Cumulative gap to total earning assets 7.26 % (5.89) (7.40) - ----------------------------- ---------- ---------- ----------
(1) Assets and liabilities that mature in one year or less and/or have interest rates that can be adjusted during this period are considered interest-sensitive. The interest sensitivity position has meaning only as of the date for which it is prepared. (2) Investment securities are presented at their amortized cost. The mark-to-market adjustment of $22.1 million for available for sale securities is not included. - -------------------------------------------------------------------------------- Management uses both on- and off-balance sheet strategies to manage the balance sheet. The most efficient and cost-effective method of on-balance sheet management is creating desired maturity and repricing streams through the tactical pricing of interest-earning and interest-bearing on-balance sheet products. ALCO reviews the interest-earning and interest-bearing portfolios to ensure a proper mix of fixed and variable rate products. Emphasis will continue to be placed on granting loans with short maturities and floating rates where possible. This strategy increases liquidity and is necessitated by the continued shortening of maturities and more frequent repricing opportunities of our funding sources. Estimating the amount of interest rate risk requires using assumptions about the future. These estimates will be different from actual results for many reasons, including but not limited to, changes in the growth of the overall economy, changes in credit spreads, market interest rates moving in patterns other than the patterns chosen for analysis, changes in customer preferences, changes in tactical and strategic plans and changes in Federal Reserve policy. Stress testing is performed on all market risk measurement analyses to help understand the relative sensitivity of key assumptions and thereby better understand our risk profile. Management will continue to monitor our interest sensitivity position with the goals of ensuring adequate liquidity while at the same time seeking profitable spreads between the yields on funding uses and the rates paid for funding sources. Market Risk Management Market risk arises from fluctuations in interest rates that may result in changes in the value of financial instruments that are accounted for on a mark-to-market basis, such as trading account securities. NCF's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. NCF utilizes derivative financial instruments to manage interest rate sensitivity and market risk by modifying the repricing or maturity of assets or liabilities. By their nature, derivative instruments are subject to market risk. We do not utilize derivative instruments for speculative purposes. All interest rate derivatives that qualify for hedge accounting are recorded at fair values as other assets or other liabilities on the balance sheet and are designated as either "fair value" or "cash flow hedges". As of December 31, 28 2001, we had derivative financial instruments in the form of fair value hedges related to the trust preferred securities issued in 2001. The notional amount of the hedge is $200 million. Notional amounts do not represent amounts to be exchanged between parties and are not a measure of financial risks, but only provide the basis for calculating interest payments between the counterparties. Net interest received or paid on an interest rate swap agreement is recognized over the life of the contract as an adjustment to interest income (expense) of the modified or "hedged" financial asset or liability. Table 16 provides information about our financial instruments (used for purposes other than trading) that are sensitive to changes in interest rates as of December 31, 2001. Principal cash flow and related weighted average interest rates by contractual maturities for loans, securities and liabilities with contractual maturities are presented. We included assumptions of the impact of interest rate fluctuations on prepayment of residential and home equity loans and mortgage-backed securities based on our historical experience. For core deposits that have no contractual maturity, the principal cash flows and related weighted average interest rates presented are based upon our historical experience, management's judgment and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. Weighted average variable rates are based on the rates in effect at December 31, 2001. Liquidity Risk Management Liquidity ensures that adequate funds are available to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses, provide funds for dividends, debt service and other commitments and operate the organization on an ongoing basis. Funds are primarily provided by our Subsidiary Banks through financial resources from operating activities, expansion of the deposit base, borrowing funds in money market operations and through the sale or maturity of assets. Net cash provided by operating activities and deposits from customers have been our primary sources of liquidity. Correspondent relationships are maintained with several larger banks enabling the Subsidiary Banks to purchase federal funds when needed. Also available as liquidity sources are access to the Federal Reserve discount window and the Subsidiary Banks' lines of credit maintained with the FHLB. These lines of credit are secured by blanket collateral agreements on the Subsidiary Banks' mortgage loan portfolios and certain securities. TABLE 16 Market Risk Disclosure
Principal Amount Maturing in Approximate Fair ---------------------------------------------------------- Value at In Thousands 2002 2003 2004 2005 2006 Thereafter Total December 31, 2001 - ----------------------------------- ---------- --------- --------- ------- ------- ---------- --------- ----------------- RATE SENSITIVE ASSETS: Fixed interest rate loans $1,559,171 1,412,447 1,336,992 848,457 941,549 1,203,052 7,301,668 7,697,000 Average interest rate 8.13% 8.08 7.96 8.23 7.60 7.92 8.00 Variable interest rate loans $1,070,835 448,587 344,694 360,144 454,603 1,994,234 4,673,097 4,673,000 Average interest rate 5.43% 5.41 5.46 5.16 5.05 5.14 5.25 Fixed interest rate securities $1,139,031 801,041 336,836 448,602 688,666 388,979 3,803,155 3,816,000 Average interest rate 6.12% 6.21 5.87 5.04 4.86 6.74 5.83 Variable interest rate securities $ 116,474 90,902 70,825 55,080 42,749 333,271 709,301 709,000 Average interest rate 3.38% 3.22 3.06 2.98 2.98 4.18 3.65 RATE SENSITIVE LIABILITIES: Non-interest-bearing deposits $ 425,530 391,983 391,983 130,661 130,661 261,322 1,732,140 1,732,000 Average interest rate -- -- -- -- -- -- -- Savings and NOW accounts $1,009,465 1,468,240 1,468,240 321,169 321,169 642,338 5,230,621 5,231,000 Average interest rate 2.15% 1.43 1.43 1.05 1.05 1.05 1.47 Time deposits $4,751,104 514,557 330,039 22,412 23,690 14,916 5,656,718 5,766,000 Average interest rate 4.14% 3.95 4.46 5.55 4.64 2.49 4.14 Fixed interest rate borrowings $ 401,988 216,460 150,430 15,280 150,254 1,365,127 2,299,539 2,281,000 Average interest rate 3.22% 5.32 4.79 4.67 4.61 5.18 4.79 Variable interest rate borrowings $1,223,858 157,759 -- -- -- 49,033 1,430,650 1,431,000 Average interest rate 1.74% 1.54 -- -- -- 2.86 1.75 RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Pay variable/receive fixed interest rate swaps $ 200,000 Average pay rate 2.69% Average receive rate 7.70
29 Certificates of deposit in denominations of $100,000 or more are an additional source of liquidity. At December 31, 2001, these accounts totaled $1.4 billion compared to $2 billion at December 31, 2000. During 2001, the maximum month-end balance for certificates of deposit in amounts of $100,000 or more was $2.1 billion. The following is a remaining maturity schedule of these deposits at December 31, 2001 (in thousands):
OVER 3 OVER 6 3 MONTHS THROUGH THROUGH OVER OR LESS 6 MONTHS 12 MONTHS 1 YEAR TOTAL -------- -------- --------- ------ ---------- JUMBO AND BROKERED DEPOSITS $455,298 467,467 432,390 10,879 $1,366,034
Maturities of securities held for investment and sales and maturities of securities categorized as available for sale are other sources of liquidity. Securities with carrying values of $1.3 billion mature in 2002. Securities categorized as available for sale are considered in our asset/liability management strategies and may be sold in response to changes in interest rates, liquidity needs and/or significant prepayment risk. The Parent Company's liquidity is provided though cash dividends from the Subsidiary Banks and its other non-bank subsidiaries as well as its capacity to raise additional borrowed funds as needed. Additionally, the Parent Company has a $50 million unsecured line of credit with a commercial bank available as needed. In the ordinary course of business, we enter into various off-balance sheet commitments and other arrangements to extend credit. At December 31, 2001, we had commitments to extend credit totaling $2.9 billion. These amounts include unused revolving credit lines and home mortgage equity lines of $12 million and $1.1 billion, respectively, at December 31, 2001. Standby letters of credit are commitments issued by the Subsidiary Banks to guarantee the performance of a customer to a third party. The standby letters of credit are generally secured by non-depreciable assets. The Subsidiary Banks had approximately $162 million and $128 million in outstanding standby letters of credit at December 31, 2001 and 2000. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These commitments expose us to the risk of deteriorating credit quality of borrowers to whom a commitment to extend credit has been made; however, no significant credit losses are expected from these commitments and arrangements. In addition to our commitments to extend credit to customers, we have noncancellable, long-term lease commitments totaling $81.1 million at December 31, 2001. Our institutional broker/dealer enters into transactions involving financial instruments with off-balance sheet risk in order to meet the financing and hedging needs of its customers and to reduce its own exposure to fluctuations in interest rates. The contract amounts of those instruments reflect the extent of involvement in particular classes of financial instruments. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities' market values and interest rates. At December 31, 2001, forward contracts for commitments to purchase totaled $190.2 million and commitments to sell totaled $198.7 million. When-issued contracts for commitments to purchase totaled $4.1 million and commitments to purchase totaled $17.2 million at December 31, 2001. Management believes that it has adequate resources available to manage our liquidity needs. OTHER ACCOUNTING MATTERS 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. 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. Any impairment charges from the initial impairment test at the time of adoption would be recognized as a "cumulative effect of change in accounting principles" in the income statement. 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 142 effective January 1, 2002. The amortization provisions of Statement 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization provisions of Statement 142 are effective upon adoption of the Statement. 30 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 of Statement 142, NCF will have unamortized goodwill in the amount of $946.2 million and unamortized identifiable intangible assets in the amount of $251.5 million. Amortization expense related to goodwill totaled $48.2 million and $26.9 million for the years ended December 31, 2001 and 2000, respectively. Because of the extensive effort needed to comply with adoption of Statements 141 and 142, it is not 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 June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. Statement No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The provisions of Statement No. 143 are not expected to have a material impact on the NCF's consolidated financial statements. 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. 31 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Market Risk Management" in Management's Discussion and Analysis of Financial Condition and Results of Operations for further information about market risk. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- (a) The following audited consolidated financial statements and related documents are set forth in this Annual Report on Form 10-K on the pages indicated: National Commerce Financial Corporation and Subsidiaries: Consolidated Balance Sheets at December 31, 2001 and 2000........................................................... 34 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2001............ 35 Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2001.................................................................................... 36 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001........ 37 Notes to Consolidated Financial Statements.......................................................................... 38 (b) The following supplementary data is set forth in this Annual Report on Form 10-K on the page indicated: Quarterly Financial Data.......................................................................................... 58 Report of Management Regarding Responsibility for Financial Statements............................................... 60 Reports of Independent Auditors...................................................................................... 61
33 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
As of December 31 ---------------------- In Thousands Except Share Data 2001 2000 - ------------------------------------------------------------------ ----------- ---------- Assets: Cash and due from banks $ 561,429 446,712 Time deposits in other banks 31,118 32,183 Federal funds sold and other short-term investments 51,873 52,572 Investment securities: Available for sale (amortized cost of $3,589,578 and $2,363,010) 3,611,706 2,401,526 Held to maturity (market values of $913,683 and $1,984,700) 900,750 2,016,795 Trading account securities 197,214 74,417 Loans 11,974,765 11,008,419 Less allowance for loan losses 156,401 143,614 - ------------------------------------------------------------------ ----------- ---------- Net loans 11,818,364 10,864,805 - ------------------------------------------------------------------ ----------- ---------- Premises and equipment 219,595 204,903 Goodwill 946,157 934,467 Core deposit intangibles 251,464 287,707 Other assets 684,043 429,705 - ------------------------------------------------------------------ ----------- ---------- Total assets $19,273,713 17,745,792 - ------------------------------------------------------------------ ----------- ---------- Liabilities: Deposits: Demand (noninterest-bearing) $ 1,732,140 1,366,178 Savings, NOW and money market accounts 5,230,621 4,474,114 Jumbo and brokered certificates of deposit 1,366,034 2,006,741 Time deposits 4,290,684 4,132,598 - ------------------------------------------------------------------ ----------- ---------- Total deposits 12,619,479 11,979,631 Short-term borrowed funds 1,141,617 1,212,903 Federal Home Loan Bank advances 2,306,554 1,649,055 Trust preferred securities and long-term debt 282,018 89,301 Other liabilities 468,714 450,064 - ------------------------------------------------------------------ ----------- ---------- Total liabilities 16,818,382 15,380,954 - ------------------------------------------------------------------ ----------- ---------- Stockholders' equity: Serial preferred stock. Authorized 5,000,000 shares; none issued -- -- Common stock of $2 par value. Authorized 400,000,000 shares; 205,058,713 and 205,246,098 shares issued 410,117 410,492 Additional paid-in capital 1,756,128 1,765,723 Retained earnings 276,342 165,829 Accumulated other comprehensive income 12,744 22,794 - ------------------------------------------------------------------ ----------- ---------- Total stockholders' equity 2,455,331 2,364,838 - ------------------------------------------------------------------ ----------- ---------- Total liabilities and stockholders' equity $19,273,713 17,745,792 - ------------------------------------------------------------------ ----------- ----------
Commitments and contingencies (note 15) See accompanying notes to consolidated financial statements. 34 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income
Years Ended December 31 -------------------------- In Thousands Except Per Share Data 2001 2000 1999 - --------------------------------------------------------------- ---------- ------- ------- Interest income: Interest and fees on loans $ 945,628 688,304 301,063 Interest and dividends on investment securities: U.S. Treasury 2,892 4,168 2,049 U.S. Government agencies and corporations 191,528 169,300 97,521 States and political subdivisions (primarily tax-exempt) 9,084 8,398 7,485 Equity and other securities 66,527 54,903 39,746 Interest and dividends on trading account securities 3,134 2,437 2,282 Interest on time deposits in other banks 1,257 1,597 951 Interest on federal funds sold and other short-term investments 2,815 8,869 4,877 - --------------------------------------------------------------- ---------- ------- ------- Total interest income 1,222,865 937,976 455,974 - --------------------------------------------------------------- ---------- ------- ------- Interest expense: Deposits 429,623 364,433 153,120 Short-term borrowed funds 39,066 69,577 31,177 Federal Home Loan Bank advances 97,838 77,912 41,432 Trust preferred securities and long-term debt 5,225 5,282 3,605 - --------------------------------------------------------------- ---------- ------- ------- Total interest expense 571,752 517,204 229,334 - --------------------------------------------------------------- ---------- ------- ------- Net interest income 651,113 420,772 226,640 Provision for loan losses 29,199 16,456 16,921 - --------------------------------------------------------------- ---------- ------- ------- Net interest income after provision for loan losses 621,914 404,316 209,719 - --------------------------------------------------------------- ---------- ------- ------- Other income: Service charges on deposit accounts 121,450 68,766 21,020 Trust and custodian fees 51,184 32,964 8,100 Other service charges and fees 36,703 29,919 20,024 Broker/dealer revenue and other commissions 68,006 28,816 18,092 Other operating 40,910 24,517 23,086 Investment securities gains (losses) 6,635 4,509 (3,095) - --------------------------------------------------------------- ---------- ------- ------- Total other income 324,888 189,491 87,227 - --------------------------------------------------------------- ---------- ------- ------- Other expenses: Personnel 249,565 160,136 82,927 Net occupancy 37,302 27,251 13,800 Equipment 24,166 17,367 7,050 Losses (gains) on interest rate swaps 672 77,227 (1,499) Merger-related expense 11,364 70,657 -- Goodwill amortization 48,240 26,884 3,479 Core deposit intangibles amortization 58,775 34,536 3,977 Other operating 158,034 99,839 47,372 - --------------------------------------------------------------- ---------- ------- ------- Total other expenses 588,118 513,897 157,106 - --------------------------------------------------------------- ---------- ------- ------- Income before income taxes 358,684 79,910 139,840 Income taxes 133,388 34,600 47,208 - --------------------------------------------------------------- ---------- ------- ------- Net income $ 225,296 45,310 92,632 - --------------------------------------------------------------- ---------- ------- ------- Earnings per common share: Basic $ 1.10 .29 .88 Diluted 1.09 .28 .87 Weighted average shares outstanding: Basic 204,972 157,387 104,947 Diluted 207,484 159,254 106,807
See accompanying notes to consolidated financial statements. 35 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity and Comprehensive Income Years Ended December 31, 2001, 2000, and 1999
Accumulated Additional Other Number of Common Paid-In Retained Comprehensive In Thousands Except Per Share Data Shares Stock Capital Earnings Income (Loss) - --------------------------------------------------------------- ----------- -------- ---------- -------- ------------- Balance December 31, 1998 101,442,799 $202,885 101,838 143,832 1,398 Net income -- -- -- 92,632 -- Other comprehensive loss -- Unrealized loss on securities, net of deferred tax benefit of $3,546 -- -- -- -- (5,566) Total comprehensive income Stock options exercised, net of shares tendered 1,063,472 2,127 9,725 -- -- Stock offering 3,564,529 7,129 73,119 -- -- Common stock issued for acquisitions 3,085,486 6,171 75,462 -- -- Purchase and retirement of shares (1,051,500) (2,103) (20,822) -- -- Other transactions, net 118,500 237 886 (12) -- Cash dividends ($.38 per share) -- -- -- (39,697) -- - --------------------------------------------------------------- ----------- -------- ---------- -------- ------------- Balance December 31, 1999 108,223,286 216,446 240,208 196,755 (4,168) Net income -- -- -- 45,310 -- Other comprehensive gain -- Unrealized gain on securities, net of deferred tax expense of $18,387 -- -- -- -- 26,962 Total comprehensive income Restricted stock transactions, net 434,415 869 807 -- -- Stock options exercised, net of shares tendered 1,192,298 2,385 11,213 -- -- Common stock issued in acquisitions 97,342,874 194,686 1,546,339 -- -- Purchase and retirement of shares (1,724,805) (3,450) (28,558) -- -- Other transactions, net (221,970) (444) (4,286) -- -- Cash dividends ($.48 per share) -- -- -- (76,236) -- - --------------------------------------------------------------- ----------- -------- ---------- -------- ------------- Balance December 31, 2000 205,246,098 410,492 1,765,723 165,829 22,794 Net income -- -- -- 225,296 -- Other comprehensive loss -- Unrealized loss on securities, net of deferred tax benefit of $5,217 -- -- -- -- (10,050) Total comprehensive income Restricted stock transactions, net 26,159 52 2,769 -- -- Stock options exercised, net of shares tendered 1,658,120 3,316 21,022 -- -- Common stock issued in acquisitions 2,384,695 4,769 61,727 -- -- Purchase and retirement of shares (4,255,132) (8,510) (93,702) -- -- Other transactions, net (1,227) (2) (1,411) 55 -- Cash dividends ($.56 per share) -- -- -- (114,838) -- - --------------------------------------------------------------- ----------- -------- ---------- -------- ------------- Balance December 31, 2001 205,058,713 $410,117 1,756,128 276,342 12,744 - --------------------------------------------------------------- ----------- -------- ---------- -------- -------------
Total Stockholders' In Thousands Except Per Share Data Equity - --------------------------------------------------------------- ------------- Balance December 31, 1998 449,953 Net income 92,632 Other comprehensive loss -- Unrealized loss on securities, net of deferred tax benefit of $3,546 (5,566) ------------- Total comprehensive income 87,066 Stock options exercised, net of shares tendered 11,852 Stock offering 80,248 Common stock issued for acquisitions 81,633 Purchase and retirement of shares (22,925) Other transactions, net 1,111 Cash dividends ($.38 per share) (39,697) - --------------------------------------------------------------- ------------- Balance December 31, 1999 649,241 Net income 45,310 Other comprehensive gain -- Unrealized gain on securities, net of deferred tax expense of $18,387 26,962 ------------- Total comprehensive income 72,272 Restricted stock transactions, net 1,676 Stock options exercised, net of shares tendered 13,598 Common stock issued in acquisitions 1,741,025 Purchase and retirement of shares (32,008) Other transactions, net (4,730) Cash dividends ($.48 per share) (76,236) - --------------------------------------------------------------- ------------- Balance December 31, 2000 2,364,838 Net income 225,296 Other comprehensive loss -- Unrealized loss on securities, net of deferred tax benefit of $5,217 (10,050) ------------- Total comprehensive income 215,246 Restricted stock transactions, net 2,821 Stock options exercised, net of shares tendered 24,338 Common stock issued in acquisitions 66,496 Purchase and retirement of shares (102,212) Other transactions, net (1,358) Cash dividends ($.56 per share) (114,838) - --------------------------------------------------------------- ------------- Balance December 31, 2001 2,455,331 - --------------------------------------------------------------- -------------
See accompanying notes to consolidated financial statements. 36 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Years Ended December 31 --------------------------------- In Thousands 2001 2000 1999 - --------------------------------------------------------------------------------- ----------- ---------- -------- OPERATING ACTIVITIES: Net income $ 225,296 45,310 92,632 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion, net 105,216 (13,692) 17,169 Provision for loan losses 29,199 16,456 16,921 Net loss (gain) on sales of investment securities (6,635) (4,509) 3,095 Net loss (gain) on interest rate swaps 672 77,227 (1,499) Deferred income taxes 20,407 27,051 (4,778) Changes in: Trading account securities (122,797) (44,123) 32,443 Other assets (220,870) 17,759 (48,376) Other liabilities 2,521 31,332 28,229 Other operating activities, net 2,926 (2,517) 3,771 - --------------------------------------------------------------------------------- ----------- ---------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 35,935 150,294 139,607 - --------------------------------------------------------------------------------- ----------- ---------- -------- INVESTING ACTIVITIES: Proceeds from: Maturities and issuer calls of investment securities held to maturity 1,213,809 151,243 72,370 Sales of investment securities available for sale 152,760 1,449,337 265,466 Maturities and issuer calls of investment securities available for sale 1,352,900 123,153 130,349 Purchases of: Investment securities held to maturity (92,720) (334,518) (454,651) Investment securities available for sale (2,585,766) (1,631,343) (194,328) Premises and equipment (22,702) (23,927) (12,037) Net originations of loans (413,291) (539,862) (596,660) Net cash acquired in acquisitions and dispositions (21,616) 318,633 7,660 - --------------------------------------------------------------------------------- ----------- ---------- -------- NET CASH USED BY INVESTING ACTIVITIES (416,626) (487,284) (781,831) - --------------------------------------------------------------------------------- ----------- ---------- -------- FINANCING ACTIVITIES: Net increase in deposit accounts 73,803 511,590 295,090 Net increase (decrease) in short-term borrowed funds (85,329) (25,900) 291,194 Net increase (decrease) in Federal Home Loan Bank advances 513,901 221,475 (18,239) Retirement of long-term debt (7,276) -- -- Issuance of trust preferred securities 200,000 -- -- Issuances of common stock from exercise of stock options, net 15,595 8,498 4,888 Stock offering -- -- 80,248 Purchase and retirement of common stock (102,212) (32,008) (22,925) Other equity transactions, net -- (258) 1,111 Cash dividends paid (114,838) (76,236) (39,697) - --------------------------------------------------------------------------------- ----------- ---------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 493,644 607,161 591,670 - --------------------------------------------------------------------------------- ----------- ---------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 112,953 270,171 (50,554) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 531,467 261,296 311,850 - --------------------------------------------------------------------------------- ----------- ---------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 644,420 531,467 261,296 - --------------------------------------------------------------------------------- ----------- ---------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid during the year $ 595,423 503,514 237,412 Income taxes paid during the year 103,675 44,789 53,315
See accompanying notes to consolidated financial statements. 37 NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts and results of operations of National Commerce Financial Corporation ("NCF", formerly National Commerce Bancorporation) and its subsidiaries. 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's wholly-owned bank subsidiaries include National Bank of Commerce, ("NBC") and NBC Bank, FSB (collectively, the "Subsidiary Banks"). On December 31, 2001, NCF's subsidiary Central Carolina Bank and Trust Company was merged into NBC. 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., USI Alliance, National Commerce Capital Trust I, National Commerce Capital Trust II, Senior Housing Crime Prevention Foundation Investment Corporation and Monroe Properties. Also included in the consolidated financial statements are the subsidiaries of NBC and TransPlatinum. Additionally, NBC owns 80 percent of Fenesco Financial Enterprise, Inc., D/B/A NBC Capital Markets ("Capital Markets"). All significant intercompany transactions and accounts are eliminated in consolidation. NCF has two business segments: traditional banking and financial enterprises. The Subsidiary Banks provide a full range of banking services to individual and corporate customers through their branch networks based in Tennessee, Mississippi, Arkansas, Georgia, North Carolina, South Carolina, Virginia and West Virginia. Neither NCF nor its Subsidiary Banks have active foreign operations. NCF believes that there is no concentration of risk with any single customer or supplier, or small group of customers or suppliers, whose failure or nonperformance would materially affect NCF's results. Products and services offered to customers include traditional banking services such as accepting deposits; making secured and unsecured loans; renting safety deposit boxes; performing trust functions for corporations, employee benefit plans and individuals; and providing certain insurance and brokerage services. The Subsidiary Banks are subject to competition from other financial entities and are subject to the regulations of certain Federal agencies and undergo periodic examinations by those regulatory agencies. The financial enterprises segment is comprised of trust services and investment management, transaction processing, retail banking consulting/in-store licensing and broker/dealer activities. Many of these services are offered on a national level. Financial Statement Presentation In preparing the financial statements in conformity with accounting principles generally accepted in the United States, management makes estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Certain amounts for prior years have been reclassified to conform to the 2001 presentation. For purposes of the Statements of Cash Flows, NCF considers time deposits in other banks, federal funds sold and other short-term investments to be cash equivalents. Investment Securities Securities available for sale are carried at fair value. Unrealized gains or losses are excluded from earnings and reported as a separate component of stockholders' equity. Debt securities that NCF has the positive intent and ability to hold to maturity are classified as held for maturity and reported at amortized cost. Trading account securities consist of securities inventories held for the purpose of brokerage activities and are carried at fair value with changes in fair value included in earnings. Broker/dealer revenue includes the effects of adjustments to market values of trading account securities. The adjusted cost of the specific securities sold is used to compute gains or losses on the sale of securities. Loan Portfolio The loan portfolio is comprised of the following: commercial, financial and agricultural; real estate-construction; real estate-mortgage; consumer, revolving credit accounts and leases. The lease portfolio includes rolling stock such as automobiles, trucks and trailers as well as a broadly diversified base of equipment. 38 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Interest income on loans is recorded on the accrual basis. Accrual of interest on loans (including impaired loans) is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Consumer and other retail loans are typically charged-off no later than 120 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Interest accrued but not collected on loans that are placed on non-accrual or are charged-off is reversed against interest income. Subsequent interest collected is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Allowance for Loan Losses The allowance for loan losses is increased by provisions charged to expense and reduced by loan charge-offs, net of recoveries. The allowance is maintained at a level considered adequate by management to provide for probable loan losses. The allowance is comprised of specific loan loss allocations, non-accrual loan and classified loan allocations, and general allocations by loan type for all other loans. Specific loan loss allocations are determined for significant credits where management believes that a risk of loss exists. The evaluation of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses the best information available on which to base estimates, future adjustments to the allowance may be necessary if economic conditions, particularly in the Subsidiary Banks' markets, differ substantially from the assumptions used by management. Additionally, bank regulatory agency examiners periodically review the loan portfolio and may require the Subsidiary Banks to charge-off loans and/or increase the allowance for loan losses to reflect their assessment of the collectibility of loans based on available information at the time of their examination. For all specifically reviewed loans for which it is probable that the Subsidiary Banks will be unable to collect all amounts due according to the terms of the loan agreement, the Subsidiary Banks determine a value at either the present value of expected cash flows discounted at the loan's effective interest rate, or if more practical, the market price or value of the collateral. If the resulting value of the impaired loan is less than the recorded balance, impairment is recognized by creating a valuation allowance for the difference and recognizing a corresponding bad debt expense. Derivatives and Hedging Activities NCF records derivatives at fair value in "other assets" (or "other liabilities") on the Consolidated Balance Sheets depending on whether the fair value is an unrealized gain or loss. Derivatives that are not hedges are adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of the derivatives are either offset through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. Derivative contracts are accounted for on the accrual basis and the net interest differential, including premiums paid, if any, are recognized as an adjustment to interest income or interest expense of the related asset or liability. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed over the estimated lives of the assets on accelerated and straight-line methods. Leasehold improvements are amortized over the term of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Intangibles Arising from Acquisitions Intangible assets arising from acquisitions result from paying amounts in excess of fair value for businesses, core deposits and tangible assets acquired. Such amounts are being amortized by systematic charges to income over a period no greater than the estimated remaining life of the assets acquired or not exceeding the estimated remaining life of the existing deposit base assumed. For all purchase acquisitions completed prior to July 1, 2001, goodwill is amortized on a straight-line basis over 20 years. For purchase acquisitions completed subsequent to June 30, 2001, goodwill is not amortized. Core deposit intangibles are amortized over a period of up to 10 years using the sum of the quarters' digits method, an accelerated method. Unamortized intangibles are reviewed for impairment whenever the facts and circumstances indicate that the carrying amount may not be recoverable. NCF assesses the recoverability of these intangible assets by determining whether the unamortized balance can be recovered through the future operating cash flows of the acquired institution over the remaining life of the intangible. Impairment, if any, is measured based on projected future operating cash flows using a discount rate reflecting NCF's average cost of funds. 39 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued Comprehensive Income Comprehensive income is the change in NCF's equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income is divided into net income and other comprehensive income (loss). "Other comprehensive income (loss)" for the three-year period ended December 31, 2001 and "accumulated other comprehensive income (loss)" as of December 31, 2001 and 2000 are comprised of unrealized gains and losses on certain investments in debt and equity securities. Income Taxes The provision for income taxes is based on income and expense reported for financial statement purposes after adjustment for permanent differences such as tax-exempt interest income. Deferred income taxes are provided when there is a difference between the periods items are reported for financial statement purposes and when they are reported for tax purposes and are recorded at the enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Subsequent changes in tax rates will require adjustment to these assets and liabilities. Each subsidiary provides for income taxes based on its contribution to income tax expense (benefit) of the consolidated group. Incentive Plans NCF has incentive plans covering certain officers of NCF and its subsidiaries. The market value of shares issued under the incentive plans are being charged to operating expense over periods of up to three years. Generally, NCF grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares on the date of grant. NCF has elected to account for these stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for these stock option grants. For all variable stock option grants, compensation expense is recognized in accordance with APB Opinion No. 25 over the period the employee performs related service, the vesting period. An employer that continues to apply APB No. 25, which utilizes the intrinsic value accounting method rather than the "fair value based method" promulgated under Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-based Compensation, must disclose certain pro forma information. Under the fair value based method, compensation cost is measured at the grant date of the option based on the value of the award and is recognized over the service period, which is usually the vesting period. The required pro forma amounts reflect the difference between compensation cost, if any, included in net income and the related cost measured by the fair value based method, including tax effects, that would have been recognized in the income statement if the fair value based method had been used. Earnings Per Share Basic earnings per share ("EPS") excludes dilution and is computed by dividing net income available to common shareholders 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 shareholders 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. Fair Value of Financial Instruments The financial statements include disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the financial instrument. As the fair value of certain financial instruments and all nonfinancial instruments are not presented, the aggregate fair value amounts presented do not represent the underlying value of NCF. (2) ACQUISITIONS In 2001, NCF consummated two acquisitions that were accounted for as purchases. Results of operations of the acquired companies were included in NCF's 2001 consolidated statement of income from the respective dates of acquisition. In August, 40 (2) ACQUISITIONS -- Continued NCF acquired First Vantage-Tennessee, a $165 million financial institution located in Knoxville, Tennessee. Goodwill of $11.3 million was recorded in the cash transaction. In November, NCF acquired SouthBanc Shares, Inc., a $660 million South Carolina financial institution. Approximately 2.4 million shares of NCF common stock were issued and $48.5 million of goodwill was recorded in the transaction. Proforma financial information relating to these acquisitions has not been provided, as the acquisitions are not considered material to NCF's financial position or results of operations as of December 31, 2001. In 2000, NCF consummated four acquisitions that were accounted for as purchases. Results of operations of the acquired companies were included in NCF's 2000 consolidated statement of income from the respective dates of acquisition. In July, NCF completed its merger with CCB Financial Corporation ("CCBF"), an $8.8 billion bank holding company based in Durham, North Carolina. Approximately 93.8 million shares of NCF common stock were issued and $814.2 million of goodwill was recorded. Also in July, NCF completed its merger with First Mercantile Trust and First Mercantile Capital Management, Inc., a $7 million trust company based in Germantown, Tennessee. Approximately 1.7 million shares of NCF stock were issued and $28.4 million of goodwill was recorded in the transaction. In April, NCF completed its merger with Piedmont Bancorp, Inc., a $151 million bank holding company based in Hillsborough, North Carolina. Approximately 1.5 million shares of NCF common stock were issued and $12.7 million of goodwill was recorded in the transaction. In March, TransPlatinum acquired Prime Financial Services, Inc., a receivables financing company serving the transportation industry in a cash transaction. In connection with the mergers discussed above, NCF incurred merger and integration charges in 2001 and 2000. The components of the charges are shown below:
In Thousands 2001 2000 -------------------------------------------------- ------- ------ Severance costs $ 1,040 2,211 Employee retention costs -- 186 Restricted stock acceleration -- 759 Change-in-control related costs -- 30,891 Other costs accrued 123 1,943 -------------------------------------------------- ------- ------ Total personnel-related costs 1,163 35,990 Occupancy and equipment write-downs 47 5,952 Systems and other integration costs 10,154 26,713 Securities losses from balance sheet restructuring -- 2,002 -------------------------------------------------- ------- ------ Total merger and integration costs $11,364 70,657 -------------------------------------------------- ------- ------
Personnel-related costs include accrued termination benefits, severance and employee retention costs. Occupancy and equipment write-downs include impairment of assets and lease termination costs related to closed branches, plus redundant equipment resulting from integration of technology platforms. Systems and other integration costs include incremental costs such as consultants and contract labor related to the conversion of systems, customer communications and employee benefits integration costs. The following summarizes activity within NCF's merger accrual account during the years ended December 31, 2001 and 2000:
In Thousands 2001 2000 -------------------------------------- -------- ------- Balance at beginning of period $ 10,610 -- Provision charged to operating expense 11,364 70,657 Cash outlays (16,134) (52,220) Non-cash write-downs -- (7,827) -------------------------------------- -------- ------- Balance at end of period $ 5,840 10,610 -------------------------------------- -------- -------
(3) RESTRICTIONS ON CASH AND DUE FROM BANKS The Subsidiary Banks are required to maintain reserve and clearing balances with the Federal Reserve Bank. These balances are included in "cash and due from banks" on the Consolidated Balance Sheets. For the reserve maintenance periods in effect at both December 31, 2001 and 2000, the Subsidiary Banks were required to maintain average reserve and clearing balances of $23 million and $32.3 million, respectively. (4) INVESTMENT SECURITIES Investment securities with amortized costs of approximately $2.8 billion at December 31, 2001 and $2.4 billion at December 31, 2000 were pledged to secure public funds on deposit, repurchase agreements and for other purposes required by law. The investment securities portfolio is segregated into securities available for sale and securities held to maturity. 41 (4) INVESTMENT SECURITIES -- Continued Securities Available for Sale Securities available for sale are carried at estimated fair value. The amortized cost and approximate fair values of these securities at December 31, 2001 and 2000 were as follows:
2001 2000 ------------------------------------------ ----------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR Amortized Unrealized Unrealized Fair In Thousands COST GAINS LOSSES VALUE Cost Gains Losses Value - ----------------------------------------- ---------- ---------- ---------- --------- --------- ---------- ---------- --------- U.S. Treasury $ 44,194 1,871 -- 46,065 54,580 725 (10) 55,295 U.S. Government agencies and corporations 1,528,887 18,455 (16,964) 1,530,378 528,460 12,998 (587) 540,871 Mortgage-backed securities 1,507,490 20,805 (6,780) 1,521,515 1,021,566 20,996 (1,382) 1,041,180 States and political subdivisions 86,466 2,704 (183) 88,987 111,222 2,881 (272) 113,831 Debt and equity securities 422,541 2,769 (549) 424,761 647,182 4,581 (1,414) 650,349 - ----------------------------------------- ---------- ---------- ---------- --------- --------- ---------- ---------- --------- Total $3,589,578 46,604 (24,476) 3,611,706 2,363,010 42,181 (3,665) 2,401,526 - ----------------------------------------- ---------- ---------- ---------- --------- --------- ---------- ---------- ---------
Gross gains realized on sales of available for sale securities totaled $6.7 million and gross losses totaled $110,000 for 2001. Equity securities include the Subsidiary Banks' required investment in stock of the Federal Home Loan Bank (the "FHLB") which totaled $150.5 million at December 31, 2001 and $100.4 million at December 31, 2000. No ready market exists for this stock and it has no quoted market value. However, redemption of this stock has historically been at par value. Accordingly, the carrying amounts were deemed to be a reasonable estimate of fair value. Following is a maturity schedule of securities available for sale at December 31, 2001:
AMORTIZED FAIR In Thousands COST VALUE -------------------------------------- ---------- --------- Within 1 year $ 49,154 50,225 After 1 but within 5 years 1,302,439 1,295,321 After 5 but within 10 years 299,390 311,292 After 10 years 8,564 8,592 -------------------------------------- ---------- --------- Subtotal 1,659,547 1,665,430 Mortgage-backed securities 1,507,490 1,521,515 Debt and equity securities 422,541 424,761 -------------------------------------- ---------- --------- Total securities available for sale $3,589,578 3,611,706 -------------------------------------- ---------- ---------
Securities Held to Maturity The carrying values and approximate market values of securities held to maturity at December 31, 2001 and 2000 were as follows:
2001 2000 -------------------------------------- ----------------------------------------- CARRYING UNREALIZED UNREALIZED FAIR Carrying Unrealized Unrealized Fair In Thousands VALUE GAINS LOSSES VALUE Value Gains Losses Value - ----------------------------------------- -------- ---------- ---------- ------- --------- ---------- ---------- --------- U.S. Government agencies and corporations $151,132 4,022 -- 155,154 1,130,663 1,774 (22,411) 1,110,026 Mortgage-backed securities 257,461 3,177 (91) 260,547 303,619 1,795 (7,528) 297,886 States and political subdivisions 65,008 1,580 (16) 66,572 75,702 1,434 (27) 77,109 Debt securities 427,149 10,788 (6,527) 431,410 506,811 5,573 (12,705) 499,679 - ----------------------------------------- -------- ---------- ---------- ------- --------- ---------- ---------- --------- Total $900,750 19,567 (6,634) 913,683 2,016,795 10,576 (42,671) 1,984,700 - ----------------------------------------- -------- ---------- ---------- ------- --------- ---------- ---------- ---------
Following is a maturity schedule of securities held to maturity at December 31, 2001:
CARRYING FAIR In Thousands VALUE VALUE --------------------------------- -------- ------- Within 1 year $ 1,965 2,005 After 1 but within 5 years 115,404 117,500 After 5 but within 10 years 88,054 90,900 After 10 years 10,717 11,321 --------------------------------- -------- ------- Subtotal 216,140 221,726 Mortgage-backed securities 257,461 260,547 Debt securities 427,149 431,410 --------------------------------- -------- ------- Total securities held to maturity $900,750 913,683 --------------------------------- -------- -------
42 (4) INVESTMENT SECURITIES -- Continued Unrealized gains and losses on certain investments in debt and equity securities included in other comprehensive income (loss) for the years ended December 31, 2001, 2000, and 1999 follows:
2001 2000 --------------------------- ------------------------- -------- BEFORE TAX NET OF Before Tax Net of Before TAX (EXPENSE) TAX tax (expense) tax tax In Thousands AMOUNT BENEFIT AMOUNT amount benefit amount amount - --------------------------------------------------------- -------- --------- ------- ------ --------- ------ ------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during holding period $ (8,632) 2,596 (6,036) 49,858 (20,168) 29,690 (12,207) Reclassification adjustment for losses (gains) realized in net income (6,635) 2,621 (4,014) (4,509) 1,781 (2,728) 3,095 - --------------------------------------------------------- -------- --------- ------- ------ --------- ------ ------- Other comprehensive income (loss) $(15,267) 5,217 (10,050) 45,349 (18,387) 26,962 (9,112) - --------------------------------------------------------- -------- --------- ------- ------ --------- ------ -------
Tax Net of (expense) tax In Thousands benefit amount - --------------------------------------------------------- --------- ------ Unrealized gains (losses) on securities: Unrealized gains (losses) arising during holding period 4,769 (7,438) Reclassification adjustment for losses (gains) realized in net income (1,223) 1,872 - --------------------------------------------------------- --------- ------ Other comprehensive income (loss) 3,546 (5,566) - --------------------------------------------------------- --------- ------
Unrealized net gains on trading securities were $2 million and $245,000 at December 31, 2001 and 2000, respectively, and were immaterial in 1999. (5) LOANS Management internally classifies the loan portfolio by the purpose of the borrowing and such classification is presented below as of December 31, 2001 and 2000. This classification basis places the emphasis on the source of repayment rather than the collateral source, which is the basis for regulatory classification purposes.
