10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

For the period ended September 30, 2003

Commission File Number: 0-6094

NATIONAL COMMERCE FINANCIAL CORPORATION

(Exact name of issuer as specified in charter)

Tennessee	62-0784645
(State or other jurisdiction of 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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of

common stock, as of the latest practicable date.

Common Stock, $2 Par value	204,989,632
(Class of Stock)	(Shares outstanding as of November 13, 2003)

National Commerce Financial Corporation and Subsidiaries

INDEX TO FORM 10-Q

Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets September 30, 2003 and December 31, 2002	3
Consolidated Statements of Income Three and Nine Months Ended September 30, 2003 and 2002	4
Consolidated Statements of Stockholders’ Equity Nine Months Ended September 30, 2003 and 2002	5
Consolidated Statements of Cash Flows Nine Months Ended September 30, 2003 and 2002	6
Notes to Consolidated Financial Statements As of and for the Nine Months Ended September 30, 2003 and 2002	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
Item 4. Controls and Procedures	31
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K	32
Signatures	33

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

National Commerce Financial Corporation and Subsidiaries

CONSOLIDATED BALANCE SHEETS

September 30, 2003 and December 31, 2002

In Thousands Except Share Data	(Unaudited) September 30, 2003		December 31, 2002
ASSETS
Cash and due from banks	$	520,138	517,295
Time deposits in other banks		9,335	12,276
Federal funds sold and other short-term investments		105,629	73,186
Investment securities:
Available for sale (amortized cost of $5,240,354 and $4,693,316)		5,254,107	4,777,009
Held to maturity (market values of $1,444,687 and $953,294)		1,448,778	925,652
Trading account securities		175,048	116,954
Loans		13,262,380	12,923,940
Less allowance for loan losses		172,186	163,424
Net loans		13,090,194	12,760,516
Bank owned life insurance		237,840	227,051
Investment in First Market Bank, FSB		31,309	27,997
Premises and equipment		273,395	257,676
Goodwill		1,085,565	1,077,118
Core deposit intangibles		187,867	236,916
Other assets		470,884	462,470
Total assets	$	22,890,089	21,472,116
LIABILITIES
Deposits:
Demand (noninterest-bearing)	$	2,672,509	2,241,833
Savings, NOW and money market accounts		5,813,981	5,666,407
Jumbo and brokered certificates of deposits		2,277,003	1,723,548
Time deposits		4,695,840	4,862,946
Total deposits		15,459,333	14,494,734
Short-term borrowed funds		1,641,172	1,452,764
Federal Home Loan Bank advances		2,324,433	2,106,474
Trust preferred securities and long-term debt		303,248	296,707
Other liabilities		432,500	439,005
Total liabilities		20,160,686	18,789,684
STOCKHOLDERS’ EQUITY
Serial preferred stock. Authorized 5,000,000 shares; none issued		—	—
Common stock, $2 par value. Authorized 400,000,000 shares; 204,808,440 and 205,408,183 shares issued		409,617	410,816
Additional paid-in capital		1,736,411	1,753,241
Retained earnings		578,249	467,641
Accumulated other comprehensive income		5,126	50,734
Total stockholders’ equity		2,729,403	2,682,432
Total liabilities and stockholders’ equity	$	22,890,089	21,472,116

Commitments and contingencies (note 9)

See accompanying notes to consolidated financial statements.

3

National Commerce Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

Three and Nine Months Ended September 30, 2003 and 2002

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
In Thousands Except Per Share Data	2003			2002		2003	2002
INTEREST INCOME
Interest and fees on loans	$	186,080		214,802		571,848	648,923
Interest and dividends on investment securities:
U.S. Treasury		266		458		822	1,780
U.S. Government agencies and corporations		58,275		55,416		172,075	160,181
States and political subdivisions (primarily tax-exempt)		1,379		1,638		4,342	5,452
Equity and other securities		13,457		10,346		36,802	32,065
Interest and dividends on trading account securities		396		667		1,392	1,701
Interest on time deposits in other banks		16		26		58	336
Interest on federal funds sold and other short-term investments		286		187		785	453
Total interest income		260,155		283,540		788,124	850,891
INTEREST EXPENSE
Deposits		49,805		65,867		162,277	212,564
Short-term borrowed funds		4,619		5,393		13,685	13,354
Federal Home Loan Bank advances		18,236		24,010		61,751	69,825
Trust preferred securities and long-term debt		2,036		2,410		6,329	7,365
Total interest expense		74,696		97,680		244,042	303,108
Net interest income		185,459		185,860		544,082	547,783
Provision for loan losses		14,972		10,990		36,032	25,217
Net interest income after provision for loan losses		170,487		174,870		508,050	522,566
OTHER INCOME
Service charges on deposit accounts		42,295		41,391		127,045	115,518
Other service charges and fees		9,565		9,971		28,627	28,645
Broker/dealer revenue		24,739		19,600		73,972	52,663
Asset management		14,828		12,785		40,566	39,173
Mortgage banking income		22,420		5,350		53,392	11,598
Equity earnings from First Market Bank, FSB		1,314		1,074		3,311	2,363
Other		8,777		7,802		24,119	23,898
Gain on sale of merchant processing		37,141		—		37,141	—
Gain on branch sale		7,055		—		6,910	—
Investment securities gains (losses), net		(4,512	)	5,060		412	9,474
Total other income		163,622		103,033		395,495	283,332
OTHER EXPENSE
Personnel		85,807		71,149		250,603	208,400
Net occupancy		14,898		12,434		41,094	35,620
Equipment		7,509		7,454		22,906	20,481
Core deposit intangibles amortization		15,062		17,507		47,019	53,035
Other		51,709		48,114		149,454	133,781
First Mercantile litigation		—		—		20,695	—
Employment contract terminations		—		—		14,108	—
Debt retirement/prepayment penalties (gains)		31,987		(335	)	31,661	(335	)
Conversion/merger expenses		—		—		—	4,940
Total other expenses		206,972		156,323		577,540	455,922
Income before income taxes		127,137		121,580		326,005	349,976
Income taxes		41,328		38,603		104,599	111,232
Net income	$	85,809		82,977		221,406	238,744
EARNINGS PER COMMON SHARE
Basic	$	.42		.40		1.08	1.16
Diluted		.42		.40		1.07	1.14
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		204,609		206,259		204,834	206,126
Diluted		206,005		208,328		206,151	208,531

See accompanying notes to consolidated financial statements.

4

National Commerce Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2003 and 2002

(Unaudited)

	Shares of Common Stock		Common Stock			Additional Paid-In Capital		Retained Earnings		Other Comp. Income		Total Stockholders’ Equity
Balance January 1, 2002	205,058,713		$	410,117		1,756,128		276,342		12,744		2,455,331
Net income	—			—		—		238,744		—		238,744
Restricted stock transactions, net	4,615			9		1,890		—		—		1,899
Options exercised, net of shares tendered	2,034,268			4,069		33,986		—		—		38,055
Shares repurchased and retired	(1,275,500	)		(2,551	)	(28,550	)	—		—		(31,101	)
Cash dividends ($.47 per share)	—			—		—		(97,317	)	—		(97,317	)
Change in minimum pension liability, net of applicable income taxes	—			—		—		—		98		98
Change in unrealized gains on investment securities available for sale, net of applicable income taxes	—			—		—		—		34,913		34,913
Other transactions, net	(54,158	)		(108	)	(1,001	)	—		—		(1,109	)
Balance, September 30, 2002	205,767,938		$	411,536		1,762,453		417,769		47,755		2,639,513
Balance, January 1, 2003	205,408,183		$	410,816		1,753,241		467,641		50,734		2,682,432
Net income	—			—		—		221,406		—		221,406
Restricted stock transactions, net	25,943			52		1,432		—		—		1,484
Options exercised, net of shares tendered	881,429			1,764		12,084		—		—		13,848
Shares repurchased and retired	(1,474,300	)		(2,949	)	(29,272	)	—		—		(32,221	)
Cash dividends ($.54 per share)	—			—		—		(110,798	)	—		(110,798	)
Change in minimum pension liability, net of applicable income taxes	—			—		—		—		(742	)	(742	)
Change in unrealized gains on investment securities available for sale, net of applicable income taxes	—			—		—		—		(42,255	)	(42,255	)
Unrealized loss on cash flow hedges, net of applicable income taxes	—			—		—		—		(2,611	)	(2,611	)
Other transactions, net	(32,815	)		(66	)	(1,074	)	—		—		(1,140	)
Balance, September 30, 2003	204,808,440		$	409,617		1,736,411		578,249		5,126		2,729,403

See accompanying notes to the consolidated financial statements.

