-----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, QHy5wuiq3KIUo/D4yLPxQKjTShjxhn+ADZeAF1jHpZQVIElEmW4fYiO1rkO7H2JQ Q8tg/iawDY1OcUr1wxLbDg== 0001021408-01-503032.txt : 20010704 0001021408-01-503032.hdr.sgml : 20010704 ACCESSION NUMBER: 0001021408-01-503032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL COMMERCE FINANCIAL CORP CENTRAL INDEX KEY: 0000101844 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 620784645 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-06094 FILM NUMBER: 1674571 BUSINESS ADDRESS: STREET 1: ONE COMMERCE SQUARE CITY: MEMPHIS STATE: TN ZIP: 38150 BUSINESS PHONE: 9014156416 MAIL ADDRESS: STREET 1: ONE COMMERCE SQUARE CITY: MEMPHIS STATE: TN ZIP: 38150 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL COMMERCE BANCORPORATION DATE OF NAME CHANGE: 19950822 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TENNESSEE BANCSHARES CORP DATE OF NAME CHANGE: 19780820 FORMER COMPANY: FORMER CONFORMED NAME: UNITED TENNESSEE BANSHARES CORP DATE OF NAME CHANGE: 19780525 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 2001 Commission File Number: 0-6094 ------ NATIONAL COMMERCE FINANCIAL CORPORATION --------------------------------------- (Exact name of issuer as specified in charter) Tennessee 62-0784645 --------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) One Commerce Square, Memphis, Tennessee 38150 --------------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code (901) 523-3434 ------------- National Commerce Bancorporation -------------------------------- (Former name, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [ X ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $2 Par value 204,581,455 shares - -------------------------- ------------------ (Class of Stock) (Shares outstanding as of June 29, 2001) National Commerce Financial Corporation INDEX TO FORM 10-Q Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets March 31, 2001 and December 31, 2000 3 Consolidated Statements of Income Three Months Ended March 31, 2001 and 2000 4 Consolidated Statements of Cash Flows Three Months Ended March 31, 2001 and 2000 5 Notes to Consolidated Financial Statements As of and for the Three Months Ended March 31, 2001 and 2000 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements National Commerce Financial Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS As of March 31, 2001 and December 31, 2000
(Unaudited) March 31, December 31, In Thousands Except Share Data 2001 2000 - -------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 491,757 446,712 Time deposits in other banks 34,146 32,183 Federal funds sold and other short-term investments 28,839 52,572 Investment securities: Available for sale 2,293,383 2,401,526 Held to maturity (fair values of $1,876,334 and $1,984,700) 1,874,022 2,016,795 Trading account securities 77,989 74,417 Loans 11,092,775 11,008,419 Less allowance for loan losses 144,039 143,614 - -------------------------------------------------------------------------------------------------------------------- Net loans 10,948,736 10,864,805 - ------------------------------------------------------------------------------------------------------------------- Premises and equipment 202,445 204,903 Goodwill 922,481 934,467 Core deposit intangibles 272,665 287,707 Other assets 615,373 429,705 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 17,761,836 17,745,792 =================================================================================================================== LIABILITIES Deposits: Demand (non-interest-bearing) $ 1,532,741 1,366,178 Savings, NOW and money market accounts 4,613,763 4,474,114 Jumbo and brokered certificates of deposits 1,950,014 2,006,741 Consumer time deposits 4,182,391 4,132,598 - ------------------------------------------------------------------------------------------------------------------- Total deposits 12,278,909 11,979,631 Short-term borrowed funds 958,129 1,212,903 Federal Home Loan Bank advances 1,597,504 1,649,055 Long-term debt 39,080 39,379 Other liabilities 449,726 450,064 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 15,323,348 15,331,032 - ------------------------------------------------------------------------------------------------------------------- Capital trust pass-through securities 42,636 49,922 STOCKHOLDERS' EQUITY Preferred stock, no par value. Authorized 5,000,000 shares; none issued -- -- Common stock, $2 par value. Authorized 400,000,000 shares; 205,487,104 and 205,246,098 shares issued 410,975 410,492 Additional paid-in capital 1,764,798 1,765,723 Retained earnings 191,400 165,829 Accumulated other comprehensive income 28,679 22,794 - ------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 2,395,852 2,364,838 - ------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 17,761,836 17,745,792 ===================================================================================================================
Commitments and contingencies See accompanying notes to consolidated financial statements. 3 National Commerce Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2001 and 2000 (Unaudited)