In Thousands 2001 2000 ------------------------------------------ ----------- ---------- Consumer, net of unearned $ 3,602,013 3,533,471 Commercial, net of unearned 2,900,346 2,658,406 Construction and miscellaneous real estate 3,361,232 2,831,228 Credit cards 9,368 14,671 Check protection 52,363 50,382 Mortgage 1,912,345 1,791,033 Leases receivable, net of unearned 137,098 129,228 ------------------------------------------ ----------- ---------- Total loans $11,974,765 11,008,419 ------------------------------------------ ----------- ----------
Loans totaling $22.8 million at December 31, 2001 were not accruing interest. Loans with outstanding balances of $12.1 million in 2001 were transferred from loans to other real estate acquired through loan foreclosure. Other real estate acquired through loan foreclosures amounted to $10.7 million and $5.7 million at December 31, 2001 and 2000, respectively, and is included in "other assets" on the Consolidated Balance Sheets. 43 (5) LOANS -- Continued The following is an analysis of interest income related to loans on nonaccrual status for the years ended December 31, 2001, 2000 and 1999:
In Thousands 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- ------ ---- ----- Interest income that would have been recognized if the loans had been current at original contractual rates $1,481 727 1,307 Amount recognized as interest income 619 291 322 - ----------------------------------------------------------------------------------------------------------- ------ ---- ----- Difference $ 862 436 985 - ----------------------------------------------------------------------------------------------------------- ------ ---- -----
Substantially all loans are made on a secured basis and, with the exception of marketable mortgage loans, are originated for retention in the Subsidiary Banks' portfolios. Loans held for sale carried at lower of cost or market totaled $103.4 million at December 31, 2001. No loans were held for sale at December 31, 2000. The Subsidiary Banks do not engage in highly leveraged transactions or foreign lending activities. The loan portfolios are well diversified and there are no significant concentrations of credit risk. At December 31, 2001, impaired loans totaled $62.3 million, of which $14.9 million were on non-accrual status, and their related allowance for loan losses totaled $16.8 million. The average carrying value of impaired loans was $53.9 million during 2001 and gross interest income recognized on impaired loans totaled $4.2 million. At December 31, 2000, impaired loans totaled $12.5 million, of which $6 million were on non-accrual status, and their related allowance for loan losses totaled $3.6 million. The average carrying value of impaired loans was $6.3 million during 2000 and gross interest income recognized on impaired loans totaled $351,000. During 2001 and 2000, the Subsidiary Banks had loan and deposit relationships with NCF's executive officers and directors and their associates. In the opinion of management, these loans do not involve more than the normal risk of collectibility and are made on terms comparable to other borrowers. Following is an analysis of these borrowings for the year ended December 31, 2001 (in thousands):
BEGINNING NEW OTHER END OF OF YEAR LOANS REPAYMENTS CHANGES YEAR --------- ------ ---------- ------- -------- Directors, executive officers and associates $76,041 65,307 (22,399) 8,376 $127,325 - -------------------------------------------- --------- ------ ---------- ------- --------
Loans serviced for the benefit of others totaled $668.5 million and $817.1 million at December 31, 2001 and 2000, respectively. Mortgage servicing fees totaled $2.5 million in 2001 and $1.5 million in 2000. Certain real estate-mortgage loans with carrying values totaling $2.1 billion are pledged as collateral for advances from the FHLB. (6) ALLOWANCE FOR LOAN LOSSES Following is a summary of the allowance for loan losses:
In Thousands 2001 2000 1999 --------------------------------------------- -------- ------- ------- Balance at beginning of year $143,614 59,597 49,122 Provision charged to operations 29,199 16,456 16,921 Addition from acquired financial institutions 7,850 82,228 2,044 Recoveries of loans previously charged-off 7,375 5,016 3,976 Loan losses charged to allowance (31,637) (19,683) (12,466) --------------------------------------------- -------- ------- ------- Balance at end of year $156,401 143,614 59,597 --------------------------------------------- -------- ------- -------
(7) DERIVATIVES AND HEDGING ACTIVITIES On April 1, 1999, NCF adopted SFAS No. 133, Accounting For Derivative Instruments and Hedging Activities. The fair value of NCF's derivative contracts at adoption was immaterial and has been included in "Gains and losses on interest rate swaps" on the Consolidated Statements of Income. NCF utilizes interest rate swap agreements to provide an exchange of interest payments computed on notional amounts that will offset any undesirable change in cash flows or fair value resulting from market rate changes on designated hedged transactions or items. NCF limits the credit risks of these instruments by initiating the transactions with counterparties that meet NCF's underwriting policies and quality standards. 44 (7) DERIVATIVES AND HEDGING ACTIVITIES -- Continued Interest rate agreements designated as fair value hedges help manage exposure of outstanding trust preferred securities (designated hedged item) to changes in fair value. These agreements involve the receipt of fixed-rate amounts in exchange for floating-rate payments over the life of the agreement without exchange of the underlying principal amount. The differential to be paid or received is accrued as interest rates change and is recognized as an adjustment to interest expense related to the item specifically designated as being hedged at the start of the agreement. The related amount payable or receivable from counterparties is included in "other assets" or "other liabilities" on the Consolidated Balance Sheet. At December 31, 2001, the notional amounts of interest rate agreements designated as fair value hedges were $200 million. During 1999 and 2000, NCF used interest rate agreements to modify the interest payment characteristics of its outstanding debt and large time deposits from a floating-rate to a fixed-rate basis. These agreements involve the receipt of floating-rate amounts in exchange for fixed-rate payments over the life of the agreement without exchange of the underlying principal amount. During the rising interest rate environment experienced in the beginning of 2000, NCF increased its position in these interest rate swaps that reduced its interest rate sensitivity to its wholesale funding. The fair values of the swaps, which did not qualify for hedge accounting treatment under SFAS No. 133, were included in "other assets" or "other liabilities" on the Consolidated Balance Sheet. When interest rates declined in the latter half of 2000, NCF recognized unrealized losses on these contracts. Changes in the fair value of these contracts have been recorded in the Consolidated Statements of Income as "Gains / losses on interest rate swaps". The fair value of these contracts was an unrealized loss of $77.2 million at December 31, 2000, with corresponding notional amounts of $1.5 billion. The interest rate swaps were terminated in early 2001. (8) PREMISES AND EQUIPMENT Following is a summary of premises and equipment:
Average life In Thousands (years) 2001 2000 - ----------------------------------------------- ------------ --------- -------- Land -- $ 41,066 39,645 Buildings 17.5 147,089 134,965 Leasehold improvements 10.0 48,301 46,514 Furniture and equipment 7.5 204,215 188,617 - ----------------------------------------------- ------------ --------- -------- Gross premises and equipment 440,671 409,741 Less: accumulated depreciation and amortization (221,076) (204,838) - ----------------------------------------------- ------------ --------- -------- Total premises and equipment $ 219,595 204,903 - ----------------------------------------------- ------------ --------- --------
(9) TIME DEPOSITS Interest on jumbo time deposits totaled $77 million in 2001 and $112.7 million in 2000. Maturities of time deposits for each of the years ending December 31 are as follows:
Total In Thousands Maturities ------------------- ---------- 2002 $4,750,711 2003 524,280 2004 332,668 2005 46,271 2006 and thereafter 2,788 ------------------- ---------- Total $5,656,718 ------------------- ----------
45 (10) BORROWINGS At December 31, 2001, NCF (Parent Company) had available $50 million in unsecured lines of credit with a commercial bank. No draws were outstanding as of December 31, 2001 or during 2001. Short-term Borrowed Funds Following is an analysis of short-term borrowed funds at December 31, 2001 and 2000:
End of Period Daily Average Maximum ------------------ ------------------ Outstanding Interest Interest At Any In Thousands Balance Rate Balance Rate Month End - --------------------------------------------------------------- ---------- -------- --------- -------- ----------- 2001: Federal funds purchased $ 567,487 1.66% 419,365 3.84 684,355 Treasury tax and loan depository note account 11,975 1.23 12,328 2.86 22,361 Securities sold under agreements to repurchase and master notes 562,155 1.54 647,377 3.39 846,974 - --------------------------------------------------------------- ---------- --------- Total $1,141,617 1,079,070 - --------------------------------------------------------------- ---------- -------- --------- -------- ----------- 2000: Federal funds purchased $ 438,017 6.60% 341,653 6.60 438,017 Treasury tax and loan depository note account 16,532 3.91 4,754 4.53 16,532 Securities sold under agreements to repurchase and master notes 758,354 5.96 813,407 5.76 1,259,777 - --------------------------------------------------------------- ---------- --------- Total $1,212,903 1,159,814 - --------------------------------------------------------------- ---------- -------- --------- -------- -----------
Interest on federal funds purchased totaled $16.1 million in 2001 and $22.5 million in 2000. The treasury tax and loan depository note account is payable on demand and is collateralized by various investment securities with amortized costs of $21.4 million and market values of $21.5 million at December 31, 2001. Interest on borrowings under this arrangement is payable at .25 percent below the weekly federal funds rate as quoted by the Federal Reserve. Master note borrowings are unsecured obligations of NCF which mature daily. Securities sold under agreements to repurchase are collateralized by U.S. Treasury and U.S. Government agency and corporation securities with amortized costs of $448.2 million and market values of $448.8 million at December 31, 2001. Interest expense on securities sold under agreements to repurchase totaled $13.4 million in 2001 and $40.8 million in 2000. FHLB Advances FHLB advances bear interest at either a fixed rate, variable rate equal to one-month LIBOR, or at a fixed rate for a specified period of time after the issue date, and thereafter may be converted, at the option of the FHLB, to a floating-rate equal to three-month LIBOR. The FHLB advances are collateralized by mortgage-related securities and by liens on first mortgage loans. The Subsidiary Banks have the capacity to borrow additional advances from the FHLB of up to 50 percent of total assets, subject to available collateral and level of FHLB stock ownership. Maturities of FHLB allowances for each of the years ending December 31 are as follows:
In Thousands Range of Rates Total Maturities ------------ -------------- ---------------- 2002 1.89% to 7.65% $ 650,370 2003 4.34% to 5.92% 208,560 2004 4.87% to 5.13% 101,128 2005 5.68% to 6.42% 6,292 2006 4.44% to 4.71% 150,723 Thereafter 2.00% to 6.39% 1,189,481 ---------- -------------- ---------------- Total 1.89% to 7.65% $2,306,554 ------------ -------------- ----------------
Long-Term Debt Following is a summary of long-term debt at December 31, 2001 and 2000:
In Thousands 2001 2000 ------------------------------- ------- ------ 6.75 percent subordinated notes $33,000 33,007 Term notes 6,374 6,372 ------------------------------- ------- ------ Total long-term debt $39,374 39,379 ------------------------------- ------- ------
46 (10) BORROWINGS -- Continued NCF's 6.75 percent subordinated notes due December 1, 2003 pay interest semi-annually and are not redeemable prior to maturity. These subordinated notes were assumed in the CCBF merger. There is no sinking fund for the notes. The notes are unsecured and subordinated to all present and future senior indebtedness of NCF. Interest on the subordinated notes totaled $2.2 million in 2001 and $1.1 million in 2000. The unsecured term notes originated in 1987, bearing interest payable at calendar quarters with a variable rate which is repriced every three years based on the yield on U.S. Treasury notes. The next reprice date for the notes is 2003. At December 31, 2001, the average rate was 5.48 percent. The notes mature in 2007. Interest on the term notes totaled $361,000 in 2001, $370,000 in 2000 and $369,000 in 1999. Capital Trust Preferred Securities In 2001, National Commerce Capital Trust II (the "Trust II"), a Delaware business trust subsidiary, sold $200 million of 7.70 percent Trust Preferred Securities. The Trust Preferred Securities may be redeemed in whole or in part at any time on or after December 31, 2006. The Trust II used the net proceeds from the sale of the Trust Preferred Securities to purchase a like amount of junior subordinated debentures due 2031 (the "Junior Subordinated Debentures") from NCF. The Junior Subordinated Debentures, which also bear interest at 7.70 percent, are the sole assets of the Trust II. The Junior Subordinated Debentures mature and become due and payable, together with any accrued and unpaid interest, if any, on December 15, 2031. In 1997, National Commerce Capital Trust I (the "Trust I"), a Delaware business trust subsidiary, sold $50 million of floating rate capital trust pass-through securities (the "Capital Securities") bearing interest at a variable annual rate equal to LIBOR plus .98 percent (1.75 percent and 7.80 percent at December 31, 2001 and 2000). The Trust I used the net proceeds from the sale of the Capital Securities to purchase a like amount of floating rate junior subordinated deferred interest debentures due 2027 (the "Subordinated Debt Securities") from NCF. The Subordinated Debt Securities, which also bear interest at a variable annual rate equal to LIBOR plus .98 percent, are the sole assets of the Trust. The Subordinated Debt Securities mature and become due and payable, together with any accrued and unpaid interest, if any, on April 1, 2027. During 2001, $7 million of Capital Securities were repurchased at a nominal gain and retired. The Junior Subordinated Debentures and the Subordinated Debt Securities are unsecured and are effectively subordinated to all existing and future liabilities of NCF. NCF has the right, at any time, so long as no event of default has occurred, to defer payments of interest on either issue for a period not to exceed 20 consecutive quarters. The Junior Subordinated Debentures and the Subordinated Debt Securities are eliminated, along with the related income statement effects, in the consolidated financial statements. NCF used the proceeds from the sale of the securities for general corporate purposes. NCF has fully and unconditionally guaranteed payment of amounts due under the Trust Preferred Securities and the Capital Securities on a subordinated basis and only to the extent the related Trusts have funds available for payment of those amounts. The proceeds from the Trust Preferred Securities and Capital Securities qualify as Tier 1 capital under the risk-based capital guidelines established by the Federal Reserve Board. (11) EMPLOYEE BENEFITS Pension Plan NCF has a noncontributory, qualified defined benefit pension plan covering substantially all full-time employees. The pension plan makes provisions for early and delayed retirement as well as normal retirement and provides participants with retirement benefits based on credited years of service. Contributions to the pension plan are funded as allowable for federal income tax purposes. No contributions were made in 2001, 2000 or 1999 by NCF due to funding limitations. At December 31, 2001, pension plan assets consisted primarily of corporate stocks, including 537,428 shares of NCF's common stock, corporate bonds, and obligations of U.S. government agencies and corporations. The plan assets are held and administered by trust operations of the Subsidiary Banks. The change in benefit obligation, change in plan assets and funded status of the pension plan and the amounts included in "other liabilities" on the Consolidated Balance Sheets at December 31, 2001 and 2000 are shown below: 47 (11) EMPLOYEE BENEFITS -- Continued
In Thousands 2001 2000 ---------------------------------------- -------- ------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at January 1 $124,558 38,797 Service cost 4,751 3,488 Interest cost 8,746 6,029 Amendments 1,673 -- Actuarial loss 1,573 2,535 Acquisition -- 80,394 Benefits paid (10,027) (6,685) ---------------------------------------- -------- ------- Benefit obligation at December 31 $131,274 124,558 ---------------------------------------- -------- ------- CHANGE IN PLAN ASSETS: Fair value of plan assets at January 1 $131,279 44,665 Actual return on plan assets 14,317 3,359 Acquisition -- 89,940 Benefits paid (10,027) (6,685) ---------------------------------------- -------- ------- Fair value of plan assets at December 31 $135,569 131,279 ---------------------------------------- -------- ------- RECONCILIATION OF FUNDED STATUS: As of end of year $ 4,295 6,719 Unrecognized net loss 17,817 16,941 Unrecognized prior service costs 99 (1,947) Unrecognized net transition asset (1) (10) ---------------------------------------- -------- ------- Prepaid benefit cost $ 22,210 21,703 ---------------------------------------- -------- -------
The combined components of pension expense (benefit) for the qualified plans for the years ended December 31, 2001, 2000 and 1999 are shown below:
In Thousands 2001 2000 1999 ------------------------------- -------- ------ ------ NET PERIODIC BENEFIT COST: Service cost $ 4,751 3,488 1,373 Interest cost 8,746 6,029 2,916 Expected return on assets (13,974) (9,157) (5,234) Net loss recognition 354 384 475 Prior service cost amortization (373) (406) (406) Transition asset recognition (10) (10) (10) ------------------------------- -------- ------ ------ Net pension expense (benefit) $ (506) 328 (886) ------------------------------- -------- ------ ------
NCF also has a noncontributory, nonqualified defined benefit pension plan covering highly-compensated employees. The total benefit obligation and accrued pension expense was $6.8 million and $5.6 million at December 31, 2001. These amounts were $6.6 million and $4.9 million at December 31, 2000. Net pension expense was $959,000 and $1.2 million for the years ended December 31, 2001 and 2000, respectively. Assumptions used in computing the actuarial present value of the projected benefit obligation for NCF in 2001 and 2000 were as follows:
2001 2000 ----- ----- Discount rate 7.00% 7.75 Rate of increase in compensation level of employees 3.50% 4.00 Expected long-term rate of return on pension plan assets 10.50% 10.50
48 (11) EMPLOYEE BENEFITS -- Continued Postretirement Health and Life Insurance Plan NCFC sponsors a retirement medical and life insurance plan that provides post-retirement healthcare and life insurance benefits. The plan is contributory and contains other cost-sharing features such as deductibles and coinsurance. NCFC's policy to fund the cost of medical benefits to employees varies by age and service at retirement. Benefits are provided through a self-insured plan administered by an insurance company. The following table sets forth the change in benefit obligation, funded status and the amounts included in "other liabilities" on the Consolidated Balance Sheets at December 31, 2001 and 2000:
In Thousands 2001 2000 -------------------------------------- -------- ------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at January 1 $ 12,074 3,449 Acquisition -- 7,894 Service cost 267 194 Interest cost 871 574 Benefit payments (795) (602) Actuarial (gain) loss 39 (656) Assumptions change 670 1,221 Plan change (904) -- FAS 88 charge (148) -- -------------------------------------- -------- ------- Benefit obligation at December 31 $ 12,074 12,074 -------------------------------------- -------- ------- FUNDED STATUS: As of end of year $(12,074) (12,074) Unrecognized net loss 223 2,146 Unrecognized prior service cost (1,295) (465) Unrecognized net loss 2,778 243 -------------------------------------- -------- ------- Accrued postretirement benefit expense $(10,368) (10,150) -------------------------------------- -------- -------
The accumulated postretirement benefit obligation at December 31, 2001 was determined using a discount rate of 7.0 percent. The 2000 accumulated postretirement benefit obligation was determining using a discount rate of 7.75 percent. Combined net periodic postretirement benefit expense charged to operations for the years ended December 31, 2001, 2000 and 1999 included the following components:
In Thousands 2001 2000 1999 --------------------------------------------------- ------ ---- ---- Service cost $ 267 194 23 Interest cost 871 574 161 Net amortization and deferral of unrecognized items 22 52 (1) FAS 88 curtailment gain (148) -- -- --------------------------------------------------- ------ ---- ---- Net postretirement benefit expense $1,012 820 183 --------------------------------------------------- ------ ---- ----
The health care trend rate was projected to be 8.5 percent for 2002 and 7.0 percent for the two years thereafter. A 1 percent change in the assumed health care trend rates would have the following effects:
1 percent 1 percent In Thousands Increase Decrease - ------------------------------------------------------------------------------------------------------ --------- --------- Effect on total of service and interest cost components of net periodic postretirement benefit expense $ 85 (69) Effect on the accumulated postretirement benefit obligation 969 (811)
Savings and Profit Sharing Plans NCF and CCB have defined contribution employee benefit plans covering substantially all employees with one year's service. Under these plan, employee contributions are partially matched. Stock Options and Restricted Stock Under NCF's 1994 Stock Plan, 12.2 million shares of common stock were reserved for award to key employees as stock options and restricted stock. Options vest ratably over varying periods of up to five years from the date of grant. Under the 1994 Stock Plan, NCF instituted a program to encourage stock ownership by its employees. Under ShareNCF, eligible employees who purchase NCF shares from Capital Markets are awarded two options for each share purchased. The options' exercise price equals the purchase price of the qualifying shares. The options are cancelled in the employee does not remain in NCF's 49 (11) EMPLOYEE BENEFITS -- Continued employ over the vesting period. For ShareNCF options issued prior to August 1, 2001, the options vest after two years if the employee has held the purchased shares for the two-year period after purchase. For ShareNCF options issued after August 1, 2001, the options vest after two years if the employee has held the purchased shares for the two-year period after purchase or vest after six years if the purchased shares were not held for the two-year period after purchase. As of December 31, 2001, approximately 253 employees were participating in the ShareNCF program. NCF accounts for ShareNCF options issued prior to August 1, 2001 as variable options, and, accordingly, recognizes compensation expense ratably over the two-year vesting period based on differences in the options' exercise price and the market price of NCF stock on the reporting date. For the years ended December 31, 2001, 2000 and 1999, NCF recorded compensation expense (benefit) of $348,000, ($500,000)and $1.4 million, respectively. During 2000, the terms of approximately 600,000 stock options were modified; as a result, NCF accounts for these option grants as variable options. During 2001 and 2000, $1.2 million and $2.1 million, respectively, was recorded as compensation expense related to these options. NCF continued in effect nonstatutory and incentive stock option plans existing at the date of merger with acquired financial institutions. The stock options under these plans were granted to directors and certain officers of the respective financial institutions and entitled them to purchase shares of common stock at an exercise price equal to the fair market value of the stock on the date of grant. The options granted under these plans were exercisable for periods of up to ten years with varying vesting provisions. All options outstanding at the time of the respective mergers were converted into options to acquire NCF common stock. NCF has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options as permitted under SFAS No. 123. In accordance with APB No. 25, no compensation expense is recognized when stock options are granted and the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Had compensation expense for the stock option plans been determined consistent with SFAS No. 123, NCF's net income and net income per share for the years ended December 31, 2001, 2000 and 1999 would have been reduced to the pro forma amounts indicated below. These pro forma amounts may not be representative of the effect on reported net income in future years.
In Thousands Except Per Share Data 2001 2000 1999 ---------------------------------- -------- ------- ------ Net income As reported $225,296 $45,310 92,632 Pro forma 219,626 37,914 88,697 Basic EPS As reported 1.10 .29 .88 Pro forma 1.07 .24 .85 Diluted EPS As reported 1.09 .28 .87 Pro forma 1.06 .24 .83
The weighted average fair value of options granted approximated $5.83 in 2001, $3.24 in 2000 and $6.36 in 1999. The fair values of the options granted in 2001, 2000 and 1999 are estimated on the date of the grants using the Black-Scholes option-pricing model. Option pricing models require the use of highly subjective assumptions, including expected stock volatility, which when changed can materially affect fair value estimates. The fair values were estimated using the following weighted-average assumptions:
2001 2000 1999 ------- ------- ------- Dividend yield 2.00% 2.00 2.00 Expected volatility 30.00 35.00 35.00 Risk-free interest rate 2.50 6.00 6.00 Expected average life 5 YEARS 5 years 5 years
50 (11) EMPLOYEE BENEFITS -- Continued A summary of stock option activity and related information for the years ended December 31, 2001, 2000 and 1999 follows:
Outstanding Exercisable ---------------------------- -------------------------- Option Weighted Average Option Weighted Average Shares Exercise Price Shares Exercise Price ---------- ---------------- --------- ---------------- At December 31, 1998 5,225,985 $ 8.74 Granted 1,101,100 16.49 Assumed under acquisition of financial institution 175,404 4.90 Exercised (1,208,848) 7.02 Forfeited (140,100) 14.08 - -------------------------------------------------- ---------- ---------------- At December 31, 1999 5,153,541 10.53 3,232,541 $ 7.69 - -------------------------------------------------- --------- ---------------- Granted 2,447,335 16.76 Assumed under acquisition of financial institution 4,602,911 16.09 Exercised (1,245,805) 7.89 Forfeited (287,775) 18.33 - -------------------------------------------------- ---------- ---------------- At December 31, 2000 10,670,207 14.45 7,508,818 $13.57 - -------------------------------------------------- --------- ---------------- Granted 2,322,079 24.64 Assumed under acquisition of financial institution 625,637 15.38 Exercised (1,773,155) 10.39 Forfeited (179,716) 21.07 - -------------------------------------------------- ---------- ---------------- At December 31, 2001 11,665,052 $17.26 7,676,218 $15.38 - -------------------------------------------------- ---------- ---------------- --------- ----------------
Exercise prices for options outstanding as of December 31, 2001 ranged from $3.15 to $27.44. The following table summarizes information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable --------------------------------------- ------------------------- Weighted Weighted Weighted Range of Number Average Years Average Number Average Exercise Prices of Options Remaining Exercise Price of Options Exercise Price - ---------------- ---------- ------------- -------------- ---------- -------------- $3.15 to $10.22 2,057,007 3.89 $ 7.48 2,057,007 $ 7.48 $10.69 to $15.94 2,524,364 7.07 14.91 1,641,753 14.43 $16.00 to $17.98 2,305,404 7.83 16.94 1,496,736 17.13 $18.00 to $22.84 2,452,388 7.25 21.19 2,240,645 21.23 $22.86 to $27.44 2,325,889 9.05 24.65 240,077 24.15 - ---------------- ---------- ------------- -------------- ---------- -------------- $3.15 to $27.44 11,665,052 7.09 $17.26 7,676,218 $15.38 - ---------------- ---------- ------------- -------------- ---------- --------------
Restricted stock awarded totaled 26,159 shares during 2001 and 434,415 shares during 2000. The grants in 2001 and 2000 were recorded at their fair values of $702,000 and $6.2 million, respectively, on the dates of grant and had weighted average fair values of $25.74 and $16.08 per share. Additionally, shares of restricted stock had been awarded under stock option and other incentive plans of acquired financial institutions. During 2001, 2000 and 1999, $2.4 million, $1 million and $373,000, respectively, of compensation expense was recognized for restricted stock awards. (12) STOCKHOLDERS' EQUITY Earnings Per Share The following schedule reconciles the numerators and denominators of the basic and diluted EPS computations for the years ended December 31, 2001, 2000 and 1999. Dilutive common shares arise from the potentially dilutive effect of NCF's stock options outstanding.
In Thousands Except Per Share Data 2001 2000 1999 ---------------------------------- -------- ------- ------- BASIC EPS Average common shares 204,972 157,387 104,947 Net income $225,296 45,310 92,632 Earnings per share 1.10 .29 .88 ---------------------------------- -------- ------- ------- DILUTED EPS Average common shares outstanding 204,972 157,387 104,947 Average dilutive common shares 2,512 1,867 1,860 --------------------------------- -------- ------- ------- Adjusted average common shares 207,484 159,254 106,807 Net income $225,296 45,310 92,632 Earnings per share 1.09 .28 .87 ---------------------------------- -------- ------- -------
51 (12) STOCKHOLDERS' EQUITY -- CONTINUED Regulatory Matters NCF and the Subsidiary Banks are subject to risk-based capital guidelines requiring minimum capital levels based on the perceived risk of assets and off-balance sheet instruments. As required by the Federal Deposit Insurance Corporation Improvement Act, the federal bank regulatory agencies have jointly issued rules which implement a system of prompt corrective action for financial institutions. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, there are minimum ratios of capital to risk-weighted assets. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a material effect on NCF's consolidated financial statements. Disclosure about the Subsidiary Banks' capital adequacy are set forth in the table below. Tier I capital consists of common equity and trust preferred securities less goodwill and certain other intangible assets. Tier I excludes the equity impact of adjusting available for sale securities to market value. Total capital is comprised of Tier I and Tier II capital. Tier II capital includes subordinated notes and loan loss allowance, as defined and limited according to regulatory guidelines. Balance sheet assets and the credit equivalent amount of off-balance sheet items per regulatory guidelines are assigned to broad risk categories and a category risk-weight is then applied. Management believes that as of December 31, 2001, NCF and the Subsidiary Banks met all capital adequacy requirements to which they were subject. The risk-based capital and leverage ratios for NCF and NBC as of December 31, 2001 and for NCF, NBC and CCB as of December 31, 2000 are presented below.
2001 2000 ----------------------- ------------------------------ In Thousands NCF NBC NCF NBC CCB - ------------------------------------------------------------- ----------- ---------- ---------- --------- --------- Tier I capital $ 1,492,718 1,331,124 1,169,780 430,131 673,227 Total capital 1,655,795 1,475,275 1,326,588 478,556 760,173 Risk-weighted assets 13,516,622 13,285,709 12,292,660 4,732,927 7,415,044 Adjusted quarterly average assets 17,261,097 16,946,406 16,365,141 6,833,251 9,251,932 Risk-based capital ratios: Tier I capital to risk-weighted assets: Actual 11.04 % 10.02 9.52 9.09 9.08 Regulatory minimum 4.00 4.00 4.00 4.00 4.00 Well-capitalized under prompt corrective action provisions -- 6.00 -- 6.00 6.00 Total capital to risk-weighted assets: Actual 12.25 11.10 10.79 10.11 10.25 Regulatory minimum 8.00 8.00 8.00 8.00 8.00 Well-capitalized under prompt corrective action provisions -- 10.00 -- 10.00 10.00 Leverage ratio: Actual 8.65 7.85 7.15 6.29 7.28 Regulatory minimum 3.00 4.00 3.00 4.00 4.00 Well-capitalized under prompt corrective action provisions -- 5.00 -- 5.00 5.00 - ------------------------------------------------------------- ----------- ---------- ---------- --------- ---------
No conditions or events have occurred since December 31, 2001 that would change the capital categorizations presented as of December 31, 2001. Certain restrictions exist regarding the ability of the Subsidiary Banks to transfer funds to NCF in the form of cash dividends. Regulatory capital requirements must be met by the Subsidiary Banks as well as other requirements under applicable federal and state laws. Under these requirements, the Subsidiary Banks have approximately $13.4 million in retained earnings at December 31, 2001 that can be transferred to NCF in the form of cash dividends without prior regulatory approval. Management believes that it will be able to receive regulatory approval to transfer dividends in excess of that amount, if needed. Total dividends declared by the Subsidiary Banks to NCF in 2001 were $233.7 million. As a result of the above requirements, consolidated net assets of the Subsidiary Banks amounting to approximately $2.5 billion at December 31, 2001 were restricted from transfer to NCF without prior approval from regulatory agencies. Under Federal Reserve regulations, the Subsidiary Banks are also limited as to the amount they may loan to affiliates, including the Parent Company, unless such loans are collateralized by specified obligations. At December 31, 2001, the Subsidiary Banks had loans to the Parent Company totaling $37 million. 52 (13) SUPPLEMENTARY INCOME STATEMENT INFORMATION Following is a breakdown of the components of "other operating" expenses on the Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999:
In Thousands 2001 2000 1999 ------------------------------ -------- ------ ------ Legal and professional fees $ 37,176 21,828 5,556 Marketing 14,915 7,748 2,314 Telecommunications 14,365 9,055 3,928 All other 91,578 61,208 35,574 ------------------------------ -------- ------ ------ Total other operating expenses $158,034 99,839 47,372 ------------------------------ -------- ------ ------
(14) INCOME TAXES The components of income tax expense for the years ended December 31, 2001, 2000 and 1999 were as follows:
In Thousands 2001 2000 1999 --------------------------------------- -------- ------ ------ Current income taxes: Federal $108,487 7,108 50,338 State 4,494 441 1,648 --------------------------------------- -------- ------ ------ Total current tax expense 112,981 7,549 51,986 --------------------------------------- -------- ------ ------ Deferred income tax expense (benefit): Federal 21,016 27,995 (4,205) State (609) (944) (573) --------------------------------------- -------- ------ ------ Total deferred tax expense (benefit) 20,407 27,051 (4,778) --------------------------------------- -------- ------ ------ Total income tax expense $133,388 34,600 47,208 --------------------------------------- -------- ------ ------
During 2001, 2000 and 1999, a total of $8.7 million, $5.1 million and $7 million, respectively, of income tax benefit was credited to additional paid-in capital as a result of the exercise of certain stock options. A reconciliation of income tax expense to the amount computed by multiplying income before income taxes by the statutory federal income tax rate of 35% follows:
Amount % of Pretax Income ------------------------ -------------------- In Thousands 2001 2000 1999 2001 2000 1999 - ----------------------------------------------------------- -------- ------ ------ ------ ----- ----- Tax expense at statutory rate on income before income taxes $125,539 27,969 48,944 35.00 % 35.00 35.00 State taxes, net of federal benefit 2,525 (327) 698 .70 (.41) .50 Increase (reduction) in taxes resulting from: Tax-exempt interest on investment securities and loans (3,462) (2,678) (2,279) (.97) (3.35) (1.63) Non-deductible goodwill amortization 16,766 9,125 1,130 4.67 11.42 .81 Non-taxable life insurance income (3,395) (885) -- (.95) (1.11) -- Other, net (4,585) 1,396 (1,285) (1.26) 1.75 (.92) - ----------------------------------------------------------- -------- ------ ------ ------ ----- ----- Income tax expense $133,388 34,600 47,208 37.19% 43.30 33.76 - ----------------------------------------------------------- -------- ------ ------ ------ ----- -----
53 (14) INCOME TAXES -- CONTINUED At December 31, 2001 and 2000, NCF had recorded net deferred tax liabilities of $135.2 million and $117.4 million, respectively, which are included in "other assets" or "other liabilities" on the Consolidated Balance Sheets. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In management's opinion, it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. Consequently, management has determined that a valuation allowance for deferred tax assets was not required at December 31, 2001 and 2000. The sources and tax effects of cumulative temporary differences that give rise to significant deferred tax assets (liabilities) at December 31, 2001 and 2000 are shown below:
In Thousands 2001 2000 - -------------------------------------------------------------- --------- -------- Deferred tax assets: Allowance for loan losses $ 59,808 54,648 Deferred compensation 5,470 4,453 Net operating loss and credit carryovers 7,196 7,191 Other 20,738 28,328 - -------------------------------------------------------------- --------- -------- Total gross deferred tax assets 93,212 94,620 - -------------------------------------------------------------- --------- -------- Deferred tax liabilities: Intangible assets 88,285 100,713 Deferred loan fees and costs 20,675 13,576 Premises and equipment 11,964 11,898 Investments 11,645 11,757 Pension costs 6,633 6,571 Unrealized gains on investment securities available for sale 8,453 13,670 Deferred income 73,507 46,423 Other 7,298 7,381 - -------------------------------------------------------------- --------- -------- Total gross deferred tax liabilities 228,460 211,989 - -------------------------------------------------------------- --------- -------- Net deferred tax liability $(135,248) (117,369) - -------------------------------------------------------------- --------- --------
(15) COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK Commitments and Contingencies Leases The Subsidiary Banks lease certain real property and equipment under long-term operating leases expiring at various dates to 2021. Total rental expense amounted to $20.2 million in 2001, $14.5 million in 2000 and $7.9 million in 1999. A summary of the commitments under noncancellable, long-term leases in effect at December 31, 2001 for each of the years ending December 31 follows:
Type of Property ----------------------- Total In Thousands Real Property Equipment Commitments ----------------------- ------------- --------- ----------- 2002 $ 9,538 3,762 13,300 2003 8,400 2,170 10,570 2004 6,816 1,334 8,150 2005 5,541 229 5,770 2006 4,620 157 4,777 Thereafter 38,544 -- 38,544 ----------------------- ------------- --------- ----------- Total lease commitments $73,459 7,652 81,111 ----------------------- ------------- --------- -----------
Generally, real estate taxes, insurance, and maintenance expenses are obligations of the Subsidiary Banks. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amounts shown for 2002. Litigation Certain legal claims have arisen in the normal course of business in which NCF and certain of its Subsidiary Banks have been named as defendants. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management and counsel, any such liability will have no material effect on NCF's financial position or results of operations. 54 (15) Commitments, Contingencies and Off-Balance Sheet Risk -- Continued Lending Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer's credit worthiness is evaluated on a case-by-case basis and collateral, primarily real estate or business assets, is generally obtained. At December 31, 2001 and 2000, the Subsidiary Banks had commitments to extend credit of approximately $2.9 billion and $2.5 billion. These amounts include unused revolving credit lines and home mortgage equity lines of $11.9 million and $1.1 billion, respectively, at December 31, 2001 and $71 million and $816 million, respectively, at December 31, 2000. Standby letters of credit are commitments issued by the Subsidiary Banks to guarantee the performance of a customer to a third party. The standby letters of credit are generally secured by non-depreciable assets. The Subsidiary Banks had approximately $161.8 million and $128 million in outstanding standby letters of credit at December 31, 2001 and 2000. Off-Balance Sheet Risk Capital Markets, for trading purposes, enters into transactions involving financial instruments with off-balance sheet risk in order to meet the financing and hedging needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include forward contracts, when issued contracts and options written. All such contracts are for United States Treasury, federal agency or municipal securities. These financial instruments involve varying degrees of credit and market risk. The contract amounts of those instruments reflect the extent of involvement in particular classes of financial instruments. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities' market values and interest rates. The extent of the Capital Market's involvement in financial instruments with off-balance sheet risk as of December 31 was as follows:
In Thousands 2001 2000 ------------------------- -------- ------ Forward contracts: Commitments to purchase $190,205 52,635 Commitments to sell 198,720 69,435 When issued contracts: Commitments to purchase 4,068 5,714 Commitments to sell 17,196 7,325
55 (16) NATIONAL COMMERCE FINANCIAL CORPORATION (PARENT COMPANY) The Parent Company's principal asset is its investment in the Subsidiary Banks and dividends from the Subsidiary Banks are its primary source of income. Condensed Balance Sheets as of December 31, 2001 and 2000 and the related Condensed Statements of Income and Cash Flows for the years ended December 31, 2001, 2000 and 1999 follow: CONDENSED BALANCE SHEETS As of December 31, 2001 and 2000
In Thousands 2001 2000 --------------------------------------------- ---------- --------- Cash and short-term investments $ 405,713 234,191 Investment securities 25,893 25,823 Loans 53,291 71,587 Less allowance for loan losses 721 792 --------------------------------------------- ---------- --------- Net loans 52,570 70,795 Investment in subsidiaries 2,619,718 2,387,801 Other assets 22,521 11,621 --------------------------------------------- ---------- --------- Total assets $3,126,415 2,730,231 --------------------------------------------- ---------- --------- Master notes $ 325,721 195,070 Note payable to subsidiary 38,547 50,547 Subordinated notes and debentures 281,830 82,928 Other liabilities 24,986 36,848 --------------------------------------------- ---------- --------- Total liabilities 671,084 365,393 Stockholders' equity 2,455,331 2,364,838 --------------------------------------------- ---------- --------- Total liabilities and stockholders' equity $3,126,415 2,730,231 --------------------------------------------- ---------- ---------
CONDENSED INCOME STATEMENTS Years Ended December 31, 2001, 2000 and 1999
In Thousands 2001 2000 1999 - ---------------------------------------------------------------- -------- ------- ------ Dividends from subsidiaries $236,700 82,215 60,844 Interest income 15,324 12,092 1,338 Other income 1,154 1,190 3,153 - ---------------------------------------------------------------- -------- ------- ------ Total operating income 253,178 95,497 65,335 - ---------------------------------------------------------------- -------- ------- ------ Interest expense 15,252 12,633 3,236 Other operating expenses 4,153 5,023 2,879 - ---------------------------------------------------------------- -------- ------- ------ Total operating expenses 19,405 17,656 6,115 - ---------------------------------------------------------------- -------- ------- ------ Income before income taxes 233,773 77,841 59,220 Income tax benefit (559) (1,497) (648) - ---------------------------------------------------------------- -------- ------- ------ Income before equity in undistributed net income of subsidiaries 234,332 79,338 59,868 Net income of subsidiaries, net of dividends paid (9,036) (34,028) 32,764 - ---------------------------------------------------------------- -------- ------- ------ Net income $225,296 45,310 92,632 - ---------------------------------------------------------------- -------- ------- ------
56 (16) NATIONAL COMMERCE FINANCIAL CORPORATION (PARENT COMPANY) -- CONTINUED CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, 2001, 2000 and 1999
In Thousands 2001 2000 1999 - ---------------------------------------------------- --------- ------- ------- Net cash provided by operating activities $ 225,582 144,225 43,036 - ---------------------------------------------------- --------- ------- ------- Investment in subsidiaries (160,188) (24,914) (48,331) Net decrease in loans to subsidiaries -- -- 25,626 Net (increase) decrease in loans 18,296 (2,179) -- Other, net (28,266) 189,094 (25,570) - ---------------------------------------------------- --------- ------- ------- Net cash provided (used) by investing activities (170,158) 162,001 (48,275) - ---------------------------------------------------- --------- ------- ------- Increase in master notes 130,651 9,911 -- Net decrease in notes payable to subsidiaries (12,000) (4,453) -- Net increase in subordinated notes and debentures 198,902 -- -- Proceeds from stock issuance in acquisition -- -- 80,248 Purchase and retirement of common stock (102,212) (32,008) (22,925) Cash dividends paid (114,838) (76,236) (39,697) Other, net 15,595 8,240 5,999 - ---------------------------------------------------- --------- ------- ------- Net cash provided (used) by financing activities 116,098 (94,546) 23,625 - ---------------------------------------------------- --------- ------- ------- Net increase in cash and short-term investments 171,522 211,680 18,386 Cash and short-term investments at beginning of year 234,191 22,511 4,125 - ---------------------------------------------------- --------- ------- ------- Cash and short-term investments at end of year $ 405,713 234,191 22,511 - ---------------------------------------------------- --------- ------- -------
(17) SEGMENT INFORMATION Management monitors NCF performance as two business segments, traditional banking and financial enterprises. During 2001, management redefined the financial enterprise segment to include retail brokerage/insurance commissions. Data for prior years has been restated to conform to the 2001 presentation. The traditional banking segment includes sales and distribution of financial products and services to individuals. These products and services include loan products such as residential mortgage, home equity lending, automobile and other personal financing needs. Traditional banking also offers various deposit products that are designed for customers' saving and transaction needs. This segment also includes lending and related financial services provided to small- and medium-sized corporations. Included among these services are several specialty services such as real estate finance, asset-based lending and residential construction lending. Traditional banking also includes management of the investment portfolio and non-deposit based funding. The financial enterprises segment is comprised of trust services and investment management, transaction processing, retail banking consulting/in-store licensing and broker/dealer activities. The accounting policies of the individual segments are the same as those of NCF as described in Note 1. Transactions between business segments are conducted at fair value and are eliminated for reporting consolidated financial position and results of operations. Interest income for tax-exempt loans and securities is adjusted to a taxable-equivalent basis. Expenses for centrally provided services such as data processing, human resources, and other support functions are allocated to each segment. The following tables present condensed income statements and average assets for each reportable segment.