5

National Commerce Financial Corporation and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2003 and 2002

(Unaudited)

In Thousands	2003			2002
OPERATING ACTIVITIES
Net income	$	221,406		238,744
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net		91,185		73,850
Provision for loan losses		36,032		25,217
Net gain on sales of investment securities		(412	)	(9,474	)
Loss (gain) on debt retirement/prepayment penalties		31,661		(335	)
Deferred income taxes		(18,486	)	(3,977	)
Origination of loans held for sale		(6,271,005	)	(1,296,151	)
Sales of loans held for sale		6,342,647		1,198,784
Changes in:
Trading account securities		(58,094	)	94,322
Other assets		9,844		(23,209	)
Other liabilities		25,153		(111,609	)
Other operating activities, net		(5,351	)	2,108
Net cash provided by operating activities		404,580		188,270
INVESTING ACTIVITIES
Proceeds from:
Maturities and issuer calls of investment securities held to maturity		368,118		316,714
Sales of investment securities available for sale		1,334,091		1,492,696
Maturities and issuer calls of investment securities available for sale		2,048,576		1,724,837
Purchases of:
Investment securities held to maturity		(855,007	)	(349,576	)
Investment securities available for sale		(3,337,351	)	(3,010,566	)
Premises and equipment		(40,080	)	(28,977	)
Net originations of loans		(1,098,867	)	(256,691	)
Net cash paid on branch sales		(82,101	)	—
Net cash paid in business combinations		—		(324,132	)
Net cash used by investing activities		(1,662,621	)	(435,695	)
FINANCING ACTIVITIES
Net increase in deposit accounts		1,053,514		455,695
Net increase (decrease) in short-term borrowed funds		188,408		(161,048	)
Net increase (decrease) in Federal Home Loan Bank advances		186,327		(88,652	)
Decrease in long-term debt		(4,997	)	(2,909	)
Issuances of common stock from exercise of stock options, net		10,299		27,664
Purchase and retirement of common stock		(32,221	)	(31,101	)
Other equity transactions, net		(146	)	(742	)
Cash dividends paid		(110,798	)	(97,317	)
Net cash provided by financing activities		1,290,386		101,590
Net increase (decrease) in cash and cash equivalents		32,345		(145,835	)
Cash and cash equivalents at beginning of period (December 31)		602,757		644,420
Cash and cash equivalents at end of period	$	635,102		498,585
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the period	$	256,428		308,437
Income taxes paid during the period	$	134,809		150,045

See accompanying notes to consolidated financial statements.

6

National Commerce Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Nine Months Ended September 30, 2003 and 2002

(Unaudited)

(1) CONSOLIDATION AND PRESENTATION

The accompanying unaudited consolidated financial statements of National Commerce Financial Corporation (“NCF”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of NCF on a consolidated basis, and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with NCF’s Annual Report on Form 10-K for the year ended December 31, 2002. Operating results for the three- and nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

CONSOLIDATION NCF is a bank holding company that provides diverse financial services through a regional network of banking affiliates and a national network of nonbanking affiliates. NCF’s wholly owned banking subsidiaries include National Bank of Commerce (“NBC”) and NBC Bank, FSB. The consolidated financial statements also include the accounts and results of operations of NCF’s direct and indirect wholly owned non-bank subsidiaries. All significant intercompany transactions and accounts are eliminated in consolidation.

NCF has two business segments: traditional banking and financial enterprises. Financial enterprises include transaction processing, trust services and investment management, retail banking consulting/in-store licensing and broker/dealer activities.

Certain prior period amounts have been reclassified to conform to the 2003 presentation.

BUSINESS COMBINATIONS In 2002, NCF acquired certain bank branches from Wachovia and all the outstanding common stock of BancMortgage Financial Corp. (“BancMortgage”), an Atlanta-based mortgage originator, in purchase transactions consummated in February and December, respectively. The acquisitions continue NCF’s strategic expansion into high growth areas of the Southeast. Results of operations of the acquired companies were included in NCF’s 2002 consolidated statement of income from the respective dates of acquisition.

The 37 Wachovia branches and corresponding ATMs acquired in 2002 are located in North Carolina, South Carolina, Georgia and Virginia. This acquisition added to NCF’s balance sheet $1.4 billion in deposits, $450 million in loans, $25 million in fixed assets and $1 billion in available for sale investment securities which were subsequently sold to restructure the balance sheet. The net cash purchase price for these branches totaled $324 million. Core deposit intangible and goodwill recorded from the branches acquired amounted to $55 million and $125 million, respectively. The core deposit intangible is being amortized over a period of 7 years. In accordance with the terms of the acquisition agreement with Wachovia, NCF made a contingent purchase price payment in April 2003 of approximately $8 million based on the retention of specifically identified deposit accounts. The payment was recorded as an addition to goodwill.

7

National Commerce Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) CONSOLIDATION AND PRESENTATION (Continued)

EARNINGS PER SHARE Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income 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 net income by the weighted average number of common shares outstanding plus dilutive stock options (as computed under the treasury stock method) assumed to have been exercised during the period.

COMPREHENSIVE INCOME Comprehensive income is the change in equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income for the nine months ended September 30, 2003 and 2002 and accumulated other comprehensive income as of September 30, 2003, December 31, 2002 and September 30, 2002 are comprised of unrealized gains and losses on investment securities available for sale, unrealized gains and losses on cash flow hedges and adjustments of minimum pension liability.

STOCK-BASED COMPENSATION NCF from time to time 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, which become exercisable on certain future dates with continued service by employees. 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, which include any grant that is not at a fixed exercise price or whose vesting is dependent on future performance or some event other than the passage of time, compensation expense is recognized in accordance with APB Opinion No. 25 over the period the employee performs related service, also called the vesting period.

NCF discloses pro forma net income and earnings per share in the notes to its consolidated financial statements as if compensation expense was measured under the fair value based method according to Statement No. 123, “Accounting for Stock-based Compensation.” 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. Had compensation expense for the stock option plans been determined consistent with Statement No. 123, NCF’s net income and net income per share for the three- and nine-months ended September 30, 2003 and 2002 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 for future periods.

		Three Months Ended September 30,			Nine Months Ended September 30,
In Thousands Except Per Share Data		2003		2002	2003	2002
Net income	As reported	$	85,809	82,977	221,406	238,744
	Pro forma		83,823	80,960	214,486	232,748
Basic EPS	As reported		.42	.40	1.08	1.16
	Pro forma		.41	.39	1.05	1.13
Diluted EPS	As reported		.42	.40	1.07	1.14
	Pro forma		.41	.39	1.04	1.12

8

National Commerce Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2) LOANS

Management internally classifies the loan portfolio by the purpose of the borrowing. Such classification is presented below as of September 30, 2003 and December 31, 2002. This classification method emphasizes the source of loan repayment rather than the collateral for the loan, which is the classification method followed for regulatory reporting purposes.

In Thousands	2003		2002
Commercial	$	3,654,366	3,329,451
Construction and commercial real estate		3,854,437	3,655,671
Mortgage (including loans held for sale)		1,304,138	1,798,326
Consumer		4,238,782	3,933,482
Revolving credit		81,916	74,463
Lease financing		128,741	132,547
Total loans	$	13,262,380	12,923,940

Mortgage loans held for sale, included above, totaled $365 million at September 30, 2003 and $430 million at December 31, 2002.

During March 2003, NCF consummated a transaction securitizing approximately $646 million of single-family mortgages and retained a majority of the resulting securities which are classified as available for sale. The securitization was a private securitization with NCF retaining subordinated beneficial interests. NCF retained the servicing rights for the securitized single-family mortgages and initially recorded the mortgage servicing rights at approximately $5 million.

9

National Commerce Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) ALLOWANCE FOR LOAN LOSSES

Following is the activity in the allowance for loan losses during the nine months ended September 30, 2003 and 2002:

In Thousands	2003			2002
Balance at beginning of period	$	163,424		156,401
Charge-offs:
Commercial		(5,357	)	(6,168	)
Construction and commercial real estate		(244	)	(261	)
Secured by real estate		(3,935	)	(2,534	)
Consumer		(17,621	)	(16,763	)
Revolving credit		(3,151	)	(2,825	)
Lease financing		(804	)	(590	)
Total charge-offs		(31,112	)	(29,141	)
Recoveries:
Commercial		752		666
Construction and commercial real estate		30		8
Secured by real estate		240		211
Consumer		2,460		3,173
Revolving credit		852		688
Lease financing		90		6
Total recoveries		4,424		4,752
Net charge-offs		(26,688	)	(24,389	)
Provision for loan losses		36,032		25,217
Changes from acquisitions (sales)		(582	)	6,107
Balance at end of period	$	172,186		163,336

(4) NONPERFORMING ASSETS

Following is a summary of nonperforming assets as of September 30, 2003, December 31, 2002 and September 30, 2002:

In Thousands	September 2003		December 2002	September 2002
Nonaccrual loans	$	35,983	30,806	29,654
Foreclosed real estate		25,500	25,480	24,612
Nonperforming loans and foreclosed real estate		61,483	56,286	54,266
Other repossessed assets		5,138	9,285	9,688
Nonperforming assets	$	66,621	65,571	63,954
Accruing loans 90 days or more past due	$	59,691	56,384	49,803

10

National Commerce Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(5) GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 and year ended December 31, 2002 for NCF’s business segments are as follows:

In Thousands	Traditional Banking		Financial Enterprises	Total
Balance as of January 1, 2002	$	911,185	34,972	946,157
Other goodwill adjustments		927	—	927
Goodwill acquired during the year		130,034	—	130,034
Balance as of December 31, 2002		1,042,146	34,972	1,077,118
Other goodwill adjustments		6,039	—	6,039
Goodwill acquired during the year		2,408	—	2,408
Balance as of September 30, 2003	$	1,050,593	34,972	1,085,565

Core deposit intangibles are amortized over a period of up to 10 years using an accelerated method. Following is an analysis of core deposit intangibles:

	Nine Months Ended September 30, 2003				Year Ended December 31, 2002
In Thousands	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount	Accumulated Amortization
Core deposit intangibles	$	403,097	(215,230	)	405,127	(168,211	)
Aggregate amortization expense for the period		47,019			69,930
Estimated annual amortization expense:
For year ended 12/31/03		61,356
For year ended 12/31/04		51,279
For year ended 12/31/05		41,610
For year ended 12/31/06		32,248
For year ended 12/31/07		23,265

11

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 nine months ended September 30, 2003 and 2002:

	2003							2002
In Thousands	Before Tax Amount			Tax (Expense) Benefit	Net of Tax Amount			Before Tax Amount		Tax (Expense) Benefit		Net of Tax Amount
Unrealized (losses) gains on securities:
Unrealized (losses) gains arising during holding period	$	(69,218	)	27,212		(42,006	)	66,560		(25,915	)	40,645
Reclassification adjustment for gains realized in net income		(412	)	163		(249	)	(9,474	)	3,742		(5,732	)
Minimum pension liability:
Adjustment to minimum pension liability		(1,237	)	495		(742	)	161		(63	)	98
Unrealized losses on cash flow hedging instruments:
Unrealized losses arising during holding period		(4,352	)	1,741		(2,611	)	—		—		—
Other comprehensive (income) loss	$	(75,219	)	29,611		(45,608	)	57,247		(22,236	)	35,011
Net income						221,406						238,744
Comprehensive income					$	175,798						273,755

(7) PER SHARE DATA

The following schedule presents the components of the basic and diluted EPS computations for the three and nine months ended September 30, 2003 and 2002. Dilutive common shares arise from the potentially dilutive effect of NCF’s stock options outstanding.

	Three Months Ended September 30,			Nine Months Ended September 30,
In Thousands Except Per Share Data	2003		2002	2003	2002
Basic EPS
Average common shares		204,609	206,259	204,834	206,126
Net income	$	85,809	82,977	221,406	238,744
Earnings per share		.42	.40	1.08	1.16
Diluted EPS
Average common shares		204,609	206,259	204,834	206,126
Average dilutive common shares		1,396	2,069	1,317	2,405
Adjusted average common shares		206,005	208,328	206,151	208,531
Net income	$	85,809	82,977	221,406	238,744
Earnings per share		.42	.40	1.07	1.14

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National Commerce Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(8) SUPPLEMENTARY INCOME STATEMENT INFORMATION

Following is a breakdown of the components of “other operating” expense on the Consolidated Statement of Income for the three- and nine-month periods ended September 30, 2003 and 2002:

	Three Months Ended September 30,			Nine Months Ended September 30,
In Thousands	2003		2002	2003	2002
Legal and professional fees	$	9,823	10,558	27,798	29,347
Telecommunications		4,663	4,603	13,715	12,901
Data processing		5,670	4,388	16,494	11,577
Marketing		2,494	2,913	7,980	8,117
Printing and office supplies		2,745	4,192	9,841	11,389
Postage and freight		2,395	2,486	7,906	7,313
All other		23,919	18,974	65,720	53,137
Total other operating expenses	$	51,709	48,114	149,454	133,781

(9) CONTINGENCIES

NCF has settled a purported class action filed in December 2002 against NCF, its subsidiaries First Mercantile Trust Company (“First Mercantile”) and National Bank of Commerce, a subsidiary of First Mercantile, and two officers of First Mercantile. The purported class action is pending in the United States District Court for the Western District of Tennessee and alleges, among other things, that fees collected by First Mercantile on investments held in common trust funds were improperly charged.

The settlement agreement has been approved by the federal court in Tennessee and all appeal periods have expired. The settlement agreement as approved by the court includes no admission of liability or wrongdoing by NCF or other defendants and, assuming all conditions are met, will fully resolve the lawsuit. Under the settlement, the plaintiff class will receive a total benefit with an estimated value of approximately $18 million, payable $11 million in cash and $7 million in go-forward fee reductions. The cash portion of the settlement was paid in October 2003. NCF is pursuing recovery of a portion of the settlement and its legal fees with its corporate insurance carriers; however, the amount of recovery, if any, cannot be determined at this time. NCF has not factored any recovery into its $21 million pre-tax charge for the first nine months of 2003. No expenses were recognized during the third quarter for this matter.

Certain other legal claims have arisen in the normal course of business, which, in the opinion of management and counsel, will have no material adverse effect on the financial position of NCF or its subsidiaries.

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National Commerce Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) SEGMENT INFORMATION

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 products also include various deposit products that are designed for customers’ saving and transaction needs. This segment also includes lending and related financial services provided to small- to medium-sized companies. Included among these services are several specialty services such as real estate finance, asset-based lending and residential construction lending. The traditional banking segment 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. Revenues and expenses of NCF’s correspondent mortgage business have been reclassified from financial enterprises to traditional banking for all periods presented.

The accounting policies of the individual segments are the same as those of NCF. Transactions between business segments are conducted at arm’s length. Interest income for tax-exempt loans and securities is adjusted to a taxable-equivalent basis.

The following tables present condensed income statements for each reportable segment:

In Thousands	Traditional Banking			Financial Enterprises		Intersegment Eliminations		Total
Quarter ended September 30, 2003:
Net interest income (TE)	$	187,218		5,298		—		192,516
Provision for loan losses		(14,972	)	—		—		(14,972	)
Gain on sale of merchant processing		—		37,141		—		37,141
Gain on branch sale		7,055		—		—		7,055
Noninterest income		69,403		51,965		(1,942	)	119,426
Intangibles amortization		(15,062	)	—		—		(15,062	)
Debt retirement/prepayment penalties		(31,987	)	—		—		(31,987	)
Noninterest expense		(120,927	)	(40,938	)	1,942		(159,923	)
Income before income taxes (TE)		80,728		53,466		—		134,194
Income taxes		27,533		20,852		—		48,385
Net income	$	53,195		32,614		—		85,809
Quarter ended September 30, 2002:
Net interest income (TE)	$	187,947		5,355		—		193,302
Provision for loan losses		(10,990	)	—		—		(10,990	)
Noninterest income		61,964		42,835		(1,766	)	103,033
Intangibles amortization		(17,507	)	—		—		(17,507	)
Debt retirement/prepayment gains		335		—		—		335
Noninterest expense		(106,918	)	(33,999	)	1,766		(139,151	)
Income before income taxes (TE)		114,831		14,191		—		129,022
Income taxes		40,510		5,535		—		46,045
Net income	$	74,321		8,656		—		82,977

14

National Commerce Financial Corporation and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(10) SEGMENT INFORMATION (Continued)

In Thousands	Traditional Banking			Financial Enterprises		Intersegment Eliminations		Total
Nine months ended September 30, 2003:
Net interest income (TE)	$	549,498		15,799		—		565,297
Provision for loan losses		(36,032	)	—		—		(36,032	)
Gain on sale of merchant processing		—		37,141		—		37,141
Gain on branch sale		6,910		—		—		6,910
Noninterest income		206,165		150,937		(5,658	)	351,444
Intangibles amortization		(47,019	)	—		—		(47,019	)
First Mercantile litigation		—		(20,695	)	—		(20,695	)
Employment contract terminations		(14,108	)	—		—		(14,108	)
Debt retirement/prepayment penalties		(31,661	)	—		—		(31,661	)
Noninterest expense		(353,153	)	(116,562	)	5,658		(464,057	)
Income before income taxes (TE)		280,600		66,620		—		347,220
Income taxes		99,832		25,982		—		125,814
Net income	$	180,768		40,638		—		221,406
Nine months ended September 30, 2002:
Net interest income (TE)	$	555,667		14,582		—		570,249
Provision for loan losses		(25,217	)	—		—		(25,217	)
Noninterest income		160,500		128,159		(5,327	)	283,332
Intangibles amortization		(53,035	)	—		—		(53,035	)
Debt retirement/prepayment gains		335		—		—		335
Conversion/merger expense		(4,940	)	—		—		(4,940	)
Noninterest expense		(304,589	)	(99,020	)	5,327		(398,282	)
Income before income taxes (TE)		328,721		43,721		—		372,442
Income taxes		116,647		17,051		—		133,698
Net income	$	212,074		26,670		—		238,744

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following sets forth management’s discussion and analysis of financial condition and results of operations of National Commerce Financial Corporation (“NCF”) and its wholly owned subsidiaries on a consolidated basis for the nine months ended September 30, 2003 and 2002. NCF is a registered bank holding company that provides diverse financial services through a regional network of banking subsidiaries and a national network of non-bank subsidiaries. This Quarterly Report on Form 10-Q should be read in conjunction with NCF’s 2002 Annual Report on Form 10-K.