In Thousands Except Per Share Data 2001 2000 - --------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and fees on loans $ 246,149 87,876 Interest and dividends on investment securities: U.S. Treasury 641 401 U.S. Government agencies and corporations 50,728 27,675 States and political subdivisions (primarily tax-exempt) 2,560 1,715 Equity and other securities 20,315 12,011 Interest and dividends on trading account securities 898 476 Interest on time deposits in other banks 394 99 Interest on federal funds sold and other short-term investments 1,406 2,169 - --------------------------------------------------------------------------------------------------------------- Total interest income 323,091 132,422 - --------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 130,160 46,512 Short-term borrowed funds 15,831 12,367 Federal Home Loan Bank advances 23,416 12,050 Long-term debt 642 92 - --------------------------------------------------------------------------------------------------------------- Total interest expense 170,049 71,021 - --------------------------------------------------------------------------------------------------------------- Net interest income 153,042 61,401 Provision for loan losses 6,380 2,177 - --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 146,662 59,224 - --------------------------------------------------------------------------------------------------------------- OTHER INCOME Service charges on deposit accounts 27,290 7,542 Trust and custodian fees 13,882 2,350 Other service charges and fees 8,736 5,012 Broker/dealer revenue and other commissions 15,066 4,739 Other operating 8,185 4,300 Investment securities gains 720 1 - --------------------------------------------------------------------------------------------------------------- Total other income 73,879 23,944 - --------------------------------------------------------------------------------------------------------------- OTHER EXPENSES Personnel 59,900 20,906 Net occupancy 9,322 3,572 Equipment 5,835 1,766 Losses on interest rate swaps 672 4,765 Goodwill amortization 12,074 1,356 Core deposit intangibles amortization 15,042 1,472 Other operating 34,975 14,039 - --------------------------------------------------------------------------------------------------------------- Total other expenses 137,820 47,876 - --------------------------------------------------------------------------------------------------------------- Income before income taxes 82,721 35,292 Income taxes 30,431 11,300 - --------------------------------------------------------------------------------------------------------------- Net income $ 52,290 23,992 =============================================================================================================== EARNINGS PER COMMON SHARE Basic $ .25 .22 Diluted .25 .22 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 205,632 108,277 Diluted 208,545 109,737
See accompanying notes to consolidated financial statements. 4 National Commerce Financial Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2001 and 2000 (Unaudited)
In Thousands 2001 2000 - ----------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 52,290 23,992 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation, amortization and accretion, net 28,106 5,048 Provision for loan losses 6,380 2,177 Net gain on sales of investment securities (720) (1) Losses on interest rate swaps 672 4,765 Sales of loans held for sale 261,668 173,342 Origination of loans held for sale (261,977) (173,998) Deferred income taxes (180) (3,843) Changes in: Trading account securities (3,572) 1,540 Other assets (184,701) (30,077) Other liabilities (2,403) 26,967 Other operating activities, net 675 (6,716) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by operating activities (103,762) 23,196 - ------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Proceeds from: Maturities and issuer calls of investment securities held to maturity 231,432 8,251 Sales of investment securities available for sale 30,639 - Maturities and issuer calls of investment securities available for sale 234,344 5,939 Purchases of: Investment securities held to maturity (88,467) (157,155) Investment securities available for sale (144,724) (79,871) Premises and equipment (2,744) (1,177) Net originations of loans (84,909) (82,927) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities 175,571 (306,940) - ------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net increase in deposit accounts 297,554 100,241 Net decrease in short-term borrowed funds (254,774) (77,201) Net increase (decrease) in FHLB advances (53,332) 321,300 Repurchase and retirement of capital trust pass-through securities (7,303) -- Issuances of common stock from exercise of stock options 6,196 1,599 Issuances of common stock and other -- 699 Purchase and retirement of common stock (10,101) (8,671) Cash dividends paid (26,774) (11,361) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities (48,534) 326,606 - ------------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 23,275 42,862 Cash and cash equivalents at beginning of period 531,467 261,296 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 554,742 304,158 ======================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid during the period $ 171,475 75,494 Income taxes paid during the period $ 1,217 1,484