Traditional Financial Intersegment In Thousands Banking Enterprises Eliminations Total - --------------------------------------------- ----------- ----------- ------------ ---------- Year ended December 31, 2001: Net interest income, taxable equivalent basis $ 663,936 18,518 -- 682,454 Provision for loan loss 29,199 -- -- 29,199 - --------------------------------------------- ----------- ----------- ------------ ---------- Net interest income after provision 634,737 18,518 -- 653,255 Other income 162,430 166,758 (4,300) 324,888 Intangibles amortization (105,225) (1,790) -- (107,015) Other expense (365,627) (119,776) 4,300 (481,103) - --------------------------------------------- ----------- ----------- ------------ ---------- Income before income taxes 326,315 63,710 -- 390,025 Income taxes 139,835 24,894 -- 164,729 - --------------------------------------------- ----------- ----------- ------------ ---------- Net income $ 186,480 38,816 -- 225,296 - --------------------------------------------- ----------- ----------- ------------ ---------- Average assets $17,319,317 587,695 -- 17,907,012 - --------------------------------------------- ----------- ----------- ------------ ----------
57 (17) SEGMENT INFORMATION -- CONTINUED
Traditional Financial Intersegment In Thousands Banking Enterprises Eliminations Total - --------------------------------------------- ----------- ----------- ------------ ---------- Year ended December 31, 2000: Net interest income, taxable equivalent basis $ 431,971 12,114 -- 444,085 Provision for loan loss 16,456 -- -- 16,456 - --------------------------------------------- ----------- ----------- ------------ ---------- Net interest income after provision 415,515 12,114 -- 427,629 Other income 98,124 93,485 (2,118) 189,491 Intangibles amortization (60,472) (948) -- (61,420) Other expense (388,916) (65,679) 2,118 (452,477) - --------------------------------------------- ----------- ----------- ------------ ---------- Income before income taxes 64,251 38,972 -- 103,223 Income taxes 42,691 15,222 -- 57,913 - --------------------------------------------- ----------- ----------- ------------ ---------- Net income $ 21,560 23,750 -- 45,310 - --------------------------------------------- ----------- ----------- ------------ ---------- Average assets $11,912,442 489,541 -- 12,401,983 Year ended December 31, 1999: Net interest income, taxable equivalent basis $ 228,984 11,272 -- 240,256 Provision for loan loss 16,921 -- -- 16,921 - --------------------------------------------- ----------- ----------- ------------ ---------- Net interest income after provision 212,063 11,272 -- 223,335 Other income 36,564 52,070 (1,407) 87,227 Intangibles amortization (7,456) -- -- (7,456) Other expense (117,168) (33,889) 1,407 (149,650) - --------------------------------------------- ----------- ----------- ------------ ---------- Income before income taxes 124,003 29,453 -- 153,456 Income taxes 49,147 11,677 -- 60,824 - --------------------------------------------- ----------- ----------- ------------ ---------- Net income $ 74,856 17,776 -- 92,632 - --------------------------------------------- ----------- ----------- ------------ ---------- Average assets $ 6,029,284 329,544 -- 6,358,828 - --------------------------------------------- ----------- ----------- ------------ ----------
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
2001 2000 --------------------------------------- ---------------------------- In Thousands Except Per Share Data 4TH QTR. 3RD QTR. 2ND QTR. 1ST QTR. 4th Qtr. 3rd Qtr. 2nd Qtr. - --------------------------------------------------- --------- -------- -------- -------- -------- -------- -------- Interest income $ 287,262 302,492 310,020 323,091 334,073 329,090 142,392 Interest expense 114,826 137,425 148,543 170,958 183,231 181,248 80,819 - --------------------------------------------------- --------- -------- -------- -------- -------- -------- -------- Net interest income 172,436 165,067 161,477 152,133 150,842 147,842 61,573 Provision for loan losses 6,892 9,623 6,304 6,380 5,317 5,098 3,865 - --------------------------------------------------- --------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses 165,544 155,444 155,173 145,753 145,525 142,744 57,708 Securities gains (losses) 2,752 2,588 575 720 (141) 4,522 127 Other income 89,909 76,644 78,543 73,157 69,387 67,213 24,439 Intangibles amortization (26,782) (26,449) (26,668) (27,116) (27,521) (27,822) (3,249) Other expenses (137,456) (116,222) (117,632) (109,793) (198,331) (166,093) (43,890) - --------------------------------------------------- --------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes 93,967 92,005 89,991 82,721 (11,081) 20,564 35,135 Income tax expense (benefit) 34,107 34,394 34,456 30,431 (2,669) 14,775 11,194 - --------------------------------------------------- --------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 59,860 57,611 55,535 52,290 (8,412) 5,789 23,941 - --------------------------------------------------- --------- -------- -------- -------- -------- -------- -------- Net income (loss) per share: Basic (1) $ .29 .28 .27 .25 (.04) .03 .22 Diluted (1) .29 .28 .27 .25 (.04) .03 .22 - --------------------------------------------------- --------- -------- -------- -------- -------- -------- --------
In Thousands Except Per Share Data 1st Qtr. - --------------------------------------------------- -------- Interest income 132,421 Interest expense 71,906 - --------------------------------------------------- -------- Net interest income 60,515 Provision for loan losses 2,176 - --------------------------------------------------- -------- Net interest income after provision for loan losses 58,339 Securities gains (losses) 1 Other income 23,943 Intangibles amortization (2,828) Other expenses (44,163) - --------------------------------------------------- -------- Income (loss) before income taxes 35,292 Income tax expense (benefit) 11,300 - --------------------------------------------------- -------- Net income (loss) 23,992 - --------------------------------------------------- -------- Net income (loss) per share: Basic (1) .22 Diluted (1) .22 - --------------------------------------------------- --------
(1) For 2000, the sum of the quarterly per share net income amounts do not equal the annual per share net income presented elsewhere herein due to significant changes in net income and weighted average shares outstanding impacting the third and fourth quarter. 58 (19) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
2001 2000 ---------------------- ----------------------- Carrying Carrying In Thousands Amount Fair Value Amount Fair Value - --------------------------------------------- ----------- ---------- ---------- ---------- FINANCIAL ASSETS: Cash and cash equivalents $ 644,420 644,420 531,467 531,467 Investment securities 4,512,456 4,525,389 4,418,321 4,386,226 Trading account securities 197,214 197,214 74,417 74,417 Net loans 11,818,364 12,213,405 10,864,805 10,953,779 FINANCIAL LIABILITIES: Deposits 12,619,479 12,728,535 11,979,631 12,134,567 Short-term borrowings 1,141,617 1,141,617 1,212,903 1,212,903 Federal Home Loan Bank advances 2,306,554 2,288,161 1,649,055 1,648,979 Trust preferred securities and long-term debt 282,018 281,820 89,301 99,010 DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swaps -- -- (74,140) (74,140) - --------------------------------------------- ----------- ---------- ---------- ----------
Cash and Cash Equivalents The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Investment and Trading Account Securities Fair values for investment and trading account securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Net Loans For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential) and certain consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. Deposits The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Borrowings The carrying amounts of short-term borrowings and trust preferred securities approximate their fair values. The fair values of FHLB advances and long-term debt are estimated using discounted cash flow analyses, based on NCF's incremental borrowing rates for similar types of borrowing arrangements. Interest Rate Swaps Fair values for interest rate swaps are based on discounted cash flow projections under the swap agreements based on assumptions about future interest rate movements. Off-Balance Sheet Financial Instruments The Subsidiary Banks have commitments to extend credit and standby letters of credit. These types of credit are made at market rates; therefore, there would be no market risk associated with these credits which would create a significant fair value liability. 59 REPORT OF MANAGEMENT REGARDING RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the content of the financial information included in this annual report. The financial statements from which the financial information has been drawn are prepared in accordance with accounting principles generally accepted in the United States of America. Other information in this report is consistent with the financial statements. In meeting its responsibility, management relies on the system on internal accounting control and related control systems. Elements of these systems include selection and training of qualified personnel, establishment and communication of accounting and administrative policies and procedures, appropriate segregation of responsibilities and programs of internal audit. These systems are designed to provide reasonable assurance that financial records are reliable for preparing financial statements and maintaining accountability for assets and that assets are safeguarded against unauthorized use or disposition. Such assurance cannot be absolute because of inherent limitations in any system of internal control. The concept of reasonable assurance recognizes that the cost of a system of internal control should not exceed the benefit derived and that the evaluation of such cost and benefit necessarily requires estimates and judgments. KPMG LLP, independent auditors, audited NCF's consolidated financial statements in accordance with auditing standards generally accepted in the United States of America. These standards include a study and evaluation of internal control for the purpose of establishing a basis for reliance thereon relative to the determination of the scope of their audits. The voting members of the Audit Committee of the Board of Directors consist solely of outside Directors. The Audit Committee meets periodically with management, NCF's internal auditors and the independent auditors to discuss audit, financial reporting and related matters. KPMG LLP and the internal auditors have direct access to the Audit Committee. /s/ ERNEST C. ROESSLER ERNEST C. ROESSLER President and Chief Executive Officer /s/ SHELDON M. FOX SHELDON M. FOX Chief Financial Officer 60 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders National Commerce Financial Corporation: We have audited the accompanying consolidated balance sheet of National Commerce Financial Corporation and subsidiaries as of December 31, 2001 and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2001 consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Commerce Financial Corporation and subsidiaries as of December 31, 2001, and the results of their operations and their cash flows for the year/then ended in conformity with accounting principles generally accepted in the United States of America. / /s/ KPMG LLP Memphis, Tennessee January 16, 2002 61 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders of National Commerce Financial Corporation We have audited the accompanying consolidated balance sheet of National Commerce Financial Corporation and Subsidiaries ("the Company") as of December 31, 2000, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the two years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2000 and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Memphis, Tennessee June 22, 2001 62 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL AND ACCOUNTING DISCLOSURE None. PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated herein by reference to National Commerce Financial Corporation's definitive Proxy Statement dated March 26, 2002 (the "Proxy Statement") under the heading "Proposal 1. Election of Directors" or appears under the heading "Executive Officers of the Registrant" in Part I. of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the Proxy Statement under the headings "Report of the Compensation Committee", "Compensation of Management and Other Information", "Pension Plans" and "Employment Agreements". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the Proxy Statement under the heading "Stock Ownership of Management and Principal Shareholders". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the Proxy Statement under the heading "Certain Transactions with Directors and Management". PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. and 2. The financial statements and supplementary data listed in the index set forth in Item 8 of this Annual Report are filed as part of this Annual Report. All schedules are omitted because of the absence of the condition under which they are required or because the required information is included in the financial statements or related notes. (a) 3. Exhibits are listed in the Exhibit Index beginning on page 64 of this Annual Report. (b) Reports on Form 8-K: None. 63 DESCRIPTION OF EXHIBITS Agreement and Plan of Reorganization between Registrant and SouthBanc Shares, Inc. Articles of Amendment to amended and restated Charter of Registrant Charter of Registrant as amended and restated Bylaws of Registrant as amended and restated Specimen Stock Certificate of Registrant Form of Indenture dated as of November 1, 1993, between CCB Financial Corporation and Bank of New York as successor to Wachovia Bank of North Carolina, N.A., Trustee, pursuant to which Registrant's Subordinated Notes are issued and held Certificate of Trust of National Commerce Capital Trust II Form of Promissory Notes of NBC payable to The Mallory Partners Amended and Restated Employment Agreement entered into as of November 1, 2001 by and between Registrant and Thomas M. Garrott and further amended on February 18, 2002 Employment Agreement entered into as of November 1, 2001 by and between Registrant and Ernest C. Roessler Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and William R. Reed, Jr. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and Richard L. Furr Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and J. Scott Edwards Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and Sheldon M. Fox Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and David T. Popwell Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and Tom W. Scott Change of Control Agreement dated as of July 5, 2000 by and between Registrant and Ernest C. Roessler Change of Control Agreement dated as of July 5, 2000 by and between Registrant and William R. Reed Change of Control Agreement dated as of July 5, 2000 by and between Registrant and Richard L. Furr Change of Control Agreement dated as of July 5, 2000 by and between Registrant and J. Scott Edwards Change of Control Agreement dated as of July 5, 2000 by and between Registrant and Sheldon M. Fox Change of Control Agreement dated as of July 5, 2000 by and between Registrant and David T. Popwell Change of Control Agreement dated as of July 5, 2000 by and between Registrant and Tom W. Scott Retirement Plan of Registrant as amended and restated Hillsborough Savings Bank, Inc., SSB Management Recognition Plan Piedmont Bancorp, Inc. Stock Option Plan 1993 Incentive Stock Option Plan Salem Trust Bank 1986 Incentive Stock Option Plan 1995 Directors Performance Plan of American Federal Bank, FSB 1993 Nonstatutory Stock Option Plan for CCB Savings Bank of Lenoir, Inc., SSB 64 1993 Nonstatutory Stock Option Plan for Graham Savings Bank, Inc., SSB Security Capital Bancorp Omnibus Stock Ownership and Long-Term Incentive Plan Long-Term Incentive Plan of CCB Financial Corporation American Federal Bank, FSB Amended and Restated 1998 Stock Option and Incentive Plan Stone Street Bancorp, Inc. Stock Option Plan Deferred Compensation Agreement as of December 1, 1983 for Thomas M. Garrott Supplemental Executive Retirement Plan of Registrant 1990 Stock Plan of the Registrant 1994 Stock Plan of the Registrant, as amended and restated effective as of November 1, 1996 Amendment Number One to the 1994 Stock Plan of the Registrant Amendment Number Two to the 1994 Stock Plan of the Registrant Resolution authorizing Pension Restoration Plan National Commerce Financial Corporation Deferred Compensation Plan effective January 1, 1999 CCB Financial Corporation Retirement Savings Plan SouthBanc Shares, Inc. 1998 Stock Option Plan and SouthBanc Shares, Inc. 2001 Stock Option Plan Subsidiaries of Registrant Consent of KPMG LLP Consent of Ernst & Young LLP Registrant's Proxy Statement to Shareholders for the 2002 Annual Meeting of Shareholders COPIES OF EXHIBITS ARE AVAILABLE UPON WRITTEN REQUEST TO SHELDON M. FOX, CHIEF FINANCIAL OFFICER OF NATIONAL COMMERCE FINANCIAL CORPORATION 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL COMMERCE FINANCIAL CORPORATION By: /s/ Thomas M. Garrott ----------------------------------- Thomas M. Garrott Chairman of the Board Date: March 22, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Thomas M. Garrott Chairman of the Board March 22, 2002 - ----------------------------- Thomas M. Garrott /s/ Ernest C. Roessler President and Chief Executive March 22, 2002 - ----------------------------- Officer (Principal Executive Ernest C. Roessler Officer) /s/ James B. Brame, Jr. Director March 22, 2002 - ----------------------------- James B. Brame, Jr. /s/ R. Grattan Brown, Jr. Director March 22, 2002 - ----------------------------- R. Grattan Brown, Jr. - ----------------------------- Director March , 2002 Bruce E. Campbell, Jr. - ----------------------------- Director March , 2002 John D. Canale III /s/ James H. Daughdrill, Jr. Director March 22, 2002 - ----------------------------- James H. Daughdrill, Jr. - ----------------------------- Director March , 2002 Thomas C. Farnsworth, Jr. /s/ Blake P. Garrett, Jr. Director March 22, 2002 - ----------------------------- Blake P. Garrett, Jr. /s/ C. Dan Joyner Director March 22, 2002 - ----------------------------- C. Dan Joyner /s/ W. Neely Mallory, Jr. Director March 22, 2002 - ----------------------------- W. Neely Mallory, Jr. /s/ Eugene J. McDonald Director March 22, 2002 - ----------------------------- Eugene J. McDonald 66 Signature Title Date --------- ----- ---- /s/ Phillip H. McNeill Sr. Director March 22, 2002 - ----------------------------- Phillip H. McNeill Sr. /s/ Eric B. Munson Director March 22, 2002 - ----------------------------- Eric B. Munson - ----------------------------- Director March , 2002 J. Bradbury Reed /s/ Dr. David E. Shi Director March 22, 2002 - ----------------------------- Dr. David E. Shi /s/ H. Allen Tate, Jr. Director March 22, 2002 - ----------------------------- H. Allen Tate, Jr. /s/ Dr. Phail Wynn, Jr. Director March 22, 2002 - ----------------------------- Dr. Phail Wynn, Jr. /s/ Sheldon M. Fox Chief Financial Officer March 22, 2002 - ----------------------------- (Principal Sheldon M. Fox Financial Officer) 67 EXHIBIT INDEX
Exhibit No. - ----------- (2) Plan of acquisition, reorganization, arrangement, liquidation or secession. 1. Agreement and Plan of Reorganization entered into as of, July 15, 2001 by and between the Registrant and SouthBanc Shares, Inc. is incorporated by reference from Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 filed on September 13, 2001 (File No. 333- 69338). * (3) Articles of Incorporation and Bylaws. 1. Articles of Amendment to Registrant's Amended and Restated Charter is incorporated by reference from Exhibit 3.1 to the Registrant's Form S-3/A dated July 9, 2001. 2. Amended and Restated Charter of Registrant is incorporated by reference from Exhibit 3.1 to the Registrant's Form 8-K dated July 11, 2000. * 3. Bylaws of Registrant as amended is incorporated by reference from Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. * (4) Instruments defining the rights of security holders, including indentures. 1. Specimen Stock Certificate of Registrant is incorporated herein by reference from Exhibit 4.1 of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. * 2. Form of indenture dated November 1, 1993 between CCB Financial Corporation and Bank of New York as successor to Wachovia Bank of North Carolina, N.A., Trustee, pursuant to which Registrant's Subordinated Notes are issued and held is incorporated herein by reference from Exhibit 4.2 of the CCB Registration Statement No. 33-50793 on Form S-3 (File No. 001- 11989). * 3. Certificate of Trust of National Commerce Capital Trust II is incorporated by reference from Exhibit 4.2 to the Registrant's Form S-1/1 filed on December 5, 2001. (10) Material contracts. 1. Form of Promissory Notes of NBC payable to The Mallory Partners is incorporated herein by reference from Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1987 (File No. 0-6094). * 2. Amended and Restated Employment Agreement entered into as of November 1, 2001 by and between Registrant and Thomas M. Garrott is incorporated by reference from Exhibit 10.2 to the Registrant's Form S-1/1 filed on December 5, 2001. * 3. First Amendment to Amended and Restated Employment Agreement dated as of February 18, 2002 by and between Registrant and Thomas M. Garrot. 10.1 4. Employment Agreement entered into as of November 1, 2001 by and between Registrant and Ernest C. Roessler is incorporated by reference from Exhibit 10. 3 to the Registrant's Form S- 1/1 filed on December 5, 2001. * 5. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and William R. Reed, Jr. is incorporated by reference from Exhibit 10.24 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 6. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and Richard L. Furr is incorporated by reference from Exhibit 10.25 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 7. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and J. Scott Edwards is incorporated by reference from Exhibit 10.27 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *
68
Exhibit No. - ----------- 8. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and Sheldon M. Fox is incorporated by reference from Exhibit 10.28 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 9. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and David T. Popwell is incorporated by reference from Exhibit 10.29 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 10. Employment Agreement entered into as of March 17, 2000, effective as of July 5, 2000, by and among Registrant and Tom W. Scott is incorporated by reference from Exhibit 10.30 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 11. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial Corporation and Ernest C. Roessler is incorporated by reference from Exhibit 10.31 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 * 12. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial Corporation and William R. Reed is incorporated by reference from Exhibit 10.32 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 13. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial Corporation and Richard L. Furr is incorporated by reference from Exhibit 10.33 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 14. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial Corporation and J. Scott Edwards is incorporated by reference from Exhibit 10.35 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 15. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial Corporation and Sheldon M. Fox is incorporated by reference from Exhibit 10.36 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 16. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial Corporation and David T. Popwell is incorporated by reference from Exhibit 10.37 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 17. Change of Control Agreement dated as of July 5, 2000 by and between National Commerce Financial Corporation and Tom W. Scott is incorporated by reference from Exhibit 10.38 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 18. National Commerce Financial Corporation Retirement Plan as amended and restated effective August 1, 2001. 10.2 19. Hillsborough Savings Bank, Inc., SSB Management Recognition Plan is incorporated by reference to Exhibit 10.II.B of the Form 10-K of Piedmont Bancorp, Inc. ("PBI") for the fiscal year ended June 30, 1996 (File No. 001-14070). * 20. Piedmont Bancorp, Inc. Stock Option Plan is incorporated by reference to Exhibit 10.II.A to PBI's Form 10-K for the fiscal year ended June 30, 1996 (File No. 001-14070). * 21. 1993 Incentive Stock Option Plan is incorporated by reference to Exhibit 28 to the Registration Statement No. 33-61270 on Form S-8 of CCB Financial Corporation ("CCB")(File No. 001- 11989). * 22. Salem Trust Bank 1986 Incentive Stock Option Plan is incorporated by reference to Exhibit 99 of CCB's Registration Statement No. 333-22031 on Form S-8 (File No. 001-11989). * 23. 1995 Directors Performance Plan of American Federal Bank, FSB is incorporated by reference to Exhibit 99 to CCB's Registration Statement No. 333-34231 on Form S-8 (File No. 001- 11989). *
69
Exhibit No. - ----------- 24. 1993 Nonstatutory Stock Option Plan for CCB Savings Bank of Lenoir, Inc., SSB is incorporated by reference to Exhibit 99 of CCB's Registration Statement No. 33-53599 on Form S-8, as amended by Amendment No. 1 to the 1993 Nonstatutory Stock Option Plan for CCB Savings Bank of Lenoir, Inc., SSB (incorporated by reference to Exhibit 10(G) of CCB's Annual Report on Form 10-K for the year ended December 31, 1993)(File No. 001-11989). * 25. 1993 Nonstatutory Stock Option Plan for Graham Savings Bank, Inc., SSB is incorporated by reference to Exhibit 99 to CCB's Registration Statement No. 33-53595 on Form S-8 (File No. 001-11989). * 26. Security Capital Bancorp Omnibus Stock Ownership and Long Term Incentive Plan is incorporated by reference to Exhibit 99 to CCB's Registration Statement No. 33-61791 on Form S-8 (File No. 001-11989). * 27. Long-Term Incentive Plan is incorporated by reference to Exhibit 99 to CCB's Registration Statement No. 33-54645 on Form S-8 (File No. 001-11989). * 28. American Federal Bank, FSB Amended and Restated 1988 Stock Option and Incentive Plan is incorporated by reference to Exhibit 99 of CCB's Registration Statement No. 33-34207 on Form S-8 (File No. 001-11989). * 29. Stone Street Bancorp, Inc. Stock Option Plan is incorporated by reference to Exhibit 99 of CCB's Registration Statement No. 33-9158 on Form S-8 (File No. 001-11989). * 30. Deferred Compensation Agreement as of December 1, 1983 for Thomas M. Garrott is incorporated by reference to Exhibit 10c(2) to the Registrant's Form 10-K for the year ended December 31, 1984 (File No. 0-6094). * 31. 1990 Stock Plan of the Registrant is incorporated by reference from Exhibit A to the Registrant's Proxy Statement for the 1990 Annual Meeting of Shareholders (File No. 0-6094). * 32. 1994 Stock Plan of the Registrant, as amended and restated effective as of November 1, 1996, is incorporated by reference from Exhibit A to the Registrant's Proxy Statement for the 1997 Annual Meeting of Shareholders. * 33. Amendment Number One to the 1994 Stock Plan of the Registrant, as amended and restated effective as of November 1, 1996, is incorporated by reference from Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. * 34. Amendment Number Two to the 1994 Stock Plan of the Registrant, as amended and restated effective as of November 1, 1996, is incorporated by reference from Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. * 35. Resolution authorizing Pension Restoration Plan is incorporated by reference from Exhibit 10(c)(7) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1986 (File No. 0-6094). * 36. National Commerce Financial Corporation Deferred Compensation Plan effective January 1, 1999, is incorporated by reference from Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. * 37. National Commerce Financial Corporation Supplemental Executive Retirement Plan. 10.3 38. CCB Financial Corporation Retirement Savings Plan is incorporated by reference to Exhibit 99 of Registrant's Registration Statement No. 333-66110 on Form S-8 (File No. 0-6094). * 39. Long-Term Incentive Plan is incorporated by reference to Exhibit 99 of Registrant's Registration Statement No. 333-66116 on Form S-8 (File No. 0-6094). *
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Exhibit No. - ----------- 40. SouthBanc Shares, Inc. 1998 Stock Option Plan and SouthBanc Shares, Inc. 2001 Stock Option Plan is incorporated by reference to Exhibit 99 of Registrant's Registration Statement No. 333- 69338 on Form S-8/A (File No. 0-6094). * (21) Subsidiaries of Registrant. A listing of the direct and indirect subsidiaries of Registrant. 21 (23) Consents of experts and counsel. Consent of KPMG LLP. 23.1 Consent of Ernst & Young LLP. 23.2 (99) Additional exhibits. Proxy Statement for 2002 Annual Meeting of Shareholders to be held on April 24, 2002. Not Required to be re-filed
* Previously filed 71 EX-10.1 3 dex101.txt EMPLOYMENT AGREEMENT-THOMAS M. GARROT FIRST AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT This First Amendment to Amended and Restated Employment Agreement ("First Amendment"), dated as of the 18th day of February 2002 is made and entered into by and between National Commerce Financial Corporation, a Tennessee Corporation (the "Company") and Thomas M. Garrott ("Employee"). RECITALS: WHEREAS, the Company and the Employee entered into an Amended and Restated Employment Agreement dated as of the 1st day of November 2001 (the "Employment Agreement"); and WHEREAS, the Employment Agreement contained a Section 3(F) that provides for a lump sum payment and other benefits in the event of a change in control on or before July 5, 2003; and WHEREAS, Employee has elected to waive all rights under Section 3(F) of the Employment Agreement. NOW, THEREFORE, for valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Section 3(F) of the Employment Agreement is hereby deleted in its entirety effective as of the date first above written. 2. Except as expressly modified hereby, the terms and provisions of the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered as of the date first above written. ------------------------------ Thomas M. Garrott 4001 South Galloway Drive Memphis, Tennessee 38111 NATIONAL COMMERCE FINANCIAL CORPORATION By: -------------------------- W. Neely Mallory, Jr., Chairman Compensation Committee The Mallory Group, Inc. 4294 Swinnea Rd. Memphis, Tennessee 38118 EX-10.2 4 dex102.txt NCFC RETIREMENT PLAN DATED AUG. 1, 2001 NATIONAL COMMERCE FINANCIAL CORPORATION --------------------------------------- RETIREMENT PLAN --------------- As Amended and Restated Effective August 1, 2001 -------------- TABLE OF CONTENTS -----------------
SECTION PAGE - ------- ---- 1 DEFINITIONS: PARTICIPATION............................................................................ 1-1 1.1 DEFINITIONS................................................................................... 1-1 1.2 PARTICIPATION................................................................................. 1-17 1.3 LEAVE OF ABSENCE AND TERMINATION OF SERVICE................................................... 1-18 1.4 REEMPLOYMENT.................................................................................. 1-19 1.5 TRANSFER TO OR FROM STATUS AS AN ELIGIBLE EMPLOYEE............................................ 1-24 1.6 PARTICIPATION AND BENEFITS FOR FORMER LEASED EMPLOYEES........................................ 1-27 1.7 RIGHT'S OF OTHER EMPLOYERS TO PARTICIPATE..................................................... 1-27 2. NORMAL AMOUNT AND PAYMENT OF RETIREMENT INCOME......................................................... 2-1 2.1 NORMAL RETIREMENT AND RETIREMENT INCOME....................................................... 2-1 2.2 EARLY RETIREMENT AND RETIREMENT INCOME........................................................ 2-5 2.3 DISABILITY RETIREMENT AND RETIREMENT INCOME................................................... 2-7 2.4 BENEFITS OTHER THAN ON RETIREMENT............................................................. 3. SPECIAL PROVISIONS REGARDING PAYMENT OF BENEFITS....................................................... 3-1 3.1 OPTIONAL FORMS OF RETIREMENT INCOME........................................................... 3-1 3.2 LUMP-SUM PAYMENT OF SMALL RETIREMENT INCOME................................................... 3-4 3.3 BENEFITS APPLICABLE TO PARTICIPANT WHO HAS BEEN OR IS EMPLOYED BY TWO OR MORE EMPLOYERS....... 3-4 3.4 NO DUPLICATION OF BENEFITS.................................................................... 3-4 4 GOVERNMENTAL REQUIREMENTS AFFECTING BENEFITS........................................................... 4-1 4.1 SPECIAL PROVISIONS REGARDING AMOUNT AND PAYMENT OF RETIREMENT INCOME.......................... 4-1 4.2 LIMITATIONS ON BENEFITS REQUIRED BY THE INTERNAL REVENUE SERVICE.............................. 4-9 4.3 BENEFITS NOFORFEITABLE IF PLAN IS TERMINATED.................................................. 4-11 4.4 MERGER OF PLAN................................................................................ 4-11 4.5 TERMINATION OF PLAN AND DISTRIBUTION OF TRUST FUND............................................ 4-11 4.6 SPECIAL PROVISIONS THAT APPLY IF PLAN IS TOP-HEAVY............................................ 4-14 5. MISCELLANEOUS PROVISIONS REGARDING PARTICIPANTS........................................................ 5-1 5.1 PARTICIPANTS TO FURNISH REQUIRED INFORMATION.................................................. 5-1 5.2 BENEFICIARIES................................................................................. 5-1 5.3 CONTINGENT BENEFICIARIES...................................................................... 5-3 5.4 PARTICIPANT'S RIGHTS IN TRUST FUND............................................................ 5-3 5.5 BENEFITS NOT ASSIGNABLE....................................................................... 5-4 5.6 BENEFITS PAYABLE TO MINORS AND INCOMPETENTS................................................... 5-4 5.7 CONDITIONS OF EMPLOYMENT NOT AFFECTED BY PLAN................................................. 5-5
-i- 5.8 NOTIFICATION OF MAILING ADDRESS............................................................... 5-5 5.9 WRITTEN COMMUNICATIONS REQUIRED............................................................... 5-5 5.10 BENEFITS PAYABLE AT OFFICE OF TRUSTEE......................................................... 5-6 5.11 APPEAL TO COMMITTEE........................................................................... 5-6 6. MISCELLANEOUS PROVISIONS REGARDING THE EMPLOYER........................................................ 6-1 6.1 CONTRIBUTIONS................................................................................. 6-1 6.2 EMPLOYER'S CONTRIBUTIONS IRREVOCABLE.......................................................... 6-1 6.3 FORFEITURES................................................................................... 6-1 6.4 AMENDMENT OF PLAN............................................................................. 6-2 6.5 TERMINATION OF PLAN........................................................................... 6-3 6.6 EXPENSES OF ADMINISTRTION..................................................................... 6-3 6.7 FORMAL ACTION BY EMPLOYER..................................................................... 6-3 7. ADMINISTRATION......................................................................................... 7-1 7.1 ADMINISTRATION BY COMMITTEE................................................................... 7-1 7.2 OFFICERS AND EMPLOYEES OF COMMITTEE........................................................... 7-1 7.3 ACTION BY COMMITTEE........................................................................... 7-1 7.4 RULES AND REGULATIONS OF COMMITTEE............................................................ 7-2 7.5 POWERS OF COMMITTEE........................................................................... 7-2 7.6 DUTIES OF COMMITTEE........................................................................... 7-2 7.7 INDEMNIFICATION OF MEMBERS OF COMMITTEE....................................................... 7-4 7.8 ACTUARY....................................................................................... 7-4 7.9 FIDUCIARIES................................................................................... 7-4 7.10 APPLICABLE LAW................................................................................ 7-5 8. TRUST FUND............................................................................................. 8-1 8.1 PURPOSE OF TRUST FUND......................................................................... 8-1 8.2 BENEFITS SUPPORTED ONLY BY TRUST FUND......................................................... 8-1 8.3 TRUST FUND APPLICABLE ONLY TO PAYMENT OF BENEFITS............................................. 8-1
-ii- NATIONAL COMMERCE FINANCIAL CORPORATION --------------------------------------- RETIREMENT PLAN --------------- As Amended and Restated Effective August 1, 2001 INTRODUCTION ------------ National Bank of Commerce maintains the Retirement Plan for Employees of National Bank of Commerce, Memphis Tennessee pursuant to an amended and restated plan document effective as of January 1, 1989, which has been subsequently amended (the "NBC Retirement Plan"). The NBC Retirement Plan was originally adopted by National Bank of Commerce, Memphis, Tennessee, (formerly National Bank of Commerce of Memphis effective July 1, 1951. National Bank of Commerce has assigned the primary sponsorship of the NBC Retirement Plan to its parent corporation, National Commerce Financial Corporation (the "Primary Sponsor"). CCB Financial Corporation previously maintained the CCB Financial Corporation Retirement Plan pursuant to an amended and restated plan document effective as of January 1, 1987, which has been subsequently amended (the "CCB Retirement Plan"). CCB Financial Corporation merged with and into the Primary Sponsor and by virtue of such merger, the Primary Sponsor is the primary sponsor of the CCB Retirement Plan. The Primary Sponsor wishes to merge the CCB Retirement Plan and the NBC Retirement Plan (cllectively, the "Merged Plans") and to rename the resulting plan as the "National Commerce Financial Corporation Retirement Plan" (the "Plan"), effective generally August 1, 2001 and to make such other changes as may be required by law, rulings and regulations, effective as of such earlier date as may be necessary to comply with such law, rulings and regulations. The provisions of this document shall apply only with respect to participants who perform an Hour of Service (as defined in the Plan) after August 1, 2001, except to the extent the provisions are required to apply at another date or to any other participants to comply with applicable law. This merged and restated Plan is intended to bring all of the Merged Plans into compliance with the requirements of the Uruguay Round Agreements Act (also known as the General Agreement on Tariffs and Trade) ("GATT"), the Uniformed Services Employment and Reemployment Rights Act of 1994 ("USERRA"), the Small Business Job Protection Act of 1986 ("SBJPA"), the Taxpayer Relief Act of 1997 ("TRA'97"), and the Internal Revenue Service Restructuring and Reform Act of 1998 ("RRA'98"), collectively known as "GUST," within the remedial amendment period under Code Section 401(b). 1 SECTION 1 --------- DEFINITIONS: PARTICIPATION -------------------------- 1.1 DEFINITIONS ----------- (A) The following terms as used herein shall have the meanings stated below unless a different meaning is plainly required by the context: (1) "Accrued Benefit" shall mean the monthly retirement income, payable in the manner described in Section 2.1(C) hereof commencing at the Participant's Normal Retirement Date, which the Participant has accrued as of a given date. The Accrued Benefit shall be equal to the monthly retirement income to which the Participant would have been entitled on his Normal Retirement Date in accordance with the provisions of Section 2.1(B) hereof (before applying the maximum restrictions imposed by Section 415 of the Internal Revenue Code) but using his Final Average Monthly Compensation and Credited Service determined as of such given date. Notwithstanding the foregoing, (a) the Accrued Benefit of a NBC Retirement Plan Participant who as of July 15, 1996 had not (i) attained age 55 with 5 Years of Credited Service or (ii) attained age 50 with 10 Years of Credited Service, shall not be less than such Participant's accrued benefit under the NBC Retirement Plan as of July 14, 1996. (b) the Accrued Benefit of a CCB Retirement Plan Participant, shall not be less than the benefit which the Participant would have accrued under the CCB Retirement Plan as of December 31, 2001 (based on the assumption that such plan continued in effect without regard to the merger of such plan into the Plan). (c) the Accrued Benefit payable to a Participant who was a 401(a)(17) Participant on January 1, 1988 shall not be less than the sum of: (i) the Participant's Accrued Benefit as of December 31, 1988, under the CCB Retirement Plan or the NBC Retirement Plan, as applicable, frozen in accordance with Section 1.401(a)(4)-13 of the regulations, and (ii) the Participant's Accrued Benefit determined with respect to the benefit formula applicable for the plan year beginning January 1, 1988 as stated in the NBC Retirement Plan or CCB Retirement 1-1 Plan, as applicable, as applied to the years of service credited to the Employee for plan years beginning on or after January 1, 1988. For the purposes of this subsection (c), "401(a)(17) Participant" shall mean a Participant whose Accrued Benefit as of January 1, 1988 is based on Compensation for a year beginning prior to January 1, 1988 that exceeded $200,000. (d) the Accrued Benefit payable to a Participant who was a 401(a)(17) Participant on January 1, 1994 shall not be less than the sum of: (i) the Participant's Accrued Benefit as of December 31, 1993, under the CCB Retirement Plan or the NBC Retirement Plan, as applicable, frozen in accordance with Section 1.401(a)(4)-13 of the regulations, and (ii) the Participant's Accrued Benefit determined with respect to the benefit formula applicable for the plan year beginning January 1, 1994 as stated in the NBC Retirement Plan or CCB Retirement Plan, as applicable, as applied to the years of service credited to the Employee for plan years beginning on or after January 1, 1994. For the purposes of this subsection (d), "401(a)(17) Participant" shall mean a Participant whose Accrued Benefit as of January 1, 1994 is based on Compensation for a year beginning prior to January 1, 1994 that exceeded $150,000. (2) "Annuity Starting Date" shall have the meaning assigned in Section 417(f) of the Internal Revenue Code and regulations issued with respect thereto and shall be the first day of the first period for which an amount is payable (not the actual date of payment) as an annuity or any other form. Any auxiliary disability benefits shall be disregarded in determining the Annuity Starting Date. Unless otherwise qualified by the context, the regularly scheduled Annuity Starting Date of a Participant shall be: (a) in the case of the benefit payable under Section 2.1 or 2.2 in the event of his normal or early retirement, the first day of the month coincident with or next following the date of his retirement; (b) in the case of the benefit payable under Section 2.3 in the event of his disability retirement, the date as of which his disability retirement income payments are scheduled to start under Section 2.3(F); and (c) in the case of the benefit payable under Section 2.4(A) in the event of termination of service with a vested benefit, the Participant's Normal 1-2 Retirement Date or, if applicable, the first day of the month prior to his Normal Retirement Date that the Participant has elected in accordance with the provisions of Section 2.4(A) to start receiving the benefits to which he is entitled under such section; provided, however, if the Participant elects pursuant to the provisions of Section 3.1 hereof a later commencement date, his Annuity Starting Date shall be such later date of commencement specified in his election, or, if the Participant continues in the service of the Employer beyond his Required Beginning Date, his Annuity Starting Date shall be his Required Beginning Date. (3) "Beneficiary" shall mean the person or persons on whose behalf benefits may be payable under the Plan after a Participant's death. (4) "Break in Service" shall mean the failure of an Employee to complete more than 500 Hours of Service in any Plan Year. (5) "CCB Retirement Plan Participant" means any Participant who was a participant in the CCB Retirement Plan. (6) "Committee" shall mean the Administrative Committee appointed from time to time to administer the Plan pursuant to the provisions of Section 7.1 hereof. (7) "Compensation" shall mean the sum of: (a) the amounts actually paid to an Employee by the Employer for services rendered, as reported on the Employee's Federal income tax withholding statement (Form W-2 or its subsequent equivalent) for the applicable calendar year, exclusive, however, of reimbursements and other expense allowances, fringe benefits (cash and non-cash), moving expenses, welfare benefits, and all other extraordinary compensation; provided, however, that any such Employee who receives commissions during a calendar year shall have an overall Compensation limitation of $50,000 for all calendar years prior to 1997, $100,000 for calendar years after 1996 and prior to 2002 and $170,000 for all calendar years after 2001 (such limitation will be prorated for years in which the Employee is paid for less than 12 months, based on the number of months and tenths of months worked); and (b) amounts, if any, that would have been included in the Employee's Compensation under (a) above for such calendar year if they had not been deferred by the Employee through a plan of deferred compensation under Section 401(k) of the Internal Revenue Code, under a salary reduction agreement pursuant to Section 125 of said Code, or effective January 1, 2001, pursuant to Code Section 132(f); 1-3 provided, however, that the annual compensation of each Employee taken into account under the plan shall not exceed the OBRA `93 annual compensation limit. The OBRA `93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Internal Revenue Code. The cost of living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA `93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For plan years beginning on or after January 1, 1994, any reference in this plan to the limitation under Section 401(A)(17) of the Internal Revenue Code shall mean the OBRA `93 annual compensation limit set forth in this provision. If compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current plan year, the compensation for that prior determination period is subject to the OBRA `93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first plan year beginning on or after January 1, 1994, the OBRA `93 annual compensation limit is $150,000. (8) "Controlled Group Member" shall mean: (a) the Employer; (b) any corporation or association that is a member of a controlled group of corporations (within the meaning of Section 1563(a) of the Internal Revenue Code, determined without regard to Section 1563(a)(4) and Section 1563(e)(3)(C) of said Code, except that, for the purposes of applying the limitations on benefits and contributions that are required under Section 415 of the Internal Revenue Code and are described in Section 4. 1 (A) hereof, such meaning shall be determined by substituting the phrase `more than 50%' for the phrase `at least 80%" each place that it appears in Section 1563(a)(1) of said Code) with respect to which the Employer is a member; (c) any trade or business (whether or not incorporated) that is under common control with the Employer as determined in accordance with Section 414(c) of the Internal Revenue Code and regulations issued thereunder; 1-4 (d) any service organization that is a member of an affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) with respect to which the Employer is a member; and (e) any other entity required to be aggregated with the Employer pursuant to regulations under Section 414(o) of the Internal Revenue Code. (9) "Covered Compensation" shall be equal to one-twelfth of the current "covered compensation," within the meaning of Section 401(l)(5)(E) of the Internal Revenue Code and regulations and rulings issued pursuant thereto, that applies to the Participant based upon his year of birth. Any changes in the amount of "covered compensation" that become effective after the January 1st immediately preceding the date of the Participant's retirement or termination of service shall be ignored. (10) "Credited Service" shall mean each Plan Year in which the Participant performs 1,000 Hours of Service. Notwithstanding anything contained herein to the contrary, in the case of an Employee who completes five consecutive Breaks in Service and at that time does not have any vested right in his Accrued Beneft, Credited Service shall not include all service before those Breaks in Service commenced. Notwithstanding the foregoing, the Credited Service for an NBC Retirement Plan Participant, shall be equal to the "Credited Service" of such Participant under the NBC Retirement Plan as of December 31, 2000, plus the Credited Service earned by such Participant for all subsequent Plan Years; provided, however, that with respect to the Plan Year ending on December 31, 2001, such Participant shall receive a year of Credited Service if such Participant earns a year of Credited Service pursuant to the first sentence of this Subsection or pursuant to the provisions of the NBC Retirement Plan as of July 31, 2001. (11) "Designated Nonparticipating Employer" shall mean: (a) any Controlled Group Member that is not an Employer; and (b) any other corporation, association, proprietorship, partnership or other business organization that (i) is not an Employer and (ii) the Primary Sponsor, by formal action on its part in the manner described in Section 6.7 hereof, designates on the basis of a uniform policy applied without discrimination as a "Designated Nonparticipating Employer" for the purposes of the Plan. (12) "Distributee" means an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order (as defined in Internal Revenue Code Section 414(p)), are Distributees with regard to the interest of the spouse or former spouse. 