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:

• A major element of our net income is our net interest income, which consists largely of the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We cannot predict fluctuations of market interest rates, which are affected by, among other things, changes in inflation rates, levels of business activity, unemployment levels, monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve Board, money supply and domestic and foreign financial markets. Moreover, we cannot predict the impact of interest rate changes on deposit mix, loan demand, loan prepayments and other decisions that our customers typically make. Rapid changes in interest rates could have a material adverse effect on our funding costs and our net interest margin and, consequently, our earnings per share. At the same time, if short-term interest rates remain at current levels, then our net interest margin will not be expected to improve significantly.

• Our markets are intensely competitive. 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 operations in our existing markets. Moreover, we have expanded our operations into new markets, such as Atlanta, and will continue to look for additional expansion opportunities, in each case facing substantial competition from financial institutions with better-established infrastructure and presence in those markets. Competition could have a material adverse effect on net interest margin, our ability to recruit and retain associates in new and existing markets, our noninterest income and our ability to grow our banking and non-banking businesses at the same rate as we have historically grown. Moreover, recent banking legislation has removed many obstacles to bank holding companies entering other financial services businesses. Several larger bank holding companies could enter or expand their existing 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.

• The economy in the United States continues to be sluggish and there is significant uncertainty about the economic future. Various domestic or international military or terrorist activities or conflicts could further impact the domestic and international economy. If the recovery of the domestic economy continues to lag, we could experience a decline in credit quality, resulting in higher charge-offs and higher provisions for loan losses which would have a material adverse effect on our earnings. Continued economic weakness could have a material adverse effect on the value of collateral, such as real estate assets, that secure our loans. In addition, we could have a decline in loan demand, our largest source of revenue.

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• We are subject to regulation by federal 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, cover debt obligations and for other corporate purposes. Federal banking law restricts the ability of our banking subsidiaries to pay dividends to the Parent Company. Although we expect to continue receiving dividends from our banking subsidiaries sufficient to meet our current and anticipated cash needs, a decline in their profitability 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 (“GAAP”). In accordance with these policies, we make estimates and assumptions that affect the amounts reported in those financial statements. As discussed more fully in the 2002 Annual Report on Form 10-K, we believe that our determination of the allowance for loan losses and the valuation of assets, including the impairment of intangibles, involve a higher degree of judgment and complexity than our other significant accounting policies. We refer you to our 2002 Annual Report for a more complete description of our critical accounting policies. The allowance for loan losses is discussed more fully in the section following under the heading “Provision for Loan Losses.”

As of September 30, 2003, we have unamortized goodwill totaling $1.1 billion and core deposit intangibles totaling $188 million (see Note 5 to the Consolidated Financial Statements). Mortgage servicing rights totaled $17 million at September 30, 2003. Intangible assets subject to amortization will be reviewed for impairment in accordance with GAAP. Goodwill and intangible assets not subject to amortization will be reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Results of Operations – Three Months Ended September 30, 2003 and 2002

Net income for the three months ended September 30, 2003 totaled $86 million compared to 2002’s $83 million. Basic and diluted net income per share were $.42 in third quarter 2003 and $.40 in the third quarter of 2002. Annualized returns on average assets and stockholders’ equity were 1.50 percent and 12.45 percent, respectively, in 2003 compared to 1.59 percent and 12.63 percent, respectively, for the three months ended September 30, 2002.

During the third quarter, gains totaling $44 million were realized from the sales of NCF’s merchant processing portfolio and five bank branches. Third quarter earnings also include the effect of certain actions which better position us for stronger earnings in future periods, including expenses for $32 million of early debt retirement penalties; severance of $2 million; $1 million of occupancy expense for consolidating ten branches; investment securities losses of $5 million; and other items which total $4 million. These events roughly offset the gains realized and, collectively, had no material impact on reported net income per share.

Net income for third quarter 2003 includes a full quarter’s results of operations of BancMortgage and 37 Wachovia branches and corresponding ATMs (the “acquired Wachovia operations”) acquired in December 2002 and February 2002, respectively. The quarter ended September 30, 2002 includes only the results of the acquired Wachovia operations.

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In the first quarter 2003, we consummated a transaction to purchase traditional branch buildings from Wachovia and assume Wachovia’s lease obligations for seven additional branch buildings in the Atlanta market. These branches complement our existing and planned Atlanta area in-store branches and will give us the fifth largest branch presence in the Atlanta Metropolitan Statistical Area (“MSA”) by the end of 2003 with approximately 60 branches opened or under development. Under the terms of our agreement with Wachovia, we are not permitted to commence operations in these branches until the fourth quarter of 2003. The settlement on an additional branch was delayed and we anticipate that the transaction will close at a later date.

We are focusing our efforts on capturing a five percent share of the $62 billion deposit market in the Atlanta MSA within five years. The expansion to Atlanta solidifies our geographic footprint, linking Tennessee and the north Georgia regions with the westernmost edge of our North and South Carolina operations. Having built our branch network in the fastest growing MSAs in the Southeast, we will now focus on increasing market share in each region.

Through October 2003, our Atlanta franchise consists of 31 full-service banking locations of which three are traditional and 28 are in-store, one private banking team and one commercial lending team. During the third quarter, four additional in-store locations as well as an additional private banker were added. Two in-store locations and four traditional locations, previously acquired from Wachovia, opened in October 2003. A fifth traditional location will open by the end of fourth quarter increasing the total number of Atlanta area branch locations to 38 by year-end. The openings of additional in-store locations as well as the other acquired Wachovia branches are planned for 2004 but their respective opening dates have not yet been determined.

Additionally, NCF began a pilot program with Wal-Mart in October 2003 to enhance the performance of its existing National Bank of Commerce branches in 16 Wal-Mart locations in Georgia and Tennessee. These branches will be co-branded “Wal-Mart Money Centers by National Bank of Commerce”. The branches will be staffed and operated by NBC, and may deliver certain financial services currently offered by Wal-Mart (for example, money transfers, money orders and payroll check cashing) as well as the complete array of traditional banking and financial services offered by NBC. We seek to provide customers a convenient, one-stop financial center inside the Wal-Mart stores.

NET INTEREST INCOME Average Balances and Net Interest Income Analyses on a taxable equivalent basis for each of the periods are included in Table 1. Taxable equivalent interest income is a non-GAAP financial measure used by NCF and other financial services companies to reflect tax-advantaged interest income on loans and securities on an equivalent pre-tax basis. Taxable equivalent net interest income was $193 million in the third quarter of 2003 and 2002, decreasing slightly in 2003 due to our lower net interest margin. NCF’s net interest margin declined 44 basis points from 4.27 percent in the third quarter of 2002 to 3.83 percent in the third quarter of 2003 due to decreases in interest rates over the past twelve months. Declines in interest rates hurt our net interest margin through our investment and loan portfolios as explained more fully below.

Accelerated prepayments of our investments in collateralized mortgage obligations resulted in increased amortization of premiums on those investments. We experienced lower overall investment yields as proceeds from called/prepaid investments were reinvested in securities at then current, lower yields. Additionally, we experienced lower commercial loan yields because of continued declines during the quarter in short-term interest rates. We were unable to reduce our deposit and other funding costs to the same extent as the repricing of our loans and our lower re-investment rate on securities. In addition, many fixed rate borrowers opted to refinance their loans into variable rate products to take advantage of the historically low interest rates. We did experience 16 percent annualized loan growth (excluding mortgages available for sale) at September 30, 2003 over June 30, 2003’s level which partially offset the effect of the lower loan yields. Overall, our yield on interest-earning assets fell 111 basis points from quarter-ended September 2002 to the same period in 2003.