See accompanying notes to consolidated financial statements. 5 National Commerce Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of and for the Three Months Ended March 31, 2001 and 2000 (Unaudited) (1) CONSOLIDATION AND PRESENTATION The accompanying unaudited consolidated financial statements of National Commerce Financial Corporation ("NCFC") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of NCFC on a consolidated basis, and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with NCFC's Amended Annual Report on Form 10-K/A for the year ended December 31, 2000. Operating results for the three-month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. CONSOLIDATION NCFC is a bank holding company that provides diverse financial services through a regional network of banking affiliates and a national network of nonbanking affiliates. NCFC has two principal lines of business which are operated as business segments: traditional banking and financial enterprises. Financial enterprises include transaction processing, trust and asset management, retail banking consulting and capital markets. NCFC's wholly-owned bank subsidiaries include Central Carolina Bank and Trust Company ("CCB"), National Bank of Commerce, ("NBC") and NBC Bank, FSB (collectively, the "Subsidiary Banks"). The consolidated financial statements also include the accounts and results of operations of the wholly-owned non-bank subsidiaries of NCFC: TransPlatinum Service Corp., Commerce Capital Management, Inc., First Mercantile Trust, First Mercantile Capital Management, Inc., U.S.I. Alliance, National Commerce Capital Trust I and Monroe Properties. Additionally, both CCB and NBC have subsidiaries that provide a variety of services including retail banking consulting, trust, investment advisory, insurance, broker/dealer and leasing services. All significant intercompany transactions and accounts are eliminated in consolidation. EARNINGS PER SHARE Basic earnings per share ("EPS") excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during each period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding plus dilutive stock options (as computed under the treasury stock method) assumed to have been exercised during the period. COMPREHENSIVE INCOME Comprehensive income is the change in equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) for the quarters ended March 31, 2001 and 2000 and accumulated other comprehensive income (loss) as of March 31, 2001, December 31, 2000 and March 31, 2000 are comprised of unrealized gains and losses on certain investments in debt and equity securities and certain hedging instruments. (2) RESTATEMENTS As a result of technical violations of pooling of interest rules regarding treasury share repurchases and stock options, NCFC has restated its historical financial statements for the presentation of 9 business combinations as purchases rather than as poolings of interests as previously reported. The reasons for, and financial impact of, the adjustments are described in NCFC's Annual Report Form 10-K/A for the fiscal period ended December 31, 2000. As a result of the foregoing, NCFC's 2000 consolidated financial statements have been restated for the interim periods of 2000 and 1999, and fiscal years 2000, 1999 and 1998. The restated financial statements for the periods, including condensed financial statements for the quarter ended March 31, 2000, are included in NCFC's Annual Report Form 10-K/A for the fiscal period ended December 31, 2000. Management believes that NCFC's consolidated financial statements, as restated, include all adjustments necessary for a fair presentation of NCFC's financial position as of March 31, 2000 and its results of operations for the quarter then ended. 6 National Commerce Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) LOANS A summary of loans at March 31, 2001 and December 31, 2000 follows:
In Thousands 2001 2000 - -------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 1,341,041 1,223,032 Real estate-construction 2,035,547 1,907,533 Real estate-mortgage 6,129,392 5,959,114 Consumer 1,393,866 1,730,940 Revolving credit 60,818 58,840 Lease financing 149,515 145,883 - -------------------------------------------------------------------------------------------- Gross loans 11,110,179 11,025,342 Less unearned income 17,404 16,923 - -------------------------------------------------------------------------------------------- Total loans $11,092,775 11,008,419 - --------------------------------------------------------------------------------------------
(4) ALLOWANCE FOR LOAN LOSSES Following is the activity in the allowance for loan losses during the three months ended March 31, 2001 and 2000:
In Thousands 2001 2000 - -------------------------------------------------------------------------------------------- Balance at beginning of period $ 143,614 59,597 Provision charged to operations 6,380 2,177 Recoveries of loans previously charged-off 2,052 875 Loan losses charged to allowance (8,007) (3,560) - -------------------------------------------------------------------------------------------- Balance at end of period $ 144,039 59,089 - --------------------------------------------------------------------------------------------
(5) RISK ASSETS Following is a summary of risk assets at March 31, 2001, December 31, 2000, and March 31, 2000:
March 31, December 31, March 31, In Thousands 2001 2000 2000 - ---------------------------------------------------------------------------------------------- Nonaccrual loans $10,977 7,219 1,207 Other real estate acquired through loan foreclosures 5,512 5,652 220 Restructured loans 2,224 2,232 - Accruing loans 90 days or more past due 21,682 26,362 5,037 - ------------------------------------------------------------------ --------------------------- Total risk assets $40,395 41,465 6,464 - ----------------------------------------------------------------------------------------------
7 National Commerce Financial Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) COMPREHENSIVE INCOME The following table presents the components of other comprehensive income and the related tax effects allocated for the quarters ended March 31, 2001 and 2000.