1-5 (13) "Earliest Annuity Commencement Date" shall mean: (a) the first day of the month coincident with or next following the date of termination of the Participant's service if he has satisfied the age and service requirements to be eligible for a normal or early retirement benefit under the provisions hereof as of such termination date; or (b) the earliest date as of which the Participant could elect to start receiving retirement income payments under the provisions of Section 2.4(A) hereof if his service were terminated and he had not satisfied the age and service requirements to be eligible for a normal or early retirement benefit under the provisions hereof as of such termination date. (14) "Early Retirement Date" shall have the meaning assigned in Section 2.2 hereof. (15) "Effective Date" shall mean August 1, 2001 or such later date as of which the Plan first became effective with respect to the particular Employer concerned. (16) "Electing CCB Retirement Plan Participant" means a CCB Retirement Plan Participant who (a) was employed by an Employer on August 1, 2001, (b) was a participant in the CCB Retirement Plan as of July 5, 2000, and (c) files an election with the Committee on or prior to September 25, 2001 to continue to accrue benefits under the Plan based on the provisions of the CCB Retirement Plan as of July 31, 2001. (17) "Eligibility Service" means a six-consecutive-month period during which the Employee completes no less than 500 Hours of Service beginning on the date on which the Employee first performs an Hour of Service upon his employment or reemployment with the Employer or, in the event the Employee fails to complete 500 Hours of Service in that six-consecutive-month period, any six-consecutive -month period thereafter during which the Employee completes no less than 500 Hours of Service. (18) "Eligible Employee" means any Employee of an Employer other than an Employee who is (a) covered by a collective bargaining agreement between a union and an Employer, provided that retirement benefits were the subject of good faith bargaining, unless the collective bargaining agreement provides for participation in the Plan, (b) a leased Employee within the meaning of Internal Revenue Code Section 414(n)(2) (c) deemed to be an Employee of an Employer pursuant to regulations under Internal Revenue Code Section 414(o), (d) employed at any division or branch of any Employer that is acquired by or merged into the Employer after the Effective Date unless the Employer, by formal action on its part in the manner described in Section 6.7 hereof, provides that such persons who are employed at such division or branch shall, subject to the other provisions of the Plan, be eligible for participation in the Plan in accordance with the provisions hereof or (e) is a participant and is accruing benefits (or who, upon 1-6 his satisfaction of any age and service requirements specified thereunder as a condition of participation, will be eligible to become a participant and accrue benefits) under any other qualified defined benefit pension plan maintained by the Employer or to which the Employer makes contributions on his behalf based upon his employment with the Employer. In addition, no person who is initially classified by an Employer as an independent contractor for federal income tax purposes shall be regarded as an Eligible Employee for that period, regardless of any subsequent determination that any such person should have been characterized as a common law Employee of the Employer for the period in question. (19) "Eligible Retirement Plan" means an individual retirement account described in Internal Revenue Code Section 408(a), an individual retirement annuity described in Internal Revenue Code Section 408(b), an annuity plan described in Internal Revenue Code Section 403(a) or a qualified trust described in Internal Revenue Code Section 401(a) that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (20) "Eligible Rollover Distribution" means any distribution of all or any portion of the Distributee's benefit, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated Beneficiary, or for a specified period of ten years or more; and any distribution to the extent such distribution is required under Internal Revenue Code Section 401(a)(9); the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities. (21) "Employee" shall mean any person on the payroll of the Employer whose wages from the Employer are subject to withholding for the purposes of Federal income taxes and for the purposes of the Federal Insurance Contributions Act. (22) "Employer" shall mean, collectively or distributively as the context may indicate, the Primary Sponsor and any other corporations, associations, joint ventures, proprietorships, partnerships or other business organizations that have adopted and are participating in the Plan in accordance with the provisions of Section 1.7 hereof. (23) "Final Average Monthly Compensation" shall mean the Participant's average monthly rate of Compensation from the Employer for the five successive calendar years, out of the 10 completed calendar years immediately preceding the first day of the month coincident with or next following the date on which his service terminates for any reason (or, where applicable, immediately preceding such other 1-7 date as is specified hereunder), that give the highest average monthly rate of Compensation for the Participant. The Participant's average monthly rate of Compensation will be determined by dividing the total Compensation received by him during such five-calendar-year period by the number of months for which he received Compensation from the Employer in such five-calendar-year period. The number of months for which he received Compensation from the Employer may be computed, to the extent he was paid on other than a monthly basis, by determining the number of pay periods ending within such five-calendar-year period for which he received Compensation from the Employer and converting such pay periods into months by dividing the number thereof, if weekly, by 4-1/3, if biweekly, by 2-1/6, and, if semimonthly, by 2. In computing Final Average Monthly Compensation for a Participant who has returned to the active service of the Employer following a full calendar year or calendar years during which he did not receive any regular Compensation from the Employer because of a leave of absence granted by the Employer or because of his reemployment with a reinstatement of his prior Vesting Service and Credited Service as described in Section 1.4 hereof, such full calendar year or calendar years during which he did not receive any regular Compensation from the Employer shall be ignored or excluded in determining the 10 completed calendar years and the five successive calendar years to be used in determining the Participant's Final Average Monthly Compensation at a subsequent date. Anything above to the contrary notwithstanding, if a Participant's service is terminated for any reason and he has not received any Compensation during any preceding calendar years, his "Final Average Monthly Compensation" shall mean his average monthly rate of Compensation received from the Employer during the calendar year in which his service was terminated. Such average monthly rate of Compensation will be determined in accordance with the procedure described above, based upon the total Compensation that he received and the number of months for which he received Compensation from the Employer during such calendar year. (24) "Fiduciary" shall mean each named Fiduciary and any other person who exercises or has any discretionary authority or control regarding management or administration of the Plan, any other person who renders investment advice for a fee or has any authority or responsibility to do so with respect to any assets of the Plan, or any other person who exercises or has any authority or control respecting management or disposition of assets of the Plan. (25) "Fund" shall mean the amount at any given time of cash and other property held by the Trustee pursuant to the Plan. 1-8 (26) "Highly Compensated Employee" shall mean an Employee who is a `highly compensated Employee' within the meaning of Section 414(q) of the Internal Revenue Code and regulations issued with respect thereto. (27) "Hour of Service" shall mean: (a) Each hour for which an Employee is paid, or entitled to payment, for the performance of duties for a Employer or any Controlled Group Member during the applicable computation period, and such hours shall be credited to the computation period in which the duties are performed; (b) Each hour for which an Employee is paid, or entitled to payment, by a Employer or any Controlled Group Member on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence; (c) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by a Employer or any Controlled Group Member, and such hours shall be credited to the computation period or periods to which the award or agreement for back pay pertains rather than to the computation period in which the award, agreement or payment is made; provided, that the crediting of Hours of Service for back pay awarded or agreed to with respect to periods described in Subsection (b) of this Section shall be subject to the limitations set forth in Subsection (g); (d) Solely for purposes of determining whether a Break in Service has occurred, each hour during any period that the Employee is absent from work (1) by reason of the pregnancy of the Employee, (2) by reason of the birth of a child of the Employee, (3) by reason of the placement of a child with the Employee in connection with the adoption of the child by the Employee, or (4) for purposes of caring for a child for a period immediately following its birth or placement. The hours described in this Subsection (d) shall be credited (A) only in the computation period in which the absence from work begins, if the Employee would be prevented from incurring a Break in Service in a year solely because of the credit, or (B), in any other case, in the next following computation period; (e) Solely for purposes of determining whether a Break in Service has occurred each hour during any period that the Employee is absent from work during an approved leave of absence or during military leave that is included in determining Vesting Service; (f) Without duplication of the Hours of Service counted pursuant to Subsection (d) or (e) hereof and solely for such purposes as required 1-9 pursuant to the Family and Medical Leave Act of 1993 and the regulations thereunder (the "Act"), each hour (as determined pursuant to the Act) for which an Employee is granted leave under the Act (1) for the birth of a child, (2) for placement with the Employee of a child for adoption or foster care, (3) to care for the Employee's spouse, child or parent with a serious health condition, or (4) for a serious health condition that makes the Employee unable to perform the functions of the Employee's job; (g) The Committee shall determine Hours of Service from the employment records of a Employer, or in any other manner consistent with regulations promulgated by the Secretary of Labor, and shall construe any ambiguities in favor of crediting Employees with Hours of Service. In no event shall an Employee be credited with more than 501 Hours of Service during any single continuous period during which he performs no duties for the Employer or an Controlled Group Member; or (h) In the event that a Employer or an Controlled Group Member acquires substantially all of the assets of another corporation or entity or a controlling interest of the stock of another corporation or merges with another corporation or entity and is the surviving entity, then service of an Employee who was employed by the prior corporation or entity and who is employed by the Employer or a Controlled Group Member at the time of the acquisition or merger shall be counted in the manner provided, with the consent of the Primary Sponsor, in resolutions adopted by the Employer authorizing the counting of such service. (28) "Initial Vesting Date" shall mean the earlier to occur of the following dates: (a) the date on which the Participant has completed five years of Vesting Service; or (b) the date on which the Participant attains his Normal Retirement Age; provided, however, that the provisions of Section 4.6 hereof shall apply in determining the Initial Vesting Date of a Participant who has accrued Vesting Service during any Plan Year that the Plan is top-heavy; and provided further that the Initial Vesting Date of a Participant shall not be earlier than the Effective Date. (29) "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as now or hereafter amended from time to time. (30) "Investment Committee" shall mean a committee which may be established to direct the Trustee with respect to investments of the Fund. 1-10 (31) "Investment Manager" shall mean a Fiduciary, other than the Trustee, the Committee or a Employer, which may be appointed by the Primary Sponsor: (a) who has the power to manage, acquire, or dispose of any assets of the Fund or a portion thereof; and (b) who (1) is registered as an investment adviser under the Investment Advisers Act of 1940; (2) is a bank as defined in that Act; or (3) is an insurance company qualified to perform services described in Subsection (a) of this Section under the laws of more than one state; and (c) who has acknowledged in writing that he is a Fiduciary with respect to the Plan. (32) "NBC Retirement Plan Participant" shall mean a Participant who was a participant in the NBC Retirement Plan. (33) "Normal Retirement Age" shall mean age 65 years. (34) "Normal Retirement Date" shall have the meaning assigned in Section 2.1 hereof. (35) "Participant" shall mean: (a) any active Employee who has satisfied the requirements of Section 1.2 hereof, (b) any former Employee who has satisfied the requirements of Section 1.2 hereof, whose service has not been terminated but who has subsequently been transferred from his status as an eligible Employee as described in Section 1.5 hereof, and (c) any retired or terminated Employee who has vested rights to benefits under the provisions of the Plan. (36) "Postponed Retirement Date" shall have the meaning assigned in Section 2.1 hereof. (37) The "PEP Benefit" is the lump-sum benefit payable to a Participant upon termination or retirement determined as follows (a) for any Employee who became a NBC Retirement Plan Participant on or after July 15, 1996 or who was not a CCB Retirement Plan Participant and became a Participant in the Plan on or after August 1, 2001 the PEP Benefit shall equal the product of; 1-11 (i) The cumulative sum of the Participant's Benefit Percentages (determined using the table below) based on years and months of Credited Service, Multiplied By (ii) The Participant's Final Average Monthly Compensation as of his date of termination or retirement multiplied by 12. Years of Credited Service Percentages ---------------- ------------ 1 to 5 2% per year 6 to 10 4% per year 11 to 20 6% per year 21 to 30 8% per year 31 or more 10% per year The percentage is prorated for partial years by crediting 1/12th for each completed month of Credited Service. (b) For any Participant who was a NBC Retirement Plan Participant as of July 14, 1996, the greater of (i) or (ii) below: (i) The product of: I. The cumulative sum of the Participant's Benefit Percentages (determined using the table below) based on years and months of Credited Service, Multiplied By II. The Participant's Final Average Monthly Compensation as of his date of termination or retirement multiplied by 12. Years of Credited Service Percentages ---------------- ------------ 1 to 5 2% per year 6 to 10 4% per year 11 to 20 6% per year 21 to 30 8% per year 31 or more 10% per year The percentage is prorated for partial years by crediting 1/12th for each completed month of Credited Service. 1-12 (ii) The sum of the Participant's lump-sum benefit accrued as of July 14, 1996 and the Participant's lump-sum benefit as determined by the sum of the Participant's Benefit Percentages based on his Years of Credited Service accrued after July 15, 1996 as follows: I. Lump-sum benefit as of July 14, 1996 shall be based on the actuarially equivalent lump sum value of the Participant's Accrued Benefit determined as of July 14, 1996. This lump sum value will be determined using the mortality table designated by the Secretary of the Treasury under Section 417(e) of the Internal Revenue Code and the December, 1995 30-year treasury rate of 6.06%. Plus II. The sum of the Participant's Benefit Percentages (determined using the table above) for years and months of Credited Service accrued after July 14, 1996 times the Participant's Final Average Monthly Compensation as of his date of termination or retirement multiplied by 12. (c) For any Participant who was a CCB Retirement Plan Participant and who had not as of December 31, 2001, attained the age of 55 with five years of Vesting Service nor attained the age of 50 with 10 years of Vesting Service, the greater of (i) or (ii) below: (i) The product of: I. The cumulative sum of the Participant's Benefit Percentages (determined using the table below) based on years and months of Credited Service, Multiplied By II. The Participant's Final Average Monthly Compensation as of his date of termination or retirement multiplied by 12. Years of Credited Service Percentages ---------------- ------------ 1 to 5 2% per year 6 to 10 4% per year 11 to 20 6% per year 21 to 30 8% per year 31 or more 10% per year 1-13 The percentage is prorated for partial years by crediting 1/12th for each completed month of Credited Service. (ii) The sum of the following: I. The lump-sum actuarial equivalent of the benefit the Participant would have accrued under the CCB Retirement Plan as of December 31, 2001 (based on the assumption that such plan continued in effect without regard to the merger of such plan into the Plan)). Plus II. The sum of the Participant's Benefit Percentages (determined using the table above) for years and months of Credited Service accrued after December 31, 2001 times the Participant's Final Average Monthly Compensation as of his date of termination or retirement multiplied by 12; provided, however, that years and months of Credited Service accrued prior to January 1, 2002, will be taken into account solely for the purpose of determining the Benefit Percentage attributable to each year and month of Credited Service performed after December 31, 2001, but no Benefit Percentage shall be assigned to any year of Credited Service performed prior to January 1, 2002. (d) For any Participant who was a CCB Retirement Plan Participant and who had as of December 31, 2001, attained the age of 55 with five years of Vesting Service or attained the age of 50 with 10 years of Vesting Service, the PEP Benefit shall equal the product of: (i) The cumulative sum of the Participant's Benefit Percentages (determined using the table below) based on years and months of Credited Service, Multiplied By (ii) The Participant's Final Average Monthly Compensation as of his date of termination or retirement multiplied by 12. Years of Credited Service Percentages ---------------- ----------- 1 to 5 2% per year 6 to 10 4% per year 1-14 11 to 20 6% per year 21 to 30 8% per year 31 or more 10% per year The percentage is prorated for partial years by crediting 1/12th for each completed month of Credited Service. (38) "Plan" shall mean the National Commerce Financial Corporation Retirement Plan, as amended and restated effective as of August 1, 2001, as set forth in this document and as it may hereafter be amended from time to time. (39) "Plan Year" shall mean the calendar year. (40) "Post Payment Recalculation Date" shall have the meaning assigned in Section 2.1(D) hereof. (41) "Qualified Joint and Survivor Annuity" shall mean an annuity that (a) is payable for the life of the Participant with a survivor annuity payable for the life of his spouse which is not less than 50% and is not greater than 100% of the amount of the annuity which is payable during the joint lives of the Participant and his spouse and (b) is the actuarial equivalent of the monthly retirement income payable to the Participant for life under the provisions of the Plan. (42) "Qualified Joint and 50% Survivor Annuity Option" shall have the meaning assigned in Section 3.1 hereof. (43) "Qualified Preretirement Survivor Annuity" shall mean the minimum death benefit, if any, described in Section 4. 1 (D) hereof that may be payable to the spouse of a Participant who dies prior to his Annuity Starting Date. (44) "Required Beginning Date" shall mean April 1 of the calendar year that next follows the later of the calendar year in which the Participant attains or will attain the age of 70-1/2 years or the calendar year in which he retires or his service is terminated; provided, however, that the Required Beginning Date of any Participant who is a 5-percent owner (within the meaning of Section 416 of the Internal Revenue Code) shall not be later than April 1 of the calendar year following the calendar year in which the Participant attains the age of 70-1/2 years. (45) "Retirement Date" shall mean normal, early or disability retirement, as described in Sections 2.1, 2.2 and 2.3 hereof. (46) "Superseded Plan" shall mean, collectively or distributively, as the context may indicate, the qualified retirement plan, if any, that was maintained by an Employer for its eligible Employees prior to the Effective Date and that the Plan represents an amendment and restatement thereof. References to the Superseded Plan as of 1-15 any given date shall refer to the provisions as set forth under the terms of the applicable document describing such qualified retirement plan as amended and in effect on such given date prior to the Effective Date. (47) "Supplement" shall mean any supplement that is attached to and made a part of the Plan and that describes provisions of the Plan that apply only to Employees of an Employer or Employers specified in such Supplement. (48) "Termination Completion Date" shall mean the last day of the fifth consecutive Break in Service computation period, determined under the Plan Section which defines Break in Service, in which a Participant completes a Break in Service. (49) "Trust" shall mean the trust established under an agreement between the Primary Sponsor and the Trustee to hold the Fund or any successor agreement. (50) "Trustee" means the trustee under the Trust. (51) "Vested Percentage" shall mean the percentage specified in Section 2.4(A)(1) hereof in which the Participant has a nonforfeitable right to his accrued benefit attributable to Employer contributions, based upon his number of years of Vesting Service and his age as of the date that such percentage is being determined; provided, however, that the Vested Percentage of a Participant who has accrued Vesting Service during any Plan Year that the Plan is top-heavy shall be subject to the provisions of Section 4.6 hereof. (52) "Vesting Service" shall mean each Plan Year during which an Employee has completed no less than 1,000 Hours of Service. Notwithstanding anything contained herein to the contrary, in the case of an Employee who completes five consecutive Breaks in Service and at that time does not have any vested right in his Accrued Beneft, Vesting Service shall not include all service before those Breaks in Service commenced. Notwithstanding the foregoing, the Vesting Service for an NBC Retirement Plan Participant, shall be equal to the "Vesting Service" of such Participant under the NBC Retirement Plan as of December 31, 2000, plus the Vesting Service earned by such Participant for all subsequent Plan Years; provided, however, that with respect to the Plan Year ending on December 31, 2001, such Participant shall receive a year of Vesting Service if such Participant earns a year of Vesting Service pursuant to the first sentence of this Subsection or pursuant to the provisions of the NBC Retirement Plan as of July 31, 2001. (B) The terms "actuarially equivalent," "equivalent actuarial value," "actuarial equivalent" and similar terms as used herein shall mean equality in value of the aggregate amounts expected to be received under different forms of payment based upon the same mortality and interest rate assumptions, which shall be determined as follows: 1-16 (1) Unless specifically provided otherwise under the provisions hereof, the mortality and interest rate assumptions used in computing benefits payable on behalf of a Participant upon the Participant's retirement or termination of employment and upon the exercise of optional forms of retirement income under the Plan shall be as follows: (a) the mortality assumptions shall be based on the mortality table designated by the Secretary of the Treasury under Section 417(e) of the Internal Revenue Code; and (b) the interest rate is the yield rate for 30-year Treasury constant maturity securities for the last month preceding the Plan Year of distribution as specified in the Federal Reserve Statistical Release. Notwithstanding the foregoing, with respect to distributions to CCB Retirement Plan Participants on or after the Effective Date and prior to August 1, 2002, the interest rate shall be the lesser of the rate determined above, or the interest rate equal to the yield rate for 30-year Treasury constant maturity securities for the November preceding the Plan Year of distribution, as specified in the Federal Reserve Statistical Release. . provided, however, that for the purposes of determining the maximum retirement income permitted under the provisions of Section 415 of the Internal Revenue Code, the mortality and interest rate assumptions used to determine actuarial equivalence for early retirement shall be the assumptions that would produce the early retirement adjustment factors that apply under the provisions hereof in the event of early retirement. (C) The terms "herein", "hereof", "hereunder" and similar terms refer to this document, including the Trust Agreement of which this document is a part, unless otherwise qualified by the context. (D) The pronouns "he", "him" and "his" used in the Plan shall also refer to similar pronouns of the feminine gender unless otherwise qualified by the context. 1.2 PARTICIPATION ------------- (A) Continuation of Participation of Superseded Plan Participants and ----------------------------------------------------------------- Retroactive Amendments to Superseded Plan: Each person who was a ----------------------------------------- participant in the Superseded Plan, if any, of the Employer as of the day immediately preceding the Effective Date will become a Participant in the Plan on the Effective Date; provided, however, that any such Participant who had retired or whose service had been terminated prior to the Effective Date and who is not an active Employee of an Employer or in the employment of a Designated Nonparticipating Employer or on a leave of absence granted by an Employer or Designated Nonparticipating Employer as of the Effective Date shall be entitled on and after 1-17 the Effective Date to only those benefits, if any, to which he is entitled on and after the Effective Date under the provisions of the Superseded Plan, and he and his Beneficiaries shall not be entitled to any additional benefits under the Plan as set forth herein unless he reenters the service of an Employer after the Effective Date or unless the Plan is amended on or after the Effective Date specifically to provide otherwise. (B) Participation of Other Employees: Each Employee who does not become a -------------------------------- Participant in accordance with the provisions of Section 1.2(A) above and who is in the service of the Employer on or after the Effective Date will become a Participant in the Plan on the latest to occur of the following dates: (1) the date that immediately follows his completion of his Eligibility Service; (2) the date the Employee becomes an Eligible Employee; and (3) the Effective Date; provided, however, that any such Employee whose service has not been terminated but who is absent from the active service of the Employer on such date that he is first eligible to become a Participant in the Plan as described above will become a Participant hereunder as of the date of his return to active service with the Employer. (C) Participation Following Reemployment: The above provisions of this ------------------------------------ Section 1.2 describe the date on which an Eligible Employee will initially become a Participant in the Plan. In the event that an Employee's service is terminated and he subsequently reenters the service of the Employer, the date on or after the date of his reentry as of which he will become a Participant in the Plan is subject to the provisions of Section 1.4 hereof. 1.3 LEAVE OF ABSENCE AND TERMINATION OF SERVICE ------------------------------------------- Any absence from the active service of the Employer by reason of an approved absence granted by the Employer because of accident, illness, layoff with the right of recall or military service, or for any other reason on the basis of a uniform policy applied by the Employer without discrimination, will be considered a leave of absence for the purposes of the Plan and will not terminate an Employee's service provided he returns to the active service of the Employer at or prior to the expiration of his leave or, if not specified therein, within the period of time which accords with the Employer's policy with respect to permitted absences. If the Employee does not return to the active service of the Employer at or prior to the expiration of his leave of absence as above defined, his service will be considered terminated as of the earliest to occur of (i) the date on which his leave of absence expired, (ii) the first anniversary of the date on which his leave of absence began or (iii) the date of his resignation, quit, discharge or death; provided, however, that: (1) if any such Employee, who is on a leave of absence for any reason other than military service and who was a participant in the Plan or Superseded Plan on the 1-18 date on which his leave began, is prevented from his timely return to the active service of the Employer because of his total and permanent disability prior to his Normal Retirement Date or his death, he shall be entitled, if he meets the requirements necessary to qualify therefore, to a disability benefit as provided in Section 2.3 hereof or to a death benefit as provided in Section 2.4 hereof, whichever is applicable, as though he returned to active service immediately preceding the date of his total and permanent disability or his death; and (2) if any such Employee, who is on a leave of absence because of military service and who was a participant in the Plan or Superseded Plan on the date on which his leave began, is prevented from his timely return to the active service of the Employer because of his total and permanent disability prior to his Normal Retirement Date or his death, he shall be entitled, in lieu of the benefits provided under Sections 2.3 and 2.4(B) hereof, to either: (a) if his failure to return to active service is due to his total and permanent disability, a benefit under Section 2.3(D) hereof, or (b) if his failure to return to active service is due to his death, a benefit under Section 2.4(B)(1)(a) (but not Section 2.4(B)(1)(b)) hereof; but such benefit under Section 2.3(D) will be payable only if a benefit would have been payable on behalf of such Participant under the provisions of Section 2.3 hereof if he had been in the service of the Employer on the date of his total and permanent disability and such benefit under Section 2.4(B)(1)(a) will be payable only if a benefit would have been payable on behalf of such Participant under the provisions of Section 2.4(B) hereof if he had been in the service of the Employer on the date of his death. Effective December 12, 1994, notwithstanding any provision of the Plan to the contrary, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. Transfers of an Employee's service among the Employers and Designated Nonparticipating Employers shall not be deemed interruptions of his service and shall not constitute a termination of service for the purposes of the Plan. 1.4 REEMPLOYMENT ------------ (A) Reemployment of Vested Terminated Participant Prior to Commencement of ---------------------------------------------------------------------- Payments: If a Participant's employment terminated on or after his Initial - -------- Vesting Date for a reason other than a Retirement Date and he subsequently reenters the active service of the Employer as an Eligible Employee prior to his Annuity Starting Date, he will become a Participant upon the date of such reentry and will be entitled to a reinstatement of the Vesting Service and Credited Service that he had accrued on the date of termination of his service in lieu of the benefits to which he was entitled under the Plan prior to his reentry; provided, however, that such Participant's Accrued Benefit (or his accrued monthly normal retirement income, if 1-19 applicable) determined as of any given date after the date of his reentry shall be reduced by an amount equal to the difference, if any, between (i) the monthly retirement income that would have been payable to him under Section 2.4(A) hereof commencing on his Normal Retirement Date if he had not reentered the service of the Employer, and taking into account any death benefit coverage that was in effect under Section 2.4(A) hereof after the date of termination of his service and prior to the date of his reentry and assuming that the death benefit coverage under such Section after the date of his reentry would have been declined, and (ii) the monthly retirement income that would have been payable to the Participant under Section 2.4(A) hereof commencing on his Normal Retirement Date if he had not reentered the service of the Employer and if the death benefit coverage under Section 2.4(A) hereof had been declined during the total period between the date of termination of his service and his Normal Retirement Date; and provided further, however, that the benefit payable to such Participant upon his subsequent retirement or termination of service shall not be less than the benefit that he would have been entitled to receive under the provisions of Section 2.4(A) hereof if he had not reentered the service of the Employer. (B) Reemployment of Retired or Vested Terminated Participant After -------------------------------------------------------------- Commencement of Payments: ------------------------ (1) If a Participant terminates employment on or after the Effective Date and has received a portion but not all of the retirement income to which he is entitled under the provisions of Section 2.1, 2.2 or 2.4(A)(1) hereof, subsequently reenters the active service of the Employer as an Eligible Employee, he shall become a Participant upon the date of such reentry. If the date of his reentry is prior to his Required Beginning Date, subject to the provisions of Sections 1.4(B)(2) and 2.1(D) hereof, no retirement income payments shall be made during the period of such reemployment. Upon the subsequent retirement or termination of service of such a Participant, his benefit under the Plan shall be determined in the same manner as that of a vested terminated Participant whose retirement income payments have not commenced and who subsequently reenters the service of the Employer as described in Section 1.4(A) above, except that the benefit payable under the Plan to or on behalf of such Participant upon his subsequent retirement or termination of service shall be reduced on an actuarially equivalent basis by an amount equal to the sum of the retirement income and other benefit payments that he received under the provisions of Section 2.1, 2.2, 2.4(A) or 3.1 hereof, which is applicable, prior to such reentry into the service of the Employer; provided, however, that the monthly retirement income payable to any such Participant on and after the date of his subsequent retirement shall not be less than the actuarial equivalent, determined as of the date of his subsequent retirement, of the retirement income that would have been payable on and after such date if he had not reentered the service of the Employer but had continued to received his retirement income payments during the period of his reemployment; and provided further, however, if any such Participant reenters the active service of the Employer on or after his Normal Retirement Date, the monthly retirement income payable on behalf of such Participant shall be determined in accordance with the provisions of Section 2.1. 1-20 (2) With respect to any Participant who commenced receipt of his retirement income prior to the Effective Date, in lieu of having his retirement income payments discontinued and his benefit payable upon his subsequent retirement or termination determined in accordance with the provisions of Section 1.4(B)(1) above, any such Participant, whose Vested Percentage at the date of his retirement or termination of service was 100%, and who reenters the active service of the Employer as an Eligible Employee on less than a full-time basis, may upon such reentry elect in writing filed with the Committee to continue to receive his retirement income payments after his reemployment in the same manner as though he had not reentered the service of the Employer. Any such Participant whose retirement income payments are continued in accordance with the provisions above shall be treated as if he then first entered the service of the Employer except that: (a) upon the date after his reentry that he satisfies the requirements to become a Participant in the Plan, he shall become a Participant, retroactively, as of the date of his reentry; provided, however, if he had not incurred a Break in Service prior to his reentry, he shall become a Participant immediately on the date of his reentry; and (b) upon his becoming a Participant, he shall be entitled to a reinstatement of the Vesting Service that he had accrued as of the date of his previous retirement or termination of service. The benefit which any such Participant accrues after the date of his reentry, which is payable to such Participant or his Beneficiary upon his subsequent retirement or termination of service, shall be limited to the amount that can be provided by the monthly retirement income, if any, that he accrues subsequent to such date of reentry based upon his Credited Service and Final Average Monthly Compensation determined in the same manner as though he then first entered the service of the Employer on the date on or after his reentry that he commences to accrue additional Credited Service; provided, however, that such income that such a Participant accrues subsequent to his date of reentry shall not cause the actuarial equivalent of the total income payable to the Participant or his Beneficiary under the Plan to exceed the amount that would have been payable if he had not elected to continue to receive his retirement income after his reemployment. The retirement income that is continued during the period of reemployment of any such Participant who is reemployed on less than a full-time basis shall be discontinued if the Participant is employed on a full-time basis at any time after his reentry. If the retirement income of any such Participant is subsequently discontinued, his benefit under the Plan shall be determined under this Section 1.4(B) as though his service had been terminated on the date that his retirement income was discontinued and as though he had reentered the service of the Employer immediately thereafter. (D) Reemployment After Disability Retirement: If a Participant, who has ---------------------------------------- retired on or after the Effective Date under the provisions of Section 2.3 and who has not prior to his reentry received the full actuarially equivalent value of the disability retirement income to which he was 1-21 entitled under Section 2.3 hereof, recovers from disability and reenters the active service of the Employer within one year after the date of his recovery from disability by accepting reemployment offered by the Employer within 30 days after such offer, his service will be deemed to have been continuous and he will be treated under the Plan in the same manner as though he had received Compensation, at the rate he was receiving at the time of his disability, during the period that he was considered totally and permanently disabled as provided herein. (E) Reemployment After Full Settlement: If a Participant's service has ---------------------------------- been terminated on or after the Effective Date for any reason and he was entitled, upon such termination, to a monthly retirement income under the provisions of Section 2.1, 2.2, 2.3 or 2.4(A)(1) hereof and he reenters the active service of the Employer as an Eligible Employee after the full actuarial equivalent value of such retirement income has been paid on his behalf, he shall become a Participant on the date of his reentry and shall be entitled to a reinstatement of the Vesting Service and Credited Service that he had accrued as of such previous date of termination, but the benefit payable under the Plan to or on behalf of such Participant upon his subsequent retirement or termination of service shall be reduced by the actuarially equivalent value of such retirement income that has been previously paid on his behalf. (F) Reemployment of Other Employees: Any other former Employee who is not ------------------------------- included under the provisions of Section 1.4(A), 1.4(B), 1.4(C) or 1.4(D) above and who subsequently reenters the active service of the Employer as an Eligible Employee following his termination of service will be treated as though he then first entered the service of the Employer; provided, however, that: (1) with respect to any such Employee whose service is terminated on or after the Effective Date and who incurred a Break in Service prior to the date of his reentry, the following special provisions shall apply: (a) if the number of years and days included in his Break in Service is less than either five years or the number of years and days of Vesting Service that he had accrued as of the date of termination of his service, such Employee shall be entitled, upon the date as of which he becomes a Participant in the Plan, to a reinstatement of the Credited Service and Vesting Service that he had accrued as of such previous date of termination of service; (b) if such Employee was a Participant in the Plan as of the date of termination of his service and he is entitled to a reinstatement of his previous Credited Service and Vesting Service under (a) above, he shall be eligible to become a Participant in the Plan as of the date of his reentry as an Eligible Employee; and (c) if such Employee was not a Participant in the Plan as of the date of termination of his service but he is entitled to a reinstatement of his previous Credited Service and Vesting Service under (a) above or if such Employee (regardless of whether or not he was a Participant in the Plan as of the date of termination of his service) reenters the service of the 1-22 Employer prior to his Termination Completion Date, the date on which he will be eligible to become a Participant in the Plan following his date of reentry shall not be later than the date on which he would have been eligible to become a Participant if he had been on a leave of absence during the period between the date of his previous termination of service and the date of his reentry; and (2) with respect to any such Employee whose service was terminated prior to the Effective Date (while the Superseded Plan was in effect with respect to the Employer by which he was employed at the date of termination of his service) and who had reentered the active service of the Employer prior to the Effective Date or who reenters the active service of the Employer on or after the Effective Date, his rights under the Plan with respect to the period of his service prior to such date of reentry into the service of the Employer shall be determined under the applicable provisions of the Superseded Plan as in effect on the date of his prior termination of service. (G) Reemployment of Employee Who Is Not an "Eligible Employee": The rights ---------------------------------------------------------- of any terminated Employee of the Employer who was not an Eligible Employee on the date of termination of his service and who is reemployed in a status in which he qualifies as an Eligible Employee shall be determined in accordance with the provisions of the Plan in the same manner as though such Employee had been an Eligible Employee on the date of termination of his service (but his benefits, if any, under the Plan shall be determined ignoring such one day of assumed employment as an Eligible Employee as defined herein). The rights of any terminated Eligible Employee who is reemployed by the Employer in a status other than that of an Eligible Employee shall be determined in accordance with the provisions of the Plan in the same manner as though such Employee had been reemployed by the as an Eligible Employee and had immediately thereafter been transferred from his status as an Eligible Employee (but his benefits, if any, under the Plan shall be determined ignoring such one day of assumed employment as an Eligible Employee). (H) Reemployment of Employee of Designated Nonparticipating Employer: The ---------------------------------------------------------------- rights of any terminated Employee of a Designated Nonparticipating Employer who is reemployed by an Employer as an Eligible Employee shall be determined in accordance with the provisions of the Plan in the same manner as though such Employee had been an Eligible Employee on the date of termination of his service (but his benefits, if any, under the Plan shall be determined ignoring such one day of assumed employment as an Employee as defined herein). The rights of any terminated Employee of an Employer who is reemployed by a Designated Nonparticipating Employer shall be determined in accordance with the provisions of the Plan in the same manner as though such Employee had been reemployed by the Employer as an Eligible Employee and had immediately thereafter been transferred to such Designated Nonparticipating Employer (but his benefits, if any, under the Plan shall be determined ignoring such one day of assumed employment as an Eligible Employee). (I) Employment with Former Employer or Former Designated Nonparticipating --------------------------------------------------------------------- Employer: In determining the rights under the Plan of any Employee who was - -------- previously employed (either before, on or after the Effective Date) by an employer, which was formerly an 1-23 Employer participating in the Plan or Superseded Plan or was formerly a Designated Nonparticipating Employer but which is not currently an Employer or Designated Nonparticipating Employer, the period of such Employee's employment with such employer while it was an Employer or Designated Nonparticipating Employer, as the case may be, shall be recognized in determining the Vesting Service of such Employee in the same manner as though such employment during such period had been with a current Employer or Designated Nonparticipating Employer, but any period of employment with such employer after the date that it ceased to be an Employer or Designated Nonparticipating Employer shall not be recognized and his service shall be deemed to have been terminated during such period that such Employer is not an Employer or Designated Nonparticipating Employer. 1.5 TRANSFER TO OR FROM STATUS AS AN ELIGIBLE EMPLOYEE -------------------------------------------------- An Employee will be deemed to be transferred from his status as an Eligible Employee in the event that he remains in the service of the Employer but has a change in his Employee status so that he no longer qualifies as an Eligible Employee or in the event that he is transferred to and becomes an Employee of a Designated Nonparticipating Employer. Conversely, an Employee of an Employer who is not an Eligible Employee will be deemed to be transferred to the status of an Eligible Employee in the event that he remain in the service of the Employer but has a change in his employee status so that he becomes an Eligible Employee or, if he was an Employee of a Designated Nonparticipating Employer, in the event that he is transferred to an Employer from such Designated Nonparticipating Employer and becomes an Eligible Employee. The service of such a person described above shall not be considered to be interrupted by reason of any such transfer, and service with the Designated Nonparticipating Employer or with the Employer while not an Eligible Employee shall be terminated in the same manner as service with the Employer while an Eligible Employee is terminated. Any provisions of Section 2.1, 2.2, 2.3 or 2.4 hereof to the contrary notwithstanding, the benefits of any such Participant who has been transferred to or from the status as an Eligible Employee on or after the date that the Plan or Superseded Plan first became effective with respect to his Employer shall be determined in accordance with the following provisions of this Section 1.5. With respect to any Employee who had been transferred to or from the status as an Eligible Employee prior to the date that the Plan or Superseded Plan first became effective with respect to his Employer, his Employee status as of his first day of employment on or after such date that the Plan or Superseded Plan first became effective with respect to his Employer shall be deemed for the purposes of the Plan (subject to the provisions of Section 1.5(C)(1) below) to have been his Employee status during the entire period of his prior service, except that he shall not accrue any Credited Service under the Plan for any such period of service that he was in the service of a Designated Nonparticipating Employer and not in the service of the Employer and he shall not accrue any Credited Service during such period prior to the Effective Date that would have been excluded from his Credited Service under the provisions of the Superseded Plan. (A) Eligibility for Benefits: In determining the eligibility of such an ------------------------ Employee to whom the provisions of this Section 1.5 are applicable for participation in the Plan and in determining his eligibility for the benefits provided under the Plan, his Vesting Service and Hours of Service shall be determined in the same manner as though his service with the Designated Nonparticipating Employers and with the Employers while not an Eligible Employee 1-24 had been accrued with the Employers while an Eligible Employee. Any such Employee who is transferred to the status of an Eligible Employee shall become a Participant in the Plan on the date that he becomes an Eligible Employee if he has otherwise satisfied the requirements to become a Participant in the Plan as described in Section 1.2 hereof prior to such date that he becomes an Eligible Employee. (B) Computation of Benefits: A Participant to whom the provisions of this ----------------------- Section 1.5 are applicable shall be entitled upon his retirement or termination of service (or his Beneficiary shall be entitled in the event his service is terminated by reason of his death), if he meets all requirements necessary to qualify for a benefit under the provisions of Section 2.1, 2.2, 2.3 or 2.4 hereof or under the provisions of any applicable Supplement hereto, as the case may be, to a benefit payable in accordance with the provisions of Section 2.1, 2.2, 2.3 or 2.4 hereof or in accordance with the provisions of any applicable Supplement hereto, as the case may be, but the amount of the monthly retirement income that is payable on his behalf under the Plan shall, subject to the provisions of Section 1.5(C) below, be equal to the product of: (1) the monthly retirement income which would have been payable on behalf of such Participant under the provisions of Section 2.1, 2.2, 2.3 or 2.4 hereof or under the provisions of any Supplement hereto, as the case may be, if his service accrued with the Designated Nonparticipating Employers and with the Employers while not an Eligible Employee herein were included with his Credited Service accrued with the Employers while an Eligible Employee; multiplied by (2) the fraction in which the numerator is the Participant's Credited Service that he accrued while in the service of the Employers hereunder while an Eligible Employee and the denominator is the total Credited Service that he would have accrued if his service accrued with the Designated Nonparticipating Employers and with the Employers while not an Eligible Employee were included with his Credited Service accrued with the Employers while an Elgible Employee. (C) Special Provisions Applicable to Benefits: The monthly income computed ----------------------------------------- under this Section 1.5 shall be subject to the following: (1) there shall be no duplication of service in computing benefits under the Plan and under any other qualified pension or annuity plan to which any Employer or Designated Nonparticipating Employer makes contributions on behalf of its Employees who are not Eligible Employees, and, if service accrued while an Eligible Employee is used in determining the accrued benefit of the Participant under any such other qualified pension or annuity plan, then the portion of the benefit payable under the Plan based on such duplicated service shall be reduced (but not so as to produce a negative amount) by the actuarially equivalent amount of the benefit payable under such other qualified pension or annuity plan based on such duplicated service; 1-25 (2) all compensation that a Participant received from the Designated Nonparticipating Employers and from the Employers while not an Eligible Employee shall be treated in determining his Final Average Monthly Compensation in the same manner as though such compensation had been received from the Employer while an Eligible Employee; (3) the amount of such monthly retirement income that is payable under the Plan on behalf of a Participant who has been transferred to the status of an Eligible Employee shall not be less than an amount equal to the excess, if any, of: (a) the monthly retirement income that would have been payable on behalf of such Participant under the applicable provisions hereof if, subject to the provisions of (2) above, he had initially been employed by the Employer on the date that he was transferred to the status of an Eligible Employee; over (b) the actuarially equivalent amount of monthly retirement income or other benefit that is payable on behalf of such Participant under each other qualified pension or annuity plan, if any, to which an Employer or Designated Nonparticipating Employer has made contributions on his behalf based upon his employment prior to such date that he was transferred to the status of an Eligible Employee; (4) the disability retirement income determined under Section 2.3(D) hereof shall apply only if the Participant is an Eligible Employee on the date of his total and permanent disability and, in that event, such disability retirement income determined under such Section shall not be reduced by the application of the fraction specified in Section 1.5(B)-above, but the benefit determined under Section 2.3(D) hereof shall be reduced by the amount of monthly income payments or other benefits concurrently payable on behalf of such Participant under each other qualified pension or annuity plan, if any, to which an Employer or Designated Nonparticipating Employer has made contributions on his behalf; and (5) the benefit determined under Section 2.4(B)(1)(b) hereof shall apply only if the Participant is an Eligible Employee on the date of his death and in that event: (a) the benefit under Section 2.4(B)(1)(b)(i) shall not be reduced by the application of the fraction specified in Section 1.5(B)(2) above but shall be reduced by the actuarial equivalent of the benefit payable on behalf of such Participant under each other qualified pension or annuity plan, if any, to which an Employer or Designated Nonparticipating Employer has made contributions on his behalf, and (b) the limitation equal to 100 times the Participant's monthly normal retirement income, described in Section 2.4(B)(1)(b)(ii), shall include the 1-26 anticipated monthly retirement income based on his service accrued prior to his death to which such Participant would be entitled at his Normal Retirement Date or the date of his death, whichever is later, under each other qualified pension or annuity plan, if any, to which an Employer or Designated Nonparticipating Employer has made contributions on his behalf. (D) Payments From One Trust Fund: In lieu of the payment of retirement ---------------------------- income or other benefits to such a Participant from the trust fund of more than one qualified pension plan of the Designated Nonparticipating Employers and the Employers, the administrators of the pension plans may, by mutual agreement, provide for payment of the entire monthly income or other benefit from one trust fund with appropriate reimbursement to the trustee of the trust fund from which the benefits are to be paid by transfer of funds equal to the lump sum actuarially equivalent value of the benefits payable under the other plan (or plans) to the trust fund from which benefits actually will be paid. 1.6 PARTICIPATION AND BENEFITS FOR FORMER LEASED EMPLOYEES ------------------------------------------------------ A "leased employee" (within the meaning of Section 414(n) of the Internal Revenue Code) of an Employer or Designated Nonparticipating Employer shall not be deemed for any purposes of the Plan to be an Eligible Employee. However, in the event that any such former leased employee qualifies as an Eligible Employee or after the Effective Date, unless the Plan is otherwise excluded by applicable regulations from the requirements of Section 414(n) of the Internal Revenue Code, the total period that he provided services to the Employer or Designated Nonparticipating Employer as a leased employee shall be treated under the Plan in determining his nonforfeitable right to his accrued benefits and his eligibility to become a Participant in the Plan in the manner described in Section 1.5(A) hereof as though he had been an Employee of a Designated Nonparticipating Employer during such period of service (but such service shall not be included in the service that is used to calculate any benefits that he accrues under the Plan). 