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Table 1

AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS

Three Months Ended September 30, 2003 and 2002

(Taxable Equivalent Basis - Dollars in Thousands) (1)

	2003						2002
	Average Balance		Interest		Average Yield/ Rate		Average Balance	Interest	Average Yield/ Rate
Earning assets:
Loans (2)	$	13,065,302		188,073	5.72	%	12,600,075	217,482	6.86
U.S. Treasury and agency obligations (3)		5,476,165		62,717	4.58		4,431,463	59,570	5.38
States and political subdivision obligations (3)		98,756		2,028	8.22		125,483	2,501	7.97
Other securities (3)		1,113,693		13,675	4.91		753,404	10,540	5.60
Trading securities		136,198		416	1.22		75,782	672	3.55
Time deposits in other banks		5,726		16	1.11		5,475	26	1.87
Federal funds sold and other short-term investments		148,627		287	.76		39,867	191	1.90
Total earning assets		20,044,467		267,212	5.31		18,031,549	290,982	6.42
Non-earning assets:
Cash and due from banks		450,576					418,062
Bank owned life insurance		235,741					221,185
Investment in First Market Bank		30,471					26,221
Premises and equipment		276,435					251,228
Goodwill		1,083,340					1,071,943
Core deposit intangibles		197,593					262,844
All other assets, net		408,676					356,642
Total assets	$	22,727,299					20,639,674
Interest-bearing liabilities:
Savings, NOW and money market accounts	$	5,845,036		9,372	.64	%	5,591,451	15,605	1.11
Jumbo and brokered certificates of deposit		2,166,011		6,452	1.18		1,683,886	8,611	2.03
Time deposits		4,770,283		33,981	2.82		4,778,297	41,651	3.46
Total interest-bearing deposits		12,781,330		49,805	1.55		12,053,634	65,867	2.17
Short-term borrowed funds		1,608,179		4,619	1.14		1,192,955	5,393	1.79
FHLB advances		2,218,184		18,236	3.26		2,133,208	24,010	4.47
Trust preferred securities and long-term debt		297,701		2,036	2.74		281,684	2,410	3.42
Total interest-bearing liabilities		16,905,394		74,696	1.75		15,661,481	97,680	2.47
Other liabilities and stockholders’ equity:
Demand deposits		2,565,673					1,989,040
Other liabilities		522,151					382,656
Stockholders’ equity		2,734,081					2,606,497
Total liabilities and stockholders’ equity	$	22,727,299					20,639,674
Net interest income and net interest margin (4)				192,516	3.83	%		193,302	4.27
Interest rate spread (5)					3.56	%			3.95
Tax equivalent adjustment				7,057				7,442
GAAP net interest income and net interest margin			$	185,459	3.69	%		185,860	4.10

(1) The taxable equivalent basis is computed using 35% federal and applicable state tax rates in 2003 and 2002.

(2) The average loan balances include non-accruing loans. Gross loan fees of $1 million and $2 million for 2003 and 2002, respectively, are included in interest income.

(3) The average balances for debt and equity securities exclude the effect of their mark-to-market adjustment, if any.

(4) Net interest margin is computed by dividing net interest income by total earning assets.

(5) Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.

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Our cost of interest-bearing liabilities declined by only 72 basis points from 2.47 percent for the three months ended September 30, 2002 to 1.75 percent for the three months ended September 30, 2003. While interest-bearing deposit costs declined 62 basis points, longer-term liabilities such as FHLB advances declined 121 basis points due in part to our early termination of certain FHLB advances as discussed in the following paragraph. The contribution of “net free liabilities” to the net interest margin (computed as net interest margin less the interest rate spread) fell to 27 basis points for the three months ended September 30, 2003 from 32 basis points for the three months ended September 30, 2002. We have focused sales efforts on increasing our noninterest-bearing deposits. Average noninterest-bearing deposits increased $190 million from June 30, 2003 to September 30, 2003. Despite the increase in “net free liabilities” of approximately $769 million, their benefit to our net interest margin declined as a result of the significant decline in the average yield on our interest-earning assets as discussed previously.

During the third quarter 2003, we have managed our asset sensitivity to a more neutral position. During the later part of the second quarter, we converted $200 million of floating rate, LIBOR-based loans to fixed-rate loans using interest rate swaps designated as cash flow hedges. Additionally, in the third quarter, NCF prepaid approximately $658 million of fixed-rate FHLB advances with weighted average rates of 4.27 percent, replacing the funding with lower-cost borrowings, and sold approximately $300 million of investment securities, reinvesting the proceeds in higher yielding securities with a comparable average life. Early termination penalties of $32 million on the early retirement of the debt recorded during the quarter will be recouped through lower future interest expense as we believe we will be able to replace this funding with other, cheaper short-term borrowings. Lastly, due to the extremely low interest rate environment, at times we may curtail or refrain from the reinvestment of cash flows from our investment portfolio, instead using proceeds to pay off wholesale funding liabilities and reduce our balance sheet thereby improving capital ratios. Our Asset/Liability Management Committee (“ALCO”), which monitors our interest sensitivity and liquidity, continues to target a neutral to slightly asset-sensitive position in recognition that interest rate increases will likely begin as the economy begins to improve.

The Federal Reserve last adjusted the target federal funds rate in June 2003 by reducing it 25 basis points. We reduced our prime lending rate by the same 25 basis points. Historically, the Federal Reserve has not increased interest rates until the national unemployment rate is on a sustained downward trend. We anticipate a very slow-paced recovery of the U.S. economy. See the “Liquidity and Interest Sensitivity” section for additional discussion of our asset sensitivity.

PROVISION FOR LOAN LOSSES The provision for loan losses during the third quarter of 2003 was $15 million compared to $11 million in the third quarter of 2002. Net loan charge-offs totaled $10 million in the third quarter of 2003 and $9 million in the third quarter of 2002, which represent .31 percent and .29 percent (annualized) net charge-offs to average loans for the respective periods. The allowance for loan losses as a percent of total loans was 1.30 percent at September 30, 2003 and 1.28 percent at September 30, 2002. The current level of the allowance for loan losses provides a coverage level of 4.30 times the current quarter’s annualized net charge-offs and 4.79 times nonperforming loans.

Management performs an analysis of the loan portfolio quarterly to determine the adequacy of the allowance for loan losses. The overall allowance analysis considers the results of detailed loan reviews, quantitative and qualitative indicators of the current quality of the loan portfolio and the inherent risk not captured in the reviews and assessments of individual loans or pools of loans. We also track a number of key performance indicators in establishing the allowance for loan losses. As discussed previously, the U.S. economy continues to show signs of weakness and while general economic conditions have deteriorated, our portfolio quality indicators have not dramatically deteriorated. Management believes that our strong collateral positions will prevent significant charge-offs from assets that are currently not performing. However, continued economic weakness could have a material adverse effect on the value of collateral, such as real estate. Table 2 summarizes indicators of portfolio quality and the allowance for loan losses as of and for the five quarters ended September 30, 2003.

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Table 2

INDICATORS OF PORTFOLIO QUALITY AND

ALLOWANCE FOR LOAN LOSSES

Five Quarters Ended September 30, 2003

(Dollars in Thousands)

	2003			2003	2003	2002	2002
	Third Quarter			Second Quarter	First Quarter	Fourth Quarter	Third Quarter
Loans outstanding	$	13,262,380		12,909,893	12,288,866	12,923,940	12,740,563
Ratio of allowance for loan losses to loans outstanding		1.30	%	1.30	1.33	1.26	1.28
Average loans outstanding for the period	$	13,065,302		12,614,546	12,789,028	12,803,821	12,600,075
Ratio of annualized net charge-offs to average loans for the period		.31	%	.28	.24	.22	.29
Ratio of recoveries to charge-offs for the period		11.80	%	14.23	17.20	14.99	13.17
Ratio of nonperforming loans to:
Loans outstanding		.27	%	.26	.27	.24	.23
Total assets		.16	%	.15	.15	.14	.14
Ratio of nonperforming assets to:
Loans outstanding plus foreclosed real estate and other repossessed assets		.50	%	.51	.55	.51	.50
Total assets		.29	%	.29	.31	.31	.31
Allowance for loan losses to total nonperforming loans		4.79	x	4.94	4.96	5.30	5.51

The ratio of nonperforming loans to loans outstanding was .27 percent at September 30, 2003 compared to .24 percent at December 31, 2002 and .23 percent at September 30, 2002. Nonperforming assets have remained stable over the last four quarters. At September 30, 2003, total nonperforming assets (consisting of nonperforming loans, foreclosed real estate and other repossessed assets) amounted to $67 million or .50 percent of outstanding loans plus other real estate acquired through foreclosure and other repossessed assets. This compares to $66 million or .51 percent at December 31, 2002 and $64 million or .50 percent at September 30, 2002.

Based on its review, management believes that the allowance for loan losses at September 30, 2003 is adequate to absorb estimated probable losses inherent in the loan portfolio. As discussed in our 2002 Annual Report on Form 10-K, we refined our risk scoring system in late 2002 to better align our risk definitions with regulatory requirements. By year-end 2002, we had substantially completed the steps to refine the criteria and review loans but we did not complete the re-evaluation of risk factors assigned to each credit category. The refinements resulted in certain credits shifting from “special mention” to “substandard”; however, management believes that the modification of credit classifications did not indicate deterioration of credit quality as much as different grading methodologies.

Our model for computing allowance for loan losses assigns risk factors to each credit category based on many factors, including historical loan losses within each credit category. “Substandard” credits are given a substantially higher risk factor than “special mention” credits. As a result of not completing our re-evaluation of risk factors by year-end, the shift of certain credits from “special mention” to “substandard” increased the allowance allocated to

21

specific credits and decreased the unallocated portion of the allowance. We completed our risk factor re-evaluation process during the first quarter of 2003. Our re-evaluation indicated that lower risk factors than those used in the December 31, 2002 model were warranted. Consequently, our unallocated allowance for loan losses increased to approximately $45 million at September 30, 2003 compared to $25 million at December 31, 2002. The September 30, 2003 unallocated allowance is comparable to our unallocated allowance for periods prior to December 31, 2002. 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 adjustments to the allowance for loan losses based on information available at the date of examination.