2001 2000 ------------------------------- --------------------------------- Before Tax Net Before Tax Net tax (expense) of tax tax (expense) of tax In Thousands amount benefit amount amount benefit amount - ---------------------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities: Unrealized gains (losses) arising during holding period $10,912 (4,310) 6,602 (3,969) 1,568 (2,401) Less: Reclassification adjustment for gains realized in net income 720 (284) 436 1 - 1 Unrealized gains (losses) on cash flow hedging instruments: Unrealized losses arising during holding period (1,159) 458 (701) - - - Less: Reclasification adjustment for gains realized in net income (694) 274 (420) - - - Other comprehensive income (loss) 5,885 (2,402) Net income 52,290 23,992 - ---------------------------------------------------------------------------------------------------------------------- Comprehensive income $58,175 21,590 - ----------------------------------------------------------------------------------------------------------------------
(7) PER SHARE DATA The following schedule reconciles the numerators and denominators of the basic and diluted EPS computations for the quarters ended March 31, 2001 and 2000. Dilutive common shares arise from the potentially dilutive effect of NCFC's stock options outstanding.
In Thousand Except Per Share Data 2001 2000 - ----------------------------------------------------------------------------- BASIC EPS Average common shares outstanding 205,632 108,277 Net income $ 52,290 23,992 Earnings per share $ .25 .22 - ----------------------------------------------------------------------------- DILUTED EPS Average common shares outstanding 205,632 108,277 Average dilutive common shares 2,913 1,460 - ----------------------------------------------------------------------------- Adjusted average common shares 208,545 109,737 Net income $ 52,290 23,992 Earnings per share $ .25 .22 - -----------------------------------------------------------------------------
(8) CONTINGENCIES Certain legal claims have arisen in the normal course of business, which, in the opinion of management and counsel, will have no material adverse effect on the financial position of NCFC or its subsidiaries. 8 (9) SEGMENT INFORMATION TRADITIONAL BANKING This segment includes sales and distribution of financial products and services to consumer and corporate customers. These products and services include loan products such as residential mortgages, home equity loans, automobile and other personal loan products. Traditional banking also offers various deposit products that are designed for customers' saving and transaction needs. This segment also includes financial services provided to large and medium-sized corporations including real estate finance, asset-based lending and residential construction lending. Traditional banking also includes management of NCFC's investment portfolio and non-deposit based funding. FINANCIAL ENTERPRISES This segment is comprised of trust services and investment management, transaction processing, retail banking consulting/in-store licensing and institutional broker/dealer activities. The accounting policies of the individual segments are the same as those of NCFC. Transactions between business segments are conducted at fair value and are eliminated for reporting consolidated financial position and results of operations. There are no significant intersegment revenues. Net interest income is presented on a taxable-equivalent basis. Expenses for centrally provided services such as data processing, human resources, accounting and other back-office support functions and management overhead are allocated to each segment based upon various statistical information. The following tables present condensed income statements and average assets for each reportable segment.
Traditional Financial In Thousands banking Enterprises Total - ------------------------------------------------------------------------------------------------- Quarter ended March 31, 2001: Net interest income $ 156,221 3,992 160,213 Provision for loan loss 6,380 -- 6,380 - ------------------------------------------------------------------------------------------------- Net interest income after provision 149,841 3,992 153,833 Non-interest income 39,513 34,366 73,879 Non-interest expense 111,823 25,997 137,820 - ------------------------------------------------------------------------------------------------- Income before income taxes 77,531 12,361 89,892 Income taxes 32,733 4,869 37,602 - ------------------------------------------------------------------------------------------------- Net income $ 44,798 7,492 52,290 - ------------------------------------------------------------------------------------------------- Average assets $ 17,062,210 519,338 17,581,548 Quarter ended March 31, 2000: Net interest income $ 63,120 2,556 65,676 Provision for loan loss 2,177 -- 2,177 - ------------------------------------------------------------------------------------------------- Net interest income after provision 60,943 2,556 63,499 Non-interest income 9,493 14,450 23,943 Non-interest expense 38,085 9,790 47,875 - ------------------------------------------------------------------------------------------------- Income before income taxes 32,351 7,216 39,567 Income taxes 12,761 2,814 15,575 - ------------------------------------------------------------------------------------------------- Net income $ 19,590 4,402 23,992 - ------------------------------------------------------------------------------------------------- Average assets $ 6,909,432 373,433 7,282,865