1.7 RIGHT'S OF OTHER EMPLOYERS TO PARTICIPATE ----------------------------------------- National Bank of Commerce, National Commerce Financial Corporation, Central Carolina Bank and Trust Company, CCB Investment and Insurance Service Corporation, Salem Trust Company, NBC Capital Markets Group, Transplatinum Service Corporation, USI Alliance Corporation, First Mercantile Trust Company, National Commerce Bank Services, Inc., NBC Bank, FSB (Memphis), Commerce Capital Management, Inc., Monroe Properties, Inc., Prime Financial Services, Inc., FleetOne, LLC, NBC Insurance Services, Inc., and NBC Financial Corporation are participating Employers in the Plan as amended and restated on August 1, 2001. Any other corporation, association, joint venture, proprietorship, partnership or other business organization may, in the future, adopt the Plan on behalf of all or certain of its Employees by formal action on its part in the manner described in Section 6.7 hereof provided that the Primary Sponsor, by formal action on its part in the manner described in Section 6.7 hereof, and the Committee both approve such participation. The administrative powers and control of the Primary Sponsor, as provided in the Plan, shall not be deemed diminished under the Plan by reason of the participation of any other 1-27 Employers in the Plan, and such administrative powers and control specifically granted herein to the Primary Sponsor with respect to the appointment of the Committee, amendment of the Plan and other matters shall apply only with respect to the Primary Sponsor. The Plan is a single plan with respect to all Employers unless the Primary Sponsor, by formal action on its part in the manner described in Section 6.7 hereof, specifically provides that the Plan shall be a separate plan with respect to any Employer or to any division of any Employer or with respect to any group of Employers and/or divisions. In the event that the Plan does not represent a single plan with respect to all divisions of any Employer, the division or divisions with respect to which the Plan represents a separate plan shall be considered for the purposes of this Section and treated under the Plan as one Employer and its other division or divisions shall be considered for the purposes of this Section and treated under the Plan as a separate Employer or, if applicable, as separate Employers. The contributions of any Employer that is a member of a group of Employers with respect to which the Plan represents a single plan shall be available to provide benefits on behalf of any Participants who are Employees of any other Employers that are members of such group but shall not be available to provide benefits on behalf of any Participants who are Employees of any Employers that are not members of such group. The contributions of any Employer with respect to which the Plan represents a single plan for only that Employer shall be available to provide benefits on behalf of Participants who are its Employees but shall not be available to provide benefits on behalf of Participants who are Employees of any other Employers. Any Employer may withdraw from the Plan at any time by formal action on its part, in the manner described in Section 6.7 hereof, specifying its determination to withdraw. Any such withdrawing Employer shall furnish the Committee and the Trustee with evidence of the formal action of its determination to withdraw. Any such withdrawal may be accompanied by such modifications to the Plan as such Employer shall deem proper to continue a retirement plan for its Employees separate and distinct from the retirement plan herein set forth. Withdrawal from the Plan by any Employer shall not affect the continued operation of the Plan with respect to the other Employers; provided, however, in the event of the withdrawal of an Employer that is a member of a group of Employers with respect to which the Plan represents a single plan and in the event that provision is made for the continuation of a retirement plan for its Employees separate and distinct from the retirement plan herein set forth, the share, if any, of the assets of the Trust Fund allocable to such group of Employers that is transferred on behalf of such withdrawing Employer to such other retirement plan shall be equal to the assets, if any, that would have been allocated on behalf of the Employees of such withdrawing Employer under the provisions of Section 4.5 hereof if such withdrawing Employer had terminated its participation in the Plan on the date of such withdrawal; provided, however, that the Primary Sponsor may, in its absolute discretion, direct that an additional amount of assets be transferred on behalf of such withdrawing Employer to such other retirement plan provided that the transfer of such additional amount of assets would not lower the amount of the distributions that would be made on behalf of the Participants who are Employees of the other Employers that are members of such group of Employers with respect to which the Plan represents a single plan if the Plan were terminated as of the effective date of such transfer with respect to all of the Employers that are members of such group of Employers. 1-28 The Primary Sponsor, by formal action on its part in the manner described in Section 6.7 hereof, may in its absolute discretion terminate any Employer's participation in the Plan at any time, and the provisions of the Plan shall be applied with respect to such Employer in the same manner as though it had voluntarily withdrawn as a participating Employer. 1-29 SECTION 2 --------- NORMAL AMOUNT AND PAYMENT OF RETIREMENT INCOME ---------------------------------------------- 2.1 NORMAL RETIREMENT AND RETIREMENT INCOME --------------------------------------- Normal retirement under the Plan is retirement from the service of the Employer on or after the date that the Participant attains his Normal Retirement Age. No provision of this Section or the Plan shall require the retirement of a Participant upon his attainment of his Normal Retirement Age, but actual retirement shall be governed by the policy of the Employer. In the event of normal retirement, payment of retirement income will be governed, subject to the provisions of Section 4 hereof, by the following provisions of this Section 2.1. (A) Normal Retirement Date: The Normal Retirement Date of each Participant ---------------------- will be the first day of the month coincident with or next following the date on which he attains his Normal Retirement Age. Any Participant who retires after attaining his Normal Retirement Age but prior to his Normal Retirement Date and who is surviving on his Normal Retirement Date shall be considered for the purposes of the Plan to have retired on his Normal Retirement Date. (B) Amount of Retirement Income: The monthly retirement income payable in --------------------------- the manner described in Section 2.1(C) hereof to a Participant who retires on or after his Normal Retirement Date shall equal: (1) any Participant who (a) becomes a Participant in the Plan on or after July 31, 2001 and who was neither a CCB Retirement Plan Participant nor an NBC Retirement Plan Participant, (b) became an NBC Retirement Plan Participant on or after July 15, 1996, (c) was a NBC Retirement Plan Participant as of July 14, 1996 but had not attained age 55 with 5 Years of Credited Service or attained age 50 with 10 Years of Credited Service as of December 31, 1996, or (d) was a CCB Retirement Plan Participant as of July 31, 2001 but either (i) had not attained age 55 with 5 Years of Vesting Service or attained age 50 with 10 Years of Vesting Service as of December 31, 2001 or (ii) is not an Electing CCB Retirement Plan Participant, the actuarially equivalent monthly income of the Participant's PEP Benefit. (2) for any Participant who was a NBC Retirement Plan Participant as of July 14, 1996 and who had attained age 55 with 5 Years of Credited Service or had attained age 50 with 10 Years of Credited Service as of December 31, 1996, the greater of (a) and (b) as follows: (a) The actuarially equivalent monthly income of the Participant's PEP Benefit. (b) A monthly benefit determined under the provisions of the NBC Retirement Plan as they existed July 14, 1996 assuming such provisions remain in effect until the Participant's retirement date. 2-1 (3) for any Participant who was a CCB Retirement Plan Participant as of July 31, 2001 and who had attained age 55 with 5 Years of Vesting Service or had attained age 50 with 10 Years of Vesting Service as of December 31, 2001, the greater of (a) and (b) as follows: (a) The actuarially equivalent monthly income of the Participant's PEP Benefit. (b) A monthly benefit determined under the provisions of the CCB Retirement Plan as they existed July 31, 2001 assuming such provisions remain in effect until the Participant's retirement date. (4) for any Participant who is an Electing CCB Retirement Plan Participant, a monthly benefit determined under the provisions of the CCB Retirement Plan as they existed July 31, 2001 assuming such provisions remain in effect until the Participant's retirement date. (C) Payment of Retirement Income: The monthly retirement income payable in ---------------------------- the event of normal retirement will be payable on the first day of each month. The first payment will be made on the Participant's Normal Retirement Date, or, if the Participant retires after his Normal Retirement Date, the first payment will be made on the first day of the month coincident with or next following the date of his actual retirement. The last payment will be the payment due immediately preceding the retired Participant's death; except that if the Participant's benefit is determined pursuant to Plan Section 2.1(B)(1), (2) or (3)(a), in the event the Participant dies after his retirement but before he received retirement income payments for a period of 10 years, the same monthly benefit that was payable to the Participant will be paid for the remainder of such 10-year period to the Beneficiary designated by the Participant or, if no designated Beneficiary is surviving, the same monthly benefit shall be payable for the remainder of such 10-year period as provided in Sections 5.2 and 5.3 hereof. (D) Special Provisions Applicable to Participants Who Receive Retirement -------------------------------------------------------------------- Income Payments While Continuing in Employment of Employer After Required - ------------------------------------------------------------------------- Beginning Date: Any of the above provisions of this Section 2.1 to the contrary - -------------- notwithstanding, but subject to the provisions of Section 4.1 hereof, a Participant who continues in the employment of the Employer beyond his Required Beginning Date shall start receiving monthly retirement income payments commencing as of his Required Beginning Date. Such monthly retirement income payments shall be determined and payable in the same manner as though the Participant had actually retired on his Required Beginning Date. The retirement income payable to such a Participant shall thereafter be subject to adjustment as of the first day of each Plan Year which begins after his Required Beginning Date and prior to the date of his actual retirement and shall be subject to adjustment as of the first day of the month coincident with or next following the date of his actual retirement (each such adjustment day is herein referred to as a "Post Payment Recalculation Date") to reflect the additional accruals, if any, that such Participant is entitled to receive because of his employment after his Required Beginning Date. The additional retirement income, if any, payable to any such Participant on and after an applicable Post Payment 2-2 Recalculation Date shall be determined in accordance with the provisions of Section 411(b)(1)(H) of the Internal Revenue Code and regulations issued with respect thereto, and the actuarial equivalent of the retirement income payments that the Participant has received under the provisions of this Section 2.1 on and after his Required Beginning Date and prior to the applicable Post Payment Recalculation Date shall be used as an offset in the determination of such additional income, but such offset shall not result in the retirement income payable to the Participant being reduced below the amount that was payable on his behalf immediately prior to such Post Payment Recalculation Date. The additional amount of monthly retirement income, if any, that a Participant accrues after his Required Beginning Date shall be converted to an actuarially equivalent amount of monthly retirement income that is payable in the same manner and form as the monthly retirement income that is payable on his behalf immediately prior to the applicable Post Payment Recalculation Date, and such additional actuarially equivalent income shall be payable to the Participant commencing as of the applicable Post Payment Recalculation Date. (E) Postponed Retirement Date: Each Participant may remain an Employee ------------------------- after his Normal Retirement Date and retire on his Postponed Retirement Date. The pension payable to a Participant as of his Postponed Retirement Date shall be equal to the Accrued Benefit of the Participant as of his Postponed Retirement Date. Notwithstanding the foregoing, in accordance with Section 401(a)(9), effective January 1, 1997, in the event a Participant retires after the April 1 of the year following the calendar year in which the Participant attained the age of 70 1/2 (the "401(a)(9) Date"), the Participant's Accrued Benefit on the Participant's Postponed Retirement Date shall be equal to the actuarial equivalent of the Participant's Accrued Benefit as of the 401(a)(9) Date, plus the actuarial equivalent of any additional benefits accrued after the 401(a)(9) Date, reduced by the actuarial equivalent of any distributions made to the Participant after the 401(a)(9) Date. (F) Suspension of Benefits (1) Except as otherwise provided in Section 1.4(B)(2), if a Participant is reemployed by an Employer after beginning to receive payment of his retirement benefits or if the Participant continues to be employed by an Employer after Normal Retirement Age, the payment of his retirement benefits shall be suspended for each month during which he performs "substantial service" for an Employer. A Participant will be deemed to be performing "substantial service" for a month if he receives payment from an Employer for services performed for any Employer or for reasons other than the performance of duties on eight (8) or more days during the month. (2) The payment of retirement benefits which have been suspended shall resume no later than the first day of the third calendar month after the month in which the Participant ceases to perform substantial service for an Employer. Upon resumption, the initial payment shall include the amount of the payment scheduled to occur in the calendar month of resumption and any amounts which were withheld during the period between the cessation of the performance of 2-3 substantial service by the Participant and the resumption of payment, reduced by an offsets described in Subsection (3) below. (3) Upon the resumption of payments, there shall be deducted or offset from such payments an amount equal to any payments made by the Plan to the Participant for any months in which the Participant performed substantial service for an Employer, provided that the amount of the deduction or offset shall not exceed, in any one month, twenty-five percent (25%) of that month's benefit payment which would have been due the Participant, and further provided that the initial payment made upon the resumption of payments shall be subject to deduction or offset without limitation. (4) Payments shall not be suspended unless the Committee notifies the Participant of the suspension by personal delivery or first class mail during the first calendar month in which payments are to be suspended. The notification shall contain a description of the specific reasons why the payments are being suspended, a general description of the provisions of the Plan relating to the suspension of benefits and a copy of those provisions, a statement to the effect that applicable Department of Labor regulations may be found in Section 2530.203-3 of the Code of Federal Regulations and a statement that the Participant may employ the claim review procedure described in Section 5.11 the Plan to obtain a review by the Committee of the decision to suspend payments. If a reduction or offset is to be made to a Participant's payment, the notification shall also describe the periods of employment with respect to which payments were previously made from the Plan and during which the Participant performed substantial service for an Employer, the amount of the benefit subject to reduction or offset and the manner in which the Committee intends to reduce or offset the benefit payment. (5) A Participant who is receiving benefits must notify the Committee of any employment, and in connection therewith the Committee shall be entitled to request from the Participant any information which the Committee deems reasonably necessary to verify whether or not the Participant is employed. The Committee may require any Participant who is receiving benefit payments, as a condition to receiving any future benefit payments, to certify to the Committee in writing that he is unemployed or to provide information sufficient to establish that he is not performing substantial service for any Employer. (6) A Participant who is receiving payments is entitled to request the Committee to determine whether any specific contemplated employment for an Employer by the Participant will constitute substantial service. This request shall be treated as a claim for benefits under Section 5.11 of the Plan, and accordingly the Participant must comply with the claim review procedure described in Section 5.11. (7) In order to be entitled to the resumption of payment of benefits, the Participant must notify the Committee in writing that he has ceased to perform substantial service. The notification by the Committee which is described in Subsection (4) 2-4 above shall describe the procedure which the Participant must follow in notifying the Committee that he has ceased to perform substantial service and shall include any forms which the Participant must file with the Committee in connection therewith. (8) If a Participant, the payment of whose benefits has been suspended, resumes employment with an Employer, his benefit shall be recomputed upon his subsequent retirement to reflect payments previously paid to him. 2.2 EARLY RETIREMENT AND RETIREMENT INCOME -------------------------------------- Early retirement under the Plan is retirement from the service of the Employer prior to the Participant's Normal Retirement Date and on or after the date as of which he has both attained the age of 55 years and completed 5 years of Vesting Service. In order to retire under the provisions of this section, the written consent of the Participant must be filed with the Committee within 90 days of the date as of which his retirement income payments are to commence. In the event of early retirement, payment of retirement income will be governed, subject to the provisions of Section 4 hereof, by the following provisions of this Section 2.2. (A) Early Retirement Date: The Early Retirement Date will be the first day --------------------- of the month coincident with or next following the date a Participant retires from the service of the Employer under the provisions of this Section 2.2 prior to his Normal Retirement Date. (B) Amount of Retirement Income: The monthly retirement income payable in --------------------------- the manner described in Section 2.2(C) hereof to a Participant who retires prior to his Normal Retirement Date shall equal: (1) for any Participant who (a) became a NBC Retirement Plan Participant on or after July 15, 1996, (b) was a NBC Retirement Plan Participant as of July 14, 1996, but had not attained age 55 with 5 Years of Credited Service or attained age 50 with 10 Years of Credited Service as of December 31, 1996; (c) was neither an NBC Retirement Plan Participant nor a CCB Retirement Plan Participant; or (d) was a CCB Retirement Plan Participant as of July 31, 2001, but either (i) had not attained age 55 with 5 Years of Vesting Service or attained age 50 with 10 Years of Vesting Service as of December 31, 2001 or (ii) is not an Electing CCB Retirement Plan Participant, the actuarially equivalent monthly income of the Participant's PEP Benefit. (2) for any Participant who was a NBC Retirement Plan Participant as of July 14, 1996 and who had attained age 55 with 5 Years of Credited Service or had attained age 50 with 10 Years of Credited Service as of December 31 1996, the greater of (a) and (b), as follows: 2-5 (a) The actuarially equivalent monthly income of the Participant's PEP Benefit. (b) A monthly benefit determined under the provisions of the NBC Retirement Plan as they existed July 14, 1996 assuming such provisions remain in effect until the Participant's retirement date. (3) for any Participant who was a CCB Retirement Plan Participant as of July 31, 2001 and who had attained age 55 with 5 Years of Vesting Service or had attained age 50 with 10 Years of Vesting Service as of December 31, 2001, the greater of (a) and (b), as follows: (a) The actuarially equivalent monthly income of the Participant's PEP Benefit. (b) A monthly benefit determined under the provisions of the CCB Retirement Plan as they existed July 31, 2001 assuming such provisions remain in effect until the Participant's retirement date. (4) for any Participant who is an Electing CCB Retirement Plan Participant, a monthly benefit determined under the provisions of the CCB Retirement Plan as they existed July 31, 2001 assuming such provisions remain in effect until the Participant's retirement date. (C) Payment of Retirement Income: The retirement income payable in the ---------------------------- event of early retirement will be payable on the first day of the month. The first payment will be made on the Participant's Early Retirement Date and the last payment will be the payment due immediately preceding the retired Participant's death; except that if the Participant's benefit is determined pursuant to Plan Section 2.2(B)(1), (2) or (3)(a), in the event the Participant dies before be has received retirement income payments for a period of 10 years, the same monthly benefit that was payable to the Participant will be paid for the remainder of such 10-year period to the Beneficiary designated by the Participant, or if no designated Beneficiary is surviving, the same monthly benefit shall be payable for the remainder of such 10-year period as provided in Sections 5.2 and 5.3 hereof. 2-6 2.3 DISABILITY RETIREMENT AND RETIREMENT INCOME ------------------------------------------- (A) Definition: A Participant may retire from the service of the Employer ---------- under the Plan if his service is terminated prior to his Normal Retirement Date and on or after the Effective Date by reason of his becoming totally and permanently disabled as defined in Section 2.3(B) below. Such retirement from the service of the Employer shall herein be referred to as disability retirement. In the event of disability retirement, uniformly and consistently applied rules shall be used with respect to all Participants in similar circumstances and payment of retirement income will be governed, subject to the provisions of Section 4 hereof, by the following provisions of this Section 2.3. (B) Total and Permanent Disability: A Participant shall be considered ------------------------------ totally and permanently disabled for the purposes of the Plan if he is eligible to receive disability payments from the long-term disability plan sponsored by the Employer and receives payments from such long-term disability plan until his Normal Retirement Date. (C) Proof of Disability: The Committee before approving the payment of any ------------------- disability retirement income shall require satisfactory proof that the Participant has become disabled and is eligible for benefits from the long-term disability plan. (D) Disability Retirement Income: The monthly amount of retirement income ---------------------------- which is payable in the manner described in Section 2.3(E) hereof to a Participant who retires under the provisions of this Section 2.3 due to total and permanent disability shall be equal to the monthly income payable on his Normal Retirement Date assuming that he continued in the service of the Employer until his Normal Retirement Date with no change in his last regular monthly rate of Compensation and based on his Covered Compensation, if applicable, determined as of his date of disability; provided, however if the Participant is married on his date of disability, the amount of his disability benefit will be equal to the actuarial equivalent of his Accrued Benefit payable in the form of a Qualified Joint and 50% Survivor Annuity. However, a Participant who has satisfied the age and service requirements to qualify for an early retirement benefit under the provisions of Section 2.2 hereof as of the date of termination of his service due to disability, may elect to receive his early retirement benefit in lieu of the disability benefit payable on his Normal Retirement Date. (E) Payment of Disability Retirement Income: The monthly retirement income --------------------------------------- to which the Participant is entitled in the event of his disability retirement will be payable on the first day of each month. The first payment will be made on his Normal Retirement Date and the last payment will be the payment due immediately preceding the retired Participant's death; except that if the Participant's benefit is determined pursuant to Plan Section 2.1(B)(1),(2) or (3)(a) or Plan Section 2.2(B)(1), (2) or (3)(a), in the event the Participant dies before he has received retirement income payments for a period of 10 years, the same monthly benefit that was payable to the Participant will be paid for the remainder of such 10-year period to the Beneficiary designated by the Participant, or, if no designated Beneficiary is surviving, the same monthly benefit shall be payable for the remainder of such 10-year period as provided in Sections 5.2 and 5.3 hereof. 2-7 (F) Benefit Payable in the Event of Death of Disabled Participant Prior to ---------------------------------------------------------------------- Commencement of Payments: In the event a Participant dies after he has been - ------------------------ determined to be totally and permanently disabled by the Committee and prior to his recovery from his total and permanent disability and prior to his Normal Retirement Date, his Beneficiary will receive the death benefit, determined and payable in the manner described in Section 2.4(B) hereof, that would have been payable on behalf of the Participant under the provisions of Section 2.4(B) if he had remained in the service of the Employer until the date of his death, with no change in his last regular monthly rate of Compensation. (G) Recovery from Disability: If the Committee finds that any Participant ------------------------ who is entitled to receive a disability retirement income under the provisions of this Section 2.3 has, at any time prior to his Normal Retirement Date, recovered from his total and permanent disability, such Participant and his Beneficiary shall not be entitled to benefits under this Section 2.3 unless he reenters the service of the Employer and his service is subsequently terminated by reason of his total and permanent disability in accordance with the provisions hereof. A Participant shall be deemed to have recovered from his total and permanent disability for the purposes of the Plan if he is determined to be no longer disabled under the terms of the long-term disability plan. Any such Participant who recovers from his disability shall accrue Vesting Service during the period that he is considered by the Committee to have been totally and permanently disabled as provided herein; and, if the date of his recovery from his total and permanent disability is on or after his Initial Vesting Date and he does not reenter the service of the Employer, he shall be entitled to the vested retirement income, payable in accordance with the provisions of Section 2.4(A) hereof, computed as though his service had been terminated on the date of his recovery from his total and permanent disability but based upon his Credited Service, Final Average Monthly Compensation and Covered Compensation determined as of the date of termination of his service due to disability. 2.4 BENEFITS OTHER THAN ON RETIREMENT. ---------------------------------- (A) Benefit on Termination of Service and on Death After Termination of ------------------------------------------------------------------- Service: ------- (1) In the event that a Participant's service is terminated prior to his Normal Retirement Date or Early Retirement Date, if any, and on or after his Initial Vesting Date for any reason other than his death, or disability retirement as described in Section 2.3 hereof, he will be entitled to a monthly retirement income to commence on his Normal Retirement Date or, (a) with respect to a Participant other than CCB Retirement Plan Participant who has not performed an Hour of Service on or after August 1, 2001 and other than an Electing CCB Retirement Plan Paticipant, if he so requests in writing filed with the Committee at least 30 days but not more than 90 days prior to the Annuity Starting Date, to commence on the first day of any month prior to his Normal Retirement Date and (b) with respect to a CCB Retirement Plan Participant who does not perform an Hour of Service on or after August 1, 2001 and an Electing CCB Retirement Plan Participant, who in either case has five (5) years of 2-8 Vesting Service; if he so requests in writing filed with the Committee at least 30 days but not more than 90 days prior to the Annuity Starting Date, to commence on the first day of any month prior to his Normal Retirement Date and on or after the date the Participant attains age 55. Such monthly retirement income payable in the manner described in Section 2.4(A)(2) hereof to a Participant under the provisions of this Section 2.4(A) shall be equal to: (a) the Accrued Benefit that he has accrued to the date of termination of his service; multiplied by (b) his Vested Percentage, which shall be equal to the percentage specified in the schedule below, based upon his number of years (ignoring fractions) of Vesting Service as of the date of termination of his service: Years of Vested Vesting Service Percentage --------------- ---------- Less than 5 0% 5 or more 100% provided, however, that the Vested Percentage of any Participant who has attained his Normal Retirement Age as of the date of termination of his service shall be 100%; and provided further that the Vested Percentage of any Participant who at the time of the Participant's termination of services was not a Highly Compensated Employees and who terminated services with an Employer within one year of a Change of Ownership or Effective Control due to an announced program of the Employer to reduce the size of the Employer's workforce or eliminate duplicative positions, shall be 100%; with the resulting product multiplied by (c) an actuarially computed factor that will convert, if applicable, the amount of monthly retirement income that is payable to the Participant in the manner described in Section 2.4(A)(2) hereof commencing at his Normal Retirement Date to an actuarially equivalent amount of monthly retirement income that is payable to the Participant in the manner described in Section 2.4(A)(2) hereof commencing on his Annuity Starting Date. 2-9 (2) The retirement income payable under Section 2.4(A)(1) above will be payable on the first day of each month. The first payment will be made, if the Participant shall then be living, on the date as of which his retirement income payments are to commence as described in Section 2.4(A)(1) above, and the last payment will be the payment due immediately preceding his death; except that if the Participant's Accrued Benefit is determined pursuant to Plan Section 2.1(B)(1), (2) or (3)(a), in the event the Participant dies on or after such date of commencement of payments but before he has received retirement income payments for a period of 10 years, the same monthly benefit that was payable to the Participant will be paid for the remainder of such 10-year period to the Beneficiary designated by the Participant, or if no designated beneficiary is surviving, the same monthly benefit shall be payable for the remainder of such 10-year period as provided in Sections 5.2 and 5.3 hereof. The provisions of Sections 3.1 and 4.1 hereof are applicable to the benefits provided under this Section 2.4(A). (3) In the event that the terminated Participant dies prior to his Annuity Starting Date (without his having received, prior to his death, the actuarially equivalent value of the benefit provided on his behalf under Section 2.4(A)(1) above), his Beneficiary will receive the monthly retirement income, beginning on the first day of the month coincident with or next following the date of the terminated Participant's death, which can be provided on an actuarially equivalent basis by the lump sum value of the benefit determined in accordance with Section 2.4(A)(1) above to which the terminated Participant was entitled as of the date of termination of his service. The monthly retirement income payments under this Section 2.4(A)(3) shall, subject to the provisions of Section 2.4(B)(4) hereof, be payable for the life of the Beneficiary designated or selected under Section 5.2 hereof to receive such benefit, and, if the Participant's Accrued Benefit is determined pursuant to Plan Section 2.1(B)(1), (2) or (3)(a), in the event of such Beneficiary's death within a period of 10 years after the Participant's death, the same monthly amount that was payable to the Beneficiary shall be payable for the remainder of such 10-year period in the manner and subject to the provisions of Section 5.3 hereof.However, in lieu of payment of such benefit in the form of monthly income described above, the lump sum value of such benefit may be paid on an actuarially equivalent basis to the Participant's designated Beneficiary in such other manner and form permitted under Section 2.4(B) hereof and commencing on such other date permitted under Section 2.4(B) hereof as the Participant may elect in writing filed with the Committee or, in the event that a specific election has not been made by the Participant and filed with the Committee prior to his death, as the Beneficiary may elect in writing filed with the Committee. 2-10 (4) Except as specifically provided otherwise in any Supplement hereto and except as provided in Section 2.3 with respect to disability retirement and Section 2.4 with respect to death, and unless specifically provided otherwise in the Plan, the Participant whose service is terminated prior to his Initial Vesting Date shall not be entitled to any benefit under the Plan whatever. (B) Benefit Payable in Event of Death While in Service: -------------------------------------------------- (1) If the service of a Participant is terminated by reason of his death prior to his Required Beginning Date, there shall be payable to the Participant's designated Beneficiary a monthly retirement income, beginning on the first day of the month coincident with or next following the date of the Participant's death, that can be provided on an actuarially equivalent basis by: (a) if the Participant's service is terminated by reason of his death prior to his Normal Retirement Date, the actuarially equivalent lump sum value, determined as of the date of his death, of the Accrued Benefit that the Participant has accrued to the date of his death; (b) if the Participant's service is terminated by reason of his death on or after his Normal Retirement Date, the actuarially equivalent lump sum value, determined immediately prior to the Participant's death, of the monthly retirement income that the Participant would have been entitled to receive under the provisions of Section 2.1(B) hereof if he had retired from the service of the Employer on the date of his death; (2) Except as provided in Section 2.4(B)(3) below and subject to the provisions of Section 2.4(B)(4) below, the monthly retirement income payments under this Section 2.4(B) shall be payable for the life of the Beneficiary designated or selected under Section 5.2 hereof to receive such benefit, and that if the Participant's Accrued Benefit is determined pursuant to Plan Section 2.1(B)(1), (2) or (3)(a), in the event of such Beneficiary's death within a period of 10 years after the Participant's death, the same monthly amount that was payable to the Beneficiary shall be payable for the remainder of such 10-year period in the manner and subject to the provisions of Section 5.3 hereof. (3) A Participant may elect, or, in the event that a specific election has not been made by the Participant and filed with the Committee prior to his death, his designated Beneficiary may elect, in writing filed with the Committee, that, in lieu of payment of the benefit provided under this Section 2.4(B) (or, if applicable, under Section 2.3(F) or 2.4(A)(3) hereof) in the manner described above, such benefit will be paid on an actuarially equivalent basis to the designated Beneficiary commencing on the first day of any month that is on or after the date of the Participant's death and is on or prior to the Participant's Required Beginning Date and is payable in accordance with one of the options described below: 2-11 Option A: A monthly retirement income in equal amounts that is -------- payable to the Beneficiary for his lifetime, with the added provision that payments in the same monthly amount will be made for the remainder of a 10-year period certain in the event of the death of the Beneficiary prior to the expiration of such specified period certain. Option B: A retirement income in equal amounts that is payable for -------- either a 5 year or ten year period certain which is specified by the Participant or his Beneficiary, as the case may be, in his written election filed with the Committee. In the event of the Beneficiary's death prior to the expiration of such specified period certain, the same amount shall be payable for the remainder of the specified period certain in the manner and subject to the provisions of Section 5.3 hereof. Option C: A lump-sum payment; provided, however, that such option is -------- only available to Participants other than CCB Retirement Plan Participants who have not performed an Hour of Service on or after August 1, 2001 and other than Electing CCB Retirement Plan Participants; and provided further, that any former participant in the Security Capital Bancorp Employees' Pension Plan who is not otherwise eligible for a lump sum payment hereunder, but whose benefits were transferred to the CCB Retirement Plan as part of the merger of such plan with the CCB Retirement Plan which occurred as of May 19, 1995, may elect this option if the actuarial equivalent value of such Participant's accured benefit under the Security Capital Bancorp Employees' Pension Plan determined as of May 19, 1995 is $10,000 or less. A Beneficiary may elect a lump-sum payment only within four months of receipt of a certification of plan benefits. Provided, however, that payment of any such benefit shall be subject to the provisions of Section 2.4(B)(4) below. (4) Any form of payment applicable to the death benefit provided under this Section 2.4(B) (or, if applicable, under Section 2.3(F) or 2.4(A)(3) hereof), which has been designated by a Participant prior to January 1, 1984 under the terms of the Superseded Plan and which satisfies the traditional rule in Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248), will continue in effect on and after the Effective Date with respect to the death benefits provided under this Section 2.4(B) (or, if applicable, under Section 2.3(F) or 2.4(A)(3) hereof) unless such designated form of payment has been or is subsequently revoked or changed (a change of Beneficiaries under the designation will not be considered to be a revocation or change of such form of payment so long as the change in Beneficiaries does not alter, directly or indirectly, the period over which distributions are to be made under such form of payment); provided, 2-12 however, if a Participant, whose death occurs on or after his Initial Vesting Date, had been married to his spouse throughout the one-year period immediately preceding his death and he had designated a person other than his spouse as his Beneficiary and such spouse has not consented to such other person being designated, the provisions of Section 4.1(D) hereof shall apply with respect to payments due his surviving spouse, if any. Subject to the preceding sentence and except to the extent otherwise permissible under Section 401(a)(9) of the Internal Revenue Code including the provisions of Proposed Regulation 1.401(a)(9)-2 and regulations issued pursuant thereto, the benefit payable under this Section 2.4(B) (or, if applicable, under Section 2.3(F) or 2.4(A)(3) hereof) on behalf of any Participant must be payable in a manner that satisfies the restrictions of Section 401(a)(9) of the Internal Revenue Code including the provisions of Proposed Regulation 1.401(a)(9)-2 and must: (a) commence not later than the Participant's Required Beginning Date; provided, however, if the Beneficiary is not the Participant's spouse, distribution must commence not later than one year after the date of the Participant's death or, if the Participant's surviving spouse was his Beneficiary and such surviving spouse dies prior to the commencement of benefit payments, distribution must commence not later than one year after the date of such surviving spouse's death; and (b) be distributed to the Participant's Beneficiary over one or a combination of the following periods: (i) the life of his Beneficiary; or (ii) a period certain not extending beyond the life expectancy of the Beneficiary; provided, however, if the Participant has no designated Beneficiary or if the designated Beneficiary is not a living person, such benefit must be distributed in its entirety to the Beneficiary not later than the fifth anniversary of the date of (i) the Participant's death or (ii) the death of the Participant's spouse, whichever death is the later to occur. Any amount payable to a child of the Participant shall be treated for the purposes of this Section 2.4(B)(4) as if it had been payable to the surviving spouse of the Participant if such amount that is payable to the child will become payable to such surviving spouse upon such child's reaching majority (or upon the occurrence of such other designated event permitted under regulations issued with respect to Section 401(a)(9) of the Internal Revenue Code including the provisions of Proposed Regulation 1.401(a)(9)-2). In the event that the Beneficiary to receive the death benefit payable under Section 2.3(F), 2.4(A)(3) or 2.4(B) hereof on behalf of a Participant whose death occurs prior to his Normal Retirement Date is his surviving spouse, the retirement income payable to such surviving spouse under Section 2.3(F), 2.4(A)(3) or 2.4(B) hereof shall be deferred and be payable on an actuarially equivalent basis to such surviving 2-13 spouse commencing on the Participant's Normal Retirement Date, if such surviving spouse is then living, unless (i) the surviving spouse consents or elects in writing to receive such benefit commencing as of a date that is prior to the Participant's Normal Retirement Date and is on or after the date of the Participant's death, (ii) the date of death of the Participant is prior to his Initial Vesting Date, (iii) the Participant had not been married to his surviving spouse throughout the one-year period immediately preceding his death or (iv) a lump-sum payment is payable to his surviving spouse under the provisions of Section 3.2 hereof. (5) If the service of a Participant is terminated by reason of his death on or after his Required Beginning Date, there shall be payable to the Participant's designated Beneficiary the monthly retirement income, payable in the manner described in Section 2.4(B)(2) or 2.4(B)(3) above beginning on the first day of the month coincident with or next following the date of the Participant's death, that can be provided on an actuarially equivalent basis by an amount equal to the excess, if any, of: (a) the amount described in Section 2.4(B)(1)(a) or Section 2.4(B)(1)(b), whichever is applicable; over (b) the sum of: (i) the actuarially equivalent lump sum value, determined as of the Participant's Required Beginning Date, of the retirement income that was payable on his behalf commencing on his Required Beginning Date, accumulated with interest from his Required Beginning Date until the date of his death; plus (ii) the sum of the actuarially equivalent lump sum values, determined as of each applicable Post Payment Recalculation Date occurring after the Participant's Required Beginning Date, of the additional retirement income, if any, payable to such Participant commencing on such applicable Post Payment Recalculation Date, accumulated with interest from the applicable Post Payment Recalculation Date to the date of his death. Additional retirement income payments may be payable after the Participant's death to his joint pensioner or other Beneficiary, depending upon the form of payment of the retirement income that the Participant was receiving immediately prior to his death and taking into account the increase, if any, that would have applied under the provisions of Section 2.1(D) hereof to the amount of retirement income payable to the Participant 2-14 commencing as of the first day of the month coincident with or next following the date of the Participant's death if the Participant had retired immediately prior to his death and had survived to such day. 2-15 SECTION 3 --------- SPECIAL PROVISIONS REGARDING PAYMENT OF BENEFITS ------------------------------------------------ 3.1 OPTIONAL FORMS OF RETIREMENT INCOME ----------------------------------- In lieu of the amount and form of retirement income commencing on the Participant's regularly scheduled Annuity Starting Date which is payable, subject to the provisions of Section 4.1 hereof, in the event of his normal retirement, early retirement, disability retirement or termination of service, as determined and specified in Section 2.1, 2.2, 2.3 or 2.4(A) hereof, whichever is applicable, such Participant, upon written request to the Committee, may elect to receive a retirement income or benefit of equivalent actuarial value payable in accordance with one of the options described below commencing on his regularly scheduled Annuity Starting Date or commencing on such later date, which shall not be later than his Required Beginning Date, as the Participant may specify in his written request to the Committee. Option 1: A retirement income of modified monthly amount that is payable in equal monthly amounts to the Participant for his lifetime, and, in the event that the Participant predeceases a joint pensioner designated by him, a percentage, which is either 50% or 100% and is specified by the Participant in his written request to the Committee, of such modified monthly amount will be payable after the death of the Participant to such designated joint pensioner for the lifetime of such joint pensioner. This option is referred to herein as the "Qualified Joint and 50% Survivor Annuity Option" when the spouse of the Participant is the designated joint pensioner and the specified percentage is 50%. Option 2: A retirement income that is payable in equal monthly amounts to the Participant for his lifetime. Option 3: A retirement income that is payable in equal monthly amounts to the Participant for his lifetime, with the added provision that payments will be made for the remainder of a 10 year, 15 year or 20 year period certain, as specified by the Participant in which written request to the Committee. Option 4: A lump-sum payment; provided however, that such option is only available to Participants other than CCB Retirement Plan Participants who have not performed an Hour of Service on or after August 1, 2001 and other than Electing CCB Retirement Plan Participants; and provided further, that any former participant in the Security Capital Bancorp Employees' Pension Plan who is not otherwise eligible for a lump sum payment hereunder, but whose benefits were transferred to the CCB Retirement Plan as part of the merger of such plan with the CCB Retirement Plan which occurred as of May 19, 1995, may elect this option if the actuarial equivalent value of such Participant's accrued benefit under the Security Capital Bancorp Employees' Pension Plan determined as of May 19, 1995 is $10,000 or less. In the case of a distribution that is 3-1 in excess of the maximum amount permissible as an involuntary cash-out under Sections 411(a)(11) and 417(e) of the Internal Revenue Code, the Participant and his spouse, if any, must elect in writing to receive such lump-sum payment in lieu of a monthly income payable from the Plan. A Participant may make this election only within four months of his receipt of a certification of his retirement plan benefits. The amount of retirement income determined under any of the above optional forms of payment must satisfy the permitted disparity requirements of Sections 401(a)(4) and 401(1) of the Internal Revenue Code and rulings and regulations issued with respect thereto, and, any provisions hereof to the contrary notwithstanding, any optional form of payment which would otherwise be permitted under the provisions of this Section 3.1 shall not be available to a Participant if the amount of retirement income payable under such option would result in the amount of retirement income payable on behalf of such Participant under the Plan being increased by a percentage that would cause the disparity in the rate of employer-derived benefits under the Plan to exceed the maximum disparity permitted under Sections 401(a)(4) and 401(1) of the Internal Revenue Code and rulings and regulations issued with respect thereto. Any optional form of payment designated by a Participant prior to January 1, 1984, which satisfies the transitional rule in Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248), will continue in effect on and after the Effective Date of the Plan unless such optional form of payment has been or is subsequently revoked or changed (a change of Beneficiaries under the designation will not be considered to be a revocation or change of such optional form of payment so long as the change in Beneficiaries does not alter, directly or indirectly, the period over which distributions are to be made under such form of payment); provided, however, that the provisions of Section 4.1(C) hereof shall apply if the Participant has a spouse at the date on which his initial payment under such optional form is due and his spouse does not consent to such optional form of payment. Subject to the preceding sentence but notwithstanding any other provision of this Section 3.1 to the contrary, any option elected under this Section 3.1 must provide that the entire interest of the Participant will be expected to be distributed to the Participant and his Beneficiaries and joint pensioners, in a manner that satisfies the restrictions of Section 401(a)(9) of the Internal Revenue Code including the provisions of Proposed Regulation 1.401(a)(9)-2, over one or a combination of the following periods: (1) the life of the Participant; (2) the lives of the Participant and his designated Beneficiary or joint pensioner; (3) a period certain not extending beyond the life expectancy of the Participant; or (4) a period certain not extending beyond the joint life and last survivor expectancy of the Participant and his designated Beneficiary or joint pensioner. Any amount that is payable to the child of a Participant under an optional form of payment hereunder shall be treated for the purposes of satisfying the requirements of this paragraph as if it had been payable to the surviving spouse of the Participant if such amount that 3-2 is payable to the child will become payable to such surviving spouse upon such child's reaching majority (or upon the occurrence of such other designated event permitted under regulations issued with respect to Section 401(a)(9) of the Internal Revenue Code including the provisions of Proposed Regulation 1.401(a)(9)-2). Retirement income payments will be made under the option elected in accordance with the provisions of this Section and will be subject to the following limitations: (1) If a Participant's service is terminated by reason of his death prior to his Annuity Starting Date, no benefit will be payable under the option to any person, but a benefit may be payable on his behalf in accordance with the provisions of Section 2.4(B) hereof. (2) If a terminated Participant dies after the date of termination of his service and prior to his Annuity Starting Date, no benefit will be payable under the option to any person, but a benefit may be payable on his behalf under the provisions of Section 2.4(A)(3) hereof. (3) In the case of a Participant who is married and who elects an option under which the commencement of payment of his retirement income is deferred beyond his regularly scheduled Annuity Starting Date, the option elected by such Participant must provide that a monthly lifetime income equal to or greater than a qualified preretirement survivor annuity (within the meaning of Section 417(c) of the Internal Revenue Code) will be payable to his surviving spouse in the event of his death after such regularly scheduled Annuity Starting Date and prior to his elected Annuity Starting Date unless his spouse consents to the option not providing such an income. (4) If the designated Beneficiary or joint pensioner dies before the Participant's Annuity Starting Date, the option elected will be canceled automatically and the retirement income payable to the Participant will be paid in the applicable form described in Section 2 hereof unless a new election is made in accordance with the provisions of this Section or unless a new Beneficiary or joint pensioner is designated by the Participant prior to the date that his retirement income commences under the Plan and within 90 days after the death of the prior Beneficiary or joint pensioner. (5) If the Participant and, if applicable, his joint pensioner and his designated Beneficiary all die after the Participant's Annuity Starting Date but before the full payment has been effected under any option providing for payments for a period certain and if the commuted value of the remaining payments is equal to or less than the maximum amount that is permissible as an involuntary cashout of accrued benefits under Sections 411(a)(11) and 417(e) of the Internal Revenue Code and regulations issued with respect thereto, the commuted value of the remaining payments shall, subject to the provisions of Section 3.2 hereof, be paid in a lump sum in accordance with the provisions of Section 5.3 hereof. 