NONINTEREST INCOME AND EXPENSE Noninterest income, excluding investment securities transactions, increased from $98 million in third quarter 2002 to $168 million in third quarter 2003. During the third quarter of 2003, gains totaling $44 million were realized from the sales of NCF’s merchant processing portfolio and five banking branches. Broker/dealer revenue and other commissions increased $5 million, from $20 million for third quarter 2002 to $25 million in third quarter 2003 due primarily to sales of fixed income securities to institutional customers and, to a lesser extent, increases in our retail brokerage business. Higher interest rates may result in declined institutional brokerage revenue in future quarters. Mortgage banking income, which includes the results of BancMortgage acquired in December 2002, increased $17 million from $5 million in 2002 to $22 million in 2003, on over $2.7 billion of residential mortgage loan originations. The mortgage banking industry experienced tremendous levels of refinancings due to historically low rates. However, mortgage rates rose during the third quarter and refinancing applications have declined from the levels experienced in the first six months of the year. The trend may continue and lower levels of mortgage banking income may be experienced due to lower refinancing activity. Annualized noninterest income as a percentage of average assets improved to 2.86 percent for third quarter 2003 compared to 1.98 percent in the same period of 2002. Deposit service charges increased primarily due to increased NSF fees offset by declines in debit card revenues from the industry settlement of debit card fees.

Noninterest expense increased $51 million to $207 million in third quarter 2003 from $156 million in third quarter 2002 due in large part to the $32 million in penalties on the early retirement of debt previously discussed. Personnel expenses increased $15 million in the third quarter of 2003 over the third quarter of 2002 primarily due to commissions paid for higher revenue in the mortgage and broker/dealer businesses, approximately $2 million of severance payments incurred through re-alignment of staffing needs and, to a lesser extent, the BancMortgage acquisition. We had 5,458 full-time equivalent employees at September 30, 2003 compared to 5,402 at September 30, 2002. We anticipate minimal increases in FTE’s during the remainder of 2003 as we plan to fund FTE increases required for our Atlanta expansion with FTE reductions elsewhere in the company.

Occupancy and equipment expense increased $3 million in third quarter 2003 over the same quarter in 2002 due in part to costs associated with consolidation of ten branches and our Atlanta branch expansion. Other expenses increased $4 million in third quarter 2003 (see Note 8 to the Consolidated Financial Statements) over the same quarter in 2002. Data processing expense increases were related to new technology platforms including implementation of imaging checks and statements and branch automation in addition to increases in Internet banking customers. Included within all other expense are increased FDIC insurance, courier expenses and ATM and debit card fees.

In the third quarter of 2003, core deposit intangibles amortization totaled $15 million compared to $18 million for the quarter ended September 30, 2002. The decline in the expense is consistent with the accelerated amortization method we use. During the third quarter, we recorded $2 million of gross premiums received from branches sold as a reduction to core deposit intangibles related to deposits associated with those branches when acquired. During the fourth quarter of 2003, we anticipate continuing our branch optimization process whereby we may sell certain branches in outlying areas of the franchise and consolidate other branches; we anticipate that approximately five to ten branches may be impacted in the fourth quarter. We anticipate that approximately 20 to 30 branches will be sold or closed during this branch optimization process.

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Results of Operations – Nine Months Ended September 30, 2003 and 2002

Net income for the nine months ended September 30, 2003 totaled $221 million compared to $239 million for the same period in 2002. Basic and diluted net income per share were $1.08 and $1.07, respectively, for the first nine months of 2003 and $1.16 and $1.14, respectively, for the first nine months of 2002. Annualized returns on average assets and stockholders’ equity were 1.34 percent and 10.92 percent, respectively, in 2003 compared to 1.58 percent and 12.56 percent, respectively, for the nine months ended September 30, 2002.

Excluding the third quarter 2003 special events discussed above that essentially offset each other, net income and earnings per diluted share in the first nine months of 2003 were reduced by a $13 million charge (after-tax), or $.07 per diluted share, related to the proposed settlement of a class action lawsuit against NCF’s First Mercantile business unit and a $9 million charge (after-tax), or $.04 per diluted share on employment contract termination payments. The first nine months of 2002 included a charge of $3 million (after-tax), or $.02 per diluted share, for conversion and merger expenses. In addition, we had $5 million of securities gains during the first six months of 2003.

Net income for first nine months of 2003 includes a full nine months of operations of BancMortgage and the acquired Wachovia operations that were acquired in December 2002 and February 2002, respectively. Net income for the first nine months of 2002 includes only the results of operations of the acquired Wachovia operations since their acquisition date.

NET INTEREST INCOME Average Balances and Net Interest Income Analyses on a taxable equivalent basis for each of the periods are included in Table 3. Taxable equivalent net interest income was $565 million in the first nine months of 2003, compared to $570 million for the first nine months of 2002. This decrease was due to the lower interest rates in effect during 2003 versus 2002 offset by higher levels of earning assets and interest- bearing liabilities. The decrease in the yield on our interest-earning assets caused interest income to decrease $163 million from the nine months ended September 30, 2002 but higher volume of interest-earning assets increased interest income by $99 million from the 2002 level to result in a net decrease of $64 million. The impact on interest expense of decreased rates paid on interest-bearing liabilities ($89 million) was partially offset by increased interest expense due to higher volumes of interest-bearing liabilities ($30 million) to result in a net decrease in interest expense of $59 million.

The yield on our interest-earning assets declined from 6.63 percent in the first nine months of 2002 to 5.57 percent for the first nine months of 2003. The decline of 106 basis points was largely attributable to a decline of 108 and 77 basis points, respectively, in the loan and investment yields. These declines were attributable to lower interest rates available for reinvested assets after existing assets matured or repriced, the negative effect on variable rate assets due to lower short-term interest rates and higher premium amortization on investment securities.

In comparison to the 106 basis point decline in our interest-earning asset yield, our cost of interest-bearing liabilities declined by only 67 basis points for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002. Consequently, our interest rate spread tightened 39 basis points to 3.59 percent for the nine months ended September 30, 2003. The contribution of “net free liabilities” to the net interest margin (computed as net interest margin less the interest rate spread) fell to 30 basis points for the nine months ended September 30, 2003 from 35 basis points for the same period in 2002. Despite the increase in “net free liabilities” of approximately $629 million, their benefit to our net interest margin declined as a result of the significant decline in the average yield on our interest-earning assets as discussed previously. Consequently, NCF’s net interest margin declined 44 basis points from 4.33 percent in the first nine months of 2002 to 3.89 percent in the first nine months of 2003.

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Table 3

AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS

Nine Months Ended September 30, 2003 and 2002

(Taxable Equivalent Basis - Dollars in Thousands) (1)

	2003						2002
	Average Balance		Interest		Average Yield/ Rate		Average Balance	Interest	Average Yield/ Rate
Earning assets:
Loans (2)	$	12,823,971		578,173	6.03	%	12,349,955	657,159	7.11
U.S. Treasury and agency obligations (3)		5,258,917		185,133	4.69		4,218,149	172,589	5.45
States and political subdivision obligations (3)		106,473		6,439	8.06		134,531	8,209	8.14
Other securities (3)		994,825		37,303	5.00		761,604	32,869	5.75
Trading securities		115,076		1,439	1.67		80,245	1,727	2.87
Time deposits in other banks		7,000		58	1.11		18,590	336	2.41
Federal funds sold and other short-term investments		102,782		794	1.03		30,024	468	2.08
Total earning assets		19,409,044		809,339	5.57		17,593,098	873,357	6.63
Non-earning assets:
Cash and due from banks		424,121					442,199
Bank owned life insurance		231,812					217,573
Investment in First Market Bank		29,365					25,425
Premises and equipment		270,491					243,245
Goodwill		1,080,869					1,051,179
Core deposit intangibles		213,119					271,507
All other assets, net		410,813					300,065
Total assets	$	22,069,634					20,144,291
Interest-bearing liabilities:
Savings, NOW and money market accounts	$	5,765,615		32,335	.75	%	5,625,867	51,534	1.28
Jumbo and brokered certificates of deposit		1,999,718		21,019	1.41		1,596,697	25,719	2.15
Time deposits		4,864,862		108,923	2.99		4,655,235	135,311	4.11
Total interest-bearing deposits		12,630,195		162,277	1.72		11,877,799	212,564	2.39
Short-term borrowed funds		1,416,728		13,685	1.29		1,096,987	13,354	1.63
FHLB advances		2,158,008		61,751	3.83		2,058,921	69,825	4.53
Trust preferred securities and long-term debt		297,902		6,329	2.84		281,928	7,365	3.52
Total interest-bearing liabilities		16,502,833		244,042	1.98		15,315,635	303,108	2.65
Other liabilities and stockholders’ equity:
Demand deposits		2,362,096					1,887,139
Other liabilities		493,610					399,749
Stockholders’ equity		2,711,095					2,541,768
Total liabilities and stockholders’ equity	$	22,069,634					20,144,291
Net interest income and net interest margin (4)				565,297	3.89	%		570,249	4.33
Interest rate spread (5)					3.59	%			3.98
Tax equivalent adjustment				21,215				22,466
GAAP net interest income and net interest margin			$	544,082	3.74	%		547,783	4.16

(1) The taxable equivalent basis is computed using 35% federal and applicable state tax rates in 2003 and 2002.