9 (10) SUBSEQUENT EVENTS On April 6, 2001, NCFC announced that it had executed an agreement for NCFC to acquire First Vantage Bank, a $168 million financial institution with ten locations in East Tennessee. The acquisition is subject to regulatory approval and is expected to close in the third quarter of 2001. The transaction is anticipated to be accounted for as a purchase. On April 25, 2001, the stockholders of NCFC approved a name change of the former National Commerce Bancorporation to National Commerce Financial Corporation. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Our objective is to provide a concise but complete understanding of the financial condition and results of operations of National Commerce Financial Corporation ("NCFC" which also may be referred to as "we", "us" or "our") and its wholly-owned subsidiaries for the quarters ended March 31, 2001 and 2000. NCFC is a registered bank holding company which provides diverse financial services through a regional network of banking subsidiaries and a national network of nonbank subsidiaries. Our banking subsidiaries are Central Carolina Bank and Trust Company ("CCB"), a $10.5 billion state-chartered bank based in North Carolina, National Bank of Commerce ("NBC"), a $7.2 billion national banking association based in Tennessee and NBC Bank, FSB, a $23 million federal savings bank with branches in Mississippi (collectively, the "Subsidiary Banks") Additionally, NCFC owns 49 percent of First Market Bank, FSB, a $608 million institution based in Virginia. Our other wholly-owned subsidiaries are TransPlatinum Service Corp., a provider of financial services to the trucking and petroleum industries and bankcard services to merchants; Commerce Capital Management, Inc., an investment advisor; First Mercantile Trust ("First Mercantile"), a provider of processing and other services for retirement plans; First Mercantile Capital Management, Inc. ("First Mercantile Capital"), a provider of professional money management services for employee benefit plans; U.S.I. Alliance and Senior Housing Crime Prevention Foundation Investment Corporation, providers of security programs in the long-term care industry; National Commerce Capital Trust I, a special purpose entity formed to offer floating-rate capital trust pass-through securities; and Monroe Properties, an inactive subsidiary that has held foreclosed real estate. Additionally, both CCB and NBC have wholly-owned subsidiaries that provide a variety of services including retail banking consulting, trust, investment advisory, insurance, broker/dealer and leasing services. This discussion and analysis is intended to complement the unaudited financial statements and footnotes and the supplemental financial data appearing elsewhere in this Form 10-Q, and should be read in conjunction therewith. The following discussion contains certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to anticipated future operating and financial performance measures, including net interest margin, credit quality, business initiatives, growth opportunities and growth rates, among other things. Words such as "expects," "plans," "estimates," "projects," "objectives" and "goals" and similar expressions are intended to identify these forward-looking statements. We caution readers that such forward-looking statements are necessarily estimates based on management's judgment, and obtaining the estimated results is subject to a number of risks and uncertainties. Such risks include: . Increases in interest rates could have a material adverse effect on our funding costs and our net interest margin and, consequently, our earnings per share. . Our markets are intensely competitive, and competition in loan and deposit pricing, as well as the entry of new competitors in our markets through, among other means, de novo expansion and acquisitions could have a material adverse effect on our net interest margin, our ability to recruit and retain associates, our non-interest income and our ability to grow our banking and non-banking businesses at the same rate as we have historically grown. Moreover, the Gramm-Leach-Bliley Act has removed many obstacles to bank holding companies entering other financial services businesses. Several larger bank holding companies could enter the transaction processing, asset management, securities brokerage and capital markets businesses in our markets, deploying capital resources that are significantly greater than ours. Such activities could adversely affect our banking and non-banking businesses and have a material adverse effect on our earnings. . We continue to integrate CCB following our merger with CCB Financial Corporation in July 2000, and costs incurred in such continuing integration and difficulties we might experience in effecting the integration could have a material adverse effect on our efficiency ratio and our product delivery, which could adversely affect our earnings. . We have recently restated our earnings for 1998 through 2000 due to technical violations of pooling of interest rules, and any failure to meet consensus earnings estimates could have a more pronounced negative impact on our share price than if we had not restated our earnings for those years. . If the domestic economy suffers a longer and deeper slowdown than is currently anticipated, we could experience a decline in credit quality which could have a material adverse effect on our earnings. . We are subject to regulation by federal and state banking agencies and authorities and the Securities and Exchange Commission. Changes in or new regulations could make it more costly for us to do business or could force changes to the way we do business, which could have a