3-3 (6) If the Participant dies after his Annuity Starting Date, payment of his remaining interest, if any, shall be distributed, to the extent required by Section 401(a)(9) of the Internal Revenue Code including the provisions of Proposed Regulation 1.401(a)(9)-2 and regulations issued with respect thereto, at least as rapidly as provided under the method of payment in effect prior to his death. 3.2 LUMP-SUM PAYMENT OF SMALL RETIREMENT INCOME ------------------------------------------- Notwithstanding any provision of the Plan to the contrary, if the actuarially equivalent lump sum value of the retirement income or other benefit payable to any person entitled to any benefit hereunder is equal to or less than the maximum amount that is permissible as an involuntary cash-out of accrued benefits under Sections 411(a)(11) and 417(e) of the Internal Revenue Code and regulations issued with respect thereto ($5,000 as of January 1, 1998), the actuarial equivalent of such retirement income or other benefit shall, subject to the provisions below, be paid in a lump sum. If the present value of the vested accrued benefit that is payable on behalf of any Participant whose service is terminated (either before, on or after the Effective Date) is zero, the Participant shall be deemed to have received a distribution of his vested accrued benefit as of the date of termination of his service. 3.3 BENEFITS APPLICABLE TO PARTICIPANT WHO HAS BEEN ----------------------------------------------- OR IS EMPLOYED BY TWO OR MORE EMPLOYERS --------------------------------------- In the event that a Participant's service is terminated for any reason and such Participant has been or is employed by any two or more Employers, his retirement or termination benefit, if any, shall be computed by applying the benefit formulas as if all the Employers were a single Employer; provided, however, if the Plan does not represent a single plan with respect to all such Employers, there must be a proper allocation (taking into account the Credited Service and Compensation applicable to each Employer or group of Employers with respect to which the Plan represents a single plan) of the costs of the resulting benefits among the Employers (with respect to which the Plan does not represent a single plan) by which such Participant has been or is employed. 3.4 NO DUPLICATION OF BENEFITS -------------------------- Unless the context clearly provides otherwise, there shall be no duplication of benefits under the Plan or under any Supplement hereto, and the benefits payable under any Section of the Plan to or on behalf of a Participant shall be inclusive of the benefits, if any, concurrently payable to or on behalf of the same Participant under all other sections of the Plan and under any Supplement hereto. 3-4 SECTION 4 --------- GOVERNMENTAL REQUIREMENTS AFFECTING BENEFITS -------------------------------------------- 4.1 SPECIAL PROVISIONS REGARDING AMOUNT AND PAYMENT OF RETIREMENT INCOME -------------------------------------------------------------------- The amount and payment of retirement income determined under Sections 2.1, 2.2, 2.3 and 2.4 hereof shall be subjected to the following provisions of this Section 4.1. (A) Limitation Imposed by Section 415 of Internal Revenue Code: (1) Maximum Amount of Retirement Income: Any provisions herein to the ----------------------------------- contrary notwithstanding, in no event shall the monthly retirement income that is payable on or after the first day of the limitation year beginning in 1987 to a Participant hereunder exceed the maximum amount of retirement income for defined benefit plans as specified in Section 415 of the Internal Revenue Code and regulations and rulings issued pursuant thereto; provided, however, that: (a) the maximum amount of retirement income applicable to a Participant who was a participant in the Superseded Plan, if any, before the limitation year beginning in 1983 and whose Credited Service includes service that was accrued prior to such limitation year, shall not be less than his current accrued benefit within the meaning of Section 235(g)(4) of the Tax Equity and Fiscal Responsibility Act of 1982; and (b) such maximum amount of retirement income applicable to a Participant who was a participant in the Superseded Plan, if any, before the limitation year beginning in 1987 and whose Credited Service includes service that was accrued prior to such limitation year, shall not be less than his current accrued benefit within the meaning of Section 1106(i)(3)(B) of the Tax Reform Act of 1986; and provided further, however, for any Plan Year ending on or before December 31, 1999, in the event that the sum of the defined benefit plan fraction and defined contribution plan fraction of a Participant, who is a participant in both a defined benefit plan and a defined contribution plan maintained by any Controlled Group Members, would exceed 1.0, the monthly retirement income payable on his behalf under the defined benefit plans shall be reduced to the amount that will result in such sum being equal to 1.0. In determining the maximum monthly retirement income payable on behalf of any Participant, all defined benefit plans (whether or not terminated) of the Controlled Group Members are to be treated as one defined benefit plan; and all defined contribution plans (whether or not terminated) of the Controlled Group Members are to be treated as one defined contribution plan. The proportion of the maximum monthly retirement income applicable to all such 4-1 defined benefit plans of the Controlled Group Members shall be determined on a pro rat-a basis depending upon the actuarially equivalent amount of retirement income other-wise accrued under each such defined benefit plan. (2) Actuarial Assumptions: The mortality and interest assumptions that are --------------------- used to compute the actuarially equivalent maximum amounts of retirement income permitted under the provisions of this Section 4.1(A) shall be the same as those that are used in computing actuarially equivalent benefits payable on behalf of a Participant upon his retirement or termination of service and upon the exercise of optional forms of retirement income under the Plan except that: (a) the interest rate assumption shall not be less than 5% for the purposes of converting the maximum retirement income to a form other than a straight life annuity (with no ancillary benefits); (b) the interest rate assumption shall not be greater than 5% for the purposes of adjusting the maximum retirement income payable to a Participant who is over the social security retirement age within the meaning of Section 415(b)(8) of the Internal Revenue Code so that it is actuarially equivalent to such a retirement income commencing at the social security retirement age; and (c) the factor for adjusting the maximum permissible retirement income to a Participant who is less than age 62 years so that it is actuarially equivalent to such a retirement income commencing at age 62 years shall be equal to (i) the factor for determining actuarial equivalence for early retirement under the Plan or (ii) an actuarially computed reduction factor determined using an interest rate assumption of 5% and the mortality assumptions that apply in determining actuarially equivalent monthly retirement incomes under the Plan (except that the mortality decrement shall be ignored if a death benefit at least equal to the actuarially equivalent lump sum value of the Participant's Accrued Benefit would be payable under the Plan on behalf of the Participant if he remained in the service of the Employer and his service were to be terminated by, reason of his death prior to his Normal Retirement Date), whichever factor will provide the greater reduction. The factor for determining actuarial equivalence for early retirement under the Plan for any given age below age 62 years shall be determined by dividing (aa) the product of the early retirement adjustment factor that applies under the Plan at such given age multiplied by a factor that will convert, if applicable, the amount of retirement income payable in the manner described in Section 2.2(C) hereof commencing at such given age to an actuarially equivalent amount of retirement income payable as straight life annuity commencing at such given age by (bb) the pro-duct of the early retirement adjustment factor that applies under the Plan at age 62 years multiplied by a factor that will convert, if applicable, the amount of retirement income payable in the manner described in Section 2.2 hereof commencing at age 62 years to an actuarially 4-2 equivalent amount of retirement income payable as a straight life annuity commencing at age 62 years (where such actuarial conversion factors used in (aa) and (bb) above shall be determined in accordance with the provisions of this Section 4.1(A)). (3) Cost-of-Living Adjustments: In the event that the maximum amount of ------------------------------ retirement income permitted under Section 415 of the Internal Revenue Code is increased after the date of commencement of a Participant's retirement income and prior to the date of termination of the Plan due to any cost-of-living adjustment announced by the Internal Revenue Service pursuant to the provisions of Section 415(d) of the Internal Revenue Code, the amount of monthly retirement income payable under the Plan to a Participant whose retirement income is restricted due to the provisions of such Section of the Internal Revenue Code shall be increased, effective as of January 1st of the calendar year for which such increase becomes effective or, if applicable, as of such other date as the Secretary of the Treasury or his delegate may prescribe as the date on which such increase shall become effective, to reflect the increase in the amount of retirement income that may be payable under the Plan as a result of such cost-of-living adjustment; provided, however, if the Employer maintains an "excess benefit plan" (within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974) for the purpose of providing benefits for certain Participants in excess of the limitations on contributions and benefits imposed by Section 415 of the Internal Revenue Code and if the Participant or his Beneficiary receives or has received a benefit or benefits under such excess benefit plan and a portion of such benefit or benefits would be duplicated by the cost-of-living adjustment provided under this paragraph, then such cost-of-living adjustment that would represent a duplication of benefits shall not apply to the Participant or Beneficiary unless the value of the benefit payable from the excess benefit plan that would cause such duplication of benefits under this Plan is returned to the Employer by the Participant or Beneficiary within 60 days of the effective date of such cost-of-living adjustment or the date that such cost-of-living adjustment is announced by the Internal Revenue Service, whichever date is later; and provided further, however, that such 60-day period may be extended by the Committee if, in its opinion, reasonable cause exists for such an extension. (4) Special Rule for Participants in the National Bank of Commerce -------------------------------------------------------------- Supplemental Executive Retirement Plan. Notwithstanding the foregoing, the -------------------------------------- maximum monthly retirement income provided to any Participant who received a distribution from the National Bank of Commerce Supplemental Executive Retirement Plan prior to January 1, 2001 shall not exceed the limitations contained in Code Section 415 in effect on December 31, 2001. (B) Requirement With Respect to Form of Payment: The Committee shall ------------------------------------------- provide each Participant, during the period beginning 90 days before his Annuity Starting Date and ending 30 days before his Annuity Starting Date (or as soon after the expiration of such period as is administratively practicable), written notification of the terms and conditions of payment that is provided under Section 2.1(C), 2.2(C), 2.3(E) or 2.4(A) hereof, whichever is applicable, commencing as of his Annuity Starting Date, and, if the Participant is married, the terms and 4-3 conditions of payment that is provided under the Qualified Joint and 50% Survivor Annuity Option commencing as of such date and the relative financial effect on the Participant's retirement income under such forms of payment. Any provisions of Section 2.1, 2.2, 2.3, 2.4(A) or 3.1 hereof to the contrary notwithstanding, if a Participant does not elect, in writing filed with the Committee during the election period described below, to receive the retirement income payable on his behalf on and after his Annuity Starting Date either (i) under the form of payment that is specified in Section 2.1 (C), 2.2(C), 2.3(E) or 2.4(A)(2), whichever is applicable, or (ii) under an optional form of payment described in and subject to the provisions of Section 3.1 hereof, such Participant shall be deemed to have elected, and the retirement income payable on and after his Annuity Starting Date shall automatically be paid in accordance with the provisions of, either: (1) if he does not have a spouse at his Annuity Starting Date, the form of payment that is specified in Section 2.1(C), 2.2(C), 2.3(E) or 2.4(A)(2), whichever is applicable; or (2) if he has a spouse at his Annuity Starting Date, the Qualified Joint and 50% Survivor Annuity Option; provided, however, if payment to the Participant in the form of a Qualified Joint and 50% Survivor Annuity would result in the amount of retirement income payable on behalf of such Participant being increased by a percentage that would cause the disparity in the rate of his employer-derived benefits under the Plan to exceed the maximum disparity permitted under Section 401(1) of the Internal Revenue Code and rulings and regulations issued with respect thereto, the Qualified Joint and Survivor Annuity of such Participant shall be changed to an actuarially equivalent Qualified Joint and Survivor Annuity that provides payments in equal monthly amounts to the Participant for his lifetime and in the event that he predeceases his spouse, the percentage of the monthly retirement income payable to such surviving spouse for life shall be increased (in increments of 5%) until the permitted disparity provided under Section 401(1) of the Internal Revenue Code is satisfied or until re-aching a maximum of 100%, and, if a joint and 100% survivor annuity will not satisfy the permitted disparity requirements of said Section 4.01(1), a period certain for which payments will be made shall be added to the joint and 100% survivor annuity (in increments of one year) until such permitted disparity requirements are satisfied. Any Participant may make an election under this Section at any time (and any number of times) prior to the commencement of his retirement income or other benefit payments and during the period beginning on the date which is 90 days prior to his Annuity Starting Date and ending on the latest to occur of (i) his Annuity Starting Date, (ii) the date which is 90 days after the date on which he was provided with the general written explanation described above or (iii) the date which is 90 days after the date on which he was provided with any specific detailed information concerning the payment of his retirement income that is required to be furnished due to the request of the Participant. If any such Participant does not file his election with the Committee prior to the expiration of the election period described above, the commencement of his retirement income will be delayed until the end of such election period or until such earlier date 4-4 as of which he files his election with the Committee, but he will be entitled to a retroactive payment with respect to those retirement income payments which were delayed. If any Participant has elected a form of payment other than the automatic form provided above and his retirement income or other benefit payments have not commenced, he may subsequently revoke such election, in writing filed with the Committee within the election period described above, in order to receive his retirement income payable in accordance with the automatic form provided above. Any provisions of Section 3.1 hereof to the contrary notwithstanding, if any Participant is not provided with the written notification described in the first sentence of this Section at least 30 days before his Annuity Starting Date but he files his election with the Committee, and his retirement income or other benefit commences, prior to the date which is 30 days after the date on which he was provided with such written notification, he may subsequently, in writing filed with the Committee prior to the expiration of such 30-day period, revoke such election and elect to receive his retirement income payable under any other form of payment that was available to him on his Annuity Starting Date; provided, however, in order for such revocation and new election to become effective, he shall be required to return to the Fund, prior to the expiration of such 30-day period, the portion, if any, of the payments that he has received that is in excess of the payments due under his newly elected form of payment, or, at the option of the Participant, future payments due under such newly elected form of payment may be reduced, over a period not to exceed 12 months (or such longer period as is required to recover such excess if the Participant's payments are reduced to zero), until such excess has been recovered. Any provisions herein to the contrary notwithstanding, the consent of the Participant's spouse during the applicable election period shall be required in order for the Participant to receive his retirement income in a form other than that provided under a Qualified Joint and Survivor Annuity. (D) Qualified Preretirement Survivor Annuity: If a deceased Participant, ---------------------------------------- whose death occurs on or after his Initial Vesting Date and prior to his Annuity Starting Date had been married to his spouse throughout the one-year period immediately preceding his death and he had designated a person other than his spouse as his Beneficiary and such spouse has not consented to such other person being designated as the Beneficiary, the Participant shall be deemed to have: (1) revoked his prior designation of Beneficiary; (2) designated such spouse as his Beneficiary to receive a portion of the death benefit payable on his behalf under Section 2.3(F), 2.4(A)(3) or 2.4(B), whichever is applicable; (3) specified that the portion of the benefit provided under Section 2.3(F), 2.4(A)(3) or 2.4(B) that is payable to his surviving spouse will be payable as an actuarially equivalent monthly income payable on the first day of each month with the first payment being due (only if said spouse is then living) on the Participant's Normal Retirement Date or the first day of the month coincident with or next following the date of the Participant's death, whichever is later, and with the last payment being the payment due immediately preceding such spouse's death; 4-5 (4) specified that the portion of the benefit provided under Section 2.3(F), 2.4(A)(3) or 2.4(B) that is payable to the surviving spouse shall have an actuarially equivalent lump sum value, determined as of the date of his death, of the monthly retirement income that would be payable to his surviving spouse, commencing on the Participant's Earliest Annuity Commencment Date, under the Qualified Joint and 50% Survivor Annuity Option if: (a) the Participant's service had been terminated on the date of his death for a reason other than disability retirement or death (or, if the Particpant is a vested terminated Participant entitled to a benefit under Section 2.4(A) hereof, he had survived to the Earliest Annuity Commencement Date); (b) the Participant had (for the purposes of determining the amount of such monthly retirement income commencing at his Earliest Annuity Commencement Date) waived the death benefit coverage under Section 2.4(A)(3) hereof, if applicable, during the period beginning on the date of his death and ending on his Earliest Annuity Commencement Date; and (c) the Participant had died immediately after such commencement of payment (one-half of the intial payment which would have been due the Participant on his Earliest Annuity Commencement Date shall be included in the determination of such lump sum value); and (5) designated such other person (or persons) that was named as his Beneficiary under such revoked designation as the Beneficiary to receive the remaining portion of such benefit payable on his behalf under and in accordance with the provisions of Section 2.3(F), 2.4(A)(3) or 2.4(B) hereof. In lieu of the payment of such benefit to the surviving spouse of a Participant in the form of monthly income described in Section 4.1(D)(3) above commencing at the Participant's Normal Retirement Date, such benefit may be paid on an actuarially equivalent basis to the Participant's spouse in such other manner and form permitted under Section 2.4(B) hereof and commencing on such other date permitted under Section 2.4(B) hereof as the surviving spouse may elect in writing filed with the Committee. For the purposes of Sections 4.1(D)(3) and 4.1(D)(4) above, the Earliest Annuity Commencement Date of a deceased disabled Participant on whose behalf a death benefit is payable under Section 2.3(F) hereof and the monthly retirement income that would be payable to his surviving spouse, commencing on his Earliest Annuity Commencement Date, under the Qualified Joint and 50% Survivor Annuity Option, shall be determined as though such Participant had recovered from his total and permanent disability and had reentered the service of the Employer immediately prior to his death. If a deceased Participant, whose death occurs on or after his Initial Vesting Date and prior to his Annuity Starting Date, had been married to his spouse throughout the one-year period immediately preceding his death and he had designated a person other than his spouse as his Beneficiary and such spouse has consented prior to the Participant's attainment of the age of 35 years to such other person being designated as the Beneficiary but has not consented to such 4-6 designation on or after either the Participant's attainment of such age or his separation from service, unless it is otherwise permissible under the provisions of Section 417 (or any other applicable section) of the Internal Revenue Code or regulations or rulings issued pursuant thereto for such a spouse to elect to waive his or her right to the qualified preretirement survivor annuity, such consent of such spouse shall be invalid and the benefit payable on behalf of such Participant shall be determined and payable in the manner described above as though the Participant spouse had not consented to such other person being designated as the Beneficiary of the Participant. The Committee shall provide each Employee, who is a Participant in the Plan, within the one-year period immediately following the date on which he attains the age of 32 years or on which he becomes a Participant in the Plan, whichever is later, or, if his service is terminated on or after his Initial Vesting Date and prior to his attaining the age of 35 years, the date of termination of his service or as soon thereafter as is administratively practicable, with written notification of (i) the terms and conditions upon which the Qualified Preretirement Survivor Annuity described above will be payable to his surviving spouse, (ii) the Participant's right to designate at any time prior to his death a person other than his spouse as his Beneficiary and the effect that such a designation will have on the Qualified Preretirement Survivor Annuity, (iii) the rights of the Participant's spouse in the event that the spouse does not consent to such designation and (iv) the right of the Participant to change his Beneficiary designation in accordance with the provisions of Section 5.2 hereof at any time prior to his death and the effect that such a change will have upon the Qualified Preretirement Survivor Annuity. If the Beneficiary of a Participant is his spouse but the Participant elects, pursuant to the provisions of Section 2.4(A)(3) or 2.4(B) hereof, whichever is applicable, an actuarially equivalent form of payment of the benefit provided under such applicable Section that does not provide for monthly payments during the lifetime of his spouse in an amount at least as great as the actuarially equivalent income, if any, that would have been payable to such spouse under the provisions of the Qualified Joint and 50% Survivor Annuity Option if the Participant had retired under the provisions of Section 2.1 or 2.2 hereof or his retirement income payments due under Section 2.4(A) hereof had commenced, whichever is applicable, on the day before his death while said option was in effect and he had died immediately thereafter, the Committee shall inform such Participant that such election will constitute an election not to receive a benefit which has the effect of a Qualified Preretirement Survivor Annuity provided under a qualified joint and survivor annuity as described in Section 417 of the Internal Revenue Code, and the consent of the Participant's spouse shall be required in order for such an election to become effective. There shall be no duplication between the benefits provided under Sections 2.3(F), 2.4(A)(3) and 2.4(B) and under the Qualified Preretirement Survivor Annuity described in this Section 4.1(D), but the benefits under each shall be inclusive of the benefits under the other. (E) Spousal Consent Requirement and Waiver: Any provisions herein to the -------------------------------------- contrary notwithstanding, if the consent of the spouse of the Participant is required for any reason under the provisions hereof, such consent in order to be effective must be in writing and witnessed by a Plan representative or a notary public. In the event that such consent is with respect to the election of a form of payment other than a Qualified Joint and Survivor Annuity or the 4-7 designation of a person other than the spouse as the Participant's Beneficiary, such consent must acknowledge the specific form of payment that has been elected or the person who has been designated as Beneficiary, as the case may be, and must acknowledge the effect of such consent. Any of the above to the contrary notwithstanding, such spousal consent for any reason hereunder shall, unless otherwise required by the Committee or by applicable law, be waived for the purposes of the Plan if: (1) the spouse has previously consented to such specified action in accordance with the provisions above and such previous consent (a) permits changes with respect to such specified action without any requirement of further consent by such spouse and (b) acknowledges the effect of such consent by the spouse; or (2) it is established to the satisfaction of the Committee that such consent may not be obtained because there is no spouse, because the spouse cannot be located or because of such other circumstances as the Secretary of the Treasury or his delegate may prescribe by regulations as reasons for waiving the spousal consent requirement. (F) Latest Date of Commencement of Payments: Except to the extent --------------------------------------- otherwise permissible under rules or regulations issued by the Internal Revenue Service, distribution of the accrued benefit to which a Participant has a nonforfeitable interest must commence on a date not later than the earlier to occur of: (1) his Required Beginning Date, regardless of whether or not his service has been terminated; or (2) the later of: (a) the date that is no later than the 60th day after the close of the Plan Year during which (i) his service is terminated for any reason, (ii) he attains the age of 65 years or (iii) the tenth anniversary of the date on which he initially commenced participation in the Plan or Superseded Plan, whichever is latest, occurs; or (b) the date that the Participant elects in accordance with the provisions of Section 3.1 hereof as the date of commencement of his retirement income; provided, however, if an election of a form of payment has been made by a Participant prior to January 1, 1984 that provides for the commencement of his benefit at a date later than the date applicable under (1) or (2) above and such election both (i) satisfies the transitional rule in Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248) and (ii) it has not been subsequently revoked or changed (a change of Beneficiaries under the designation will not be considered to be a revocation or change of such form of payment so long as the change in Beneficiaries does not alter, directly or indirectly, the period over which distributions are to be made under such form of payment), distribution of the Participant's accrued benefit shall not be required to commence prior to the date of commencement specified in such election. 4-8 (G) No Benefit Reduction Due to Post Termination Social Security Changes: -------------------------------------------------------------------- Benefits under the Plan shall not be decreased by reason of any increase in the benefit levels payable under Title II of the Social Security Act or by reason of any increase in the wage base under such Title II, if such increase takes place after September 2, 1974 or (if later) the earlier of the date of first receipt of such benefits or the date of the Participant's separation from service, as the case may be. (H) Minimum Preserved Benefit Due to Certain Amendments: In the event that --------------------------------------------------- the Plan or Superseded Plan has been or is amended effective as of a date on or after January 1, 1989 to eliminate or reduce a subsidy or an early retirement benefit or to change the actuarial assumptions used to determine actuarially equivalent benefits payable thereunder, the monthly retirement income or other benefit, if any, payable under the provisions of Section 2.1, 2.2, 2.3 or 2.4 (and Section 3.1 if an optional form of payment is applicable) to a Participant, who was a participant in the Plan or Superseded Plan as of the day immediately preceding the date that the elimination, reduction or change becomes effective (herein referred to as the 'Preservation Date') and who retires or whose service is terminated after the Preservation Date, shall be at least equal to the corresponding amount of the monthly retirement income or other benefit, if any, payable to him under the provisions of such applicable Section of the Plan (or, if applicable, the Section of the Superseded Plan that corresponds to such applicable Section of the Plan) as in effect on the Preservation Date computed using his Credited Service, Final Average Monthly Compensation and Covered Compensation (or, if applicable, their corresponding terms under the Superseded Plan) determined as of the Preservation Date under the provisions of the Plan (or, if applicable, the Superseded Plan) as in effect on such date and using, if applicable, the mortality table and interest rate assumptions that applied under the provisions of the Plan (or, if applicable, the Superseded Plan) as in effect on the Preservation Date to compute actuarially equivalent benefits payable to a Participant who retired or whose service was terminated on the Preservation Date. (I) Direct Rollover Options for Eligible Rollover Distributions: ----------------------------------------------------------- Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this section, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a direct rollover. 4.2 LIMITATIONS ON BENEFITS REQUIRED BY THE INTERNAL REVENUE SERVICE ---------------------------------------------------------------- (A) Limitation in the Event of Plan Termination: In the event that the ------------------------------------------- Plan is terminated, the benefit of any Participant who is a Highly Compensated Employee (or a highly compensated former Employee) shall be limited to a benefit that is nondiscriminatory under Section 401(a)(4) of the Internal Revenue Code and regulations issued with respect thereto. 4-9 (B) Limitation on Annual Payments: ----------------------------- (1) The provisions of this Section (B) shall apply during each Plan Year to those Participants who during such Plan Year (a) are among the 25 highest-paid Participants (including former Participants) in the Plan (determined with respect to each Employer or group of Employers with respect to which the Plan represents a separate single plan) and (b) are Highly Compensated Employees (or highly compensated former Employees) and whose annual payments under the Plan must be restricted due to the provisions of Section 401(a)(4) of the Internal Revenue Code and regulations issued with respect thereto. (2) To the extent required by Section 401(a)(4) of the Internal Revenue Code and regulations issued with respect thereto, the annual benefit payable under the Plan to any such Participant to whom the provisions of this Section (B) are applicable shall not exceed an amount equal to the payments that would be made on his behalf under a single life annuity that is the actuarial equivalent of the sum of his accrued benefit and his other benefits under the Plan; provided, however, that such restriction shall not apply if. (a) after payment of the "benefits" (as defined below) to the Participants to whom the provisions of this Section (B) are applicable, the remaining value of Plan assets equals or exceeds 110% of the value of current liabilities within the meaning of Section 4120)(7) of the Internal Revenue Code and regulations issued with respect thereto; or (b) the value of the 'benefits' (as defined below) for such Participant is less than 1% of the value of current liabilities within the meaning of Section 4120)(7) of the Internal Revenue Code and regulations issued with respect thereto. (3) For the purposes of this Section (B), the term 'benefit' shall have the meaning assigned in Treasury Regulation 1.401(a)(4)-5(c) and shall include loans in excess of the amounts set forth in Section 72(p)(2)(A) of the Internal Revenue Code, any periodic income, any withdrawal values payable to a living Employee, and any death benefits not provided for by insurance on the Employee's life. 4-10 4.3 BENEFITS NOFORFEITABLE IF PLAN IS TERMINATED -------------------------------------------- In the event of the termination or partial termination of the Plan, the rights of each affected Participant in the Plan to benefits accrued to such date of termination, to the extent then funded, shall be nonforfeitable, where such benefits shall be determined and distributed as provided in Section 4.5 hereof; provided, however, if the participation in the Plan of one or more but not all Employers that are members of a group of Employers with respect to which the Plan represents a single plan is terminated, the Plan shall not be considered to have been terminated for the purposes of this Section 4.3 (although a partial termination of the Plan may result because of such termination of participation). Unless specifically, required otherwise by law or by rules or regulations of the Internal Revenue Service, the nonforfeitable rights granted to Participants under the provisions of this Section shall not apply with respect to (i) any benefits (or portions thereof that have been cashed out, whether voluntarily or involuntarily, under the provisions hereof and that have not been reinstated (by repayment or by the reinstatement of Credited Service accrued prior to the date of such cashout) in accordance with the provisions hereof prior to the date of the termination or partial termination of the Plan or (ii) any nonvested benefits at the date of termination of service of a terminated or retired Participant whose service was terminated prior to the date of termination or partial termination of the Plan. 4.4 MERGER OF PLAN -------------- In the case of the merger or consolidation of the Plan with, or the transfer of assets or liabilities to, another qualified retirement plan, each Participant must be entitled to receive a benefit, upon termination of such other retirement plan after such merger, consolidation or transfer, which is at least equal to the benefit which he would have been entitled to receive immediately before the merger, consolidation or transfer if the Plan had been terminated at that time. 4.5 TERMINATION OF PLAN AND DISTRIBUTION OF TRUST FUND -------------------------------------------------- In the event the Primary Sponsor shall be the subject of a Change of Ownership or Effective Control, the Plan will automatically be terminated. Upon termination of the Plan in accordance with the provisions hereof, the share of the assets of the Trust Fund available for distribution to the affected Participants and Beneficiaries shall be allocated and distributed in accordance with the following procedure. (A) The Committee shall determine the date of distribution and the share in the value of the assets of the Trust Fund that is attributable to each Employer or group of Employers with respect to which the Plan represents a single plan. (B) The distribution of the asset value will, subject to the provisions of Section 417(e)(1) of the Internal Revenue Code, be provided by the purchase of insured annuities from a company or companies selected by the Committee for each class of Participants and other persons entitled to benefits under the Plan, as specified in (C) below, except that, in lieu of the purchase of an annuity, a lump-sum distribution shall be made to or on behalf of a Participant if the present value actuarial equivalent of the Particpant's Accrued Benefit exceeds $5,000 and the 4-11 Participant elects a lump sum distribution or (i) the actuarially equivalent lump sum value of the benefit to be distributed to him or on his behalf under the provisions of this Section 4.5 is equal to or less than $5,000, or is equal to or less than such larger amount that is permitted as an involuntary cashout of benefits under rules and regulations of the Internal Revenue Service and Pension Benefit Guaranty Corporation, and (ii) such distribution may be made without the necessity of having the consent of the recipient under any applicable rules or regulations of the Internal Revenue Service or Pension Benefit Guaranty Corporation. Any annuities purchased pursuant to the provisions of this Section 4.5 will be subject to the provisions hereof pertaining to the Qualified Joint and 50% Survivor Annuity Option and to the Qualified Preretirement Survivor Annuity. (C) The Committee shall determine the asset value available for distribution on behalf of each Employer or group of Employers with respect to which the Plan represents a single plan after taking into account the expenses of such distribution. After having determined such asset value available for distribution to each such Employer or group of Employers, as the case may be, and subject to the applicable provisions of any Supplement hereto pertaining to the distribution of assets upon the termination of the Plan, the Committee shall allocate such asset value (allocated to the particular Employer or group of Employers) as of the date of termination of the Plan in accordance with Section 4044 of the Employee Retirement Income Security Act of 1974, as amended. (D) In the event there be asset value remaining after satisfaction of all liabilities of the Plan to Participants and Beneficiaries, the Plan shall be amended in order to allocate any such residual assets, after purchase of annuities for inactive Participants, to the active Participants in the plan on such date of plan termination. The amendment to the Plan shall provide an additional benefit equal to the Participant's Final Average Monthly Compensation multiplied by his Credited Service as of the date of termination further multiplied by a percentage which will exactly eliminate the residual assets based upon the mortality and interest rate assumptions described in Section 1.1(B)(2) of the Plan. If the Plan terminates, the benefit for Participants in the active service of the Primary Sponsor shall be paid in a lump sum as soon as practical after approval of the appropriate governmental agencies. For the purpose of this Section, Change in Ownership or Effective Control shall be defined and deemed to have occurred if (1) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Primary Sponsor where such acquisition causes such person to own twenty percent (20%) or more of the combined voting power of the then outstanding voting securities of the Primary Sponsor entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this Subsection (1), the following acquisitions shall not be deemed to result in a Change of Ownership or Effective Control: (A) any acquisition directly from the Primary Sponsor, (B) any acquisition by the Primary 4-12 Sponsor, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Primary Sponsor or any corporation controlled by the Primary Sponsor or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of Subsection (3) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Corporation Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Primary Sponsor, such subsequent acquisition shall be treated as an acquisition that causes such Person to own twenty percent (20%) or more of the Outstanding Corporation Voting Securities; or (2) individuals who as of the date hereof, constitute the Board of Directors of the Primary Sponsor (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of the Primary Sponsor; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Primary Sponsor's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of the Primary Sponsor; or (3) the shareholders of the Primary Sponsor approve of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Primary Sponsor ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than sixty percent (60%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Primary Sponsor or all or substantially all of the Primary Sponsor's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of the Primary Sponsor or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, twenty 4-13 percent (20%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (4) approval by the shareholders of the Primary Sponsor of a complete liquidation or dissolution of the Primary Sponsor. The successful closing of a merger agreement between National Commerce Bancorporation and CCB Financial Corporation on or before December 31, 2000 shall not be considered a Change of Ownership or Effective Control for the purposes of this Plan. (E) The order of priorities for, and the amounts and methods of, the distributions set forth in (C) above and the rights of Participants and Beneficiaries to benefits under the Plan shall be subject (i) to the distribution rules set forth in the Plan, (ii) to the limitations provided by Section of the Plan, (iii) to any changes, including the recapture of any prior distributions to Participants, as may be ordered by the Pension Benefit Guaranty Corporation and (iv) to any changes required by the Internal Revenue Service as a condition for issuing a favorable determination letter stating that the distribution of assets will not adversely affect the continued qualified status of the Plan under Section 401(a) of the Internal Revenue Code. (F) As soon as practicable after both (a) the date that the assets may be distributed under the rules and regulations of the Pension Benefit Guaranty Corporation and (b) the date that a favorable determination letter is received from the Internal Revenue Service stating that in its opinion the method of distribution will not adversely affect the continued qualified status of the Plan under Section 401(a) of the Internal Revenue Code, the Committee shall direct the Trustee to distribute the assets to the affected parties in accordance with such method. 4.6 SPECIAL PROVISIONS THAT APPLY IF PLAN IS TOP-HEAVY -------------------------------------------------- The provisions of this Section 4.6 shall apply if the Superseded Plan was or the Plan is a "top-heavy plan" within the meaning of Section 416(g) of the Internal Revenue Code with respect to any Plan Year beginning after December 31, 1983. (A) Determination of Plan Years in Which Plan is Top-heavy: The Plan shall ------------------------------------------------------- be top-heavy with respect to an applicable Plan Year if: (1) either: (a) any Participant, former Participant or Beneficiary in the Plan is a 'key Employee" within the meanings of Sections 416(i)(1) and 416(i)(5) of the 4-14 Internal Revenue Code (hereinafter referred to in this Section 4.6 as "Key-Employees"); or (b) the Plan is required to be combined with any other plan, which is included in the Aggregation Group (as defined below) and which has a participant who is a Key Employee, in order to enable such other plan to meet the requirements of Section 401(a)(4) or Section 410 of the Internal Revenue Code; and (2) the ratio (determined in accordance with Section 416 of the Internal Revenue Code) as of the last day of the preceding Plan Year or, in the case of the first Plan Year, the last day of such first Plan Year (such day, whether applicable to the first Plan Year or to subsequent Plan Years, is hereinafter referred to in this Section 4.6 as the 'Determination Date') of: (a) the sum of (i) the present value of the cumulative accrued benefits for all Key Employees under all defined benefit plans included in the Aggregation Group plus (ii) the aggregate of the individual accounts of all Key Employees under all defined contribution plans included in such Aggregation Group; to (b) a similar sum determined for all Participants, former Participants and Beneficiaries - excluding any such Participant or former Participant (or his Beneficiary) who was a Key Employee for any prior Plan Year but who is not currently a Key Employee and also excluding, for Plan Years beginning after December 31, 1984, any Participant or former Participant (or his Beneficiary) who has not at any time during the five-year period ending on the Determination Date performed services for any employer maintaining a plan included in the Aggregation Group - under all defined benefit plans and defined contribution plans included in such Aggregation Group; is greater than 60%. For the purposes of this Section 4.6, the Aggregation Group shall mean the Plan plus all other defined benefit plans and defined contribution plans (including any such plans that terminated during the five-year period ending on the Determination Date), if any, maintained by the Controlled Group Members; provided, however, that any defined benefit plan or defined contribution plan of any Controlled Group Member that (i) does not have any participant who is a Key Employee and (ii) is not required to be combined with any other plan, which is included in the Aggregation Group and which has a participant who is a Key Employee, in order to enable such other plan to meet the requirements of Section 401(a)(4) or Section 410 of the Internal Revenue Code, shall be included in the Aggregation Group only if such defined benefit plan or defined contribution plan, together with other plans that are included in the Aggregation Group, 4-15 as combined group satisfy the requirements of Sections 401(a)(4) and 410 of the Internal Revenue Code. The present value of an accrued benefit under the Plan shall, for the purposes of this Section 4.6, be determined as of the most recent valuation date that (i) is used for the Plan Year for computing Plan costs for minimum funding purposes (regardless of whether a valuation is actually performed for that year) and (ii) is within the 12-month period ending on the applicable Determination Date (such valuation date is herein referred to in this Section 4.6 as the 'Valuation Date'). Such present value of accrued benefits under the Plan shall be computed using 5% interest and the mortality table used for such Plan Year for computing Plan costs for minimum funding purposes. The present value of the cumulative accrued benefits under the other defined benefit plans included in the Aggregation Group and the aggregate of the individual accounts under the defined contribution plans included in such Aggregation Group shall be determined separately for each such plan in accordance with Section 416 of the Internal Revenue Code and regulations issued with respect thereto as of the "determination date" that is applicable to each such separate plan and that falls within the same calendar year that the Determination Date applicable to the Plan falls. Unless required other-wise under Section 416 of the Internal Revenue Code and regulations issued thereunder, a Participant's (or Beneficiary's) accrued benefit under the Plan shall be equal to the sum of: (1) an amount equal to either: (a) if his service has not been terminated and he has not reached his Normal Retirement Date as of the Valuation Date, the Accrued Benefit that he has accrued as of the Valuation Date; (b) if his service has not been terminated and be has reached his Normal Retirement Date as of the Valuation Date, the monthly retirement income to which he would have been entitled under the normal retirement provisions of the Plan if he had retired on the Valuation Date; or (c) if his service has been terminated as of the Valuation Date, the amount of retirement income or other benefit that is payable on his behalf under the Plan on and after the Valuation Date; plus (2) the aggregate distributions made on his behalf during the five-year period ending on the Determination Date; 4-16 provided, however, that his estimated accrued benefit between the Valuation Date and Determination Date applicable to the first Plan Year shall be included as part of his accrued benefit with respect to the first Plan Year only. Any provisions hereof to the contrary notwithstanding and solely for the purpose of determining if the Plan is top-heavy with respect to an applicable Plan Year beginning after December 31, 1986, the accrued benefit of any Employee who is not a Key Employee shall be determined under the method which is used for accrual purposes for all defined benefit plans included in the Aggregation Group or, if a single method is not used for all such defined benefit plans, the accrued benefit of such Employee shall be determined as though it accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rule of Section 41 1 (b)(1)(C) of the Internal Revenue Code. (B) Minimum Vesting Provisions if Plan Becomes Top-Heavy: Any other ----------------------------------------------------- provision of the Plan to the contrary notwithstanding, the Initial Vesting Date of a Participant in the Plan, who has accrued an Hour of Service during any Plan Year that is subsequent to the last Plan Year that the Plan was not top-heavy, for the purpose of determining his eligibility for the benefit provided under Section 2.4(A) hereof during any Plan Year that is subsequent to the last Plan Year that the Plan was not top-heavy, shall not be later than (i) the date as of which he completes two years of Vesting Service or (ii) the first day of the Plan Year immediately following the last Plan Year that the Plan was not top-heavy, whichever is later, but the Vested Percentage of the Participant for the purposes of Section 2.4(A)(1) shall be 100% with respect to the portion of his Accrued Benefit that is attributable to his own contributions, if any, and shall not be less than the percentage specified in the schedule below, based upon the Participant's number of years (ignoring fractions) of Vesting Service as of the date of termination of his service, with respect to the portion of his Accrued Benefit that is attributable to employer contributions: Years of Vesting Vested Service Percentage ---------------- ---------- Less than 2 0% 2 20% 3 40% 4 60% 5 or More 100% In the event that the Plan ceases to be top-heavy with respect to any subsequent Plan Year, the following provisions will apply with respect to the minimum benefits to which such a Participant is entitled under Section 2.4(A) hereof during such subsequent Plan Years that the Plan is not top-heavy: (1) if the Participant had not completed at least two years of Vesting Service as of the last day of the last Plan Year during which the Plan was top-heavy, his nonforfeitable right to the benefits to which he is entitled under Sect-ion 2.4(A) hereof shall be determined as though the Plan had never been top-heavy; (2) if the Participant had completed at least two but had not completed at least three years of Vesting Service as of the last day of the last Plan Year during which the Plan was top-heavy, he shall be eligible for a minimum benefit payable under 4-17 Section 2.4(A) hereof; such minimum benefit provided under Section 2.4(A)(1) shall be based upon (a) 100% of the portion of his Accrued Benefit that he has accrued as of the date of termination of his service that is attributable to his own contributions, if any, plus (b) the product of (i) the portion of the Accrued Benefit that he had accrued as of the date of termination of his service that is attributable to employer contributions multiplied by (ii) his Vested Percentage determined as of the last day of the last Plan Year during which the Plan was top-heavy; (3) if the Participant had completed at least three years of Vesting Service as of the last day of the last Plan Year during which the Plan was top-heavy, he shall be eligible for the benefit provided under Section 2.4(A) hereof, but the Participant's Vested Percentage shall be determined in the same manner as though the Plan had remained top-heavy; and (4) the Accrued Benefit that a Participant, whose Vesting Service includes service that was accrued on or prior to the last day of the last Plan Year that the Plan was top-heavy, has accrued as of any give date shall not be less than the actuarial equivalent of (a) the benefit provided on his behalf under Section 4.6(C) (1) below as of such given date plus (b) the benefit provided on his behalf under Section 4.6(C)(2)(a) below as of the last day of the last Plan Year during which the Plan was top-heavy less (c) the amount of the benefit provided on his behalf under Section 4.6(C)(2)(b) below as of such given date. (C) Minimum Benefit If Plan Becomes Top-Heavy: In the event that the ------------------------------------------ service of a Participant is terminated on or after his Initial Vesting Date for any reason, the retirement income payable to the Participant under the provisions of Section 2.1, 2.2, 2.3 or 2.4(A) hereof or, if the service of the Participant is terminated by reason of his death, the retirement income which he has accrued as of the date of his death that is used to determine the benefit payable on his behalf under the provisions of Section 2.4(B) hereof, whichever is applicable, shall not be less than that amount of retirement income which is actuarially equivalent (based upon the interest and mortality assumptions that are being used under the Plan as of the date of his retirement or termination of service to determine actuarially equivalent non-decreasing annuities) to an amount equal to the excess, if any, of: (1) a monthly retirement income payable to the Participant for life (with w ancillary benefits) commencing at his Normal Retirement Date in an amount equal to (i) 2% of his 'IRC 416 Final Average Monthly Compensation' multiplied by (ii) his number of years of Vesting Service, not in excess of 10 years, that were accrued during those Plan Years in which the Plan was top-heavy, with the resulting product of (i) and (ii) multiplied by (iii) his Vested Percentage at the date of his retirement or termination of service; provided, however, if the Participant retires after his Normal Retirement Date, the amount of the monthly retirement income determined under this Subparagraph (a) shall not be less than the actuarial equivalent of the monthly retirement income determined in accordance with this subparagraph that would have been payable to the Participant if he had retired on his Normal Retirement Date; 4-18 over (2) the monthly retirement income payable to the Participant for life (with no ancillary benefits) commencing at his Normal Retirement Date in an amount equal to the sum of: (a) such amount of income, if any, that he has a nonforfeitable right to receive and that is attributable to employer contributions and is payable to the Participant under the other defined benefit plans, if any, which are included in the Aggregation Group; plus (b) such amount of income that can be provided on an actuarially equivalent basis (based upon the interest and mortality assumptions that are being used under the Plan as of the date of his retirement or termination of service to determine actuarially equivalent non-decreasing annuities) by the amounts, if any, that he has a nonforfeitable right to receive and that are attributable to employer contributions and forfeitures that are credited to his account under the defined contribution plans, if any, included in the Aggregation Group; provided, however, if the Aggregation Group includes one or more defined contribution plans and if, with respect to each Plan Year that the Plan is top-heavy, the Participant has received an allocation of employer contributions and forfeitures to his account under such defined contribution plan or plans which is equal to or greater than 5% of the IRC 415 Compensation that he received during such Plan Year from the employers maintaining plans included in the Aggregation Group, the minimum benefit described above in this Section 4.6(C) shall not apply to such Participant. For the purposes of this Section 4.6(C), a Participant's "IRC 416 Final Average Monthly Compensation" shall be equal to his average monthly rate of IRC 415 Compensation for the five consecutive calendar years, which are prior to the January 1st immediately following (i) the date of the Participant's retirement or termination of service or (ii) the close of the last Plan Year in which the Plan is top-heavy, whichever is earlier, during which he received the highest aggregate IRC 415 Compensation. Such average monthly rate will be determined by dividing the total of such IRC 415 Compensation that he received during such five-consecutive-calendar year period from the employers maintaining plans included in the Aggregation Group by the product equal to 12 times the number of years of Vesting Service which be accrued during such five-calendar-year period. In the event that the Participant does not receive both IRC 415 Compensation and Vesting Service during a calendar year or calendar years, such calendar year or calendar years during which he did not receive both IRC 415 Compensation and Vesting Service shall be ignored and excluded in determining the five consecutive calendar years during which he received the highest aggregate IRC 415 Compensation. 