(2) The average loan balances include non-accruing loans. Gross loan fees of $9 million and $13 million for 2003 and 2002, respectively, are included in interest income.

(3) The average balances for debt and equity securities exclude the effect of their mark-to-market adjustment, if any.

(4) Net interest margin is computed by dividing net interest income by total earning assets.

(5) Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.

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In late March 2003, we consummated a securitization transaction involving “one-to-four family” mortgages. The transaction was a private securitization with NCF retaining subordinated beneficial interests. NCF securitized $428 million of adjustable rate mortgages (ARMs) and $218 million of fixed rate mortgages. We retained all but approximately $90 million of the newly created securities. NCF will continue to service all the loans and will be compensated for its servicing responsibilities at market rates. Mortgage servicing rights of approximately $5 million were initially recorded as an asset in this transaction.

PROVISION FOR LOAN LOSSES The provision for loan losses during the first nine months of 2003 was $36 million compared to $25 million in the first nine months of 2002. Net loan charge-offs totaled $27 million in the nine months ended September 30, 2003 and $24 million in the nine months ended September 30, 2002 which represents .28 percent and .26 percent (annualized) net charge-offs to average loans for the respective periods. The allowance for loan losses as a percent of total loans was 1.30 percent at September 30, 2003 and 1.28 percent at September 30, 2002. The current level of the allowance for loan losses provides a coverage level of 4.83 times annualized net charge-offs for the nine months ended September 30, 2003.

NONINTEREST INCOME AND EXPENSE Noninterest income, excluding investment securities transactions, increased from $274 million in the first nine months of 2002 to $395 million in the first nine months of 2003. Gains totaling $44 million were realized from the sales of NCF’s merchant processing portfolio and five banking branches during the third quarter of 2003. Service charges on deposit accounts increased $11 million from $116 million in the first nine months of 2002 to $127 million in the first nine months of 2003 due to higher volume of commercial accounts, the impact of lower interest rates in computing commercial service charges, increases in ATM and check card usage, and increases in overdraft fees primarily due to growth in consumer demand deposit accounts. Broker/dealer revenue and other commissions increased $21 million, from $53 million for the first nine months of 2002 to $74 million in the first nine months of 2003 due primarily to sales of fixed income securities to institutional customers and, to a lesser extent, improvements in our retail brokerage business. Mortgage banking income, which includes the results of BancMortgage acquired in December 2002, increased $41 million from $12 million in the nine months ended September 30, 2002 to $53 million in the same period of 2003, on over $6.3 billion of residential mortgage loan originations.

Noninterest expense increased $122 million to $578 million in the first nine months of 2003 from $456 million in the same period of 2002, due primarily to the $32 million in penalties on the early retirement of debt previously discussed, the $21 million charge related to the proposed settlement of a class action lawsuit against NCF’s First Mercantile business unit and the $14 million charge related to employment contract terminations as previously discussed. Noninterest expense for 2002 includes $5 million of conversion/merger expense related to the business combinations discussed in Note 1 to the financial statements. Personnel expenses increased $42 million in the first nine months of 2003 over the first nine months of 2002 primarily due to commissions paid for higher revenue in the mortgage and broker/dealer businesses, an increase in salaries, payroll taxes and insurance driven by higher overall headcount during 2003 compared to 2002, an increase in pension expense in 2003 and severance costs incurred in the third quarter of 2003. We had 5,458 full-time equivalent employees at September 30, 2003 compared to 5,490 at December 31, 2002 and 5,402 at September 30, 2002.

Occupancy and equipment expense increased $8 million in the first nine months of 2003 over the same period in 2002 due in large part to the previously discussed branch consolidation costs and our expanded Atlanta network. Other expenses increased $16 million in the first nine months of 2003 (see Note 8 to the Consolidated Financial Statements). Data processing expense increases were related to new technology platforms including implementation of imaging checks and statements and branch automation in addition to increases in Internet banking customers. Included within all other expense are increased FDIC insurance, courier expenses and ATM and debit card fees related to the expanded branch network.

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Financial Condition and Capital Resources

Total assets have increased to $22.9 billion at September 30, 2003 from $21.5 billion at December 31, 2002 and $20.9 billion at September 30, 2002. Quarterly average assets increased to $22.7 billion for the third quarter of 2003 from $20.6 billion for the same quarter in 2002. The increase was attributable to the BancMortgage acquisition and Atlanta expansion, as well as growth in existing markets.

Our ratio of average equity to average assets has fallen from 12.62 percent as of September 30, 2002 to 12.28 percent as of September 30, 2003 due to the 9.6 percent increase in our average assets as well as the impact of our share repurchase program which decreased average equity. Our book value per share at September 30, 2003 was $13.33 compared to $12.83 at September 30, 2002. The effect of unrealized losses on investment securities available for sale, net of applicable tax expense, decreased stockholders’ equity by $42 million from December 31, 2002. As of September 30, 2003, unrealized net gains on investment securities available for sale, net of applicable tax expense, totaled $8 million and contributed $.04 per share to period-end book value.

On October 20, 2003, NCF’s Board of Directors declared a quarterly cash dividend of $.20 per common share payable January 2, 2004 to shareholders of record December 5, 2003. NCF’s Board of Directors announced approval in April 2003 of a stock repurchase program authorizing the repurchase of up to three million shares through December 31, 2003. Under the April 2003 repurchase authorization, 2,116,000 shares remain available for repurchase in the remainder of 2003. During the first nine months of 2003, approximately 1,474,000 shares were repurchased at an average cost of $21.86 per share.

Bank holding companies are required to comply with the Federal Reserve’s risk-based capital guidelines requiring a minimum leverage ratio relative to average 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.

Each of our banking subsidiaries is subject to similar risk-based and leverage capital requirements adopted by its applicable federal banking agency. NCF and our banking subsidiaries continue to maintain higher capital ratios than required under regulatory guidelines and all of our banking subsidiaries were considered to be “well-capitalized” at September 30, 2003. Table 4 discloses NCF and NBC’s components of capital, risk-adjusted asset information and capital ratios at September 30, 2003.

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Table 4

CAPITAL INFORMATION AND RATIOS

As of September 30, 2003

(Dollars in Thousands)

	NCF					NBC
In Thousands	Regulatory Minimum			Actual		Regulatory Minimum		Actual
Tier I capital	$	627,207			1,694,293	621,209		1,571,344
Tier II capital:
Allowable loan loss reserve					172,186			171,719
Other					53			53
Total capital	$	1,254,414			1,866,532	1,242,418		1,743,116
Risk-adjusted assets				$	15,680,184			15,530,233
Average regulatory assets					21,363,244			21,259,906
Tier I capital ratio		4.00	%		10.81	4.00	%	10.12
Total capital ratio		8.00			11.90	8.00		11.22
Leverage ratio		3.00			7.93	3.00		7.39

Liquidity and Interest Sensitivity

We manage interest sensitivity so as to mitigate 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 ALCO. 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. An analysis of our interest sensitivity position at September 30, 2003 is presented in Table 5. At September 30, 2003, we had a cumulative “negative gap” (interest-sensitive liabilities, equity and interest rate swaps exceeded interest-sensitive assets) of $1.2 billion or 5.27 percent of total assets over a twelve-month horizon. This compares to a cumulative positive gap of $909 million or 4.23 percent of total assets over a twelve-month horizon at December 31, 2002. The ratio of assets to liabilities, equity and interest rate swaps was .9x at September 30, 2003 compared to 1.10x at December 31, 2002. Throughout the remainder of 2003, ALCO will manage interest rate sensitivity to a more neutral to slightly asset sensitive position by shortening the duration of assets and lengthening the duration of liabilities.

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In June 2003, the Federal Reserve reduced the federal funds rate 25 basis points to 1 percent and NCF lowered its prime rate by the same amount to 4 percent. As a result of the asset sensitive gap position in the less than 30 day category, as shown in Table 5, additional declines in interest rates could have a negative impact on our net interest margin during the fourth quarter and into 2004 until our interest-bearing liabilities reprice.

Gap Analysis is a limited measurement tool, however, because it does not incorporate the interrelationships between interest rates charged or paid, balance sheet trends and reaction to interest rate changes. In addition, a gap analysis model does not consider that changes in interest rates do not affect all categories of assets and liabilities equally or simultaneously. Therefore, ALCO uses Gap Analysis as a tool to monitor changes in the balance sheet structure. To estimate the impact that changes in interest rates would have on our earnings, ALCO uses Simulation Analysis. ALCO prepares and reviews the Simulation Analysis quarterly. The most recent Simulation Analysis was as of August 31, 2003 and those results do not vary significantly from those that would have been obtained for an analysis as of September 30, 2003.