material adverse effect on earnings. A variety of factors, including those described above, could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in this report. We do not assume any obligation to update these forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. Results of Operations Results of operations for the three months ended March 31, 2001 as compared to the three months ended March 31, 2000 are impacted significantly by the purchase acquisitions of Piedmont Bancorp, Inc. in April, 2000, CCB Financial Corporation in July, 2000 and First Mercantile and First Mercantile Capital in July, 2000. These companies are referred to collectively in the remainder of this discussion as the "Acquired Companies". Net income for the three months ended March 31, 2001 totaled $52.3 million compared to 2000's $24.0 million. First quarter 2000 income included a loss on interest rate swaps of $4.8 million ($3 million after-tax). Basic and diluted income per share totaled $.25 in 2001 and $.22 in the first quarter of 2000. Annualized returns on average assets and stockholders' equity were 1.21% and 8.87%, respectively, in 2001 compared to 2000's 1.32% and 14.79%. Excluding the non-recurring 2000 loss, annualized returns on average assets and stockholders' equity were 1.48% and 16.54%. 11 NET INTEREST INCOME Average Balances and Net Interest Income Analyses on a taxable equivalent basis for each of the periods are included in Table 1. Slower loan growth resulted in average earning assets growing $39.3 million during the first quarter of 2001 from the fourth quarter of 2000. During the first quarter of 2001, the Federal Reserve decreased the target federal funds rate three times, in 50 basis point increments. Changes in the federal funds rate generally affect other interest rates. The Subsidiary Banks' prime rates have fallen from 9.50% at December 31, 2000 to 8.00% at March 31, 2001 and compare to the March 31, 2000 prime rate of 9.00%. With the liability sensitive nature of our balance sheet, in times of falling interest rates, the decrease in interest expense from lower cost of interest-bearing liabilities exceeds the decrease in interest income from the lower yield on earning assets. Consequently, our net interest margin improved to 4.17% for the first quarter of 2001 compared to fourth quarter 2000's 4.12% and our interest rate spread widened to 3.50% compared to the fourth quarter's 3.37%. The net interest margin for the first quarter of 2000, which excludes the Acquired Companies, was 3.91% and the interest rate spread was 3.37%. Management expects additional decreases in short-term interest rates in 2001 as the Federal Reserve acts to combat recession fears and perceived slowdowns in the economy. We expect that such actions will result in additional improvements to our net interest income. PROVISION FOR LOAN LOSSES The provision for loan losses during the first quarter of 2001 was $6.4 million compared to $5.3 million in the fourth quarter of 2000 and $2.2 million in the first quarter of 2000. Net loan charge-offs (annualized) were .22%, .19% and .27% for the respective periods. Total risk assets fell $1.1 million from December 31, 2000. The allowance for loan losses as a percent of total loans and leases was 1.30% at March 31, 2001 and December 31, 2000. At March 31, 2000, prior to the purchase of the Acquired Companies, the allowance amounted to 1.45% of total loans and leases. The Company tracks a number of key performance indicators in establishing the allowance for loan losses. Management believes that indicators of portfolio quality and general economic conditions have not changed significantly since December 31, 2000. Consequently, the allowance for loan losses and the allocation of components of the allowance at March 31, 2001 are consistent with the amounts at December 31, 2000. The following table summarizes indicators of portfolio quality and the allowance for loan losses at March 31, 2001 and December 31 and March 31, 2000 and for the quarters then ended (dollars in millions):
March 31, 2001 December 31, 2000 March 31, 2000 -------------- ----------------- -------------- Loans outstanding $11,093 11,008 4,061 Ratio of allowance for loan losses to loans outstanding 1.30% 1.30 1.45 Average loans outstanding for the period $11,033 10,925 4,019 Ratio of annualized net charge-offs to average loans for the period 0.22% 0.19 0.27 Ratio of recoveries to charge-offs for the period 25.63% 20.39 24.58 Ratio of non-performing assets to: Loans outstanding and other assets acquired through loan foreclosures 0.17% 0.14 0.04 Total assets 0.11% 0.09 0.02 Ratio of total risk assets to: Loans outstanding and other assets acquired through loan foreclosures 0.36% 0.38 0.16 Total assets 0.23% 0.23 0.09 Allowance for loan losses to total risk assets 3.57X 3.46 9.14