4-19 SECTION 5 --------- MISCELLANEOUS PROVISIONS REGARDING PARTICIPANTS ----------------------------------------------- 5.1 PARTICIPANTS TO FURNISH REQUIRED INFORMATION -------------------------------------------- Each Participant, his spouse and his Beneficiaries and joint pensioners will furnish to the Committee such information as the Committee considers necessary or desirable for purposes of administering the Plan, and the provisions of the Plan respecting any payments thereunder are conditional upon the Participant's, Beneficiary's or joint pensioner's furnishing promptly such true, full and complete information as the Committee may request. Each Participant will submit proof of his age and marital status and proof of the age and continued life of each Beneficiary and joint pensioner designated or selected by him to the Committee at such time as required by the Committee. The Committee will, if such proof of age, marital status or continued life is not submitted as required, use as conclusive evidence thereof, such information as is deemed by it to be reliable, regardless of the source of such information. Any adjustment required by reason of lack of proof or the misstatement of the age of persons entitled to benefits hereunder, by the Participant or otherwise, will be in such manner as the Committee deems equitable. Any notice or information which, according to the terms of the Plan or the rules of the Committee, must be filed with the Committee, shall be deemed so filed at the time that it is actually received by the Committee. The Employer, the Committee, and any person or persons involved in the administration of the Plan shall be entitled to rely upon any certification, statement, or representation made or evidence furnished by an Employee, Participant, Beneficiary or joint pensioner with respect to his age or other facts required to be determined under any of the provisions of the Plan and shall not be liable on account of the payment of any monies or the doing of any act or failure to act in reliance thereon. Any such certification, statement, representation or evidence, upon being duly made or furnished, shall be conclusively binding upon the person furnishing same; but it shall not be binding upon the Employer, the Committee, or any other person or persons involved in the administration of the Plan, and nothing herein contained shall be construed to prevent any of such parties from contesting any such certification, statement, representation or evidence or to relieve the Employee, Participant, Beneficiary or joint pensioner from the duty of submitting satisfactory proof of any such fact. 5.2 BENEFICIARIES ------------- Subject to the provisions of the following paragraphs of this section, each Participant may, on a form provided for that purpose, signed and filed with the Committee, designate a Beneficiary to receive the benefit, if any, which may be payable under the Plan in the event of his death, and each designation may be revoked by such Participant by signing and filing with the Committee a new designation of Beneficiary form. 5-1 If a deceased Participant, who has been married to his spouse throughout the one-year period immediately preceding his death, has designated a person other than his spouse as his Beneficiary and such spouse has not consented in accordance with the provisions of Section 4.1(E) hereof, either after the date of the Participant's separation from service or on or after the date that the Participant attained the age of 35 years, to such other person being designated as the Beneficiary, the provisions of Section 4.1(D) hereof, relating to the qualified preretirement survivor annuity payable to his surviving spouse, will apply in the event of his death on or after his Initial Vesting Date, and the Participant will automatically be deemed to have changed his designation of Beneficiary to the extent necessary to comply with the provisions of Section 4.1(D). If a deceased Participant who had a spouse at the date of his death failed to designate a Beneficiary in accordance with the provisions of this section, he shall be deemed to have designated his spouse as his Beneficiary. If a deceased Participant who had no spouse at the date of his death failed to designate a Beneficiary in accordance with the provisions of this section or if a deceased Participant (whether or not he has a surviving spouse at the date of his death) had previously designated a Beneficiary but no designated Beneficiary is surviving at the date of his death, the death benefit, if any, that may be payable under the Plan with respect to such deceased Participant may be paid, in the discretion of the Committee but subject to the provisions of Sections 4.1(D) and 4.1(E) hereof if the spouse of such deceased Participant is surviving, either to: (1) any one or more of the persons comprising the group consisting of the Participant's spouse, the Participant's descendants, the Participant's parents or the Participant's heirs-at-law, and the Committee may direct the payment of the entire benefit to any member of such group or the apportionment of such benefit among any two or more of them in such shares as the Committee, in its sole discretion, shall determine; or (2) the estate of such deceased Participant; or in the event the Committee does not so direct any of such payments, the Committee may elect to have a court of applicable jurisdiction determine to whom a payment or payments shall be paid. In any of such cases, if the commuted value of the remaining monthly income payments is equal to or less than the maximum amount that is permissible as an involuntary cashout of accrued benefits under Sections 411(a)(11) and 417(e) of the Internal Revenue Code and regulations issued with respect thereto, the commuted value of the remaining payments shall, subject to the provisions of Section 3.2 hereof, be paid in a lump sum. Any payment made to any person pursuant to the provisions of this Section 5.2 shall operate as a complete discharge of all obligations under the Plan with respect to such deceased Participant and shall not be subject to review by anyone but shall be final, binding and conclusive on all persons ever interested hereunder. 5-2 5.3 CONTINGENT BENEFICIARIES ------------------------ In the event of the death of a Beneficiary who survives the Participant and who, at the Beneficiary's death, is receiving benefits pursuant to the provisions of the Plan within any certain period specified under the Plan with respect to which death benefits are payable under the Plan after the Participant's death, the same amount of monthly retirement income that the Beneficiary was receiving shall be payable for the remainder of such specified certain period to a person designated by the Participant (in the manner provided in Section 5.2) to receive the remaining death benefits, if any, payable in the event of such contingency or, if no person was so named, then to a person designated by the Beneficiary (in the manner provided in Section 5.2) of the deceased Participant to receive the remaining death benefits, if any, payable in the event of such contingency; provided, however, that if no person so designated be living upon the occurrence of such contingency, then the remaining death benefits, if any, shall be payable for the remainder of such specified certain period, in the discretion of the Committee, either to: (1) all or any one or more of the persons comprising the group consisting of the Participant's spouse, the Beneficiary's spouse, the Participant's descendants, the Beneficiary's descendants, the Participant's parents, the Beneficiary's parents, the Participant's heirs-at-law or the Beneficiary's heirs-at-law, and the Committee may direct the payment of the entire benefit to any member of such group or the apportionment of such benefit among any two or more of them in such shares as the Committee, in its sole discretion, shall determine; or (2) the estate of such deceased Beneficiary; or in the event the Committee does not so direct any of such payments, the Committee may elect to have a court of applicable jurisdiction determine to whom a payment or payments shall be paid. In any of such cases, if the commuted value of the monthly income payments due for the remainder of the specified certain period is equal to or less than the maximum amount that is permissible as an involuntary cashout of accrued benefits under Sections 411(a)(11) and 417(e) of the Internal Revenue Code and regulations issued with respect thereto, the commuted value of the remaining payments shall, subject to the provisions of Section 3.2 hereof, be paid in a lump sum. Any payments made to any person pursuant to the provisions of this Section 5.3 shall operate as a complete discharge of all obligations under the Plan with respect to such deceased Beneficiary and shall not be subject to review by anyone but shall be final, binding and conclusive on all persons ever interested hereunder. 5.4 PARTICIPANT'S RIGHTS IN TRUST FUND ---------------------------------- No Participant or other person shall have any interest in or any right in, to or under the Trust Fund, or any part of the assets held thereunder, except as to the extent expressly provided in the Plan. 5-3 5.5 BENEFITS NOT ASSIGNABLE ----------------------- Except to the extent required to comply with a qualified domestic relations order as described in Sections 401(a)(13) and 414(p) of the Internal Revenue Code, no benefits, rights or accounts shall exist under the Plan which are subject in any manner to voluntary or involuntary anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt so to anticipate, alienate, transfer, assign, pledge, encumber or charge the same shall be null and void; nor shall any such benefit, right or account under the Plan be in any manner liable for or subject to the debts, contracts, liabilities, engagements, torts or other obligations of the person entitled to such benefit, right or account; nor shall any benefit, right or account under the Plan constitute an asset in case of the bankruptcy, receivership or divorce of any person entitled under the Plan; and any such benefit, right or account under the Plan shall be payable only directly to the Participant or Beneficiary, as the case may be. Where a qualified domestic relations order has been received by the Committee, the terms and benefits of the Plan will be considered to have been modified with respect to the Participant affected to the extent that such order requires benefits to be paid to specified individuals other than the Participant. 5.6 BENEFITS PAYABLE TO MINORS AND INCOMPETENTS ------------------------------------------- Whenever any person entitled to payments under the Plan shall be a minor or under other legal disability or in the sole judgment of the Committee shall otherwise be unable to apply such payments to his own best interest and advantage (as in the case of illness, whether mental or physical, or where the person not under legal disability is unable to preserve his estate for his own best interest), the Committee may in the exercise of its discretion direct all or any portion of such payments to be made in any one or more of the following ways unless claim shall have been made therefor by an existing and duly appointed guardian, tutor, conservator, committee or other duly appointed legal representative, in which event payment shall be made to such representative: (A) directly to such person unless such person shall be an infant or shall have been legally adjudicated incompetent at the time of the payment; (B) to the spouse, child, parent or other blood relative to be expended on behalf of the person entitled or on behalf of those dependents as to whom the person entitled has the duty of support; or (C) to a recognized charity or governmental institution to be expended for the benefit of the person entitled or for the benefit of those dependents as to whom the person entitled has the duty of support. The decision of the Committee will, in each case, be final and binding upon all persons, and the Committee shall not be obliged to see to the proper application or expenditure of any payments so made. Any payment made pursuant to the power herein conferred upon the Committee shall operate as a complete discharge of the obligations of the Trustee and of the Committee. 5-4 5.7 CONDITIONS OF EMPLOYMENT NOT AFFECTED BY PLAN --------------------------------------------- The establishment and maintenance of the Plan will not be construed as conferring any legal rights upon any Participant to the continuation of his employment with the Employer, nor will the Plan interfere with the right of the Employer to discipline, lay off or discharge any Participant. The adoption and maintenance of the Plan shall not be deemed to constitute a contract between the Employer and any Employee or to be a consideration for, inducement to, or condition of employment of any person. 5.8 NOTIFICATION OF MAILING ADDRESS ------------------------------- Each Participant and other person entitled to benefits hereunder shall file with the Committee from time to time, in writing, his post office address and each change of post office address, and any check representing payment hereunder and any communication addressed to a Participant, a former Participant, a Beneficiary or a pensioner hereunder at his last address filed with the Committee (or, if no such address has been filed, then at his last address as indicated on the records of the Employer) shall be binding on such person for all purposes of the Plan, and neither the Committee nor the Trustee shall be obliged to search for or ascertain the location of any such person. If the Committee, for any reason, is in doubt as to whether retirement income payments are being received by the person entitled thereto, it may, by registered mail addressed to such person and to such person's designated Beneficiary, if any, at their address last known to the Committee, notify such person and his Beneficiary that all unmailed and future retirement income payments shall be henceforth withheld until the Committee is provided with evidence of such person's continued life and his proper mailing address or with evidence of such person's death. In the event that (i) such notification is mailed to such person and his designated Beneficiary, (ii) the Committee is not furnished with evidence of such person's continued life and proper mailing address or with evidence of his death within three years of the date such notification was mailed and (iii) the Committee is unable to find any person to whom payment is due under the provisions of the Plan within three years of the date such notification was mailed, all retirement income and other benefit payments due shall be forfeited at the end of such three-year period following the date such notification was mailed; provided, however, if claim for any forfeited benefit is subsequently made by any such person to whom payment is due under the Plan, such forfeited benefits due such person shall be reinstated. 5.9 WRITTEN COMMUNICATIONS REQUIRED ------------------------------- Any notice, request, instruction, or other communication to be given or made hereunder shall be in writing and may be delivered to the addressee personally, may be delivered to the addressee by a commercial delivery service at the last address for notice shown on the Committee's records, or may be deposited in the United States mail fully postpaid and properly addressed to such addressee at the last address for notice shown on the Committee's records. 5-5 5.10 BENEFITS PAYABLE AT OFFICE OF TRUSTEE ------------------------------------- All benefits hereunder, and installments thereof, shall be payable at the office of the Trustee. 5.11 APPEAL TO COMMITTEE ------------------- A Participant or Beneficiary who feels he is being denied any benefit or right provided under the Plan must file a written claim with the Committee. All such claims shall be submitted on a form provided by the Committee which shall be signed by the claimant and shall be considered filed on the date the claim is received by the Committee. Upon the receipt of such a claim and in the event the claim is denied, the Committee shall, within 90 days after its receipt of such claim, provide such claimant a written statement which shall be delivered or mailed to the claimant by certified or registered mail to his last known address, which statement shall contain the following: (A) the specific reason or reasons for the denial of benefits; (B) a specific reference to the pertinent provisions of the Plan upon which the denial is based; (C) a description of any additional material or information that is necessary; and (D) an explanation of the review procedure provided below; provided, however, in the event that special circumstances require an extension of time for processing the claim, the Committee shall provide such claimant with such written statement described above not later than 180 days after receipt of the claimant's claim, but, in such event, the Committee shall furnish the claimant, within 90 days after its receipt of such claim, written notification of the extension explaining the circumstances requiring such extension and the date that it is anticipated that such written statement will be furnished. Within 60 days after receipt of a notice of a denial of benefits as provided above, if the claimant disagrees with the denial of benefits, the claimant or his authorized representative must request, in writing, that the Committee review his claim and may request to appear before the Committee for such review. In conducting its review, the Committee shall consider any written statement or other evidence presented by the claimant or his authorized representative in support of his claim. The Committee shall give the claimant and his authorized representative reasonable access to all pertinent documents which the Committee deems pertinent and necessary for the preparation of his claim. Within 60 days after receipt by the Committee of a written application for review of his claim, the Committee shall notify the claimant of its decision by delivery or by certified or registered mail to his last known address; provided, however, in the event that special circumstances require an extension of time for processing such application, the Committee shall 5-6 so notify the claimant of its decision not later than 120 days after receipt of such application, but, in such event, the Committee shall furnish the claimant, within 60 days after its receipt of such application, written notification of the extension explaining the circumstances requiring such extension and the date that it is anticipated that its decision will be furnished. The decision of the Committee shall be in writing and shall include the specific reasons for the decision presented in a manner calculated to be understood by the claimant and shall contain reference to all relevant Plan provisions on which the decision was based. The decision of the Committee shall be final and conclusive. 5-7 SECTION 6 --------- MISCELLANEOUS PROVISIONS REGARDING THE EMPLOYER ----------------------------------------------- 6.1 CONTRIBUTIONS ------------- No contributions shall be required of or permitted to be made by any Participant. The Employer intends, but does not guarantee, to make annual contributions in amounts at least equal to the amounts, if any, required to meet the minimum funding requirements of Section 412 of the Internal Revenue Code, as specified in the actuary's valuation reports for the applicable periods of time. Subject to applicable provisions of law, neither the Employer nor any of its officers, agents or Employees, nor any member of its board of directors, nor any partner or sole proprietor, guarantees, in any manner the payment of benefits under the Plan. 6.2 EMPLOYER'S CONTRIBUTIONS IRREVOCABLE ------------------------------------ The Employer shall have no right, title or interest in the Trust Fund or in any part thereof, and no contributions made thereto shall revert to the Employer except such part of the Trust Fund, if any, that remains therein after the satisfaction of all liabilities to persons entitled to benefits under the Plan and except as provided in the following paragraph. All contributions to the Plan are made subject to the qualification of the Plan under Section 401 of the Internal Revenue Code and to their deductibility under Section 404 of said Code. In the event that the Plan represents a newly established retirement plan (and not an amendment of an existing retirement plan) with respect to an Employer and such qualification of the Plan is denied, the total contributions of the Employer, adjusted for any earnings or losses of the Trust Fund attributable thereto, shall be returned to the Employer within one year of the date of denial of qualification. In the event that a contribution either is made by a good faith mistake of fact or is disallowed. as a tax deductible expense under Section 404 of the Internal Revenue Code, the excess of the amount contributed over either the amount that would have been contributed if there had not been such a mistake or the amount that is allowed as a tax deductible expense, as the case may be, with such excess reduced by the net losses, if any, of the Trust Fund attributable thereto (but without any increase due to the net earnings, if any, of the Trust Fund attributable thereto), shall be returned to the Employer within one year of the date of the mistaken payment or the disallowance of the deduction, as the case may be. 6.3 FORFEITURES ----------- Forfeitures shall not be used to increase the benefits that any Participant would otherwise receive under the Plan at any time prior to the termination of the Plan but shall be anticipated in determining the costs under the Plan. 6-1 6.4 AMENDMENT OF PLAN ----------------- The Plan may be amended from time to time in any respect whatever by formal action on the part of the Primary Sponsor in the manner described in Section 6.7 hereof specifying such amendment, subject only to the following limitations: (A) Under no condition shall such amendment result in or permit the return or repayment to any Employer of any property held or acquired by the Trustee hereunder or the proceeds thereof or result in or permit the distribution of any such property for the benefit of anyone other than the Participants and their Beneficiaries or joint pensioners, except to the extent provided by Section 4.5 and Section 6.6 hereof with respect to termination of the Plan and expenses of administration, respectively. (B) Under no condition shall such amendment change the duties or responsibilities of the Trustee hereunder without its written consent. Except to the extent permissible to comply with any laws or regulations of the United States or of any state to qualify this as a tax-exempt plan and trust, no amendment may be made that would result in a slower rate of vesting under the Plan for any Participant who has completed at least three years of Vesting Service as of the effective date of such amendment or, if later, as of the date such amendment is adopted, unless such amendment provides that each such Participant may elect, during the period described below, to retain the rate of vesting in effect under the Plan prior to such amendment in lieu of the new rate of vesting. The period during which the election described in the preceding sentence may be made shall begin no later than the date the Plan amendment is adopted and shall end no earlier than 60 days after (i) the date the amendment is adopted, (ii) the effective date of such amendment or (iii) the date the Participant is notified in writing of the amendment by the Committee, whichever is the latest date to occur. Subject to the foregoing limitations, any amendment may be made retroactively which, in the judgment of the Committee, is necessary or advisable provided that such retroactive amendment does not deprive a Participant, without his consent, of a right to receive benefits hereunder which have already vested and matured in such Participant, except such modification or amendment as shall be necessary to comply with any laws or regulations of the United States or of any state to qualify this as a tax-exempt plan and trust. The participation in the Plan of Employers other than the Primary Sponsor shall not limit the power of the Primary Sponsor under the foregoing provisions, and all amendments by the Primary Sponsor to the Plan shall be binding upon all other Employers. Any Supplement to the Plan adopted by an Employer or Employers shall apply only to the Employees of the Employer or Employers adopting such supplement and shall not affect the continued operation of the Plan with respect to any other Employers. 6-2 6.5 TERMINATION OF PLAN ------------------- The Plan may be terminated by the Primary Sponsor at any time by formal action, in the manner described in Section 6.7 hereof, specifying (a) that the Plan is being terminated and (b) the date as of which the termination is to be effective. In the event the Plan is to be terminated, the Primary Sponsor shall notify the Committee and the Trustee of such termination. The Plan or participation in the Plan may be terminated in the manner described above with respect to one, but less than all, of the Employers theretofore parties hereto and the Plan continued for the remaining Employer or Employers. The Plan or participation in the Plan shall automatically terminate as to a particular Employer only upon dissolution of such Employer or upon its liquidation, merger or consolidation without provisions being made by its successor, if any, for the continuation of the Plan. In the event of the liquidation, dissolution, merger or consolidation of the Employer under such circumstances that there shall be a successor person, firm or corporation continuing and carrying on all or a substantial part of its business, such successor may be substituted for the Employer under the terms of the Plan by formal action on the part of such successor in the manner described in Section 6.7 hereof specifying its election to continue the Plan. 6.6 EXPENSES OF ADMINISTRTION ------------------------- The Employer may pay all expenses incurred in the establishment and administration of the Plan, including expenses and fees of the Trustee, but it shall not be obligated to do so, and any such expenses not so paid by the Employer shall be paid from the Trust Fund. 6.7 FORMAL ACTION BY EMPLOYER ------------------------- Any formal action herein permitted or required to be taken by an Employer shall be: (1) if and when a partnership, by written instrument executed by one or more of its general partners or by written instrument executed by a person or group of persons who has been authorized by written instrument executed by one or more general partners as having authority to take such action; (2) if and when a proprietorship, by written instrument executed by the proprietor or by written instrument executed by a person or group of persons who has been authorized by written instrument executed by the proprietor as having authority to take such action; (3) if and when a corporation, by resolution of its board of directors or other governing board, or by written instrument executed by a person or group of persons who has been authorized by resolution of its board of directors or other governing board as having authority to take such action; or (4) if and when a joint venture, by formal action on the part of the joint venturers in the manner described above. 6-3 SECTION 7 --------- ADMINISTRATION -------------- 7.1 ADMINISTRATION BY COMMITTEE --------------------------- The Plan will be administered by the Administrative Committee appointed by the Primary Sponsor by formal action on its part in the manner described in Section 6.7 hereof. Such Committee will consist of (a) a chairman and at least two additional members or (b) a single individual. Each member may, but need not, be a director, proprietor, partner, officer or Employee of any Employer, and each such member shall be appointed by the Primary Sponsor to serve until his successor shall be appointed in like manner. Any member of the Committee may resign by delivering his written resignation to the Primary Sponsor and to the other members, if any, of the Committee. The Primary Sponsor by formal action on its part in the manner described in Section 6.7 hereof may remove any member of the Committee by so notifying the member and other Committee members, if any, in writing. Vacancies on the Committee shall be filled by formal action on the part of the Primary Sponsor in the manner described in Section 6.7 hereof. The Committee, in its discretion, may delegate all or any part of its responsibilities of administering the provisions of the Plan with respect to any Employer or group of Employers to one or more individuals whom will be appointed by such Employer or group of Employers by formal action on its or their part in the manner described in Section 6.7 hereof. In such event, references to the "Committee" in any provisions hereof which apply with respect to such delegated responsibilities shall refer to such individuals instead of the Administrative Committee. 7.2 OFFICERS AND EMPLOYEES OF COMMITTEE ----------------------------------- The Committee may appoint a secretary who may, but need not, be a member of the Committee and may employ such agents, clerical and other services, legal counsel, accountants and actuaries as may be required for the purpose of administering the Plan. Any person or firm so employed may be a person or firm then, theretofore or thereafter serving the Employer in any capacity. The Committee and any individual member of the Committee and any agent thereof shall be fully protected when acting in a prudent manner and relying in good faith upon the advice of the following professional consultants or advisors employed by the Employer or the Committee: any attorney insofar as legal matters are concerned, any certified public accountant insofar as accounting matters are concerned and any enrolled actuary insofar as actuarial matters are concerned. 7.3 ACTION BY COMMITTEE ------------------- A majority of the members of the Committee shall constitute a quorum for the transaction of business and shall have full power to act hereunder. The Committee may act either at a meeting at which a quorum is present or by a writing subscribed by at least a majority of the members of the Committee then serving. Any written memorandum signed by the secretary or any member of the Committee who has been authorized to act on behalf of the Committee shall 7-1 have the same force and effect as a formal resolution adopted in open meeting. Minutes of all meetings of the Committee and a record of any action taken by the Committee shall be kept in written form by the secretary appointed by the Committee or, if no secretary has been appointed by the Committee, by an individual member of the Committee. The Committee shall give to the Trustee any order, direction, consent or advice required under the terms of the Trust Agreement, and the Trustee shall be entitled to rely on any instrument delivered to it and signed by the secretary or any authorized member of the Committee as evidencing the action of the Committee. A member of the Committee may not vote or decide upon any matter relating solely to himself or vote in any case in which his individual right or claim to any benefit under the Plan is particularly involved. If, in any case in which any Committee member is so disqualified to act, the remaining members cannot agree or if there is only one individual member of the Committee, the Primary Sponsor, by formal action on its part in the manner described in Section 6.7 hereof, will appoint a temporary substitute member to exercise all of the powers of a qualified member concerning the matter in which the disqualified member is not qualified to act. 7.4 RULES AND REGULATIONS OF COMMITTEE ---------------------------------- The Committee shall have the authority to make such rules and regulations and to take such action as may be necessary to carry out the provisions of the Plan and will, subject to the provisions of the Plan, decide any questions arising in the administration, interpretation and application of the Plan, which decisions shall be conclusive and binding on all parties. The Committee may allocate or delegate any part of its authority and duties as it deems expedient. 7.5 POWERS OF COMMITTEE ------------------- In order to effectuate the purposes of the Plan, the Committee shall have the power to construe the Plan and to make equitable adjustments for any mistakes or errors made in the administration of the Plan, and all such actions or determinations made by the Committee in good faith shall not be subject to review by anyone. The Committee is given the power to appoint, in its discretion, one or more Investment Managers to manage, including the power to acquire or dispose of, all or any portion of the assets of the Plan and Trust Fund. The Committee is also given the power to serve as paying agent for the Trust Fund, if it so desires, or to appoint, in its discretion, a paying agent or agents to disburse the benefits payable from the Trust Fund and to authorize and direct the Trustee to make distribution to the Committee as paying agent or to such other paying agent as the Committee shall direct in writing. 7.6 DUTIES OF COMMITTEE ------------------- The Committee shall, as a part of its general duty to supervise and administer the Plan: (1) determine all facts and maintain records with respect to any Employee's age, amount of Compensation, length of service, Hours of Service, Vesting Service, Credited Service and date of initial coverage under the Plan, and by application of the facts so determined and any other facts deemed material, determine the amount, if any, of benefit payable under the Plan on behalf of a Participant; 7-2 (2) establish, carry out and periodically review a funding policy and method consistent with the objectives of the Plan and the applicable lawful requirements of Title I of the Employee Retirement Income Security Act of 1974; provided, however, that any decisions pertaining to the amount and timing of contributions by the Employer to the Trust Fund are delegated to the Employer; (3) give the Trustee specific directions in writing with respect to: (a) the making of distribution payments, giving the names of the payees, the amounts to be paid and the time or times when payments shall be made; and (b) the making of any other payments which the Trustee is not by the terms of the Trust Agreement authorized to make without a direction in writing of the Committee; (4) furnish the Trustee with such information (including information relative to the liquidity needs of the Plan) as is deemed necessary for the Trustee to carry out the purposes of the Trust Agreement; (5) comply with all applicable lawful reporting and disclosure requirements of the Employee Retirement Income Security Act of 1974; (6) comply (or transfer responsibility for compliance to the Trustee) with all applicable Federal income tax withholding requirements for distribution payments imposed by the Tax Equity and Fiscal Responsibility Act of 1982; (7) engage on behalf of all Plan Participants an independent qualified public accountant to examine the financial statements and other records of the Plan for the purposes of an annual audit and opinion as to whether the financial statements and schedules in the annual report of the Plan are presented fairly in conformity with generally accepted accounting principles, unless such audit is waived by the Secretary of Labor or his delegate or unless such audit is otherwise not required; and (8) engage on behalf of all Plan Participants an enrolled actuary to prepare required actuarial statements, unless this requirement is waived by the Secretary of Labor or his delegate or unless such actuarial statements are otherwise not required. The foregoing list of express duties is not intended to be either complete or conclusive, and the Committee shall, in addition, exercise such other powers and perform such other duties as it may deem necessary, desirable, advisable or proper for the supervision and administration of the Plan. 7-3 7.7 INDEMNIFICATION OF MEMBERS OF COMMITTEE --------------------------------------- To the extent not covered by insurance or if there is a failure to provide full insurance coverage for any reason and to the extent permissible under corporate by-laws and other applicable laws and regulations, the Employers agree to hold harmless and indemnify the members of the Committee against any and all claims and causes of action by or on behalf of any and all parties whomsoever and all losses therefrom, including, without limitation, costs of defense and attorneys' fees, based upon or arising out of any act or omission relating to or in connection with the Plan and Trust Agreement other than losses resulting from any such person's fraud or willful misconduct. 7.8 ACTUARY ------- The actuary will do such technical and advisory work as the Committee or the Employer may request, including analysis of the experience of the Plan from time to time, the preparation of actuarial tables for the making of computations thereunder, and the submission of actuarial reports to the Primary Sponsor, which reports shall contain an actuarial valuation showing the financial condition of the Plan, a statement of the contributions to be made by the Employers and such other information as may be required by the Committee. The actuary shall be appointed by the Primary Sponsor to serve as long as it is agreeable to the Committee, the Primary Sponsor and the actuary. 7.9 FIDUCIARIES ----------- The Trustee is the named fiduciary hereunder with respect to the powers, duties and responsibilities of investment of the Trust Fund, and the Committee is the plan administrator and is the named fiduciary hereunder with respect to the other powers, duties and responsibilities of the administration of the Plan; provided, however, that certain powers, duties and responsibilities of each of said named fiduciaries are specifically delegated to others under the provisions of the Plan and Trust Agreement, and other powers, duties and responsibilities of any fiduciaries may be delegated by written agreement to others to the extent permitted under the provisions of the Plan and Trust Agreement. The powers and duties of each fiduciary hereunder, whether or not a named fiduciary, shall be limited to those specifically delegated to each of them under the terms of the Plan and Trust Agreement. It is intended that the provisions of the Plan and Trust Agreement allocate to each fiduciary the individual responsibilities for the prudent execution of the functions assigned to each fiduciary. None of the allocated responsibilities or any other responsibilities shall be shared by two or more fiduciaries unless such sharing shall be provided by a specific provision in the Plan or the Trust Agreement. If any of the enumerated responsibilities of a fiduciary are specifically waived by the Secretary of Labor, then such enumerated responsibilities shall also be deemed to be waived for the purposes of the Plan and Trust Agreement. Whenever one fiduciary is required by the Plan or the Trust Agreement to follow the directions of another fiduciary, the two fiduciaries shall not be deemed to have been assigned a share of any responsibility, but the responsibility of the fiduciary giving the directions shall be deemed to be his sole responsibility and the responsibility of the fiduciary receiving those directions shall be to follow same insofar 7-4 as such instructions on their face are proper under applicable law. Any fiduciary may employ one or more persons to render advice with respect to any responsibility such fiduciary has under the Plan or Trust Agreement. Each fiduciary may, but need not, be a director, proprietor, partner, officer or Employee of the Employer. Nothing in the Plan shall be construed to prohibit any fiduciary from: (1) serving in more than one fiduciary capacity with respect to the Plan and Trust Agreement; (2) receiving any benefit to which he may be entitled as a Participant or Beneficiary in the Plan, so long as the benefit is computed and paid on a basis that is consistent with the terms of the Plan as applied to all other Participants and Beneficiaries; or (3) receiving any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred in the performance of his duties with respect to the Plan, except that no person so serving who already receives full-time pay from an Employer shall receive compensation from the Plan, except for reimbursement of expenses properly and actually incurred. Each fiduciary shall be bonded as required by applicable law or statute of the United States, or of any state having appropriate jurisdiction, unless such bond may under such law or statute be waived by the parties to the Trust Agreement. The Employer shall pay the cost of bonding any fiduciary who is an Employee of the Employer. 7.10 APPLICABLE LAW -------------- The Plan will, unless superseded by federal law, be construed and enforced according to the laws of the State of Tennessee, and all provisions of the Plan will, unless superseded by federal law, be administered according to the laws of the said state. 7-5 SECTION 8 --------- TRUST FUND ---------- 8.1 PURPOSE OF TRUST FUND --------------------- The Trust Fund has been created and will be maintained for the purposes of the Plan, and the moneys thereof will be invested in accordance with the terms of the agreement and declaration of trust which forms a part of the Plan. All contributions will be paid into the Trust Fund, and all benefits under the Plan will be paid from the Trust Fund. 8.2 BENEFITS SUPPORTED ONLY BY TRUST FUND ------------------------------------- Subject to applicable provisions of law, any person having any claim under the Plan will look solely to the assets of the Trust Fund for satisfaction. 8.3 TRUST FUND APPLICABLE ONLY TO PAYMENT OF BENEFITS ------------------------------------------------- The Trust Fund will be used and applied only in accordance with the provisions of the Plan, to provide the benefits thereof, and no part of the corpus or income of the Trust Fund will be used for, or diverted to, purposes other than for the exclusive benefit of Participants and other persons thereunder entitled to benefits, except to the extent provided in Section 4.5 and Section 6.6 hereof with respect to termination of the Plan and expenses of administration, respectively. 8-1 IN WITNESS WHEREOF, National Commerce Financial Corporation has caused this instrument to be executed by its duly authorized officers on this day of --- , 2001, effective as of July 31, 2001. - -------------- (CORPORATE SEAL) NATIONAL COMMERCE FINANCIAL CORPORATION By: ----------------------------- Title: ----------------------------- FIRST SUPPLEMENT ---------------- TO -- NATIONAL COMMERCE FINANCIAL CORPORATION RETIREMENT PLAN ------------------------------------------------------- As Amended and Restated Effective August 1, 2001 (A) FIRST SUPPLEMENT A PART OF PLAN ------------------------------- (1) This FIRST SUPPLEMENT TO NATIONAL COMMERCE FINANCIAL CORPORATION RETIREMENT PLAN (herein referred to as the "First Supplement") forms a part of the National Commerce Financial Corporation Retirement Plan. (2) All terms used in this First Supplement shall have the meanings assigned to them in the provisions of the Plan unless otherwise qualified by the context. There shall be no duplication of benefits provided under the Plan and this First Supplement, and the actuarially equivalent benefits payable under one shall be inclusive of the actuarially equivalent benefits payable under the other unless specifically provided otherwise in the provisions of the Plan or this First Supplement. (B) SPECIAL PROVISIONS APPLICABLE TO PARTICIPANTS WHO WERE PARTICIPANTS IN THE -------------------------------------------------------------------------- NBC RETIREMENT PLAN AS OF FEBRUARY 28, 1994 ------------------------------------------- The provisions of this Section (B) shall apply only to those Participants who were active NBC Retirement Plan Participants as of February 28, 1994. For purposes of the provisions of Section (B)(1) and (B)(2) of the First Supplement, Final Average Monthly Compensation will be based on the assumption that the Participant's basic rate of Compensation as of January 1, 1994 (plus any bonus paid in January 1994) continues unchanged until his date of retirement or termination of service. However, a Participant who had attained the age of 55 as of February 28, 1994 shall have his Final Average Monthly Compensation determined on actual Compensation. (1) Minimum Normal Retirement Income: Subject to the provisions of Section -------------------------------- 4.1 of the Plan, the monthly amount of retirement income determined under Section 2.1(B) of the Plan which is payable in accordance with the provisions of Section 2.1(C) of the Plan to a Participant to whom the provisions of this Section (B) are applicable who retires on or after his Normal Retirement Date shall not be less than the sum of: (a) 1.65% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service; plus S1-1 (b) 0.65% of that portion, if any, of his Final Average Monthly Compensation that is in excess of the Covered Compensation that applies to him multiplied by his number of years of Credited Service that are not in excess of 35 years; provided, however, that such product shall not exceed (i) 0.75% of that portion, if any, of his Final Average Monthly Compensation at such given date that is in excess of the Covered Compensation that applies to him at such given date multiplied by (ii) his number of years of Credited Service at such given date that are not in excess of 35 years, with the resulting product multiplied by (iii) a factor that will effect a reduction of 1/180 for each month that his Normal Retirement Date precedes the date on which he will attain his Social Security Retirement Age. For purposes of the provisions of the First Supplement, "Social Security Retirement Age" shall have the meaning given such term by Section 415(b)(8) of the Internal Revenue Code and shall be: (a) age 65 years for a Participant whose date of birth is prior to January 1, 1938; (b) age 66 years for a Participant whose date of birth is on or after January 1, 1938 and is prior to January 1, 1955; and (c) age 67 years for a Participant whose date of birth is on or after January 1, 1955. (2) Minimum Early Retirement Income: Subject to the provisions of Section ------------------------------- 4.1 of the Plan, the monthly amount of retirement income determined under Section 2.2(B) of the Plan which is payable in accordance with the provisions of Section 2.2(C) of the Plan to a Participant to whom the provisions of this Section (B) are applicable who retires on or after his Early Retirement Date shall not be less than: (a) the amount equal to: (i) 1.65% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service which he would have accrued if he had continued in the service of the Employer until his Normal Retirement Date; multiplied by (ii) the fraction in which the numerator is the Credited Service that he has accrued to such given date and the denominator is the Credited Service that he would accrue on his Normal Retirement Date if he S1-2 continued in full-time service of the Employer after such given date until his Normal Retirement Date; multiplied by (iii) his Non-Integrated factor, as specified in the Section 2.2(B) of the plan, based upon the number of years and full months by which the Participant's Early Retirement Date precedes his Normal Retirement Date; plus (b) the amount equal to: (i) 0.65% of that portion, if any, of his Final Average Monthly Compensation that is in excess of the Covered Compensation that applies to him multiplied by his number of years of Credited Service which he would have accrued if he had continued in the service of the Employer until his Normal Retirement Date and that are not in excess of 35 years; provided, however, that such product shall not exceed (i) 0.75% of that portion, if any, of his Final Average Monthly Compensation at such given date that is in excess of the Covered Compensation that applies to him at such given date multiplied by (ii) his number of years of Credited Service at such given date that are not in excess of 35 years, with the resulting product multiplied by (iii) a factor that will effect a reduction of 1/180 for each month that his Normal Retirement Date precedes the date on which he will attain his Social Security Retirement Age. multiplied by (ii) the fraction in which the numerator is the Credited Service that he has accrued to such given date and the denominator is the Credited Service that he would accrue on his Normal Retirement Date if he continued in full-time service of the Employer after such given date until his Normal Retirement Date; multiplied by (iii) his IRS Defined Actuarial Reduction factor, as specified in Section 2.2(B) of the Plan, based upon the number of years and full months by which the Participant's Early Retirement Date precedes his Normal Retirement Date; S1-3 (C) RIGHT TO AMEND OR TERMINATE FIRST SUPPLEMENT -------------------------------------------- The provisions of Sections 6.4 and 6.5 of the Plan with respect to amendment and termination thereof shall apply with equal force to this First Supplement. S1-4 SECOND SUPPLEMENT ----------------- TO -- NATIONAL COMMERCE FINANCIAL CORPORATION RETIREMENT PLAN ------------------------------------------------------- As Amended and Restated Effective August 1, 2001 (A) SECOND SUPPLEMENT A PART OF PLAN -------------------------------- (1) This SECOND SUPPLEMENT TO NATIONAL COMMERCE FINANCIAL CORPORATION RETIREMENT PLAN (herein referred to as the "Second Supplement") forms a part of the National Commerce Financial Corporation Retirement Plan. (2) All terms used in this Second Supplement shall have the meanings assigned to them in the provisions of the Plan unless otherwise qualified by the context. There shall be no duplication of benefits provided under the Plan and this Second Supplement, and the actuarially equivalent benefits payable under one shall be inclusive of the actuarially equivalent benefits payable under the other unless specifically provided otherwise in the provisions of the Plan or this Second Supplement. (B) SPECIAL PROVISIONS APPLICABLE TO PARTICIPANTS WHO WERE PARTICIPANTS IN THE -------------------------------------------------------------------------- RETIREMENT PLAN FOR EMPLOYEES OF WEST BANK OF MEMPHIS ON MARCH 31, 1998 ----------------------------------------------------------------------- (1) The monthly retirement income payable in the manner described in Section 2.1(C) of the Plan to a Participant who was a participant in the Retirement Plan for Employees of Bank of West Memphis on March 31, 1998 and who retires on or after his Normal Retirement Date shall be an amount equal to the sum of (1) the Participant's Accrued Benefit as of March 31, 1998 under the terms of the Retirement Plan for Employees of Bank of West Memphis and (2) the amount determined under Section 2.1 of the Plan taking into account only the Participant's Credited Service after March 31, 1998. (2) The monthly retirement income payable in the manner described in Section 2.2(C) of the Plan to a Participant who was a participant in the Retirement Plan for Employees of Bank of West Memphis on March 31, 1998 and who retires prior to his Normal Retirement Date shall be an amount equal to the sum of (1) the Participant's early retirement benefit based on the Accrued Benefit as of March 31, 1998 under the terms of the Retirement Plan for Employees of Bank of West Memphis and (2) the amount determined under Section 2.2 of the Plan taking into account only the Participant's Credited Service after March 31, 1998. S2-1 (C) RIGHT TO AMEND OR TERMINATE SECOND SUPPLEMENT --------------------------------------------- The provisions of Sections 6.4 and 6.5 of the Plan with respect to amendment and termination thereof shall apply with equal force to this Second Supplement. S2-2 EX-10.3 5 dex103.txt NCFC SERP EFFECTIVE AUG. 1, 2001 NATIONAL COMMERCE FINANCIAL CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EFFECTIVE AUGUST 1, 2001 NATIONAL COMMERCE FINANCIAL CORPORATION SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -------------------------------------- This Supplemental Executive Retirement Plan, hereinafter referred to as the Plan, effective as of August 1, 2001, constitutes an amendment and restatement of both the National Bank of Commerce Supplemental Executive Retirement Plan (the "NBC Plan") and the CCB Financial Corporation Retirement Income Equity Plan (the "CCB Plan"), which plans are hereby merged into the Plan. The Plan is being adopted by National Commerce Financial Corporation to provide additional retirement income for certain key executives who are managerial or highly compensated employees within the meaning of Section 201(2) of the Employee Income Retirement Security Act of 1974, as amended. ARTICLE 1 - DEFINITIONS ----------------------- As used herein, the following terms shall have the following meanings unless a different meaning is plainly required by the context: 1.1 BASIC PLAN: The National Commence Financial Corporation Retirement Plan in ---------- effect on August 1, 2001 and as it may be amended from time to time. 1.2 BENEFICIARY: The party or parties entitled to receive a Participant's ----------- Benefit in the event of the Participant's death. 