Simulation Analysis is performed using a computer-based asset/liability model incorporating current portfolio balances and rates, contractual maturities, repricing opportunities, and assumptions about prepayments, future interest rates, and future volumes. Using this information, the model calculates earnings estimates under multiple interest rate scenarios. To measure the sensitivity of our earnings, the results of multiple simulations, which assume changes in interest rates, are compared to the “base case” simulation, which assumes no changes in interest rates. The sensitivity of earnings is expressed as a percentage change in comparison to the “base case” simulation. The model assumes an immediate parallel shift in the interest rate environment. Using data as of August 31, 2003, and including the impact of the debt restructuring discussed earlier, a 100 basis point increase is projected to decrease net income 1.4 percent and a 100 basis point decrease is projected to decrease net income 3.3 percent. The model uses asymmetrical pricing assumptions with certain borrowings whereby interest rates are assumed not to be able to fall as much as they are able to rise (a floor is established but no ceiling). With call risk, in a falling interest rate environment, issuer calls of higher yielding securities produce excess cash that would be re-invested at the lower rates available in the market. In a rising rate environment, maturities of lower-yielding callable securities are extended and less cash is generated for re-investment at the higher market rates available.

If simulation results show that earnings sensitivity exceeds the targeted limit, ALCO will adopt on-balance sheet and/or off-balance sheet strategies to bring earnings sensitivity within target guidelines. ALCO reviews the interest-earning and interest-bearing portfolios to ensure a proper mix of fixed and variable rate products.

Estimating the amount of interest rate risk requires using significant 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 quarterly on all market risk measurement analyses to help understand the relative sensitivity of key assumptions and thereby better understand and evaluate 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.

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Table 5

INTEREST SENSITIVITY ANALYSIS

(Dollars in Thousands)

	As of September 30, 2003 (1)
	30 Days Sensitive			6 Months Sensitive		6 Months to 1 Year Sensitive		Total Sensitive		Beyond 1 Year Sensitive		Total
Assets:
Short term investments	$	290,012		—		—		290,012		—		290,012
Investment securities		697,529		440,210		859,417		1,997,156		4,705,729		6,702,885
Loans		6,538,262		970,051		953,353		8,461,666		4,800,714		13,262,380
Other assets		—		—		—		—		2,634,812		2,634,812
Total assets		7,525,803		1,410,261		1,812,770		10,748,834		12,141,255		22,890,089
Liabilities:
Noninterest DDA		223,364		446,728		—		670,092		2,002,417		2,672,509
Savings deposits		933,960		647,462		647,462		2,228,884		3,585,097		5,813,981
Time deposits		1,902,378		1,992,132		1,693,023		5,587,533		1,385,310		6,972,843
Short-term borrowed funds		1,481,172		—		150,000		1,631,172		10,000		1,641,172
Long-term debt		1,262,083		73,878		514		1,336,475		1,291,206		2,627,681
Other liabilities		—		—		—		—		432,500		432,500
Total liabilities		5,802,957		3,160,200		2,490,999		11,454,156		8,706,530		20,160,686
Total equity		—		—		—		—		2,729,403		2,729,403
Total liabilities and equity		5,802,957		3,160,200		2,490,999		11,454,156		11,435,933		22,890,089
Interest rate swaps:
Pay floating/receive fixed		300,000		200,000		—		500,000		(500,000	)	—
Total interest rate swaps		300,000		200,000		—		500,000		(500,000	)	—
Interest sensitivity gap	$	1,422,846		(1,949,939	)	(678,229	)	(1,205,322	)
Cumulative gap	$	1,422,846		(527,093	)	(1,205,322	)
Cumulative ratio of assets to liabilities, equity and interest rate swaps		1.23	x	.94		.90
Cumulative gap to total assets		6.22	%	(2.30	)	(5.27	)
COMPARATIVE INTEREST SENSITIVITY GAP
	As of December 31, 2002
Cumulative gap	$	2,341,321		1,110,902		908,780
Cumulative ratio of assets to liabilities, equity and interest rate swaps		1.57	x	1.15		1.10
Cumulative gap to total assets		10.90	%	5.17		4.23

(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.

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Impact of Recently Issued Accounting Standards

In December 2002, the FASB issued Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Statement No. 148 amends Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation (the “transition provisions”). In addition, Statement No. 148 amends the disclosure requirements of Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to require proforma disclosure in interim financial statements by companies that elect to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25. The transition methods of Statement No. 148 became effective for NCF’s March 31, 2003 Form 10-Q. NCF continues to use the intrinsic value method of accounting for stock-based compensation. As a result, the transition provisions will not have an effect on NCF’s consolidated financial statements.

Additionally, the FASB recently announced that it would require all companies to use a fair value-based method of accounting to recognize expense related to stock-based compensation beginning in 2005. The FASB is expected to issue final rules on stock option expensing during the second quarter of 2004.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46 sets forth the criteria used in determining whether an investment in a variable interest entity (“VIE”) should be consolidated and is based on the general premise that companies that control another entity through interests other than voting interests should consolidate the controlled entity. The FASB recently postponed the applicability of FIN 46 to VIEs created before February 1, 2003 until issuance of the annual financial statements for the year ended December 31, 2003. For specified VIEs created after January 31, 2003, FIN 46 requires consolidation in NCF’s March 31, 2003 Form 10-Q. NCF does not anticipate a material impact on the consolidated financial statements from fully adopting the provisions of FIN 46.

In April 2003, the FASB issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149, effective, in most regards, for contracts entered into or modified after June 30, 2003 provides clarifying guidance to SFAS No. 133 and establishes additional accounting and reporting standards for derivative instruments, hedging activities, and derivatives embedded in other contracts. NCF is evaluating the effects of SFAS No. 149, but currently does not expect that the standard will have a material effect on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities.” SFAS No. 150, effective for financial instruments entered into or modified after May 31, 2003 and for interim periods beginning after June 15, 2003, requires that certain instruments that were previously classified as equity should be classified as a liability. These include instruments for which redemption is mandatory, that have an obligation to repurchase the issuer’s equity shares, and unconditional obligation that must or may be settled by issuing a variable number of the issuer’s equity shares, provided that certain characteristics are present. NCF does not have any instruments that would be required to be reclassified, under SFAS No. 150, from equity to a liability.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.

NCF’s market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of NCF’s loan and deposit portfolios is such that a significant rise or decline in interest rates may adversely impact net market values and net interest income. NCF is not subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with ALCO, comprised of senior management. ALCO regularly reviews NCF’s interest rate risk position and adopts balance sheet strategies that are intended to optimize net interest income while maintaining market risk within a set of Board-approved guidelines.

Management believes that there have been no other significant changes in market risk as disclosed in NCF’s Annual Report on Form 10-K for the year ended December 31, 2002.

Item 4. Controls and Procedures

(a). Evaluation of Disclosure Controls and Procedures

NCF maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to NCF’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature, can provide only reasonable assurance regarding management’s control objectives. NCF also has an investment in an unconsolidated entity which is not under our control. Consequently, our disclosure controls and procedures with respect to such entity are necessarily more limited than those we maintain with respect to our consolidated subsidiaries.

Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of NCF’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that NCF’s disclosure controls and procedures are effective in timely alerting them to material information relating to NCF (including its consolidated subsidiaries) that is required to be included in our Exchange Act filings.

(b). Changes in Internal Controls

There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date our evaluation was completed.

Special Note Regarding Analyst Reports

Investors should also be aware that while NCF’s management does, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that NCF agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, we have a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of NCF.

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a).	Exhibits
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b).	Reports on Form 8-K

A current report on Form 8-K dated July 17, 2003 was filed July 17, 2003 under Item 7 furnishing Financial Statements and Exhibits and Item 9 reporting Regulation FD Disclosure.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NATIONAL COMMERCE FINANCIAL CORPORATION
		Registrant
Date: November 13, 2003		/s/ JOHN M. PRESLEY
		John M. Presley Chief Financial Officer

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EX-31.1

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William R. Reed, Jr., certify that:

(1) I have reviewed this quarterly report on Form 10-Q of National Commerce Financial Corporation;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in the report any change in the registrant’s internal controls over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2003	/s/ WILLIAM R. REED JR.
	William R. Reed, Jr. Chief Executive Officer

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EX-31.2

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John M. Presley, certify that:

(1) I have reviewed this quarterly report on Form 10-Q of National Commerce Financial Corporation;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in the report any change in the registrant’s internal controls over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(6) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2003	/s/ JOHN M. PRESLEY
	John M. Presley Chief Financial Officer

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EX-32

Exhibit 32

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of National Commerce Financial Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, William R. Reed, Jr. and John M. Presley, Chief Executive Officer and Chief Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1.) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2.) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 13, 2003	By:	/s/ WILLIAM R. REED, JR.
		William R. Reed, Jr.
		Chief Executive Officer
		/s/ JOHN M. PRESLEY
		John M. Presley
		Chief Financial Officer

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