Management performs a detailed analysis of the loan portfolio quarterly to determine the adequacy of the allowance for loan losses. The overall allowance analysis considers the results of detailed loan reviews, quantitative and qualitative indicators of the current quality of the loan portfolio and the inherent risk not captured in the reviews and assessments of individual loans or pools of loans. Based on its review, Management believes that the allowance for loan losses at March 31, 2001 is adequate to absorb estimated probable losses inherent in the loan portfolio. The most recent regulatory agency examinations have not revealed any material problem credits that had not been previously identified; however, future regulatory examinations may result in the regulatory agencies requiring additions to the allowance for loan losses based on information available at the date of examination. NONINTEREST INCOME AND EXPENSE Non-interest income, excluding investment securities transactions, increased from $23.9 million in first quarter 2000 to $73.2 million in first quarter 2001. Approximately $40.8 million of the increase is attributable to the Acquired Companies. In addition, institutional broker/dealer revenue and commissions increased by $6.4 million, from $4.4 million to $10.8 million, due to higher volumes of broker/dealer transactions experienced by NCFC's institutional broker, Capital Markets Group, Inc. Excluding Capital Markets and growth resulting from the Acquired Companies, non- interest income in first quarter 2001 increased by $2.1 million, or 10.8% over first quarter 2000. Annualized noninterest income as a percentage of average assets improved to 1.70% for first quarter 2001 compared to 1.32% in the same period of 2000. 12 Table 1 National Commerce Financial Corporation and Subsidiaries AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS Three Months Ended March 31, 2001 and 2000 (Taxable Equivalent Basis - Dollars In Thousands)
2001 2000 ----------------------------------- ---------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------------ --------- ---------- ------------ ----------- -------- EARNING ASSETS Loans (2) $ 11,033,307 249,355 9.14 % 4,019,195 89,795 8.98 U.S. Treasury and agency obligations (3) 2,890,477 54,301 7.53 1,683,005 28,490 6.78 States and political subdivision obligations 183,132 3,011 6.58 130,468 2,630 7.87 Equity and other securities (3) 1,130,856 20,818 7.36 701,990 13,030 7.42 Trading account securities 64,191 921 5.74 29,391 484 6.58 Federal funds sold and other short-term investments 100,589 1,461 5.89 143,560 2,169 6.08 Time deposits in other banks 28,200 394 5.67 10,201 100 3.93 - --------------------------------------------------------------------------------------------------------------------- Total earning assets (3) 15,430,752 330,261 8.64 6,717,810 136,698 8.17 - --------------------------------------------------------------------------------------------------------------------- NON-EARNING ASSETS Cash and due from banks 346,416 197,360 Premises and equipment 205,552 47,645 All other assets, net 1,598,828 320,050 - --------------------------------------------------------------------------------------------------------------------- Total assets $ 17,581,548 7,282,865 - --------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Savings and time deposits $ 10,657,118 130,160 4.95 % 4,157,695 46,513 4.50 Short-term borrowed funds 1,179,763 15,831 5.58 907,632 12,367 5.51 Federal Home Loan Bank advances 1,544,128 23,415 5.47 881,429 12,050 5.50 Long-term debt 39,380 642 6.56 6,384 92 5.75 - --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 13,420,389 170,048 5.14 5,953,140 71,022 4.80 - --------------------------------------------------------------------------------------------------------------------- OTHER LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits 1,284,045 524,934 Other liabilities 435,508 102,618 Capital trust pass-through securities 49,842 49,911 Stockholders' equity 2,391,764 652,262 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' $ 17,581,548 7,282,865 equity - --------------------------------------------------------------------------------------------------------------------- Net interest income and net interest margin (4) $ 160,213 4.17 % 65,676 3.91 - --------------------------------------------------------------------------------------------------------------------- Interest rate spread (5) 3.50 % 3.37 - ---------------------------------------------------------------------------------------------------------------------
(1) The taxable equivalent basis is computed using 35% federal and applicable state tax rates in 2001 and 2000. (2) The average loan balances include non-accruing loans. (3) The average balances for debt and equity securities exclude the effect of their mark-to-market adjustment, if any. (4) Net interest margin is computed by dividing net interest income by total earning assets. (5) Interest rate spread equals the earning asset yield minus the interest- bearing liability rate. 13 Non-interest expenses increased to $137.8 million in first quarter 2001 from $43.1 million in first quarter 2000, after excluding the 2000 loss on interest rate swaps. Approximately $83.4 million of the increase is attributable to the Acquired Companies. In addition, expenses of Capital Markets increased by $4.5 million, from $3.5 million to $8.0 million related to the increase in broker/dealer revenues discussed previously. Excluding Capital Markets and growth resulting from the Acquired Companies, non-interest expense in first quarter 2001 increased by $6.8 million, or 17.2% over first quarter 2000 due to expansion of service delivery in the NBC markets and general growth of our operations. As a result of the aforementioned changes, net overhead (noninterest expense less noninterest income) as a percentage of average assets decreased to .85% for the three months ended March 31, 2001 from .90% for the same period in 2000. Our cash efficiency ratio (noninterest expense, less goodwill and core deposit amortization, as a percentage of taxable equivalent net interest income and noninterest income) was 47.29% for the three months ended March 31, 2001 and 44.95% for the 2000 period. The following schedule presents noninterest income and expense as a percentage of average assets for the three months ended March 31, 2001 and 2000 (excluding goodwill and core deposit amortization, and the non-recurring loss on interest rate swaps in 2000).