1.3 BENEFIT: The benefit payable to the Participant pursuant to Article 3, ------- Article 4 or Article 5. 1.4 BOARD: The Board of Directors of the Corporation. ----- 1.5 CHANGE IN CONTROL: A Change in Control shall be defined and deemed to have ----------------- occurred if (1) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Corporation where such acquisition causes such person to own twenty percent (20%) or more of the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this Subsection (1), the following acquisitions shall not be deemed to result in a Change in Control: (A) any acquisition directly from the Corporation, (B) any acquisition by the Corporation, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation or (D) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of Subsection (3) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Corporation Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (A) or (B) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Corporation, such subsequent acquisition shall be treated as an acquisition that causes such Person to own twenty percent (20%) or more of the Outstanding Corporation Voting Securities; or (2) individuals who as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) the shareholders of the Corporation approve of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than sixty percent (60%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Voting Securities, (B) no Person (excluding any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding 2 voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (4) approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. The successful closing of a merger agreement between National Commerce Bancorporation and CCB Financial Corporation on or before December 31, 2000 shall not be considered a Change in Control for the purposes of this Plan. 1.6 CODE: The Internal Revenue Code of 1986, as amended. ---- 1.7 COMMITTEE: The Committee shall mean the Administrative Committee appointed --------- from time to time to administer the Basic Plan. 1.8 COMPENSATION: The total compensation, paid by the Corporation to the ------------ Participant as defined in the Basic Plan (but determined without regard to the limitations of Code Section 401(a)(17)) increased by any amounts deferred by the Participant (for the year in which such amounts would have otherwise been payable) under the Corporation's nonqualified deferred compensation plan. 1.9 CORPORATION: Corporation shall mean National Commerce Financial ----------- Corporation, its successors and assigns. 1.10 CREDITED SERVICE: Credited Service shall have the same definition as in the ---------------- Basic Plan. 1.11 EARLY RETIREMENT DATE: The later of the Participant's 55th birthday and the --------------------- date he completes five Years of Vesting Service. 1.12 FINAL AVERAGE MONTHLY COMPENSATION: The amount obtained by dividing (a) the ---------------------------------- amount of Compensation paid to the Participant during the five consecutive calendar years out of the last ten which produces the highest such total by (b) the number of months during such period during which the Participant received any Compensation. 1.13 IRS MAXIMUM MONTHLY COVERED COMPENSATION: The amount shall be equal to ---------------------------------------- one-twelfth of the "covered compensation", within the meaning of Section 401(1)(5)(E) of the Internal Revenue Code and regulations and rulings issued pursuant thereto, that applies to the Participant based upon his year of birth. Any changes in the amount of "covered compensation" that become effective after the January 1st 3 immediately preceding the date of the Participant's retirement or termination of service shall be ignored. 1.14 NORMAL RETIREMENT DATE: A Participant's 65th birthday. ---------------------- 1.15 PARTICIPANT: Participant shall mean the employees and former employees ----------- identified on the attached Exhibit I. 1.16 SPOUSE: The Participant's lawful Spouse. ------ 1.17 TERMINATION DATE: The effective date of the termination of the ---------------- Participant's employment; provided, however, that for purposes of this Section, the Participant's temporary absence from the service of the Corporation with the Corporation's written approval shall not result in the termination of his employment unless he fails to return to the service of the Corporation on or before the date specified by the Corporation in such written approval, in which event such date shall be his Termination Date. 1.18 VESTING SERVICE. Vesting Service shall have the same definition as in the --------------- Basic Plan. ARTICLE 2 - PARTICIPATION ------------------------- Each employee named on Exhibit I shall participate in the Plan and shall cease to participate upon his Termination Date if there is no benefit payable from the Plan, or if there are benefits payable, upon the complete payment of all benefits due to the Participant. In the event that any such Participant shall cease to be a member of a select group of highly compensated and managerial employees within the meaning of Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended, such Participant shall, notwithstanding anything to the contrary contained in the Plan, cease to accrue any additional benefits under the Plan, but shall continue to be a Participant in the Plan for all other purposes. ARTICLE 3 - NORMAL RETIREMENT BENEFITS -------------------------------------- 3.l ELIGIBILITY: A Participant whose employment terminates on or after his ----------- Normal Retirement Age for any reason other than his death shall receive a Benefit pursuant to this Article. 4 3.2 AMOUNT OF GROUP I PARTICIPANT `S NORMAL RETIREMENT BENEFIT: ---------------------------------------------------------- (A) A Group I-A's Participant's Benefit pursuant to this Article shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be equal to the amount by which (1) exceeds (2), where (1) is the equal to (i) minus (ii) plus (iii) below: (i) 1.85% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service after August 1, 2000 that are not in excess of 35 years. (ii) 0.5% of his IRS Maximum Monthly Covered Compensation multiplied by his number of years of Credited Service after August 1, 2000 that are not in excess of 35 years. (iii) 1.35% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service after August 1, 2000 that are in excess of 35 years. (2) is the increase since August 1, 2000 in the monthly retirement benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. (B) A Group I-B Participant's Benefit payable pursuant to this Article shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be equal to the amount by which (1) exceeds (2), where (1) is the equal to (i) minus (ii) plus (iii) below: (i) 1.85% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service that are not in excess of 35 years. (ii) 0.5% of his IRS Maximum Monthly Covered Compensation multiplied by his number of years of Credited that are not in excess of 35 years. (iii) 1.35% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service that are in excess of 35 years. 5 Provided however, in the event that a Group I-B Participant was a participant in the NBC Plan as of February 28, 1994, in no event shall the benefit payable from this plan to such Participant be less than the amount computed under the provisions of Section 3.2 of the NBC Plan in effect on February 28, 1994 assuming the Participant's rate of pay as of January 1, 1994 (including any bonuses received in 1994) continued unchanged to his Termination Date, but based only on Credited Service through December 31, 2001. (2) is the monthly retirement benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. (C) A Group I-C Participant's Benefit pursuant to this Article shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be equal to the amount by which (1) plus (2) exceeds (3), where (1) is the equal to (i) minus (ii) plus (iii) below: (i) 1.85% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service after December 31, 2000 that are not in excess of 35 years. (ii) 0.5% of his IRS Maximum Monthly Covered Compensation multiplied by his number of years of Credited Service after December 31, 2000 that are not in excess of 35 years. (iii) 1.35% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service after December 31, 2000 that are in excess of 35 years. (2) is equal to the benefit the Participant accrued under the CCB Plan as of December 31, 2000, expressed in the form of a Ten Year Certain and Life Annuity, based on the Participant's Credited Service through December 31, 2000 and final average compensation (as calculated under the provisions of the CCB Plan as they existed on July 31, 2001) determined as of the Participant's Termination Date. (3) is the monthly retirement benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. 3.3 AMOUNT OF GROUP II PARTICIPANT'S BENEFIT: A Group II Participant's Benefit ---------------------------------------- pursuant to this Article shall be payable on the first day of the month following the 6 Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be equal to the amount by which the sum of (A) plus (B) plus (C) exceeds (D), where (A) is 1.35% of his Final Average Monthly Compensation determined and frozen as of December 31, 2001 and not in excess of the limitation of Code Section 401(a)(17) in effect as of such date, multiplied by his number of years of Credited Service completed by the Participant prior to January 1, 2002. (B) is .50% of his Final Average Monthly Compensation determined and frozen as of December 31, 2001 and not in excess of the limitation of Code Section 401(a)(17) in effect as of such date, in excess of the Participant's IRS Maximum Monthly Covered Compensation determined as of December 31, 2001, (C) is the actuarial equivalent (based on the actuarial equivalence factors contained in the Basic Plan) expressed in the form of a Ten Year Certain and Life Annuity, of the product of (1) and (2), where (1) is the cumulative sum of the Participant's Benefit Percentages (determined using the table below) based on the number of years and months of Credited Service completed by the Participant after December 31, 2001; provided, however, that years and months of Credited Service completed prior to January 1, 2002, will be taken into account solely for the purpose of determining the Benefit Percentage attributable to each year and month of Credited Service performed after December 31, 2001, but no Benefit Percentage shall be assigned to any year of Credited Service performed prior to January 1, 2002. Years of Credited Service Benefit Percentages ------------------------- ------------------- 1 to 5 2% Per Year 6 to 10 4% Per Year 11 to 20 6% Per Year 21 to 30 8% Per Year 31 or more 10% Per Year The percentage is prorated for partial years by crediting 1/12th for each completed month of Credited Service. (2) is the Participant's Final Average Compensation as of the Participant's Termination Date. (D) is the monthly benefit which he would be entitled to receive from the Basic Plan, expressed in the form of a Ten Year Certain and Life Annuity, as of his Termination Date. 7 3.4 AMOUNT OF GROUP III PARTICIPANT'S BENEFIT: ----------------------------------------- (A) Grandfathered Group III Participants. The Benefit payable pursuant to ------------------------------------ this Article for a Group III Participant who as of December 31, 2001 had attained age 55 with 5 years of Vesting Service or had attained age 50 with 10 years of Vesting Service shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be equal to the amount by which the greater of (1) or (2) exceeds (3), where (1) is equal to the benefit the Participant would have accrued under the CCB Plan, expressed in the form of a Ten Year Certain and Life Annuity, if that plan had continued in effect under the terms of such plan in effect as of July 31, 2001, based on the Participant's service and final average compensation determined as of the Participant's Termination Date. (2) is the actuarial equivalent (based on the actuarial equivalence factors contained in the Basic Plan) expressed in the form of a Ten Year Certain and Life Annuity, of the product of (i) and (ii), where (i) is the cumulative sum of the Participant's Benefit Percentages (determined using the table below) based on the number of years and months of Credited Service completed by the Participant. Years of Credited Service Benefit Percentages ------------------------- ------------------- 1 to 5 2% Per Year 6 to 10 4% Per Year 11 to 20 6% Per Year 21 to 30 8% Per Year 31 or more 10% Per Year The percentage is prorated for partial years by crediting 1/12th for each completed month of Credited Service. (ii) is the Participant's Final Average Compensation as of the Participant's Termination Date. (3) is the monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. (B) Other Group III Participants. The Benefit payable pursuant to this ---------------------------- Article for a Group III Participant who is not described in Subsection 3.4(A) shall be payable 8 on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be equal to the amount by which (1) exceeds (2), where (1) the benefit described in Section 1.1(A)(37)(c) of the Basic Plan determined by using Final Average Compensation as defined in this Plan (provided, however, that for purposes of Section 1.1(a)(37)(c)(ii)(I) of the Basic Plan, Final Average Compensation shall be determined as of December 31, 2001). (2) is the monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. 3.5 AMOUNT OF GROUP IV PARTICIPANT'S BENEFIT. The Benefit payable pursuant to ---------------------------------------- this Article for a Group IV Participant shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be the amount by which (A) exceeds (B), where (A) is equal to the monthly benefit determined under the provisions of the CCB Financial Corporation Retirement Plan as they existed July 31, 2001, expressed in the form of a Ten Year Certain and Life Annuity, assuming such provisions remain in effect until the Participant's retirement date, determined without regard to the Code Section 401(a)(17) limit. (B) is the monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. 3.6 AMOUNT OF GROUP V PARTICIPANT'S BENEFIT. The Benefit payable pursuant to --------------------------------------- this Article for a Group V Participant shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be the amount by which (A) exceeds (B), where (A) is the retirement benefit the Participant's would have accrued under the Basic Plan, expressed in the form of a Ten Year Certain and Life Annuity, had the Participant received 5 years of additional Credited Service under the Basic Plan. (B) is the monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. 9 ARTICLE 4 - EARLY RETIREMENT BENEFITS ------------------------------------- 4.1 ELIGIBILITY. A Participant whose employment terminates on or after his ----------- Early Retirement Date and prior to his Normal Retirement Age for any reason other than his death shall receive a Benefit pursuant to this Article. 4.2 AMOUNT OF GROUP I PARTICIPANT'S BENEFIT: --------------------------------------- (A) A Group I-A's Participant's Benefit pursuant to this Article shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be the amount by which (1) exceeds (2), with the result being multiplied by the factors specified in Section 1 of Appendix A, where (1) is the equal to (i) minus (ii) plus (iii) below: (i) 1.85% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service after August 1, 2000 that are not in excess of 35 years. (ii) 0.5% of his IRS Maximum Monthly Covered Compensation multiplied by his number of years of Credited Service after August 1, 2000 that are not in excess of 35 years. (iii) 1.35% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service after August 1, 2000 that are in excess of 35 years. (2) is the increase since August 1, 2000 in the monthly normal retirement benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as his Termination Date. (B) A Group I-B Participant's Benefit payable pursuant to this Article shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be the amount by which (1) exceeds (2), where (1) is the equal to (i) minus (ii) plus (iii) below: (i) 1.85% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service that are not in excess of 35 years, multiplied by the factors specified in Section 1 of Appendix A hereto to reflect early commencement. 10 (ii) 0.5% of his IRS Maximum Monthly Covered Compensation multiplied by his number of years of Credited that are not in excess of 35 years, multiplied by the factors specified in Section 2 of Appendix A hereto to reflect early commencement. (iii) 1.35% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service that are in excess of 35 years, multiplied by the factors specified in Section 1 of Appendix A hereto to reflect early commencement. Provided however, in the event that a Group I-B Participant was a participant in the NBC Plan as of February 28, 1994, in no event shall the benefit payable from this plan to such Participant be less than the amount computed under the provisions of Section 3.2 of the NBC Plan in effect on February 28, 1994 assuming the Participant's rate of pay as of January 1, 1994 (including any bonuses received in 1994) continued unchanged to his Termination, but based only on Credited Service through December 31, 2001. (2) is the immediate monthly retirement benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. (C) A Group I-C Participant's Benefit payable pursuant to this Article shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be the amount by which (1) plus (2) exceeds (3), where (1) is the equal to (i) minus (ii) plus (iii) below: (i) 1.85% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service after December 31, 2000 that are not in excess of 35 years, multiplied by the factors specified in Section 1 of Appendix A hereto to reflect early commencement. (ii) 0.5% of his IRS Maximum Monthly Covered Compensation multiplied by his number of years of Credited Service after December 31, 2000 that are not in excess of 35 years, multiplied by the factors specified in Section 2 of Appendix A hereto to reflect early commencement. (iii) 1.35% of his Final Average Monthly Compensation multiplied by his number of years of Credited Service after December 31, 2000 11 that are in excess of 35 years, multiplied by the factors specified in Section 1 of Appendix A hereto to reflect early commencement. (2) is equal to the benefit the Participant accrued under the CCB Plan as of December 31, 2000, expressed in the form of a Ten Year Certain and Life Annuity, based on the Participant's Credited Service through December 31, 2000 and final average compensation (as calculated under the provisions of the CCB Plan as they existed on July 31, 2001) determined as of the Participant's termination of employment or retirement with the Corporation, multiplied by the early retirement factors of the CCB Plan in effect as of July 31, 2001 to reflect early commencement. (3) is the immediate monthly retirement benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive as of the date of his retirement from the Basic Plan as of his Termination Date. 4.3 AMOUNT OF GROUP II PARTICIPANT'S BENEFIT: A Group II Participant's Benefit ---------------------------------------- pursuant to this Article shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be the amount by which the sum of (A) plus (B) plus (C) exceeds (D), where (A) is 1.35% of his Final Average Monthly Compensation determined and frozen as of December 31, 2001 and not in excess of the limitation of Code Section 401(a)(17) in effect as of such date, multiplied by his number of years of Credited Service completed by the Participant prior to January 1, 2002, multiplied by the factors specified in Section 1 of Appendix A hereof to reflect early commencement. (B) is .50% of his Final Average Monthly Compensation determined and frozen as of December 31, 2001 and not in excess of the limitation of Code Section 401(a)(17) in effect as of such date, in excess of the Participant's IRS Maximum Monthly Covered Compensation determined as of December 31, 2001, multiplied by the factors specified in Section 2 of Appendix A hereof to reflect early commencement. (C) is the actuarial present value (determined using the actuarial equivalent factors utilized by the Basic Plan as of the date of determination), expressed in the form of a Ten Year Certain and Life Annuity, of the product of (1) and (2) (which amount is otherwise payable on the first day of the month following the date the Participant would attain Normal Retirement Age), where (1) is the cumulative sum of the Participant's Benefit Percentages (determined using the table below) based on the number of years and months of Credited Service completed by the Participant after December 31, 2001; 12 provided, however, that years and months of Credited Service completed prior to January 1, 2002, will be taken into account solely for the purpose of determining the Benefit Percentage attributable to each year and month of Credited Service performed after December 31, 2001, but no Benefit Percentage shall be assigned to any year of Credited Service performed prior to January 1, 2002. Years of Credited Service Benefit Percentages ------------------------- ------------------- 1 to 5 2% Per Year 6 to 10 4% Per Year 11 to 20 6% Per Year 21 to 30 8% Per Year 31 or more 10% Per Year The percentage is prorated for partial years by crediting 1/12th for each completed month of Credited Service. (2) is the Participant's Final Average Compensation as of the date of the Participant's termination of employment. (D) is the immediate monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. 4.4 AMOUNT OF GROUP III PARTICIPANT'S BENEFIT: ----------------------------------------- (A) Grandfathered Group III Participants. The Benefit payable pursuant to ------------------------------------ this Article for a Group III Participants who as of December 31, 2001 had attained age 55 with 5 years of Vesting Service or had attained age 50 with 10 years of Vesting Service shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be the amount by which the greater of (1) or (2) exceeds (3), where (1) is equal to the benefit the Participant would have accrued under the CCB Plan if that plan had continued in effect under the terms of such plan in effect as of July 31, 2001, based on the Participant's service and final average compensation determined as of the Participant's termination of employment or retirement with the Corporation, multiplied by the early retirement factors of the CCB Plan in effect as of July 31, 2001 to reflect early commencement. (2) is the actuarial present value (determined using the actuarial equivalent factors utilized by the Basic Plan as of the date of determination), expressed in the form of a Ten Year and Certain Annuity, of the product of 13 (i) and (ii) (which amount is otherwise payable on the first day of the month following the date the Participant would attain Normal Retirement Age), where (i) is the cumulative sum of the Participant's Benefit Percentages (determined using the table below) based on the number of years and months of Credited Service completed by the Participant. Years of Credited Service Benefit Percentages ------------------------- ------------------- 1 to 5 2% Per Year 6 to 10 4% Per Year 11 to 20 6% Per Year 21 to 30 8% Per Year 31 or more 10% Per Year The percentage is prorated for partial years by crediting 1/12th for each completed month of Credited Service. (ii) is the Participant's Final Average Compensation as of the date of the Participant's Termination Date. (3) is the immediate monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to from the Basic Plan as of his Termination Date. (B) Other Group III Participants. The Benefit payable pursuant to this ---------------------------- Article for a Group III Participant who is not described in Subsection 4.4(A) and who terminates for reasons other than death shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be equal to the amount by which (1) exceeds (2), where (1) the benefit described in Section 1.1(A)(37)(c) of the Basic Plan determined by using Final Average Compensation as defined in this Plan (provided, however, that for purposes of Section 1.1(A)(37)(c)(ii)(I) of the Basic Plan, Final Average Compensation shall be determined as of December 31, 2001); (2) is the immediately monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. 4.5 AMOUNT OF GROUP IV PARTICIPANT'S BENEFIT. The Benefit payable pursuant to ---------------------------------------- this Article for a Group IV Participant shall be payable on the first day of the month 14 following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be the amount by which (A) exceeds (B), where (A) is equal to the monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, determined under the provisions of the CCB Financial Corporation Retirement Plan as they existed July 31, 2001 assuming such provisions remain in effect until the Participant's retirement date (including any early reduction factors), determined without regard to the Code Section 401(a)(17) limit. (B) is theimmeidate monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. 4.6 AMOUNT OF GROUP V PARTICIPANT'S BENEFIT. The Benefit payable pursuant to --------------------------------------- this Article for a Group V Participant shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall be the amount by which (A) exceeds (B), where (A) is the immediate retirement benefit, expressed in the form of a Ten Year Certain and Life Annuity, as of the date of the Participant's retirement that the Participant would have been entitled to receive under the Basic Plan had the Participant received 5 years of additional Credited Service under the Basic Plan. (B) is the immediate monthly benefit, expressed in the form of a Ten Year Certain and Life Annuity, which he would be entitled to receive from the Basic Plan as of his Termination Date. ARTICLE 5 - VESTED BENEFITS --------------------------- 5.1 ELIGIBILITY: A Participant whose employment terminates prior to his Early ----------- Retirement Date or Normal Retirement Date for any reason other than his death and who has been credited with at least five (5) years of Vesting Service shall receive a Retirement Benefit pursuant to this Article. Notwithstanding the foregoing, upon a Change of Control, any Participant who is employed by the Corporation on such date shall be fully vested in his Benefit and shall be entitled to a Benefit pursuant to this Article if the Participant terminates employment on or before his Early Retirement Date or Normal Retirement Date. 5.2 AMOUNT. ------ (a) The Benefit of a Participant (other than a Group IV Participant) payable pursuant to this Article shall be payable on the first day of the month following the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall equal the actuarial equivalent (determined using 15 the actuarial equivalence factors in effect under the Basic Plan as of the Participant's Termination Date) of the Benefit determined under the applicable Section of Article 3 hereof (assuming for this purpose that such benefit is payable commencing on the Participant's Normal Retirement Date), based on the class of Participant in which the Participant is a member. (b) The Benefit of a Group IV Participant payable pursuant to this Article shall be payable on the first day of the month following the later of the date the Participant attains age 55 or the Participant's Termination Date and, when expressed in the form of a Ten Year Certain and Life Annuity, shall equal the actuarial equivalent (determined using the actuarial equivalence factors in effect under the Basic Plan as of the Participant's Termination Date) of the Benefit determined under Section 3.5 hereof (assuming for this purpose that such benefit is payable commencing on the Participant's Normal Retirement Date). ARTICLE 6 - PRE-RETIREMENT DEATH BENEFIT ---------------------------------------- 6.1 ELIGIBILITY: The Beneficiary of a Participant whose employment is ----------- terminated by reason of his death shall receive a death benefit pursuant to this Article. 6.2 AMOUNT: ------ (a) PRIOR TO EARLY RETIREMENT DATE. ------------------------------ (1) The death benefit payable pursuant to this Article to the Beneficiary of a Participant (other than a Group IV Participant) who dies while an employee of the Corporation or one of its subsidiaries on and prior to his Early Retirement Date, shall equal the actuarial equivalent amount as of the date of the Participant's death (determined using the actuarial equivalent factors in effect under the Basic Plan as of the Participant's Termination Date) of the benefit determined under Plan Section 5.2. The benefit shall be payable to the Beneficiary as of the first day of the month following receipt by the Corporation of notice of the Participant's death. (2) The death benefit payable pursuant to this Article to the Beneficiary of a Group IV Participant who dies while an employee of the Corporation or one of its subsidiaries on and prior to his Early Retirement Date, shall equal the amount that would be payable to such Beneficiary if the Participant had as of the date of this death terminated employment with a vested benefit under Plan Section 5.2, survived to age 55, elected pursuant to Plan Section 7.1 to receive his Benefit in the form of a Joint and 50% Survivor Annuity with his Beneficiary and died immediately thereafter. The benefit payable to the Beneficary of a Group IV Paricipant shall be payable as of the first day of the month following the later of receipt by the 16 Corporation of notice of the Participant's death or the date the Participant would have attained age 55. (b) ON OR AFTER EARLY RETIREMENT DATE AND PRIOR TO NORMAL RETIREMENT ---------------------------------------------------------------- DATE.The death benefit payable pursuant to this Article to the ---- Beneficiary of a Participant who dies while an employee of the Corporation or one of its subsidiaries on or after his Early Retirement Date and prior to his Normal Retirement Date, shall equal the benefit determined under the applicable Section of Article 4 based on the class of Participant in which the Participant was a member. (c) ON OR AFTER NORMAL RETIREMENT DATE.The death benefit payable pursuant ---------------------------------- to this Article to the Beneficiary of a Participant who dies while an employee of the Corporation or one of its subsidiaries on or after his Normal Retirement Date, shall equal the benefit determined under the applicable Section of Article 3 based on the class of Participant in which the Participant was a member. 6.3 PAYMENT OF DEATH BENEFITS: The Beneficiary shall receive the death benefit ------------------------- in the form of a Ten Years Certain and Life Annuity, or if elected, another form of payment as provided in the Basic Plan and elected by the Participant. However, if the actuarial present value of the Beneficiary's benefit is less than $5,000, the benefit shall be payable in a lump sum. ARTICLE 7 - PAYMENT OF RETIREMENT BENEFITS ------------------------------------------ 7.1 FORM OF PAYMENT: The Benefit from the Plan shall be payable in the form of --------------- a Ten Years Certain and Life Annuity if the Participant does not have a Spouse, and in the form of an actuarially equivalent Joint and 50% Survivor Annuity if the Participant has a Spouse. If the Participant elects at least twelve months in advance of the Participant's Termination Date by delivery to the Corporation of an election form in such manner as the Corporation from time to time specifies, the Benefit may be payable in any actuarial equivalent optional form of benefit available under the Basic Plan based on the factors for determining actuarial equivalence in effect on the Participant's Termination Date under the Basic Plan. Any such election may be revoked or modified by delivery of a new election form to the Committee, but such revocation or modification shall not be effective until twelve months following receipt by the Corporation. 7.2 EFFECT OF CHANGE OF CONTROL: Notwithstanding Section 7.1, in the event of a --------------------------- Change in Control, the Participant's Benefit may be paid in a lump-sum distribution if so elected on the Participant Election Form. This special lump-sum option available in the event of a Change of Control is applicable to both inactive Participants (whether or not in 17 pay status) at the time of the Change of Control and to active Participants (whether or not in pay status) upon termination of employment following a Change in Control. 7.3 CASH OUT OF SMALL BENEFITS: If the actuarial present value (determined -------------------------- using the actuarial factors then in effect under the Basic Plan) of the Participant's Benefit is less than $5,000, the Benefit shall be payable in a lump sum. ARTICLE 8 - AMENDMENT AND TERMINATION ------------------------------------- 8.1 AMENDMENT: The Corporation may amend any or all of the provisions of this --------- Plan at any time without the consent of any Participant or Beneficiary; provided, however, that no such amendment shall deprive any Participant or Beneficiary of any Benefit which had accrued prior to the effective date of such amendment. 8.2 TERMINATION: The Corporation may terminate the Plan at any time and shall ----------- cease paying Benefits hereunder immediately upon the effective date of such termination. Within 90 days following such effective date, the Corporation shall pay: (a) to each Participant or Beneficiary to whom payment of a Benefit has commenced as of such effective date an amount equal to the present value of the installments of such Benefit coming due on or after such date; and (b) to each other Participant an amount equal to the present value of any Benefit to which he would be entitled had he voluntarily, terminated his employment on such effective date. In determining the amount to be paid to a Participant or Beneficiary pursuant to this Section, the Corporation shall use the discount rate and mortality tables as specified by the definition of actuarial equivalence in the Basic Plan. ARTICLE 9 - ADMINISTRATION -------------------------- 9.1 ADMINISTRATION: The Committee shall administer the Plan and shall have all -------------- powers necessary or appropriate to enable it to carry out its duties including, without limitation, the power to interpret the Plan and to make, establish and change rules and procedures with respect to the operation of the Plan. The Committee shall have the authority to decide all questions arising under the Plan including those involving an individual's eligibility for Benefits and to determine the amount of any Benefit to be paid to any Participant or Beneficiary hereunder. All such decisions shall be conclusive and binding on all persons. 9.2 REQUIRED INFORMATION: Each Participant and Beneficiary shall furnish the -------------------- Committee such information as it shall consider necessary or desirable for purposes of 18 administering the Plan. The provisions of the Plan respecting the payment of any Benefit are conditional upon the Committee's prompt receipt of such information. The Corporation, the Committee and any other party involved in the administration of the Plan shall be entitled to rely upon any information furnished by a Participant or Beneficiary with respect to any matters required to be determined hereunder and shall not be liable on account of the payment of any monies or the doing of any act or failure to act in reliance thereon. 9.3 CLAIMS: Any person having a claim for the payment of a Benefit shall file ------ such claim with the Committee in writing on a form furnished by the Committee. (a) Denial of Claims: In the event any such claim is denied or not paid ---------------- within 60 days after the date of the filing thereof, the Committee shall notify the claimant in writing of the specific reasons for the denial or nonpayment, the specific provisions of this Plan upon which such denial or nonpayment is based and the appeal procedures set forth below. (b) Appeal Procedures: The Committee shall review appeals of claims which ----------------- have been denied or have not been paid. Any claimant whose claim has been denied or has not been paid within said 60 day period may file a written appeal of such denial or nonpayment with the Committee within 90 days after the expiration of said 60 day period together with such information concerning such claim as the claimant desires the Committee to consider in its review of such denial or nonpayment. Not later than 60 days after its receipt of any such appeal, the Committee shall notify the claimant in writing of its decision on such appeal setting forth the specific reasons for its decision and the provisions of the Plan upon which its decision is based. 9.4 DISPUTES: If a dispute arises as to the proper recipient of any payment, -------- the Committee, in its sole discretion, may withhold or cause such payment to be withheld until the dispute shall have been settled or determined by a court of competent jurisdiction. ARTICLE 10 - MISCELLANEOUS -------------------------- 10.1 OWNERSHIP OF ASSETS: Any assets which may be used to discharge the ------------------- Corporation's obligations under this Plan shall be and remain the property of the Corporation, no person other than the Corporation shall, by virtue of this Plan, have any interest in such assets and no Participant or Beneficiary shall have any right, title or interest in, or claim to, any investment the Corporation may make to aid the Corporation in meeting its obligations hereunder. To the extent that any person acquires a right to receive payments from the Corporation under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Corporation. 19 10.2 NO ASSIGNMENT: No Benefit payable hereunder shall be subject in any manner ------------- to anticipation, alienation, sale, transfer, assignment, pledge or encumbrance and any attempt to anticipate, alienate, sell, transfer, assign, pledge or encumber or charge the same shall be void. No such Benefit shall in any manner be subject to the debts or liabilities of any Participant or Beneficiary nor shall it be subject to attachment or legal process for or against such person and the same shall not be recognized hereunder except to such extent as may be required by law. 10.3 EFFECT ON EMPLOYMENT: Nothing contained herein shall give any Participant -------------------- the right to be retained in the service of the Corporation or to interfere with the right of the Corporation to discharge any Participant at any time regardless of the effect which such discharge shall or may have upon such individual as a Participant. 10.4 PAYMENTS TO MINOR OR INCOMPETENT: In making any payment to or for the -------------------------------- benefit of any minor or incompetent person or any other person who, in the opinion of the Committee, is otherwise unable to apply such distribution to his own best interest and advantage, the Committee, in its sole discretion may direct that such distribution be made directly to such person, to the legal guardian, conservator or custodian of such person for the use and benefit of such person or to a relative of such person to be expended by such relative for the benefit of such person. The Committee shall not be obligated to see the application of any such payment. 10.5 INDEMNIFICATION: The Corporation agrees to hold harmless and indemnify the --------------- members of the Committee and all directors, officers and employees of the Corporation against any and all parties whomsoever, and all losses therefrom, including without limitation, costs of defense and attorneys' fees, based upon or arising out of any act or omission relating to, or in connection with, this Plan other than losses resulting from such person's fraud or willful misconduct. 10.6 BINDING ON EMPLOYER, PARTICIPANTS AND THEIR SUCCESSORS: This Plan shall be ------------------------------------------------------ binding upon and inure to the benefit of the Corporation and to any other Employers participating in this Plan, their successors and assigns and the participant and his heirs, executors, Committees and duly appointed legal representatives. 10.7 RIGHTS OF AFFILIATES TO PARTICIPATE: Any Employer participating in the ----------------------------------- Basic Plan may, in the future, adopt this Plan provided that proper action is taken by the Board of Directors of such Employer and the participation of such Employer is approved by the Board of Directors of the Corporation. The administrative powers and control of the Corporation, as provided in this Plan, shall not be deemed diminished under this Plan by reason of the participation of any other Employer and the administrative pointers and control granted hereunder to the Committee shall be binding upon any Employer adopting this Plan. Each Employer adopting this Plan shall have the obligation to pay the benefits to its employees hereunder and no other Employer shall have such obligation and any failure by a particular Employer to live up to its obligations under this Plan shall have no 20 effect on any other Employer. Any Employer may discontinue this Plan at any time by proper action of its Board of Directors subject to the provisions of Article 8. 10.8 APPLICABLE LAW: The provisions of this Plan shall be interpreted and -------------- construed according to the laws of the State of Tennessee. 10.9 EFFECTIVE DATE: This Plan shall be effective August 1, 2001, with respect -------------- to payments made to or on behalf of participants on and after such date. IN WITNESS WHEREOF, NATIONAL COMMERCE FINANCIAL CORPORATION, TENNESSEE has caused this instrument to be executed by its duly authorized officers on this day of , 2001, effective as of August 1, 2001. - ----- ------------------ (CORPORATE SEAL) ATTEST: NATIONAL COMMERCE FINANCIAL CORPORATION By: - ----------------------------------- -------------------------------- Title: ----------------------------- 21 EXHIBIT I --------- ------------------------------------- GROUP I-A PARTICIPANTS ------------------------------------- Thomas M. Garrott ------------------------------------- Mackie H. Gober ------------------------------------- Gary Lazarini ------------------------------------- David Popwell ------------------------------------- William R. Reed, Jr. ------------------------------------- ------------------------------------- GROUP I-B PARTICIPANTS ------------------------------------- Donald B. Clanton ------------------------------------- Walter B. Howell, Jr. ------------------------------------- ------------------------------------- GROUP I-C PARTICIPANTS ------------------------------------- James S. Edwards ------------------------------------- Sheldon M. Fox ------------------------------------- Richard L. Furr ------------------------------------- E. C. Roessler ------------------------------------- ------------------------------------- GROUP II PARTICIPANTS ------------------------------------- Walter Bowick, IV ------------------------------------- Aubrey Cox ------------------------------------- Samuel Ettinghoff ------------------------------------- John Fisher ------------------------------------- Joseph Gilmore ------------------------------------- William Glaus ------------------------------------- Charles Grantham ------------------------------------- Stephen Horn ------------------------------------- W. Jones, Jr. ------------------------------------- Dennis Korner ------------------------------------- Fletcher Maynard, Jr. ------------------------------------- William Menkel ------------------------------------- John Presley ------------------------------------- Thomas Ramer ------------------------------------- Ronald Reddin ------------------------------------- Michael Reddoch ------------------------------------- John Womble ------------------------------------- Group III Participants are those persons who were participants in the CCB Plan on July 31, 2001 who are not members of Group I Participants or Group IV Participants. 22 Group IV Participants are persons who were participants in the CCB Plan on July 31, 2001, who are not members of Group I Participants and who are "Electing CCB Plan Participants" as defined in the Basic Plan. Group V Participants are the following employees of First Mercantile Trust Company: Kenneth Lenoir, Scott Lenoir and Ronald Hodges. 23 APPENDIX A ---------- SECTION 1 --------- Non-Integrated Early Retirement Reduction Factors By Years and Months By -- Which Early Retirement Date Precedes Normal Retirement Date -----------------------------------------------------------
Months - ----------------------------------------------------------------------------------------------------- Years 0 1 2 3 4 5 6 7 8 9 10 11 - ----------------------------------------------------------------------------------------------------- 0 1.000 1.000 1.000 1.000 1.000 1,000 1,000 1.000 1.000 1.000 1.000 1.000 1 1.000 1.000 1.000 1.000 1.000 1,000 1,000 1.(00 1.000 1.000 1.000 1.000 2 1.000 1.000 1.000 1.000 1.000 1,000 1,000 1.000 1.000 1.000 1.000 1.000 3 1.000 1.000 1.000 1.000 1.000 1,000 1,000 1.000 1.000 1.000 1.000 1.000 4 1.000 1.000 1.000 1.000 1.000 1,000 1,000 1.000 1.000 1.000 1.000 1.000 5 1.000 .995 .990 .985 .980 .975 .970 .965 .960 .955 .950 .945 6 .940 .935 .930 .925 .920 .915 .910 .905 .900 .895 .890 .885 7 .880 .875 .870 .865 .860 .855 .850 .845 .840 .835 .830 .825 8 .820 .815 .810 .805 .800 .795 .790 .785 .780 .775 .770 .765 9 .760 .755 .750 .745 .740 .735 .730 .725 .720 .715 .710 .705 10 .700
SECTION 2 --------- IRS Defined Actuarial Reduction Factors By Years and Months By Which Early Retirement Date Precedes Normal Retirement Date --------------------------------------------------------------
Months - ------------------------------------------------------------------------------------------ Years 0 1 2 3 4 5 6 7 8 9 10 11 - ------------------------------------------------------------------------------------------ 0 1.000 .994 .989 .983 .978 .972 .967 .961 .956 .950 .944 .939 1 .933 .928 .922 .917 .911 .906 .900 .894 .889 .883 .879 .872 2 .867 .861 .856 .850 .844 .839 .833 .828 .822 .817 .811 .806 3 .800 .794 .789 .783 .778 .772 .767 .761 .756 .750 .744 .739 4 .733 .728 .722 .717 .711 .706 .700 .694 .689 .683 .678 .672 5 .667 .664 .661 .658 .656 .653 .650 .647 .644 .642 .639 .636 6 .633 .631 .628 .625 .622 .619 .617 .614 .611 .608 .606 .603 7 .600 .597 .594 .592 .589 .586 .583 .581 .578 .575 .572 .569 8 .567 .564 .561 .558 .556 .553 .550 .547 .544 .542 .539 .536 9 .533 .531 .528 .525 .522 .519 .517 .514 .511 .508 .506 .503 10 .500
24 EX-21 6 dex21.txt SUBSIDIARIES OF REGISTRANT Exhibit 21 PARENT AND SUBSIDIARIES NATIONAL COMMERCE FINANCIAL CORPORATION AND SUBSIDIARIES The following table shows the subsidiaries of NCF, their jurisdiction of organization, and the percentage of voting securities owned by each subsidiary's parent as of December 31, 2001.
% of Voting Securities Jurisdiction of Owned by Name of Subsidiary Organization Parent Parent - ------------------ ------------ ------ ------ Commerce Capital Management, Inc. Tennessee NCF 100.00 First Market Bank, FSB United States NCF 49.00 First Mercantile Capital Management, Inc. Tennessee NCF 100.00 First Mercantile Trust Company Tennessee NCF 100.00 Monroe Properties, Inc. Tennessee NCF 100.00 National Bank of Commerce (NBC) United States NCF 100.00 National Commerce Capital Trust I Delaware NCF 100.00 National Commerce Capital Trust II Delaware NCF 100.00 Senior Housing Crime Prevention Investment Fund Tennessee NCF 100.00 TransPlatinum Service Corp. Tennessee NCF 100.00 USI Alliance Corp Tennessee NCF 100.00 American Title and Escrow, Inc. Tennessee NBC 100.00 Corcoran Holdings, Inc. (Corcoran) Virginia NBC Capital North 100.00 Fenesco Financial Services, Inc. D/B/A NBC Capital Markets Tennessee NBC 80.00 J&S Leasing, Inc. Tennessee NBC 100.00 Kenesaw Leasing, Inc. Tennessee NBC 100.00 Mortgage First Service Corp. South Carolina NBC 100.00 National Commerce Bank Services, Inc. (NCBS) Tennessee NBC 100.00 National Commerce Real Estate Holding Company (NCREHC) Tennessee NBC 100.00 NBC Bank, FSB United States NBC 100.00 NBC Capital North, Inc. Tennessee NBC 100.00 NBC Insurance Services, Inc. Tennessee NBC 100.00 NBC Investco, Inc. (INVESTCO) Tennessee NBC 100.00 NBC Market South, Inc. Tennessee NBC 100.00 Salem Trust Company Florida NBC 100.00 Southland Associates, Inc. North Carolina NBC 100.00 Sprunt Insurance, Ltd. British Virgin Islands NBC 100.00 United Service Corporation (USC) South Carolina NBC 100.00 Watts Properties, Inc. North Carolina Corcoran 100.00 Commerce Real Estate Company (CREC) Delaware CREHC 100.00 CCBDE, Inc. Delaware INVESTCO 100.00 NBC Financial Corporation Tennessee NBC Bank, FSB 100.00 NBC Management Co. Tennessee NBC Market South 100.00 BankersMart Tennessee NCBS 100.00 Commerce Real Estate Holding Company (CREHC) Delaware NCREHC 100.00 FleetOne, L.L.C. Delaware TransPlatinum 100.00 Prime Financial Services, Inc. Tennessee TransPlatinum 100.00 United Investment Services South Carolina USC 100.00
EX-23.1 7 dex231.txt CONSENT OF KPMG LLP Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the registration statement (Form S-8: Nos. 33-23100, 33-38552, 33-88440, 333-42212, 333-42214, 333-69338, 333-66110, and 333-66116; and Form S-3: Nos. 333-53587, 333-60953, and 333-49140) of National Commerce Financial Corporation of our report dated January 16, 2002, with respect to the consolidated balance sheet of National Commerce Financial Corporation and subsidiaries as of December 31, 2001, and the related consolidated statements of income, stockholders' equiy and comprehensive income and cash flows for the year ended December 31, 2001, which report appears in the December 31, 2001 annual report on Form 10-K of National Commerce Financial Corporation. /s/ KPMG LLP Memphis, Tennessee March 22, 2002 EX-23.2 8 dex232.txt CONSENT OF ERNST & YOUNG LLP Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8: Nos. 33-23100, 33-38552, 33-88440, 333-42212, 333-42214, 333-69338, 333-66110 and 333-66116; and Form S-3: Nos. 333-53587, 333-60953, and 333-49140) of National Commerce Financial Corporation and in the related Prospectuses of our report dated June 22, 2001, with respect to the consolidated financial statements of National Commerce Financial Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2001. /S/ ERNST & YOUNG LLP Memphis, Tennessee March 19, 2002 -----END PRIVACY-ENHANCED MESSAGE-----