2001 2000 - ------------------------------------------------------------------------- Noninterest income 1.70 % 1.32 - ------------------------------------------------------------------------- Personnel expense 1.38 1.15 Occupancy and equipment expense .35 .29 Other operating expense, cash basis .82 .78 - ------------------------------------------------------------------------- Noninterest expense, cash basis 2.55 2.22 - ------------------------------------------------------------------------- Net overhead, cash basis .85 % .90 - -------------------------------------------------------------------------
Financial Condition; Liquidity and Capital Resources Total assets have increased $10.3 billion since March 31, 2000 with the majority of the increase attributable to the Acquired Companies. Average assets have increased $10.3 billion from $7.3 billion for the quarter ended March 31, 2000 to $17.6 billion for the quarter ended March 31, 2001. At March 31, 2001, total risk assets (consisting of nonaccrual loans, foreclosed real estate, restructured loans and accruing loans 90 days or more past due) amounted to $40.4 million or .36% of outstanding loans plus other assets acquired through loan foreclosures. This compares to $41.5 million or .38% at December 31, 2000 and $6.5 million or .16% at March 31, 2000, prior to purchase of the Acquired Companies. The allowance for loan losses to risk assets was 3.57x at March 31, 2001 compared to 3.46x at December 31, 2000 and 9.14x at March 31, 2000. Our capital position has historically been strong as evidenced by the ratio of average tangible equity to average tangible assets of 7.20% and 7.30% for the three months ended March 31, 2001 and 2000, respectively. The unrealized gains on investment securities available for sale, net of applicable tax expense, increased $6.2 million from December 31, 2000 to result in an after-tax unrealized gain at March 31, 2001 of $29.0 million. As of March 31, 2001, unrealized gains on investment securities available for sale, net of applicable tax expense, increased book value per share by $.14. On April 25, 2001, NCFC's Board of Directors declared a quarterly cash dividend of $.13 per common share. The dividend is payable July 2, 2001, to stockholders of record as of June 8, 2001. Bank holding companies are required to comply with the Federal Reserve's risk-based capital guidelines requiring a minimum leverage ratio relative to total assets and minimum capital ratios relative to risk-adjusted assets. The minimum leverage ratio is 3% if the holding company has the highest regulatory rating and meets other requirements but the leverage ratio required may be raised from 100 to 200 basis points if the holding company does not meet these requirements. The minimum risk-adjusted capital ratios are 4% for Tier I capital and 8% for total capital. Additionally, the Federal Reserve may set capital requirements higher than the minimums we have described for holding companies whose circumstances warrant it. NCFC and the Subsidiary Banks continue to maintain higher capital ratios than required under regulatory guidelines. 14 The following table discloses NCFC's components of capital, risk-adjusted asset information and capital ratios at March 31, 2001. Tier I capital $ 1,214,745 Tier II capital: Allowable loan loss reserve 144,039 Subordinated debt 13,194 Other 9 ------------- Total capital $ 1,371,987 ========================================================== Risk-adjusted assets $ 12,302,220 Average regulatory assets 16,385,457 Tier I capital ratio 9.87 % Total capital ratio 11.15 Leverage ratio 7.42 ========================================================== 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 March 31, 2001. 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. NCFC's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of NCFC's loan and deposit portfolios is such that a significant rise or decline in interest rates may adversely impact net market values and net interest income. NCFC is not subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with the Asset/Liability Management Committee ("ALCO"), comprised of senior management. ALCO regularly reviews NCFC's interest rate risk position and adopts balance sheet strategies that are intended to optimize net interest income while maintaining market risk within a set of Board-approved guidelines. During the quarter ended March 31, 2001, NCFC terminated $1.5 billion notional amount of pay fixed/receive variable interest rate swap agreements. Management believes that there have been no other significant changes in market risk as disclosed in NCFC's Amended Annual Report on Form 10-K/A for the year ended December 31, 2000. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a). Exhibits None. (b). Reports on Form 8-K A Current Report on Form 8-K dated January 19, 2001 was filed under Items 5 and 7 reporting a publicly-disseminated press release and the text of a presentation by management. A Current Report on Form 8-K dated March 20, 2001 was filed March 26, 2001 under Item 4 reporting a change in accountants. This report was amended on Form 8-K/A filed June 11, 2001. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL COMMERCE FINANCIAL CORPORATION --------------------------------------- Registrant Date: July 2, 2001 /s/ ERNEST C. ROESSLER ---------------------- Ernest C. Roessler President and Chief Executive Officer Date: July 2, 2001 /s/ SHELDON M. FOX ------------------ Sheldon M. Fox Chief Financial Officer Date: July 2, 2001 /s/ MARK A. WENDEL ------------------ Mark A. Wendel Senior Vice President and Chief Accounting Officer 17 -----END PRIVACY-ENHANCED MESSAGE-----